Q3 2020 Berkshire Hills Bancorp Inc Earnings Call
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Good morning, and welcome to venture Hills Bancorp Conference call.
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Please note. This event is being recorded I would now like to turn the call first over to David Gong to.
Please go ahead David.
Thank you.
Good morning, and.
Thank you for joining this discussion of third quarter results.
Our news release, which is available on the Investor Relations section of our website.
Berkshire Bank Dot com and.
And will be furnished to the FCC.
Supplemental Investor Information is also provided in an information presentation at our website at IR deck, Berkshire Bank Dot com.
We will refer to this in our remarks.
Our remarks will include forward looking statements and actual results could differ materially from those cases.
Or detail on related factors. Please see our earnings release and most recent FCC reports on forms 10-K and 10-Q.
In addition, certain non-GAAP financial measures will be discussed on this conference call.
References to non-GAAP measures are only provided to assist you in understanding our results and performance trends.
And should not be relied on his financial measures actual results or future projections.
The comparison and reconciliation to GAAP measures is included in our news release.
And with that I will turn the call over to acting CEO, Sean Gray.
Thank you Dave Good morning, everyone and thank you for joining us today for our third quarter earnings call with me. This morning is Jamie Moses our CFO and for today will be joined by George Bacigalupo, Our commercial banking leader, Georgia, Miller, Chief Credit Officer, and Greg Glenn to mute Chief Risk Officer, Let me see.
Mark by saying that since our last earnings release, we have been focused on driving stronger financial performance.
Our measure of core pre tax pre provision revenue increased by 30% quarter over quarter due to higher revenue and lower expenses the.
The efficiency ratio improved to 65% from 71% and our capital and liquidity metrics continues to strengthen the.
Additionally, we made great progress in moving our loan customers back towards normal payment schedules as business operations were normalizing in our markets as.
While we have been taking these immediate steps we have also been moving forward with developing our 21st century community Bank.
As a result of the team we've cultivated and the technology that we've already invested in we have the capacity to respond to the accelerated changes in customer preferences and shifting workplace dynamics we.
We have introduced an industry, leading digital account opening experience and enhance our customer experience by upgrading our call center and rolling out our E signature platform.
We're also developing strategic initiatives that rationalize our real estate footprint at both the branch and corporate level with the goal of improved profitability in 2021 I'm.
I'm grateful for the dedication of the whole team in serving the shifting use of our markets during the pandemic, while strengthening our company and our culture.
At this time of leadership transition I want to assure you that the executive team and board are working closely together towards our larger corporate objectives, we understand that actions matter and we are committed to taking the necessary steps.
Our markets were active in the third quarter as the economies in most of our regions were reopened with some continuing restrictions in certain activities gender.
General transaction volumes move back towards normal with digital channel usage remain elevated.
Commercial credit demand remain subdued as Ford business planning continues to face uncertainties.
Our PPP loans remained unchanged as banks and customers waiting.
For clarification of loan forgiveness rules.
I want to focus at this time on credit quality update we have some slides in our investor presentation with updated credit information.
Our lending teams, which have reported can be for several years continue to work actively with our credit risk team to assess and manage the portfolio, we're being proactive in our credit administration and as a result, we have a comprehensive understanding of our pandemic credit risks.
Our traditional loan performance metrics remains in line in the third quarter, including delinquencies non accruals and charge offs.
We disclosed Ah reductions in our coal good loan payment deferrals in September our Investor presentation shows that these deferrals remain on a downward trend.
We have narrowed the commercial industries that we view as Colgate sensitive and these account for the preponderance of the loan modifications that we our report.
Our loan loss provision decline from the elevated levels in the first half of the year and we are comfortable that were properly reserved for pandemic related loan losses based on the current outlook for public health and economic activity.
We maintained a disciplined credit process and strive for strong communications with our customers.
The decline in loan Outstandings. This year has reflected cautious loan demand from customers, along with higher customer liquidity and accelerated prepayments. Our regional teams are well positioned to respond to qualify and credit needs in our community and we have strong capital and funding sources to be a preferred credit provider with structures and pricing that our approach.
Great for this environment.
Our teams remain dedicated to serving our markets and I have full confidence that we are well positioned to maintain this service with prudent decision, making as we go forward at.
At this point ill ask Jamie to comment further on some of our financial metrics Jamie.
Thanks, Sean we produced core EPS at 53 cents per share, resulting in a core ROA of 84 basis points and a core Roe of 9.3%.
On a GAAP basis, EPS was 42 cents per share our away with 67 basis points and our OE was 7.5%.
Core results were up both quarter over quarter and year over year.
We posted higher revenue and lower operating expenses in the third quarter compared to the prior quarter the.
The benefit the benefit of this is clearest in the efficiency ratio, which improved to 65% from 71%. It also shows up in our non-GAAP measure of PPNR, which increased by 7 million to $30 million on a quarter over quarter basis.
Our revenue gain was based on a 9% increase in fee income, which was mainly driven by higher deposit fees as customer activity moved back toward normalized levels.
We also had a nice pickup in secondary market income on stronger volumes in both mortgage banking and SB lending, which offset lower commercial swap revenue during the quarter we.
We expect total fee income to remain near these levels in the fourth quarter.
Turning to net interest income this revenue slipped a little by 1% due to lower loan balances. The margin was little changed at 261 basis points and the income change reflected lower earning assets heading.
Setting aside PPP loans, while we expect loan volumes to begin to firm after year end. It is likely that these balances will decline further in the fourth quarter.
We are focused on minimizing and offsetting this decrease including expanding the investment portfolio and reducing higher cost wholesale funds we.
We expect that further deposit cost reductions will generally offset changes in loan yields at.
At this time, we expect most PPP loan forgiveness to benefit 2021 results, but we may see some net interest income benefit in the fourth quarter.
Our unamortized PPP net deferred fees totaled 16, and a half million at the end of the quarter.
Turning to the credit loss provision since we had previously buttressed our allowance protection there was a modest $1 million provision expense during the third quarter as slightly better economic forecast emerged at the end of Q3 and the overall loan portfolio decreased.
There was no material change in the ratio of the allowance to loans during the quarter.
Moving onto expenses. These came down from the second quarter, which was elevated due to the onetime bonus related to PDP loan originations. We also reduced other compensation expense during the quarter and we continue to keep a close focus on operating expenses as we are targeting flattish expenses in Q4 relative to Q3.
Moving to the tax line, we had a small tax credit for the quarter due to the losses recorded in the first six months.
We expect the tax rate to be in the area of 10% in the fourth quarter, but this will depend on the timing of factors affecting pre tax income.
We recorded $5 million in after tax non core charges for the third quarter. This was primarily due to the cost of the CEO separation agreement that was entered into during the quarter and related professional fees. We continue to record wind down costs on our discontinued operations, but expect to complete those costs of this transition in the fourth quarter.
I've noted the progress we made on key operating components and our goal is to build on that progress as conditions allow.
As you know, we announced that we were cutting our dividend in half beginning with the most recent payment and this decision was to better align the dividend with our current level of earnings generation console.
Consistent with our new procedure, we will communicate later in the quarter about the next quarterly dividend.
We're continuing to improve our capital metrics until we feel that there is opportunity to re initiate stock buybacks, which we view as attractive based on current market conditions and with that I will turn the call back over to John.
Thanks, Jamie.
As you've seen we are managing pandemic related impacts to our operations and bars in doing the necessary work to adjust our business model to improve performance in this environment.
We're entering changes in customer behavior is while keeping our focus on our community bank value.
As I mentioned earlier, we recently launched a best in class digital account opening technology, which is which has been in development for a number of months. This a more visible component of the technology investment that we have absorbed into our core expense run rate.
This platform provides benefits to the customer experience to revenue generation into our operating efficiency.
Our enhanced capabilities are that much more valuable as a result of the customer needs and accelerated digital transformation, resulting from the pandemic.
As I indicated upfront, we're well along in a strategic analysis to rationalize our infrastructure footprint. This includes reshaping our branch office network, identifying and releasing surplus corporate real estate and making other operational adjustments to our business model.
We are also looking to formalize cost save opportunities arising from work from home as well as changes in procurement process in the current environment.
Our goal is to reduce annualized core expense by $10 million to $15 million by the second half of 2021.
We expect to have more announcements about these strategies in the coming months, we intend to streamline our business model in our core markets and leverage organic growth around that foundation.
Two critical enablers will be the technology. We previously invested in and are my banker program. As you know we have been successfully developing and deploying these mobile personal bankers for a number of years to bring service to customers, where and when they need it.
And they remain integral to the distinctive customer experience that we are developing as the 21st century community Bank.
In line with our initiatives, we recently announced the promotion of two of our leaders to regional president position our.
Our wealth leader K Hertz will lead our Boston region team and will retire as the head of our foundation will lead our Berkshire County region a.
Our regional presidents remain critical to our engagement with the markets that we serve.
As a result of these promotions women now constitute half of our regional presidents team.
We also promoted our executive Vice President and Chief Information Officer, Jason Why don't we.
Driving our technology investment and was recently honored as the Boston area.
All of the year.
Our purpose driven culture was further recognized by the North American inspiring workplaces award for our diversity and culture program, which is under the direction of Jackie Court right, who was promoted to executive Vice President and Chief Human resources and culture Officer.
I'll close by thanking our team our investors and our other stakeholders, who rely on us to operate this business and enhance franchise value as a strong and preferred provider to our market.
With that I'll ask the operator to open the lines up for questions. Thank you.
We will now begin the question and answer session.
I'll ask a question to me Press Star then one on your telephone keypad.
We are using a speakerphone please pick up your headset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we'll take a moment to assemble our roster.
Our first question comes from Mark Fitzgibbon with Piper Sandler Please.
This is mark go ahead. Thanks.
Thank you and good morning, guys.
First just wanted to clarify a couple of things that you had said Sean.
Did I hear correctly that you had said your your cost savings initiative would potentially reduce annualized expenses by $10 million to $15 million.
That is correct.
And that will will start to appear in sort of the back half of next year.
Actually the work to that has started now and as we alluded to we're hoping for additional announcements coming soon.
But yes, we will start to see that in the middle of next year.
Okay.
And then Jim are you.
Yeah, sorry, guys I, just want to add to that Mark just you'll see you'll see that start to appear in the beginning of the of next year, but as Sean said, we expect to sort of fully realize those things by the back half.
Okay, and then Jamie just to clarify something you said.
You think the stock is attractive here capital ratios are building how about you.
Slide four with the regulators permission to be able to buy back or is that something you're contemplating.
Yeah, I mean, we don't I don't want to get too far into the details of our interactions with the regulators, but and I'd say that we are we are working on we.
We are working on.
The ability to start to buy back shares like as you said you know, we we think that we have very strong capital ratios.
We think we are very well capitalized in that regard and I've said that over the last six months as we've been talking through this so from.
From a from a buyback perspective, I think that there's certainly that opportunity that okay.
Okay, and then you referenced the possibility of the balance sheet shrinking at the fourth quarter. I mean is it likely would you just be sort of a natural run off for use playing a much larger shrinkage of the balance sheet in for Q.
Yes, no at this point I think we're looking more of a natural run off with a with a little bit of softness I think on the customer side from in terms of demand and in our remarks, we also talked about them using some of our excess liquidity to you know to increase the.
Securities portfolio to try to.
You help ourselves in that regard to offset some of the run off.
So it looks like you have a little over $900 million of liquidity did sort of half of that go away quickly as you deployed into securities or is it more than that.
No I think I think you're thinking about that right I mean in terms of quickness you know that.
That's a big number to do quickly, but I don't we're not looking at a.
Looking at increasing the portfolio by a billion.
And then two last things I Wonder if you could share with us your outlook for the margin.
For Q and what that the effective tax rate might look like in 2021. Thank you.
Yes, sure. So I guess, you know [laughter] the I'll start with the tax rate, that's obviously highly dependent on elections and things like that.
I guess I would say sort of steady state.
We expect it to be in that 20% range, where we've been in the past although.
Although we're still working through all of the components of that in terms of forward guidance into next year.
On the margin you know again as as I've said, we're looking to deploy some of that excess liquidity into you know into the investment portfolio. So sort of offsetting you know.
Offsetting declines on funding side of things we.
We expect that we can probably decrease our deposit cost by another 10 to 15 basis points.
But.
That could be offset by increased investments in the investment portfolio, which as you know are going to be a little.
A little have a little less margin associated with that so I think that were probably in a in a flat type margin scenario in Q4 and of course, you know get PPP accelerate there's there's positive opportunity that.
Thank you.
Our next question comes from Collyn Gilbert with KBW. Please call. Please go ahead.
Thanks, Jamie let me just start topped on on your comment on the NIM and kind of the dynamics. There. Yeah. Do you are you guys in a position to just sort of give us a sense as to what you think and I always gonna do or when I and I bottoms. I mean, obviously you had indicated you know further run off in the fourth quarter, but [laughter].
Sort of how you're thinking about M&A trend and excluding PDP, but trending throughout next year.
Right so again.
Again 20, a little too early to talk about 2021, I think other than to say we expect to.
Start turning this around and into a.
An asset generation story versus a a balanced shrinkage story, so I think I'm, hoping to keep an eye levels.
Similar in.
In the fourth quarter as they are now, but again, that's that's going to be dependent on a lot of things that happen.
Yields that we can get an investment portfolio payoffs that may or may not happen on the loan side of things in Q4.
And just started those general market conditions, so I'm feeling feeling pretty good that if you're not going to see some massive decline and I are here into the fourth quarter and then on a go forward, we would expect to increase that.
Okay, Okay, and just to get our arms around some of the dynamics with it but the run off and that's on the balance sheet do you happen to have what the loan origination volumes were this quarter versus what was.
Paid off.
I don't I don't have that right in front of me right now, but I can get back to you on that.
Okay. Okay, and then I guess just following on that you.
You know Sean you you know indicated that there's momentum within kind of the hurt your lending business and kind of throughout the footprint and I mean any sense and is it maybe if there's a on kind of a target that you're putting out there for your lenders in terms of loan growth for next year, just just trying to get a sense of what.
You think kind of just the franchise is capable of generating.
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In terms of new loan demand next year.
Sure you know obviously, we've done so much from a balance sheet rationalization, and we've identified products and offerings that didnt meet our community bank kind of overarching strategic.
Model and so you've seen us start to jettison aircraft, we've seen us whether that be indirect lending. So we do feel now we've got a real good core focus on what we do well and where we compete from a from a value differentiation perspective. So you know I know George is on the phone today, we're sitting at least Lotus thing.
Well digit.
Loan growth goals for the commercial business and as we've talked a lot about we've aligned it with our four main verticals, which are CRISI and I.
Business banking and a deal and then we also think would this better focus there is some niche businesses.
The perform well in you know needs current economic environment and that be that being our business banking, our 44 business capital group as well as the deal. So demand is subdued right now but activity as we measure it through sales force.
His speaking towards a pent up demand if the macroeconomic conditions.
Ken stabilized so that's how we're thinking about it in totality I hope that helps from a directional perspective no.
Got it that's okay. Thank you for that and then so just shifting to credit obviously, you know resolution on the deferrals [laughter] two things. One is can you kind of guide us through how you're thinking about sort of the deferral workouts from here on and maybe where the embedded risk still lives from a loss perspective and then.
Also too if you could give us any color as to what some of the classified loan trends were during the quarter.
Sure you know obviously, the deferrals remain on a downward trend.
And we're making progress even within that deferral bucket of moving customers back to normal payments and then there's percentages that within that deferral bucket.
Were we are seeing that they are paying.
Interest at this time, so I'll, probably kick this over to George or Georgia.
Thank you, we'll be able to provide a little bit more detail to the question.
Yeah, Collin high it's a Georgia Hey, John.
Hi, Susan.
Thinking about you know the the criticized assets are are trending up.
We we are in the fours as a percentage of total loans, obviously due mostly to the alcoa that impacted businesses and we will be putting out obviously more information about that as an excuse.
You know as far as how we're thinking about it from a workout perspective, I mean, we have formed a hospitality management goals that is overseeing all of the hospitality loans currently in the federal So we are speaking to our customers on a regular basis, obviously, we're getting updated financial information.
And we are seeing that a large majority of those customers are looking for and the interest only.
You know what we are seeing in some cases, our sponsors are asking for longer terms of deferrals, but like I said and the kind of who will be receiving interest payments and and or an interest reserve will be established.
So.
So that's the way, we're dealing with a with the hospitality portfolio.
As far as the Firestone portfolio go.
No we are seeing deferrals across most segments concentration will be or are in the location based entertainment in the fitness segment, but again, it's we're entering into the the third phase we are seeing customer starting to return to interest only so we are encouraged by that.
Okay. Okay, and then I guess, just finally closing the loop on that for you Jamie in terms of how you're thinking about the reserves from here. So you know kind of stable in the third quarter and is the expectation that it's really going to be about movements within the delinquencies and charge offs of what you're seeing in the deferral buckets. It.
[laughter] that drives the provisioning more than any other qualitative factors or just kind of your thoughts around the reserve outlook, Yeah, Yeah, Collin I think thats right I think.
That what we're seeing is generally speaking a stabilizing macroeconomic Ah forecast and you know.
Put around those things on which help help which continue to drive that any changes in that obviously it could affect that as well, but I think that that's really more of where were looking at now right, which is you know how things are progressing through the credit process, you know and what changes we see there.
And you had also asked about classified Collin It will we'll have more information on that in the in the queue.
Okay, Okay very good I'll leave it there thanks guys.
Thanks Alan.
Our next question comes from Laurie Hunsicker with Compass point.
He is Laurie go ahead.
Yeah, Hi, good morning, Hello tragedy.
If if we could just go back to fires John Guinee.
Can you help us think about the the 258 million.
$62 million in deposits at September 30, what what is that looking like as we roll through to the end of October how much do you expect the deferral down and then also on that thought can you just help us think about.
What's interest only.
Well currently as of the end of September I would and this is the gas I could get you the actual numbers, but I would I would guess that the majority of that 62.
Is it full payment deferral.
As far as going through the month of October and through the fourth quarter. I think you know again. This is an in process number the 24%. So that is capturing what we expect to be doing this month based on conversations that we've had with our customers and whats in the pipeline.
Line. So I think the percentage is probably going to stay right around where it is I don't what we are seeing is that as we are talking to our customers going into the fourth quarter more and more we are hearing from customers that they will be able to return to interest only but I really wouldn't even want to take a guess as to.
How much of it would go back to interest only this quarter at this point I think it's too early.
Got it Okay, and then I know that the portfolio had about I guess 16 million or selling PPP around.
Likely unchanged do you know of of the remainder of the of the portfolio.
You know, what what clients tipped PPP around the way in other banks.
And you know.
There's 240, Oh go ahead.
No I understand and interesting that you asked that because we actually surveyed some of our Firestone customers and this goes back to the second quarter.
And what we found I think we spoke to over 200 of our customers and you know we were able to come up with you know through extrapolation, roughly 50% to 55% of those customers did apply for P.P.T. loans from other institutions.
Got it Okay. That's helpful. And then what percentage is out of footprint what percentage of that of new England.
Is that the men fires that yeah.
Yeah for fire. So yes, absolutely the majority of it is out of marketing.
Okay. Okay. So okay.
That's helpful and then I don't know how much how book.
Same question in other words as we roll through October.
Where do you see those deferrals going on that 330 million, you've got 160 million now when.
Could we see that continue to come down.
You know I'll start that and then I'll flip it over to George because I know George as having daily conversations with his team on these loans, but yeah I would expect that number to come down and I also would it affect the majority of those customers to we turned the interest on the.
And like I said with many of them posting reserves.
George did you have.
Yeah. So.
Yeah, just a couple of comments I would say is that Oh.
So some of the customers are tourist destination type of hotels.
<unk> core market, Oh, Berkshares as well as say Newport, Rhode Island that was example, where those folks is the highly seasonal and pretty much the off season now with the winter. So those are the folks that will we feel very confident that they will eventually return to full payment well, we'll probably need longer term defaults.
The good news is that we've moved to all the referrals in the fourth quarter a lot of pasta.
Approximately 70% of the 160 million are able to make interest payments to us and in many cases, they were having full p. it either for all just earlier. So we are seeing some progress do you think this is always in sales of liquidity.
With those operators.
Okay, Great. That's helpful. And then Jamie just wondered if if we can't go back to margin I know last quarter. You had indicated you know.
Potentially 10 to 20 basis points of expansion by the end of the year now almost sounds like it's maybe a little less can you help us think about.
In your comments around out of it. So that took me sales deposit topic can you help us maybe think about that a little more what sort of restructuring things that you have planned that.
You know are going to be helpful to margin.
Right. So so the the biggest benefit to the margin is sort of paying off hire whole cost there or sorry wholesale funding.
You know costs on that so we expect maybe 15 basis points 10 to 15 basis points on the deposit side of things you know on the one hand, it's great that the industry has this liquidity.
You know in terms of deposit.
You know that.
That have stuck around but maybe I'm, a little bit longer than we had anticipated and so you know we have we have these deposits and others. There is you know fewer things to address those deposits into and so they tend to be at the moment, it's going to be in bonds that.
Do not have as high yield as say your typical loan portfolio would so you know it's reinvesting some of these deposits into the into the securities portfolio sort of it sort of expanding the securities portfolio, a bit which will increase and I I'm on the one hand, but.
Yes, the margin would decrease along with that.
Okay. Okay, Great and then I also just wanted to go back that.
I wanted to make sure hedging right on your your one time costs merger restructuring costs or I should say restructuring cost wind down in the fourth quarter I just wanted to make sure I heard that right.
But that will be looking forward whatever restructuring, you're you're tending to doing are tightening it up.
In the back half of this year is that correct.
That's right that's right Okay. Okay, and then what do you what do you expect the restructuring charge, if they're not quite quite are or is that too early.
It's too early.
I wouldn't expect I wouldn't expect a really large number in the fourth quarter right and so just you know if you're looking at that that nine of the release.
You know that those those restructuring charges were related to almost entirely to the CEO separation that happened during the quarter.
Okay. Okay, great. That's helpful. Thank you very much something that.
Yep. Thanks Laurie.
Our next question comes from Collyn Gilbert.
PPW please.
Please Cowen go ahead.
Hi, guys, sorry, just a quick follow up I just want to make sure I've got some of these numbers correct on that so Sean your comment about you know looking to reduce operating expenses by 10 to 15 million on an annual basis in 2021 [laughter].
And I know you had indicated you know some of it can be achieved in the first quarter and then the majority of it you know she's by the end of the year, but just wanted just one that tighten that up a bit so off of what base should we be assuming is that a third quarter 20, opex number and if so what is it you know just trying to get to nail that down a little bit.
Sure.
So calling up on <unk> Penney, yeah, its really based off of what we what we say our what we think our core expenses are on a year over year basis. So you know think.
Think about it as the you know.
Core expenses that weve given throughout the year 10 to 15 million off of that and so you know on average that third quarter core number that's about right. That's that's about right. How you should be thinking about.
Okay. So 'cause it's fun.
But I think if we're on the same page in terms of what the core expenses are about like so I've got core expenses in Threeq, you have 67, and a half million, but that's quite a bit lower than maybe the 71 and 70 and a half that you put up into Q show it taking like an average of those three quarters and then taking 10 to 15 million off of that or is it taking 10 to 15 million off the 60 cents.
One and a half, especially around right yeah, yeah, sorry, so I should be more clear you should take an average of the three quarters and then take that 10 15 on that okay and by the end by four to 21 that run rate should essentially be 10 to 15 million less than.
The average of those three.
You got it okay.
Okay. Okay, just wanted to confirm thanks Yep Yep. Thanks Alan.
This concludes our question and answer session I would like to turn the conference back over to Sean Gray for any closing remarks, please mr. Sean.
Well. Thank you all I appreciate the questions and this concludes our formal.
Formal announcements and please join us in our fourth quarter earnings call. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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