Q4 2020 Berkshire Hills Bancorp Inc Earnings Call
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Good morning, and welcome to the Berkshire Hills Bancorp Q4 earnings release Conference call. All participants will be in listen only mode should you need assistance. Please signal of the conference specialist by pressing the Starkey followed by zero after today's presentation there'll be and all.
And any day to ask questions to ask a question you May Press Star then one on of Touchtone phone to the.
The draw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference or what the David Garnsey Investor Relations manager. Please go ahead.
Good morning, and thank.
And for joining this discussion of fourth quarter results.
Our news release is available on the Investor Relations section of our website, Berkshire Bank Dot com.
And it will be furnished to the SEC.
Supplemental and Investor information is provided in and information presentation at our website at IR, Dod procured bank Dot com and.
And we may refer to this and our remarks.
Our remarks will include forward looking statements and actual results could differ materially from those statements.
For detail on the related factors. Please see our earnings release and most recent SEC reports on forms 10-K and 10-Q.
In addition, certain non-GAAP financial measures will be discussed on this conference call.
References to non-GAAP measures are only provided to assist you and understanding our results and performance trends and.
And should not be relied on as financial measures of actual results or future projections.
The comparison and reconciliation to GAAP measures is included in our news release.
As you know, we also released and announcement yesterday about our CEO.
Our board share Bill Dunlavy joining.
Joining us for the first part of the call to comment on this announcement.
And so at this time I will turn the call over to Bill.
Yeah.
Thank you David good morning, everyone.
And as David said, I and build on lately and it's my privilege to be.
The chairman of the board of Directors of Berkshire Hills Bancorp.
Before Sean and Jamie cover of our financial results I want to take I want to share a few words of your honor of announcement yesterday and.
Right.
And the named Chief Executive Officer of Berkshire Hills, Bancorp, and Berkshire Bank the.
The decision of our board made after a thorough planning process and the comprehensive national search.
And as the ideal choice to lead the bank into the future and propel Berkshire to long term success fulfilling our promise to meet changing customer expectations and the demands of the 21st century banking.
Net and this track record of leadership and the accomplishment at Webster Bank and Citigroup is exemplary.
He is the national reputation as an innovator of banking executives, who can deliver results grow market share and improve profitability.
He has broad experience working at global banks like Citi.
And shares Berkshire his passion for community banking and.
And our pledge to serve the unique needs of all of our customers across our entire footprint.
The Webster knit and was instrumental and helping the bank evolves from a mainstream mass market bank to the specialized bank. It is today.
Serving multiple segments with tailored product offerings.
He oversaw the operational improvements and the branches through automation around the universal banking banker of model.
Streamlining the systems and improving customer service.
He is the true pioneer and the application of data analytics and the use of digital automation to lower cost stream.
Importantly.
Net and fully embraces Berkshire is the first values and the principal driven culture.
The strongly believes and empowering employees to respect individual dignity earned.
Earn trust through ethical behavior and.
And give back to communities.
I also want to take a moment to commend and Sean Gray.
Shawn and took on the acting CEO role during a challenging period from the bank and.
And guided us through the CEO transition with a steady hand.
During the bank and maintaining the executive team's focus on our strategic priorities on.
Under his leadership the entire management team was outstanding during this period, maintaining a high level of performance.
And showing their commitment under demanding circumstances.
That concludes my remarks, I'm now going to excuse myself from this call and turn it back over to Sean and our management team.
Thank you for your time this morning.
Thank you Bill. Thank you very much and if I could take a moment to add to bills comments first net and has a distinguished reputation and the industry and is highly regarded and community banking circles. So I'm excited about our future with net and leaving the bank and myself continuing.
As President and Chief operating Officer, we.
We have and exceptionally capable executive team at the bank and we are well positioned for future success I know and is looking forward to engaging with all of you. After he officially starts as CEO on Friday January 29.
Moving on to our fourth quarter 2020 financial results, let me start by mentioning with me. This morning is Jamie Moses our CFO and for Q&A, we will be joined by George Bacigalupo, Our commercial banking leader, Georgia, Melas, Chief Credit Officer, and Greg Lindenmuth Chief risk Officer.
I'll start my remarks, with a focus on the fourth quarter, and then I'll ask Jamie to provide more detail on the financials.
I'll follow that by commenting on our recent strategic initiatives and our key focus areas going into 2021.
Our fourth quarter earnings were <unk> 30 per share and we earned 28 cents of core EPS.
These results were ahead of consensus, but they were down from the prior quarter, primarily due to a higher non cash pandemic credit provisions.
I'd like the first highlight some of our operational accomplishments, we maintained our net interest margin with the strong focus on lowering our deposit costs.
We strengthened our fee income except for a normal seasonal decline in mortgage banking revenue.
We've reduced occupancy and technology costs and manage staffing levels.
And we completed the exit of our discontinued national mortgage banking operations.
Our team is adhering to the financial and operating disciplines, while business conditions are currently constrained.
Turning to credit and we saw further progress towards normalizing our loan portfolio.
While credit conditions remain sensitive to the evolving impact of Covid. Our borrowers have continued to adjust and this environment, we saw decreases and deferred loans criticized loans and accruing delinquent loans.
Total deferrals decreased 22% and the fourth quarter and continued to decline so far in 'twenty and 'twenty one.
About 63% of the commercial deferrals on paying current period interest.
We remain focused on a handful of COVID-19 sensitive industries with primary focus on hospitality and our Firestone equipment loans.
And we provided further information about these loans and our investor presentation.
The first the fourth quarter was the first time, and which significant pandemic impacts began to surface and our traditional asset quality metrics.
And increase in nonperforming loans was due to two commercial credits, which were classified prior to the pandemic net.
Net charge offs increased due to a handful of hospitality loans.
We set our allowance for credit losses at 171% of year end total loans, excluding PPP loans.
This ratio did not change materially and the second half of the year.
Based on our outlook at year end, we would expect the amount of the allowance the decline in 'twenty and 'twenty, one as pandemic related credit losses are recognized and the future.
Turning to PPP, we expect that most of these loans will be forgiven and the first half of 2021.
We've engaged a third party to support of quick and efficient response, the PPP loan requests under the new program now being rolled out.
Internally, we're giving priority to expediting the processing of forgiveness for the first round PPP loans.
We're also anticipating strong volume for our SBA lending team based on the new hire and 90% guarantee under the seven day program and.
And our small business teams will be focused on credit needs.
And our communities.
We believe our teams are well positioned to respond to new credit demand and our markets based on anticipated economic improvement in 'twenty and 'twenty one.
With that I'll ask Jamie to comment and further detail on our fourth quarter financials Jamie.
Thanks, Sean and.
As you noted earlier, our fourth quarter earnings were <unk> 30 per share and where and 28 cents and core EPS.
Core P PNR declined by $6 million to $24 million.
In addition to the pandemic impacts on our core of P. PNR. We also recorded $3 million and charges following and operational review of consumer loans servicing primarily related to past conversions and acquisition and is reflected and the increases quarter over quarter to the professional services and other expense categories.
The project has been completed and we believe that the expense impact has been fully recognized and is limited to this quarter.
And then the impacts on P. PNR include and interest write offs on non accruing loans and loan workout expense as well as constrained business volumes.
And I'll take a minute to comment on the balance sheet before further elaborating on the income statement.
And the unusually high payroll deposit balances at year end and as a result short term investments were up $622 million and total assets increased by $220 million.
On December 2nd we announced an agreement to sell on mid Atlantic branches, and so we transfer at $617 million of deposits and $301 million of loans to held for sale and <unk>.
Adjusting for this branch sale, our loans declined by approximately 600 million or 7%.
We invested some of these funds into an additional $236 million in the investment securities.
We also paid down wholesale funding and the average balance of earning assets, therefore decreased by approximately $200 million or 2%.
Looking forward, we're targeting commercial loan growth ex PPP at a mid single digit pace in 'twenty and 'twenty one.
We also plan to grow the mortgage portfolio due to higher originations slower prepays and purchases from input court, it's sorry, excuse me in footprint of correspondent banks.
We expect this growth to generally offset continued run off of indirect auto and certain commercial business. We are working down such as the aircrafts and some COVID-19 sensitive types of borrowers.
So the portfolio is generally.
<unk> to be stable or up slightly before the impact of PPP loans.
We expect most of the $633 million and PPP loans that remain on our books to be forgiven and the first half of the year and therefore of total loans are expected to be down for the year due to these payoffs.
As Sean noted, we've engaged a third party to expedite and new P. P. P loans and so these won't show up on our balance sheet.
We're hoping to see up to 50% of the volume that we handled on the first round and expect to receive some fee income as well as the related deposits.
We expect total earning assets to also reflect the PPP runoff as well as the sale of the mid Atlantic loan balances as part of the branch sale.
Additionally, investment Securities May come down as we allow higher cost and wholesale funds to run off without replacement.
On the liability side for the fourth quarter adjusting for the branch sale, along with payroll deposits and brokered balances all other total deposits increased 1% for the quarter.
Wholesale funds decreased to approximately $1 2 billion at year end compared to $1 5 billion at the end of the third quarter and 2 billion at the start of the year.
Looking forward, we expect to see organic deposit growth and the low single digits in 'twenty and 'twenty, one while we expect to further pay down broker deposits and borrowings with total wholesale funds decreasing to $1 billion or less by year end.
Turning back to the income statement net interest income was down a couple of percent and the fourth quarter due to the decrease in average earning assets with no change on the margin.
We move down the cost of deposits to support the margin, including reducing broker deposits pricing down maturing time accounts and reclassifying, the higher cost mid Atlantic deposits as held for sale.
Loan interest income was negatively impacted by the increase and non accruing loans and benefited from revenue recognition from PPP loan forgiveness.
Looking forward, we expect to continue to see further margin benefit as we focus on deposits repricing down more than assets.
We expect asset yields to benefit from the change and mix toward more core lending.
The income benefit from this is likely to be more than offset by the impact of lower earning assets.
Separately, we expect that the net interest income benefit from additional PPP loan forgiveness will be mostly recognized in the first half of the year.
The balance of unamortized deferred PPP fees stood at $13 million at year end 2020.
Moving to fee income, we had good results and the fourth quarter across most categories, except from mortgage banking, which is normally seasonally lower.
We continue to target and $19 million to $20 million of quarterly fee income and the new year.
Moving to provision expense we of course.
We recorded $10 million and the fourth quarter the.
The increase from the prior quarter, primarily reflected the impact of higher non accruals on the qualitative component of our model future.
Future provision expense will depend significantly on the severity of the pandemic and its impact on our markets.
Turning to expenses total GAAP expense decreased primarily due to the non core costs related to the CEO separation recorded and the third quarter.
Core non interest expense increased by $4 million, primarily due to the loan servicing related project I mentioned earlier, along with the impact of problem loan related costs.
Looking forward, we are targeting to manage core non interest expense down below $70 million per quarter and the second half of the year. After our branch initiatives are completed.
The benefit from our branch initiatives is expected to initially be partially offset by loan related expense.
Regarding taxes, we had a tax benefit for the year, primarily due to the higher provision expense in 'twenty and 'twenty. One we expect to have of core tax rate and the area of 15%.
As we've previously noted we expect to record a net gain on the sale of the mid Atlantic operations and charges related to the planned consolidation of 16 branches.
We expect to report these as non core items during the first half of the year.
Based on the asset decline from PPP loans, we expect to be operating with lower assets in 2021, while we also target earnings that will continue to build capital.
Our financial focus is on.
Is on improving our return on equity and we're hopeful that conditions will be supportive of that objective as we move through 2021.
Before I close I'd like to share that I've previously had the opportunity to work alongside our new CEO and I'm looking forward to doing so again.
And mittens, new role as the leader of our team here at Berkshire with that I'll turn the call back over to Sean.
Thanks, Jamie.
Our guidance demonstrates that we are leaning in to our operating plan by tightening our focus on building, our core business and our footprint and in support of our community Bank mission.
We announced our branch sale and consolidation initiatives during the quarter.
These initiatives were under development for several months and they're consistent with the strategy of focusing on core operations and core market.
They also reflect our smart blend of technology and flexible personalized service, including our distinctive my banker concierge bankers.
Our 2021 results will have some noise as we transition through these initiatives and through what we hope will be the final pandemic year.
Our focus will be on strengthening our purpose driven community bank. The year 2020 has reaffirmed the premise that purposeful and constructive community engagement will attract customer preference and gives us the opportunity to build market share profitability and long run investment value.
I'm very proud of our team's work the share and responding to the health and financial needs that we encounter.
Throughout the entire pandemic, we continue to prioritize the safety of our customers and employees operating flexibly to offer the best service possible within the constraints of government guidelines and mandates.
We proactively brought federal borrower relief programs to our markets, including PPP loans and qualifying loan modification.
We adjusted our deposit fees and transaction limits to facilitate changes in customer activity.
Our employee volunteer teams continued to provide targeted community service and our foundation increase thats philanthropic giving to support the organizations and people impacted the most by the pandemic.
We look forward to applying the same energy creativity and flexibility to the challenges ahead of us by implementing our initiatives and strengthening our competitive advantages and the core geographies that we serve best based on.
Our be first values and commitment of diversity equity and social responsibility are local regionalized decision, making and community support our.
Our previous investments and internal and customer facing technology.
Our coordinated relationship service with special emphasis on our my banker personalized bankers.
And our disciplined focus on core business activities, and our growing business line, including asset based lending SBA lending and wealth management.
Our earnings materials highlights the improved rankings that we are achieving as a socially responsible investment vehicle.
We welcome further interest from shareholders, who value of investments in companies with solidly demonstrated performance and advancing social values.
Together with our dedication to earning the cost of our capital. We believe this positions our stock attractively as the preferred investment vehicle.
I'll close by thanking the entire organization for its support during these past few months, we came together as a team under trying circumstances and delivered well for all of our stakeholders.
The passion energy and dedication with which you attack the hurdles set in front of us as the credit to your high character and mental toughness and.
I will be forever grateful to have had the opportunity to be your leader during this transition and I am looking forward to continuing to build on the positive momentum we've created.
With that I'll ask the operator to open the lines up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using the speaker phone. Please pickup your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys good morning.
Hey, Mark good morning, Mark.
Given your comments around balance sheet growth looking sort of modest and the new year and the fact that your capital ratios have continued to build I guess I'm curious at what point you'd be comfortable restarting stock repurchases.
Yeah, I think that's a good good question Marc I mean, that's something obviously that we are always looking looking at where the.
To evaluate the best way possible for us to.
Get the highest returns for our shareholders.
It's something that we are we always consider and of course.
From a strategic perspective, I havent spoken with.
This.
And so I'm sure he is going to have opinions about.
And the ability of.
And our ability to invest and either growth.
Or or capital or capital actions like this so.
Likely more thoughts about that on the next call.
Okay.
And then.
Of the 199 million of CRE deferrals that you have can you give us a sense for what types of CRE credits. They are and if there may be concentrated in any particular part of your footprint.
<unk>.
Georgia, if you don't mind, providing a little color there I think that'd be that'd be great sure.
Sure absolutely Hi, Mark.
Approximately about $146 million of the 199 is in the hospitality book on the remaining $14 million is I'm sorry, the remaining is just spread out amongst.
Some of it there's a little bit of retail in there.
And it's just smaller just other credits.
Okay and.
Okay.
I'm, sorry, I apologize I didn't hear that.
Sorry, the bulk of it like I said $146 million of it is hospitality of the rest of the spread out amongst.
Various other sectors.
And is it geographically concentrated and any particular area.
Well the hospitality.
All the all is pretty diversified between Massachusetts, New York.
So I I don't have the exact breakout, but I wouldnt say, there would be any significant concentrations, but we can definitely follow up with that.
Thank you.
The next question comes from Laurie Hunsicker with Compass.
Compass point. Please go ahead.
Yeah, Hi, good morning.
Of course, hoping that we.
We can say on credit here that.
And just go on.
Some of these details.
And I appreciate how you've laid them out in the slide from maybe just starting with retail and.
If you can give us what the balances on retail and what the criticized assets.
But the non accruals are what the charge offs are.
And then maybe George I think from here.
Yeah, Yeah go ahead.
Yeah Laurie.
Some of them.
Got some of that information available on the balances for retail our $864 million.
And I'm not sure. If you asked of the deferral amount on retail that's about six and a half million of that portfolio is currently and deferral of the rest of US all resumed active payment.
And I'm sorry, you also I don't have the breakout of how much of that portfolio is criticized but I cannot I can get that to you.
Okay, and then yeah and I was wondering how much of that is also on non accrual.
The non accrual piece and.
Again, I don't have an exact number but I can definitely follow up with you Yeah I don't have the exact number for you on the non accruals.
Okay, Great and and I think there was and there was maybe some confusion if you could just give us a little bit of color around the retail back I certainly was under the impression that a quarter of that with mall exposure and the can you help us think about how much of that is actually indoor mall not to be confused with.
Outdoor strip centers that are anchored by grocery.
Yes.
And no out of the 864 million, we have two components 273 million, which we call the community center malls, which are the larger outdoor mall.
And then we have the neighborhood centers and strip malls, which are also outdoor mall, but just smaller and square footage. So those two pieces make up roughly $525 million of the 864 million and retail exposure.
And the majority of that is either anchored by grocery and big box.
Or you know yeah pretty much most of it is anchored by either of grocery are a big box tenants.
Okay.
The work.
Yeah, just to be clear Laura we have we have no like indoor type mall exposure.
That's just not something we've ever focused on all of our retail exposure is two of those outdoor type mall.
Okay. That's really helpful. And then just just one more question on that do you have anything that's and.
And you would conclude are anchored by movie theaters.
Nothing is anchored by a movie theater, we do have a large outdoor mall that is anchored by the Cosco that has a movie theater in it.
<unk> is the major anchor on that mall.
Okay perfect. That's super helpful. Okay, and then the laser and and excluding Firestone.
Can you give us the balances on leisure excluding Firestone.
On the what laser what what's the deferred and what the criticized assets the non accrual there.
Leisure is the 112, Oh I'm sorry, it's on the.
No go ahead, Georgia give the details, but I can provide a little color alright.
Alright, Yeah, leisure was $112 million of exposure and 14 million of that exposure is currently and deferral.
Okay, and then do you have the criticized amount and the non accrual amounts of that.
And I can circle back with you and if you don't have that.
Yeah, why don't I get back to you on that I, just want to make sure I give you the the correct number.
Okay, Great and then and and I'm, sorry, Sean and I cut you off did you have did you have comments.
Just the the.
And the leisure excluding Firestone as we look at debt that.
Debt portfolio.
Very strong credits very good collateral coverage.
Incredibly strong guarantors.
The composition of of Golf course marinas of.
Of strong relationship borrowers to the bank so.
It's very different I know it I know we call it leisure, but very different than the leisure that is included and Firestone and so I just want to make that debt distinguish that difference.
Okay.
That's very helpful. Okay, and then Firestone.
Jamie can you help us think about you know of of the provision this quarter of $10 million how much of that was.
Firestone and related or just right.
You know any any other color and the the details you provided on Firestone, where super helpful on the job.
Yeah sure of Laurie I mean, that's not something that we really get into too much of I mean, I would think that I guess I would say that some of the provision that we had this quarter was was definitely related to Firestone.
But not necessarily any more than than anything else that we were doing so some piece of that was.
In general if you look at the amount of criticized loans and Firestone and so.
The 83 million and so.
And one third or so of that but the only five of its on on non accrual at the moment. So.
Think of that we think about that portfolio is certainly being of elevated.
Elevated risk and the same way that we look at our hospitality and restaurants.
But at the moment we were.
We're seeing pretty good performance from <unk>.
From that portfolio, especially when you consider that you know now.
94% of the deferrals that we have in that portfolio of portfolio are paying interest to us right now so.
Certainly and elevated concern.
But nothing that is massively impacting our provision or allowance at the moment.
Okay, and and do you have the debt what were the charge offs for the quarter and Firestone.
Yes Laurie.
That's the million and a half.
Well on behalf.
Okay, Great and then.
I guess just jumping over.
Just one more question on person do you have of geographical breakdown.
Or just given your your most concentrated sales on that exposure and I don't think we've had and update on that and six years.
Laurie.
And I can take this from John and I could give general and GA, if you've got it broken down a little greater that would be fine too.
And we don't have the concentration in any one state over the 11% from.
From an overall geographies of where it's predominantly the south of the northeast and the West Coast.
Georgia is there more color you can provide.
Luckily I think last quarter, Laura you had asked how much of it was and our footprint. Our footprint is probably makes up 20% to 25% of the the Firestone exposure of the rest is spread out amongst you know many many states by Sean said, none larger than 11%.
Okay, Okay, that's helpful and and and I guess, just with respect to the branch consolidation and thinking and sorry. This is shifting gears on the <unk>.
<unk> consolidation and thinking about expenses and Jamie can you help us think about how that's going to actually closer a little tighter I think you mentioned and the back half of the year, but can you help us think about how that's going to flow through in terms of where we would actually.
Back to the core run rate layering and the fact that you probably I'll start kind of Hudson technology spend.
Yeah, I think yeah, so I think that.
We talked about and my remarks about the sub $70 million.
Expense run rate.
By Q4, and I think that's a I think we're in a pretty good pretty good range. There I think you know somewhere 65 to 70.
The back half of the year and on a go forward I think is I think is where were targeting at the moment.
Great. Thank you I'll leave it there.
Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Sean Gray for any closing remarks.
Well. Thank you. Thank you all today.
We will be sending out our time for our Q1 call.
And I appreciate your comments and questions.
So thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.