Q1 2021 Berkshire Hills Bancorp Inc Earnings Call
And growth business units over that time I.
I believe that my experience positions me well to work with my team at Berkshire Bank to significantly improve financial performance and stakeholder value.
I must say I am deeply humbled by and grateful for the warm welcome and support that I received from my Berkshire colleagues and the board of directors and also from various partners and well wishers across the industry, including many of you on the call. Thank you so much.
I'm confident that with new leadership, a new strategic plan in the making which I'll address later and the collective resolve of the organization to maximize value for all stakeholders, we will fulfill our promise.
While meaningfully improving financial performance of this community dedicated institution.
Before I provide the highlights for the quarter I'd like to share some of my early observations as I complete three months today at Berkshire CEO.
First I want to salute, what I know to be exceptionally good about the organization starting with their score.
Strong Huntington 75 year history of being a purpose driven community dedicated bank that truly cares about its customers bankers and the communities.
And we have some remarkably talented bankers, who know our markets really well have built strong relationships with the customers and communities in those markets and other non customer facing bankers, who are passionate about delivering high quality experience to all our customers.
Building from that strong core we clearly have opportunities for improvement beginning with developing a clearer strategic imperative, specifically identifying the businesses markets and products, we will invest into growth.
We need to double down on what were best at and most passionate about and what drives our economic engine, because there and nowhere else is where we'll allocate capital and key resources as we drive for economic profit.
As we consider our strategic choices there is much to be done right away.
One we need to significantly improve channels and processes to jumpstart our revenue engine.
Our current levels of originations and relationship deepening not commensurate with that potential.
Do we need to accelerate our roadmap to digitize customer journeys from loan originations through servicing to integrating state of the art platforms that are built as platform as a service.
Three we need to really at all of our programs to be singularly focused on delivering exceptional customer experience and driving through industry, leading customer satisfaction and net promoter scores all of which I believe will ultimately lead to improved shareholder value.
With that let's turn to our earnings presentation, beginning on slide three I had a few important quarterly highlights first and driving home. The price I just communicated is a new leadership team at the helm infusing energy into the culture executing on near term priorities and building together.
Other a transformational strategy.
I'll touch on our new executive leadership in a few minutes and where we are in our strategic journey towards the end of my prepared remarks.
Second is the improving income and strengthening balance sheet. Some of those highlights that you see on the slide include GAAP EPS of 26 cents compared to a loss of 40 cents in the year ago period.
Core or adjusted EPS was <unk> 32 cents in the first quarter.
Non interest bearing deposits were up 37% year over year, while the cost of funds were down 48 basis right basis points versus 111 basis points in Q1 'twenty.
Loan balances were down due to pay downs and portfolio runoff exceeding new originations.
We are rebuilding our organic growth muscle by improving originations and building our pipeline with quality opportunities as Sean will highlight later.
The third highlight is the strides we've made in the trend in credit and asset quality.
Overall trends in credit and asset quality were highly encouraging.
Loan modifications were down by 86% from their peak of second quarter of last year and by 39% quarter over quarter.
Nonperforming assets were up modestly year over year, but improved on a sequential basis down 14% quarter over quarter.
Net charge offs declined by five and 42% year over year and quarter over quarter, respectively.
During the quarter. We also completed a comprehensive bottoms up credit review of our COVID-19 sensitive portfolios along with a total external validation of critical segment of the Firestone portfolio.
Fourth highlight is our laser focus on enhancing customer experience, especially through our digital channels.
While we have ways to go we are gaining traction and drove some early improvements in the first quarter for example, online banking and mobile banking users increased by 11% and 14% year over year.
Mobile App rating increased significantly to about four and a half stars on iOS and Android platforms.
Digital deposit deposit account openings as a percentage of total accounts open grew from below 2% in Q1 'twenty to over 7% this quarter.
As I said earlier, we have ways to go but are certainly headed in the right direction on this front.
Finally, we are focused on our capital levels and sustaining our financial flexibility to invest for growth and returns capital levels remained very strong with $1 21 common equity tier one ratio of 14%.
As part of our transformation plan will sharpen our focus on capital allocations and fund those businesses with the highest potential for return on equity in excess of cost of capital.
As you saw in our 8-K release last night, we also plan to return capital to shareholders in the form of share buybacks.
Overtime, we expect to deploy capital to profitable balance sheet growth. However, given our capital levels. The board and I believe that returning capital to shareholders via share buyback is a prudent course of action.
I'm pleased to report that the board has authorized a share buyback of up to two 5 million shares equal to about 5% of outstanding shares.
With that please turn to slide four to review some of the organizational highlights.
I'm excited to introduce shouldn't the bathroom, who joined as our new CFO in March prior to joining Berkshire Bank. He worked at Bank of America, Citigroup and most recently at State Street.
Over his 22 years of banking experience, so, but they've earned increasing roles of responsibility across finance function.
A key executive leader and a partner he will play an important role in our strategic transformation and driving improved financial performance.
Next is Kevin Collins, who you've heard from earlier in the call and who joined as our new head of Investor Relations and corporate development.
Kevin has served on the buy side for over 22 years and will play an important role as we strengthen our Investor Relations program.
In addition, we've hired several senior leaders are promoted new high potential candidates to payrolls for.
Let's take the example of the ongoing talent infusion includes Telerik again, the Carnegie who joined US from State Street as the new head of SG&A, and Angela Dixon, who joined as our new Chief diversity officer, leading a D and other initiatives.
Obviously, Angela I was the president of Dixon consulting a management consulting firm focused on diversity equity and inclusion.
Additionally, we're making a few changes in the board as you may have seen in our proxy. The board has nominated two new directors as set forth in a cooperation agreement between Berkshire, and Holdco asset management under which we agreed to nominate leashes Isa from Holdco and a new independent director Deborah Bailey select.
By Berkshire.
Reshaped the cofounder and managing director of Holdco as general partner and has served on numerous corporate boards oversight committees and capital comedies.
Deborah Bally had a distinguished career in both public and private sectors. She currently sits on the printer a board of governors for.
Prior government regulatory experience with the OCC and Federal Reserve Bank Board includes for role as the Deputy director of banking supervision and regulation, where she was a direct report to Federal Reserve Chairman Ben Bernanke, Inc.
She has also held positions at the managing director at KPMG, and Deloitte and Touche.
We are grateful that meshach, Deborah have agreed to serve on our board and look forward for their contributions.
I also wanted to share that David for now has been promoted to why share of the board.
David served on our board for three years and has over 20 years of business experience in financial services.
In addition, his current share of our audit committee and member of our governance and nominating Committee.
Finally, I'd like to express my sincere thanks to need Mahoney, and Jeff Templeton Who's retiring as of May 20th 2021.
Neel and Jeff have been on our board since 2005, and we're deeply grateful for their contributions to Berkshire Bank.
Wish them well always.
With that I'll turn it over to share but need to review the financials in more detail.
19 of them.
Excited to be part of the team here at Berkshire Bank.
Now if you'll turn to slide five.
Like to share our high level P&L with you on both a GAAP and an adjusted basis.
As a reminder, the adjusted EPS excludes keep one $5 million of expenses, leading to primarily our branch consolidation activities.
Our GAAP revenues were up 10% year over year, and 2% quarter over quarter ex champion fee revenues offset equal net interest income.
GAAP noninterest expenses were up about 10% year over year, and 9% quarter over quarter on higher legal and advisory fees and three and a half million dollars restructuring.
Restructuring expenses that was driven primarily by brand contribution.
Credit provision expenses dropped to $6 $5 million down 35% versus the fourth quarter and down 81% year over year due to improved.
Economic forecasts and reduced net charge offs.
Our tax provision was 22% of pretax income this quarter.
Adjusted revenues were down marginally year over year, primarily due to weaker net interest income it was up 6% quarter over quarter with strength in key income offset by weaker and net interest income.
Adjusted expenses were up about 5% quarter over quarter and year over year, driven primarily by higher legal and advisory fees.
Adjusted EPS was <unk> 32 cents in the quarter versus for Eaton in the last quarter and adjusted return on tangible common equity was six 4% versus five 5%.
Turning to slide six let me address changes in our earning assets.
Turning assets were up modestly on both a year over year and quarter over quarter basis with the mix shift from loans into investment securities.
Loans, excluding held for sales were down 16% year over year, and 8% versus the fourth quarter.
Mortgage balances were down 34% year over year, and 12% quarter over quarter, primarily driven by prepayments.
Our consumer loan book was down 31% year over year, and 13% quarter over quarter.
Driven by lower home equity loan originations and strategic Luna from our indirect auto loan book.
The commercial and industrial loan book was down quarter over quarter, primarily D. D. D. D D forgiveness that accounted for approximately $119 million decline in commercial and industrial loan balances.
Our commercial real estate balances were down due to market conditions, resulting in weaker loan demand.
Our loan book will also be impacted by the plans of the eight mid Atlantic branches around midyear 2021, which have about $300 million in loans.
Our total investment book was up 67% year over year, and 20% quarter over quarter in response to the growth in deposits and weaker loan demand.
Our longer term investment portfolio was up 26% year over year, and 12% quarter over quarter.
It is highly liquid with over 80% of the portfolio consisting of agency mortgage product and Treasury notes.
Our short term investment book was also up significantly driven by deposit growth and muted demand for loans.
We plan to redeploy that liquidity, primarily for being down high cost borrowings enhancing investment book yields and supporting loan growth.
Slide seven shows our average liabilities given.
Given the growth in deposits, we have a unique opportunity to shift our funding from wholesale to lower cost deposits.
Higher cost funding from FHA, B borrowings and brokered Cds are down significantly.
Combination of the above have enabled us to significantly lower our cost of funds from 40 basis points to 40 basis points from 111 basis points, a year ago, a 59% reduction in funding costs.
Yeah.
Slide eight shows our net interest margin trends net interest income and net interest margin dropped from the first to second quarter of 2020 as interest rates declined.
Over the last three quarters net interest margin has been stable and net interest income has been down modestly.
Wholesale funding, which includes FHFA borrowings and broker deposits is down 57% since year end 2019, and 26% since year end 2020.
Higher cost borrowings are down $379 million from year end 2019, our 46% and broker Cds are down $777 million or 64%.
Moving on to slide nine.
Slide nine shows our adjusted fee revenues we.
We had broad based fee revenue growth in the first quarter up 70% year over year and up 34% quarter over quarter.
Loan fees were up on strengthen SBA originations asset based lending originations and also on swap fees related to CRE loans.
I'd note that loan fees include $1 $5 million a day.
For the referral fees, which will not recur after the second quarter.
It also includes adjustments for our swap contracts and MSR valuations.
Wealth management fees were up 7% and insurance revenue was up 3% year over year.
Both businesses are seasonal and are subject to cyclicality with a higher fee revenue is typically in the first quarter of the year.
On slide 10, we show our adjusted expenses.
They were up 5% on book quarter over quarter and year over year basis for pet.
Small services fees were above our usual quarterly run rate on higher legal and advisory expenses, we expect those expenses to moderate during the course of the year.
Excluding professional services expenses, all other total expenses were down 1% year over year.
Loan processing expenses were lower due to lower loan volumes.
As discussed earlier, our $3 $5 million of restructuring expenses were primarily attributable to a branch consolidation activities.
Slide 11 is a summary of our asset quality metrics, which are encouraging signs loans.
Loan modifications have dropped to $214 million, which is down 686% from their peak in the second quarter of last year.
Non accrual loans are up modestly year over year, but down 14% versus the fourth quarter and net charge offs are down 42% versus the fourth quarter.
We are cautiously optimistic about our credit exposures, we expect credit provisions and charge offs to trend towards pre pandemic levels over the next year or so.
Slide 12 shows our exposure in credit metrics for COVID-19 sensitive segments, including hospitality, Firestone restaurants, and nursing assisted living loan books.
Quarter over quarter, our loan balances are down our criticized assets are down.
And our COVID-19 related loan deferrals and non accruals are also down significantly.
The sequential quarter trends are very encouraging.
Slide 13, and 14 include more granular details on our COVID-19 sensitive loan portfolios.
Again overall trends are encouraging and deferrals across these portfolios have declined quarter over quarter with declines ranging between 25 per cent and 71%.
Slide 15 shows detailed on our capital and liquidity positions our capital levels remain very strong.
Our estimated common equity tier one capital ratio ended the first quarter at about 14%.
And the fourth quarter of 2020, our common equity tier one ratio was about 230 basis points higher than our peer median ratios.
Our capital structure is also very robust with high quality common equity tier one capital accounting for 98 per cent of tier one capital and 88% of total capex.
Admittedly eluded too earlier, we are singularly focused on instilling discipline around effective capital deployment, and earning returns that maximize franchise and shareholder value.
The share buybacks discussed earlier is one of the key steps towards that goal.
Also with the deposit to loan ratio of 75%, you're well positioned to fund future loan growth.
In summary, this was an encouraging quarter, whereas we had revenue growth primarily driven by increased fee income a steady downward trend in funding costs improved asset quality trends, including in COVID-19 sensitive segments.
Lower credit provisions and strong capital and liquidity positions.
We also continued to see muted demand for loans.
I'd like to close with comments on our outlook.
First the most recent Moody's economic forecast points to a significant recovery in the U S. Specifically, our six 5% GDP growth in 2021.
Vaccinations have also progressed at a rapid rate with about 30% of the U S population vaccinated.
Massachusetts, Connecticut, and New York States, where our footprint is concentrated and vaccination rates that are higher than the national average.
While we are upbeat about the economic forecasts and vaccination progress weaker loan trends seen in recent quarters are expected to persist for us and likely for the industry.
It's still early in the year, but.
We expect modest decline in loan balances for the remainder of the year.
Both driven by the time for economic recovery and ramp up of origination pipeline runoff.
The runoff of the PPP loans and certain loan book balances.
We estimate about $450 million of TPB related loans runoff between first quarter of 2021 and year end.
The estimated impact of PPD on NII for first quarter of 'twenty, one was $6 $6 million, we expect core NII for the remainder of the year to be flat to down modestly.
We expect net interest margin to modestly improve over the course of the year.
We expect organic deposits to be flat to up modestly during the course of 2021.
On wholesale funding, we expect it for their feet out maturing wholesale funds during the course of 2021 and for the lower our cost of deposit cost of funds.
Based on current economic forecast and our portfolio composition, we expect a meaningfully improved credit environment over time, and the credit provision expenses will trend towards pre pandemic levels in 2022.
We also expect that we'll get two D. One seasonal reserves.
To loan ratio in 2022.
I'd caution that our credit can be lumpy. So we don't expect a straight line on provision expenses are charge offs.
We expect fees to return to normal levels in the second quarter from the high level in first quarter, but remained stable to up modestly of debt lower base.
On a run rate basis, we expect second quarter expenses to moderate.
Consistent with our previous guidance, we expect to trend below $70 million in expenses by end of year.
However in light of getting earlier comments and in addition to expenses, we are focused on optimizing efficiency ratios.
And we expect our tax rate for 2021 to be around 15% to 16% with that I'll hand over to Sean.
Thank you attributed and it's been a pleasure collaborating with you since your arrival I'd like to begin by sharing some of our key operational highlights from the first quarter, which are collectively positioning the company toward a bright and innovative future I'm on slide 16.
We have several ongoing initiatives aimed at transforming our community bank model, including the continued optimization of our branch network. We remain laser focused on executing our previously announced branch optimization initiative to strengthen our franchise. This includes the consolidation of 16 branches.
Nine of which were completed in the first quarter.
The majority of the remaining branches are targeted for consolidation by mid year, and we expect to maintain our strong history of deposit retention.
The sale of our east mid Atlantic branches in New Jersey, and Pennsylvania is on track and scheduled to be completed by mid year pending necessary regulatory approvals.
The branch sale is expected to include more than $600 million in deposits and $300 million in loans.
Fective optimization of our branch network allows us to meet changing customer needs <unk>.
Reinvesting those savings into the right blend of personalized service and the latest digital technology to enable a seamless customer experience.
The combination of our branch optimization efforts for 16 plant consolidations plus the sale of the mid Atlantic branches will reduce our overall branch footprint by 18%.
Our branch count to 106.
Yeah.
Moving on to Slide 17, we will continue to evaluate our banking channel supported by our my banker team, which provides highly personalized service digital offerings and financial advisor on <unk>.
Bankers have a track record of customer and portfolio growth and continue to be instrumental in retaining our client base and deposits post consolidations.
As a result, we expect our my banker program to be an area of growth and a proven alternative to traditional brick and mortar channels.
Recently, there has been several significant bank merger announcements in our markets. These transactions create disruption in the market and opportunities for all our bankers to begin forging new relationships and strengthen existing ones.
In June we will open a commercial office in Providence, Rhode Island, and that will serve as a hub for lending activities in support of our eastern Connecticut, and Rhode Island markets.
As I noted above we will continue to meet changing customer needs, including increased digital adoption by accelerating and executing our digital transformation roadmap.
This will allow us to create a full omnichannel customer experience that combines the personalized service of traditional banks with value added digital offerings.
We've already completed a number of technology infrastructure projects aimed at improving operational efficiency and the customer experience. This includes the launch of our best in class digital account opening platform.
We're excited to provide customers with a frictionless experience, allowing them to open an account in just over two minutes, which is four times faster than the industry average.
During the quarter, we saw additional progress from our initiatives, including a remarkable increase in our mobile operating increasing significantly to about a four five star rating in the Apple App store and Google Android platform.
We expect to make additional enhancements to our mobile app to better serve our customers in the upcoming quarter.
This progress builds on the existing infrastructure investments made in our consumer E banking experience.
Enterprise wide E signature platform.
And additional sales force API integrations.
We will continue to periodically keep you updated on the progress and impact of these initiatives.
Now while loan demand is muted based on excess liquidity in the market. We are seeing our share of potential deals as outlined on slide 18 of our presentation.
Our overall pipelines are increasing towards pre pandemic levels. Our teams are active in our communities and we continue to be selective to maintain our credit and pricing discipline in a competitive market.
Commercial originations are up quarter over quarter as our residential mortgages.
Our ABL group has had a strong start to the year bolstered by key new hires. We also made additions to our business banking and private banking teams to strengthen our position and ability to support our Boston area customers.
We produced solid benefits for our communities customers and shareholders during the quarter with over 8000 applications process successfully we were able to say we were able to save approximately 100000 jobs on the payrolls of small and medium sized businesses through the PPP program.
Our efforts not only helped us generate additional income for the bank, but was instrumental in supporting thousands of small businesses on our main streets.
Now since the start of the P. P for P program last year, we have assisted our markets with nearly $1 billion in PPP loans.
On the socially responsible front, we were added to the Bloomberg gender equality index in 2020 and were named a best place to work for LGBTQ equality by the human rights campaign.
Activates demonstrates the collective actions of all of our team members and will help enable us to become the leading socially responsible omni channel community Bank.
With that I'll turn it over to net.
Thank you Sean before we open it up for questions I want to provide a quick update on where we are in terms of our new strategic plan I'm on slide 19.
Since the day I die we've been working on a transformational strategic plan that will significantly improve Berkshire its financial performance, while building on our core values and purpose.
Building this plan organically with inputs and commitment from senior leaders of the bank.
We have internally branded business at Berkshire exciting strategic transformation our best.
I think high level best had three foundational pillars optimize digitize and enhance.
The first pillar optimize will drive.
<unk> fees across our channels geographies processing business segments, and optimize our balance sheet.
The second pillar, digitize and Delaware personalized online experiences across customer journeys for customers and consumers and businesses alike.
We believe our efforts will result in a highly differentiated omnichannel experience and deliver top quartile customer satisfaction levels and net promoter score.
The third pillar is in here.
Hence through which we will enhance engagement experience and value proposition for our bankers and customers, including improved customer segmentation and relationship deepening which will lead to growth in balances and wallet share over time.
Overall best plan is focused on transformation through organic growth, whereby we'll focus on getting better before we get bigger.
We believe that with the successful launch and execution of debt. We've all become the leading socially responsible omni channel community bank in the markets we serve.
So what does that ultimately mean.
What it means is through the execution of this program risk Delaware a return on equity index set off our cost of capital and approximately three years and over that period will improve our efficiency ratio by over 10%.
We will be in the top quartile of customer satisfaction and net promoter score in the markets that we serve and we won't be in the top quartile of ESG indexes nationally.
We look forward to sharing more details of our strategy at our virtual strategy update call scheduled for May 18, and we'll provide more details in the coming weeks.
In closing having worked with the leadership team over the last three months I can assure you that could be moving forward with a sense of urgency collective resolve passion and confidence to prove that Berkshire. Its purpose driven community dedicated culture now enabled by our best program is it.
Ready to transform our performance to enhance returns for all our stakeholders.
Thank you and with that I'd like to open up the floor for questions Jason.
We will now begin the question and answer session.
A question you May Press Star then one on your Touchtone zone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question comes from Laurie Hunsicker from Compass point. Please go ahead.
Hi, good morning seem to buyback appreciate all the details in our press release and the day.
And the details on credit, but just wondered maybe could that day.
If you can help us a little bit you said core net interest income.
And I'm, just kind of walk through that very high level like if I'm looking at your net interest income currently at $75 1 million. It was 6.6 P. P. P. So.
Obviously other P. P P for the rest of this year, but assuming that's out.