Q2 2021 Berkshire Hills Bancorp Inc Earnings Call
And Chief operating officer, and Greg Lindenmuth, our Chief risk Officer at this time I'll turn the call over to our CEO net net in heidrick.
Thank you, Kevin and good morning, everyone and welcome to Berkshire second quarter earnings call.
And we've been busy since our last earnings call.
We held our virtual strategy meeting on May 18th, where we announced best or Berkshire is exciting strategic transformation day.
Details of this program and its projected impact is captured in the materials that remain available on our website and I encourage you to take a look.
In June we welcomed 2 new board members, Deborah belly and niche and sites to their first board meeting.
And we've also been building out Berkshire team, which I'll address later in the call.
Let's turn to our earnings presentation, beginning on slide 3.
We had a strong quarter with solid financials.
Crude asset quality continued capital deployment and the launch of our transformational best strategy as the key highlights of the quarter.
In terms of financials, we had a good year over year trends across all key financial matrix that drove improved EPS and return on tangible common equity for ROTC.
Adjusted EPS was <unk> 44 cents up 12% quarter over quarter and up 57 cents year over year.
Revenue improved year over year and declined slightly from Q1.
Net interest income was stable once again and fee revenue strengthened year over year.
Increased consumer spending drove interchange fees higher while strong gain on sales from higher SBA loan originations increased loan related fees.
Expenses were down across the board on both quarter over quarter and year over year basis.
Lower compensation and lower professional services expenses drove much of the improvement.
<unk> will share more details on this and a few minutes.
On credit what a difference 2 quarters make.
Asset quality has shown consistent improvement over past 2 quarters with delinquencies non accruals charge offs, all down quarter over quarter, driven by improving economic conditions and proactive loss mitigation programs.
We are well reserved for credit and I'm grateful to our credit and portfolio management teams for their diligence and vigilant over the last 6 quarters under the pandemic challenging circumstances.
On capital, we returned $26.8 million to shareholders in the second quarter through share buybacks and dividends, representing about 124% of net income and the quarter.
Our capital ratios remained strong relative to peers with CET, 1 at 14, 3% of risk weighted assets at quarter end.
Our balance sheet strength gives us ample of capital to both opportunistically repurchase stock and to achieve our expected loan growth targets.
And on strategy, we are grateful that about 700 investors analysts employees community members and centers of influence attended our best strategy launch meeting on May 18th as we said then our strategy will self fund that is expense sales will fund investments and bank.
<unk> technology and customer experience, which in turn will significantly enhance stakeholder value for example, our enhanced procurement strategy targets over $10 million and expense saves over 3 year Best program timeline. In addition to real estate rationalization cost saves.
Later in the call I'll discuss how we are building back our loan originations engine and will provide data on early progress on our best programs performance targets.
With that I'll turn the call over to ship a deep to discuss our financials in more detail shortly.
Thank you Nathan.
If you turn to slide for I'd like to share on our high level income statement with you.
My comments will be on an adjusted numbers versus GAAP.
Please see the appendix for a reconciliation for our GAAP and adjusted financials.
Our revenues were up 4% year over year and see growth offset a modest decline in net interest income.
Fees were up 36% year on year, and commercial and consumer activity increase from their pandemic lows.
Revenues were lower sequentially, driven by seasonally higher wealth management and insurance revenues and the first quarter.
We also had a high swap fair value adjustment and high BBB referral fees in the first quarter.
Expenses were down 8% sequentially, driven by lower professional services compensation and payroll tax expenses.
We are very encouraged by early progress on expenses. However, I want to remind you that we will be investing and hiring bankers and investing in technology as part of the self funding the best plan.
Our provision expense was zero this quarter down from $6.5 million, and first quarter, reflecting and improving credit environment.
Our return on tangible common equity was 8.1% up 210 basis points versus the first quarter.
Turning to slide 5 let me address changes and our earning assets.
Earning assets were essentially flat on both a year over year and quarter over quarter basis.
While industry headwinds for loan growth are expected to persist in the short term.
We are encouraged by the expansion of our team of bankers and the upward trend for deal activity.
Commercial real estate was flat versus the first quarter and excluding PPP run off our underlying average C&I loans were modestly down by 3%.
Importantly, we are encouraged by recent loan origination volumes and our loan originations for the second quarter of 310 million and reflect a 63% and 33% improvement versus prior year and prior quarter respectively.
The growth and originations is also balanced and spread across our commercial and consumer portfolios.
Loan yields were up 11 basis points quarter over quarter.
For the CRE portfolio, we recognized higher purchase loan accretion and C&I yields rose due to PPP forgiveness.
We ended the quarter with 173 million and PPP loans. These balances are expected to run off in the third quarter of 2021.
To assist with your analysis, we have added a page in the appendix on PPP impacts to our balance sheet and P&L.
We have 146 million and non strategic indirect auto loans, which we expect to run off over the next 8 quarters.
And you will recall, we are also selling 8 mid Atlantic branches, and the third quarter, which had average second quarter loans of $269 million and average deposits of $517 million we.
We expect the transaction to close and third quarter of 2021.
Our investment portfolio has grown 13% on a quarter over quarter basis.
We continue to pursue investment options to enhance yield on the investment portfolio, while balancing liquidity needs for the best plan.
Yeah.
Slide 6 shows our average liabilities, we continue to manage down our funding costs by replacing higher cost funding with lower cost funding.
Non interest bearing deposits are up 19% year over year.
Higher cost brokered Cds, and <unk> borrowings are down year over year of 65% and 60%.
Our cost of funds has dropped by 60% from 92 basis points and second quarter of 2020 to 36 basis points in second quarter of 2021.
Our net interest margin has been stable at 262 basis points.
Slide 7 provides more detail on our funding trends with the growth of non interest bearing now money market and savings deposits are lower cost deposits constitute 83% of our total deposit base.
And 4% of our customer Cds are expected to reprice and the next 6 quarters for.
Benefits of our Cds repricing downwards are reflected in our deposit costs for customer Cds.
102 basis points on a year over year basis.
We have also paid down half a billion dollars and wholesale funding in the first half of 2021.
We anticipate paying down approximately $300 million of addition, wholesale funding and the second half of 2021.
Slide 8 shows our fee revenues.
We're encouraged that fee revenues are up 36% year over year as economic activity has recovered of pandemic lows.
Deposit related fees, which includes service charges on deposit accounts and card fees interchange, we're up 40% year over year as consumer activity increased.
Our SBA lending business continues to exhibit strong momentum.
Loan fees and revenue are up 30% driven principally by higher gain on sales from SBA lending and higher swap fees.
Fees were down sequentially, driven by seasonally higher first quarter wealth management and insurance fees.
We also had high positive swap and MSR fair value adjustment adjustments and high PPP referral fees in the first quarter.
On slide 9 we show our expenses.
Adjusted expenses were down 8% quarter over quarter, primarily driven by lower professional services expenses.
Your compensation expenses and lower occupancy expenses.
On a year over year basis expenses were down 2% driven.
Driven primarily by lower head count and lower PPP related expenses.
Our head count was down 6% on a year over year basis.
As discussed at our meeting and the best launch our goal is to self fund our transformation efforts and we are very encouraged by the early progress, we're making on that front.
Slide 10 is a summary of our asset quality metrics.
<unk> improved across the board.
Loan modifications are down 94% year over year to $98 million or 1.4% of loans.
Charge offs are at $4.7 million down 50% versus first quarter.
Total delinquencies, including non performing loans are at $66 million or 92 basis points of total loans, which is down 27% versus the first quarter.
Both charge offs and delinquencies for the quarter are close to pre pandemic levels.
Leading indicators also point to similar improvements and asset quality.
30 to 80, and 90 day delinquency bucket has reduced 57% year over year from 35 million to $15 million.
Improved credit quality, coupled with improved economic forecasts and resulted in zero provision expenses in the second quarter versus $6.5 million provision in the first quarter.
Our allowance for credit losses is at $1.6 9% of total loans, excluding PPP loans.
It should be noted that delinquencies net of charge offs and ACL as a percentage of total loans are down notwithstanding a decline in our loan balances.
Slide 11, and further highlight significant improvements in our COVID-19 sensitive segments, including hospitality Firestone restaurant and nursing assisted living loan books.
Covid sensitive deferrals are down 88% year over year, and 58% versus the first quarter.
Criticized assets are down double digits versus the first quarter and non accrual loans are down 4%.
The appendix includes 2 pages detailing trends for each of the COVID-19 sensitive portfolios.
Covid deferrals for a restaurant and nursing assess.
And living portfolios are down to zero and.
And down 86% for Firestone and 38% for our hospitality portfolio.
I'm happy to discuss with you further if you want to follow up with us.
Slide 12 shows detailed on our capital and liquidity positions.
As Nathan mentioned, we returned $26.8 million of capital or approximately 124% of second quarter 2021, net income to shareholders.
We have stock repurchase and dividends.
Our capital levels continue to remain very strong the common equity tier 1 capital ratio improved by 10 basis points versus first quarter.
Our second quarter training them on estimated CET 1 ratio is at 14, 3%.
We continue to execute on our share buyback program, having already purchased 745000 shares of the 2.5 million shares authorized by the board.
As you can see from the quarterly CET 1 walk our estimated arguably has also dropped due to change and asset mix moving to lower risk categories.
In summary, this was an encouraging quarter and provides us momentum as we continue to execute on our transformation plan.
We had revenue growth, primarily driven by increased fee income.
Expense discipline drove down expenses and credit quality has significantly improved resulting in zero provision expenses.
Capital levels are robust and we continue to return excess capital to shareholders.
Roxy was 8.1% and we grew our tangible book value per share to $22.66, which is up 3% versus second quarter of 2020.
Now I would like to close with comments on our outlook.
While we are upbeat about the vaccination trends in our footprint and improved economic forecasts weaker loan demand trends seen in recent quarters are expected to persist.
We expect NII to be lower for the rest of the year as PPP interest income declines and non strategic loan books continuing to run off.
We expect fee revenues to be stable throughout the second half of the year.
We expect to meaningfully improved credit environment over time and debt credit provision expenses trend towards pre pandemic levels in 2022.
As we said last quarter, we expect to get to Dave on Cecil reserves to loans in 2022.
I caution that our credits can be lumpy. So we don't expect a straight line on provision expenses or charge offs.
We expect expenses for the rest of the year to be stable at about $70 million run rate.
Our tax rate was higher this quarter and.
And we expect our tax rate for the rest of 2021 to be and mid to high teens.
And we.
We expect our fully diluted share counts to be lower.
With that I'll turn it back to net and for closing comments Nathan.
Thanks for everything he per.
Attributive share the pandemic and the macroeconomic factors have caused loan growth challenges for the industry and for Berkshire.
In addition, while we expect that the decline and PPP balances closing of mid Atlantic transaction and runoff of non strategic books to occur and the second half for 2021, we feel confident that we will see modest growth and balances beginning in 2022, and we will strive to outperform market.
Trends through our best plan initiatives.
We are adding to our loan originations muscle and 3 broad ways.
First we are successfully retaining our strong performers and hiring new bankers in both commercial and consumer banking.
Second we are partnering with correspondent lenders for residential mortgage originations in our footprint and.
And third we are partnering with Fintech platforms to prudently increase our relationship based lending to serve the needs of customers and prospects in our footprint.
On slide 13, we show, how we are strengthening our team and winning new business.
Our existing team of bankers have strong relationships with their customers and know their markets communities centers of influence and sponsors really well and.
And we have a very high banker and customer retention rate.
M&A activity and our markets and bankers seeking to work and a community dedicated institution has provided Berkshire, a greater opportunity to hire bankers from competitors, who share our passion for doing well by doing good for our customers and the communities that we operate and.
We've hired leading commercial bankers across our footprint in several key asset categories, including bed and Garcia a senior asset based lender from Wells Fargo and the Albany market <unk>.
Boston and business banking team led by Scott Vickery from Webster and Tim can ski a senior banker from bank of America, and Albany commercial lending markets.
To fast track, our optimization efforts outline and the best program. We also hired Mark Mylan, who is 1 of the top procurement experts and the country and it's 100% focused on managing our 500, plus vendors more efficiently and build effective strategic sourcing program for us.
Our bankers are energized by our focus on organic growth and we are winning new customers and new deals from our competitors.
We have shared some examples here to highlight that we are winning significant relationships across our banker footprint, especially in commercial and business banking.
A combination of these initiatives have created market momentum that drove second quarter origination, 63% higher year over year, and 33% higher quarter over quarter.
On Slide 14, we show our early progress against our best performance targets across our 5 key matrix.
ROTC Aro A&P PNR are up smartly compared to the base line of full year 2020 performance and will be tracked on an ongoing basis to ensure that these key matrix continue to track towards our best program goals.
For second quarter, the financial matrix of ROTC, Ottawa, and PPE and are are moving and the right direction, reflecting 8.1% and 70 basis points on adjusted basis for ROTC, and Ottawa, respectively, and annualized second quarter P. P and R is at $116 million up.
And over 6% from the baseline full year, 'twenty PPE and art.
We're also making progress on harder to measure, but equally important ESG and NPS scores.
Our blended ESG score rose 10 points versus last year to take us to 29th percentile and on net promoter score puts us at about 58 percentile amongst the banks operating in new England.
Although some terrific smaller competitors, but well ahead of some large household name banks.
We will continue to provide regular updates on progress on the best program.
In summary, a saw.
Solid quarter across many fronts.
<unk> net interest income strong commercial loan originations and stable balances.
Good free momentum good expense control Inc.
Proving credit profile, and we are well into our share repurchase program.
Our best program will build further momentum into 2022.
With that I'll turn it over to the operator for questions operator.
We will now begin the question on non core.
A quick question on.
And then 1 on <unk> touched on.
We'll go on Speakerphone. Please pick up also on corporate for customers.
And more questions on Kumar, who would like to try and question.
Todd on too.
And we will pause momentarily to assemble our Uh huh.
Yeah.
Yes.
The first question comes from Mark.
And Oh.
Guys good morning.
First off congratulations on a good quarter.
Wanted to just follow up sugar deep you mentioned that the New Jersey branch sale will happen and the third quarter can you give us a better sense for when and the third quarter, that's likely to happen.
Hi, Mark good to hear from you and hope all is well.
And at this point the guidance that we're going to give us it is going to close and in third quarter.
And until the deal is finalized and signed you know we can't give us further details on potential dates.
Okay, and then secondly, I think you mentioned and your outlook comments that you expect operating expenses to be sort of stable in the $70 million range, but assuming you were to get sell those branches sometime early in her mid third quarter Shouldnt operating costs come down by a decent amount wouldnt that.
And $70 million kind of be high.
Sure Mark so on the $70 million guidance, that's the net number from a sort of total operating expense perspective.
And there are ins and outs of debt number so sort of just to highlight that you know there are sort of expense saves that will reduce debt number but on the other front, we're going to invest as we said for sort of best plan related and are hiring bankers and technology and the third will be sort of the branch expenses that will be coming and on a run rate base.
Says that you will see not only and in order for the rest of the year, but coming in 2022 as well.
Okay. Thank you and then I wondered if you could share with US I know you said that there is no industry pressures on loan demand, but could you share with us the size of your pipelines today.
I'll take that Mark and what we could say is we clearly had a strong.
Originations quarter I think on originations were highest in the last 5 quarters and so as our pipeline and I think that gives us the momentum getting into third and fourth quarter and debt will continue to grow as we continue to hire new bankers and build out more teams and commercial and small business. While we are ramping up our partnerships for the consumer side of the equation. So I think the.
Short answer would be a not just the originations were at the highest point this quarter, but so was the pipeline across commercial and consumer.
Okay, and then net and just sort of a more strategic question as you look at the <unk>.
And your fee based businesses like wealth management and insurance and mortgage are there any candidates for dramatic new investments for growth or or any of those potential sales candidates I guess I'm just curious because you've talked a lot about growing the lending businesses, but but hadn't heard much on the fee side.
Big question, Mark and you know this very well for years, obviously, a highly capital efficient.
On stream of revenue.
And it also.
And is challenging and the times that we are and we are looking at all opportunities to grow for your revenues from the components for the businesses that we have we are investing heavily into our SBA loan originations of unit that create significant amount of gain on sale and for your revenue and that's accretive for both income as well as return on capital.
We are looking at some components, where they might be up opportunities to oh.
<unk> rationalized some of the operations, which are.
Not as efficient as the other businesses are.
So I think the short answer would be.
Yes, we wont grow fee revenue, we are looking to invest into our fee income opportunities coming from 40 for BC, which is our SBA, our wealth management and mortgage and consumer operations, while looking at opportunities to rationalize some of the businesses.
Thank you.
And next question comes from line on cocoa content growth.
And <unk>.
Hi, good morning on <unk>.
Good morning.
And I Wonder if we could go back.
So the expense for.
Because I'm on I'm also trying to understand that and other words and looking at the <unk>.
Alright, and sending out on your.
Quarterly run rate on shopping closer to call it that.
And I have quite a big capital.
On the doubtful.
And for that kind of be hiring people technology and et cetera.
And I am is that the right way to be thinking about that.
Hi, Laurie and good to hear from you should believe so I think you know as I sort of.
Answered the prior question on the calls for so.
You know as we said, we're going to get expense saves from our branch sales and and but we're going to be investing debt amount into a part of that into our in our best plan and and there are several ins and outs in terms of in on expenses. You know there are and the expense saves that are coming and optimization answer.
And our real estate and other things that are coming and that will drive that number down but at the end of the day $70 million is sort of a balanced impact of all of those different categories.
Okay, Okay, great and then just to confirm and we're going to be running with our branch count and.
On the neighborhood of 500.
And the tax on 100 and Stephane.
And so is that correct, yeah, l'oreal and I'll ask Sean address that question sure mineral interest.
Adding to the expense run rate discussion with consolidated 15 of our planned 16 branches. The 16th is scheduled for late October deposit retention has been exceeding expectations. The budget is on target and <unk>.
When we launched best we talked about an additional 5% to 10% of our branch count being reduced throughout the end of the year and thanks for next year. So we feel for an experienced proven consolidator. We've got a good strong history of customer deposit retention. So we will continue to execute on that 5% to 10%.
8 to 10 branches from a starting on all those plants have begun moving into the first half from next year.
Okay, Great and so then it seems that connect and I'm, saying another 5 to 10 branches.
Is that correct.
Credit script.
Okay. Okay.
Continuing on that.
Hey, Laurie just too high.
A little flavor on what Sean just highlighted I think what's been remarkable just looking at this and you and me coming in 6 months and looking at the history of consolidations that we've done, whereas Sean highlighted we've retained our customers retain the deposits, but we've also done a remarkable job of retaining bankers through managing through attrition, which has been.
<unk>, which has been the strength of this organization and I just wanted to highlight debt.
Okay, Great that's helpful.
And then credit and Hum and your point and improved a lot this quarter and it looks very very strong you have mentioned.
And I guess for your prepared comments that pre pandemic.
Level in terms of investing won't return until 2020 tail on that.
And we're thinking for the back half of 2021 you're working on.
Cool.
Tom and Obama.
Third quarter or how should we be thinking about that.
And then your reserves to loans actually people were putting on 169.
On a color on where you want that target.
Hi, Larry I'm sure. So look at this point based on where we think our portfolio is looking at sort of and the improved economic forecasts, where it's growing.
And basically what you saw is our zero provision expenses.
As we highlighted and the first quarter, we feel really good in terms of the direction the strategic direction from a credit quality perspective, our portfolio is growing and and we believe that momentum is going to continue. So you know as as debt momentum continues you're going to see similar trends and provision expenses for the rest of day and going forward and and and.
And I want to emphasize that you know such trends continue we expect to return to pre pandemic levels of ACL to loan loss reserves.
Okay. Okay, and then just in terms of that target that was there on target, but what's a good number.
So again it depends on sort of are the portfolios and United is easy new and part of the best plan. You know we have youre growing our commercial business for growing our consumer business and a few sort of take that out and a ballpark. If you look at our book of business commercial book of business and consumer make debt behalf.
Currently it's between 90 to 100 basis points.
Okay.
Okay.
Okay and then on in terms of you had you're sending me on your audio.
Sales tax credit for.
And then which I think for both here in the back half of 2020, 1 and you gave us the tax on that but I, just wonder and sometimes in the past and put the net charge and debt to income that sort of tactically and its commercial projects and that's net which was a bit of a drag a week and I would expect to see that uptick or how should we be thinking about that line.
Yeah, and as you know and no tax credits can be lumpy, so and and we go through sort of and a very well.
Well total process in terms of how we do that so yeah first 2 quarters you can see the benefits of that from a effective tax rate perspective, but in subsequent quarters as I provided in my guidance, we are going to see the the downtick and the effective tax rates.
Okay. Okay. That's all in terms of in terms of a drag in terms of the charges and non interest income.
And it couldn't go back from where we're seeing and a 3 and a half for a million dollar annual run rate.
For that line or how should we be thinking about that.
I think you know given sort of the first 2 quarters.
At this point I think you know I'll provide some guidance on the effective tax rate, which I said and mid to high teens and then we can discuss in more detail. When we talk later about.
The additional question that he has.
Okay. Okay.
Perfect. That's helpful. And then just 2 more questions.
Looking at debt.
Net payable there that's a pleasant at kind of sort of broken out detail. The P. P. P income and that was on the net interest income number and that's $75 million, what what was that number.
So I think the last page and and take a look at it Lorie. When you have a chance page 20 slide 20 of the earnings presentation has a detailed PPP impact by quarter. So to answer your question. The interest income impact was $5.1 million for PPD for <unk>.
Yeah, you know and I can't read and hear it got it Okay. And then the same thing on accretion income and look like that it looked like it was rounded to 10 million I was just looking on your platform, which is a big number I just wonder.
And you'll have an exact number as to what that was and Christina income included in net interest income.
Yes, we can talk after all those details and we speak later Laurie.
Okay sounds good I'll leave it there thank you.
Thanks Laurie.
From a question consumer value.
Inc.
Please go ahead.
Hey, good morning, guys.
And Jay good morning.
I know you alluded to on NIM pressure and the second half for year.
Think about your net interest income dollars <unk> was really the first quarter and a couple of years, where you actually saw net your net interest income moved higher.
And can you can continue to grow your net interest income despite the NIM pressure.
Sorry, Jake can you repeat the last part of the question.
Yeah. So do you think you can continue to grow your net interest income dollars. Despite the margin pressure that you alluded to and the back half of 2020.1 price.
Thank you guys and and this goes back also to the discussion we had as part of the best plan. So as he said this year our balance sheet is going to be sort of modestly to the flat flat and even you know marginally down for the rest of the year, but that represents sort of the you know.
And the impact of PPP loans running off.
And the other runoff of non strategic portfolios.
Having said that we are really getting sort of spending and sort of the next half of the year preparing for ramping up the balance sheet growth in terms of a NIM perspective, I think as you know obviously there are pressures and the market, but we expect NII to be down modestly down for the rest of the year.
Okay, great. Thanks.
The only other question I have is.
You anticipate that Youll continue to grow the investment securities portfolio as you have for the past several quarters or does.
Does the does that shift in the interest rate environment here over the last few weeks that changed your thinking on that.
No actually I think if you look at for investment portfolio. It is grown and and the growth over the last few.
A few quarters, including this quarter you know in terms of debt liquidity that you have you're looking to sort of obviously best deploy it in terms of and making sure that we enhance the investment portfolio yields so you're going to probably see some more deployments into securities at the same time, we want to make sure that we are adequately.
To prepare and plan for to deploy that for the for the best land related strategic growth. So to answer. Your question. Yes, you can see some deployments into securities.
Okay.
No that's great. Thanks, Thanks, guys, that's all I have.
Jake.
Thank you.
This concludes our question and answer.
I'd like to turn the conference back over to Michael not true.
Mark.
Thank you for joining us today on our call and for your interest and Berkshire have a great day and be well.
Okay.
The current concludes now concluded.
And Craig on consumer now disconnect.
[music].
Okay.
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