Q1 2022 Berkshire Hills Bancorp Inc Earnings Call
Good morning, Good afternoon, and welcome to the Berkshire Hills Bancorp Q1 earnings release Conference call. My name is out there, but nobody ever up rates are today, if you'd like to ask a question. During the Q&A portion of today's call you may do so by pressing star one on your telephone keypad now.
How did you give it to Kevin Collins begins Kevin. Please go ahead when you're ready.
Good morning, and thank you for joining Berkshire Bank's first quarter earnings call. My name is Kevin Con Investor Relations and corporate development Officer.
Our news release is available in the Investor Relations section of our website, Berkshire Bank Dot com and will be furnished to the SEC.
Supplemental investor information is provided in an information presentation at our website at IR Dot Berkshire Bank Dot com and we will refer to this in our remarks.
Our remarks will include forward looking statements and actual results could differ materially from those statements for details. 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 in 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 as financial measures of actual results or future projections.
A comparison and reconciliation to GAAP measures is included in our news release on the call today, we have knitting hydrate, President and Chief Executive Officer of Berkshire Hills Bancorp <unk> Passu, our Chief Financial Officer, Sean Gray, our Chief operating officer, and Greg Lindenmuth, our chief risk Officer.
At this time I'll turn the call over to our CEO getting hot right now.
You, Kevin and good morning, everyone and welcome once again to Berkshares first quarter's earning call.
I'll begin my remarks on slide three where you can see the highlights of the first quarter.
It was another solid quarter with strong financial performance continued balance sheet strength and steady progress on our best strategy.
Our earnings per share of 43 cents was up by 4% quarter over quarter and up 37% year over year.
Revenues were lower year over year, driven by run off in the P. P b and non strategic loan portfolios. While our continued expense discipline resulted in expenses flat quarter over quarter and lower by 8% year over year.
As we've said before we will self fund our best strategy through optimization initiatives, while reinvesting those saves in bankers customer expedience and technology investments that enable our future growth.
We are pleased to see that trend come through once again this quarter.
Adjusted return on tangible common equity improved to 7.5% from 6% a year ago.
Moving to balance sheet update.
As indicated on previous calls we were expecting to reach an inflection point on the total loan balance growth in the first half of 'twenty to 'twenty two.
We are pleased to report a quarter over quarter growth of 3.1, and six 5% in average and end of period loan balances.
This growth was driven by strong loan originations this quarter.
I'll provide more details on loan balances shortly.
Overall, our balance sheet remains strong.
We deployed capital for balance sheet growth and returned $35 million of capital to shareholders. We.
We ended the quarter with an estimated CET one ratio of 14%.
We have ample capital to both fund loan growth and continued stock repurchases.
Our share count has dropped by 6% over the past year.
On the strategy front, we've made good progress and we'll continue to stay focused on execution of our journey forward.
We continue to add talent and critical to our best plan. Our board replenishment continues and we've expanded our partnership with the army to further improve our digital experience and net promoter score.
Turning to slide four I wanted to spend a moment sharing more details on our loan growth.
After seven quarters, we're starting to see loan balances grew once again, primarily driven by growth in commercial portfolio.
Balances growth was driven by new loan originations that were up significantly quarter over quarter and year over year.
Our existing bankers and new hires are winning new business across the board, which is reflected in our originations and pipeline growth.
It is quite encouraging to see our loan book growing as we reactivate our organic growth muscle.
Finally, I'd like to thank all of our employees for their hard work in the quarter.
They are the reason why we are making great progress on our transformation.
Their dedication and commitment to Berkshire customers is what is driving our success and our progress towards becoming a high performing leading socially responsible community bank.
With that I'll turn the call over to <unk> to discuss our financials in more detail shortly.
Thank you Nathan.
Everyone.
Slide five shows our quarterly income statement. Please.
Please see the appendix for a reconciliation of GAAP and adjusted financials.
My comments will be on an adjusted basis in Nat cat.
Our revenues were up 1% quarter over quarter and down 11% year over year.
Sequentially, we had stable net interest income despite two fewer days in the quarter.
Fee revenues were up 5% quarter over quarter.
And continued expense discipline resulted in flat expenses quarter over quarter and down 8% year over year.
We had a provision benefit of $4 million this quarter driven by improved credit performance.
After tax income rose, 3%, and 30% quarter over quarter and year over year, respectively.
Yeah.
Turning to slide six slide six highlights changes in our earning assets.
As Milton mentioned, we are pleased to report of a 3% increase in average loans with particular strength in C&I lending, which is up 7% quarter over quarter.
Growth in C&I lending was driven by asset based lending.
Our CRE and residential mortgage books were each up 2% quarter over quarter.
It's nice to see loan growth again.
Securities are up 12% quarter over quarter and up 21% year over year.
It reflects continued reinvestment of cash highly.
Highlights in the quarter include selective purchases of short term treasuries to enhance near term returns and allow for flexibility to invest at higher rates later on in the cycle.
While available cash funded strong loan and securities growth in the quarter ample liquidity remain still opportunistically deploy excess cash as rates rise.
Moving on to slide seven.
Slide seven shows our average liabilities our funding mix continues to be meaningfully improved as lower cost funding replaces higher cost funding.
Year over year, our cost of funds has dropped by 25 basis points to 23 basis points.
Brokered deposits and wholesale borrowings have dropped to $3 $41 million down 67% from 1 billion in the first quarter of 2021 and down 82% from $1 9 billion in first quarter of 2020, a very significant decrease.
We also plan to redeemed $75 million of subordinated debt with a coupon of 685% no later than third quarter of 2022.
Our net interest margin was 261% up a basis point in the first quarter.
Adjusted NIM, excluding PPP and purchase loan accretion our pls impact was $2 five 8% in the first quarter versus 246.
A year ago.
That is up 12 basis points.
It's nice to see the impact of purchase loan accretion diminish to only three basis points versus higher levels in prior quarters.
Turning to slide eight we show our fee revenues are fee revenues were up 5% quarter over quarter and down 18% year over year.
Sequential growth was primarily driven by higher wealth management fees swap fees and lower tax credit impairments.
The year over year, the fee decline was driven by the sale of our insurance business lower SBA gain on sale and mortgage banking revenues.
Lower SBA lending revenue was driven by seasonality and a reduction of SBA guarantees from 90% to 75%.
However, the pipeline and outlook for SBA loans and corresponding fees remained strong for the remainder of the year.
On.
Nine we show our expenses.
Continued expense discipline resulted in flat expenses quarter over quarter and down 8% year over year.
We continue to benefit from expense saves for market exits and branch consolidations.
We're also assessing our non branch real estate footprint.
Based on post pandemic work environment, we're targeting to reduce that square footage by a meaningful amount, which is an important self help lever as we call. It.
Overall, our focus on expense management has helped us self fund our investments in frontline bankers and technology.
Moving to the next slide Slide 10 is a summary of our asset quality metrics.
Strong improvements in credit across the board continuing the trend over the last several quarters delinquencies are down 45% year over year, and our net charge offs dropped to 15 basis points.
Our allowance for credit losses to loans ended the quarter at 137% of loans.
Next slide slide 11 shows detail on our capital and liquidity positions.
Capital levels levels remained strong.
Our common equity tier one capital ratio ended the first quarter, either an estimated 14%.
Our top priority by far.
<unk> and deploying capital to support organic balance sheet growth.
We are also biased to opportunities opportunistic stock repurchases, given our low stock valuation and have repurchased about $29 million of stock in the first quarter.
We also expect to grow our cash dividends over time.
Like many banks, we recorded a negative bond mark and other comprehensive income in our equity account, which amounts to $75 million.
Our bond portfolio is managed within the context of our holistic balance sheet management and <unk> strategy as rates rise the negative marks to a securities book are immediate while the significant positive impact of higher asset yields and net interest income accrues over time.
The OCI Mark also does not impact our risk capital ratios.
So in summary, a solid quarter with robust balance sheet growth strong capital position ample deposits to fund future growth and importantly, strong credit performance and expense management.
I would like to now close with comments on our outlook for the rest of 2022.
The New Zealand economy is strong labor markets are strong and consumer demand, which is two thirds of GDP is high as we come out of the pandemic.
We are confident about achieving.
The 5% to 7% loan growth as announced as part of her best program the.
The pipeline is robust and we're seeing solid loan growth momentum.
We expect low single digit deposit growth in 2022, we also expect NIM to trend higher.
Recall that our NII guidance in January was for mid single digit NII growth of reported NII of $291 million and included four rate increases.
Our current guidance includes six rate increases.
As a result, we're expecting NII lift of approximately 6% in 2022.
On an adjusted basis, excluding PPP and mid Atlantic.
The NII growth in 2022, they expect it to be low double digits.
The current market implied rate increase is eat for the rest of the year.
The macro environment can change quickly and we have opted to remain conservative at this time.
About 60% of our loans are floating rate loans, and we have loan growth, we are well positioned for a rising rate environment.
We expect expenses for the rest of the year to be stable at about 60% to $70 million quarterly run rate.
However, I would like to remind you that expenses can be lumpy quarter to quarter.
Our asset quality remains strong and underwriting continues to follow our conservative guidelines.
We have had provision benefits for the last three quarters, we expect credit provision expense to start to normalize later in 2022.
And hit our loan loss reserve to loans ratio of 115 to 120 basis points in the second half of 2022.
That will be in line with our balance sheet growth and asset mix change.
Our tax rate for 2022 should be in the high teens.
Finally, we expect to continue to execute our new $140 million stock repurchase program in 2022, and complete the remainder of $111 million and buybacks in 2022.
With that I will turn it back to net <unk> for further comments Nathan.
Thanks, Jim on Slide 12, we have our best programs not start chart.
Which shows our progress on five key performance matrix of the program.
The financial matrix continue to show steady improvement NPS score remains at 58 percentile and ESG percentile ranking improved further this quarter to 22nd percentile nationally.
We would also ranked amongst the top 10, most trustworthy banks in the nation by Newsweek's America's most trustworthy companies in 2020 do report published this month.
We are executing in all three pillars of our best program optimized digitized and enhance as planned.
We have reignited our organic growth engine and have started to see growth in loan balances.
Overall, the program is working as expected with potential upside to balances revenues and profitability over long term if the current trend continues.
As indicated during the last earnings call. We are updating our best program to reflect this positive momentum and a significantly higher rate environment. We are in now compared to last year. When the program was launched.
We also recognize that the geopolitical macroeconomic and the rate environment has changed further since our last earnings call and is expected to evolve even more over the next few months.
Given that we will schedule, an investor call dedicated to provide details of the updated best program. After second quarter earnings, which will also be around the time, we complete the one year anniversary of our best program launch.
Our differentiated technology roadmap is another important element of our best transformation program that will set us apart from competitors, while maximizing value for all stakeholders.
Slide 13 shows the central tenet of our technology roadmap.
We believe that it is highly effective and efficient for us to pursue the strategy of optimizing the core versus building a new core all wrapped <unk> system with individual indications and that's the journey we're on.
Cloud migration API enablement data warehousing CRM system and integrated digital banking experience.
Foundational elements of our technology roadmap and we've completed implementation of most of these elements over the last year or so.
Many of these foundational elements have been established through partnerships with best in class partners. Some of whom are listed on the slide with Nuomi as the latest partner that will help us deliver exceptional customer experience for digital banking.
Slide 14 provides a more detailed view of the scope of the features functionality and the overall ecosystem in which we can now participate as a result of this expanded relationship with army.
<unk> is one of the fastest growing software as a service providers with a mission to provide world class digital banking experience to their bank partners will.
We began our partnership with them about two years ago with a focus on enabling digital account opening for our consumer segment.
We recently expanded our relationship with the Army to include App management and online banking for consumers and small business segment.
This partnership will ultimately further improve our net promoter score and relationship deepening.
Slide 15 is a short value of our new Board member Mihir day side.
<unk> is a professor of finance at Harvard Business School, and Professor of law at Harvard Law School.
He is also an accomplished author and expert in finance and tax policy and serves as a research associate in the National Bureau of economic researches public economics, and corporate finance programs with.
We are delighted that he has joined our board welcome to here.
In summary, a solid quarter with continued momentum on our transformational best plan strong loan growth disciplined expense management and improved financial returns.
With that I'll turn it over to the operator for questions Adam.
Thank you as a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now we're preparing to ask a question. Please ensure your handsets fully plugged in and muted locally that star one on your telephone keypad to ask a question.
The first question today comes from Mark Fitzgibbon from Piper Sandler. Please go ahead. Your line is open.
Thank you good morning, Tony.
Hum.
First should we be.
Hey, Nathan.
I'm sure. Many of you had mentioned the pipelines were strong I wondered if you could help us size those how large those pipelines are and maybe what the average rate for new logos.
Hey, Mark I'll start there the pipeline.
Is actually stronger as of now for the second quarter than it was at the end of first quarter and the fourth.
Good quarter.
I won't give you the specific number but I think sufficient substitute for you to know that it is actually hired the commercial is about the same level.
Bit of increase in the resi and consumer the overall pipeline is modestly higher than the last quarter.
And Hey, Mark distributed.
Right.
Yes, and Thats exactly what I was going with that Mark I think you know.
On the <unk> side, we are seeing.
<unk> on the portfolio of this.
This quarter in overall portfolio yields went down but that was primarily due to some prepayment activity that we saw and thats likely to reduce in a rising rate environment.
So we are as we have guided also in our last.
In our last call, we expect to see that yields increase and obviously, we stand to benefit from the rising rates and also I would like to point out that 60% of our both our floating rate loans.
Okay.
And then secondly should believe could you share with us what the Aoc Awards this quarter.
Yes, it was $75 million impact about a 6% reduction in tangible book.
Okay.
And you guys have done a really good job of holding the line on operating expenses I guess I'd be curious at what point do you think operating expenses will start to rise is that 2023 kind of event.
So mark hydro distributed by a great great question. So as we have guided all along.
And also our annual guidance, we expect to maintain $60 million to $70 million run rate expenses for the remainder of 2022, it could be lumpy. So there could be some fluctuations, but overall that's the run rate we are targeting and if you expect an increase in those expenses will be sure to guide.
In subsequent earnings calls.
Okay, and then last question I had.
In the press release, you referenced that you hired a number of bankers I guess I'm curious sort of how many roughly how many senior lenders you have today and you know how many of those are say new in the last year.
Hey, Mark.
We wouldn't give you a specific number what I would say is we continue to hire especially on the commercial side and little bit on the <unk> side, we have grown our workforce and more importantly, the new producers that rehiring.
Bringing in new pipeline and their production levels are higher than what we anticipated them to be.
Early on.
Thank you.
Thanks Mark.
The next question comes from Bill Young of RBC capital markets. Please your line is open. Please go ahead.
Hey, good morning, guys how are you.
Good morning Ali.
Just a quick question a couple of quick questions here can you speak a little bit to the CD growth you saw this quarter what the drivers there were.
Could you repeat that believe you just broke up a little bit.
Im sorry could you speak a little bit to the Cds. The time deposit growth you saw this quarter and what the drivers were.
Yes, hi, so so in terms of our deposit growth I think overall for total deposits.
Stayed more or less like flu.
<unk> I mean on an average basis it was one.
<unk> up.
On the overall I think on an end of period basis, our deposits are up like around 6%.
And what is your question around sort of Cds.
Yeah, Yeah looks like.
It looked like CD balances are up about.
Mid 20% quarter over quarter.
I'm not sure if you look because if you look at our slide.
Slide seven of our earnings presentation, Billy we talk about our liability than Cds and time deposits. So it's down.
7% quarter over quarter, and 28% year over year.
Hello.
Okay that was my mistake, then I apologize for that.
No one of them.
Okay.
Uh huh.
Then yeah. It was good to see the trends in loan originations this quarter and the commentary about the stronger pipelines.
How should we think about kind of the mix between.
Consumer and commercial originations going forward here it looks like consumer was.
Stronger than I had expected this quarter and given some of your initiatives and.
And things such as upstart, how should we think about the mix going forward.
Billy Hi, net in here just I think on the broadly speaking for the for the first quarter. The originations mix was about 60 plus percent was commercial.
We expect the commercial to have continued momentum.
Consumers speaking of Israel, along with royalty. So I think overall the mix would be a 50 plus percent commercial and the rest coming through resident consumer.
Okay. Thank you that's very helpful.
And my last question is just what kind of drew.
Drag was the lower day count this quarter.
On NII I believe is I believe this should be the two days.
Looking for the data do you have a dollar amount of the drag.
Yes, we typically don't disclose the dollar or the dollar amount on the right.
Okay.
I believe we typically don't disclose the dollar amount, but I can give you a two day count I think you can probably estimate from the NII numbers that we have published.
Okay.
So it's typically 90 days for thank you very much.
Two days versus 90 days for the quarter.
Okay. Thank you.
Thanks.
As a reminder, if you'd like to ask a question Thats star one on your telephone keypad.
The next question comes from Chris O'connell with <unk>, Chris. Please go ahead. Your line is open.
Good morning.
Good morning, Joe just wanted to follow up on the.
On the deposit growth discussion I know you guys called out a couple of seasonal items regarding payroll in the press release, if you could just remind us.
Exactly what those seasonal dynamics are and then given the strong growth to start off the year reconciling that with the low single digit guide for the full year and deposits are we going to see a.
Decline from here or two side, we're thinking about that.
Hi, Chris So from a guidance perspective, we are still going to stick with.
Our low single digit deposit growth that we gave out in terms of.
Are.
The payroll deposits as you know and as the business dictates.
Depending on sort of the dates of the payrolls are processed.
Balances come in and then you see you know the balances getting drawn down in a matter of three or four days.
I think this quarter, we experienced higher inflows of payroll deposits than normally we would expect to and you know we are being watchful and see how that trend plays out.
Okay got it.
And so how does the.
There is a.
Sharp decline in money market.
I'm, assuming the payrolls are going into now.
Now so I guess, what's the seasonality you know with the money market in the first quarter versus the fourth quarter. If you could just remind us of that.
So typically.
That.
Substantial movement, you would see between money markets and now is almost always driven by payroll balances moving between switching between those two accounts.
That's what drives the movement.
Hey, Chris just to give you a little bit of a Mac clause.
Chris just a macro color on this this isn't it in here on the payroll, which has its component of seasonality like you said and depending on the day of the week there could be a spike at the end of period balances, but what we are seeing is the it seems to be the payroll itself is growing and workers.
As workers get back into the payroll it looks like at least our average for the first quarter and we don't know if that makes it a trend yet but the average for the quarter was also significantly higher than the previous quarters. So that could be a reflection of the workforce growth in people coming back to work. So if that continues we should we should continue to see.
<unk>.
Better outages than we've seen in the past.
Understood got it.
And then maybe if you could just talk a little bit more.
About.
Of the loan growth sources.
You talked about in the press release.
You're developing new sourcing channels on the resin consumer side.
To support loan growth this year.
Yes, so it's broad based.
<unk> on the commercial side, it's improved productivity from the existing bankers new hires.
And specific programs that we've kind of rolled out so that is certainly getting the momentum on the commercial side on the consumer side, we have the growth in different line bankers on the retail channel we have corresponding partnerships.
The unsecured side, we have partnership that we announced with upstart. So I think a combination of all of those is going to continue to improve the trajectory and the momentum on both fronts and as I said earlier I think commercial will continue to be.
50% to 55% of the originations and as the.
The pie grows overall.
Yeah.
Okay got it.
And then on the a and the other fees this quarter.
Those came in a bit strong.
Is that swap related and are you seeing an increase in demand.
For swap activity going forward.
Hi, Chris distributed Siloed attribute that to primarily three buckets. One is in our tax credit impairment, which came in lower which is a contra item, which shows up there.
Second one is trailer revenues from credit card and other things, which typically now show up post year end and first quarter.
And the third component swap fees, we do see a healthy pickup in swap fees, which are very encouraged about.
Yeah.
Got it thanks Judy.
That's it for now I'll hop out thank you.
Thanks, Chris Thank you Chris.
As we have no further questions I'll hand back to Mr. Mark Berry for any closing remarks.
Thank you Adam and thank you all for joining us today on our call and for your interest in Berkshire have a great day and be well.
Adam you can close the call now.
This concludes today's COVID-19 . Thank you very much for your attendance you may now disconnect your lines.
Right.
Yeah.
Right.
Okay.
Okay.
Okay.