Q3 2022 Berkshire Hills Bancorp Inc Earnings Call
Common equity ratio of eight 1%.
We have ample capital to both fund growth and continued stock repurchases.
This past quarter, we returned about $26 million of capital via dividends and stock repurchases and over time, we expect to resume the growth of our dividend.
Our credit metrics remained strong in the third quarter. Thanks.
Thanks to the tremendous work by Berkshire team members across frontline to the workout group.
Brett will review, our credit matrix detailed intermodal and Greg Lindenmuth, our chief risk officer is on the call to assist on any credit related questions.
On the best strategy front, we continue continue our optimization.
Including acquisition and consolidation of five branches in the quarter.
We continue to make steady progress against our ESG priorities.
You may recall that we issued $100 million sustainability bond this summer and we've been actively deploying those proceeds within our sustainable financing framework into projects.
Renewable electricity green buildings and affordable housing.
As I always do I would like to thank all of our Berkshire Bank colleagues for their continued.
Hardware and passionate commitment to our vision of becoming a high performing leading socially responsible community bank.
Their commitment to our strategy and dedication to our customers is what is driving our ongoing and accelerating performance improvement.
Progress.
With that I'll turn the call over to Brett to discuss our financials in more detail Bret.
Thank you Dan and good morning, everyone.
Slide four shows our quarterly income statement. Please see the appendix for a reconciliation of GAAP and adjusted financials Mike.
My comments will be on adjusted basis and Nokia.
Revenues were up 10% quarter over quarter and about 17% year over year.
Net interest income grew 13% sequentially due to loan growth increased asset yields and stable funding costs.
Fee revenues were down about 3% versus the second quarter and I'll speak to those in more detail in a moment.
Expenses were up low single digits on both a quarter over quarter and year over year basis.
And close to the higher end of the $68 million to $70 million quarterly range, we guided to in the past.
Our efficiency ratio was 62% in the quarter.
<unk> above our best target of 60% for 2024.
We recorded restructuring charges of $11 5 million pre tax.
$7 million after tax or approximately <unk> <unk> per share due to the consolidation of five branches in Firestone item.
At this time, we do not anticipate any material restructuring charges in the fourth quarter.
We had a provision expense of $3 million this quarter and our credit allowance remained relatively stable at $96 million.
Adjusted after tax income rose about 19% and 9% quarter over quarter and year over year, respectively.
We also had positive operating leverage quarter over quarter and year.
Slide five highlights with changes in our earning assets.
As mentioned, we had another quarter of loan growth with a 5% increase in average loans with growth across most of our business lines.
Residential mortgage balance growth continued even in a difficult environment, largely driven by new loan officers hired over the last few quarters.
Loan yields rose 55 basis points versus the second quarter.
As a result of the rising rate environment and the shift in our balance sheet from lower yielding cash investments to higher yielding loans, which also drove the growth in our NIM and NII.
Slide six shows our average liabilities.
Total deposits declined, 1% and 3% quarter over quarter and year over year, respectively.
Noninterest bearing deposits were flat both quarter over quarter <unk>.
Our cost of deposits was at 33 basis points up 16 basis points from the second quarter.
The fed raised rates by 150 basis points in the quarter. So our deposit beta for the quarter was about 12.
While our deposit costs have remained relatively stable due to high deposit market share in relatively less competitive markets.
We do expect deposit cost to increase over the coming quarters.
We still expect deposit beta through the cycle and the 30% to 40% range.
Slide seven shows more detail on our net interest income and margin.
Net interest income grew 13% and 29% quarter over quarter and year over year, respectively.
While we were pleased with the lift in our NIM, we expect a relatively modest lift going forward in the fourth quarter.
Turning to slide eight we show our fee revenues, which were down about 3% versus the second quarter.
Strength in deposit related fees and other fees, which includes both.
<unk> were offset primarily by declines in loan fees and wealth management fees.
Deposit related fees were higher on more consumer activity and interchange income.
And loan fees were down on lower SBA gain on sale and lower swap fee revenues, which are currently running well below our normal run rate.
On slide nine we show our expenses, which were up low single digits, both quarter over quarter and year over year.
We continue to benefit from expense saves from vendor management branch consolidations and other real estate optimization efforts, which have resulted in lower occupancy and equipment costs.
Compensation was up mid single digits on modest wage inflation and commission expenses related to sales and origination activity.
Yeah.
Slide 10 is a summary of our asset quality metrics.
Credit quality remains solid.
Delinquent and nonperforming loans were down 16% versus the second quarter and flat year over year.
At 74 basis points of loans remain well below our long term historic range of $85 to 115 basis points.
The increase in nonperforming loans, and the $6 million and net charge offs, primarily reflect a small number of isolated.
While we are monitoring credit closely we are not seeing any broad based portfolio credit deterioration and are encouraged that accruing delinquent loans or early stage delinquencies were down 51% versus the second quarter.
Slide 11 shows details of our liquidity and capital positions.
Our loan to deposit ratio was 80% this quarter.
Common equity tier one capital ratio ended the quarter at an estimated 12, 7%.
Our TCE ratio ended the quarter at $8, one and included cumulative OCI bond marks of $183 million on an after tax basis.
The cumulative bond marks includes 61 million booked in the third quarter.
We believe our bond marks have been in line with peers.
And those bonds will post par over time and the marks are not included in our regulatory capital ratios.
Our tangible book value per share ended the quarter at 24.
And I want to be clear that this is a non-GAAP adjustment.
But excluding the OCI marks the total tangible book value per share would have increased by $4, making it the highest TBD per share historically for Berkshire at $24 five.
We provided a GAAP to adjusted TBB reconciliation in the appendix.
Our top priority is to deploy capital to support organic growth, we are biased to opportunistic stock repurchases, given our relatively low stock valuation intangible book value.
We repurchased about 705000 shares for $20 2 million in the second quarter.
And as Ned mentioned, we also expect to grow our cash dividends overtime.
Finally, we're going through our annual budgeting process over the next month or so and we'll share 2023 guidance on our fourth quarter call in January .
And with that I'll turn it back over to netting for further comments.
Thank you Brett.
On Slide 12, we have our best program not Star chart that shows our progress on five key performance metrics.
As you will see so naturally it takes up ROTC narrow eight are just below the low end of our stated three year goal.
We are also encouraged that our annualized <unk> was $154 million well above the $102 million in 2021, and heading towards $180 million to $200 million.
Best target in 2024.
Our ESG score remained in the top quartile at 23rd percentile nationally.
And we've announced our NPS score measurement processes to J D power to provide us with a net promoter scores directly through our service.
With an increased sample size, we hope to have a relative ranking versus new England banks first quarter 2023.
On Slide 13, you can see some examples of how we are reinvesting our expense through best optimization initiatives in people and technology.
An investment in people front.
Continue to complement our strong existing team of frontline bankers with new bankers with solid experience in the market who want to join our purpose driven transformational journey.
We have benefited from the disrupted market environment with high quality talent.
Across our business lines commercial 44, BC wealth management, private banking retail and mortgage lending.
From a broad spectrum of banks.
We have also made significant investments in coaching and promotions of our bankers.
Knowledge investment front.
Right hand side of this slide highlights how we are bringing our digital architecture to life.
What that essentially means that we are well on our way to create a top notch digital experience offered by large banks Wildcat.
While creating an ability to retain the personal touch of a community bank.
It's possible because the investments made in these foundational elements and best in class partners and platforms, which include data warehouse through Snowflake middleware integration two mills up digital acquisition and Onboarding tsunami.
CRM and sales platform through Salesforce dot com et cetera.
We truly believe that in medium term technology solutions will become a differentiating moat for Brookfield Bank.
I'll close my remarks with comments on the economy.
As the fed raises rates to battle inflation, we are seeing a wide dispersion of outlooks for near to medium term.
The equity market seems to be pricing in a hard landing.
We are fortunate to be operating primarily in the steady Eddie New England market.
Which remains on a solid relative per day.
As we talk to our customers, we are seeing a bit more caution driven by titles.
Inflation and supply chain concerns.
AD loads.
And corresponding demand.
Still seems to be supported by the recovery from the pandemic doldrums.
We are also supporting become backfill various communities across our footprint and are highly encouraged by the initiatives by local leaders in those markets.
In markets like Syracuse with excited about investments being made through local government and private companies like Micron, then reinvest single $100 billion.
In creating one of the largest micro chips plants in the nation.
We are and will continue to remain vigilant and stand ready to navigate through the changes in the macro environment, while providing exceptional service to our customers and content new our progress.
It's becoming a high performing leading socially responsible community bank and with that I'll turn it over to the operator for <unk>.
Not yet.
Thank you if you would like to ask a question today. Please press star followed by one.
Pat if you choose to withdraw your question. Please press star followed by case when the Pan to ask a question. Please ensure your phone is on mute lately and our first question today comes from Bill Young of RBC. Please go ahead. Your line is open.
Okay.
Hey, good morning, guys how are you.
Good how are you.
Good.
Yeah.
I might have missed the comment.
On what some of the drivers were for the higher NPS Npls this quarter. So.
I apologize if I missed this.
Did you disclose what types of credits these were.
Yes.
This is Brett those were primarily related to C&I.
And Greg I don't know if you want to provide any additional color.
Yeah, absolutely thanks, Brett.
Yes.
The <unk> for the quarter were we're really episodic in nature.
Some were driven driven by.
C&I loans on the portfolio.
But I think it's also important to note that management was also.
Proactive credit risk management practices, and we took advantage of a very attractive market to sell <unk> assets. This quarter, so roughly about $1 million of the charge offs do relate to problem loan sales.
That we that we took advantage of that.
Almost a higher than 90 cents on the dollar for those loans. So some of that is a proactive decision on.
On the part of management.
Ah.
Any particular sectors that these credits are exposed to and it sounds like.
These men and known issues.
Oh, Yes, all were known issued known issues and included in our prior.
Plus five criticized balances, which we do expect to trend lower.
Okay. Thank you appreciate that.
And then can you maybe elaborate a little bit on the expectations or your expectations for a modest lift in <unk>.
Spread revenues do you expect to see more of a bigger step up in deposit betas versus a pretty low level today.
Billy the short answer would be yes.
Like the beta is to grow as compared to the third quarter, but like Brad said in his remarks, I think we are blessed to have.
Good market share in a relatively less competitive market.
So we've been able to contain our better beta as well our beta for the quarter was about 12 and our cumulative beta so far in this cycle is about six and I think that's a reflection of the fact that the markets that we're in and all of the programs that our retail team has put together to proactively manage the customer relations.
Yes.
Got it got it and lastly.
Just a quick question on loan activity in growth, obviously, it bottomline trends were solid and consistent with your outlook. It seems most of the growth this quarter was driven by.
Throughout the mortgage side.
And it seemed like there were a little bit more pressures on commercial so could you just speak to me.
Maybe some of the drivers of growth.
In general over the next few quarters, and what Youre seeing on commercial.
Does mortgage perhaps drive a bigger piece of growth in the near term with your expanded mortgage team.
Sure Billy we couldn't hear you well, but I think I got the DSO question.
The quarter was relatively soft on the commercial originators, but the pipeline has built by the end of the quarter. So we expect to have a stronger quarter for our commercial going into the fourth quarter and the residential quota would be similar to the levels that we saw in the third quarter. So the overall fourth quarter should be.
Stronger than the third quarter, and we're pleased with the momentum that we're seeing across the board.
Okay. Thank you for taking my questions.
Thanks Neely.
Thank you and our next question you guys should Mark Fitzgibbon of Piper Sandler. Please go ahead. Your line is open.
Hey, guys. Good morning, I wondered if I could following on on one of the last good morning, Dan.
I wondered if I could follow up on one of the last questions about the C&I delinquencies.
I am not sure Greg you had answered that in terms of which sectors of the C&I portfolio were negatively impacted by.
Or showed up in delinquencies there any particular industries, any particular geographies or types of C&I lending.
No actually.
It's just a one off transactions are not related to any.
Any portfolio or segment deterioration whatsoever. So it's very specific to the to the borrowers in question.
Okay.
And then secondly, Brad I wondered if you could share with us if you have at your fingertips, what the spot deposit rates today are.
I don't think I have those right.
Can get back to you on that.
Are you talking about the cost of deposits it's mark.
Yeah today, Kurt currently yes today I think we ended the quarter at about 33, I think two days spud would be about 41 42.
Okay great.
And then.
I know you had said there would be no more charges in the fourth quarter, but do you have plans for more branch consolidations, maybe in early 'twenty three or beyond.
B B, we were used to be you will recall mark you've been tracking us realize we used to be about 130 branches network have you been.
And the network is now close to 100, we believe the overall number will be relatively steady.
And I think as we might still have some <unk>.
Consolidations and relocations, but there will be a wash. So we don't expect the number to change now in terms of the branch count I think branches will continue to play an important role.
To us as a community bank and the rules of the bankers have changed from being transaction processing solutions providers and digital ambassadors. So we believe that we are pretty much very close to that inflection point.
Okay, and then lastly give.
Given that the bank has continued to see some turnover in recent years I guess I wondered if you could comment on what sorts of things the organization is doing to stem that.
Yes.
We've done a tremendous number of things in terms of employee engagement and.
Starting with different types of engagement activities Downhaul communications keeps.
Keeping a real good mix of <unk>.
Folks with institutional knowledge and the new folks that are coming in and how do we avoid.
<unk> for them to interact in this relatively hybrid work environment that we're in and we did.
This completed our employee engagement survey.
We are actually waiting to see what that shows us and <unk>.
We ended up last year at about 68% employee engagement rate and typically if you're 70% above its viewed in the top quartile. So we expect we're hoping that we'll get there this year.
Wide slew of activities and the team is pretty energized about the future.
Thank you.
Thank you and our next question guys, Hey, David Bishop of Health LLC. David. Please go ahead. Your line is open.
Yes, good morning, how are you.
Good morning, Dave.
Hey, a quick question noticed the past couple of quarters.
From a funding perspective looks like you're leaning on the Securities book.
To fund loan growth and some of the deposit outflows.
We expect that.
Overall bell.
Securities to continue to trend into the fourth quarter and maybe into next year, just curious how youre thinking about funding incremental loan growth.
Yes, David This is Steve and Conoco, Yes, I think that has been part of the strategy as well.
Loan portfolio.
Continue to run down obviously that pace has slowed down.
Sorry, it's curious.
That.
That portfolio has obviously slowed down a little bit, but we continue to use that as part of the strategy.
In the short run.
The cash flows are per month.
About $25 million amongst.
Got it and then just looking turning back to the margin discussion.
Noted what you said in terms of the deposit front, but.
Circling in on the loan yields are noticed residential mortgage loan yields were down and obviously mortgage rates are trending up at anything driving that phenomenon and what we're seeing.
As far as the decline or decrease in residential mortgage yields.
This is Brian so what we actually noticed was last quarter, we had a little higher than normal.
The deferred cost late charges and purchase loan accretion in Q2 that did not reoccur in Q3.
With the expectation that you think that trends up over time just curious.
And maybe.
The types of mortgage loans, you're putting on the books et cetera.
<unk> yields.
The residential loans we're currently.
Around I believe.
Four.
Yes, the third quarter the brands the originations that invariably the lag was about four handle.
The fourth quarter should have been a five to 600.
Got it and then just.
But in terms of the movement in the deposit rates are you seeing.
I should say sort of.
A dichotomy in terms of rates across maybe your core.
Massachusetts footprint in upstate New York, just curious if there's a big differential in terms of deposit pricing within those markets.
Yes, I think our core markets in central mass.
The booster Berkshares Springfield, yes, they are relatively less competitive and we have the flexibility to then price them accordingly, while managing the customer relationships and the ultra competitive markets that it's been a Boston and New York.
We are staying competitive, but I think the focus is on relationships.
And I think.
Our retail team commercial team is doing great job of managing that commercial team is also focused on getting operating accounts every time, we have lending conversation. So all of that is helping us.
We expect and we feel reasonable and that our betas will continue to be lower than the market.
Got it and then one final question for me I think you noted the preamble first run rate.
Probably near the top end of the guidance for the quarter at a little bit about $70 million.
Thoughts in terms of where we should be thinking about the expense run rate.
Moving forward to office level. Thanks.
Hi, This is Bryan again, I think we're comfortable with the guidance that we provided.
Last quarter.
I think we expect to see expenses in that.
Range.
That's the $60 million to $70 million range correct.
Correct.
Got it thank you I'll hop off.
Thank you and our next question guys.
<unk> of Compass point. Please go ahead your line is open.
Great Hi, Thanks, good morning.
Wondering if we could start with the 11 million of restructuring charges. You took what was the breakdown between iron down right down and.
Five branch closings, how does how does that break out.
The Firestone.
It was about $2 million.
Split between.
Lease terminations and severance.
And the remaining was primarily related to the five branches.
Got it okay.
<unk>.
Okay. That's helpful. And then can you just can you just give us a refresh on.
Yes, specifically at start and Firestone in terms of.
Where they are on a nonperforming loan balance and also charge offs in the quarter I'm just kind of.
Looking obviously and I think others can ask the question, but linked quarter. Your C&I Nonperformer went from 5 million to $21 million.
Your C&I charge offs in the quarter went from 200000 last quarter, and Thats, why not and kind of thinking.
A lot of it is there but can you help us think about specifically what the dollar amount of non performers are in both of those categories and then the charge offs in the corner.
Hey, Laurie this is Doug Caf.
We're not sharing any of the delinquency nonperforming loan data on either of those books.
Okay.
The butcher in really good shape and they continue to run down.
So so we're happy to share exposure data on loan buckets, because I know you usually have questions on many loan bucket buckets.
But for any of the buckets, we're not going to share delinquencies or charge off numbers or.
Like that.
At this time.
Okay. Well then maybe can you comment specifically on the on the jump in coal and iron ore.
Third quarter non performers.
I'm sorry, Jeff.
What was that and how should we be putting that comes from Rama.
Hi, Laurie, Yes, again, Gregg just a hint.
Yes, thanks and.
Hi, Laurie.
Again, Laurie it's just a handful of one off.
C&I credits that's related to that we've.
Previously identified as problem assets.
Okay.
Yeah.
Okay.
Great I'll leave it there thank you.
Actually I am thanks, Alright.
Hello, Lee I'm going to re open your line now.
Okay, Great sorry, one last question can you just refresh us on your your total SBA and wont be on guaranteed piece of that.
And thanks again.
Laurie I got 15 loan bucket to the exposure that we can share with you that is one that we do not share but.
Sean can provide some color commentary on that one.
Sure.
Had strong historic performance.
I do think it's important to know we booked and guaranteed portion at fair value.
Good recovery history, we can pro rata apply that to the stub.
Weighted average coupon and plus two in a quarter.
I am 40% of this is secured by real estate.
Great. Thanks for taking my questions.
Thank you Lori thank you.
And our next question guys, Hey, Chris O'connell of <unk>, Chris. Please go ahead. Your line is open.
Okay.
Good morning.
Good morning, good morning to start off on the.
Hi.
On the deposit flows and if you guys could give an update on what the overnight payroll deposit balances were at the end of the quarter.
End of the quarter they were approximately around $1 billion.
And Thats generally in line now that we've seen before orders.
Yeah, so moving forward.
Do you expect that book to be more stable.
I would say is the payroll always has a little bit of lumpiness to it however.
It's really around the $1 billion $1 $1 billion range, most most quarters.
Yes, Chris I would say first quarter not as a.
Upward spike, but outside of that I think <unk> typically about a billion and the average is 700.
And that's been consistent over pretty much last eight quarters I think we've seen maybe a marginal improvement.
As the more workforce I think FEMSA.
Comes back into the labor market, but otherwise its been relatively steady.
Got it.
And then.
On the margin guide for next quarter.
I'm wondering if you could.
Provide a little bit of detail around.
What exactly like modest lift.
Uh huh.
Encompassing given how large the increases have been the past couple of quarters, and then what exactly the sub debt impact of the redemption is on the margin for next quarter.
Yes, I think Chris.
We won't give specific NIM guidance, but I will say it'll be it'll be higher a point, we hired at the same clip as we saw in the second and third quarter.
But we expect it to continue because the loan betas will continue to outpace the deposit betas.
What we could we could say from a modeling perspective is the combination of balance.
Albeit at a slower rate.
And the margin expansion good quarter thing again thinking could be higher in fourth quarter compared to third quarter or by.
3% to 5%.
Got it.
Just given those comments around the margin.
And the reaffirmation of the overall guidance provided last quarter I mean it seems.
Like the NII guide.
Should should be moving higher.
Given what you guys have already put up for this year.
In the 9% to 11% GAAP growth for the year.
Any updates on on that NII guidance.
Yes, I think we will refresh the guidance Chris as we said in January 2023, as we get the full year guidance for 'twenty.
So I think you will certainly hear at that point of time, we would complete.
Internal budgeting process by then for fourth quarter like I said, we expect April I'm, just talking about 3% to 2022 guide.
Okay.
Yes.
Chris I believe you asked and then I'll stop there.
Yes.
Yeah. So.
So I believe we called the sub debt the $75 million sub debt in September about a $1 $25 million expense.
For the quarter.
Great.
And on this on the fee guidance for the year.
Just wondering.
What you think the swap and loan fees.
We will do from here based on the customer activity that you're seeing.
And if you.
You see it.
Potential uptick in kind of the overall.
A few levels to get to the adjusted 10% to 15%.
Got it.
Yeah.
But I think fees are under pressure.
Especially with our loan fees swap fees in wealth management of all of them have the macro headwinds.
But even within that context, I would say.
We expect just based on the pipeline.
Modest uptick on the loans.
Loan fees.
And swap fees.
So should be relatively similar quarter in the fourth quarter may be modestly higher.
Thanks, Chris.
And then.
Some of the some of the line items in that loan fee and revenue are running at well below normal levels. So if you look at the last eight quarters.
We average about something around $7 $7 million in that line item and obviously, we are running about half that this quarter. So we do expect there's nothing broken it just macros are impacting wealth management, the SBA gain on sale book.
So.
They are definitely a few line items in there that are running below normal.
Great.
And on the loan yields.
The uptick in CRE was fairly substantial.
Any thing unusual or.
One off driving that uptick this quarter.
And then if you could provide.
The entirety of the loan portfolio, that's a percentage wise, that's floating or variable.
So I don't think there was anything that kind of stood out from the from that side.
Nothing significant.
Currently booking somewhere in the mid <unk>.
For the commercial loans.
And then.
To answer your second question, we're about $3 2 billion and three months three months adjustable which is mostly index.
Great.
And then lastly.
I think you guys had mentioned.
On last quarter's call at.
All else equal you intended to.
Finish off the current buyback authorization by the end of the year I believe you have around $35 million left any change in that outlook.
No Chris we're going to continue to manage through the authorization opportunistically.
In the quarter.
Great.
Thank you.
Thank you Chris.
Thank you we have no further questions I will now hand back to Nathan Harte Tracy for any closing remarks.
Thank you all for joining the call today and thank you for your interest.
Be well.
Thank you. This now concludes today's call. Thank you for joining you may now disconnect your lines.
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