Berkshire Hills Bancorp Inc. Q1 2023 Earnings Call
Industry volatility and our positioning.
Speaker 1: with comments on the economy, recent industry volatility, and our positioning.
Speaker 1: We are fortunate to be operating primarily in the steady-added New England market, which remains on relatively solid footing.
Speaker 1: In markets like Syracuse, we're excited about the investments being made through local government and private companies like Micron that will be investing over $100 billion in creating one of the largest microchip plants in the nation.
Speaker 1: The banking industry has experienced a lot of volatility over the past several months.
Speaker 1: The current industry issues are significantly different than the great financial crisis.
Speaker 1: Banks are in a much better capital and liquidity positions, and the incremental regulatory reform will likely be more focused on CIFI and large regional banks than community banks like Berkshire.
Speaker 1: Problems with customer concentration, long dated health to maturity securities, and liquidity appear to be isolated to a few larger regional banks with unique business models.
Speaker 1: We have a strong capital and liquidity position and are positioned to benefit from the market disruption in our footprint.
Speaker 1: We remain focused on responsible and profitable organic growth and are confident that we will get bigger while getting better.
Speaker 1: With that, I'll turn it over to the operator for questions. Charlie, please open the line for questions now.
Speaker 2: Of course, if you'd like to ask a question, please press star followed by 1 on your telephone keypad. If you'd like to withdraw your question, please press star followed by 2. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, that's star followed by 1 on your telephone keypad now.
Speaker 2: Our first question comes from Billy Young of RBC Capital Markets. Billy, your line is open, please go ahead.
Speaker 3: Hey, good morning guys. How are you?
Speaker 4: Very well Billy, how are you doing?
Speaker 3: Good good good first I guess.
Speaker 3: Maybe we could just start on the FHLB borrowing. What's the thinking and the strategy around holding these borrowings? And you're bouncing in the near term. Do you have expectation of paying it off sooner rather than later?
Speaker 5: Sure, Billy, it's David. Great question. So post Silicon Valley turmoil, we, as we caught out in the comments, bolstered our liquidity position. And we primarily did that.
Speaker 5: in, you know,
Speaker 5: the second week of March by tapping the home loan bank borrowings. So internally we decided to target much higher levels of cash balances.
Speaker 5: We ended the quarter, as I said in my comments, at a little over $900 million of home loan advances.
Speaker 5: as I said in my comments, at a little over $900 million of home loan advances.
Speaker 5: What I would suggest that we will in the second quarter and assuming we're all past the crisis, which it certainly feels like it is, we will probably bring that number down by about a third. So, ballpark about $300 million and reduce the excess liquidity on the balance sheet.
Speaker 5: The amount will still be up versus fourth quarter of last year, and that's really more a reflection of the competition in the deposit market and the growth in the quarter of loans outpacing deposits. We're very proud of
Speaker 5: our deposit performance in the quarter though, it shows the diversified funding base of the institution as a pleasant surprise as a newcomer to the bank to see the depth of the quality.
Speaker 3: Thank you. I appreciate that. I guess I appreciate that you typically don't provide additional quarterly guidance updates beyond what you established in January , but can you just comment on management's confidence level on achieving the mid-teens NII guide that you established for the year?
Speaker 5: Sure, so that was a non FTE guide of 15 to 16%.
Speaker 6: The
Speaker 5: What I would say is it's clear that
Speaker 5: The pressure is downward, not upward on margins and not an interest income, clearly. But we're not going to be adjusting that guidance. If you annualize Q1, you'll see that the pressure is downward.
Speaker 5: We're a little below. We do pick up days, day count as you know as the year unfolds. And we....
Speaker 5: remain optimistic that that guide is still achievable at this point. As I said, the pressure is clearly.
Speaker 5: down, not up on net interest income.
Speaker 5: If we need to, we will wind up trying to offset some of that headwind on the expense side while still being very careful about making sure we make the right investments in technology and people. For more information, visit www.fema.gov
Speaker 3: Thank you. And then just one last question and I'll step back. Just on the pyro Organism in C
Speaker 3: You laid out a mid single digit period and growth target this year and you're essentially there today and just appreciate your comments you made earlier about responsible growth and monitoring new tradition activity. What should we think about?
Speaker 3: you know, your appetite to kind of grow and take out additional credit from here.
Speaker 1: I think you are right. The loan growth is moving faster than the original guidance but it is really a function for the quarter with the pipelines in the fourth quarter that came through in the quarter. We expect that to slow down. The pipeline at the end of the quarter is modestly lower than what we had at the previous point. Goodbye.
Speaker 1: slightly lower. So I think with the offset of those two, going back to the point David made earlier about we feel good about the NII guidance on the loan growth we might end up having slightly higher growth than what we had anticipated but we would do that judiciously, we're being more selective, we're getting more...
Speaker 1: and improve pricing opportunities and relationship opportunities along the way.
Speaker 1: and relationship opportunities along the way. Thank you for taking my questions.
Speaker 2: Thank you Billy. Thank you. Our next question comes from Mark Fitzgibbon of Piper Sander. Mark, your line is open, please go ahead.
Speaker 7: Hey guys, good morning.
Speaker 7: Good morning, Mark.
Speaker 5: Just wanted to follow up on a question that you and I have talked about in the past. Do you worry about growing loans as fast as you are given how late we are in the economic cycle? I know that spreads look better but do you worry that perhaps really pedal to the metal on loan growth right now is?
Speaker 5: is ideal from a credit perspective.
Speaker 1: Mark, great question. And you're right, there's no pedal to the metal here. We actually slowed down originations. We ended up potentially saying no more in the last quarter than we probably have in the last year or so. We are being selective. We recognize that because...
Speaker 1: lower than the previous quarter, right? So I think, and we expect that to slow down further. So we're actually slowing down, and yet as a function of the fact of the market disruption of, and the distractions that some of our competitors have, we're getting more swings at the plate. So we get better opportunity to be selective, better pricing, better relationship, like I said earlier.
Speaker 5: But a 4% growth, you grew 4% in the first quarter. That's a pretty aggressive growth rate. No? I mean, it's certainly well above what the market's growing and your peers are growing.
Speaker 1: Yes, it is. It's really the strong pipeline that we have in the fourth quarter. That's now down 25 percent as we get into the next quarters. The origination slow down. The rate of growth slows down correspondingly. And yet, Mark, I think we also recognize that this is also a great time and opportunity for us to...
Speaker 1: provide lending to our customers that continue to perform well. And we don't want to turn them away in this kind of scenario.
Speaker 5: Great. And then I wonder if you could update us on your thinking around sort of the franchise footprint. It's, you know, geographically, obviously your footprint's pretty spread out. Is there more potential to sell or shrink parts of the franchise?
We have looked at it, Mark, and as you know, we got out of mid-Atlantic. We've reduced our branch footprint by about 25 to 30 percent over the last three years. We continue to look for it, but we're comfortable where we are, especially given the fact that we found a lot of new bankers.
that are able to serve customers in those markets over the last couple of years. And we see significant opportunity for deepening relationships in those markets. So I think at this point of time, we're not looking at any further consolidation of geography of branches outside of tactical opportunities that come along the way.
Okay, and then last question, your best goals are inside here. I guess that I'm curious at what point would you consider raising them to something closer to sort of peer levels of profitability? Thank you.
Great question, Mark. We will do that as part of our next year's guidance. I think our best target, we call it best 1.0 now, that was scheduled to be done by mid-2024. Our guidance in January 2024 will also have the...
your line is open, please go ahead.
Yeah, good morning gentlemen.
Yeah, good morning, gentlemen. Morning, David. Morning, David.
I hate, uh, Smith or Dave, just curious, it sounds like in the preamble, there might have been.
Some noises that may be temporarily or abnormally deflated operating expenses in the 1st quarter. Just curious if you can go over them again, how we should think about a. A good run rate in 2nd quarter into the 2nd, half of 2023 from a. Holistic basis, but you're targeting them in terms of total operating expenses.
Hey Dave, it's David.
You know, I, I wouldn't really say there was there was noise in the first quarter. You know, we caught out a little bit another, but we also Q1 have, as, you know, employee benefit costs go up with the return of
tax payments and FICA, et cetera.
What's been impressive to me is the steady state run rate here on expenses and you know we're right on right within guidance we expect that to continue so really no from our perspective no no real noise in the first quarter it's a it's a good run rate
Then, Greg, I appreciate the disclosures, updated disclosures on the Office CRE. Outside of that, within the Commercial Real Estate portfolio, any other areas you are monitoring for heightened monitoring here, we're...
out of any other portfolios right now and really reflected really in the strong performance of the overall portfolio that you're seeing. But I will say, you know, we continue to really remain focused on credit management regardless through to any type of cycle.
due loan origination yields, but you're onboarding this quarter versus last. I know a couple peers at least in the southeast are starting to see credit spreads bonding and over so forth.
Yeah, but Greg, I can take that. Dave, the yields on the new production were closer to 6%, you know, 5.85, 5.86, so closer to 6% in the quarter. And that's almost a 50 basis points improvement over the previous quarter. And I think the portfolio as a result.
the loans portfolio went up by 29 basis points in portfolio years.
Got it. Then just a housekeeping, make sure I heard you right. I hear that 1.2 million chairs were repurchased.
this quarter under the current authorization? Okay, I guess there was some off-net submission.
the current authorization? Okay. I guess there was some offsets to Michigan. No, in dollars.
So modest share repurchases in dollars. Got it.
Got it. Okay. Yeah, I was gonna say I was trying to put to the epic. Yeah. Okay, great. I'll stop there get back into Q
I was trying to put to the expert, okay, that makes more sense. Yeah. Okay, great. I'll stop there, get back into queue. Thanks, Dave.
Thank you. Our next question comes from Chris O'Connell of KBW. Chris, your line is open. Please proceed.
Hey, good morning.
I was hoping to follow up on the prior question on the origination yields on the loan portfolio. I mean the portfolio yields at like 588 I think right now.
So are the do you expect that the increase or sorry 557 so do you expect that increase in the loan yields going forward to kind of moderate a bit from here?
Chris, they did go up 29 basis points. I think the beta was 29 on loans. I think we expect that to go up because the new production that we've seen so far this quarter still has improved yield. So –
By natural extension, we expect the portfolio yields to go up in the quarter, yes. Hey, Chris, I would just chime in and say about 60% of the aggregate loan book, so across commercial as well as retail, is floating or adjustable rate.
So you have two components, right? You obviously have 60% of the book that's moving with fed funds changes as well as we're seeing better spreads across the books.
Okay, got it.
On the deposit side, the CD growth is pretty robust this quarter. Do you expect that to be one of the primary drivers in the near term of deposit growth? And what are the spot rates that you guys are putting on right now for CDs?
is going to continue to see non-interest bearing and low interest rate paid, meaning nows and legacy money markets move to both CDs as well as any money market specials that might be wrong.
The good news there, from my perspective, is
still seeing good.
account openings in non-interest bearing DDA, new relationships, people banking with us. You know, that only moves the needle so much against industry headwinds.
that will play out more over time. But there's definitely, interest rates have reached the level and there's enough competition now.
that we're competing with money funds and it's impacting the whole industry as we all know. We're competitive in CD offerings, relatively short terms meaning 6 months out to 13 months right about.
4.5%, 4.25%, 4.5%. And the good news there, from my perspective, is we know we can drive growth.
with price. Not that you want to do that and you've got to be careful about internal movements of funds, but we're seeing it just as everyone else is.
If I may add, just a little nugget. Hey Chris.
Yeah, go ahead. Chris, I was just going to add, I think the point David made is very important. I think our deposit production, and these are activities that we had been planning over last quarter or so, are translating into good results. DDA production, for example.
It's up by 35% year over year. And as those balances season, we expect to kind of see that flow into that bucket as well. So while there will be campaigns on promotional campaigns on CDs and money market, we are also pushing on the DDA's. And we have a laundry list of new segments that we are going after.
that we could serve better and those will be less price sensitive. And then the other thing that goes in our favor, which you already know Chris, is six out of eight markets that we operate in are in tier two towns where we have been a bank for them for over 175 years and it helps us to that extent kind of relatively insulate ourselves from the pricing pressure. So I think all of those combined.
We hope to outperform the peer banks.
I appreciate the color there. And I guess just one more on the deposit side. I think in the prepared comments you mentioned a lot of the flows this quarter were into the wealth side of the business to money market type of funds there. Have you seen some of that transfer?
off balance sheet into the wealth business slow as we've gotten into the second quarter here.
Absolutely. There was a flurry of activity in that week to week and a half period of time. But it was kind of amazing to me how quickly things settled down. And we spent a lot of time internally.
as we were thinking about this is this happened within the context of
heightened competition for deposits as well, right? We had a crisis within a...
tough environment for deposits anyway just because of
the Fed's tightening actions. But the quote, unquote crisis for us really didn't last very long at all and was looking back now over a relatively short period of time, it was very quick lived.
Yep, got it. And just kind of putting it all together, you know, here with the margin, I mean, given the
you know, expectation for, you know, cash and borrowings to come down pretty substantially in the second quarter. I know a lot of it will depend on timing, you know, and I know you guys have the NII guide out there, but can you help us think about how you're thinking about the trajectory into the second quarter.
about a third was referencing the roughly $900 million increase in home loan. And that, when I say we're backing that down a third, that will be $300 million less of on-balance sheet liquidity we plan on carrying forward.
getting back to normal levels pre-SBB is the way we're thinking about it.
So that liquidity did drag on our margin in the first quarter. I would, we would put that about three to four basis points.
really driven by just carrying higher average balances on the balance sheet.
Back to my...
kind of comments on net interest income. The pressure is certainly downward, not upward on the margin. So as you know, we don't give margin guidance, but the 358, there will be pressure on that in the second quarter and...
realistically into the third and then a lot of it's going to have to do with what the Fed winds up doing it market forwards.
around the Fed tightening cycle being over or not, it winds up being true. So we've got a few tools to try to offset some of that, but we're not immune to what's going on in the markets and in particular in the deposit markets. I think we'll see loans.
reprice up. We've been continuing to shrink the cash flows off the portfolio. That's providing a little
funding for loan growth, but we have to remain competitive on the deposit side and work through this cycle.
I think I'm connecting your question back to the question, the first question in the queue as well. I think there are levers that David just highlighted. I think that we have in the toolbox, we're still expecting to meet the NII guidance. The NIM is relatively less controllable, but the NII is and we're still focused on staying with that guidance. Thank you.
Yeah, I hear you.
I appreciate the color on there. And last one for me, how are you guys thinking about utilizing the buyback going forward? And obviously, the shares are down and it looks more attractive probably to use, but it's a difficult market environment.
So yeah, I mean, do you guys intend to be active in the near term or pause a bit here and kind of make some decisions as an environment progresses throughout the year?
Yeah, Chris, it's David. So we were, we had very moderate activity in Q1.
Let's say the quarter prior to SVD,
Our stock price was obviously higher than in the last three weeks of the quarter. Based on the average price we paid, you can probably figure out when we bought those shares. They were modest.
I would suggest that we'll be in the market, you know, in the second quarter and in the back half of the year. The real, we're in an environment where capital is, is highly important, right? Because economic uncertainty is there. That's a lot.
We're also trading at 1.1 times tangible book value. So we think our stock is very compelling. So we're balancing.
the desire to buy a lot versus the need to harbor capital for economic uncertainty. And then that's an active discussion that we have internally and we have with our board as well, as you can imagine.
Great. Thanks for taking my question.
Anytime. Thanks.
Thank you. At this time, we have no further questions, so I'll hand back over to the management team for any closing remarks.
Thank you for joining us today on our call and for your interest in Berkshire. Have a great day and be well.
Charlie, you can close the call now.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.