Q3 2023 Berkshire Hills Bancorp Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Berkshire Hills Bancorp third quarter 2023 earnings Conference call.
At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Friday October 22023.
I would now like to turn the conference over to <unk>.
Kevin Cohen. Please go ahead.
Okay.
Good morning, and thank you for joining Berkshire Bank's third quarter earnings call. My name is Kevin Kahn, Investor Relations and corporate development Officer here with me today are <unk>, Chief Executive Officer, Sean Gray, Chief Operating Officer, David Rosato, Chief Financial Officer, and Greg Lindenmuth Chief Risk Officer.
Our remarks will include forward looking statements and refer to non-GAAP financial measures.
Results could differ materially from those two statements.
Those statements. Please see our legal disclosure on page two of the earnings presentation referencing forward looking statements and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in our news release at this time I will turn the call over to Nick.
Thank you Kevin good morning, everyone.
I'll begin my comments on slide three where you can see the highlights for the third quarter.
While the rate environment remains challenging for Berkshire, and the overall banking industry.
We are encouraged by the trends in our margin that reflects a deceleration in NIM compression we.
We are also encouraged by the trends in asset quality and deposit durability.
While expenses were flat quarter over quarter, given the challenging macroeconomic environment, we will have heightened focus on rationalizing expenses.
Some of these initiatives have already begun and we are exploring all of the avenues to create a sustained long term efficiency improvement.
David will discuss this in more detail in his remarks.
That it is trending in line with expectations.
<unk> declined linked quarter and loan loss reserves increased modestly.
Operating net income of $21 5 million and operating EPS of <unk> 50 <unk>.
Both declined 9% linked quarter, primarily from a decline in net interest income.
Year to date EPS of $1 67 is up by 7% year over year.
Deposits were stable in the third quarter up 1% linked quarter on an average balance basis and down 1% on an end of period basis.
While we're not immune to the funding cost and mix pressures facing the industry. We believe our deposit base is relatively stable given our history and long term relationships with clients in smaller cities across our markets.
Average loan balances were up 2% linked quarter with balanced growth across commercial and consumer loans.
Balance sheet remains strong.
We ended the quarter with common equity tier one ratio of 12, 1%.
And a tangible common equity ratio of 767%.
We've added a page in the appendix on our overall commercial real estate portfolio.
The updated the appendix space that provides details on our office portfolio, both of which highlight how our portfolio is granular geographically diverse and resultingly less risky.
David will commerce covered some of these may takes in more detail in a few moments.
Other professed strategy front this quarter marks the start of year three of a three year best program.
We continue to rationalize our real estate footprint, including the consolidation of four branches and sale of one office building this past quarter.
In continuation of our Digitization journey, we launched our new mobile banking App and online banking platform towards the end of the third quarter.
The disruption in our markets has enabled us to opportunistically hire deposited and relationship focused frontline bankers.
We are also delighted that Mary Ann Callahan has joined our board of directors.
We've included a page with <unk> value in the appendix.
Welcome aboard.
Operator: At this time, all minds are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.
Slide four shows our best programs progress on five key performance metrics as we've said in the past the path to our targets will not be a straight line.
We are near the low end of our target range for operating return on assets at 73 basis points and our operating return on tangible common equity of oxy at nine 7%.
Operator: This call has been recorded on Friday, October 20th, 2023.
Kevin Conn: I would now like to turn the conference over to Kevin Conn. Please go ahead.
We've added a new ROTC calculation to be more consistent with our peers, which David will review in his remarks.
Kevin Conn: Good morning, and thank you for joining Berkshire Banc's 3rd quarter earnings call. My name is Kevin Conn, Investor Relations and Corporate Development Officer. Here with me today are Nitin Mhatre, Chief Executive Officer, Sean Gray, Chief Operating Officer, David Rosado, Chief Financial Officer, and Greg Lindenmuth, Chief Risk Officer.
Our quarterly <unk>, our annualized $236 million and our ESG score remains in the top quartile at the 19% nationally.
Our net promoter score in the third quarter came in at 54 significantly higher than our full year 2022, NPS score of 43.
Kevin Conn: Our remarks will include forward-looking statements and refer to non-gap financial measures. Actual results could differ materially from those two statements. Those statements. Please see our legal disclosure on page 2 of the earnings presentation, referencing forward-looking statements and non-gap financial measures. A reconciliation of non-gap financial measures is included in our news release.
I want to use this opportunity to thank all of my Berkshire Bank colleagues for their continued hard work and commitment to our vision to be a high performing relationship focused community bank.
Their commitment to our strategy and dedication to our customers and communities.
Nitin Mhatre: At this time, I'll turn the call over to Nitin. Thank you, Kevin.
That brings us together and sets us apart.
With that I'll turn the call over to David to discuss our financials in more detail David. Thank you, Matt and slide five shows an overview of the quarter as Nick mentioned operating earnings were $21 5 million or <unk> 50 per fully diluted share down five linked quarter.
Nitin Mhatre: Good morning, everyone. I'll begin my comments on slide 3, where you can see the highlights for the third quarter. While the rate environment remains challenging for Berkshire and the overall banking industry, we're encouraged by the trends in our margin that reflect a desaleration in NIM compression. We're also encouraged by the trends in asset quality and deposit durability. While expenses were flat, quarter-over-quartered, given the challenging macroeconomic environment, we will have heightened focus on rationalizing expenses.
And down 12, <unk> year over year.
Our net interest margin was $3 18 down six basis points linked quarter and down 30 basis points year over year.
Net interest income declined $2 4 million or 3% linked quarter and was down $1 8 million or 2% year over year.
Nitin Mhatre: Some of these initiatives have already begun, and we're exploring all other avenues to create a sustained long-term efficiency improvement. David will discuss this in more detail in his remarks. That it is trending in line with expectations, charges of decline length quarter and loan loss reserves increase modestly. Operating net income of 21.5 million and operating EPS of 50 cents, both decline 9% length quarter, primarily from a decline in net interest income. Year-to-date EPS of $1.67 is up by 7% year-over-year.
Operating non interest income was up 2% in the quarter and up 7% year over year.
Operating operating expenses were flat versus last quarter, and up three 7 million or 5% year over year.
Average loans increased $161 million or 2% linked quarter.
Average deposits increased $62 million or 1% from the second quarter.
Provision expense for the quarter was $8 million.
At the midpoint of our July guidance and flat to the second quarter.
Nitin Mhatre: Deposits were stable in the third quarter, up 1% length quarter on an average balance basis, and down 1% on an end-of-theat basis. While we're not immune to the funding caused and mixed pressures facing the industry, we believe our deposit base is relatively stable, given our history and long-term relationships with clients in smaller cities across our markets. Average loan balances were up 2% length quarter, with balance growth across commercial and consumer loans.
Net charge offs were in line with expectations at $5 4 million or.
Our 24 basis points of average loans.
We increased our allowance for credit losses by $2 $6 million in the quarter.
Slide six shows more detail on our average loan balances, which were up $161 million or 2% linked quarter.
We had balanced growth across our commercial real estate and residential mortgage books with modest declines in C&I and consumer.
Nitin Mhatre: Our balance sheet remains strong. We ended the quarter with common equity We've added a page in the appendix on our overall commercial real estate portfolio, and updated the appendix page that provides details on our office portfolio, both of which highlight how our portfolio is granular, geographically diverse, and resultantly less risky. David will cover some of these matrix in more detail in a few moments.
Slide seven shows our average deposit balances totaled.
Total deposits increased $62 million or 1% in the quarter and were essentially flat year over year.
As expected the deposit mix shifted with a modest decline in noninterest bearing deposits and an increase in time deposits.
Noninterest bearing deposits as a percentage of total average deposits were 26% in the third quarter <unk>, 27% in Q2.
Our deposit costs were 181 basis points up 30 basis points from the second quarter.
Nitin Mhatre: On the best strategy front, this quarter marks the start of year three of our three-year best program. We continue to rationalize our real estate footprint, including the consolidation of four branches, and sale of one office building this past quarter. In continuation of our digitization journey, we launched our new mobile banking app and online banking platform towards the end of the third quarter. The disruption in our markets has enabled us to opportunistically hire the positive and relationship-focused front-line bankers. We've also delighted that Mary Ann Callahan has joined our board of directors. We've included a page with Mary Ann's bio in the appendix. Welcome aboard Mary Ann.
Our deposit beta for the third quarter was 112%.
And our cumulative beta is 32% through 525 basis points of fed tightening.
Borrowings stood at 9% of total funding on an average balance basis down from 12% in the second quarter and up from 3%.
Third quarter of 2022.
Turning to slide eight we show net interest income.
Higher loan volumes provided a lift to the third quarter, while higher deposit costs contributed to the $2 4 million or 3% decrease in net interest income.
The $1 $8 million or 2% year over year decline in net interest income was primarily driven by higher deposit and borrowing costs.
Nitin Mhatre: Flight four shows our best program's progress on five key performance matrix. As we've said in the past, the paths to our targets will not be a straight line. We are near the low end of our target range for operating return on assets at 73 basis points and are operating return on tangible common equity or OTC at 9.27%. We've added a new OTC calculation to be more consistent with our peers, which David will review in his remarks.
Slide nine shows fee income, which was up 371000 or 2% linked quarter.
Deposit related fees were up 221000.
Loan and other fees were down 310000 in the second quarter.
Yeah.
Gain on sale of SBA loans were down 362000, <unk> first the second quarter due to lower premiums in the market.
Nitin Mhatre: Our quarterly PP&R annualizes 236 million, and our ESG score remains in the top quartile at the 19 percentile nationally. Our net promoter score in the third quarter came in at 54, significantly higher than our full year 2022 NPS score of 43. I want to use this opportunity to thank all of my Berkshire bank colleagues for their continued hard work and commitment to our vision to be a high-performing relationship-focused community bank. Their commitment to our strategy and dedication to our customers and communities is what brings us together and sets us apart.
Wealth management fees were down $102000 linked quarter.
Other fees, which include a securities fair value adjustment of negative 400.
$67000 were higher primarily driven by the reversal of tax credit amortization.
Slide 10 shows our expenses.
Expenses were flat linked quarter and are closer to the low end of the guided range of $73 million to $76 million per quarter.
Modest increases in compensation and technology expenses were offset by declines in occupancy and equipment professional services and other expenses.
David Rosado: With that, I'll turn the call over to David to discuss our financials in more detail. David, thank you, Niden. Slide five shows an overview of the quarter. As Niden mentioned, operating earnings were 21.5 million dollars for 50 cents per fully diluted share. Down 5 cents, link quarter, and down 12 cents year over year. Our net interest margin was 318, down 6 basis points, link quarter, and down 30 basis points year over year.
GAAP expenses of $76 5 million include $2 6 million of restructuring charges, primarily driven by branch consolidations.
Expenses year over year were up $3 $7 million or 5%.
Largely driven by higher compensation and technology expenses.
David Rosado: Net interest income declined $2.4 million or 3% link quarter, and was down 1.8 million or 2% year over year. Operating non-interest income was up 2% in the quarter, and up 7% year over year. Operating expenses were flat first last quarter, and up 3.7 million dollars for 5% year over year. Average loans increased $161 million or 2% link water, while average deposits increased $62 million or 1% from the second quarter. Provision expense for the quarter was $8 million.
The increase in other expenses was primarily driven by higher deposit insurance insurance premiums and loan servicing expense.
As we said last quarter technology spend will normalize over the coming quarters.
Reduce costs related to our legacy digital platform.
We are committed to managing expenses with discipline and transparency.
We have instituted biweekly meetings in which every vendor expense of $25000 or more in every request for new hires as well as replacement hires above a preset grade level.
This granular approach to due to expense management to starting to have the desired impact of reducing our expense base.
David Rosado: At the midpoint of our July guidance and flat to the second quarter, net charge offs were in line with expectations at $5.4 million or 24 basis points of average loans. We increased our allowance for credit losses by $2.6 million in the quarter. Slide six shows more detail on our average loan balances, which were up $161 million or 2% link water. We had balance growth across our commercial real estate and residential mortgage books with modest declines in C&I and consumer.
This strategy will ensure that every dollar is thoughtfully spent and is necessary to run the bank efficiently or to grow our revenue and earnings.
Slide 11 is a summary of asset quality metrics.
Nonperforming loans were down $1 $8 million.
Linked quarter, and $11 $3 million year over year.
Net charge offs of $5 4 million or 24 basis points, we're down $300000 in the second quarter versus the second quarter.
David Rosado: Slide seven shows our average deposit balances. Total deposits increased $62 million for 1% in the quarter, and were essentially flat year over year. As expected, the deposit mix shifted with a modest decline in non-intersparing deposits and an increase in time deposits. Non-intersparing deposits as a percentage of total average deposits were 26% in the third quarter, first 27% in Q2. Our deposit costs were 181 basis points, up 30 basis points from the second quarter.
In the top right chart, you can see that Berkshares 10 year average net charge offs to loans average is 27 basis points and we are currently operating around that normalized level.
Net charge offs included commercial loan charge offs of $3 $2 million in consumer loan charge offs of $2 2 million.
We've included a chart in the appendix with Berkshares charge off rates versus the industry since 2000.
Since the year 2000.
As Ned mentioned, we've added a page in the appendix on overall credit exposure.
David Rosado: Our deposit beta for the third quarter was 112%, and our cumulative beta is 32% through 525 basis points of Fed tightening. Farrowing stood at 9% of total funding on an average balance basis, down from 12% in the second quarter, and up from 3% in third quarter of 2022. Turning the slide eight, we showed net interest income. Higher loan volumes provided a lift to the third quarter, while higher deposit costs contributed to the 2.4 million or 3% decrease in net interest income.
The <unk> book is well diversified in terms of geography and collateral type.
Credit quality of this portfolio remains strong with non accrual loans at 12 basis points of total loans.
We also updated the page in the appendix on the office portfolio as noted last quarter, the weighted average loan to value ratios.
Approximately 60% and a large majority is in suburban and class a office space.
While current credit quality metrics are benign we recognize that economic uncertainties exist, we are monitoring both new originations and our.
David Rosado: The $1.8 million or 2% year over year decline in net interest income was primarily driven by higher deposit and borrowing costs. Slide nine shows fee income, which was up 371,000 or 2% length quarter. The deposit-related fees were up 221,000, loan and other fees were down 310,000 in the second quarter. Gain on sale of SBA loans were down 362,000, first the second quarter, due to lower premiums in the market. Wealth management fees were down $102,000, link quarter.
Our existing portfolios carefully we have modestly increased our reserves commensurately.
Slide 12 shows returns over the past five quarters on a GAAP and an operating basis.
As you know the current operating environment is presenting headwinds, but we remain highly focused on improving our medium term performance.
I want to highlight several new roads, we've added to the financial tables at the beginning of the earnings release this quarter.
We have been reporting return on tangible common equity that they denominator that excludes the negative <unk>.
Hi, Mark from our Securities.
David Rosado: Other fees, which include a security spare value adjustment of negative $467,000, were higher, primarily driven by the reversal of tax credit and mortgages of the nation. Slide 10 shows our expenses. Expenses were flat, link quarter, and are closer to the lower end of the guided range of $73 to $76 million per quarter. Modest increases in compensation and technology expenses were offset by declines in occupancy and equipment, professional services, and other expenses.
These portfolio.
We are now also reporting ROTC with a denominator that includes the negative OCI, mark, which lowers the denominator and increases proxy.
Most of our peers calculate return on tangible common equity this way and we'd encourage you to consider ROTC figures on an apples to apples basis.
We are not moving the return goalposts goalposts, but are simply aligning part of our reporting to be more consistent with both peers and larger banks.
Slide 13 shows capital ratios, our top capital management priority is to deploy capital to support organic loan growth.
David Rosado: Gap expenses of $76.5 million include $2.6 million of restructuring charges primarily driven by branch consolidations. Expenses year over year were up $3.7 million or 5% largely driven by higher compensation and technology expenses. The increase in other expenses was primarily driven by higher deposit insurance premiums and loan servicing expense. As we said last quarter, technology spend will normalize over the coming quarters as we reduce costs related to our legacy digital platform. We are committed to managing expenses with discipline and transparency.
Candidly, we remain biased towards stock repurchases, given our stock prices below tangible book value.
In Q3, we repurchased three $9 million of stock at an average cost of $20.01.
We believe Berkshire stock is undervalued, given our growth potential and low risk business model.
We will continue to opportunistically repurchase stock.
With that I'd like to turn it back to Nick for further comments.
Thank you David I'll close my remarks with comments on the economy, the industry and our positioning.
We are fortunate to be operating in the relatively stable markets in the northeast, which continue to remain on solid footing.
David Rosado: We have instituted biweekly meetings in which every vendor expense of $25,000 or more and every request for new hires as well as replacement hires above a preset grade level. This granular approach to expense management is starting to have the desired impact of reducing our expense space. This strategy will ensure that every dollar is thought fully spent and is necessary to run the bank efficiently or to grow our revenue and earnings. Slide 11 is a summary of asset quality metrics.
We are facing typical banking industry cyclicality issues, such as NIM compression from the inverted yield curve and normalization of credit cycle.
Thanks to adjust and we expect margin compression to decline over the next few quarters.
While we expect credit costs to increase modestly they will be significantly lower than the losses during the <unk> cycle.
We also believe that increased regulatory costs will impact the industry, but unlikely to impact larger regional banks are money center banks much more than community banks like bookshelf.
David Rosado: Non-performing loans were down $1.8 million, link quarter, and $11.3 million year over year. That charge of $5.4 million or 24 basis points were down $300,000 in the second quarter, first the second quarter. In the top right chart, you can see that Berkshire's 10-year average net charge-offs to loans averages 27 basis points and we are currently operating around that normalized level. Net charge-offs included commercial loan charge-offs of $3.2 million in consumer loan charge-offs of $2.2 million.
While we can't operate our control the macro environment. We are focused on controlling what we can and have several levers, including opportunistic hiring for deposit growth derisking, the balance sheet and rigorous expense management.
When I started as CEO in early 2021, we faced declining loan balances that we steadily turned into loan growth.
Similarly, overcome the current challenges, especially deposits growth and expense management.
We remain focused on selective responsible and profitable organic growth and are confident that we will get bigger while getting better.
David Rosado: We've included a chart in the appendix with Berkshire's charge-off rates versus the industry since 2000 since the year 2000. As Nitin mentioned, we've added a page in the appendix on overall pre-exposure. The pre-book is well-diversified in terms of geography and collateral type. Credit quality of this portfolio remains strong but non-accrual loans at 12 basis points of total loans. We also updated the page in the appendix on the office portfolio. As noted last quarter, the weighted average loan to value ratios are approximately 60 percent and a large majority is in suburban and class A office space. While current credit quality metrics are benign, we recognize that economic uncertainties exist. We are monitoring both new originations and our existing portfolios carefully.
With that I'll turn it over to the operator for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press the star followed by one on your Touchtone phone.
You will hear a three toone pump technology request and your questions will be pulled in the order they are received.
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Our first question.
Comes from Billy Young of RBC.
People.
Markets.
Please go ahead.
My apologize we seem to have eased.
So we'll go to the next question from the line of Mark Fitzgibbon of Piper Sandler. Please go ahead.
David Rosado: We have modestly increased our reserves Slide 12 shows returns over the past five quarters on a gap and an operating basis. As you know, the current operating environment is presenting headwinds, but we remain highly focused on improving our medium term performance. I want to highlight several new rows we've added to the financial tables at the beginning of the earnings release this quarter. The denominator that excludes the negative AOCI mark from our AFS securities portfolio.
Hey, guys, good morning, and happy Friday.
Hey, good morning Lauren.
First question I had should we expect more branch.
<unk> and restructuring charges associated with that in coming quarters.
I think the short answer Mark would be yes, we constantly monitor our geography and opportunities for consolidation while retaining.
Clients and bankers, so that process will continue and to that extent you should continue to expect that.
Okay, and then how about balance sheet restructuring in the fourth quarter given that it looks like rates are going to stay up here for a while.
David Rosado: We are now also reporting Rossi with a denominator that includes the negative AOCI mark, which lowers the denominator and increases proxy. Most of our peers calculate return on tangible common equity this way and we'd encourage you to consider Rossi figures on an Apple's to Apple's basis. We are not moving the return goal post, but are simply a lining part of our reporting to be more consistent with both peers and larger banks.
Thats something that that you are contemplating.
Hi, Mark it's David Yes.
Yes.
We are.
Constantly thinking about the logic of restructuring the securities portfolio were very similar to a lot of banks, where the whole portfolio is underwater.
Its primarily mortgage backed securities some of the durations of length lengthened out a little bit.
<unk>.
David Rosado: Slide 13 shows capital ratios. Our top capital management priority is to deploy capital to support organic loan growth. Secondly, we remain biased towards stock repurchases, given our stock prices below tangible book value. In Q3, we repurchase $3.9 million of stock at an average cost of $20.1. We believe Berkshire stock is undervalued given our growth potential and low risk business model. We will continue to opportunistically repurchase stock.
<unk>.
So as.
As you know very clearly, it's just taken that equity hits to create a much better run rate going forward.
The things that we think about mostly is.
The future path of interest rates and the.
The.
We're constantly trying to think through.
Whether we're close to the turn in rates and if so it's probably not the best strategy because that equity.
As large.
But.
Nitin Mhatre: With that, I'd like to turn it back to Nathan for further comments. Thank you, David.
It could happen or could not happen in Q4 or even into 2024 at this point.
Nitin Mhatre: I'll close my remarks with comments on the economy, the industry, and our positioning. We're fortunate to be operating in the relatively stable markets in the Northeast, which continue to remain on solid footing. We're facing typical banking industry cyclicality issues, such as nim compression from the inverted yield curve and normalization of credit cycle. Banks do adjust and we expect margin compression to decline over the next three quarters. While we expect credit costs to increase modestly, they will be significantly lower than the losses during the GFC cycle. We also believe that increased regulatory costs will impact the industry, but are likely to impact larger regional banks or money center banks much more than community banks like Berkshire.
Okay. That's a fair answer and then I guess at a macro level can you share with us how you're thinking about either growing or shrinking the tax credit investments over time, and maybe what the implications might be for the effective rate going forward.
Yes, that's a really good question so the we.
We actually have a really nice high quality tax credit portfolio. It's.
That's it.
Consist of low.
Low income housing tax credits historic tax credits has a few new market tax credits in it and then solar tax credits.
The interesting thing is that the accounting is going to change from the first of the year and which will.
Nitin Mhatre: While we can't operate or control the macro environment, we're focused on controlling what we can and have several levers, including all opportunistic hiding for deposit growth, de-resking the balance sheet and rigorous expense management. When I started as CEO in early 2021, we faced declining loan balances that we steadily turned into loan growth. We will similarly overcome the current challenges, especially deposit growth and expense management. We remain focused on selective, responsible, and profitable organic growth and are confident that we will get bigger while getting better.
Drive up our effective tax rate.
But we'll.
No longer require us to amortize.
The expense.
The amortization, we we put those numbers in the financial tables to be very clear about the positive impact of the of the programs. We're on.
But the accounting will change going forward the economics do not change which is important to know.
But the effective tax rate will rise upon the purchase of what's called Pam accounting.
Operator: With that, I'll turn it over to the operator for questions. Jerry? Thank you.
So where would you expect the effective rate to settle out.
Operator: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question? Please press the star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process? Please press the star followed by the two. If you are using a speaker phone, please lift the handset before pressing on any keys.
We're still working through that we will have a lot more clarity and.
In January when we give guidance.
The only reason.
<unk>.
Pushing that to January is.
Some of our credits reside in the state of New York, which.
May not allow the adoption of Pam accounting.
Which means we're still working through that minor issue, which will drive the final effective tax rate.
Bill Young: Our first question comes from Billy Young of RBC capital markets.
Okay, and then lastly.
Last quarter, David You said, you thought the NIM would sort of bottom out in the $3 15 to $3 20 range in the second half of the year.
Unknown Executive: Please go ahead. My poses, we seem to have an issue there.
Given what you see today with funding challenges do you still feel like.
Mark Fitzgibbon: So we'll go to the next question from the line of Mark Fitzgibbon of Pipe Sandler. Please go ahead.
That's a reasonable.
<unk> for the fourth quarter.
Nitin Mhatre: Hey guys, good morning and happy Friday. First question I had. Should we expect more branch consolidations and restructuring charges associated with that in common quarters? I think the short answer mark would be yes. We constantly monitor geography and opportunities for consolidation while retaining our clients and bankers. So that process will continue and to that extent you should continue to expect that. Okay, and then how about balance you restructuring in the fourth quarter given that it looks like rates are going to stay up here for a while. Is that something that you're contemplating?
Yes.
<unk>.
So I think even a.
So the answer is yes.
Let's think about the NIM, a little broader though I want to stop short again.
Of talking too much about 2024, but what I would what I would point out is the six basis point reduction in NIM this quarter relative to the 34 basis point reduction last quarter. So the real positive message and news.
<unk> is the.
The pressure while the pressure remains on.
The competition around deposits and.
David Rosado: Hi, Mark. It's David. Yeah, you know, we are constantly thinking about the logic of restructuring the securities portfolio. We're very similar to a lot of banks where, you know, the whole portfolio is underwater. It's primarily mortgage back securities. Some of the durations have lengthened out a little bit.
We have about half of our loan portfolio is.
Variable variable rate, mostly mostly so far at this point, but prime as well.
What I would characterize this quarter as mid <unk>.
Single digit decline in the NIM.
We look forward I think.
David Rosado: The so it's as you know, very clearly it's just taking that equity hit to create a much better run rate going forward. The the things that we think about mostly is the future path of interest rates and the we are constantly trying to think through whether we're close to the turn in rates. And if so, it's probably not the best strategy because that equity hit is large. But it could happen or could not happen in Q4 or even into 2024 at this point. Okay, that's a fair answer.
That numbers going to.
Go to low single digit declines as we start to think about 2024. So I think there is a really good message embedded in that.
About the.
Overall margin for our company.
The only other nuance to that is that's really based on forward rates, which of course has won easing today built into the.
The back half of next year.
So those comments our preference preferenced prefaced on the current rate environment.
Which has an end to the tightening cycle, but there's good news embedded in what I am trying to say.
David Rosado: And then I guess at a macro level, can you share with us how you're thinking about either growing or shrinking the tax credit investments over time and maybe what the implications might be for the effective rate going forward? Yeah, that's a really good question. So the we we actually have a really nice high quality tax credit portfolio. It's it's it's consistent of low income housing tax credits, historic tax credits has a few new market tax credits in it and then solar tax credits.
Okay. Thank you.
Youre welcome.
Our next question comes from the line of Billy Young of RBC capital markets. Please go ahead.
Hey, guys, let's try this again can you hear me okay.
Yes, we can now really good morning.
Great. Thank you sorry about that technical difficulties.
Just to start maybe just to follow up on Mark's last question.
I know you don't want to.
Excuse me.
Give much guidance for 'twenty 'twenty four but.
David Rosado: The interesting thing is that the accounting is going to change come the first of the year and which will, will drive up our effective tax rate but will no longer require us to amortize the expense of the amortization. We put those numbers in the financial tables to be very clear about the positive impact of the programs we were on. But the accounting will change going forward, the economics do not change, which is important to know. But the effective tax rate will rise upon the purchase of what's called PAM accounting. So where would you expect the effective rate to settle out?
Yeah.
David alluded to low single digit declines in the NIM as we go into next year.
I guess just why is that if we kind of think that if we assume that that's kind of done or close to done kind of where is that incremental.
Rising pressure coming from that will kind of offset.
Asset re pricing opportunities going into next year.
It's more on the liability side, just when you think about the role of the CD book It takes a little bit of time for.
All of that to rollover, so we have role.
This.
We've got most of the fourth quarter.
What I was Telegraphing was.
The easing that's built into the market doesn't actually occur until the beginning of the back half of next year. So.
David Rosado: We're still working through that, we will have a lot more clarity in January when we give guidance. And the only reason I'm pushing that to January is some of our credits reside in the state of New York, which will may not allow the adoption of PAM accounting. Which means we're still working through that minor issue, which will drive the final effective tax rate. And then lastly, I think last quarter, David, you said you thought that the NIM would sort of bottom out in the 315 to 320 range in the second half of the year. You know, given what you see today with funding challenges, do you still feel like, you know, that's a reasonable range for the fourth quarter? Yes, they.
Unless the market Smith sniff that out earlier economic weakness.
And forwards come down more you've got essentially almost.
Full.
Pricing of the CD book.
That's going to have has a lag effect that add a lagged effect on the way up so have a bit of a lag effect on the way down until that happens banks are still competing for deposits.
And we see in our markets, we see some fairly aggressive.
<unk> from interesting to me, both larger and smaller banks.
The so the so it's simply that.
Understood that makes sense makes sense.
Okay, and then just on maybe loan growth.
David Rosado: So I think even so the answer is yes, let's think about the NIM a little broader, though, I want to stop short again of talking too much about 2024. But what I would point out is the six basis point reduction in NIM this quarter relative to 34 basis point reduction last quarter. So the real positive message and news is the pressure, while the pressure remains on the competition around deposits. And we have about half of our loan portfolio is variable, variable rate, mostly, mostly so far at this point, but prime as well.
Maybe a two part question here.
First your thoughts on whether the nine two to $9 4 billion in the back half of the year.
So a good number for you in terms of target and then on <unk>.
C&I balances have been under pressure for the last couple of quarters I guess.
What are you hearing or seeing from customers here, how does that impact your thinking on the growth mix in the near term because I know.
It was I think it was $70 75 per se commercial was kind of the target for for where you're getting the growth from.
Yes, so bill.
Give a high level overview, and then David could give more specifics I think specific guidance. The number that you pointed to nine 2% to $9. Four I think we might be on the lower end or even slightly lower than the lower end at this point of time, we see the slowdown in the pipelines across all books.
David Rosado: The what I would characterize this quarter as mid single digit decline in the NIM, as we look forward, I think that numbers going to go to most single digit declines as we start to think about 2024. So I think there's a really good message embedded in that about the overall margin for our company. The only other nuance to that is that's really based on forward rates, which of course has one easy today built into the back half of next year. So those comments are preference preference on the current rate environment, which has an end to the tightening cycle, but there's good news embedded in what I'm trying to say.
So that's going to show up in the Q4.
We did I think David did provide guidance for the second half of growth of 7% to 11% and again I think it will be on the lower end of that or even slightly short of that and I think thats a good thing Indian gladman that we are in.
Unknown Executive: Thank you. You're welcome.
The second part of your question is yes, we do expect that the commercial book.
Goes from 65% to 70% over time and our teams are doing a fantastic job managing the balance sheet.
Even though on a residential book, we've slowed down pretty much stopped third party originations.
Slowdown on the originations and have improved our ability to do secondary market sales, which were more than 20% last quarter. So I think it's a mix of activities.
In kind of accordance to the market environment.
The only thing I would add.
Add to that is our plan.
Net in SaaS.
Our pipelines are slower or lower that's by design. Okay. So we certainly have the ability to land more and more lending, but we're repositioning.
Bill Young: Our next question comes from the line of Billy Young of RBC Capital Markets. Please go ahead. Hey, guys, let's try this again. Can you hear me okay? Yes, we can now, really. Good morning. Oh, great. Thank you. Sorry about that technical difficulties.
Under the leadership.
In commercial of Jim Brown too.
Work to blend and create deposits.
David Rosado: Just to start, maybe just to follow up on Mark's last question, I know you don't want to give much guidance for 2024, but he kind of, David alluded to, you know, low single digit declines in the NIM as we go into next year. I guess just why is that if we kind of think of mental pricing pressure coming from that would kind of offset, you know, asset repricing opportunities going to next year.
Which is a a modest or is there a change in our philosophy, so full or both sides of the balance sheet relationships is what we're going after rather than just extending high quality credit.
And I think we'll be very successful with that.
Over time, it takes time Didnt referenced in his original comments that the industry disruption has allowed us to higher deposit focused commercial bankers and we will continue to try to do that so that's the real color behind what we're trying.
David Rosado: It's more on the liability side just when you think about the role of the CD book, it takes a little bit of time for all of that to roll over. So we have role. I mean, you know, we've got most of the fourth quarter. And what I was telegraphing was that the easing that's built into the market doesn't actually occur until the beginning of the back half of next year. So unless the market snips that out earlier, economic weakness and forwards come down more, you've got essentially almost a full pricing of the CD book that's going to have has a lag effect.
To achieve here.
Hope that helps.
It does thank you very much for taking my questions I'll step back now.
Thank you.
Our next question comes from the line of Dave Bishop.
Group.
Please go ahead.
Yes, good morning, gentlemen.
Good morning, Dave Martin.
Hey, Dave just curious obviously theres been some.
Maybe year over year pressure on data processing technology, and communication costs and you bought it.
You noted the revamp of the digital banking.
Platform just curious maybe is there potential to a new break what the savings are implemented and maybe what how much of that year over year pressures been related to sort of that that addition.
David Rosado: It had a lag effect on the way up, so have a bit of a lag effect on the way down. Until that happens, thanks are still competing for deposits. And we see in our markets, we see some fairly aggressive pricing from interesting to me, both larger and smaller banks. So it's simply, Pat, I understand that makes sense, it makes sense. Okay.
Yes, Dave I'll ask Sean to talk about the technology kind of outlook here, Sean Yes, there is opportunity.
It's a lower.
Unit costs going forward, so we anticipate.
Very low.
Single digit reduction off of where we are today.
Bill Young: And then just on maybe long growth, maybe a two-part question here.
Bill Young: First your thoughts on whether the 9.2 to 9.4 billion in the back half of the year, that's still a good number for you in terms of target. And then on CNI, you know, balances have been underpushed for the last couple quarters. I guess, you know, what are you hearing or seeing from customers here? How is that impact you're thinking on the growth next in the near term? Because I know, you know, it was, I think it was 70, 75 percent commercial was kind of the target for where you're getting your growth from.
Dave what was the second question again.
And then second question.
Obviously with expenses in the crosshairs.
And maybe this is something you've thought about or pursue just doesn't make sense in the current environment.
I appreciate the disclosures around the run off portfolios upstart.
So any potential for maybe a bulk sale they were partial bulk sale.
To accelerate the reduction of sort of the software portfolio is it maybe the expenses attributed to perform.
I would say Dave.
We're looking at everything right. So I think it started with expenses. So all options on the table real estate procurement suppliers ox structures discretionary. So that's on the expense side. Similarly on the balance sheet side to your question. Yes. We're looking at every Optionality we have to.
Nitin Mhatre: Thanks. Yes, so Billy, I'll give a high level overview and then David could give it a little more specific. So I think specific guidance, the number that you pointed to 9.2 to 9.4, or I think we might be on the lower end or even slightly lower than the lower end at this point of time. We see the slowdown in the pipelines across all books. So that's going to show up in the queue for.
Improved the balance sheet mix, so, yes, everything's on the table.
And Dave.
I would just go back to I thought I had said this last quarter. So last quarter, we were calling out the double technology expense so to speak because of the army conversion that we talked about.
Nitin Mhatre: We did, I think David did provide guidance for the second half of growth of 7 to 11 percent. And again, I think it will be on the lower end of that or even slightly short of that. And I think that's a good thing in the environment that we are in. The second part of your question is, yeah, we do expect that the commercial book goes from 65 to 70 percent over time.
So and I mentioned that in our comments today about.
The reduction in our legacy deposit system.
Nitin Mhatre: And our teams are doing a fantastic job managing the balance sheet. And even on a residential book, we've slowed down. We've pretty much stopped third party originations. We've slowed down on the originations and have improved our ability to do secondary market sales, which were more than 20 percent last quarter. So I think it's a mix of activities in kind of accordance to the market environment. The only thing I would add to that is when Nitin says our pipelines are slower or lower, that's by design.
So that's about half a million bucks a quarter or so.
<unk>.
So that hasnt.
Come out of the run rate yet.
But it will.
As.
We go through this quarter and into next year.
The problem with technology expenses. There is always there is always more around the corner.
That's what we have to.
Diligent around.
Got it and then one final question just curious.
David just new commercial origination yields where you're onboarding, a new commercial loans.
Nitin Mhatre: So we certainly have the ability to land more than we're lending, but we're repositioning under the leadership in commercial of Jim Brown to work to blend and create deposits, which is a modest or a change in our philosophy. So fuller both sides of the balance sheet relationships is what we're going after rather than just extending my quality credit. And I think we'll be very successful with that. Over time, it takes time, Nitin referenced in his original comments that the industry disruption has allowed us to hire deposit-focused commercial bankers, and we will continue to try to do that. So that's the real color behind what we're trying to achieve here. Bob, that helps.
Yes, they are about closer to 8% I think 775% to 8%.
Perfect. Thank you.
Thanks, Dave.
Our next question comes from the line of Chris O'connell of <unk>. Please go ahead.
Hey, good morning.
So we wanted to.
David Rosado: It does.
Talk about the share repurchases.
This quarter was a little.
Bit less than half.
So it seems like there.
The repurchases last quarter and I believe this plan that you are currently on.
And at the end of this year just wanted to know what your appetite was going into the fourth quarter, whether you think it will look a little bit more like <unk> levels or to Q.
And whether you intend.
To re up the plan as we move into 2024.
Sure. So two part question.
Unknown Executive: Thank you very much for taking any questions.
Unknown Executive: I'll step back now.
Our approach in the third quarter was.
Unknown Executive: Thanks.
Unknown Executive: Thank you.
The equity markets felt a little with fee to us, especially the sector that.
Dave Bishop: Our next question comes from the line of Dave Bishop of Houth Group. Please go ahead. Yeah, good morning, gentlemen. Morning, Dave. Good morning. Hey, Nitin, Dave, just curious. Obviously, there's been some maybe year-to-year pressure on data processing technology, communication cost, and you noted the sort of revamp of the digital banking platform.
We all travel with so.
The average price our share traded at.
In the third quarter was $21 40.
Sean Gray: Just curious, maybe there's a potential to enumerate what the savings are, once that's what that is, and maybe how much of that year-to-year pressure has been related to that initiative? Yeah, Dave, I'll ask Sean to talk about the technology kind of outlook here. Sean? Yeah, there is an opportunity. It's a lower unit cost going forward. So we anticipate very low single-digit reduction off of where we are today.
<unk>.
We have a tangible book value at the end of the quarter $21 23.
So our approach in the third quarter, which was mostly around price discipline.
So we bought stock at $20.01. So we were a bit more focused on price.
And the discipline and a lot of that was just concerned about how our sector is trading.
But in my comments I did very clearly state that.
Our stock is undervalued.
The question is.
It may our stock and our all of our peers.
Stay undervalued for a period of time so.
That doesn't give you a lot of color to Q4, but I think we will.
We would have liked to have bought more stock at that price.
David Rosado: Dave, what is the second question again? Yeah, and that second question, then obviously with expenses in the crosshairs, and maybe this is something you thought about, or pursued, and just doesn't make sense of the current environment. But you appreciate the disclosures around the runoff portfolio, upstart, and fire zone. Any potential for maybe a bulk sale, they're a partial bulk sale, just to accelerate the reduction of sort of not poor portfolios, and maybe the expenses attributed with them?
In the third quarter it just wasn't available.
The second part of your question was this one this does expire and weak.
Come up with another program most likely answer to that is yes.
We still have to socialize that with the board.
Go through the normal regulatory protocols, but that.
That would be our.
David Rosado: I would say, Dave, we're looking at everything, right? So I think you started with expenses, so all options on the table, real estate procurement, suppliers, all structures, discretionary. So that's on the expense side. Similarly, on the balance sheet side, your question, yeah, we're looking at every optionality we have to improve the balance sheet makes, so yeah, everything's on the table, and Dave, I would just go back. I thought I had said this last quarter.
The intention as long as our board is supportive.
Great.
And just on the on the.
On the balance sheet and the cash levels.
You guys are still I think a little bit elevated to historical levels today.
Do you see an opportunity to kind of bring that down.
In the coming quarters to help out either fund.
<unk> loan growth or or reduce some higher cost funding.
David Rosado: Yeah, so last quarter, we were calling out the double technology expense, so to speak because of the army conversion that we talked about. And I mentioned that in our comments today about the reduction in our legacy deposit system. So, you know, that's about half a million bucks a quarter or so. So, so that hasn't come out of the run rate yet, but it will as as as we go through this quarter and in the next year.
Yes, probably.
Just as you mentioned, we brought it down quite a bit from where we were in the first half of the year.
Yeah.
In Q2, it was a little elevated.
We're going through the government shutdown business.
To have a more liquid balance sheet, who knows if we're going to be dealing with that again or not but aside from that generally we would generally concur.
The ability to break cash levels down.
Okay got it.
David Rosado: The problem with technology expenses, there's always there's always more around the corner. And that's that's what we have to deal with in around. Got it.
And then just.
Just thinking about bigger picture here as we move into year, three and you guys are moving towards those best targets.
David Rosado: Then one more question just curious, David, just a new commercial origination deals where you're onboarding a new commercial loan. Thanks. Yeah, they're about closer to 8% I think 7.75 to 8%. Perfect. Thank you. Thanks Dave.
Where do you think.
Both stability or levers.
To pull in order to.
Trends and get towards those targets.
Obviously, a little bit of margin compression, but is it.
Balance sheet growth.
<unk> management or any fee income opportunities, where do you see the biggest bright spots.
Chris O'connell: Our next question comes from the line of Chris O'Connell of KBW. Please go ahead. Hey, good morning. So, wanted to talk about the share purchases. You know, this quarter was a little bit less than half or so it seems like the repurchases last quarter. And I believe this plan that you're currently on ends at the end of this year. Just wanted to know, you know, what your appetite was going into the fourth quarter, you know, whether you think it'll look a little bit more like three Q levels or two Q. And whether you intend to re up the plan as we move into 2024.
Yes, I think it's kind of a different order, but do you spelled out the two components I think expenses will be a big component of it.
Balance sheet mix change and growth will be the other part.
I think historically, if you look at the 10 year average.
Margins used to be.
Two seven I think we believe there is an opportunity to have much higher margins. So there is little bit of debt below margin play as well and we continue to get up to these through the disruption that's going on in the market and the ability to hire.
Clive.
Client books, and the bankers with deposit oriented relationships. We've seen good success constantly and I think that'll get accelerated as we go into next year.
Yes, I think we also have opportunities on the fee income side I mean those are those are.
David Rosado: Two are so to far question. So our approach in the third quarter was, you know, the equity markets sell a little bit to us, especially the sector that, you know, we all travel win. So the average price our share traded at in the third quarter was $21.40. We have a tangible book value at the end of the quarter, $21.23. So our approach in the third quarter was just was mostly around price discipline.
Are really good businesses.
Take time to scale.
Need the right people in the right positions, but I do think we have opportunities there over the next couple of years.
Great.
And then lastly, I know you guys gave a lot of detail in the deck with regards to this but.
And just any internal outlook or updates on your thoughts on the overall office portfolio and just the general kind of market conditions.
David Rosado: So we bought stock at $20 and one set. So we were a bit more focused on price and the discipline. And a lot of that was just concerned about how our sector is trading. But in my comments, I did very clearly state that, you know, our stock is undervalued. The question is it may our stock and our all of our peers may stay undervalued for a period of time. So that doesn't give you a lot of color to Q for, but I think we will.
In your areas.
Greg.
Sure.
Our overall outlook for the portfolio.
Is it still consistent with what we've seen in the past.
Obviously, we're familiar with what other banks are going through and some of the risks in the industry.
But the portfolio performance.
Still remains solid and we will continue to look at opportunities too.
David Rosado: We would have liked to have bought more stock at that price in the, in the third quarter, it just wasn't available. The second part of your question was this one, this does expire, and will we come up with another program. Most likely answer to that is yes. Yeah, we still have to socialize that with the board and go through the normal regulatory protocols, but that would be our intention as long as our board is supportive.
Revisit renewal opportunities and whether we decide to renew credits in the future or not.
We think it's a very good time as.
As we experienced some of the maturities over the next year or two <unk>.
We rebalanced the portfolio.
And I would add Chris that we would also.
<unk>.
As part of slowing down of some of the originations. We have also seen a decline in that portfolio roughly 5% quarter over quarter. So the portfolio is performing well and its been.
Not growing at a fast space, So I think that kind of bodes well, Florida asset quality put us.
And this is great.
David Rosado: Great. And just on the, on the, on the balance sheet on the cash levels, you know, you guys are still, I think, a little bit elevated to historical levels today. Do you see an opportunity to kind of bring that down in the coming quarters to help out either, you know, fun to long growth or, or reduce some, you know, higher cost fundings. Yeah, probably we've, as you mentioned, we brought it down quite a bit from where we were in the first half of the year.
Great appreciate the color thanks for taking my questions.
Thanks, Chris.
Our next question comes from the line of Laurie Hunsicker of Seaport Research. Please go ahead.
Hi, Thanks, good morning.
Please go back to your branches that you sat on the.
The four branches were any of those in Boston are aware wherever they are located in Massachusetts.
Yes, they were.
Northern Boston.
And do we still have the footprint.
David Rosado: In Q2, it was a little elevated when we were going through the government shutdown business. We want, you know, we want to have a more liquid balance sheet. Who knows if we're going to be dealing with that again or not, but it's fine from that. Generally, we would generally concur, there's the ability to break cash levels down. Okay, got it.
Yes, yes, yes, Laurie really west of $4 95 in Massachusetts.
Okay. Okay.
And then as you as you think about your 96 branch footprint. If you were to look a year out and then how do you see that is that 96 going to 90 is that 96 going to 80, how do you how do you think about that.
Nitin Mhatre: And then just thinking about bigger picture here, you know, as we, you know, move into, you know, year three and you guys are, you know, moving towards those best targets. You know, where do you think you have the most ability or levers, you know, to pull in order to, you know, try and get toward those targets. You know, obviously, you know, a little bit of margin compression, but you know, is it a balance sheet growth, you know, expense management or any income opportunities, you know, where do you see the biggest bright spots.
Yes, we can.
Give a specific number Larry but we as we said in the earlier question as well we constantly evaluate.
Branch footprint.
<unk> retail business and her team is constantly also looking at customer foot traffic and servicing patterns and where you could actually serve those clients better we have channels like my banker that are unique to us whereby we go to declined as opposed to clients having to come to the branch. So I think all of that is baked into the equation.
We do believe.
Based on what we see that there is an opportunity for further consolidation, we just can't spell out a specific number at this point.
Nitin Mhatre: Yeah, I think it's kind of a different order, but you spelled out the three components. I think expenses will be a big component of a balance sheet, mix change and growth will be the other part. And I think historically, if you look at the 10 year average margins used to be 27, I think we believe there's an opportunity to have much higher margins. So there is a little bit of that, you know, margin play as well.
Okay, Okay, and then $2 6 million in one time charges, what what are the cost savings you are getting.
With these closures and was that any of that reflected in <unk> and <unk>.
How much how do you think about how much of that drops to the bottom line.
Franchise reinvestment.
Yes, Laurie its David.
Nitin Mhatre: And we continue to get opportunities through the disruption that's going on in the market and the for our ability to hire. You know, climb, you know, climb books and the bankers with the positive oriented relationships. We've seen good success constantly, and I think that'll get accelerated as we go into next year. I think we also have opportunities on the team and come side. I mean, it's those are, those are really good businesses. They take time to scale.
<unk>.
It's a modest number that drops to the bottom line on a go forward basis.
<unk>.
I think of these branch some of these brands.
Closures as cleanup.
Meaning.
They were two of them were closed branches. So there wasn't operating.
Near term our current period operating expenses.
It was real estate cleanup and then two where operating branches. So it's a relatively modest number.
Nitin Mhatre: You need the right people in the right positions, but I do think we have opportunities there over the next couple of years. Great.
Okay got it.
I know you're hesitant to sort of talk about this going forward, but.
Do you think we're going to see more branch closures in fourth quarter or Youre looking further out in terms of rationalizing expenses.
Greg Lindenmuth: And then last year, you know, I know you guys give a lot of detail in the deck with regards to this, but, you know, just any internal outlook or updates on your thoughts on the overall office portfolio and just the general kind of, you know, market conditions in your area. Greg. Sure. Yeah, our overall outlook for the portfolio is still consistent with what we've seen in the past. Obviously, we're familiar with what other banks are going through in some of the risk in the industry.
I think it's.
Yet to be determined, but more likely to be into 2024 than fourth quarter.
Got you got you okay. Thanks Thats helpful.
Okay, and then going back to office here it looks like you.
Had a really nice drop linked quarter you went from 523 in the investor back down to $479 million.
With that.
Or was there a reclassification there how should we think about.
That was I mean, you didn't really have any commercial real estate charge offs to speak of in the corner. So I'm just trying to understand.
I'm, just trying to understand that movement.
It's a combination of both Laurie I think one part was brief.
Greg Lindenmuth: But the portfolio performance, you know, still remains solid. And, you know, we will continue to look at opportunities to revisit renewal opportunities, and whether we decide to renew credits in the future or not. We think it's a very good time as we experience some of the maturities over the next year or two. You rebalance the portfolio. And I would add, Chris, that we're also, you know, as part of slowing down of some of the originations, we've also seen a decline in that portfolio roughly 5% quarter quarter quarter. So the portfolio is performing well, and it's, you know, not growing at a fast pace. So I think that kind of boards well for acid quality for us. In this environment.
Reclassification of of companies that supply.
Do the office space versus actual office space itself.
I think that brought some of the number down but even if you normalize for it as I mentioned earlier to the other question.
Susan the office portfolio went down roughly by.
5% and $25 million.
We had some.
And our first.
Iteration of going through the portfolio there were some suppliers to office.
<unk> that were included.
So that should not have been included originally so we made that change this quarter, but as knit and says more importantly on normalizing for that portfolio.
Chris O'connell: Great. We should be calling. Thanks for taking my questions. Thanks, Chris.
Portfolio still was down 5% and it was not through sales or charge offs. It was simply maturities.
Lori Hansicka: Our next question comes from the line of Lori Hansicka of seaport research. Please go ahead. Great. Hi. Thanks. Good morning.
Gotcha Gotcha.
Cree in your office the slide in the deck very helpful.
Nitin Mhatre: I want to go back to see your branches that you said are the four branches were any of those in Boston or where, where were they located in Massachusetts? Yeah, they were not involved in two west and two east of the footprint. Yeah. Lori, you know, really west of 495 in Massachusetts. Okay.
So on office I know you've got another.
360, some odd million that our lab can you talk a little bit about that is not included in that number is that the right number is there a better number and just I guess specifically.
How medical is holding up very well labus checking to see a little bit of weakness are you seeing anything there. That's concerning you or how is how is that portfolio looking.
Yes, no no concerns that we've seen so far are Greg if you would like to provide any more color.
Nitin Mhatre: And then as you, as you think about your, your 96 branch footprint, if you were to look a year out and then how do you see that is that 96 going to 90 is at 96 going to 80. How do you, how do you think about that? Yeah, no, we can give a specific number, Lori, but we, as we said in the earlier question as well, we constantly evaluate our branch footprint and our retail business and her team is constantly also looking at customer foot traffic and servicing patterns and where you could actually serve those clients better.
No Laurie we're not seeing any early signs of weakness in the portfolio no increases.
Criticized or classified and you can see some of our <unk>.
PL and NCL rates on the portfolio and even some of the early stage, we're not seeing anything there.
Okay, and then $360 million is that the right number for office lab or is there a better number.
Laurie this is Bob.
Nitin Mhatre: We have channels like my banker that are unique to us, whereby we go to the client as opposed to clients having to come to the branch. So I think all of that is baked into the equation. We do believe based on what we see that there is an opportunity for further consolidation, we just can spell out a specific number at this.
Oh, sorry go ahead Greg.
No human office lab.
Laurie.
<unk>.
Yeah correct.
Are you asking about education and medical Laurie.
I don't know I was under the impression you had about $360 million of office lab.
David Rosado: Okay. And then 2.6 million and one time charges. What are the cost savings you're getting with these closures? And was that any of that reflected in 3Q? And how much, how do you think about how much of that drop to the bottom line versus a franchise re-investment? Yeah, Laura. It's David. There's, it's a modest number that drops to the bottom line on a go-forward basis. I think of these branch, some of these branch closures as clean up, meaning they were close to of them were closed branches. So there wasn't operating. I mean, near term or current period operating expenses, it was real estate clean up. And then 2 were operating branches. So it's a relatively modest number.
Semi chatted with you, but maybe I got that and correct.
Unknown Executive: Okay. Got it.
Just to clarify that.
Yes, the education and medical exposures were 350 million at the end of the second quarter and dropped 9% to $318 million at the end of the third quarter.
Okay perfect.
Perfect perfect sorry about the confusion there okay, great and then I guess just sort of a very high level can you can you talk a little bit about.
And I realize you haven't provided 2020 guidance, but can you talk a little bit about what would be your sort of first plan of attack as you de risk the balance sheet.
In near term quarters, how we should be thinking about that.
Yes.
Alrighty.
You broke up a little bit you said first benefit back to do what T. Bruce.
And any risk.
Yes, you mentioned that was the priority can you just say.
In coming quarters, just very generally talk about sort of what what is your first plan of attack is we look for the next couple of quarters.
Unknown Executive: And I know your house is into sort of talk about this going forward. But do you think we're going to see more branch closures in fourth quarter, or you're looking further out in terms of rationalizing expenses? I think it's yet to be determined, but more likely to be into 2024 than fourth quarter. Gotcha. Okay. Thanks. That's helpful.
On the de risking strategy there.
I think I'll leave that when we provide the guidance because we will have better line of sight, Laurie, but I think broadly speaking the question I answered earlier, we're looking at.
All components of the balance sheet and opportunities that are embedded within it but beyond that I think we'll have better clarity as we go forward in the Meanwhile, I think the teams are doing a fantastic job monitoring the existing portfolios working with declines and keep the credit quality as pristine as we can.
Lori Hansicka: Okay. And then going back to office here, it looks like you had a really nice drop link quarter. You went from 523 and the investor book down to 479 million. Was that a sale or was there reclassification there? How should we think about what that was? I mean, you didn't really have any commercial real estate charge off to speak of in the quarter. So I'm just trying to understand. I'm just trying to understand that movement.
And if I could just jump in for a setback and so.
I really think net and comments or in response to Dave's question.
The.
As a relative newcomer here I would just say that the balance sheet isn't necessarily in need of Derisking I wouldnt that impression out there that we feel we need to derisk our balance sheet.
Lori Hansicka: It's a combination of both glory. I think one part was reclassification of, you know, companies that supply, you know, to the office space versus actual office space itself. I think that brought some of the number down. But even if you normalize for it, as I mentioned earlier, for the other question are balances in the office portfolio, went down roughly by, you know, 5% or 25 million. We had some in our first iteration of going through the portfolio.
I see.
Laurie I think this was before you started covering us so I probably said it in my first conference call if I remember correctly.
Right.
My my impressions my initial impressions devices still my impression as I get to understand the company better is we have a really strong credit process.
Lori Hansicka: There were some suppliers to office buildings that were included. So that should not have been included originally. So we made that change this quarter. But as Niden says more importantly, on normalizing for that, the portfolio still was down 5%. And it was not through sales or charge off. It was simply maturities.
Very well developed especially when I think about the size of the organization the reporting.
The quality of the discussions around the risk that we have.
The risks that we take and manage so there's.
Yes, there's a few portfolios that are in run off mode, but they're not necessarily in run off mode.
Greg Lindenmuth: Gotcha. Yeah, you're you're creating in your office slides in the deck, very helpful. So on office. I know you've got another, I don't know 360 some odd million that are lab. Can you talk a little bit about, you know, that's not included in that number. Is that the right number? Is there a better number and just I guess specifically. You know, how medical is holding a very well lab is starting to see a little bit of weakness.
Because of.
Brexit per se.
So and those are very small component.
The loan portfolio when you think about.
C&I portfolio and the ABL portfolio, our residential mortgage portfolio, our commercial real estate portfolios, where the big numbers are.
Greg Lindenmuth: Are you seeing anything there that's concerning you or how, how is, how is that portfolio looking? Yeah, no, no concerns that, you know, we've seen so far. Are, Greg, if you would like to provide any more colors. No, Laurie, we're not seeing any like early signs of weakness in the portfolio, no increases in, criticized or classified. And you can see some of our MPL and NCO rates on the portfolio, even some of the early stage, we're not seeing anything there.
The point I'm trying to convey is we have very solid risk management practices around the core.
For the business.
Great. Thank you very much for taking my question.
Thank you Laura.
There are no further questions at this time. Please proceed.
Thank you all for joining the call today and for your interest in Berkshire Bank.
Have a good one.
Greg Lindenmuth: Okay, and then 360 million, is that the right number for office lab, or is there a better number? Laurie, this is cancer. Sorry, go ahead, Greg. No, even office lab. Laurie, what, what's specifically? Yeah, correct. Right. Are you asking about education, medical, Laurie? I don't know, I was under the impression you had about 360 million of office lab. Last time I chatted with you, but maybe I got that firm in court.
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Okay.
Okay.
Thank you.
Okay.
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Okay.
Greg Lindenmuth: You had just a bridge. Yeah, the education and medical exposure was 350 million at the second quarter and drop 9% to 318 million at the end of the third quarter. 318, perfect, perfect. Sorry about the confusion there.
Okay.
Unknown Executive: Okay, great.
Yes.
Unknown Executive: And then I guess just sort of very high level. And can you, can you talk a little bit about, and I realize you haven't provided 2024 guidance, but can you talk a little bit about what would be your sort of first plan of attack as you de-risk the balance sheet that's been in near term quarters. How we should be thinking about that. Yeah, when you talk about that priority. You broke up a little bit, you said for your plan of attack to do what?
Unknown Executive: So in the balance sheet, yeah, you mentioned that was a priority. Can you just say, you know, in incoming quarters, you very generally talk about sort of what, what is your first plan of attack as we look for the next couple quarters on the D risking strategy there.
Nitin Mhatre: I think I'll leave that when we provide the guidance because you'd have better line of sight. Sorry, but I think broadly speaking to the question I answered earlier, we're looking at all components of the balance sheet and opportunities that are embedded within it, but beyond that, I think we'll have better clarity as we go forward. In the meanwhile, I think the teams are doing a fantastic job, monitoring the existing portfolios, working with the clients, and keep the credit quality as pristine as we can.
Greg Lindenmuth: And if I could just jump in for a second. So I really think Nitten's comments were in response to Dave's question. The, you know, as a relative newcomer here, I would just say that the balance sheet isn't necessarily in need of de risking. I wouldn't want that impression out there that we feel we need to de risk our balance sheet. I see, and I look why I think this was before you started recovering us.
Greg Lindenmuth: So I probably set it in my first conference call if I remember correctly. My impressions, my initial impressions, my still my impression, as I get to understand, the company better is we have a really strong credit process very well developed, especially when I think about the size of the organization, the reporting, the quality of the discussions around the risk that we have, the risk that we take and manage, so there's, you know, there's a few portfolios that are in runoff mode, but they're not necessarily in runoff mode because of credit per se.
Greg Lindenmuth: So, and those are a very small component of the loan portfolio, when you think about an I portfolio, the AVL portfolio, our residential mortgage portfolio, our commercial real estate portfolios, where the big numbers are, what I the point I'm trying to convey is we have very solid risk management practices around the core of the business.
Lori Hansicka: Great, thank you very much for taking my question. Thank you, Lord.
Operator: There are no further questions at this time, please proceed. Thank you all for joining the call today and for your interest in Berkshire Banc, have a good one. Ladies and gentlemen, this concludes your conference call for today.
Operator: We thank you for participating and ask that you disconnect your lines.