Q3 2024 Berkshire Hills Bancorp Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Berkshire Hills.
Speaker Change: Bank Corp, third quarter 2024 earnings conference call at this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session ask a question. Please press star one on your Touchtone phone should you wish to decline from the polling process. Please press star followed by the two if you are using a speaker phone please lift the handset.
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Speaker Change: Anytime to during this call you required immediate assistance. Please press star zero for the operator. This call is being recorded on October 24, 2024, I would now like to turn the conference over to Kevin Con Investor Relations Officer. Please go ahead.
Deposit costs were 242 basis points up seven basis points linked quarter and our cumulative total deposit beta is 44%.
Speaker Change: While it's early in the cycle, we expect deposit betas in a down interest rate environment to be higher.
Speaker Change: Then the beta on the way up as we remain focused on managing deposit costs.
Speaker Change: Turning to slide seven we show net interest income.
Speaker Change: Net interest income was down 1% linked quarter and down 3% year over year net interest margin was down four basis points linked quarter to 316 versus $3 20 in the second quarter and $3 15 in the first quarter.
Speaker Change: Our historical range for NIM, excluding the pandemic years has been between 310 and $3 40, we expect the fourth quarter NIM to be between 310 and $3 20.
Speaker Change: While we have headwinds of floating rate loans repricing lower short term. We also have several tailwind we.
Speaker Change: We have $1 6 billion of Cds or 67% of that book maturing in the next six months.
Speaker Change: And we have about $400 million of <unk> funding debt matures over the same time period.
Speaker Change: Further we have $600 million of low yield received fixed swaps maturing over 2025 and 2026.
Speaker Change: We have low yield fixed rate securities and loans that will mature and reprice at higher yields.
Speaker Change: Slide eight shows operating noninterest income up one 4 million or 7% linked quarter and up $4 million or 23% year over year.
Speaker Change: The growth in fees was primarily related to higher swap volume.
Speaker Change: This was the third quarter in a row, where we've seen solid growth in overall fees.
Speaker Change: Slide nine shows expenses.
Speaker Change: Operating expenses were up 1% linked quarter to $72 3 million and down 2% year over year <unk>.
Speaker Change: Occupancy and professional services expense declined linked quarter and were offset by slightly higher compensation and higher other expense.
Speaker Change: Other expenses include check fraud expenses align that impacts the entire industry and which can be volatile. This quarter that line item was $1 5 million higher than the average of the prior eight quarters due to one isolated incident.
Speaker Change: Slide 10 is a summary of asset quality metrics.
Speaker Change: Nonperforming loans were up 12% linked quarter and down 10% year over year.
Speaker Change: The increase in <unk> nonperforming loans linked quarter was driven by one isolated multi use property in upstate New York.
Speaker Change: Net charge offs of $5 $6 million were up 4 million linked quarter and 193000 year over year.
Speaker Change: Net charge offs included $1 9 million related to the upstart loan sales.
Charge offs, excluding that sale.
Speaker Change: $3 8 million or 16 basis points of loans.
Speaker Change: We've included a chart in the appendix with Berkshares net charge off rates versus the industry since 2000, which reflects relatively better asset quality than the industry over time.
Speaker Change: On those rates do you guys have a start either interest bearing or total deposit cost post.
Speaker Change: The sale and after the the rate moves.
The spot for September was 310, Chris I think Guy button spot NIM was about <unk> 10 for September and I think we believe for the fourth quarter, we should be between 310 and 320.
Speaker Change: Scott do you have anything spot on the overall deposit costs.
Speaker Change: Deposit costs.
Speaker Change: Just give us one second Chris.
Chris: No problem.
Speaker Change: There was 242 basis point rate was for the whole.
Chris: Quarter.
Chris: The homerun.
Chris: First spot for just September alone and it was 241 through 41.
Chris: Yes.
Speaker Change: Great. Thank you.
Speaker Change: And then just last one for me and I'll step out.
Speaker Change: It seems like the swap fees ticked up quite a bit this quarter.
Speaker Change: Are you guys seeing just in general with the change in the rate environment increased demand for that product.
Speaker Change: I think the demand because you we see that in the pipeline the pipeline seems to suggest that it'll be relatively flat in the fourth quarter difficult to predict beyond that beyond what's in the pipeline, but Betsy I think the momentum seems to be holding a going into the fourth quarter.
Speaker Change: Great appreciate the time thank you thank.
Chris: Thank you Chris.
Speaker Change: Your next question comes from Laurie Hunsicker with Seaport Research. Your line is now open.
Laurie Hunsicker: Yeah, Hi, Thanks, good morning, gentlemen.
Speaker Change: Good morning, Gary and Laurie.
Laurie Hunsicker:
Laurie Hunsicker: If we could go back to expenses.
Laurie Hunsicker: Any other comments you gave Chris expenses.
Laurie Hunsicker: That makes sense that maybe you can just help us think about you know.
Laurie Hunsicker: What's reinvest said.
Laurie Hunsicker: What's dropping to the bottom line rates, we look at your expenses. They were 72 million this quarter $1.6 million of fraud comes out and then that the 10 branch closures previously you all had said that the $6 5 million expense.
Laurie Hunsicker: Saving so $1 6 million in the quarter, which would then take us down to 69 million, maybe just help us think about what's being reinvested or just in terms of dollars. How we should be thinking about the expense line in the fourth quarter.
Laurie Hunsicker: Yeah, I would tie Laurie this is Brett I would say from an expense standpoint, some of the expenses that we had related to those branches were already captured in the current quarter.
Laurie Hunsicker: So there will be some falling to the bottom line you do remove the $1.34 million of the fraud losses that we saw.
Laurie Hunsicker: We're looking to be in the range of right around to approximately $71 million of Q4 operating expenses give or take.
Speaker Change: Okay, Okay, great and then just going over here Kip to office and I. Appreciate all the details you guys provided can you can you just update on a couple of things with respect kill you criticize back that that 24 million specifically.
Speaker Change: It looked like $14 million in class Santana and class B, just what are the occupancies on those and when do they mature or are there any specific reserves any concerns you're seeing there.
Speaker Change: And then same on that class B nonperformer that $3 5 million, let's say occupancy and when does that mature.
Speaker Change: Sure.
Speaker Change: Greg you want to take that.
Speaker Change: Sure thing Hi, Laurie how are you.
Laurie Hunsicker: Hey, there.
Laurie Hunsicker: On for the class a.
Speaker Change: It's a single credit basically 80% occupancy it does mature in December 2024, and we're working closely with the client to refinance our credit and they'll likely be an improved structure.
Speaker Change: As far as the class B, it's a couple handful of credits that range in occupancy from 25% to 50% occupancy.
Speaker Change: And what are those credits happens to be one of the npls as well.
Speaker Change: And those mature in 26 to 2028.
Speaker Change: Got it Okay got it and then what what's the reserve on your whole office stock.
Speaker Change: And just to answer your prior question. There are no specific reserves on those criticized assets none of them warrants specific reserves and I would have approximated at about one 5% based off the lower risk profile of our office book.
Speaker Change: Got it got it okay. Great. That's helpful. And then just last question upstart, obviously, you got a great price here at 96 on the dollar.
Speaker Change: Can you talk a little bit.
Speaker Change: About how that came together and then just remind us when specifically in the quarter.
Speaker Change: That closed and what was the FICO.
Speaker Change: On those and then I just want to confirm to us I'm looking at this so your upstart sale had $1 9 million in charge offs. Then you had another $2 million in charge offs.
Speaker Change: Related to your back when you said the cycle and that was 682, so I just want to.
Speaker Change: Want to understand that a little bit too thanks sure.
Okay go ahead, sorry, no go ahead Greg.
Speaker Change: Yes, so while the sale criteria of the purchasers investment policies were.
Speaker Change: Basically nothing past due and anything over 660.
Speaker Change: Now that there is a integral C. I think with the pass through piece, even if it was one day late.
Speaker Change: That was not included in the sale, so actually 40% of the book that we're retaining.
Speaker Change: Was 1% to 30 days past due and that has a similar risk profile, including loans that are in their grace period, similar risk profiles, our existing book.
Speaker Change: And that's why you see a credit is a weighted average credit score in the book of 682.
Speaker Change: The of the of the loans that we sold.
Speaker Change: The weighted average FICO was slightly above our overall average at around 711.
Speaker Change: And that sale closed right in the middle of October one 2016.
Speaker Change: Okay, Boris the losses, the $2 million in losses that was just our quarterly run rate for our our basically our $67 million book at the end of <unk> that was our losses for the whole quarter.
Speaker Change: Got it okay. Thanks for taking my question.
Speaker Change: Thank you Laura.
Speaker Change: Your next question comes from Mark Fitzgibbon with Piper Sandler Your line is now open.
Mark Fitzgibbon: Hey, guys good morning.
Speaker Change: Good morning, Mark.
First question just to follow up on a question my esteemed colleague Lawrie just asked about I'm curious is it likely will see more upstart or Firestone loan sales in coming quarters is the plan to two sort of fire sale those out.
Speaker Change: No I think our model, we believe we would be kind of run those portfolios of upside is really down to that 10 million is sufficiently provided for at this point of time and Firestone as well in terms of performance.
Speaker Change: While it is liquidating in runoff mode. Its performance is actually exceeding our expectations and in fact this quarter at a net recovery. So I think we've done it's a very tiny piece of our portfolio roughly about 50 60 basis points of the entire loan portfolio. So it's really in the run off mode and we don't see any.
Speaker Change: The difference in direction anymore.
Speaker Change: Okay.
Speaker Change: And then secondly, wondering if I could dig in a little bit to the check fraud situation, you mentioned and I know you all kind of downplayed. It is you know unique thing for the industry, but it's still a million and half dollars and I guess I wonder why couldnt that be $15 million $150 million I.
Speaker Change: I guess I'm curious if you could give us share any color on what happened and how you are going to prevent similar kinds of things from occurring.
Speaker Change: It was really a commercial checks kind of fraud is check washing gained by I think across every forum that you attend there is an increase in that activity and this is one of those situations, where you have all the controls, but the fraudsters somehow.
Speaker Change: Our able to slip one through it.
Speaker Change: It will be protected to the extent that there'll be somebody three coming off of it because of the insurance, but by and large are trained on the <unk>.
Speaker Change: On the fraud losses is consistent with what we've seen in the industrial marginally better.
Speaker Change: This is really one of those or check washing things that just kind of escaped through.
Speaker Change: Through our controls.
Speaker Change: Okay. So is there like a a diligence process, you're going through to kind of figure out what happened and how to change that process. So this thing doesn't occur again.
Speaker Change: Yes, and the good news part as Dave we have been noticing the increase in fraud in the industry over the last 12 months or so and there have been significant number of changes that have been made including updating some of the processes and platforms and I think everything that we have now should total lehigh.
Speaker Change: Would prevent a repeat of such a incidences.
Speaker Change: Okay.
Speaker Change: And then next I was curious if you could share with us kind of your priorities for capital today, you've got a little bit of excess capital.
Speaker Change: Think about buybacks dividends growth M&A, you know your thoughts on prioritizing.
Speaker Change: Yes, I think the sequence remains similar mark a bit Ob wanted to the first dollar wanted to be allocated to the to.
Speaker Change: So the organic growth right and we're beginning to see momentum as I mentioned in my remarks, our loans growth was kind of roughly 1% in the quarter, but our loan pipeline was up about 20% year over year. So we have a pipeline. There are we just being judicious is being careful.
Speaker Change: Selective when in fact, leading.
Speaker Change: With clients that have deposit relationships as well across the board so.
Speaker Change: Yeah first dollar goes to organic growth and then followed by <unk>.
Speaker Change: Dividends buybacks and.
Unknown Executive: If that opportunity is outside of that, we'll explore those as well, but that's the sequence.
Speaker Change: If there are opportunities outside of that we'll explore those as well, but that's the sequence.
Mark Fitzgibbon: Do you feel like Berkshire Hills is ready to consider an acquisition at this point? If you kind of got your house in a place where you feel like if an opportunity came along, you'd be positioned to capitalize on that?
Speaker Change: Do you feel like Berkshire Hills is ready to consider an acquisition at this point of view kind of got your house in a place where you feel like if an opportunity came along you'd you'd be positioned to capitalize on that.
Nitin Mhatre: We have, I think, it does feel like through everything that we've done, through our transformation, we are in the best possible situation to earn the right to be able to grow our currency and look for opportunities outside. With right now, pretty much the team is focused on. How do we improve, continue, improve our performance, improve our currency, and if something comes along, we take a look at that.
Speaker Change: We have I think it does we lag through everything that we've done through our transformation we are in the best.
Speaker Change: Best possible situation to underwrite to be able to grow our currency and look at opportunities outside but right now pretty much. The team is focused on how do we improve continue to improve our performance improve our currency and if something comes along we are.
Speaker Change: Take a look at that.
Mark Fitzgibbon: Okay, and then the last question I had is, when can we expect sort of an update on your best goals? I think we go to give annual guidance in January, and at that point of time, we could even look at some midterm guidance as part of that guidance.
Speaker Change: Okay and then last question I had is when can we expect sort of an update on your best goals.
Speaker Change: I think we're going to give annual guidance in January and at that point of time, we could even look at some midterm guide.
Speaker Change: Guidance as part of that guidance.
Nitin Mhatre: Great, thank you.
Speaker Change: Great. Thank you.
Mark Fitzgibbon: Thank you, Mark.
Speaker Change: Thank you Mark.
Joel: There are no further questions at this time. I will now turn the call over to Nathan Mahatre. Please go ahead.
There are no further questions at this time I will now turn the call over to Milton Malhotra.
Speaker Change: Please go ahead.
Nitin Mhatre: Thank you, Joel, and thank you all for joining us today on our call and for your continued interest in Workshop. Have a great day and be well.
Milton Malhotra: Thank you all and thank you all for joining us today on our call and for your continued interest in Berkshire have a great day and be well.
Joel: Joel, you can close the call now. Thank you, ladies and gentlemen. This is a conference call today.
Speaker Change: Joel you can close the call now.
Speaker Change: Thank you ladies and gentlemen this.
Speaker Change: Conference call today, we thank you for participating and ask that you. Please disconnect your lines.
Unknown Executive: We thank you for participating in that, but you please disconnect your lines. Thank you.
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