Berkshire Hills Bancorp, Inc.
Q2 2021 Earnings Call Transcript

Published: 21 Jul 2021

[Company Representatives:]

Nitin Mhatre - President, Chief Executive Officer of Berkshire Hills Bancorp Subhadeep Basu - Chief Financial Officer Sean Gray - Chief Operating Officer Greg Lindenmuth - Chief Risk Officer Kevin Conn - Investor Relations, Corporate Development Officer

[Operator:]

Good day and welcome to the Berkshire Hills Bancorp, Q2 Earnings Release Conference Call. All participants will be in listen-only mode. . Please note, this event is being recorded. I would now like to turn the conference over to Kevin Conn. Please go ahead.

[Kevin Conn:]

Good morning and thank you for joining Berkshire Bank's second quarter earnings call. My name is Kevin Conn, Investor Relations and Corporate Development Officer. Our news release is available on the Investor Relations section of our website www.berkshirebank.com and will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our website at ir.berkshirebank.com, and we will refer to this in our remarks.

[Nitin Mhatre:]

Thank you, Kevin, and good morning everyone and welcome to Berkshire's second quarter earnings call. We've been busy since our last earnings call. We held our Virtual Strategy Meeting on May 18 where we announced BEST, our Berkshire's Exciting Strategic Transformation. Details of this program and its projected impact is captured in the materials that remain available on our website and I'd encourage you to take a look. In June we welcomed two new Board Members, Deborah Bailey and Misha Zaitzeff to their first board meeting and we've also been building our Berkshire team, which I'll address later in the call. Let's turn to our earnings presentation, beginning on slide three. We had a strong quarter with solid financials, improved asset quality, continued capital deployment and the launch of our transformational BEST strategy as the key highlights of the quarter. In terms of financials, we had a good year-over-year trend across all key financial metrics that drove improved EPS and return on tangible common equity or ROTCE. Adjusted EPS was $0.44, up $0.12 quarter-over-quarter and up $0.57 year-over-year. Revenue improved year-over-year and declined slightly from Q1. Net interest income was stable once again and fee revenue strengthened year-over-year. Increased consumer spending drove interchange fees higher, while strong gain on sale from higher SBA loan originations increased loan related fees. Expenses were down across the board on both quarter-over-quarter and year-over-year basis. Lower compensation and lower professional services expenses drove much of the improvement. Subhadeep will share more details on this in a few minutes.

[Subhadeep Basu:]

Thank you, Nitin. If you turn to slide four, I'd like to share our high level income statement with you. My comments will be on an adjusted numbers versus GAAP. Please see the appendix for a reconciliation of our GAAP and adjusted financials. Our revenues were up 4% year-over-year as fee growth offset a modest decline in net interest income. Fees were up 36% year-on-year as commercial and consumer activity increased from their pandemic lows. Revenues were lower sequentially, driven by seasonally higher wealth management and insurance revenues in the first quarter. We also had a high swap fair value adjustment and high PPP referral fees in the first quarter. Expenses were down 8% sequentially, driven by lower professional services, compensation and payroll tax expenses. We are very encouraged by our early progress on expense saves; however, I want to remind you that we will be investing in hiring bankers and investing in technology as part of the self-funding the BEST plan.

[Nitin Mhatre:]

Thanks Subhadeep. As Subhadeep said, the pandemic and the macroeconomic factors have caused loan growth challenges for the industry and for Berkshire. In addition, while we expect that the decline in PPP balances, closing off mid-Atlantic transaction, and run-off of non-strategic books to occur in the second half of 2021, we feel confident that we will see modest growth in balances beginning in 2022 and we will strive to outperform market trends through our best plan initiatives. We're adding to our loan originations muscle in three broad ways

[Operator:]

. The first question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

[Mark Fitzgibbon:]

Guys, good morning. First off, congratulations on a good quarter. Wanted to just follow up, Subhadeep you mentioned that the New Jersey branch sale will happen in the third quarter. Can you give us a better sense for when in the third quarter that's likely to happen?

[Subhadeep Basu:]

Hi Mark! Good to hear from you. Hope all is well. You know at this point, the guidance that we're going to give is it is going to close in third quarter. Till the deal is finalized and signed, you know we can’t give out further details on potential dates.

[Mark Fitzgibbon:]

Okay. And then secondly, I think you mentioned in your outlook comments that you expect operating expenses to be sort of stable in the $70 million range, but assuming you were to get – you know sell those branches sometime early or mid-third quarter, shouldn't operating costs come down by a decent amount, wouldn't that $70 million kind of be high?

[Subhadeep Basu:]

Sure Mark. So, on that $70 million guidance, that’s the net number from a sort of total operating expense perspective. Remember there are in’s and out’s of that number, so sort of just to highlight that, you know there are sort of expense saves that will reduce that number. But on the other front we are going to invest as we said for sort of BEST plan really hiring bankers and technology. And the third will be sort of the branch expenses that will be coming in on a run rate basis. That you will see not only for the rest of the year, but coming in 2022 as well.

[Mark Fitzgibbon:]

Okay, thank you. And then I wondered if you could share with us. I know you said that there's industry pressures on loan demand, but could you share with us the size of your pipelines today?

[Nitin Mhatre:]

I’ll take that Mark. What we could say is, we clearly had a strong originations quarter. I think our originations were highest in last five quarters and so is our pipeline, and I think that gives us the momentum getting into third and fourth quarter, and that will continue to grow as we continue to hire new bankers and build out more teams in commercial and small business while we are ramping up our partnerships with the consumer side of the equation. So I think the short answer would be not just the origination were at the highest point this quarter, but so was the pipeline across commercial and consumer.

[Mark Fitzgibbon:]

Okay, and then Nitin, just sort of a more strategic question. As you look at the, you know your fee based businesses like wealth management and insurance and mortgage, are there any candidates for dramatic new investments or growth or any of those potential sale candidates? I guess I'm just curious, because you've talked a lot about growing the lending businesses, but hadn't heard much on the fees side.

[Nitin Mhatre:]

So great question Mark, and you know this very well. Fee is obviously you know a highly capital efficient stream of revenue. It also is challenging in the times that we are in. We are looking at all opportunities to grow fee revenues from the components of the businesses that we have. We are investing heavily into our SBA loan originations unit that create significant amount of gain on sale and fee revenue and that’s accretive for both income, as well as return on capital. We are looking at some components where there might be opportunities to rationalize some of the operations which are not as efficient as the other businesses are. So I think the short answer would be, yes, we want to grow fee revenue. We are looking to invest into fee income opportunities coming from 44 BC, which is our SBA arm, wealth management and mortgage and consumer operations, while looking at opportunities to rationalize some of the businesses.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

[Laurie Hunsicker:]

Yeah, hey! Good morning.

[A - Nitin Mhatre:]

Good morning Laurie.

[A - Subhadeep Basu:]

Good morning.

[Laurie Hunsicker:]

I just wonder if we could go back to expenses, because I'm also trying to understand this too. In other words if I'm looking at the ISPC sale as coming out, then your quarterly run rate is dropping closer to call it $65.5 million, $66 million a quarter. Are you then suggesting that the delta difference there, that's going to be hiring people, technology spend, etc. to take you to $70 million. Is that the right way to be thinking about this?

[Subhadeep Basu:]

Hi Laurie, good to hear from you, Subhadeep. So I think you know as I sort of answered the prior question, the call before, so you know as we said we are going to get expense saves from our branch sales, but we are going to be investing that amount into – you know part of that into our BEST plan and there are several in’s and out’s. In terms of you know expenses you know there are I think expense saves that are coming in, optimization on sort of real estate and other things that are coming in that will drive that number down, but at the end of the day that $70 million is sort of a balanced impact of all those different categories.

[Laurie Hunsicker:]

Okay, okay, great. And then also just to confirm, you're going to be running with a branch count in the neighborhood of 106 or 107 or so, is that correct?

[Subhadeep Basu:]

Yeah Laurie, I’ll ask Sean to address that question.

[Sean Gray:]

Sure. You know in just adding to the expense run rate discussion, we’ve consolidated 15 of our planned 16 branches. The sixteenth is scheduled for late October. Deposit retention has been exceeding expectation, the budget is on target. And when we launched BEST we talked about an additional 5% to 10% of our branch count being reduced throughout the end of the year and into next year. So we feel for an experienced prudent consolidator, we’ve got a good strong history of customer deposit retention, so we will continue to execute on that 5% to 10%, eight to 10 branches or from starting now those plans have begun moving into the first half of next year.

[Laurie Hunsicker:]

Okay, great. And so then as we look to next year, that's potentially another five to 10 branches that you may close, is that correct?

[Sean Gray:]

That is correct.

[Laurie Hunsicker:]

Okay, okay, making sure on that, okay.

[A - Nitin Mhatre:]

Hey Laurie, just to add a little flavor on what Sean just highlighted, I think what's been remarkable, just looking at this and even me coming in six months and looking at the history of consolidations that we've done, whereas Sean highlighted we’ve retained our customers, retained the deposits. But we've also done a remarkable job of retaining bankers through managing through attrition, which has been the strength of this organization, I just wanted to highlight that.

[Laurie Hunsicker:]

Okay, great, that's helpful. And then credit, to your point improved a lot that's quarter. It looks very, very, strong. You had mentioned Subhadeep in I guess you're prepared comments that pre pandemic levels in terms of provisioning won’t return until 2022. So we’re thinking for the back half of 2021 you're going to see very nominal loan loss provisioning almost like this quarter or how should we be thinking about that? I mean you're reserve to loans ex-PPP is sitting at 169. Any color on where you want that target to be?

[Subhadeep Basu:]

Hi Laurie! Sure. So look, at this point you know based on where we think our portfolio is looking at sort of in the improved economic forecasts where it's going, you know that's basically what you saw as our zero provision expenses. You know as we highlighted in the first quarter, we feel really good in terms of the direction, the strategic direction from a credit quality perspective our portfolio is going, and we believe that momentum is going to continue. So you know as that momentum continues, you're going to see similar trends in provision expenses for the rest of the year and going forward, and I want to emphasize that you know with sub strengths continue, we expect to return to pre-pandemic levels of ACL to loan loss reserves.

[Laurie Hunsicker:]

Okay, okay, and then just in terms of that target that was there for loan to target with, what’s a good number? How do you think about that?

[Subhadeep Basu:]

So you know again, it depends on sort of our, you know the portfolios and you know in part of the BEST plan you know we have, we’re growing our commercial business, we’re growing our consumer business. You know if you sort of pick that out, you know ballpark if you look at our book of business, commercial book of business and consumer mix that we have currently, it’s between 90 to 100 basis points.

[Laurie Hunsicker:]

Okay, okay, that’s helpful. Okay and then in terms of you had – you said in here your adding new tax credit investments, which obviously will appear in the back half of 2021 and you gave us the tax rate guide, but I just wonder, I know you sometimes in the past have taken a charge in the fee income, that sort of tax advantage commercial project investment which was a bit of a drag. Are we going to expect to see that up-tick or how should we be thinking about that line?

[A - Nitin Mhatre:]

Yeah, and as we know you know tax credits can be lumpy, so – and we go through sort of a very well thought out process in terms of how we do that. So yeah, first two quarters you didn’t see the benefits of that from you know an effective tax rate perspective, but in subsequent quarters as I provided in my guidance, we are going to see the down-tick in the effective tax rate.

[Laurie Hunsicker:]

Okay, okay, but so in terms of the drag, in terms of charge through non-interest income, I mean could we go back to where we're seeing at a $3.5 million, $4 million annual run rate through that line or how should we be thinking about that?

[Subhadeep Basu:]

So I think you know, given sort of the first two quarters, you know we at this point I think you know I’ll provide some of the guidance on the effective tax rate, which I said in the mid to high teens, and then Laurie we can discuss in more detail when we talk later about you know the additional question that you have.

[Laurie Hunsicker:]

Okay, okay, perfect, that’s helpful. And then just two more questions; just looking at this FX table, there just wasn't a ton of sort of broken out details. The PPP income that was in the net interest income number, in the $75 million, what was that number?

[Subhadeep Basu:]

So I think you know the last page and take a look at it Laurie when you have a chance. Page 20, slide 20 of the earnings presentation has the detailed you know PPP impact by quarter. So to answer your question, the interest income impact was $5.1 million for PPP for the second quarter.

[Laurie Hunsicker:]

Oh! I see it. You know what, I see it right in here, got it, okay. And then the same thing on accretion income. It looked like the – it looked like it was rounded to $2 million. I was just looking in your press release, which is a big number. Just wondered, do you have an exact number as to what that was, the accretion income included in that interest income?

[Subhadeep Basu:]

Yeah, we can talk after all those details when we speak later Laurie.

[Laurie Hunsicker:]

Okay, got that. I'll leave it there, thank you.

[Subhadeep Basu:]

Thank you.

[Nitin Mhatre:]

Thanks Laurie.

[Operator:]

The next question comes from Jake Civiello with Janney. Please go ahead.

[Jake Civiello:]

Hey, good morning guys.

[A - Nitin Mhatre:]

Good morning Jake.

[Subhadeep Basu:]

Good morning.

[Jake Civiello:]

I know you alluded to NIM pressure in the second half of the year. If you think about your net interest income dollars, 2Q was really the first quarter in a couple of years where you actually saw net interest income move higher. If you can continue to grow your net interest income despite the NIM pressure.

[Subhadeep Basu:]

Sorry Jake, can you repeat the last part of the question?

[Jake Civiello:]

Yes, so do you think you can continue to grow your net interest income dollars despite the margin pressure that you alluded to in the back half of 2021?

[Subhadeep Basu:]

I think you know and this goes back also Jake to the discussion we had as part of the BEST plan. So you know as we said, this year our balance sheet is going to be sort of modestly sort of flat, flat to medium marginally down for the rest of the year, but that represents sort of the, you know the impact of PPP loans running off and you know other run off of non-strategic portfolios. You know having said that, we are really getting sort of spending sort of the next half of the year preparing for ramping up the balance sheet growth. In terms of a NIM perspective, I think as you know obviously there are pressures in the market, but we expect sort of NII to be sort of down, modestly down for the rest of the year.

[Jake Civiello:]

Okay, great, thanks. The only other question I have is, so you anticipate that you'll continue to grow the investment securities portfolio as you have the past several quarters or does the shift in the interest rate environment here over the last few weeks kind of changed your thinking on that?

[A - Subhadeep Basu:]

No, I think you know if you look at our investment portfolio it has grown and grown over the last you know few quarters, including this quarter. You know in terms of that liquidity that you have, your you know looking to sort of obviously best deployed it in terms of (a) making sure that we enhance the investment portfolio yield, so you're going to probably see some more deployments into securities. At the same time we want to make sure that we are adequately sort of prepared and planned for – to deploy that for the best plan related strategic growth. So to answer your question, yes, you can see some deployments into securities. Jake?

[Jake Civiello:]

No, that’s great. Thanks guys. That’s all I have.

[Nitin Mhatre:]

Thanks Jake.

[Subhadeep Basu:]

Thank you.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Nitin Mhatre for any closing remarks.

[Nitin Mhatre:]

Thank you all for joining us today on our call and for your interest in Berkshire. Have a great day and be well.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.