Berkshire Hills Bancorp, Inc.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good morning, and welcome to the Berkshire Hills Bancorp First Quarter 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, Head of Investor Relations and Corporate Development. Please go ahead.

[Kevin Conn:]

Thank you, Jason. Good morning and thank you for joining Berkshire Bank's first quarter earnings call. My name is Kevin Conn and I'm the Head of Investor Relations and Corporate Development at Berkshire Bank. I started in this role about a month ago after spending over 23 years as an institutional investor at Sanford Bernstein, MFS Investments and Hudson Executive Capital.

[Nitin Mhatre:]

Thank you, Kevin. Good morning, everyone, and welcome to Berkshire's first quarter earnings call. For those of you who are new to our story or new to me, let me first share some of my background prior to joining Berkshire Bank. I've worked in banking for 25 years in very large and midsized organizations and have had the opportunity to turn around, transform and grow business units over that time. I believe that my experience positions me well to work with my team at Berkshire Bank to significantly improve financial performance and stakeholder value. I must say I'm deeply humbled by and grateful for the warm welcome and support that I've received from my Berkshire colleagues and the Board of Directors and also from various partners and well wishers across the industry, including many of you on the call. Thank you so much. I'm confident that with new leadership, our new strategic plan in the making, which I'll address later and the collective resolve of the organization to maximize value for all stakeholders, we will fulfill our promise while meaningfully improving financial performance of this community-dedicated institution. Before I provide the highlights of the quarter, I'd like to share some of my early observations as I complete three months today as Berkshire's CEO. First, I want to salute what I know to be exceptionally good about the organization, starting with its score, a strong, 175-year history of being a purpose-driven, community-dedicated bank that truly cares about its customers, bankers and the communities. And we have some remarkably talented bankers who know our markets really well, have built strong relationships with the customers and communities in those markets and have non-customer facing bankers who are passionate about delivering high-quality experience to all our customers.

[Subhadeep Basu:]

Thank you, Nitin. I'm excited to be part of the team here at Berkshire Bank. Now if you turn to Slide five. I'd like to share high-level P&L with you on both a GAAP and an adjusted basis. As a reminder, the adjusted basis excludes $3.5 million of expenses pertaining to primarily our branch-consolidation activities. Our GAAP revenues were up 10% year-over-year and 2% quarter-over-quarter as strength in fee revenues offset weaker net interest income. GAAP non-interest expenses were up about 10% year-over-year and 9% quarter-over-quarter on higher legal and advisory fees and $3.5 million of restructuring expenses that was driven primarily by branch consolidation. Credit provision expenses dropped to $6.5 million, down 35% versus the fourth quarter and down 81% year-over-year due to improved economic forecast and reduced net charge-offs.

[Shaun Dwyer:]

Thank you, Subhadeep and it's been a pleasure collaborating with you since your arrival. I'd like to begin by sharing some of our key operational highlights from the first quarter, which are collectively positioning the company toward a bright and innovative future. I'm on Slide 16. We have several ongoing initiatives aimed at transforming our community bank model, including the continued optimization of our branch network. We remain laser focused on executing our previously announced branch-optimization initiatives to strengthen our franchise. This includes the consolidation of 16 branches, nine of which were completed in the first quarter. The majority of the remaining branches are targeted for consolidation by mid-year and we expect to maintain our strong history of deposit retention. The sale of our eight Mid-Atlantic branches in New Jersey and Pennsylvania is on track and scheduled to be completed by mid-year, pending necessary regulatory approvals. The branch sale is expected to include more than $600 million in deposits and $300 million in loans. Effective optimization of our branch network allows us to meet changing customer needs, reinvesting those savings into the right blend of personalized service and the latest digital technology to enable a seamless customer experience. The combination of our branch-optimization efforts, the 16 plant consolidations plus the sale of the eight Mid-Atlantic branches will reduce our overall branch footprint by 18%, bringing our branch count to 106. Moving on to Slide 17. We will continue to evaluate our banking channels supported by our MyBanker team, which provides highly personalized service, digital offerings and financial advisement. Our MyBankers have a track record of customer and portfolio growth and continue to be instrumental in retaining our client base and deposits post consolidation. As a result, we expect our MyBanker program to be an area of growth and a proven alternative to traditional brick-and-mortar channels. Recently, there has been several significant bank merger announcements in our markets. These transactions create disruption in the market and opportunities for all our bankers to begin forging new relationships and strengthen existing ones. In mid-June, we will open a commercial office in Providence, Rhode Island, and that will serve as a hub for lending activities in support of our Eastern Connecticut and Rhode Island markets. As I noted above, we will continue to meet changing customer needs, including increased digital adoption by accelerating and executing our digital transformation road map. This will allow us to create a full omni-channel customer experience that combines the personalized service of traditional banks with value-added digital offerings. We've already completed a number of technology infrastructure projects aimed at improving operational efficiency and the customer experience. This includes the launch of our best-in-class digital account-opening platform We're excited to provide customers with a frictionless experience, allowing them to open an account in just over two minutes, which is 4x faster than the industry average. During the last quarter, we saw additional progress from our initiatives, including a remarkable increase in our mobile app rating, increasing significantly to about a 4.5-star rating in the Apple App Store and Google Android platform. We expect to make additional enhancements to our mobile app to better serve our customers in the upcoming quarter. This progress builds on the existing infrastructure investments made in our consumer eBanking experience, enterprisewide eSignature and additional sales force API integration. We'll continue to periodically keep you updated on the progress and impact of these initiatives. Now while loan demand is muted based on excess liquidity in the market, we are seeing our share of potential deals, as outlined on Slide 18 of our presentation. Our overall pipelines are increasing toward prepandemic levels. Our teams are active in our communities, and we continue to be selective to maintain our credit and pricing discipline in a competitive market. Commercial originations are up quarter-over-quarter, as are residential mortgages. Our ABL Group has had a strong start to the year, bolstered by key new hires. We also made additions to our business banking and private banking teams to strengthen our position and ability to support our Boston area customers. We produced solid benefits for our communities, customers and shareholders during the quarter. With over 8,000 applications processed successfully, we were able to save approximately 100,000 jobs on the payrolls of small and medium-sized businesses through the PPP program. Our efforts not only helped us generate additional income for the bank but was instrumental in supporting thousands of small businesses on our main street. Now since the start of the PPP program last year, we have assisted our markets with nearly $1 billion in PPP loans. On the socially responsible front, we were added to the Bloomberg Gender Equality Index in 2020 and were named a Best Place to Work for LGBTQ Equality by the Human Rights Campaign. These accolades demonstrate the collective actions of all of our team members and will help enable us to become the leading, socially responsible, omni-channel community bank. With that, I'll turn it over to Nitin.

[Nitin Mhatre:]

Thank you, Shaun. Before we open it up to questions, I want to provide a quick update on where we are in terms of our new strategic plan. I'm on Slide 19. Since the day I arrived, we've been working on a transformational, strategic plan that will significantly improve Berkshire's financial performance, while building on our core values and purpose. We are building this plan organically with inputs and commitments from senior leaders of the bank. We have internally branded this as Berkshire's exciting strategic transformation, or BEST. At a high level, BEST has three foundational pillars

[Operator:]

Our first question comes from Laurie Hunsicker from Compass Point.

[Laurie Hunsicker:]

Love seeing the buyback. I appreciate all the details in the press release and the deck and the details on credit. But just wondered, maybe Subhadeep, if you can help us a little bit. You said core net interest income, flat to down. And I'm just trying to walk through this very high level, like, if I'm looking at your net interest income currently of $75.1 million there was 6.6 of PPP. And obviously, you'll have PPP for the rest of this year. But assuming that's out, assuming that the accretion income, which was $1.5 million, normalizes to below $1 million, assuming the sale to ISDC completes, maybe that's another $2 million out, and then you've got some of these higher-risk, higher-yielding loan books running down like Firestone, which is great they're running down, but that comes out. So I'm suddenly sitting at an adjusted NII core of $65 million, $66 million. So potentially, I'm missing something. And so if you can just step us through maybe just a little bit more details around NII, around net interest margin, how we should think about that, maybe even from a cleanup standpoint as we fast forward several quarters, that would be really helpful.

[Subhadeep Basu:]

Sure, Laurie. Thanks, and let me just jump in here and, obviously, happy taking more questions around that. So obviously, as you pointed out, that's a key component of our P&L. So as we pointed out and I pointed out earlier in my prepared remarks, $6.5 million PPP impact. Having said that, and we have around $450 million in PPP loans that are trailing off the balance sheet as well as our sale of Mid-Atlantic branches around $300 million in assets, right? So my remark focused around core NII, which is ex-PPP, which we're expecting to be around sort of flat to modestly down to the end of the year. Where we're expecting sort of the ins and outs as part of this is we're expecting deposit growth in sort of profitable deposits. We're expecting to be down wholesale funding and lower our cost of deposits. And obviously, there is a pipeline that Shaun referred to in terms of growth in loans on the different books that we are focusing on. I think combination of that is where -- based on which our guidance was around flat, core NII to be flat towards the end of the year.

[Laurie Hunsicker:]

Okay. So, sorry, just to fine-tune this a little bit more. If I'm looking at this, thinking $65 million, $66 million of NII a quarter, is that right? Or am I missing something larger? Can you just help me think about that a little bit?

[Subhadeep Basu:]

Yes. So without getting into sort of a lot of details and happy to take you offline in terms of where our head is at, we're probably looking at around between $66 million to $68 million of NII fourth quarter.

[Laurie Hunsicker:]

Okay. Great. That's helpful. And then the sale to ISDC, I had in my notes originally that was closing on or about April 23, and it looks like that's delayed as -- is there any reason that's delayed or how should we be thinking about that?

[Nitin Mhatre:]

No. So I think discussions are ongoing and our expected closure date is in the second quarter. But Shaun, if you want to add more color to that.

[Shaun Dwyer:]

Yes, our internal projections, we had it at midyear to give some time for necessary regulatory approvals but all things are moving forward appropriately.

[Operator:]

The next question comes from Mark Fitzgibbon from Piper Sandler.

[Mark Fitzgibbon:]

I wondered, first, Nitin, you may want to hold off answering this until your May 18 call. But I guess I was just curious, under your new three-year plan is the balance sheet likely to be bigger or smaller than it is today, would you guess?

[Nitin Mhatre:]

Yes. I think I weaved that into my comments. It's going to get better before we get bigger as I described it. So I think in the initial part of it, we're going to rebalance the balance sheet and then it will start growing. So you'll see the exact cadence of it when we connect on May 18.

[Mark Fitzgibbon:]

Okay. And I know that you closed those nine branches, and obviously, you're closing -- or selling the New Jersey branches shortly. I guess I was curious, are you also considering selling other geographies?

[Nitin Mhatre:]

Yes. I'll let Shaun go first and then share my comments as well.

[Shaun Dwyer:]

So Mark, I think with the speed of digital adoption taking pace, I think you have to continuously be looking at branch optimization. So we do go through a very thorough process. Can't comment on specific geographies, but we will continue to look at all of our branches. And obviously, with the most recent reductions, we're reducing the branch footprint by about 18%.

[Mark Fitzgibbon:]

Okay. And then, assuming moderate or shrinkage of the balance sheet, you'll continue to create capital. Should we think about this buyback program as the first in a line of potentially many programs as a means for absorbing excess capital?

[Nitin Mhatre:]

Yes. Mark, I think, just an outset, I would say we're obviously pleased to reinstate our share buyback program, per GAAP, I think it was about 18 months. We absolutely think it's a step in the right direction as we continue to look for ways to deploy capital that maximize the shareholder value. And like you said, that will be an ongoing process. So we'll keep you updated as and when we consider future actions.

[Mark Fitzgibbon:]

Okay. And then, lastly, just to clarify on the tax rate. I think the guidance you gave was 15% to 16% for the rest of this year. Should we expect that, over time, the tax credit business will shrink and the effective rate will drift upward?

[Subhadeep Basu:]

Mark, this is Subhadeep. No, I think we're going to continue with our tax credit program and the sort of the increase in tax rate that you saw was because of sort of the timing of our tax credits that goes on and off our income statement. So you're going to see the impact of additional tax credits going into the rest of the year and beyond.

[Operator:]

There are no more questions in the queue. This concludes our 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 and your interest in Berkshire. I hope you'll be able to join us on May 18 as we detail our plans to transform Berkshire. In the meantime, have a great day and be well. Jason, you can close the call now. Thank you.

[Operator:]

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