Berkshire Hills Bancorp, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Jan 2021

[Executives:]

David Gonci - IR Manager Bill Dunleavy - Chairman of the Board of Directors Sean Gray - Acting CEO Jamie Moses - CFO Georgia Melas - Chief Credit Officer George Bacigalupo - Commercial Banking Leader Greg Lindenmuth - Chief Risk Officer

[Analysts:]

Mark Fitzgibbon - Piper Sandler Laurie Hunsicker - Compass Point

[Operator:]

Good morning, and welcome to the Berkshire Hills Bancorp Q4 Earnings Release Conference call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to David Gonci, Investor Relations Manager. Please go ahead.

[David Gonci:]

Good morning, and thank you for joining this discussion of fourth quarter results. Our news release is available on the Investor Relations section of our Web site, berkshirebank.com, and will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our Web site at ir.berkshirebank.com, and we may refer to this in our remarks. Our remarks will include forward-looking statements, and actual results could differ materially from those statements. For detail on related factors, please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q.

[Bill Dunleavy:]

Thanks. Thank you, David. Good morning, everyone. As David said, I am Bill Dunleavy, and it's my privilege to be the Chairman of the Board of Directors of Berkshire Hills Bancorp. Before Sean and Jamie cover our financial results, I want to share a few words with you. On our announcement yesterday, Nitin Mhatre has been named Chief Executive Officer of Berkshire Hills Bancorp and Berkshire Bank, a decision our Board made after a thorough planning process and a comprehensive national search. Nitin is the ideal face to lead the bank into the future and propel Berkshire to long-term success, fulfilling our promise to meet changing customer expectations and the demands of the 21st century banking. Nitin's track record of leadership and accomplishment at Webster Bank and Citi Group is exemplary. He has a national reputation as an innovative banking executive, who can deliver results, grow market share, and improve profitability. He has broad experience working at global banks like Citi, and shares Berkshire’s passion for community banking, and our pledge to serve the unique needs of all of our customers across our entire footprint. At Webster, Nitin was instrumental in helping the bank evolve from a mainstream mass market bank to the specialized bank it is today, serving multiple segments with tailored product offerings. He oversaw operational improvements in the branches through automation around the universal banker model, streamlining the systems, and improving customer service. He is a true pioneer in the application of data analytics, and the use of digital automation to lower cost, streamline processes, and improve the customer experience. Importantly, Nitin fully embraces Berkshire's Be FIRST values and principle-driven culture. He strongly believes in empowering employees to respect individual dignity, earn trust through ethical behavior, and give back to communities.

[Sean Gray:]

Thank you, Bill. Thank you very much. If I could take a moment to add to Bill's comments, first, Nitin has a distinguished reputation in the industry and is highly regarded in community banking circle. So, I'm excited about our future with Nitin leading the bank and myself continuing as President and Chief Operating Officer. We have an exceptionally capable executive team at the bank, and we are well-positioned for future success. I know Nitin is looking forward to engaging with all of you after he officially starts as CEO on Friday January 29th. Moving on to our fourth quarter 2020 financial results, let me start by mentioning with me this morning is Jamie Moses, our CFO and for Q&A, we will be joined by George Bacigalupo, our Commercial Banking Leader, Georgia Melas, Chief Credit Officer, and Greg Lindenmuth, Chief Risk Officer. I’ll start my remarks with the focus on the fourth quarter, and then I’ll ask Jamie to provide more detail on the financials. I’ll follow that by commenting on our recent strategic initiatives, and our key focus areas going into 2021. Our fourth quarter earnings were $0.30 per share and we earned $0.28 in core EPS. These results were ahead of consensus but they were down from the prior quarter primarily due to a higher non-cash pandemic credit provision. I’d like to first highlight some of our operational accomplishments. We maintained our net interest margin with a strong focus on lowering our deposit cost. We strengthened our fee income except for a normal seasonal decline in mortgage banking revenue. We reduced occupancy and technology cost and managed staffing levels, and we completed the exit of our discontinued national mortgage banking operation. Our team is adhering to the financial and operating disciplines while business conditions are currently constrained. Turning to credit, we saw further progress towards normalizing our loan portfolio. While credit conditions remained sensitive to the evolving impacts of COVID, our borrowers have continued to adjust in this environment. We saw decreases in deferred loans, criticized loans and accruing delinquent loans. Total deferrals decreased 22% in the fourth quarter and continue to decline so far in 2021.

[Jamie Moses:]

Thanks, Sean. As you noted earlier, our fourth quarter earnings were $0.30 per share, and were $0.28 in core EPS. Core PPNR declined by $6 million to $24 million. In addition to pandemic impacts on our core PPNR, we also recorded $3 million in charges following an operational review of consumer loan servicing primarily related to past conversions and acquisitions, and is reflected in the increases quarter-over-quarter to the professional services and other expense categories. This project has been completed and we believe that the expense impact has been fully recognized and is limited to this quarter. Pandemic impacts on PPNR, included interest write-offs on non-accruing loans and loan workout expense, as well as constrained business volumes. I’ll take a minute to comment on the balance sheet before further elaborating on the income statement. We had an unusually high payroll deposit balances at year-end, and as a result, short-term investments were up $622 million and total assets increased by $220 million.

[Sean Gray:]

Thanks, Jamie. Our guidance demonstrates that we're leaning in to our operating plan by tightening our focus and building our core business and our footprint and in support of our community bank mission. We announced our branch sale and consolidation initiatives during the quarter. These initiatives were under development for several months and they're consistent with the strategy of focusing on core operations and core markets. They also reflect our smart blend of technology and flexible personalized service, including our distinctive MyBanker Concierges Bankers. Our 2021 results will have some noise as we transition through these initiatives and through what we hope will be the final pandemic year. Our focus will be on strengthening our purpose driven community bank. The year 2020 has reaffirmed the premise that purposeful and constructive community engagement will attract customer preference and give us the opportunity to build market share, profitability and long run investment value. I'm very proud of our team's work this year in responding to the health and financial needs that we encounter throughout the entire pandemic. We continue to prioritize the safety of our customers and employees operating flexibly to offer the best service possible within the constraints of government guidelines and mandates. We proactively brought federal borrow relief programs to our markets including PPP loans and qualifying loan modification. We adjusted our deposit fees and transaction limits to facilitate changes in customer activity. Our employee volunteer teams continued to provide targeted community service and our foundation increased its philanthropic giving to support the organizations and people impacted the most by the pandemic. We look forward to applying the same energy, creativity and flexibility to the challenges ahead of us by implementing our initiatives and strengthening our competitive advantages in the core geographies that we serve best based on our Be FIRST values and commitment to diversity equity and social responsibility, our local regionalized decision-making and community support our previous investments in internal and customer facing technology. Our coordinated relationship service with special emphasis on our MyBanker personalized bankers, and our disciplined focus on core business activities and our growing business lines including asset based lending, SBA lending, and wealth management. Our earnings materials highlight the improved rankings that we are achieving as a socially responsible investment vehicle. We welcome further interest from shareholders who value investments in companies with solidly demonstrated performance and advancing social values. Together with our dedication to earning the cost of our capital, we believe these positions are stocked attractively as a preferred investment vehicle. I’ll close by thanking the entire organization for its support during these past three months. They came together as a team under trying circumstances and delivered well for all of our stakeholders. The passion, energy, and dedication with which you attack the hurdles set in front of us is credit to your high character and mental toughness. I will be forever grateful to have had the opportunity to be your leader during this transition. And I am looking forward to continuing to build on the positive momentum we have created. With that, I’ll ask the operator to open the lines up for questions.

[Operator:]

The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

[Mark Fitzgibbon:]

Hey guys, good morning.

[Jamie Moses:]

Hey, Mark.

[Sean Gray:]

Good morning, Mark.

[Mark Fitzgibbon:]

Given your comments around balance sheet growth looking sort of modest in the New Year and the fact that your capital ratios have continued to build, I guess I am curious at what point you would be comfortable restarting stock repurchases?

[Jamie Moses:]

Yes, I think that’s a good question, Mark. I mean that’s something obviously that we are always looking at. We evaluate the best way possible for us to get the highest returns for our shareholders. It’s something that we always consider, and of course, from a strategic perspective, I haven’t spoken with Mitten about this. And so, I am sure he is going to have opinions about our ability to invest in either growth or capital actions like this, so likely more thoughts about that on the next call.

[Mark Fitzgibbon:]

Okay. And then, of the $199 million of CRE deferrals that you have can you give us a sense for what types of CRE credits they are, and if they are maybe concentrated in particular part of your footprint? Thank you.

[Sean Gray:]

Georgia, if you don’t mind providing a little color there I think that would be great.

[Georgia Melas:]

Sure, absolutely. Hi, Mark. Approximately about $146 million of the $199 is in the hospitality book. The remaining $40 million -- I am sorry, the remaining is just spread out amongst some -- there is a retail bit of retail in there and just smaller other credits.

[Mark Fitzgibbon:]

Okay.

[Georgia Melas:]

The bulk of it is hospitality.

[Mark Fitzgibbon:]

I am sorry, I apologize, didn’t hear that.

[Georgia Melas:]

I am sorry. The bulk of it, like I said $146 million of it is hospitality, the rest is spread out amongst various other sectors.

[Mark Fitzgibbon:]

And is it geographically concentrated in any particular area?

[Georgia Melas:]

Well, the hospitality portfolio is pretty diversified between Massachusetts, New York. So, I don’t have the exact breakout. But I wouldn’t say there would be any significant concentration. But we can definitely follow up with that.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

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

[Laurie Hunsicker:]

Yes. Hi, good morning. Just hoping that we can say on credit here and just some of these details and I appreciate how you have laid them out in the slide. So maybe just starting with retail, if you can give us what the balance is on retail? What the credit size is? What the non-accruals are? What the charge-offs are? And then maybe -- yes, go ahead.

[Georgia Melas:]

Laurie, I guess some of that is -- I have kept some of that information available. The balances for retail are $864 million. And I am sure if you asked for the deferral amount on retail? About $6.5 million of that portfolio was currently in deferral. The rest has resumed active payment. And, I am sorry you also -- I don’t have the breakout of how much of that portfolio is credit size, but I can get that to you.

[Laurie Hunsicker:]

Okay. And then -- yes, and I was wondering how much of that is also in nonaccrual.

[Georgia Melas:]

The non-accrual piece, again I don’t have an exact number. But I can definitely follow up with you. Yes, I don’t have the exact number for you on the non-accruals.

[Laurie Hunsicker:]

Okay, great. And I think there was maybe some confusion. If you could just give us a little bit of color around the retail , I certainly was under the impression that a quarter of it was mall exposure, but can you help us think about how much of that is actually indoor mall not to be confused with outdoor strip centers that are anchored by grocery?

[Georgia Melas:]

Yes. Out of the $864 million, we have two components, $273 million which we call the community center malls which are the larger outdoor malls, and then, we have the neighborhood-centered and strip malls, which are also outdoor malls but just smaller in square footage. So, those two pieces make up roughly $525 million of the $864 million in retail exposure. The majority of that is either anchored by grocery, Big Box, or -- yes, pretty much most of it is anchored by either grocery or a Big Box tenant.

[Laurie Hunsicker:]

Okay. …

[Georgia Melas:]

Yes, just to be clear, Laurie, we have no like indoor type mall exposure. That’s just not something we have ever focused on. All of our retail exposure is to those outdoor type malls.

[Laurie Hunsicker:]

Okay, that’s very helpful. And then just one more question on that, do you have anything that you consider anchored by movie theaters?

[Georgia Melas:]

Nothing is anchored by a movie theater. We do have a large outdoor mall that is anchored by a Costco that has a movie theater in it. But, Costco is the major anchor on that mall.

[Laurie Hunsicker:]

Okay, perfect. That’s super helpful. Okay, and then leisure and excluding Firestone -- can you give us the balances on leisure excluding Firestone in terms of what’s leisure, what’s the differed, what’s the credit size, what’s the nonaccrual there?

[Georgia Melas:]

Leisure is $112. Oh, I am sorry, Sean.

[Sean Gray:]

No, go ahead Georgia. Give the details and I can provide a little color.

[Georgia Melas:]

All right, yes, leisure is $112 million of exposure and $40 million of that exposure is currently in deferral.

[Laurie Hunsicker:]

Okay. And then do you have the credit size amount and non-accrual amount for that? Or, I can circle back with you if you don’t have that.

[Georgia Melas:]

Yes, why don’t I get back to you on that? I just want to make sure I give you the correct number.

[Laurie Hunsicker:]

Okay, great. And then -- and I am sorry, Sean I cut you off. Did you have comments?

[Sean Gray:]

Sure. Just the leisure excluding Firestone as we look at that portfolio, very strong credits, very good collateral coverage, incredibly strong guarantors, a composition of golf course marine is of strong relationship borrowers to the bank, so very different. I know we call it leisure, but very different than the leisure that is included in Firestone. So, I just want to make that -- distinguish that difference.

[Laurie Hunsicker:]

Okay, that’s very helpful. Okay and then Firestone, Jamie, can you help us think about of the provision this quarter $10 million, how much of that was Firestone-related, or just -- any other color in there? The details you provided on Firestone were super helpful .

[Jamie Moses:]

Yes. Sure, Laurie. I mean that’s not something that we really get into too much. I mean I would think that -- I guess I would say that some of the provision that we had this quarter was definitely related to Firestone, but not necessarily any more than anything else that we were doing. So, some piece of that was I think in general, you look at the amount of criticized loans in Firestone, so $83 million, so we have one-third of sellers there, but only five of its on non-accrual at the moment. So, I think that we think about that portfolio as certainly being of elevated risk in the same way that we look at our hospitality in restaurants, but at the moment, we are seeing pretty good performance from that portfolio especially when you consider that 94% of the deferrals that we have in that portfolio are paying interest to us right now. So, it's certainly an elevated concern, but nothing that is massively impacting our provision or allowance at the moment.

[Laurie Hunsicker:]

Okay. And do you have the -- what were the charges-off for the quarter in Firestone?

[Georgia Melas:]

Yes, Laurie, that is $1.5 million.

[Laurie Hunsicker:]

$1.5 million, okay. Okay, great. And then, I guess just jumping over -- or just one more question on Firestone, do you have a geographical breakdown, or just even your most concentrated dates on that exposure? I don't think we've had an update on that in six years.

[Sean Gray:]

Laurie, this is Sean. I can take this, I can give general, and Georgia, if you've got it broken down a little greater that would be fine too. We don't have a concentration in any one state over the 11% from an overall geographies, it's predominantly the South, the Northeast and the West coast. Maybe Georgia, is there more color you can provide?

[Georgia Melas:]

Just roughly, I think last quarter, Laurie you had asked how much of it was in our footprint. Our footprint is probably makes up 20% to 25% of the Firestone exposure. The rest is spread out amongst many, many states, like Sean said none larger than 11%.

[Laurie Hunsicker:]

Okay, that's helpful. And I guess just with respect to the branch consolidation and thinking; I am sorry, this is shifting gears, the brands consolidation and thinking about expenses, Jamie, can you help us think about how that's going to actually flow through a little tighter? I think you mentioned in the back-half of the year, but can you help us think about how that's going to flow through in terms of where we would actually expect to see a core run rate layering in the fact that you probably are also going to have some technology sense?

[Sean Gray:]

Yes. So I think that we did talk about in my remarks about $70 million expense run rate by Q4, and I think we're in a pretty good range there, I think somewhere 65 to 70 back-half of the year, and on a go-forward I think is where we're targeting at the moment.

[Laurie Hunsicker:]

Great, thank you. I'll leave it there.

[Sean Gray:]

Thank you.

[Operator:]

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

[Sean Gray:]

Well, thank you. Thank you all today. We will be sending out our time for our Q1 call, and appreciate your comments and questions today. So, thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.