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spk08: Good morning and welcome to Benkshire Hills Bancorp conference call. All participants will be in listen-only mode. Should you need assistance, please sign up a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and two. Please note this event is being recorded. I would now like to turn the conference over to David Gonti. Please go ahead, David.
spk00: Thank you. Good morning and thank you for joining this discussion of third quarter results. Our news release is available on the investor relations section of our website. berkshirebank.com and will be furnished to the SEC. Supplemental investor information is also provided in an information presentation at our website at ir.berkshirebank.com and we will 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. In addition, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding our results and performance trends and should not be relied on as financial measures of actual results or future projections. A comparison and reconciliation to GAAP measures is included in our news release. And with that, I'll turn the call over to Acting CEO, Sean Gray.
spk05: Thank you, Dave. Good morning, everyone. And thank you for joining us today for our third quarter earnings call. With me this morning is Jamie Moses, our CFO. And for Q&A, we'll be joined by George Vachgalupo, our commercial banking leader, George Amilis, Chief Credit Officer, and Greg Lindemuth, Chief Risk Officer. Let me start by saying that since our last earnings release, we have been focused on driving stronger financial performance. Our measure of core pre-tax, pre-provision revenue increased by 30% quarter over quarter due to higher revenue and lower expenses. The efficiency ratio improved to 65% from 71%, and our capital and liquidity metrics continued to strengthen. Additionally, we made great progress in moving our loan customers back towards normal payment schedules as business operations were normalizing in our market. While we have been taking these immediate steps, we have also been moving forward with developing our 21st Century Community Bank. As a result of the team we've cultivated and the technology that we've already invested in, we have the capacity to respond to the accelerated changes in customer preferences and shifting workplace dynamics. We have introduced an industry-leading digital account opening experience and enhanced our customer experience by upgrading our call center and rolling out our e-signature platform. We're also developing strategic initiatives that rationalize our real estate footprint at both the branch and corporate level with the goal of improved profitability in 2021. I'm grateful for the dedication of the whole team in serving the shifting needs of our markets during the pandemic while strengthening our company and our culture. At this time of leadership transition, I want to assure you that the executive team and board are working closely together towards our larger corporate objectives. We understand that actions matter and we are committed to taking the necessary steps. Our markets were active in the third quarter as the economies in most of our regions were reopened with some continuing restrictions in certain activities. General transaction volumes moved back towards normal with digital channel usage remaining elevated. Commercial credit demand remains subdued as forward business planning continues to face uncertainties. Our PPP loans remained unchanged as banks and customers waiting for clarification of loan forgiveness rules. I want to focus at this time on a credit quality update. We have some slides in our investor presentation with updated credit information. Our lending teams, which have reported to me for several years, continue to work actively with our credit and risk team to assess and manage the portfolio. We're being proactive in our credit administration, and as a result, we have a comprehensive understanding of our pandemic credit risk. Our traditional loan performance metrics remained in line in the third quarter, including delinquencies, non-accruals, and charge-offs. We disclosed reductions in our COVID loan payment deferrals in September. Our investor presentation shows that these deferrals remain on a downward trend. We have narrowed the commercial industries that we view as COVID-sensitive, and these account for the preponderance of the loan modifications that we are reporting. Our loan loss provisions decline from the elevated levels in the first half of the year, and we are comfortable that we're properly reserved for pandemic-related loan losses based on the current outlook for public health and economic activity. We maintain a disciplined credit process and strive for strong communications with our customers. The decline in loan outstanding this year has reflected cautious loan demand from customers, along with higher customer liquidity and accelerated prepayments. Our regional teams are well positioned to respond to qualifying credit needs in our community, and we have strong capital and funding sources to be a preferred credit provider with structures and pricing that are appropriate to this environment. Our teams remain dedicated to serving our markets, and I have full confidence that we are well-positioned to maintain this service with prudent decision-making as we go forward. At this point, I'll ask Jamie to comment further on some of our financial metrics. Jamie?
spk04: Thanks, Sean. We produced core EPS of 53 cents per share, resulting in a core ROA of 84 basis points and a core ROE of 9.3%. On a GAAP basis, EPS was 42 cents per share, ROA was 67 basis points, and ROE was 7.5%. Our core results were up both quarter-over-quarter and year-over-year. We posted higher revenue and lower operating expenses in the third quarter compared to the prior quarter. The benefit of this is clearest in the efficiency ratio, which improved to 65% from 71%. It also shows up in our non-GAAP measure of PPNR, which increased by $7 million to $30 million on a quarter-over-quarter basis. Our revenue gain was based on a 9% increase in fee income, which was mainly driven by higher deposit fees as customer activity moved back toward normalized levels. We also had a nice pickup in secondary market income on stronger volumes in both mortgage banking and SBA lending, which offset lower commercial swap revenue during the quarter. We expect total fee income to remain near these levels in the fourth quarter. Turning to net interest income, this revenue slipped a little by 1% due to lower loan balances. The margin was little changed at 261 basis points, and the income change reflected lower earning assets. Setting aside PPP loans, while we expect loan volumes to begin to firm after year-end, it is likely that these balances will decline further in the fourth quarter. We are focused on minimizing and offsetting this decrease, including expanding the investment portfolio and reducing higher-cost wholesale funds. We expect that further deposit cost reductions will generally offset changes in loan yields. At this time, we expect most PPP loan forgiveness to benefit 2021 results, but we may see some net interest income benefit in the fourth quarter. Our unamortized PPP net deferred fees totaled $16.5 million at the end of the quarter. Turning to the credit loss provision, since we had previously buttressed our allowance protection, there was a modest $1 million provision expense during the third quarter. as slightly better economic forecasts emerged at the end of Q3 and the overall loan portfolio decreased. There was no material change in the ratio of the allowance to loans during the quarter. Moving on to expenses, these came down from the second quarter, which was elevated due to the one-time bonus related to PPP loan originations. We also reduced other compensation expense during the quarter, and we continue to keep a close focus on operating expense as we are targeting flattish expenses in Q4 relative to Q3. Moving to the tax line, we had a small tax credit for the quarter due to the losses recorded in the first six months. We expect the tax rate to be in the area of 10% in the fourth quarter, but this will depend on the timing of factors affecting pre-tax income. We recorded $5 million in after-tax non-core charges for the third quarter. This was primarily due to the cost of the CEO separation agreement that was entered into during the quarter and related professional fees. We continue to record wind down costs on our discontinued operations, but expect to complete those costs of this transition in the fourth quarter. I've noted the progress we made on key operating components, and our goal is to build on that progress as conditions allow. As you know, we announced that we were cutting our dividend in half beginning with the most recent payment, and this decision was to better align the dividend with our current level of earnings generation. Consistent with our new procedure, we will communicate later in the quarter about the next quarterly dividend. We're continuing to improve our capital metrics until we feel that there is opportunity to reinitiate stock buybacks, which we view as attractive based on current market conditions. And with that, I'll turn the call back over to Sean.
spk05: Thanks, Jamie. As you've seen, we are managing pandemic-related impacts to our operations and borrowers. and doing the necessary work to adjust our business model to improve performance in this environment. We're answering changes in customer behaviors while keeping our focus on our community bank values. As I mentioned earlier, we recently launched a best-in-class digital account opening technology, which has been in development for a number of months. This is a more visible component of the technology investment that we have absorbed into our current expense run rate. This platform provides benefits to the customer experience, to revenue generation, and to our operating efficiency. Our enhanced capabilities are that much more valuable as a result of the customer needs and accelerated digital transformation resulting from the pandemic. As I indicated up front, we're well along in a strategic analysis to rationalize our infrastructure footprint. This includes reshaping our branch office network, identifying and releasing surplus corporate real estate and making other operational adjustments to our business model. We are also looking to formalize cost-save opportunities arising from work from home, as well as changes in procurement process in the current environment. Our goal is to reduce annualized core expense by $10 to $15 million by the second half of 2021. We expect to have more announcements about these strategies in the coming months. We intend to streamline our business model and our core markets and leverage organic growth around that foundation. Two critical enablers will be the technology we've previously invested in and our MyBanker program. As you know, we have been successfully developing and deploying these mobile personal bankers for a number of years to bring service to customers where and when they need it, and they remain integral to the distinctive customer experience that we are developing as a 21st century community bank. In line with our initiatives, we recently announced the promotion of two of our leaders to regional president position. Our wealth leader, Kate Hersey, will lead our Boston region team. And Lori Tyler, the head of our foundation, will lead our Berkshire County region. Our regional presidents remain critical to our engagement with the markets that we serve. As a result of these promotions, women now constitute half of our regional president team. We also promoted our executive vice president and chief information officer, Jason White, who is driving our technology investment and was recently honored as the Boston Area CIO of the Year. Our purpose-driven culture was further recognized by the North American Inspiring Workplaces Award for our diversity and culture program, which is under the direction of Jackie Courtright, who is promoted to Executive Vice President and Chief Human Resources and Culture Officer. I'll close by thanking our team, our investors, and our other stakeholders who rely on us to operate this business and enhance franchise value as a strong and preferred provider to our market. With that, I'll ask the operator to open the lines up for questions. Thank you.
spk08: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll take a moment to assemble our roaster. Our first question comes from Mark Fitzgibbon with Piper Sandler. Please, Mark, go ahead.
spk06: Thank you, and good morning, guys. First, just wanted to clarify a couple of things that you had said. Sean, did I hear correctly that you had said your cost savings initiative would potentially reduce annualized expenses by $10 to $15 million?
spk05: That is correct.
spk06: And that will start to appear in sort of the back half of next year?
spk05: Actually, the work to that has started now. And as we alluded to, we're hoping for additional announcements coming soon. Um, but yes, we'll start to see that in the middle of next year.
spk04: Okay. And then Jamie, I'm sorry, go ahead. I just want to add to that, Mark. Uh, just, you know, you'll, you'll see, you'll see that start to appear, um, in the beginning of the, of next year. But as Sean said that we, you know, we expect to sort of fully realize those things by the back half.
spk06: Okay. And then Jamie, just to clarify something you said, um, you, you, you think the stock is attractive here. Um, uh, capital ratios are building. Have you applied for, with the regulators, permission to be able to buy it back, or is that something you're contemplating?
spk04: Yeah, I mean, we don't, you know, I don't want to get too far into the details of, you know, our interactions with the regulators, but, you know, I'd say that we are working on the ability to start to buy back shares. You know, as you said, you know, we think that we have very strong capital ratios You know, we think we are very well capitalized in that regard. And, you know, I've said that over the last, you know, six months as we've been talking through this. So, you know, from a buyback perspective, you know, I think that there's certainly that opportunity there. Okay.
spk06: And then you referenced the possibility of the balance sheet shrinking in the fourth quarter. I mean, is it likely to just be sort of a natural runoff or are you planning a much, you know, larger shrinkage of the balance sheet in 4Q?
spk04: At this point, I think we're looking more of a natural runoff with a little bit of softness, I think, on the customer side in terms of demand. In our remarks, we also talked about using some of our excess liquidity to increase the securities portfolio to try to help ourselves in that regard to offset some of the runoff.
spk06: So it looks like you have a little over $900 million of liquidity. Does sort of half of that go away quickly as you deploy it into securities, or is it more than that?
spk04: No, I think you're thinking about that right. I mean, in terms of quickness, that's a big number to do quickly. But we're not looking at increasing the portfolio by a billion.
spk06: And then two last things. I wondered if you could share with us your outlook for the margin in 4Q and what the effective tax rate might look like in 2021. Thank you.
spk04: Yeah, sure. So I guess, you know, I'll start with the tax rate. That's obviously highly dependent on elections and things like that. You know, I guess I would say sort of steady state. You know, we would expect it to be in that 20% range where we've been in the past. Although we're still working through all of the components of that in terms of forward guidance into next year. And on the margin, again, as I've said, we're looking to deploy some of that excess liquidity into the investment portfolio. So sort of offsetting declines on the funding side of things. We expect that we can probably decrease our deposit costs by another 10 to 15 basis points, but that could be offset by increased investments in the investment portfolio, which, as you know, are going to have a little less margin associated with that. I think that we're probably in a flat-type margin scenario in Q4. And, of course, you know, if PPP accelerates, there's, you know, there's positive opportunity there.
spk06: Thank you.
spk08: Our next question comes from Colin Gilbreth with KBW. Please, Colin, go ahead.
spk01: Thanks. Jamie, just to start following up on your comment on the NIM and some of the dynamics there, are you guys in a position to sort of give us a sense as to what you think NII is going to do or when NII bottoms? I mean, obviously, you had indicated further runoff in the fourth quarter, but sort of how you're thinking about NII trending and excluding PPP, but trending throughout next year.
spk04: Right. So, you know, again, you know, a little too early to talk about 2021, I think, other than to say we expect to, you know, start turning this around into an asset generation story versus a balanced shrinkage story. You know, so I think, you know, I'm hoping to keep NII levels similar in the fourth quarter as they are now. But again, you know, that's going to be dependent on a lot of things that happen. yields that we can get in the investment portfolio, payoffs that may or may not happen on the loan side of things in Q4, you know, and just sort of those general market conditions. So, you know, feeling pretty good that, you know, you're not going to see some massive decline in NII here into the fourth quarter. And then on a go forward, we would expect to increase that.
spk01: Okay. Okay. And just to get our arms around some of the dynamics with the runoff on the balance sheet, do you happen to have what the loan origination volumes were this quarter versus what was paid off?
spk04: You know, I don't have that right in front of me right now, but I can get back to you on that.
spk01: Okay. Okay. And then I guess just following on that, you know, Sean, you know, indicated that there's momentum within kind of your lending business and kind of throughout the footprint. And I mean, any sense and is it maybe if there's a kind of a target that you're putting out there for your lenders in terms of loan growth for next year? Just trying to get a sense of what you think kind of the franchise is capable of generating in terms of new loan demand next year.
spk05: Sure. Obviously, we've done so much from a balance sheet rationalization, and we've identified products and offerings that didn't meet our community bank overarching strategic model. You've seen us start to jettison aircraft. You've seen us, whether that be indirect lending. We do feel now we've got a real good core focus on what we do well and where we compete from a value differentiation perspective. I know George is on the phone today. We're setting at least low to single-digit loan growth goals for the commercial business. And as we've talked a lot about, we've aligned it with our four main verticals, which are Cree, CNI, business banking, and ABL. And then we also think with this better focus, there are some niche businesses that perform well in these current economic environments. and that being our business banking, our 44 business capital group, as well as ABL. So demand is subdued right now, but activity as we measure it through Salesforce is speaking towards a pent-up demand if the macroeconomic conditions can stabilize. So that's how we're thinking about it in totality. I hope that helps from a directional perspective.
spk01: No, it does. It does. Okay, thank you for that. And then, so just shifting to credit, obviously, you know, resolution on the deferrals. Two things. One is, can you kind of guide us through how you're thinking about sort of the deferral workouts from here and maybe where the embedded risk still lies from a loss perspective? And then also, too, if you could give us any color as to what some of the classified loan trends were during the quarter.
spk05: Sure. You know, obviously, deferrals remain on a downward trend. You know, and we're making progress even within that deferral bucket of moving customers back to normal payments. And then there's percentages within that deferral bucket where we are seeing that they are paying interest at this time. So I'll probably kick this over to George or Georgia. I think you'll be able to provide a little bit more detail to the question.
spk03: Yeah. Colin, hi. It's Georgia. Hey, Georgia. Hi. Speaking about, you know, the criticized assets are trending up. Currently, we are in the fours as a percentage of total loans, obviously due mostly to the COVID-impacted businesses. And we will be putting out, obviously, more information about that in the queues. You know, as far as how we're thinking about it from a workout perspective, I mean, you know, we have formed a hospitality management group that is overseeing all of the hospitality loans currently in deferral. So we are speaking to our customers on a regular basis. Obviously, we're getting updated financial information. And we are seeing that a large majority of those customers are looking to turn to interest-only services. You know, what we are seeing in some cases, our sponsors are asking for longer-term deferrals. But like I said, in return, we will be receiving interest payments and or an interest reserve will be established. So that's the way we're dealing with the hospitality portfolio. As far as the Firestone portfolio goes, You know, we are seeing deferrals across most segments. Concentrations will be or are in the location-based entertainment and the fitness segments. But, again, as we're entering into the third phase, we are seeing customers starting to return to interest only. So we are encouraged by that.
spk01: Okay. Okay. And then I guess just finally closing the loop out on that for you, Jamie, in terms of – how you're thinking about the reserve from here? So, you know, kind of stable in the third quarter. And is the expectation that it's really going to be about movements within the delinquencies and charge-offs of what you're seeing in the deferral bucket that drives the provisioning more than any other qualitative factors? Or just kind of your thoughts around the reserve outlook? Yeah, I think...
spk04: Yeah, Colin, I think that's right. I think that what we're seeing is, generally speaking, a stabilizing macroeconomic forecast and output around those things, which continue to drive that. Any changes in that obviously could affect it as well. But I think that that's really more of where we're looking at now, which is how things are progressing through the credit process. you know, and what changes we see there. And you had also asked about classified, Colin, and, you know, we'll have more information on that in the queue. Okay.
spk01: Okay. Very good. I'll leave it there. Thanks, guys.
spk04: Yep. Thanks, Colin.
spk08: Our next question comes from Laurie Helsinker with ComposePoint. Please, Laurie, go ahead.
spk02: Yeah. Hi, thanks. Good morning. Um, Georgia, if, um, if we could just go back to Firestone, um, can you help us think about the, the 258 million, um, 62 million in deferrals this September 30? What, what is that looking like as we, um, roll through to the end of October? How much do you expect those deferrals down? And then also on that book, can you just help us think about what's interest only?
spk03: Well, currently, as of the end of September, I would, and this is a guess, I could get you the actual numbers, but I would guess that the majority of that 62 is full payment deferral. As far as going through the month of October and through the fourth quarter, I think the, you know, again, this is an in-process number, the 24%, so that is capturing the what we expect to be doing this month based on conversations that we've had with our customers and what's in the pipeline. So I think the percentage is probably going to stay right around where it is. But what we are seeing is that as we are talking to our customers going into the fourth quarter, more and more we are hearing from customers that they will be able to return to interest-only, but I really wouldn't even want to take a guess as to how much of it would go back to interest-only this quarter at this point. I think it's too early.
spk02: Got it. Okay, and then I know the portfolio had about, I guess, $16 million or so in PPP loans likely unchanged. Do you know of the remainder of the portfolio? you know, what clients took PPP loans away at other banks?
spk03: You know, interesting. Oh, go ahead. No, I understand. And interesting that you asked that because we actually surveyed some of our Firestone customers, and this goes back to the second quarter. And what we found, I think we spoke to over 200 clients of our customers and, you know, we were able to come up with, you know, through extrapolation, roughly 50 to 55% of those customers did apply for PPP loans from other institutions. Got it.
spk02: Okay. That's helpful. And then what percentage is out of footprint? What percentage is out of New England? Is that the majority of it? Yeah.
spk03: For Firestone, yeah, absolutely. The majority of it is out of our footprint.
spk02: The majority. Okay. Okay. So, okay. That's helpful. And then on the hotel book, same question. In other words, as we roll through October, where do you see those deferrals going? On the $330 million, you've got $160 million now. Could we see that continue to come down?
spk03: You know, I'll start that, and then I'll flip it over to George, because I know George is having daily conversations with his team on these loans. But, yeah, I would expect that number to come down. And I also would expect the majority of those customers to return to interest only. And like I said, with many of them posting reserves. George, did you have anything else?
spk07: Yeah, just a couple of comments I would say is that, you know, some of the customers are, you know, tourist destination type of hotels. Our core market of the Berkshires as well as, say, Newport, Rhode Island would be another example where those folks are highly seasonal and pretty much the off-season now will be the winter. So those are folks that we feel very confident that they will eventually return to full payment. They'll probably need longer-term referrals. The good news is that we've moved to the referrals in the fourth quarter approximately 70%. of these 160 million are able to make interest payments to us. And in many cases, they were having full P&I deferrals earlier. So we're seeing some progress. We think there's some resiliency and some liquidity with those operators.
spk02: Okay, great. That's helpful. And then, Jamie, just wondered if we could go back to margin. I know last quarter you had indicated, you know, potentially 15 to 20 basis points of expansion by the end of the year. Yeah. And it sounds like it's maybe a little less. Can you help us think about, you know, in your comments around obviously the decreasing deposit cost basis, but can you help us maybe think about that a little more? What sort of restructuring things that you have planned that, you know, are going to be helpful to margins?
spk04: Right. So the biggest benefit to the margin is sort of paying off higher wholesale funding costs on that. So we expect maybe 15 basis points, 10 to 15 basis points on the deposit side of things. On the one hand, it's great that the industry has this liquidity advantage. you know, in terms of deposits, you know, that have stuck around maybe a little bit longer than we had anticipated. And so, you know, we have these deposits and there's, you know, fewer things to invest those deposits into. And so they tend to be, at the moment, it's going to be in you know, bonds that do not have as high a yield as, say, your typical loan portfolio would. So, you know, it's reinvesting some of these deposits into the securities portfolio, sort of expanding the securities portfolio a bit, which will increase NII on the one hand, but, you know, the margin would decrease along with that.
spk02: Okay. Okay, great. And then I also just wanted to go back to, I wanted to make sure I heard you right. Your one-time costs, merger restructuring costs, or I should say restructuring costs, wind down in the fourth quarter. I just wanted to make sure I heard that right. So that we'll be looking forward, whatever restructuring you're tending to do, you're tightening it up in the back half of this year. Is that correct?
spk04: That's right. That's right.
spk02: Okay. Okay. Okay, and then what do you expect for restructuring charges in the fourth quarter, or is it too early?
spk04: It's too early. I wouldn't expect a really large number in the fourth quarter, right? And so just, you know, if you're looking at F9 of the release, you know, those restructuring charges were related to almost entirely to the CEO separation that happened during the quarter.
spk02: Okay. Okay. Okay, great. That's helpful. Thank you very much. I'll leave it there.
spk04: Yep. Thanks, Laurie.
spk08: Our next question comes from Colleen Gilbert with KBW. Please, Colleen, go ahead.
spk01: Hi, guys. Sorry. Just a quick follow-up. I just want to make sure. I've got some of these numbers correct. So, Sean, your comment about, you know, looking to reduce operating expenses by 10 to 15 million on an annual basis in 2021. And I know you had indicated, you know, some of it to be achieved in the first quarter and then the majority of it, you know, achieved by the end of the year. But just want to tighten that up a bit. So off of what base should we be assuming? Is that a third quarter 20 OPEX number? And if so, what is it? Just trying to nail that down a little bit clearer.
spk04: Colin, I'll take that. It's really based off of what we think our core expenses are on a year-over-year basis. Think about it as the core expenses that we've given throughout the year, $10 million to $15 million off of that. you know, on average, the third quarter core number, that's about right. That's about right how you should be thinking about it.
spk01: Okay. So, because if, I mean, if I'm thinking if we're on the same page in terms of what the core expenses are, but like, so I've got core expenses in 3Q of 67 and a half million, but that's quite a bit lower than maybe the 71 and the 70 and a half that you put up in 2Q. So, Is it taking like an average of those three quarters and then taking 10 to 15 million off of that? Or is it taking 10 to 15 million off the 67 and a half as the future run rate?
spk04: Yeah. Yeah. Sorry. So I should be more clear. You should take an average of the three quarters and then take the 10 to 15 off of that.
spk01: Okay. And by the end, by 4Q21, that run rate should essentially be 10 to 15 million less than the average of those three.
spk04: You got it.
spk01: Okay. Okay. Just wanted to confirm. Thanks.
spk04: Yep, yep. Thanks, Colin.
spk08: This concludes our question and answer session. I would like to turn the conference back over to Sean Gray for any closing remarks. Please, Mr. Sean.
spk05: Well, thank you all. I appreciate the questions, and this concludes our formal announcements, and please join us in our fourth quarter earnings call. Thank you.
spk08: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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