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spk01: Good morning and welcome to the Berkshire Hills Bancorp Q4 earnings release conference call. All participants will be in listen-only mode. Should you need assistance, please signal 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 a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to David Gonsi, Investor Relations Manager. Please go ahead.
spk02: 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 website, BerkshireBank.com, and it will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our website 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 released, 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 gap measures is included in our news release. As you know, we also released an announcement yesterday about our CEO. Our board chair, Bill Dunleavy, is joining us for the first part of the call to comment on this announcement. And so, at this time, I'll turn the call over to Bill. Thanks.
spk06: 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 Bank Corp. Before Sean and Jamie cover our financial results, I want to share a few words with you on our announcement yesterday that Nitin Matre has been named Chief Executive Officer of Berkshire Hills Bank Corp. and Berkshire Bank, a decision our board made after a thorough planning process and a comprehensive national search. Nitin is the ideal choice 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 21st century banking. Nitin's track record of leadership and accomplishment at Webster Bank and Citigroup 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 a 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 costs, 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. I also want to take a moment to commend Sean Gray. Sean took on the acting CEO role during a challenging period for the bank and guided us through this CEO transition with a steady hand, steering the bank and maintaining the executive team's focus on our strategic priorities. Under his leadership, the entire management team was outstanding during this period, maintaining a high level of performance and showing their commitment under demanding circumstances. That concludes my remarks. I am now going to excuse myself from this call and turn it back over to Sean and our management team. Thank you for your time this morning.
spk07: 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 circles. So I'm excited to 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, George Amilis, Chief Credit Officer, and Greg Lindemuth, Chief Risk Officer. I'll start my remarks with a 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 costs. We strengthened our fee income except for a normal seasonal decline in mortgage banking revenue. We reduced occupancy and technology costs 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 remain 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 percent in the fourth quarter and continue to decline so far in 2021. About 63 percent of the commercial deferrals are paying current period interest. We remain focused on a handful of COVID-sensitive industries with primary focus on hospitality and our Firestone equipment loans. We've provided further information about these loans in our investor presentation. The fourth quarter was the first time in which significant pandemic impacts began to surface in our traditional asset quality metric. An increase in non-performing loans was due to two commercial credits which were classified prior to the pandemic. Net charge-offs increased due to a handful of hospitality loans. We set our allowance for credit losses at 1.71% of year-end total loans, excluding PPP loans. This ratio did not change materially in the second half of the year. Based on our outlook at year end, we would expect the amount of the allowance to decline in 2021 as pandemic-related credit losses are recognized in the future. Turning to PPP, we expect that most of these loans will be forgiven in the first half of 2021. We've engaged a third party to support a quick and efficient response to PPP loan requests under the new program now being rolled out. Internally, we're giving priority to expediting the processing of forgiveness for first-round PPP loans. We're also anticipating strong volume for our SBA lending team based on the new higher 90% guarantee under the 7A program. And our small business teams will be focused on credit needs in our communities. We believe our teams are well-positioned to respond to new credit demand in our markets based on anticipated economic improvement in 2021. With that, I'll ask Jamie to comment in further detail on our fourth quarter financials. Jamie.
spk05: Thanks, Sean. As you noted earlier, our fourth quarter earnings were 30 cents per share, and we're in 28 cents 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 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. On December 2nd, we announced an agreement to sell our Mid-Atlantic branches And so we transferred $617 million of deposits and $301 million of loans to held for sale. Adjusting for this branch sale, our loans declined by approximately 600 million or 7%. We invested some of these funds into an additional $236 million in investment securities. We also paid down wholesale funding and the average balance of earning assets therefore decreased by approximately 200 million or 2%. Looking forward, we're targeting commercial loan growth, XPPP, at a mid-single-digit pace in 2021. We also plan to grow the mortgage portfolio due to higher originations, slower prepays, and purchases from in-foot, sorry, excuse me, in-footprint correspondent banks. We expect this growth to generally offset continued runoff of indirect auto and certain commercial business we are working down, such as aircraft and some COVID-sensitive types of borrowers. So the portfolio is generally expected to be stable or up slightly before the impact of PPP loans. We expect most of the $633 million in PPP loans that remain on our books to be forgiven in the first half of the year, and therefore total loans are expected to be down for the year due to these payoffs. As Sean noted, we've engaged a third party to expedite new PPP loans, and so these won't show up on our balance sheet. We're hoping to see up to 50% of the volume that we handled on the first round and expect to receive some fee income as well as the related deposits. We expect total earning assets to also reflect the PPP runoff as well as the sale of the Mid-Atlantic loan balances as part of the branch sale. Additionally, investment securities may come down as we allow higher costing wholesale funds to run off without replacement. On the liability side, for the fourth quarter, adjusting for the branch sale, Along with payroll deposits and broker balances, all other total deposits increased 1% for the quarter. Wholesale funds decreased to approximately $1.2 billion at year-end, compared to $1.5 billion at the end of the third quarter and $2 billion at the start of the year. Looking forward, we expect to see organic deposit growth in the low single digits in 2021, while we expect to further pay down broker deposits and borrowings, with total wholesale funds decreasing to a billion or less by year end. Turning back to the income statement, net interest income was down a couple percent in the fourth quarter due to the decrease in average earning assets with no change in the margin. We moved down the cost of deposits to support the margin, including reducing broker deposits, pricing down maturing time accounts, and reclassifying the higher cost mid-Atlantic deposits as held for sale. Loan interest income was negatively impacted by the increase in non-accruing loans and benefited from revenue recognition from PPP loan forgiveness. Looking forward, we expect to continue to see further margin benefit as we focus on deposits repricing down more than assets. We expect asset yields to benefit from the change in mix toward more core lending. The income benefit from this is likely to be more than offset by the impact of lower earning assets. Separately, we expect that the net interest income benefit from additional PPP loan forgiveness will be mostly recognized in the first half of the year. The balance of unamortized deferred PPP fees stood at $13 million at year-end 2020. Moving to fee income, we had good results in the fourth quarter across most categories, except for mortgage banking, which is normally seasonally lower. We continue to target $19 to $20 million in quarterly fee income in the new year. Moving to provision expense, we recorded $10 million in the fourth quarter. The increase from the prior quarter primarily reflected the impact of higher non-accruals on the qualitative component of our model. Future provision expense will depend significantly on the severity of the pandemic and its impact in our markets. Turning to expenses, total gap expense decreased primarily due to the non-core costs related to the CEO separation recorded in the third quarter. Core non-interest expense increased by $4 million, primarily due to the loan servicing-related project I mentioned earlier, along with the impact of problem loan-related costs. Looking forward, we're targeting to manage core non-interest expense down below $70 million per quarter in the second half of the year after our branch initiatives are completed. The benefit from our branch initiatives is expected to initially be partially offset by loan-related expense. Regarding taxes, we had a tax benefit for the year, primarily due to the higher provision expense. In 2021, we expect to have a core tax rate in the area of 15%. As we've previously noted, we expect to record a net gain on the sale of the Mid-Atlantic operations and charges related to the planned consolidation of 16 branches. We expect to report these as non-core items during the first half of the year. Based on the asset decline from PPP loans, we expect to be operating with lower assets in 2021, while we also target earnings that will continue to build capital. Our financial focus is on improving our return on equity, and we're hopeful that conditions will be supportive of that objective as we move through 2021. Before I close, I'd like to share that I've previously had the opportunity to work alongside our new CEO, and I'm looking forward to doing so again in Nitin's new role as the leader of our team here at Berkshire. With that, I'll turn the call back over to Sean.
spk07: Thanks, Jamie. Our guidance demonstrates that we're leaning in to our operating plan by tightening our focus and building our core business in 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 concierge 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 borrower 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 BFIRST 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 in advancing social values. Together with our dedication to earning the cost of our capital, we believe this positions our stock attractively as a preferred investment vehicle. I'll close by thanking the entire organization for its support during these past three months. We 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 a 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've created. With that, I'll ask the operator to open the lines up for questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
spk08: Hey, guys. Good morning.
spk05: Hey, Mark.
spk08: Good morning, Mark. 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'm curious at what point you'd be comfortable restarting stock repurchases.
spk05: Yeah, 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 Nitin about this, and so I'm sure he's going to have opinions about you know, the ability and, you know, our ability to invest in either growth, you know, or capital actions like this. So, you know, likely more thoughts about that, you know, on the next call.
spk08: 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're maybe concentrated in any particular part of your footprint? Thank you.
spk07: Georgia, if you don't mind providing a little color there, I think that'd be, that'd be great.
spk04: Sure. Absolutely. Hi Mark. Um, approximately about 146 million of the 199 is in the hospitality book. Um, the remaining, you know, 14 million is, um, I'm sorry, the remaining is just spread out amongst, you know, um, some re there's a little bit of retail in there. It's just smaller, just other credits. Okay.
spk08: I'm sorry. I apologize. I didn't hear that.
spk04: I'm sorry. The bulk of it, like I said, 146 million of it is hospitality. The rest is spread out amongst, you know, various other sectors.
spk08: And is it geographically concentrated in any particular area?
spk04: No. 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 concentrations, but we can definitely follow up with that.
spk08: Thank you.
spk01: The next question comes from Laurie Hunsicker with CompassPoint. Please go ahead.
spk03: Yeah, hi, good morning. Just hoping that we can stay on credit here and just want some of these details. And I appreciate how you've 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 criticized is, what the non-accruals are, what the charge-offs are. And then maybe when you're... Yeah, go ahead.
spk04: Yeah, Lori, I've got some of that information available. The balances for retail are $864 million. And I'm not sure if you asked for the deferral amount on retail. That's about $6.5 million of that portfolio is currently in deferral. The rest is all resumed active payment And I'm sorry, you also, I don't have the breakout of how much of that portfolio is criticized, but I can get that to you.
spk03: Okay. And then, yeah, and I was wondering how much of that is also on non-accrual?
spk04: The non-accrual piece, again, I don't have an exact number, but I can definitely follow up with you. Yeah, I don't have the exact number for you on the non-accrual piece. Okay, great.
spk03: And I think there was maybe some confusion. If you could just give us a little bit of color around the retail book. 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 centers that are anchored by grocery?
spk04: 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 centers 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, you know, yeah, pretty much most of it is anchored by either grocery or a big box tenant. Okay. Yeah, just to be clear, Lori, we have no, like, indoor-type mall exposure here. That's just not something we've ever focused on. All of our retail exposure is to those outdoor-type malls.
spk03: Okay, that's really helpful. And then just one more question on that. Do you have anything that you would consider anchored by movie theaters?
spk04: 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.
spk03: 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 deferred, what's the criticized, what's the non-approval there?
spk04: Leisure is 112. Oh, I'm sorry, Sean.
spk03: No, go ahead, Georgia.
spk07: Okay. Give the details and I can provide a little color.
spk04: All right. Yeah. Leisure is $112 million of exposure and $14 million of that exposure is currently in deferral.
spk03: Okay. And then do you have the criticized amount and the non-accrual amount for that? Or I can circle back with you if you don't have that.
spk04: Yeah. Why don't I get back to you on that? I just want to make sure I give you the correct number.
spk03: Okay, great. And then, and I'm sorry, Sean, I cut you off. Did you have comments?
spk07: Just the leisure excluding Firestone, as we look at that portfolio, you know, very strong credits, very good collateral coverage, you know, incredibly strong guarantors, a composition of golf course marinas, of strong relationship borrowers to the bank. So, you know, 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.
spk03: Okay. That's really helpful. Okay. And then Firestone. Jamie, can you help us think about, you know, of the provision this quarter, $10 million, how much of that was Firestone related or just You know, any other color? And the details you provided on Firestone were super helpful in the draft.
spk05: Yeah, sure, Lori. I mean, you know, 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, you know, not necessarily any more than, you know, than anything else that we were doing. So some piece of that was, you know, I think in general, you look at the amount of criticized loans in Firestone. So, you know, 83 million. So, you know, we have, you know, a third or so of that, but we're only five of it's on non-accrual at the moment. So, you know, I think that, you know, we think about that portfolio as certainly being, you know, of elevated risk in the same way that we look at our hospitality and restaurant's But at the moment, we're 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.
spk03: Okay. And do you have the – what were the charge-offs for the corridor in Firestone?
spk04: Yeah, Lori, that's the million and a half.
spk03: Million and a half. 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 states on that exposure? I don't think we've had an update on that in six years.
spk07: Laurie, you know, Sean, I can take this. I can give general in 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 geography, it's predominantly the south, the northeast, and the west coast. maybe, Georgia, is there more color you can provide?
spk04: You know, just roughly, I think last quarter, Laura, you had asked how much of it was in our footprint. You know, our footprint probably makes up 20% to 25% of the Firestone exposure. The rest is spread out amongst, you know, many, many states, like Sean said, none larger than 11%. Okay.
spk03: Okay. That's helpful. And I guess just with respect to The branch consolidation and thinking, sorry, this is shifting gears. The branch 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 also are going to have some technology spends?
spk05: Yeah, so I think that, you know, we talked about in my remarks about a sub-$70 million expense run rate, you know, by Q4. And I think we're in a pretty good range there. I think, you know, somewhere 65 to 70, you know, back half of the year and on a go forward, I think is where we're targeting at the moment.
spk03: Great. Thank you. I'll leave it there.
spk07: Thank you.
spk01: concludes our question and answer session. I would like to turn the conference back over to Sean Gray for any closing remarks.
spk07: 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.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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