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spk03: Hello and welcome to the Berkshire Hills Bancorp Q3 earnings release conference call. My name is Emma and I'll be the operator for today's call. If you'd like to ask a question, you can do so at the end of the presentation by pressing star followed by one on your telephone keypad. It's now my pleasure to hand over to Kevin Conning, investor relations officer. Please go ahead, Kevin.
spk00: Thank you, Emma. Good morning and thank you for joining Berkshire Bank's third quarter earnings call. My name is Kevin Kahn, investor relations and corporate development officer. Our news release is available in the investor relations section of our website, berkshirebank.com, and will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our website at ir.berkshirebank.com, and we will refer to this in our remarks. Our remarks will include forward-looking statements, and actual results could differ materially from those statements. For details, 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 in 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. On the call today, we have Nitin Mahatre, President and Chief Executive Officer of Berkshire Hills Bancorp, Shubhadeep Basu, our Chief Financial Officer, Sean Gray, our Chief Operating Officer, and Greg Lindenmuth, our Chief Risk Officer. At this time, I'll turn the call over to our CEO, Nitin Mahatre.
spk06: Thank you, Kevin. Good morning, everyone, and welcome once again to Berkshire's third quarter earnings call. I'll begin my comments on slide three, where you can see the highlights of the quarter. It was another solid quarter with progress across four components highlighted here, including financials, asset quality, capital, and strategy. In terms of financial results, we posted GAAP EPS of $1.31 in the quarter, an increase of $0.89 and $0.88 year over year and quarter over quarter, including one-time gains through strategic exit from insurance business and mid-Atlantic markets. Adjusted EPS was 53 cents, up 9 cents quarter over quarter and unchanged from a year ago. To provide more color on the financial results and specifically about the balance sheet, I'd say that we're making tangible progress towards our high performance goals overall. We're still in the getting better before getting bigger phase for the balance sheet. This is consistent with what we'd highlighted during our best program launch call on May 18th this year. Our deposits balance sheet is getting better in terms of its mix and corresponding cost of funds. Our loan balances are declining, including runoff of non-strategic portfolios, but we're also seeing a reduction in the rate of decline in loan balances and should start seeing growth in those balances in the first half of 2022 as we reactivate the organic growth muscle through growth and productivity from existing bankers, addition of top-notch bankers, and adding new partners to grow low-nourish nations. Expenses were essentially flat on both quarter-over-quarter and year-over-year basis. Subhadip will share more details on this in a few minutes, and I would reiterate that we are committed 100% to self-funding our best strategy. We will generate expense saves while reinvesting most of those saves to grow revenues and bottom line in coming years. Adjusted return on tangible common equity, or ROTC, for the quarter was 9.5%, and adjusted return on assets was 0.86%. Both of these metrics trending in the right direction, consistent with our best program three-year targets. Switching to asset quality, as you will see from the charts in the deck and the appendix, our credit trends continue to improve rapidly across the board, as our risk management actions over the past year or more have paid dividends. Delinquency rates are around pre pandemic levels of 0.87% down 11 basis points year over year and five basis points quarter over quarter. COVID loan modifications were down 85% year over year to 65 million or less than 1% of loans portfolio. You may recall that our COVID deferrals had peaked in Q2 of 2020 at 1.6 billion. when our bankers ran towards our customers at the start of the pandemic versus running away from them to give those borrowers the best chance to survive through the crisis. Deferrals are now down by 96% from that peak, and we've been able to help many of our customers weather the storm effectively. Kudos to our lenders, portfolio managers, credit, and workout teams for their customer focus and corresponding asset quality improvement. Non-performing loans were down 22% and net charges were down 66% year-over-year and 55% quarter-over-quarter. Marked improvement in asset quality supported provision benefit of $4 million in the quarter. On capital, we returned over $54 million to our shareholders in the second quarter through share buybacks and dividends, representing about 210% of our adjusted net income in the quarter. Our capital ratios remain quite strong relative to peers with CET1 at 15.3% at quarter end and increase of about 1% over previous quarter. Our balance sheet trend gives us more than ample capital to both opportunistically repurchase stock to improve shareholder value over the near term and to achieve expected loan growth targets in our best plan over the medium to long term. On strategy front, We made great progress this past quarter on our best strategic plan. We streamlined our business model by selling non-coal operations, including the sale of our insurance subsidiary and mid-Atlantic franchise. We announced our Berkshire community comeback initiative that highlights how our lending investments and philanthropic initiatives in the community will help our customers across the footprint and specifically in the low to moderate income neighborhoods. This is consistent with our best plan as well as our vision to become the leading socially responsible community bank in New England and beyond. As mentioned earlier, part of our growth strategy includes partnerships. These partnerships include like-minded fintech partners that are delivering exceptional customer experience. We just announced a strategic partnership with Upstart. Upstart is a lending, leading artificial intelligence or AI lending platform designed to improve access to credit digitally while reducing the risk and cost of lending. Upstart will help us generate consumer loans in the footprint within our credit risk parameters. We continue to build our firm with key hires, which I'll describe in more detail later. It's a great environment to hire bankers in our footprint as there is significant consolidation going on. Our board of directors continues its refresh. We added Jeff Kipp as a new director, and Dave Brunel was named as the chair of the board in the third quarter. Jeff's bio is attached in the appendix section. Our heartfelt gratitude goes out to Bill Dunleavy, who retired after 10 years of service on our board, including the last two years as the chair, during which time Berkshire made meaningful changes in board governance, executive leadership, risk management, and strategy. Thank you, Bill. We appreciate your steady and prudent guidance during a challenging time. With that, I'll turn the call over to Shivadeep to discuss our financials in more detail. Shivadeep.
spk04: Thank you, Nitin. A very good morning to everyone. I hope everybody's gotten over the bad overtime loss that Celtic suffered yesterday. With that, let me get into the earnings in a little bit more detail. If you could please turn to slide four, it captures our income statement. I would like to point out that our third quarter GAAP numbers include $52 million in pre-tax gains from the sale of Berkshire Insurance Group and Mid-Atlantic businesses and net $1.4 million in restructuring charges associated with FHLB prepayments, real estate, and severance. Please see the appendix for reconciliation of GAAP and adjusted financials. My comments will be on an adjusted basis and not GAAP. We've also included non-GAAP views excluding insurance and Mid-Atlantic businesses to help with your analysis. Revenues were down 5% with quarter-over-quarter and year-over-year driven by a decline in net interest income. Excluding the sale of the insurance business quarter-over-quarter, adjusted revenues and expenses were down 4% and 1% respectively. Net interest income decline was driven primarily by runoff of PPP and non-strategic portfolios, sale of mid-Atlantic businesses, and lower loan balances. Expenses were essentially flat sequentially and year over year. I'll touch on expenses in more detail in a few minutes. We had a provision benefit of $4 million this quarter as the credit quality of loan portfolios continued to improve significantly. including net charge-offs of about $2 million, the ACL decreased by $6 million. Our return on tangible common equity was 9.5%, up 145 basis points versus the second quarter, and our return on assets was 0.86%, up 15 basis points from the second quarter. The core effective tax rate was at 12% for third quarter of 21, down from 24% in third quarter of 20. The lower tax rate was driven primarily by recognition of historic tax credits funded in the third quarter of 21. Overall, our net income was down 3% year over year, but was up 16% quarter over quarter. Net interest margin was down six basis points from 262 basis points to 256 basis points, primarily driven by a lower PPP income, purchased accounting accretion, partially offset by a reduction in wholesale funding. Turning to slide five, let me address changes in our loan portfolios and earning assets. Our total average loan portfolio was down year over year, primarily driven by runoff of PPP and non-strategic portfolios like indirect auto and aircraft, sale of mid-Atlantic businesses, and lower loan balances for consumer and commercial portfolios. Excluding those portfolios, our loans were down 2% sequentially and down 14% year-over-year. The bottom table shows average loans excluding PPP, mid-Atlantic, and non-strategic runoff portfolios. The mid-Atlantic loans will be off the balance sheet as of end of third quarter of 21, and we expect the indirect auto and aircraft portfolio to decline by 50% by the end of 2022. The commercial real estate portfolio, which accounts for 51% of the total loan portfolio, has been stable at approximately $3.6 billion over the last three quarters. We expect the balance sheet to begin ramping up in the first half of 2022. The investments portfolio is up 54% year over year. We're actively pursuing strategies to deploy cash into high-yielding securities to drive earnings growth while retaining asset sensitivity and credit quality. We will share more details in subsequent quarters, starting with the fourth quarter of 2021. If you could turn to slide six. Slide six shows our average liabilities. Our funding mix continues to meaningfully improve as lower cost of funding replaces higher cost funding. Noninterest bearing deposits are up 13% year over year, and as of third quarter 21, accounts for 29% of total deposits, which is up from 24% in third quarter of 2020. Year over year, our cost of funds have dropped 42 basis points from 73 basis points to 31 basis points. Also, year over year, our cost of deposits have dropped significantly, down 39 basis points from 61 basis points to 22 basis points. If you could turn to slide seven. Slide seven provides more detail on the unique improvement in our funding profile and future opportunities to further lower our cost of funds. Year over year, our retail CDs have declined by about $600 million or 28% with costs going down by 81 basis points from 154 basis points to 73 basis points. Furthermore, $1.2 billion of our high-cost retail CDs will reprice over the next six quarters and continue to lower overall deposit costs. We have also significantly lowered our reliance on wholesale funding. Year over year, brokered CDs are down 61%, and higher-cost FHLB borrowings are down 67%. As part of our strategy to lower funding costs, We have prepaid $94 million of FHLB borrowings in third quarter of 21 and reduced FHLB borrowings to about $14 million at the end of third quarter. We expect our brokered CD borrowings to decline by over 75% by the end of second quarter of 2022. Our borrowings also include $97 million of expensive subordinated debt with a coupon of 6.875%. We plan to redeem it no later than third quarter of 2022. Overall, we believe that we are uniquely positioned to meaningfully lower the cost of funding and drive profitability as we grow our balance sheet over the course of the best plan. Slide eight. Turning to slide eight, we show our fee revenues. I would like to note that our fee revenues for third quarter 2021 include only two months of insurance fee revenues due to the timing of sale of the insurance business in third quarter of 21. Excluding insurance, our fee revenues were up 11% year over year and 1% quarter over quarter. We are encouraged that fee revenues are up 4% year over year as the economy is recovering of pandemic lows. Deposit related fees were up 8% year over year and 2% quarter over quarter as consumer activity increased. Loan fees and revenue were up 66% year over year and 11% quarter over quarter driven primarily by higher gain on sale from strong SBA lending and higher swap fees. The SBA lending business continued to exhibit strong performance and achieved historically high revenues in the third quarter of 2021. Wealth management fees were up 15% year over year and 5% quarter over quarter, driven by market impact, new products, and new relationships. Other non-interest revenue declined due to $1.6 million in higher amortization expenses related to new tax credit investment project initiated in third quarter of 21. However, This was more than offset by the 2.2 million increase in investment tax credit benefits that lowered the effective tax rate for third quarter of 21. Moving on to slide nine. On slide nine, we show our expenses. We continue to maintain expense discipline while we execute on our best strategy to self-fund. That is, reinvesting meaningful expenses to drive growth while maintaining overall expenses at or near current levels. Adjusted expenses were essentially flat quarter-over-quarter and year-over-year. Increases in compensation expenses year-over-year were offset by declines in occupancy and equipment and other expenses. We are already benefiting from the expense saves from the branch consolidation that was done earlier in the year. Starting with fourth quarter of 21, we will also benefit from the expense reductions from the sale of insurance, business, and mid-Atlantic businesses. On other focus areas like procurement and real estate, we continue to make good progress driven by our newly formed procurement organization. Moving on to the next slide, it provides a summary of our asset quality metrics. Strong improvements in credit quality across the board for third quarter of 21, and importantly, significant improvements for three quarters in a row. COVID loan deferrals are down 85% year over year and 34% quarter over quarter to 65 million or 0.95% of loans. Net charge-offs are down 55% versus second quarter to $2.1 million. Allowance for credit losses to loans, ex-PPP, essentially remain flat, driven by lower reserves, but compensated for by lower loan balances. Our COVID-impacted portfolios, including hospitality, restaurants, Firestone, and nursing-assisted living, continue to significantly improve with year over year deferrals declining between 60 to 100%. We have moved more detailed credit data for COVID sensitive segments to the appendix and happy to discuss in more detail. Moving on to the next slide, slide 11 on capital and liquidity. Slide 11 shows detail on our capital and liquidity positions. Our capital levels remain uniquely strong Our common equity tier one capital ratio ended the third quarter at an estimated 15.3%. As Nitin mentioned, we returned $54.1 million of capital to shareholders this quarter via stock repurchases and dividends. We also completed our last approved stock repo program for 2.5 million shares. We continue to stay focused on deploying capital to support balance sheet growth and returning capital to shareholders through opportunistic share buybacks and dividends. We can assure you that capital return is a key part of our three-year best strategy. So in summary, we had growth in fee income, decline in net interest income principally driven by PPP and non-strategic loan portfolio attrition, We had flat expenses, meaningful improvements in credit quality resulting in provision expense benefit of $4 million, significant improvements in funding costs, and very strong levels of capital and liquidity to support growth and capital return as outlined in the best plan. We also divested our insurance business and sold the Mid-Atlantic businesses, both of which were not part of our core growth strategy. And we executed on a share repurchase program of buying back 2.5 million shares. We also grew our tangible book value per share from 23.58 or 6% versus third quarter of 2020. I would like to close with comments on our outlook for the fourth quarter. We'll be providing 2022 guidance in January 2022. We are upbeat about the economic forecasts and are encouraged by loan growth that the industry has started to experience. We expect our loan portfolio to decline modestly. We expect our NIM to be stable for the fourth quarter of 2021. We expect our NII, or net interest income, to be down due to the impact of PPP, the sale of our mid-Atlantic assets. We expect our funding costs to further decline in the fourth quarter. We continue to be asset sensitive and expect to benefit from rising interest rates. Adjusted for insurance, we expect fee revenues to be flat to modestly lower for fourth quarter of 2021. We expect a meaningfully improved credit environment over time, and we expect to get to day one CECL reserves to loans on the existing portfolio between second quarter of 2022 and third quarter of 2022. I'd caution that our credits can be lumpy, so we don't expect a straight line on provision expense or charge offs. We expect expenses for the best rest of the year to be stable at about $68 million run rate. Tax rate, for the fourth quarter is expected to be in the mid-teens and end at 18% to 20% for full year 2021. With that, I'll turn it back to Nitin for further comments. Nitin?
spk06: Thanks, Shubhadeep. On slide 12, we have our best North Star chart, which shows five key performance metrics for our best strategic plan. We are encouraged by our progress across financial, ESG, and NPS fronts. We recognize that the progress won't be linear every quarter or every metric, but we're confident that Directionally will be making forward progress towards our North Star objectives outlined, and we're committed to sharing the progress on an ongoing basis. Slide 13 is a one-page summary of Berkshire Community Comeback Initiative announced last month. Over three years of BEST program, we plan to lend and invest over $5 billion into our local communities which includes specific ESG targets for low carbon financing projects and lending in low and moderate income neighborhoods in our footprint. As we invest in our communities, we will prove that a bank with a purpose can also deliver strong financial performance. Turning to slide 14. Over the last few months, we have experienced renewed investor interest in our stock, and based on the discussions with them, here's how we believe our story is being perceived from outside in. Berkshire is being looked at as a unique comeback story. The key tenets of the comeback story are strong capital position that will enable loan growth and capital deployment to shareholders, combination of digitization, productivity growth, and partnerships that will drive growth in originations as we reignite our organic originations engine. Outsize cost of funds reduction in coming quarters. As we indicated on this call, our cost of funds have reduced significantly faster than our peers, and we believe that this momentum will continue over coming quarters. BEST is a self-help plan. That is, there is no rate-hike benefit in the BEST plan core targets. We have unique ESG performance matrix and focus which is consistent with 175 years of purpose-driven orientation of Berkshire Bank and our bankers. We have renewed focus on customer experience and NPS, which is aligned with financial performance objectives. And last but not the least, we have a unique opportunity to hire talented, values-guided, community-dedicated bankers in our footprint from banks impacted by M&A, MOE, and other such activities. Since our last earnings call, we've hired many frontline bankers, including senior bankers and leaders. For example, we hired Lucy Bellamia from Bank of America to run our retail banking business. We hired Ellen Steinfeld from TIAA to reinvigorate our consumer and home lending business. We hired Jeff Klaus, an experienced commercial banker, to build our loan book in the middle market in Connecticut. We also added Steve Crowley and Karen Heston to our wealth management team, and Marissa Ames and Lynn Singletary to our SBA lending team at 44 Business Capital. It'll take some time for the new hires to build Originations momentum, but we expect loan balances to stabilize and start growing in the first half of 2022. In summary, a solid quarter across many fronts, improved financial results, growing checking and deposit balances, and stabilizing loan balances, moderate fee income momentum, good expense control, and improving credit. With that, I'll turn it over to the operator for questions. Emma?
spk05: Emma, can you open the line for the questions, please? Emma, it looks like we have some questions in the queue. Could you open the line for questions?
spk02: Thank you. Ladies and gentlemen, if you have a question, please press star followed by one on your telephone keypad. Our first question comes from Mark Fitzgibbon of Piper Sandler. Mark, please go ahead. Your line is open.
spk08: Hey, guys. Good morning and nice quarter. Morning, Mark. Thanks. First question, just to be clear, Nitin, I know you said that growth should resume in early 2022, but should we expect much more in the way of balance sheet shrinkage in 4Q?
spk06: I think in the guidance, Shubhadeep did indicate that we'll have a modest decline, but the rate of decline is declining, as I mentioned in my comments, Mark. So it will be relatively flat to modestly down in the fourth quarter, and we begin to start seeing growth in the first half. So I think we're consistent there.
spk08: Okay, great. And then secondly, cash balances have built up quite a bit at Berkshire as well as most banks. I guess with sort of 18% of the balance sheet in cash, I'm curious what you think the right level of liquidity for your balance sheet at this point in time would be and maybe how long it takes to get there.
spk04: Hey, Mark. This is Shubhadeep. Good to hear from you. So as I mentioned in my prepared remarks, You know, we are looking at different deployment strategies for that cash, including obviously moving it to sort of high-yielding securities. You know, and that's part of our overall best strategy as well, coming to an optimal level. I think you've got to remember that, you know, sort of the liquidity used for multiple purposes, you know, as we grow our balance sheet, we need to fund that balance sheet as well. So over time, you know, we will come to an sort of optimal level, and we'll share more details around what that would be. and with more details in January of 2022. But overall, you're going to see a reduction in that cash balance going forward starting in fourth quarter.
spk08: Okay, great. And then also, I wondered if you could share with us the size of the loan pipeline, what the mix of that looks like, and maybe your commercial line utilization rates, please.
spk06: yeah mark broadly speaking the pipeline has grown as compared to the uh end of second quarter as well as end of third quarter uh roughly about 300 million dollars in commercial line utilization about 47 percent thank you thank you our next question today comes from david bishop
spk03: from Seaport Research Partners. Please go ahead, David. Your line is now open.
spk09: Yeah, thank you. Good morning, gentlemen. Good morning, Dave. Curious about how we should think about return of capital as we enter into 2022. Obviously, the gain from the Mid-Atlantic branch system and the insurance subsidiary obviously bolstered. overall capital levels along with balance sheet attrition. Just curious, is there sort of a targeted level if you're thinking about between buybacks, the combination of buybacks and dividends paid into 2022 to 2023? Hi, Dave. This is Shubhadeep.
spk04: No, great question. I think that's one of the topics that, you know, there are a lot of discussions that we continue to have within management as well as with the board. We are very, very focused, as both Nitin and I mentioned, on deploying the capital. Our deployment strategy is obviously threefold, help support the growth of the balance sheet over the course of the next two years, take our dividend yield where it should be and obviously increasing it from where we are, as well as returning capital to shareholders via buyback.
spk09: a lot of discussions happening and you know expect to provide more information relatively soon in terms of what are the strategies for capital return got it and then uh you guys have been pretty active uh obviously in terms of uh adding uh lending talent here over the uh over the past uh several uh weeks and months here um just curious maybe you know when when these uh when this talent achieves critical mass, what sort of a growth rate or volume of loans you think they can bring on balance sheet into 2022? I don't know if you have that from a dollar perspective or a growth perspective, just how we should think about the growth opportunity of these new ads.
spk06: Yeah, no, great question, Dave. I think broadly speaking, what we have embedded within the best plan, and you'll hear more details about it at the next quarter, when we break it by year, as opposed to doing mid-year, What we have baked into the plan is about 40 to 50% growth in our frontline bankers. And that requires us to be hiding at a certain clip. And we are at that trend rate right now. And the hires that we made in the second and third quarter, uh, we'll start building their pipeline in this quarter and the next quarter. So we start really seeing the originations, uh, kick in from the second quarter. And that's when we also expect around that time, the balance sheet to grow. Just broadly speaking, the overall growth in the frontline bankers that we have in the plan, that itself should be giving us about half a billion to a billion dollars of incremental originations, to your question.
spk09: I appreciate the color. Then one final question before I hop back into the queue. Remind us, I think you noted, Subhadeep, Do you expect the allowance to trend out of the day one CECL reserves? Just remind us what that number is.
spk04: Yeah, so I think around 100 basis points on our existing portfolio, day one CECL reserves.
spk05: 100 basis points. Got it. Thank you.
spk03: Thank you. Our next question today comes from Stephen Duong from RBC Capital Markets. Please go ahead. Your line is now open.
spk01: Hi. Good morning, guys.
spk06: Morning, Steve.
spk01: Just the first question. Morning. First question just on your rate sensitivity. You mentioned that you're asset sensitive. I guess, Shubhadeep, can you speak to just, you know, how much sensitivity from a 50 basis points or 100 basis points you can expect on your NII, and also just what the assumptions are going into that in terms of deposit data?
spk04: So, hi, Steve. Good to hear from you. So, as you said, I mean, obviously looking at our balance sheet and our cash positions, you know, we are asset sensitive. In terms of added data for, you know, sensitivity and where we stand to benefit from 100 basis points or 200 basis points lift, we'll add more color and details in our 10Q.
spk01: Okay, got it. And then just on the partnership with Upstart, I guess, can you guys just maybe give some more color on these loans? Are they kind of buy now, pay later types of loans? How big are they, the credit profile of the customer, and how much exposure you guys are willing to take on it?
spk06: Yeah, happy to give you an overarching view, Steve. And we could get into more details later, but broadly speaking, Upstart is a program and part of our program plan to partner up with like-minded fintech partners that provide easier access to credit for customers in our footprint, where we can build on to a larger relationship. It is an AI-based decisioning model with about 1,500 factors that help maximize the opportunity for customers to get access to that credit at the best available price. uh it is uh we're going to stay in the prime uh space uh you know fico is about well about 625 uh in terms of the originations we expect that one partnership alone to be about 100 million dollars of personal loan originations a year but we would have more partners over time okay perfect um thank you for that um uh and then just on your um
spk01: Your SBA revenues, have you guys disclosed, you know, how much in SBA revenues you have this quarter and what was it last quarter?
spk04: Hi, Steve. No, I don't think we separately disclosed SBA revenues. It's included in one of our few revenue lines.
spk01: Okay. And then just last one for me. Your ACL is 166 XPPP. And so if we're assuming loss rates continue on at, I don't know, 20 basis points, somewhere around there, and you're looking to get a day one CECL of around 100, 101.1, If you triangulate that, that would seem to mean that you have a lot of reserves to get off in the next three quarters or so. Is that fair to say?
spk05: Sorry.
spk04: Sorry, I was. Hi. So, you know, I think in terms of where we get to our ACL reserves, you know, that's based on sort of our evaluation of the portfolio and what we're looking at from a net charge of perspective. And, you know, as and when sort of as our models determine based on our policy and guidelines and our forecast for net charge of rates, you know, we make the determination to release reserves as you did this quarter. I think it's fair to say that given the charge of trend that we are looking at, you know, and if this continues, likely to be more reserves in the coming quarter, releases in the coming quarters.
spk06: Hey, Steve, to your question, just to add to what Shubhadeep just said, that 100 to 110 basis points that you outlined, that's on the existing portfolio. We're also adding new portfolios along the way, and we would have to take, you know, incremental cover for that as well. So we will get to that, you know, day one CISO for the existing portfolio by around that third quarter timeline. That should be the outline.
spk04: Hey, sorry, can I speak?
spk01: Yeah, yeah. It just seems like... Yeah, I'm sorry. Go ahead.
spk04: No, Steve, I was just saying one quick correction on our... On the comment around the SBA lending revenues, I think we don't have it expressed in our tables, but I think on our overall press release, you'll find that the disclosure on SBA lending revenue of $5 million.
spk01: Oh, great. So that's $5 million this quarter, is that right?
spk04: Correct.
spk01: Okay, great. Yeah. And then just, yeah, just on your, your back to the ACL, I guess, you know, you had the negative 4 million this quarter in the PCL and that didn't really, you know, do much on your ACL. So it just seems that this would imply that, you know, eventually by sometime mid late next year, you're really going to have to, you know, have a lot of, you know, a sizable negative PCL. assuming loss rates continue on where they are. And so is that a fair way to think about it?
spk04: I think, you know, Steve, like as we reflected on our comments earlier on, I think as, you know, to the past of the next quarters, depending on sort of our portfolio performance and credit trends, you know, you're going to see, you know, how that turns out in the next two to three quarters. But I think I would like to reiterate, you know, the comment that I made earlier about sort of, you know, the direct correlation of improving credit quality and potential for more reserve releases.
spk01: Great. I appreciate you taking my question. Thank you.
spk06: Thank you, Steve.
spk03: Our next question today comes from Laurie Hunsicker from Compass Point. Please go ahead. Your line is now open.
spk07: Yeah, hey, thanks. Good morning. And Bill Dunlevy, I just want to say I'm wishing you well. But Nitin, Thibodeep, Kevin, and Dave, I'm just wondering, can you circle back a little bit on Upstart and help us think about, you know, just to the earlier questions, can you help us think about how you see that line? In other words, a year from now, it's 100 million. A year from now, it's 200 million. Can you just help us think a little bit about that?
spk06: Yes, it's it's 100 million a year kind of momentum at this point of time, based on the credit parameters that we've outlined for ourselves.
spk07: Okay, and then, is it 100 million and you're going to hold it flat and just see how it performs see how the last rate is going or it's 100 million continuing to grow 100 million or so every year, how do you think about that.
spk06: Yeah, we'll keep watching the performance. The great thing about programs like this, Laurie, is this gives us an ability, one, to partner up with, you know, true cutting-edge AI-based lending platform that also looks at daily repayment of the customers and recalibrates its decisioning model. So there is tremendous amount of, you know, AI-based intelligence that goes behind us that helps us track the portfolio, and we get the benefit of that. And on the other side, It also gives us the ability to make sure that the portfolio is performing as we outlined it to be. And I think to that extent, yes, we'll continue to just keep watching the portfolio as we build it. And then if it performs as we expect it to, we'll continue to operate the program going forward.
spk07: Okay. And I just, I wanted to make sure I heard this right. The FICO, the average FICO is 625.
spk06: No, that's the minimum FICO. I think what you would end up getting by and large, based on some of the experiences that we've heard from other banks, it's about, you know, 700 plus as an average FICO.
spk07: It's 700 plus. Okay. So, I mean, so in other words, I'm just going to use LendingClub here as an extrapolation. We just got off an earnings call where, you know, that's still a whole entire, you know, page of the slide deck that's a focus here. I mean, Lending Club was something that many, many banks got into, realized the loss rate was much more severe, and then subsequently got out of the tranche C, or for that matter, then completely got out of it altogether. I mean, when you think about what you're adding here, I mean, there's a big difference in unsecured consumer if you're 700 plus or 740 plus versus you're going down to 625. Can you help us think a little bit about that piece that's going to be sub 700, what you're going to see there? Yes.
spk06: I'll be happy to, Laurie. And we could also cover it offline. But at a high level, there is a big difference in the program where you purchase loans versus you originate loans based on your criteria, your credit box, your max APRs and your max DTI kind of scenario. So essentially, you're creating a originations engine. through partnering up with fintechs like AI who have received real good kudos about how they built that decisioning model. In fact, they have a three-year of kind of a CFPB clean sheet on how their decision model works. So I'm happy to share that in detail, Laurie. This is a different program than purchasing loans that some of the banks have done with likes of LendingClub.
spk07: Okay. what are you modeling in terms of the charge off rate?
spk06: It's a range between four and 5%. Four to 5%.
spk07: Okay. And then what's the coupon?
spk06: On an average, it's going to be about 11 to 12%.
spk07: Okay, great. And then just one last thing, is this a national book or is this?
spk06: No, it's in the portfolio. That's the difference, Lori. This is
spk07: in footprint relationship basis the customer is ours and we build relationship deepening programs around these customers okay okay um great thanks for that color um and then i guess um somebody can you just give us um what the ppp fees were the forgiveness fees um this quarter in into your net interest income hey hi hi laurie good to hear from you yeah and and uh
spk04: good question we anticipated that anyway but you know the the last page of the decks slide 21 outlines the ppp impact so for third quarter of 21 we're on 2.1 million dollars uh from that which is down from second quarter 5.1
spk07: Okay, sorry, I missed that. And also, I probably missed this, too. It's somewhere in your slide deck, and I apologize. It's earnings. But can you just help us think or just give me an update on the accretion that was included in that interest income?
spk04: Yeah, I think it's the accretion was, I would say, 50% over our consumer book. That includes both consumer and mortgages. And the rest, 50%, is over our commercial loan book. And I think, you know... No, no, sorry.
spk07: I mean, temporarily within... Within your net interest income, what was your accretion income? In other words, last quarter it was $2.2 million. And I apologize, it probably is somewhere in your past release, and I just haven't had a chance to find it yet.
spk04: Yeah, and I think it's on our earnings tables as well. So I think the total dollar amount for PAA in an – I'm sorry, I'm in difficult terms. 1.2. Yeah, I think it was 1.7 million.
spk07: Great. Thank you. Apologize that I didn't find that. Okay. So I guess when I'm looking at those two line items, or just even excluding the PPP fees, your core net interest margin was down to 248. And it looks like PPP is basically gone. And so when we think about a forward-looking margin, putting some of these components together. I guess one more question around that. The $94 million in FHLB borrowings that you prepaid, when did that happen in the quarter?
spk04: That happened at the very end of the quarter, Laurie, the last week. So literally, you know, the benefits of that really on a run date basis, we're going to see it in the fourth quarter onwards.
spk07: Great. Okay. That's helpful. Okay. So can you help us sort of forward think a little bit? I mean, I realize you said the margin was stable, but you certainly had, you know, outsized PPP fees that won't be there. So I guess where are you making up for that differential? In other words, when, you know, PPP fees won't be there. And so somewhere, you know, if margin is still trending at this 256, I mean, it seems to me that there's still sort of almost a 10 basis points delta happening there. Can you just drill down a little bit more? Yeah, go ahead.
spk04: Sure, sure. And I think, you know, so if you, first of all, if you think about sort of the, our core name, right, and where we ended up, you know, that was, as you said, rightly pointed out, on the negative side, there was a PPP impact, right? But on the positive side, there were sort of, you know, funding impacts or non-broker deposit mix, you know, that declining. The FHLB borrowing, which we didn't really get the benefit of that, that will be helping us in the fourth quarter. And then secondly, it's, you know, our roll-on, roll-off portfolios and sort of the impact on that from that perspective. So I think, you know, overall, that's probably, you know, what's going to guide sort of the stable name that I offered up in my guidance.
spk07: Okay. Okay. And then just in terms of your non-core portfolios, can you just update us now on the balance of where the indirect auto is and the balance of where the aircraft is?
spk04: Yeah, sure.
spk07: And if you don't have those numbers, I'll call back.
spk04: No, that's fine. It's on the footnoted table as well. So for indirect auto, I'm quoting end of period. We're at about, you know, third quarter 21, we're at about $120 million.
spk00: Okay.
spk04: um, um, in, in, in balances. Um, and then, um, on the aircraft, uh, just, I don't think we, uh, disclose that separately. Uh, we can, um, call you later with that information. Yeah, I would say the low 40s, like mid to low 40s, uh, 40, if I like 45 to $47 million.
spk09: It should be deep. It's probably, I guess it's roughly in the mid thirties and aircraft.
spk07: Okay, that's helpful. And then when do you expect both of those portfolios to be zero?
spk04: So, you know, as part of our, I think in my prepared remarks, we said, you know, end of 2022, we expect that to decline by, you know, over 50%. I think the rest of the, you know, the attrition will happen over the course of 2023. If the normal sort of are forecasted rate of attrition holds and the payment behavior that you're seeing.
spk07: Okay. Okay, that's helpful. And then just more broadly on the restructuring charges, when do we see those go away? When are there no more restructuring charges? Are we at it, you know, as we sit now that we're going to have sort of a clean look in the fourth quarter? How should we think about that?
spk04: So I think, Laurie, like, you know, restructuring charges are based on sort of obviously, you know, circumstances, events, and sort of how, you know, envision sort of planning and managing the business. So, you know, at this point, you know, we have what we have in restructuring charges. If there are future restructuring charges, you know, we'll disclose that as part of our quarterly earnings.
spk07: Okay. But as we sit today looking forward, Fourth quarter and beyond looks largely clean. Shy of you all making another announcement. Am I thinking about that the right way?
spk04: I guess at this point, Laurie, I'm unable to offer a comment on that.
spk07: Okay. Okay. And then I guess just lastly, the gains that you predisclosed, I just didn't see an actual breakdown on the 51.885 million. what's insurance and what's the branch sale gains? If you could just bifurcate those. I mean, I think insurance is around 35, but if you have an exact number, and if you don't, I can follow up with you offline.
spk04: Yeah, so I think overall for the combined impact, I think it was 78 basis points on the impact of the two. And of that, I think insurance is about $37 million pre-tax.
spk07: Okay, you know what? I'll follow up with you offline. I was just looking for exact. Yeah, we're chatting later in a bit. Okay, thank you. I will leave it there. I appreciate you taking my question.
spk05: Thanks, Lori.
spk03: We currently have no further questions, so I'll hand the call back to Mr. Mahatrey to close.
spk06: Thank you, everybody, and thank you for your interest, and have a good day. Be well.
spk03: This concludes today's call. You may now disconnect your lines.
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