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spk01: Good morning or good afternoon all and welcome to the Berkshire Hills Bancorp Q1 earnings release conference call. My name is Adam and I'll be your operator today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star 1 on your telephone keypad. I will now hand you over to Kevin Kahn to begin. So Kevin, please go ahead when you are ready.
spk00: Good morning and thank you for joining Berkshire Bank's first 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, berksherbank.com, and will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our website at ir.berksherbank.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, Shubhit 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 Mahatrey.
spk04: Thank you, Kevin, and good morning, everyone, and welcome once again to Berkshire's first quarter's earning call. I'll begin my remarks on slide three, where you can see the highlights of the first quarter. It was another solid quarter with strong financial performance, continued balance sheet strength, and steady progress on our best strategy. Our earnings per share of 43 cents was up by 4% quarter over quarter and up 37% year over year. Revenues were lower year over year, driven by runoff in the PPP and non-strategic loan portfolios, while our continued expense discipline resulted in expenses flat quarter over quarter and lower by 8% year over year. As we've said before, we will self-fund our best strategy through optimization initiatives while reinvesting those saves in bankers, customer experience, and technology investments that enable our future growth. We are pleased to see that trend come through once again this quarter. Adjusted return on tangible common equity improved to 7.5% from 6% a year ago. Moving to balance sheet updates. As indicated on previous calls, we were expecting to reach an inflection point on the total loan balances growth in the first half of 2022. We are pleased to report a quarter over quarter growth of 3.1 and 6.5% in average and end of period loan balances. This growth was driven by strong loan originations this quarter. I'll provide more details on loan balances shortly. Overall, our balance sheet remains strong. We deployed capital for balance sheet growth and returned $35 million of capital to shareholders. We ended the quarter with an estimated CET1 ratio of 14%. We have ample capital to both fund loan growth and continue stock repurchases. Our share count has dropped by 6% over past year. On the strategy front, We've made good progress and will continue to stay focused on execution of our journey forward. We continue to add talent critical to our best plan. Our board replenishment continues, and we've expanded our partnership with NARMI to further improve our digital experience and net promoter score. Turning to slide four, I wanted to spend a moment sharing more details on our loan growth. After seven quarters, we're starting to see loan balances grow once again, primarily driven by growth in commercial portfolio. Balances growth was driven by new loan originations that were up significantly quarter over quarter and year over year. Our existing bankers and new hires are winning new business across the board, which is reflected in our originations and pipeline growth. It is quite encouraging to see our loan growth growing as we reactivate our organic growth muscle. Finally, I'd like to thank all of our employees for their hard work in the quarter. They're the reason why we're making great progress on our transformation. Their dedication and commitment to Berkshire customers is what is driving our success and our progress towards becoming a high-performing, leading, socially responsible community bank. With that, I'll turn the call over to Shivadeep to discuss our financials in more detail. Shivadeep.
spk03: Thank you, Nitin. Good morning, everyone. Slide five shows our quarterly income statement. Please see the appendix for reconciliation of GAAP and adjusted financials. My comments will be on an adjusted basis and not GAAP. Our revenues were up 1% quarter over quarter and down 11% year over year. Sequentially, we had stable net interest income despite two fewer days in the quarter. Fee revenues were up 5% quarter over quarter, and continued expense discipline resulted in flat expenses quarter over quarter and down 8% year over year. We had a provision benefit of $4 million this quarter driven by improved credit performance. Our after-tax income rose 3% and 30% quarter-over-quarter and year-over-year, respectively. Turning to slide six. Slide six highlights changes in our earning assets. As Nitin mentioned, we are pleased to report over 3% increase in average loans with particular strength in CNI lending, which is up 7% quarter-over-quarter. Growth in CNI lending was driven by asset-based lending. Our CRE and residential mortgage books were each up 2% quarter-over-quarter. It's nice to see loan growth again. Securities are up 12% quarter-over-quarter and up 21% year-over-year. It reflects continued reinvestment of cash. Highlights in the quarter include selective purchases of short-term treasuries to enhance near-term returns and allow for flexibility to invest at higher rates later on in the cycle. While available cash funded strong loan and securities growth in the quarter, ample liquidity remains to opportunistically deploy excess cash as rates rise. Moving on to slide seven. Slide seven shows our average liabilities. Our funding mix continues to be meaningfully improved as lower cost funding replaces higher cost funding. Year over year, our cost of funds has dropped by 25 basis points to 23 basis points. Brokered deposits and wholesale borrowings have dropped to $341 million, down 67% from $1 billion in the first quarter of 2021, and down 82% from $1.9 billion in the first quarter of 2020, a very significant decrease. We also plan to redeem $75 million of subordinated debt with a coupon of 6.85%, no later than third quarter of 2022. Our net interest margin was 2.61%, up a basis point in the first quarter. Adjusted NIM, excluding PPP and Purchase Loan Accretion, or PLA impacts, was 2.58% in the first quarter versus 2.46 a year ago. That is up 12 basis points. It's nice to see the impact of purchase loan accretion diminish to only three basis points versus higher levels in prior quarters. Turning to slide eight, we show our fee revenues. Our fee revenues were up 5% quarter over quarter and down 18% year over year. Sequential growth was primarily driven by higher wealth management fees, swap fees, and lower tax credit impairments. The year-over-year fee decline was driven by the sale of our insurance business, lower SBA gain on sale, and mortgage banking revenues. Lower SBA lending revenue was driven by seasonality and a reduction of SBA guarantees from 90% to 75%. However, the pipeline and outlook for SBA loans and corresponding fees remain strong for the remainder of the year. On slide nine, we show our expenses. Continued expense discipline resulted in flat expenses quarter over quarter and down 8% year over year. We continue to benefit from expense saves from market exits and branch consolidations. We are also assessing our non-branch real estate footprint. Based on post-pandemic work environment, we are targeting to reduce that square footage by a meaningful amount, which is an important self-help lever, as we call it. Overall, our focus on expense management has helped us sell funder investments in frontline bankers and technology. Moving to the next slide, slide 10 is a summary of our asset quality metrics. Strong improvements in credit across the board, continuing the trend over the last several quarters. Delinquencies are down 45% year over year, and our net charge-offs dropped to 15 basis points. Our allowance for credit losses to loans ended the quarter at 1.37% of loans. Next slide, slide 11, shows detail on our capital and liquidity positions. Capital levels remain strong. Our common equity tier on capital ratio ended the first quarter at an estimated 14%. Our top priority by far remains in deploying capital to support organic balance sheet growth. We are also biased to opportunistic stock repurchase given our low stock valuation and have repurchased about $29 million of stock in the first quarter. We also expect to grow our cash dividends over time. Like many banks, we recorded a negative bond mark in other comprehensive income in our equity account which amounts to $75 million. Our bond portfolio is managed within the context of our holistic balance sheet management and ALM strategy. As rates rise, the negative marks to a securities book are immediate, while the significant positive impact of higher asset yields and net interest income accrues over time. The OCI mark also does not impact our REC capital ratios. So in summary, a solid quarter with robust balance sheet growth, strong capital position, ample deposits to fund future growth, and importantly, strong credit performance and expense management. I would like to now close with comments on our outlook for the rest of 2022. The New England economy is strong, labor markets are strong, and consumer demand, which is two-thirds of GDP, is high as we come out of the pandemic. We are confident about achieving the five to seven percent loan growth as announced as part of our best program. The pipeline is robust, and we're seeing solid loan growth momentum. We expect low single-digit deposit growth in 2022. We also expect NIM to trend higher. Recall that our NII guidance in January was for mid-single-digit NII growth of reported NII of $291 million and included four rate increases. Our current guidance includes six rate increases. As a result, we're expecting NII lift of approximately 6% in 2022. On an adjusted basis, excluding PPP and Mid-Atlantic, the NII growth in 2022 is expected to be low double digits. The current market implied rate increase is eight for the rest of the year. The macro environment can change quickly and we've opted to remain conservative at this time. About 60% of our loans are floating rate loans and we have loan growth. We are well positioned for a rising rate environment. We expect expenses for the rest of the year to be stable at about 60 to 70 million quarterly run rate. However, I would like to remind you that expenses can be lumpy quarter to quarter. Our asset quality remains strong and underwriting continues to follow our conservative guidelines. We have had provision benefits for the last three quarters. We expect credit provision expense to start to normalize later in 2022 and hit a loss reserved to loans ratio of 115 to 120 basis points in the second half of 2022. That will be in line with our balance sheet growth and asset mix change. Our tax rate for 2022 should be in the high teens. Finally, we expect to continue to execute our new $140 million stock repurchase program in 2022 and complete the remainder of $111 million in buybacks in 2022. With that, I'll turn it back to Nitin for further comments. Nitin?
spk04: Thanks, Shubhadeep. On slide 12, we have our best programs, North Star Charge. which shows our progress on five key performance metrics of the program. The financial metrics continue to show steady improvement. NPS score remains at 50th percentile, and ESG percentile ranking improved further this quarter to 22nd percentile nationally. We were also ranked amongst the top 10 most trustworthy banks in the nation by Newsweek's America's Most Trustworthy Companies in 2022 report published this month. We are executing on all three pillars of our best program, optimize, digitize, and enhance as planned. We have reignited our organic growth engine and have started to see growth in loan balances. Overall, the program is working as expected with potential upside to balances, revenues, and profitability over long term if the current trend continues. As indicated during the last earnings call, with updating our best program to reflect this positive momentum and the significantly higher rate environment we are in now compared to last year when the program was launched. We also recognize that the geopolitical, macroeconomic, and the rate environment has changed further since our last earnings call and is expected to evolve even more over the next few months. Given that, we will schedule an investor call dedicated to provide details of the updated BEST program after second quarter earnings, which will also be around the time we complete the one-year anniversary of our BEST program launch. Our differentiated technology roadmap is another important element of our BEST transformation program that will set us apart from competitors while maximizing value for all stakeholders. Slide 13 shows the central tenet of our technology roadmap. We believe that it is highly effective and efficient for us to pursue the strategy of optimizing the core versus building a new core or wrap the core system with individual integrations. And that's the journey we're on. Cloud migration, API enablement, data warehousing, CRM system, and integrated digital banking experience are the foundational elements of our technology roadmap, and we've completed implementation of most of these elements over the last year or so. Many of these foundational elements have been established through partnerships with best-in-class partners, some of whom are listed on the slide, with NARMI as the latest partner that will help us deliver exceptional customer experience for digital banking. Slide 14 provides a more detailed view of the scope of the features, functionalities, and the overall ecosystem in which we can now participate as a result of this expanded relationship with NARMI. NARMI is one of the fastest growing software as a service providers with a mission to provide world-class digital banking experience to their bank partners. We began our partnership with them about two years ago with a focus on enabling digital account opening for our consumer segment. We recently expanded our relationship with NARMI to include app management and online banking for consumers and small business segments. This partnership will ultimately further improve our net promoter score and relationship deepening. Slide 15 is a short bio of our new board member, Mihir Desai. Mihir is a professor of finance at Harvard Business School and professor of law at Harvard Law School. He's also an accomplished author and expert in finance and tax policy and serves as a research associate in the National Bureau of Economic Research's public economics and corporate finance programs. We're delighted that he has joined our board. Welcome here. In summary, a solid quarter with continued momentum on our transformational best plan, strong loan growth, disciplined expense management, and improved financial returns. With that, I'll turn it over to the operator for questions. Adam?
spk01: Thank you. As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. When preparing to ask a question, please ensure your handset is fully plugged in and unmuted locally. That's star one on your telephone keypad to ask a question. The first question today comes from Mark Fitzgibbon from Piper Sandler. Mark, please go ahead. Your line is open.
spk07: Thank you. Good morning. Morning, Mark. First, Shubhadeep. Hey, Nitin. Shubhadeep, you had mentioned the pipelines were strong. I wondered if you could help us size those, how large those pipelines are and maybe what the average rate for new loans is.
spk04: Hey, Mark. I'll start there. The pipeline is actually stronger as of now for the second quarter than it was at the end of first quarter, at the fourth quarter. I wouldn't give you the specific number, but I think sufficient for you to know that it is actually higher. The commercial is about the same level, a little bit of increase in the resi and consumer. The overall pipeline is modestly higher than the last quarter. And, hey, Mark, this is Shubhadeep.
spk03: Yeah, and that's exactly where I was going with that, Mark. I think, you know, on the yield side, you know, we are seeing, you know, stabilization on the portfolio this year. This quarter, overall portfolio yields went down, but that was primarily due to some prepayment activity that we saw, and that's likely to reduce in a rising rate environment. So we are, as we have guided also in our last call, we expect to see the yields increase, and obviously we stand to benefit from the rising rates. And also, I would like to point out that 60% of our book are floating rate loans.
spk06: Okay. And then secondly, could you share with us what the AOCL was this quarter?
spk03: Yeah, it was $75 million impact, about a 6% reduction in tangible growth.
spk07: Okay. And you guys have done a really good job of holding the line on operating expenses. I guess I'd be curious, at what point do you think operating expenses will start to rise? Is that a 2023 kind of event?
spk03: So, Mark, great question. So, as we have guided all along, you know, and also our annual guidance, we expect to maintain $60 to $70 million run rate expenses for the remainder of 2022. It could be lumpy, so there could be some fluctuations, but overall that's the run rate we are targeting. And, you know, if we expect an increase in those expenses, we'll be sure to guide in subsequent earnings calls.
spk07: Okay. And then last question I had, in the press release you referenced that you've hired a number of bankers. I guess I'm curious sort of how many, roughly how many senior lenders you have today and how many of those are, say, new in the last year?
spk04: Mark, I wouldn't give you a specific number. What I would say is we continue to hire, especially on the commercial side and a little bit on the We have grown our workforce, and more importantly, the new producers that we're hiring are bringing in new pipeline, and their production levels are higher than what we anticipated them to be early on. Thank you. Thanks, Mark.
spk01: The next question comes from Billy Young at RBC Capital Markets. Billy, your line is open. Please go ahead.
spk05: Hey, good morning, guys. How are you?
spk03: Good morning.
spk05: Morning, Billy. Just a quick question, a couple of quick questions here. Can you speak a little bit to the CD growth you saw this quarter and what the drivers there were?
spk03: Could you repeat that, Billy?
spk02: It just broke up a little bit.
spk05: I'm sorry. Could you speak a little bit to the CDs, the time deposit growth you saw this quarter and what the drivers were?
spk03: Yeah, hi. So in terms of our deposit growth, I think overall for, you know, total deposits, you know, that stayed more or less, like, flat. I mean, on an average basis, it was, you know, 1% up. On the overall, I think on an end-of-period basis, our deposits are up, like, around 6%. And was your question around sort of CDs? Yeah, it looks like...
spk05: look like CD balances are up about, you know, mid 20% quarter over quarter.
spk03: I'm not sure if you look, because if you look at our slide, slide seven of our earnings presentation, Billy, we talk about our liabilities and, you know, it has CDs and time deposits. So it's down 7% quarter over quarter and 20% year over year. Oh, that was, okay.
spk05: That was my mistake, Dan. I apologize for that. Okay. Dan, you know, it was good to see the trends in loan originations this quarter and the commentary about the stronger pipelines. How should we think about kind of the mix between, you know, consumer and commercial originations going forward here? It looked like consumer was stronger than I expected this quarter. And given some of your initiatives and things such as Upstart, how should we think about the mix going forward?
spk04: Billy, hi. Nathan here. Just so you know, I think broadly speaking, for the first quarter, the originations mix was about 60 plus percent was commercial. We expect the commercial to have continued momentum. consumers picking up as well along with Resi. So I think overall the mix would be, you know, 50 plus percent commercial and the rest coming through Resi and consumer.
spk05: Thank you. That's very helpful. And my last question is just what kind of drag was the lower day count this quarter on NII?
spk03: I believe it should be two days.
spk05: We're looking for the day count, right?
spk03: Do you have a dollar amount of the drag? Yeah. We typically don't disclose the dollar amount.
spk05: Do you have a dollar amount of the drag? Okay.
spk03: I believe we typically don't disclose the dollar amount, but I can give you a two-day count. I think, you know, you can probably estimate from, you know, the NI numbers that we have published. It's typically 90 days for the quarter. Thank you very much. 92 days versus 90 days for the quarter.
spk05: Okay. Thank you.
spk03: Thanks.
spk01: As a reminder, if you'd like to ask a question, that's star one on your telephone keypad. The next question comes from Chris O'Connor at KBW. Chris, please go ahead. Your line is open.
spk08: Good morning. I just wanted to follow up on the deposit growth discussion. I know you guys called out a couple of seasonal items regarding payroll in the press release. if you could just remind us exactly what those seasonal dynamics are, and then given the strong growth to start off the year, reconciling that with the low single-digit guide for the full year-end deposits, are we going to see a decline from here, or just how you're thinking about that?
spk03: Hi, Chris. So from a guidance perspective, we're still going to stick with our low single-digit deposit growth that we gave out. In terms of... are the payroll deposits, as you know, and as the business dictates, depending on the dates of the payrolls that are processed, the balances come in and then you see the balances getting drawn down in a matter of three or four days. I think this quarter we experienced higher inflows of payroll deposits than normally we would expect to, and we are being watchful and seeing how that trend plays out.
spk09: Okay, got it.
spk08: And so how does the, you know, there's a sharp decline in money market. I'm assuming the payrolls are going into the now. So I guess what's the seasonality, you know, with the money market in the first quarter versus the fourth quarter, if you could just remind us of that.
spk03: So typically, you know, that, you know, substantial movement you would see between money markets and now. is almost always driven by payroll balances switching between those two accounts. So that's what drives the movement.
spk04: Hey, Chris, just to give you maybe a little bit of a macro color on this. This is Nitin here. On the payroll, which has its component of seasonality, like you said, and depending on the day of the week, there could be a spike at the end of period balances. But what we are seeing is it seems to be the payroll balance itself is growing and workers are, as workers get back into the payroll, it looks like at least our average for the first quarter. And we don't know if that makes a trend yet, but the average for the quarter was also significantly higher than the previous quarters. So that could be a reflection of the, you know, workforce growth and people coming, coming back to work. So if that continues, we should, we should continue to see a better averages than we've seen in the past.
spk08: Understood. Got it. And then maybe you could just talk a little bit, you know, more about, you know, some of the loan growth sources that you talked about in the press release that where you're, you know, developing new sourcing channels on the resident consumer side to support loan growth this year.
spk04: Yes, so it's broad-based, Chris, and on the commercial side, it's improved productivity from the existing bankers, new hires, and specific programs that we've kind of rolled out. So that is certainly getting the momentum on the commercial side. On the consumer side, we have the growth in the frontline bankers on the retail channel. We have corresponding partnerships. And on the unsecured side, we have a partnership that we announced with Upstart. So I think a combination of all of those is going to continue to improve the trajectory and the momentum on both fronts. And as I said earlier, I think commercial will continue to be 50% to 55% of the originations as the pie grows overall.
spk09: Okay, got it.
spk08: And then on the other fees this quarter, you know, those came in a bit strong. Was that swap related? And are you seeing an increase in demand, you know, for swap activity going forward?
spk03: Hi, Chris. This is Shubhadeep. So I would attribute that to primarily three buckets. You know, one is, you know, tax credit impairment, which came in lower, which is a contra item which shows up there. You know, second one is trailer revenues from credit card and other things which typically, you know, show up post-year-end, you know, first quarter. And the third component is swap fees. We do see a healthy pickup in swap fees which we're very encouraged about.
spk09: Got it. Thanks, Shubhadeep.
spk08: That's it for now. I'll hop out. Thank you.
spk04: Thanks, Chris. Thank you, Chris.
spk01: As we have no further questions, I'll hand back to Mr. Mottray for any closing remarks.
spk04: Thank you, Adam, and thank you all for joining us today on our call and for your interest in Berkshire. Have a great day and be well. Adam, you can close the call now.
spk01: This concludes today's call. Thank you very much for your attendance.
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