Berkshire Hills Bancorp, Inc.

This call is being recorded on April 24th, 2025. I would now like to turn the conference over to Kevin Khan, investor relations officer. Please go ahead.

Good morning and thank you for joining Berkshire banks first quarter earnings call. My name is Kevin Khan, investor relations and corporate development officer. Here with me today are Nitin Mahatry, chief executive officer, Sean Gray, chief operating officer, Brett Berbovich, chief financial officer and Greg Lindenmuth, chief risk officer. Our remarks will include forward looking statements and refer to non-GAAP financial measures. Actual results could differ materially from those statements. Please see our legal disclosures on page two and three of Ernie's presentation, referencing forward looking statements and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in our news rules. At this time, I'll turn the call over to Nitin. Nitin.

Thank you, Kevin. Good morning everyone and thank you all for joining us today. I'll begin my comments on slide four, where you can see the highlights for the first quarter. We had a very strong quarter with operating net income of 27.6 million, up 6% link quarter and up 32% year over year. Earnings per share of 60 cents was flat to the fourth quarter including the full quarter impact of higher share count from our December equity raise and up 22% year over year. Our rigorous expense optimization initiatives continue to drive expenses lower with quarterly operating expense of about 68 million, down 4% link quarter and down 6% year over year. Ongoing momentum of improving revenues and declining expenses led to a positive operating leverage of 5% link quarter and 11% year over year. Operating ROTC of .66% was down 27 basis points link quarter and up 93 basis points year over year. Overall strong financial performance was primarily driven by improved net interest income, lower expenses and disciplined credit management. Brett will provide more details in a few moments. As it quality and balance sheet matrix remains strong. Net charge-offs were 15 basis points of loans and our reserve to loans was up two basis points to 1.24%. Total loss reserves of .24% are now at about 500% of our total non-performing loans. Total delinquencies and non-performing loans were 42 basis points of loans, the lowest level in about 20 years. A solid testament to the strength of our collaborative risk culture across frontline bankers and risk teams. Liquidity remains solid with our loan to deposit ratio at 95%, that was down 1% link quarter. On strategy front, we made steady progress on our strategic initiatives in the first quarter. Our focus on the deposits relationships across business lines continued and a relatively new digital deposit initiative has gained momentum and delivered approximately $75 million of new deposits. We sold the remaining 7 million upstart book and further de-rest our balance sheet with total non-strategic runoff portfolios down by 76% year over year to just 34 million. Brett will share more details on the portfolio sale in a moment. As you know, in December, we announced a merger of equals with Brookline Bank Corp to create a preeminent Northeast franchise. This transaction improves scale and meaningfully improves profitability as reflected in the estimated 40% and 23% accretion to Berkshire's 2026 consensus estimate on gap and cash basis respectively. Our team continues to work proactively on requisite integration planning for a seamless transition. With that, I'll turn over the call to Brett to cover our financials in more detail. Brett.

Thank you, Naden. I'll begin on slide five, which shows an overview of the first quarter metrics. As Naden mentioned, our operating earnings were 27.6 million or 60 cents per share. Our net interest margin was 324, up 10 basis points linked quarter and our net interest income was up 2.9 million or 3% linked quarter. Operating expenses were down 3.1 million or 4% linked quarter and our efficiency ratio was 59.5%. Slide six shows our average loan balances. Average loans were up 118 million or 1% linked quarter and up 348 million or 4% year over year. We've updated a page in the appendix, which shows data on the upstart and firestone runoff portfolios. The combined runoff portfolios, including the upstart loan sales are down 110 million or 76% year over year to 34 million or just 40 basis points of loans. Slide seven shows average deposit balances. Average deposits increased 188 million or 2% linked quarter and were flat year over year. Excluding payroll deposits and broker CD balances, average deposits were flat linked quarter and flat year over year. If you recall, our year over year deposits were impacted by the sale of 10 branches in upstate New York in the third quarter of 2024. Average non-interest bearing deposits as a percentage of total deposits was 23%, down 1% linked quarter. Turning slide eight, net interest income was up 3% linked quarter and up 2% year over year. Net interest margin was up 10 basis points linked quarter to 324 and our March spot NIM was 331. Slide nine shows operating non-interest income, which was down 2.5 million or 11% linked quarter and up 3.4 million or 19% year over year. Other non-interest income was down compared to the prior quarter. During the fourth quarter, we had strong SBA gains and unusually high bully income. In the near term, we expect SBA gains to be in line with our prior eight quarter average of 2.9 million due to uncertainty from the impact of tariffs. Slide 10 shows expenses. Operating expenses were down 3.1 million or 4% linked quarter to 68 million and down 4.5 million or 6% year over year. Year over year expense reductions were broad based, including our other expenses, which are an assortment of smaller items. Non-operating expenses of 2.5 million were primarily related to the merger announced in December. Slide 11 shows our expense outperformance versus proxy peers over the last four years. This slide highlights the disciplined approach to expense management we've undertaken over that time. Slide 12 shows a summary of asset quality metrics. Non-performing loans as a percentage of total loans was 25 basis points. Total delinquencies in non-performing loans were 42 basis points of total loans. Net charge-offs of 3.5 million were up 200,000 linked quarter and down 500,000 year over year. We added $2 million to our loss reserve, increasing our coverage ratio to 124 basis points. Our loss reserves to non-performing loans are now about 500%. Our 5.5 million provision reflects the most recent Moody's baseline economic outlook in our ACL assumptions. During the quarter, we sold the remaining 7 million upstart loans for net proceeds of 5.3 million or 76 cents on the dollar. With the sale of the upstart book, we have significantly de-risked our balance sheet. Our other loan books are below normal net charge-off levels, and we do expect those to normalize over time based on the macroeconomic environment and outlook. Slide 13 shows that our CRE book remains well diversified in terms of geography and collateral. Our CRE concentration ratio was approximately 290% of risk-based capital. And credit quality of the CRE portfolio remains solid with non-accrual loans at 19 basis points of period end loans. Slide 14 shows details on our office portfolio. As noted last quarter, the weighted average loan to value ratios are about 60%, and a large majority of the portfolio is in suburban and Class A space. We have very limited exposure to Boston's financial district and no exposure to high rise office buildings. Turning to capital, we have strong capital levels. Tangible book value per share was $25.50. Our CET1 ratio was 13.3%, and our TCE ratio was 9.9%. Our AOCI bond mark improved modestly from a negative 106 million to a negative 95 million. Given the pending MOE transaction in the second half of 2025, we did not provide a significant increase in the five line item income statement and balance sheet guidance for the upcoming year. That said, we are encouraged by the momentum in our financial metrics and confirm comfort with consensus net income cited in the December 16th merger presentation for 2025. And with that, I'll turn it back over to Nitin for further comments.

Nitin. Thank you, Brett. Overall, we had a very strong first quarter, driving a solid start to the year. Many of our multi-year initiatives are clearly bearing fruit. While the economic environment is uncertain, given the volatility driven by tariffs and other policy initiatives, we continue to monitor the situation and communicate with clients to better understand potential impacts to their businesses. It's still very early, and the fluidity of the news from Washington makes it difficult to predict the potential outcomes at this point, but our teams remain prepared to pivot as needed to maintain our momentum. We're excited about the potential for the combined Berkshire and Brookline franchises. The combined entity will provide growth opportunities for our employees, continued commitment to our communities, enhanced products for our customers, and significantly higher profitability and returns for our shareholders. I want to thank all of my Berkshire bank colleagues for their continued hard work and commitment to the bank and our clients, and look forward to their continued support and commitment through this transition. On slide 15, we summarize our progress on the merger integration and next steps. In short, everything is on or slightly ahead of plan. We filed the regulatory applications in March at a shareholder proxy with the SEC in early April. We anticipate stockholder approvals at our annual meeting on May 21st, and our regulatory approvals sometime in the third quarter. So a lot of progress so far, while there's more work to do. In closing, I'm proud of what Berkshire team has accomplished over the last four years in terms of financial performance improvement while delivering exceptional client experience and positive impact on the communities that we operate in. It is their hard work that continues to be recognized across various forums, including the most recent recognition by Newsweek magazine that listed Berkshire bank amongst the most trustworthy banks in America for the fourth consecutive year. Thank you, team Berkshire for everything you do to serve our clients and earn their trust. With that, I'll turn it over to the operator for questions. Operator.

Thank you. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. We will pause for a brief moment to wait for the questions to come in. Your first question comes from the line of Chris O'Connell of KBW, your line is now open.

Chris. Hey, good morning. Morning Chris. So just sort of started off with the balance sheet side, I appreciate no guidance from here and it's become a little bit more shaky economic environment. So, was hoping to get an update on loan demand, has that changed as you guys have come into the year and over the past couple of months and how you guys are thinking about standalone growth going forward?

Yeah, Chris, that's a good question. Like you said, there's a lot of uncertainty out there and broadly speaking, what we're hearing from the clients is like three different themes that are emerging. One is where there's some clients, especially commercial clients that are loading up on the inventories, in kind of anticipation of the prices going up. There's the other group that's kind of wait and watch approach and just kind of staying put where they are. And there is a third group that is actually looking at brashlyzing and reducing expenses and so on and so forth. So it's a mixed bag, but what we see in the pipeline is our pipeline has slowed down compared to the previous quarter, just like the auditionation slowed down. So I think there's a net indication of slowing demand. I think we still, I think this quarter was about 5% annualized loan growth. I think we still probably expect to be in that range, but time will tell how the economy turns out. Great, that's helpful.

And then, on the expense side, you said there's kind of a number of small items here. Just hoping to get your guys' thoughts about how the expense base grows throughout the rest of the year on a standalone basis or if it's able to remain pretty steady.

Yeah, I think we're very pleased with our expense momentum that we're seeing currently and that we've seen over the last few quarters. I am expecting it to remain relatively stable, consistent with, generally consistent with this quarter, I would say. We do hope to continue that momentum as we move forward and progress towards the merger.

Okay, got it. And then, with the final upstart sale between this quarter, last quarter, and just the overall progress on the runoff portfolios in general, you're talking about kind of normalizing that charge. Where do you think that range is now? Now that you guys have kind of changed the balance sheet, do you think that that's a different level than it's been historically?

Yep, Chris, in a normalized environment, that would have been the case. So if you look at our last five quarters, our charge-off rate has ranged between seven basis points and 24 basis points. This quarter was about 15. So I think on the last earnings call, we did say that we expected to normalize to around 20 basis points level. And I think that's where we're staying at the moment because there's so much uncertainty out there. So it's tough to say. I think Brett mentioned in his remarks that we expected to normalize, and we believe that's the normalized level.

Great, I appreciate the time. Thank you. Thank you, Chris.

Your next question comes from the line of Gregory Zingong of Piper Sandler. Your line is now open.

Hey, guys, it's Greg Steppenham for Mark. How are you?

Hey, Greg, good. How are you?

Great. Just a quick clarifying question. Did you see the spot name in March was .31%?

That's correct, yes.

Okay, awesome. And is there any update you could give us on how you're managing employee retention ahead of the MOE closing, especially for some of your key producers?

Sure, Sean here. We've identified all of those key producers. We've had those conversations, and both organizations have discussed meaningful retention and retention grants as they move towards the pro forma company. So we feel we've got a good handle, but a lot of work left to do.

Okay, thank you. And then is there any plan to align your product offerings or your deposit-related strategies ahead of the legal close?

I think in my remarks, I talked about the digital deposit initiative that we launched that's programmed today to about $75 million in deposits. And I think even more exciting outside of the absolute numbers is roughly one out of five new client relationships are coming through digital channels now, which was our original goal. So I think we're pleased with that. I don't think we're gonna launch new products per se, but I think the team continues to fine tune the functionality. So just as an example, last quarter we have launched what we call as the Direct Deposit API, whereby if you open a deposit relationship with Berkshire Bank and wanna move your direct deposit from another bank, it's really a couple of clicks of buttons on your phone. And I think those kinds of functionalities will continue to be added to create that digital first type of experience.

Awesome, thank you. And last question for me, is there a TCE ratio or CRE concentration level you guys are keeping in mind as you approach the MOE?

For CRE, we've continued to stay below 300% mark. And I think this quarter we ended at about 290. TCE, Brett, I don't know if you have a comment on that.

Yeah, no, I would expect TCE to remain relatively stable from now basically to the merger, just trying to make sure that we put ourselves in the best position possible for once the merger occurs, to continue going forward and grow.

Awesome, thanks so much guys. Thank you. Thank you.

I'd now like to hand the call back to Nitin Mottray for final remarks.

Thank you, Ali. And thank you all for joining us today on our call and for your continued interest in Berkshire. Have a great day and be well. Ali, you can close the call now.

Thank you for attending today's call. You may now disconnect. Goodbye.