Beacon Financial Corp (BBT) 2024 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Berkshire Hills Bank Corp third quarter 2024 earnings conference call at this time , All lines are in listen-only mode following the presentation, we will conduct a question and answer section. Ask a question, please press star one on your touchtone phone. Should you wish to decline from the pulling process?

Please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. If at any time during this call, you require immediate assistance. Please press star zero for the operator. This call is being recorded on October 24 2024. I would now like to turn the conference over to Kevin Conn Investor Relations Officer. Please go ahead.

Good morning and thank you for joining Berkshire Bank's third quarter earnings call. My name is Kevin Conn Investor Relations and corporate development Officer. Here with me today are Nithin Mahat, Chief Executive Officer Sean Gray, Chief Operating Officer, Brett be Bovik, 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 states. Please see our legal disclosure on page 2 of the earnings presentation, referencing, forward-looking statements and Non-GAAP financial measures. A reconciliation of Non-GAAP to GAAP measures is included in our news release at this time. I'll turn the call over to Nitin.

Thank you, Kevin. Good morning everyone and thank you all for joining us today.

I'll begin my comments on slide 3 where you can see the highlights for the third quarter.

I'm pleased to report that we had a strong quarter with robust improvement in operating earnings quarter over quarter and year over year. operating EPS , so $0.58 was up 5% linked quarter and up 16% year over year . operating net income of $24.8 million was up 7% linked quarter and up 15% year over year.

operating ROTC Sea was 9.91% Up 26 basis points linked quarter and up 64 basis points year over year, asset quality and balance sheet metrics remain strong ,excluding the upstart loan sale charge off net charge offs were 16 basis points of loans and our reserve loans was flat to second quarter at 122 basis points.

Of note, our total past due loans percentage at 53 basis points is at its lowest level in 15 years. And our reserve for losses at 122 basis points is about five times the total non performing loans we increased our capital ratios link order with CET one at 11.9% and PCE at 9.1%. Liquidity remains solid with our loan to deposit ratio at 96% and average noninterest bearing deposits as a percentage of total deposits remain steady at 24%.

We've updated the slides on overall office and multifamily portfolios. The information on those slides highlight that our portfolio remains granular, geographically diverse and resultantly less risky. The performance on those loan books remains strong.

Average loan balances were up 1% linked quarter and up 3% year over year average deposits were up 1% linked quarter and down 3% year over year. Our loans pipeline was stable versus third quarter and was up 20% year over year.

Deposit costs were up seven basis points in the quarter reflecting a reduction in the rate of increase in deposit costs and be we expect funding costs to decline as the fed continues to cut interest rates. And like many banks, we've already moved deposit rates lower late in the third quarter.

We continue to make steady progress on strategic initiatives. The sale of 10 branches in New York that was announced in March was completed this quarter, bringing our total branches to 83.

The pre tax gain on this transaction was $16 million slightly lower than the $19 million we expected in March. Given that client selected deposit retention exceeded our expectations. This transaction tightens our footprint and enhances the efficiency and profitability of our network.

We're now at about the right size for our branch network. A week ago, we announced the sale of $46.5 million of our upstart loan portfolio. The loans were priced at 96% of book value resulting in $1.9 million charge related to the sale.

The weighted average credit score for the remaining approximately $10 million upstart loans is [682] and we believe that our reserves against that book are sufficient.

We continue to make banking with Berkshire when, where and how we want it easier than ever. We continued the rollout of Brosi one and expanded suite of digital deposit products for our customers.

We will continue to invest in digitizing the customer experience while investing in our bankers to accelerate growth in deposits led client relationships. I want to thank all of my Berkshire bank colleagues for their continued hard work and commitment to the bank. Their commitment to our strategy and dedication to our customers is what continues to bring us together and truly set us apart.

I'll now turn it over to Brett to talk through our financials in more detail, Brett,

Thank you, Norton Slide 4 shows an overview of the third quarter. As mentioned, operating earnings were $24.8 million or $0.58 per share Up $0.03 linked quarter, net interest income of $88.1 million was down less than 1% linked quarter, operating interest income was $21.5 million Up 7% linked quarter, total operating revenue was up 1% linked quarter and operating expenses were $72.3 million , Up 1% linked quarter and down 2% year over year.

Net charge offs were $5.6 million or 24 basis points of average loans and included $1.9 million of charge offs related to the upstart loan sale provision expense was $5.5 million and the reserve coverage ratio was flat linked quarter at 122 basis points.

Slide, five shows our average loan balances, average loans were up $76 million linked quarter or 1%. This was primarily driven by growth in the commercial lending.

We've updated a page in the appendix which shows data on the upstart and Firestone runoff portfolio including the recent upstart loan sales. The combined run off portfolios are down by $66 million to $58 million or 60 basis points of total loans and are performing as expected.

Slide 6 shows average deposit balances, average deposits increased $64 million or 1% linked quarter year over year deposits were down 3%. But excluding the New York Branch sale deposits from prior year, balances, our deposits were up 1% year over year, non interest bearing deposits as a percentage of total deposits remained at 24% consistent with the prior two quarters, deposit costs were 242 basis points, seven basis points linked quarter. And our cumulative total deposit beta is 44%.

While it's early in the cycle, we expect deposit beta in a down interest rate environment to be higher than the beta on the way up as we remain focused on managing deposit costs.

Turning to slide 7, we show net interest income, net interest income was down 1% linked quarter and down 3% year over year net interest margin was down four basis points linked quarter to 3.16% versus 3.20% in the second quarter and .3.15% in the first quarter.

Our historical range for NIM excluding the pandemic years has been between 3.10% and 3.40. We expect the fourth quarter NIM to be between 3.10% and 3.20%

While we have headwinds of floating rate loans, repricing lower short term, we also have several tailwinds. We have $1.6 billion of CDs or 67% of that book maturing in the next six months. And we have about $400 million of FHLB funding that matures over the same time period.

Further, we have $600 million of low yield received fixed swaps maturing over 2025 and 2026. And we have low yield fixed rate securities and loans that will mature and reprice at higher yields.

Slide. Eight shows operating non interest income up $1.4 million or 7% linked quarter and up $4 million or 23% year over year. The growth in fees was primarily related to higher swap volumes. This was the third quarter in a row where we've seen solid growth in overall fees.

Slide. Nine shows expenses, operating expenses were up 1% linked quarter to $72.3 million And down 2% year over year occupancy and professional services expense declined linked quarter and were offset by slightly higher compensation and higher other expense.

Other expenses include check fraud expenses. A line that impacts the entire industry and which can be volatile. This quarter, that line item was $1.5 million higher than the average of the prior eight quarters due to one isolated incident.

Slide. 10 is a summary of asset quality metrics, non performing loans were up 12% linked quarter and down 10% year over year. The increase in pre non performing loans linked quarter was driven by one isolated multi use property in upstate New York.

Net charge offs of $5.6 million were up $4 million linked quarter and 193,000 year Over year. Net charge offs included $1.9 million related to the upstart loan sales charge off excluding that sale were $3.8 million or 16 basis points of loans. We've included a chart in the appendix with Berkshire's net charge off rates versus the industry since 2000 which reflects relatively better asset quality than the industry over time.

Slide .11 shows that our prebook is well diversified in terms of geography and collateral type. The credit quality of the [CRE ]portfolio remains solid with [nonroll] loans at 22 basis points of period end loans.

Slide. 12 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 80% of our office properties financed are under 150,000 square feet. Suggesting our portfolio has much lower default probabilities.

Slide .13 shows details of our multi family portfolio. The multi family portfolio is $664 million or 7.2% of loans. The book is well diversified across our footprint with a weighted average loan to value of 65%. While current credit quality metrics are strong, we recognize that economic uncertainties exist and we are monitoring both new originations and existing portfolios carefully. As (multiple speakers) mentioned, we have strong capital levels.

Tangible book value per share was $24 and $0.53 and increased 6% linked quarter and 16% year over year.

Our CET ratio is up 30 basis points to 11.9% and our TCE ratio rose 94 basis points to 9.1% due to higher retained earnings and a lower bond mark on our AFS securities.

Our top capital management priority is to support organic loan growth year-to-date. We repurchased $17.4 million of stock at an average cost of $21.94. All of our repo this year has been completed below tangible book value per share.

We paused our stock repurchase in the third quarter to support expected long expected balance sheet growth. We expect to continue to be opportunistic with stock repurchases. And I note that since fourth quarter of 2020 we've reduced our share count by 18%.

With that. I'll turn it back over to Nitin for further comments.

Thank you, Brett, quick comments on macroeconomic environment.

The operating environment for banking industry is improving.

As I noted last quarter, the yield curve has been in its longest period of inversion in recorded history but it is starting to normalize as the fed lowers short term interest rates starting last month.

The potential net interest income increase for the industry during periods of wheel curve deepening is substantial.

As Brett mentioned, we are already starting to reduce our funding costs and expect a more normal operating environment in the quarters to come.

A lower interest rate environment will not just lower the funding cost, but it will also help improve credit, raise property values and increase loan demand.

I'm proud of what our team has accomplished and how far we've come notably, we're starting to gain traction on our new deposit generation initiatives.

We still have work to do. Our focus near term is to accelerate our deposit growth engine. Continue to tightly manage expenses and credit and further improve client acquisition and retention through enhanced client experience and our digital banking offerings.

In closing it was a strong quarter and we will continue to focus on managing the headwinds and tailwinds towards further improving long term profitability and shareholder value.

With that. I'll turn it over to the operator for questions, operator.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question? Please press star followed by the one on your touchtone phone. You will hear prompt that your hand has been raised. Should you wish to decline from the pulling process? Please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please. For your first question, your first question comes from Christopher O'Connell with KBW.

Your line is now open.

Hey morning like and then I was just hoping to check in the guidance, not included in the slide deck is the guidance still valid? I guess from for the 2024 updated guidance provided last quarter.

Yeah, so I think, you know, we're still expecting to see in our call, you know, we're expecting for the fourth quarter to be between 3.10% and 3.20%. We're expecting revenue to be flat to slightly down in Q4 with expenses modestly down and then from the net charge off standpoint, I, I think we're expecting it to be stable when you exclude the upstart loan sale charge off from this quarter.

Okay, great. That's helpful. And then just curious on the commentary around, the cutting cycle and the deposit data is expected to be, higher on the way down than on the way up, which is I think somewhat, different than many of your peers, any, just color about why you guys feel that way or kind of, how you expect to achieve that.

Yeah, I think Chris qualitatively speaking, we do have a number of tailwinds that we've identified where we could have the opportunity to you know, manage the deposit beta and the margins better in the down cycle. We have significant amount of CD coming up for maturity. Almost two thirds of our portfolio comes up for maturities in the next two quarters, we've got some swaps rolling off and so on so forth.

So I, we believe we have those tailwinds and then on the front line of the teams are working hard to manage the deposit pricing sharply, keeping a good balance of volume versus spread. So I think there will be more opportunities as in this cycle. And we're beginning to see market react to that as well. And some of it depends on how the competition reacts.

And we're beginning to see they're always outliers, but we're beginning to see more and more of our peers bringing down the deposit rates, starting late September.

Great. And you mentioned you've already moved, you know, a bit on those rates. Do you guys have a spot, either interest bearing or total deposit cost, post the sale or, and after the rate moves,

The spot for September was 3.10%, Chris and I think our spot name was about 3.10% for September. And I think we believe for the fourth quarter we should be between 3.10% and 3.20%.

Got it. Do you have anything spot on the, the overall deposit costs?

Deposit costs?

Just give us second, Chris.

No problem.

Let's do 242 basis points. This is fine.

Let's do the whole quarter. The first spot for just September alone. It was 241.

Great. Thank you.

And then just last one for me and I'll step out, you know, it seems like the swap fees picked up quite a bit this quarter. Are you guys seeing just in general with the change in the rate environment, increased demand for, that type of product?

I think the demand because you, we see that in the pipeline, seems to suggest that it'll be relatively flat in the fourth quarter, difficult to predict it beyond that what's in the pipeline. But yeah, I think the momentum seems to be holding going into the fourth quarter.

Great, appreciate the time. Thank You

Thank you, Chris.

Your next question comes from Laurie Hunsicker with Seaport research. Your line is now open.

Yeah, hi, thanks. Good morning, gentlemen. Just wondered if we could go back to expenses. You know, the comments you gave Chris expenses are quarter if that makes sense, but maybe you can just help us think about, what's reinvested, what's dropping to the bottom line, right?

So we look at your expenses, they were $72 million this quarter, $1.6 million of fraud comes out and then the, the 10 branch closures previously. You all had said that the $6.5 million expense savings. So $1.6 million in the quarter, which would then take us down to $69 million, maybe just help us think about what's being reinvested or just in terms of dollars, how we should be thinking about the expense line in the fourth quarter.

Yeah, I would. Hi, Laurie. This is Brett. I, I would say from an expense standpoint, some of the expenses that we had related to those branches were already captured in the current quarter. So there will be some falling to the bottom line. You do remove the $1.34 million of the fraud losses that we saw. You know, I, I think we're looking to be in the range of, right around approximately $71 million of Q4 operating expenses, give or take.

Okay. Okay, great. And then just going over here to the office and I appreciate all the details you guys provide. Can you just update on a couple of things with respect to your criticized book that, that $24 million specifically, it looks like $14 million in class A and $10million in class B. Just what are the occupancies on those? And when do they mature? Are there any specific reserves, any concerns you're seeing there? And then same on that class B non performer. That's $3.5 million. What's the occupancy? And when does that mature?

Sure, Greg, you want to take that?

Sure thing. Hi Laurie how are you?

You there on for the class A it's a single credit basically, it's an 80% occupancy. It does mature in December 2024 and we're working closely with the client to refinance that credit, it'll likely be an improved structure as far as the class B, it's a couple handful of credits that range in occupancy from 25 to 50% occupancy.

And one of those credits happens to be one of the [NPLs] as well.

And those mature in 26 through 2028.

Got it. Okay, got it. And then what, what's the reserve on your whole office book?

And just to answer your prior question, there are no specific reserves on those criticized assets. None of them warrant specific reserves. And I would approximate at about 1.5% based off the lower risk profile of our office book.

Got it Okay, great. That's helpful. And then just last question, upstart, obviously you've got a great price here at $0.96 on the $1. Can you just talk a little bit about how that came together and then just remind us when specifically in the quarter that closed? And what was the FICO on those? And then I, I just want to confirm too as I'm looking at this. So your upstart sale had $1.9 million in charge offs. Then you had another $2 million in charge offs related to your book and you said the one that was 682. So I just want to want to understand that a little bit too. Thanks,

You got it.[]

Okay, go ahead[], go ahead.

Yeah, so the sale criteria, the purchasers investment policies ,were basically nothing past due and anything over [660]. Now that there's a intricacy, I think with the past due [piece], even if it was one day late, that was not included in the sale. So actually 40% of the book that we're retaining was 130 days past due. And that has a similar risk profile including loans that are in their grace period.

A similar risk profile of our existing book both and that's why you see a credit, a weighted average credit score in the book of 682 of the of the loans that we sold. The weighted average FICO was slightly above our overall average in around 711.

And that sale closed right in the middle of October on 10/16.

As far as the losses, the $2 million in losses. That was just our, quarterly run rate for our, our basically our $67 million book at the end of two Q. That was our losses for the whole quarter.

Got it. Okay. Thanks for taking my question.

Thank you, Laurie.

Your next question comes from Mark Fitzgibbon with Piper Sandler. Your line is now open.

Hey guys, good morning,

Morning Mark.

First question just to follow up on a question, my esteemed colleague Laurie just asked about I'm curious, is it likely we'll see more upstart or Firestone loan sales in coming quarters is the plan to sort of fire sale those out.

No, I think Mark, we believe we kind of run those portfolios of upstart is really down to that $10 million and it's sufficiently provided for at this point of time. And Firestone is in terms of performance, while it is liquidating runoff mode, its performance is actually exceeding our expectations. And in fact, this quarter at a net recovery. So I think we've done, it's a very tiny piece of our portfolio, roughly about 50, 60 basis points of the entire loan portfolio. So it's really in the run off mode and we don't see any difference interaction anymore.

Okay. And then secondly, I wondered if I could dig in a little bit to the check fraud situation you mentioned, I know you, you all kind of downplayed it as, unique thing for the industry, but it's still a $1.5 million. And I guess I wonder why couldn't that be $15 million or $150 million ? You know, I guess I'm curious if you could give us, share any color on what happened and, how you're going to prevent similar kinds of things from occurring.

It was really a commercial check kind of fraud check washing. And I think across every forum that you attend there is, an increase in that activity. And this is one of those situations where you have all the controls, but the fraudsters, some how are able to slip one through?

It will be protected to the extent that there'll be some coming off it because of the insurance. But by and large, our trend on the on the fraud losses is consistent with what we're seeing in the industry are marginally better. This is really one of those or check washing things that just kind of escape through our controls.

Okay. So is there like a diligence process you're going through to kind of figure out what happened and how to change that process? So that this thing doesn't occur again?

Yes. And the good news part is the we have been noticing the increase in fraud, you know, in the industry over the last, you know, 12 months or so. And there have been significant number of changes that have been made, including updating some of the processes and platforms. And I think everything that we have now should certainly help prevent a repeat of such incidences.

Okay. And then next, I was curious if you could share with us kind of your priorities for, capital today, you've got a little bit of excess capital, as you think about buybacks, dividends, growth M&A your thoughts on prioritizing.

Yeah, I think the sequence remains a similar mark. You know, we want to the first dollar want to be allocated to the to the organic growth, right? And we're beginning to see momentum. As I mentioned in my remarks, our loans growth was kind of roughly 1% in the quarter, but our loan pipeline was up about 20% year over year. So we're we have a pipeline there.

We're just being judicious, being careful selective and in fact, leading with clients that have deposit relationships as well across the board. So, yeah, first of all, it goes to organic growth and then followed by, dividends, buybacks and , if there are opportunities outside of that, we'll explore those as well. But that's the sequence.

Do you, feel like Berkshire Hills is ready to consider an acquisition at this point? If you kind of got your house in a place where you feel like if an opportunity came along, you'd you'd be positioned to capitalize on that.

Oh, we have, I think it does feel like through everything that we've done, through our transformation, we are in the , best possible situation to earn the right to be able to grow our currency and look for opportunities outside. But right now, pretty much the team is focused on how do we improve, continue to improve our performance, improve our currency. And if something comes along, we take a look at that.

Okay. And then last question I had is when can we expect sort of an update on your best goals?

I think we're going to give annual guidance in January. And at that point of time, we could even look at some mid term guidance as part of that guidance.

Great. Thank you.

Thank you, Mark.

There are no further questions at this time. I will now turn the call over to Nitin Mhatre.

Please go ahead.

Thank you Joel 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 sure you can close the call now.

Thank you, ladies and gentlemen, this is calling on this call today. We thank you for participating and ask that you please disconnect your lines.