Berkshire Hills Bancorp, Inc. (NYSE:BHLB) Q1 2023 Earnings Call Transcript April 20, 2023
Berkshire Hills Bancorp, Inc. misses on earnings expectations. Reported EPS is $0.63 EPS, expectations were $0.65.
Operator Hello, everyone, and welcome to the Berkshire Hills Bancorp First Quarter 2023 Earnings Conference Call. My name is Charlie, and I’ll be coordinating the call today. You’ll have the opportunity to ask your questions at the end of the presentation. [Operator Instructions].I will now hand over to our host, Kevin Conn, Head of Investor Relations and Corporate Development to begin. Kevin, please go ahead.Kevin Conn Good morning, and thank you for joining Berkshire Bank’s first quarter earnings call. My name is Kevin Conn, Investor Relations and Corporate Development Officer. Here with me today are Nitin Mhatre, President and Chief Executive Officer; David Rosato, 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 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. Nitin?Nitin Mhatre Thank you, Kevin, and good morning, everyone. I’ll begin my comments on Slide 3, where you can see the highlights for the first quarter. Overall, we made steady progress despite the market turmoil and headwinds in March and remain on solid footing overall. EPS or earnings per share of $0.63 in the quarter was our highest ever GAAP EPS in any first quarter. Net income of 27.6 million declined 2% linked quarter and was up 33% year-over-year.
Operating earnings per share of $0.63 declined 1% linked quarter and was up 45% year-over-year highlighting the momentum of our franchise. Return on tangible common equity was 9.59%, a modest decline linked quarter and up 210 basis points year-over-year. In response to the market events, we took many actions to prudently fortify our liquidity position further in March. Resultantly, our cash and borrowing capacity as a percentage of uninsured deposits at the end of the quarter closed at 117%. Average loan balances were up 5% linked quarter, primarily driven by diversified organic growth and lower paydowns in the quarter.Average deposit balances were down by less than 1% in the quarter. And on end of period basis, total deposits were down less than 3% linked quarter, below our expectations at the beginning of the year but in line with the total industry deposit outflows and relatively better than small bank deposit outflows of 4.6% for the most recent Fed HL [ph] reported data for the quarter.
The loan to deposit ratio was 86%, up from 81% in the fourth quarter. Given macroeconomic trends, we remain vigilant on credit, even as our asset quality continues to remain strong. Provision expense for this quarter was 9 million at the high end of our guidance range, primarily to build reserves for loan growth. Our allowance to loans ended the quarter at 113 basis points, in line with our guidance range of 110 to 120 basis points. Our balance sheet remained strong. We ended the quarter with common equity Tier 1 ratio of 12.1% and a tangible common equity ratio of 7.91%. We continue to derisk the balance sheet and run off the non-strategic loan books, including Upstart and Firestone. Run off and credit in both of these books, it’s tracking as expected and we’ve included data in an appendix page, which provides more details.
Given the market trend related to remote work and its associated impact on the commercial real estate office segment, we’ve also included two pages in the appendix that provide more details on our three office portfolio, which highlights how our portfolio mix is relatively different and diversified and resultantly less risky. David will cover some of our metrics in more detail in a few moments. On the BEST strategy front, we made steady progress in the first quarter. Our ESG score in the quarter was at 19th percentile nationally, well above the BEST 2024 target of 25th percentile. A critical part of any transformation is how the employees and customers respond to it. We mentioned on our last call that we recorded our highest employee engagement scores in 2022.In the first quarter, we also received recognition by Newsweek as one of America’s most trustworthy banks, and by Forbes magazine that listed us amongst America’s Best Midsize Employers.
Our customer Net Promoter Score hit its highest point this quarter at 52.8. We hired several new executives in the first quarter, as highlighted in the last earnings call, and we continue to hire talented bankers across the bank as part of our BEST plan. We also continued our Board enhancement with the addition of two prominent and well respected Board members. Karyn Polito joined the Board in February and Eric Rosengren joined the Board in April. Karyn brings broad expertise from both public and private sector, including as the Lieutenant Governor for Commonwealth of Massachusetts and as Principal of Polito Development Corporation. Eric has been at the Federal Reserve Bank of Boston since 1985, most recently as the President and CEO from 2007 to 2021.
Eric will bring us the insights on the banking industry, economic trends and regulatory environment and further strengthen our enterprise risk management program oversight. Welcome aboard Karyn and Eric. Slide 4 shows our BEST program’s North Star chart, which details our progress on five key performance metrics. We are near the low end of our target range for return on assets and return on tangible common equity. Our quarterly PPNR annualizes to 169 million and was at low end of our 2024 BEST target of 180 million to 200 million. Our ESG ranking nationally was at 19th percentile this quarter, above our stated goal of reaching top 25% by mid 2024. We’re still working with J.D. Power to get a competitive NPS score versus our peers in our footprint.
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In the meanwhile, we have been tracking our customer Net Promoter Score through customer surveys that J.D. Power helped us design and administer. As I mentioned earlier, our NPS score in the first quarter came in at its highest ever level of 52.8, which was significantly higher than our full year 2022 score of 44. I would like to thank all of our Berkshire Bank colleagues for their continued hard work and commitment to our vision of becoming a high-performing leading socially responsible community bank. Their commitment to our strategy and dedication to our customers is what is driving our ongoing performance improvement and continued progress. With that, I’ll turn the call over to David to discuss our financials in more detail. David?David Rosato Thanks, Nitin.
Slide 5 shows an overview of the quarter. As Nitin mentioned, operating earnings, which matched GAAP earnings, were 27.6 million or $0.63 per fully diluted share, down $0.01 linked quarter and up $0.20 year-over-year. Net interest margin was 358 basis points, down 26 basis points linked quarter and up 97 basis points year-over-year. Net interest income declined $4.6 million or 4% linked quarter and was up 41% year-over-year. Non-interest revenues were up 7% quarter-over-quarter and down 22% year-over-year. We maintained our spending discipline with operating expenses down 1% linked quarter while they were up 5% from Q1 ’22. Average loans increased $433 million or 5%, driven by diversified organic loan growth and fewer loan paydowns. Average deposits decreased $55 million or less than 1%.
Provision expense for the quarter was $9 million, at the high end of our January guidance driven by loan growth. Net charge-offs were within our expected range of $7 million or 32 basis points of average loans and we increased our allowance for credit losses by 2 million. Slide 6 shows more detail on our average loan balances. Strength in CRE, residential and commercial portfolios was offset by modest weakness in our consumer book, which was driven by a decline in our Upstart portfolio. We’ve enhanced the appendix page on our loan runoff books by adding balanced data over time, yields and credit data. All runoff book metrics are within expectations. Slide 7 shows our average deposit balances. Average total deposits declined $55 million or less than 1% versus the fourth quarter and $360 million or 4% year-over-year.
End of period linked quarter deposits declined by $260 million, of which about half of the decline moved into money market products in our wealth management business. As expected, the deposit mix shifted with a modest decline in non-interest bearing deposits and an increase in time deposits. Non-interest bearing deposits as a percentage of total deposits remain above 25%. Deposit costs were 109 basis points, up 40 basis points from the fourth quarter. The deposit beta for the first quarter was 47% and the cumulative deposit beta is 21% through 475 basis points of total Fed tightening.Turning to Slide 8, we show net interest income. Higher loan volumes provided a meaningful lift to the first quarter net interest income, while higher deposit costs and higher borrowing amounts contributed to the 4.6 million or 4% decrease in net interest income.
The 41% year-over-year growth in net interest income was primarily a function of higher loan volume and higher interest rates. Slide 9 shows fee income, up 1.1 million or 7% linked quarter, largely driven by a $484,000 increase in wealth management fees and a 752,000 increase in other fees. Wealth management revenue was helped by higher net asset flows and higher market values. I’d like to note that tax prep fees, a seasonal item in wealth management, added about $300,000 to wealth management revenue in the quarter. Other revenues included $600,000 of debit card revenue sharing, which typically occurs in the first quarter. Year-over-year loan fees were driven by unusually high swap fees in the first quarter of last year, and other was impacted by higher tax credit amortization this quarter.Slide 10 shows expenses.
Expenses are down 640,000 versus the fourth quarter and just below the midpoint of our January guidance on continued strong expense control. Increases in compensation expenses were offset by lower occupancy and equipment, technology and other expenses. I’d note that other expenses were down 1.6 million on lower loan workout expense, and we had an $850,000 increase in the provision for unfunded commitments in the fourth quarter of last year. Slide 11 is a summary of our asset quality metrics. We’ve added lines to show 10-year averages for several metrics for perspective. Non-performing loans were down 4.1 million versus the fourth quarter and stand at 31 basis points of total loans. Net charge-offs of 6.9 million mostly consisted of C&I loan charge-offs of 5.7 million.
While current credit quality metrics are benign, we recognize that economic uncertainties exist and we are monitoring both our originations and our portfolios very carefully. There’s been a lot of interest in CRE and in particular office exposures given the increase in remote work. As Nitin mentioned, we included two pages in the appendix on our CRE and office portfolios. Office balances totaled 558 million in the first quarter with weighted average loan to book value ratios of approximately 60%. We believe our office book is well positioned; about 390 million or 70% are suburban properties and 132 million or 24% are in central business districts. The majority of our office portfolio is in Class A office space. About 80% of our larger office loans have lease maturities beyond 2027.
I’d also note that overall CRE non-performing loans to end of period loans were 6 basis points in the first quarter, down from 24 basis points a year ago. Slide 12 shows our returns over the past five quarters on a GAAP and operating basis. We see a solidly improving trend over the last five quarters, which we will continue to work on. Slide 13 shows details of our liquidity and capital positions. Like most banks, we spent time in March prudently bolstering our liquidity position. We had no borrowings from the Fed funds market, the discount window, or the Fed’s Bank Term Funding Program. Cash and borrowing capacity at the end of the quarter was 4.9 billion. I’d note that our FHLB borrowings at quarter end were 904 million and 425 million on an average balance basis for the quarter.
Nitin shared that our cash and liquidity was 117% of uninsured deposits. Adjusting uninsured deposits for collateralized municipal and certain other deposits would increase that ratio to 140%. Our TCE ratio ended the quarter at 7.91% and included an AOCI mark of 159 million on an after tax basis, an improvement from the fourth quarter’s $181 million mark given a modestly lower rate environment. Including the HTM mark of $50 million after tax, our TCE ratio would drop to 7.5%, a very modest 40 basis point impact. Our tangible book value per share ended the quarter at $21.91, up 4% versus the fourth quarter.The chart on the bottom right shows continued improvement in both tangible book value per share and tangible book value per share excluding AOCI.
Our top capital management priority is to deploy capital to support organic loan growth. Secondly, we remain bias to opportunistic stock repurchases, given our current stock price compared to intrinsic value. In Q1, we repurchased $1.2 million worth of stock at an average cost of $25.17. With that, I’ll turn it back to Nitin for further comments.Nitin Mhatre Thanks, David. I’ll close my remarks with comments on the economy, recent industry volatility and our positioning. We’re fortunate to be operating primarily in the steady Eddie New England market, which remains on relatively solid footing. In markets like Syracuse, we’re excited about the investments being made through local government and private companies like Micron that we’re investing over $100 billion in creating one of the largest microchip plants in the nation.The banking industry has experienced a lot of volatility over the past several months.
The current industry issues are significantly different than the great financial crisis. Banks are in a much better capital and liquidity positions, and the incremental regulatory reform will likely be more focused on [indiscernible] and large regional banks than community banks like Berkshire. Problems with customer concentration, long dated held to maturity securities and liquidity appear to be isolated to a few larger regional banks with unique business models. We have a strong capital and liquidity position and our position to benefit from the market disruption in our footprint. We remain focused on responsible and profitable organic growth and are confident that we will get bigger while getting better. With that, I’ll turn it over to the operator for questions.
Charlie, please open the line for questions now.
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Question-and-Answer Session Operator Of course. [Operator Instructions].
Our first question comes from Billy Young of RBC Capital Markets. Billy, your line is open. Please go ahead.Billy Young Hi. Good morning, guys. How are you?Nitin Mhatre Very well, Billy. How are you doing?Billy Young Good. First, I guess maybe you could just start on the FHLB borrowings. What’s the thinking of the strategy around holding these borrowings on your balance sheet in the near term? Do you have an expectation of paying it off sooner rather than later?David Rosato Sure, Billy, it’s David, great question. So post Silicon Valley turmoil, as we called out in the comments, have bolstered our liquidity position, and we primarily did that in the second week of March by tapping the Home Loan Bank borrowings.
So internally, we decided to target much higher levels of cash balances. We ended the quarter, as I said in my comments, at a little over 900 million of home loan advances. What I would suggest that we will in the second quarter, and assuming we’re all past the crisis which it certainly feels like it is, we will probably bring that number down by about a third. So ballpark about $300 million and reduce the excess liquidity on the balance sheet. The amount will still be up versus fourth quarter of last year. And that’s really more a reflection of the competition in the deposit market and the growth in the quarter of loans outpacing deposits. We’re very proud of our deposit performance in the quarter though. It shows the diversified funding base of the institution as a pleasant surprise as a newcomer to the bank to see the depth of the quality — depth and quality of our customer relationships, both on the retail side as well as commercial and private banking.Billy Young Thank you.
I appreciate that. I appreciate that you typically don’t provide additional quarterly guidance updates beyond what you established in January, but can you just comment on — match with competence level on achieving the mid-teens NII guide that you established for the year?David Rosato Sure. So that was a non-FTE guide of 15% to 16%. What I would say is it’s clear that the pressure is downward, not upward on margins and interest income clearly. But we’re not going to be adjusting that guidance. If you annualize Q1, we’re a little below. We do pick up day count, as you know, as the year unfolds. And we remain optimistic that that guide is still achievable at this point. As I said, the pressure is clearly down, not up on net interest income. So if we need to, we will wind up trying to offset some of that headwind on the expense side while still being very careful about making sure we make the right investments in technology and people that Nitin and the team have been talking about over the last several — last two years.Billy Young Got it.
Thank you. And then just one last question, and I’ll step back, just on the loan growth outlook, you laid out a mid single digit period end growth target this year and you’re essentially there today. And just appreciating your comments that you made earlier about responsible growth and monitoring new origination activity, kind of what should we think about your appetite to kind of grow and take on additional credit from here?Nitin Mhatre Yes, Billy, I’ll take it. This is Nitin here. I think you’re right. The loan growth is moving faster than the original guidance, but it’s really a function for the quarter was the pipelines in the fourth quarter that kind of came through in the quarter. We expect that to slow down. The pipeline at the end of the quarter is modestly lower than what we had at the previous quarter.
So we expect that run rate to slow down. And yet, we continue to serve our clients. We continue to monitor quality of new originations. So we expect that the overall loan growth will be modestly higher than what we had in the original guidance. While the guidance on the deposit, we might end up being slightly lower. So I think with the offset of those two, going back to the point David made earlier about, we feel good about the NII guidance. On the loan growth, we might end up having slightly higher growth than what we had anticipated, but we would do that judiciously. We’re being more selective. We’re getting more and improved pricing opportunities and relationship opportunities along the way.Billy Young Thank you for taking my questions.Nitin Mhatre Thank you, Billy.Operator Thank you.