Berkshire Hills Bancorp, Inc. Price & Performance (BHLB)

My name is Kevin Kahn, Investor Relations and Corporate Development Officer. With me today are Nitin Mahatra, chief executive officer Sean Gray, chief operating officer Brett Berbovic, 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 the earnings presentation referencing forward looking statements and non GAAP financial measures. A reconciliation of non GAAP to GAAP measures is included in our needs groups. At this time, I'll turn the call over to Nitin. Nitin? Thank you, Kevin. 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 27,600,000.0, up 6% linked quarter and up 32% year over year. Earnings per share of $0.60 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 68,000,000 down 4% linked quarter and down 6% year over year. Ongoing momentum of improving revenues and declining expenses led to a positive operating leverage of 5% linked quarter and 11% year over year. Operating ROTCE of 9.66% was down 27 basis points linked quarter and up 93 basis points year over year. Overall strong financial performance was primarily driven by improved net interest income lower expenses disciplined credit management. Brett will provide more details in a few moments. Asset 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 1.24 are now at about 500% of our total non performing loans.

Total delinquencies and nonperforming loans were 42 basis points of loans the lowest level in about twenty 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% linked quarter. On strategy front, we made steady progress on our strategic initiatives in the first quarter. Our focus on the deposits relationships business lines continued and a relatively new digital deposit initiative has gained momentum and delivered approximately $75,000,000 of new deposits. We sold the remaining 7,000,000 upstart book and further derisked our balance sheet with total nonstrategic runoff portfolios down by 76% year over year. To just 34,000,000. Dollars 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 Bancorp to create a preeminent Northeast franchise. This transaction improves scale and meaningfully improves profitability as reflected in the estimated 4023% accretion to Berkshire's 2026 consensus estimate on GAAP 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, Ned.

I'll begin on Slide five, which shows an overview of the first quarter metrics. As Nitin mentioned, our operating earnings were $27,600,000 or $0.60 per share. Our net interest margin was 3.24 up 10 basis points linked quarter and our net interest income was up $2,900,000 or 3% linked quarter. Operating expenses were down $3,100,000 or 4% linked quarter and our efficiency ratio was 59.5%. Slide six shows our average loan balances. Average loans were up $118,000,000 or 1% linked quarter and up $348,000,000 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 $110,000,000 or 76% year over year. To $34,000,000 or just 40 basis points of loans.

Slide seven shows average deposit balances. Average deposits increased $188,000,000 or 2% linked quarter. And were flat year over year. Excluding payroll deposits and brokered 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 twenty twenty four. Average non interest bearing deposits as a percentage of total deposits was 23% down 1% linked quarter. Turning to 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 3.24 and our March spot NIM was $3.31 Slide nine, shows operating non interest income which was down 2,500,000.0 or 11% linked quarter. And up $3,400,000 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 BOLI income.

In the near term, we expect SBA gains to be in line with our prior August average of 2,900,000.0 due to uncertainty from the impact of tariffs.

Slide 10 shows expenses.

Operating expenses were down $3,100,000 or 4% linked quarter to $68,000,000 and down $4,500,000 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 $2,500,000 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 and non performing loans were 42 basis points of total loans. Net charge offs of 3,500,000.0 were up $200,000 linked quarter and down $500,000 year over year. We added $2,000,000 to our loss reserve increasing our coverage ratio to 124 basis points. Our loss reserves to non performing loans are now about 500%. Our $5,500,000 provision reflects the most recent Moody's baseline economic outlook in our ACL assumptions. During the quarter, we sold the remaining $7,000,000 of Upstart loans. For net proceeds of 5,300,000.0 or $0.76 on the dollar With the sale of the Upstart book, we have significantly derisked 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 nonaccrual 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 $25.5 Our CET1 ratio was 13.3% and our TCE ratio was 9.9%. Our AOCI bond mark improved modestly a negative $106,000,000 to a negative $95,000,000 Given the pending MOE transaction, transaction in the second half of twenty twenty five, we did not provide 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 16 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 multiyear 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 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 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, and a shareholder proxy with the SEC in early April.

We anticipate stockholder approvals at our annual meeting on May 21 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, turn it over to the operator for questions. Operator?

Thank you. We are now opening the floor for question and answer session. Your first question comes from the line of Chris O'Connell of KBW. Your line is now open.

Hey, good morning.

Morning, Chris.

And then so just wanted to start it off, you know, with the balance sheet side. You know, I appreciate no guidance from here and, you it's you know, become a a little bit more shaky economic environment. So, you know, I 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 you know, 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. You know, in in 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 rationalizing and, you know, reducing and so on and so forth. So it it's a mixed bag, but what we ref what we see in the pipeline is our pipeline has slowed down. Compared to the previous quarter just like the origination 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, that's helpful.

And then you know, on on the expense side, you you said there's kind of a number of small items here. Just just hoping to, you know, get your guys' thoughts about you know, the how the expense, you know, base grows throughout the rest of the year on a standalone basis or if it is able to remain pretty steady? Yes. 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, you know, with the the, you know, final start sale, between this quarter and last quarter, [indiscernible] progress on on the runoff portfolios in general. You're talking about kind of normalized net charge offs. I mean, where do you think that range is now? Like, you know, now that you guys have kind of changed the balance sheet, you think that you know, that's a different level than it's been historically?

Yep. Chris, in a normalized environment, that 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 expect it 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 expect it to normalize, and 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 Zengong of Piper Sandler Your line is now open.

Hey, guys. It's Greg stepping in for Mark. How are you?

Hey, Greg. Good. How are you? Good. Just a quick clarifying question. Did you say the spot NIM in March was 3.31%? That's correct. Yes. Okay. Awesome.

And 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 you know, meaningful retention and retention grants. As they move towards the pro form a 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 plans to align your product offerings, your deposit related strategies ahead of the legal close?

So I think we, we'd, in my remarks, I talked about the digital deposit initiative that we launched that's programmed to date about $75,000,000 in deposits. And I think even more exciting outside of the absolute numbers is roughly one out of new client relationships are coming through digital channels now, which was our you know, 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 functionalities. 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 a couple of clicks of buttons on your phone. I think those kind 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 a CRE concentration level guys are keeping in mind as you approach the MOE?

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

Yeah. No. I I would expect TC to to remain relatively stable. From now basically to the merger. You know, 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 Natheen for final remarks.

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

Kelly, you can close the call now.

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