Berkshire Hills Bancorp Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2023

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Berkshire Hills Bancorp Third Quarter 2023 Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, October 20, 2023. I would now like to turn the conference over to Kevin Khan.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you

Speaker 2

for joining Berkshire Bank's 3rd quarter earnings call. My name is Kevin Khan, Investor Relations and Corporate Development Officer. Here with me today are Nitin Mahatrade, Chief Executive Officer Sean Gray, Chief Operating 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 two statements those statements.

Speaker 2

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?

Speaker 3

Thank you, Kevin. Good morning, everyone. I'll begin my comments on Slide 3, where you can see the highlights for the Q3. While the rate environment remains challenging for Berkshire and the overall banking industry, We are encouraged by the trends in our margin that reflects a deceleration in NIM compression. We are also encouraged By the trends in asset quality and deposit durability.

Speaker 3

While expenses were flat quarter over quarter, Given the challenging macroeconomic environment, we will have heightened focus on rationalizing expenses. Some of these initiatives have already begun and we're exploring all other avenues to create a sustained long term efficiency improvement. David will discuss this in more detail in his remarks. Credit is trending in line with expectations. Charge offs declined linked quarter and loan loss reserves increased modestly.

Speaker 3

Operating net income of 21,500,000 Operating EPS of $0.50 both declined 9% linked quarter, primarily from a decline in net interest income. Year to date EPS of $1.67 is up by 7% year over year. Deposits were stable in the 3rd quarter, up 1% linked quarter on an average balance basis and down 1% on an end of period basis. While we're not immune to the funding cost and mix pressures facing the industry, we believe our deposit base is relatively stable. Given our history and long term relationships with clients in smaller cities across our markets, Average loan balances were up 2% linked quarter with balanced growth across commercial and consumer loans.

Speaker 3

Our balance sheet remains strong. We ended the quarter with common equity Tier 1 ratio of 12.1 percent and a tangible common equity ratio of 7.67%. We've added a page in the appendix On our overall commercial real estate portfolio, I updated the appendix page that provides details on our office portfolio, both of which highlight how our portfolio is granular, geographically diverse and resultantly less risky. David will cover some of these metrics in more detail in a few moments. On the best strategy front, This quarter marks the start of year 3 of our 3 year BEST program.

Speaker 3

We continue to rationalize our real estate footprint, including the consolidation of 4 branches and sale of 1 office building this past quarter. In continuation of our digitization journey, we launched our new mobile banking app and online banking platform towards the end of the third quarter. The disruption in our markets has enabled us to opportunistically hire deposited and relationship focused frontline bankers. We're also delighted that Mary Anne Callahan has joined our Board of Directors. We've included a page with Mary Anne's bio in the appendix.

Speaker 3

Welcome aboard, Mary Anne. Slide 4 shows our best programs progress on 5 key performance metrics. As we've said in the past, the path to our targets will not be a straight line. We are near the low end of our target range For operating return on assets at 73 basis points and our operating return on tangible common equity or ROTCE at 9.27%. We've added a new ROTCE calculation to be more consistent with our peers, which David will review in his remarks.

Speaker 3

Our quarterly PPNR annualizes to $136,000,000 and our ESG score remains in the top quartile at the 19 percentile nationally. Our net promoter score in the 3rd quarter came in at 54, significantly higher than our full year 2022 NPS score of 43. I want to use this opportunity to thank all of my Berkshire Bank colleagues For their continued hard work and commitment to our vision to be a high performing relationship focused community bank. Their commitment to our strategy and dedication to our customers and communities is what brings us together and sets us apart. With that, I'll turn the call over to David to discuss our financials in more detail.

Speaker 3

David?

Speaker 4

Thank you, Nitin. Slide 5 shows an overview of the quarter. As Nitin mentioned, operating earnings were $21,500,000 were $0.50 per fully diluted share, down $0.05 linked quarter and down $0.12 year over year. Our net interest margin was 3.18, down 6 basis points linked quarter and down 30 basis points year over year. Net interest income declined $2,400,000 or 3 percent linked quarter and was down $1,800,000 or 2% year over year.

Speaker 4

Operating non interest income was up 2% in the quarter and up 7% year over year. Operating expenses were flat versus last quarter and up $3,700,000 or 5 percent year over year. Average loans increased $161,000,000 or 2% quarter, while average deposits increased $62,000,000 or 1% from the 2nd quarter. Provision expense for the quarter was $8,000,000 at the midpoint of our July guidance and flat to the 2nd quarter. Net charge offs were in line with expectations at $5,400,000 or 24 basis points of average loans.

Speaker 4

We increased our allowance for credit losses by $2,600,000 in the quarter. Slide 6 shows more detail On our average loan balances, which were up $161,000,000 or 2% linked quarter. We had balanced growth across our commercial real estate and residential mortgage books with modest declines in C and I and consumer. Slide 7 shows our average deposit balances. Total deposits increased $62,000,000 or 1% in the quarter and were essentially flat year over year.

Speaker 4

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 average deposits We're 26% in the 3rd quarter versus 27% in Q2. Our deposit costs were 181 basis points, Up 30 basis points from the 2nd quarter, our deposit beta for the 3rd quarter was 112% And our cumulative beta is 32% through 5 25 basis points of Fed tightening. Borrowing stood at 9% of total funding on an average balance basis, down from 12% in the 2nd quarter And up from 3% in Q3 of 2022. Turning to Slide 8, we show net interest income.

Speaker 4

Higher loan volumes provided a lift to the 3rd quarter, while higher deposit costs contributed to the $2,400,000 or 3% decrease And net interest income. The $1,800,000 or 2% year over year decline in net interest income was primarily driven by higher deposit and borrowing costs. Slide 9 shows fee income, which was up $371,000 or 2 percent linked quarter. Deposit related fees were up $221,000 Loan and other fees were down $310,000 in the 2nd quarter. Gain on sale of SBA loans were down $362,000 versus the second quarter due to lower premiums in the market.

Speaker 4

Wealth management fees were down $102,000 linked quarter. Other fees, which include a securities fair value adjustment of negative $467,000 were higher primarily driven by the reversal of tax credit amortization. Slide 10 shows our expenses. Expenses were flat linked quarter and are closer to the lower end of the guided range of $73,000,000 to $76,000,000 per quarter. Modest increases in compensation and technology expenses were offset by declines in occupancy and equipment, Professional services and other expenses.

Speaker 4

GAAP expenses of $76,500,000 include $2,600,000 of restructuring charges, primarily driven by branch consolidations. Expenses year over year were up $3,700,000 or 5%, largely driven by higher compensation and technology The increase in other expenses was primarily driven by higher deposit insurance premiums and loan servicing expense. As we said last quarter, technology spend will normalize over the coming quarters as we reduce Costs related to our legacy digital platform. We are committed to managing expenses with discipline and transparency. We have instituted biweekly meetings in which every vendor expense of $25,000 or more and every request for new hires as well as replacement hires above a preset grade level.

Speaker 4

This granular approach To expense management, we're starting to have the desired impact of reducing our expense base. This strategy We'll ensure that every dollar is thoughtfully spent and is necessary to run the bank efficiently or to grow our revenue and earnings. Slide 11 is a summary of asset quality metrics. Non performing loans were down $1,800,000 Linked quarter $11,300,000 year over year. Net charge offs of $5,400,000 or 24 basis points We're down $300,000 in the 2nd quarter 1st of the second quarter.

Speaker 4

In the top right chart, you can see that Berkshire's 10 year average net Charge offs to loans averages 27 basis points and we are currently operating around that normalized level. Net charge offs included commercial loan charge offs of $3,200,000 and consumer loan charge offs of 2,200,000 We've included a chart in the appendix with Berkshire's charge off rates versus the industry Since the year 2000. As Nitin mentioned, we've added a page in the appendix on overall CRE exposure. The CRE book is well diversified in terms of geography and collateral type. Credit quality of this portfolio remains strong With non accrual loans at 12 basis points of total loans.

Speaker 4

We also updated the page in the appendix on the office portfolio. As noted last quarter, the weighted average loan to value ratios are approximately 60% and a large majority is in Suburban and Class A office space. While current credit quality metrics are benign, We recognize that economic uncertainties exist. We are monitoring both new originations and our existing portfolios carefully. We have modestly increased our reserves commensurately.

Speaker 4

Slide 12 shows returns over the past 5 quarters on a GAAP and an operating basis. As you know, the current operating environment is presenting headwinds, But we remain highly focused on improving our medium term performance. I want to highlight several new roles we've added to financial tables at the beginning of the earnings release this quarter. We have been reporting return on tangible common equity With a denominator that excludes the negative AOCI mark from our AFS securities portfolio. We are now also reporting RoTSI with a denominator that includes the negative AOCI mark, which lowers the denominator and increases RoTC.

Speaker 4

Most of our peers calculate return on tangible common equity this way, And we'd encourage you to consider ROTCE figures on an apples to apples basis. We are not moving the return goalposts, but are simply aligning part of our reporting to be more consistent with both peers and larger banks. Slide 13 shows capital ratios. Our top capital management priority is to deploy capital to support organic loan growth. Secondly, we remain biased towards stock repurchases given our stock prices below tangible book value.

Speaker 4

In Q3, we repurchased $3,900,000 of stock at an average cost of $20.01 We believe Berkshire stock is undervalued given our growth potential and low risk business model. We will continue to opportunistically repurchase stock. With that, I'd like to turn it back to Nitin for further comments.

Speaker 3

Thank you, David. I'll close my remarks with comments on the economy, The industry and our positioning. We are fortunate to be operating in the relatively stable markets in the Northeast, which continue to remain on solid footing. We're facing typical banking industry cyclicality issues such as NIM compression from the inverted yield curve And normalization of credit cycle. Banks do adjust and we expect margin compression to decline over the next few quarters.

Speaker 3

While we expect credit costs to increase modestly, they will be significantly lower than the losses during the GFC cycle. We also believe that increased regulatory costs will impact the industry, but are likely to impact larger regional banks or money center banks Much more than community banks like Berkshire. While we can't operate or control the macro environment, We are focused on controlling what we can and have several levers, including opportunistic hiring for deposit growth, Derisking the balance sheet and rigorous expense management. When I started as CEO in early 2021, we faced declining loan balances that we steadily turn into loan growth. We will similarly overcome the current challenges, especially deposits growth and expense management.

Speaker 3

We remain focused on selective, 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. Jerry?

Operator

Thank you. Ladies and gentlemen, We will now begin the question and answer You will hear a 3 tone prompt acknowledging your request and your questions will be polled in the order they are received. Please lift the handset before pressing on any keys. Our first question comes from Billy Young of RBC Capital Markets. Please go ahead.

Operator

My apologies, we seem to have an issue there. So we'll go to the next question from the line of Mark Fitzgibbon of Piper Sandler. Please go ahead.

Speaker 5

Hey, guys. Good morning and happy Friday.

Speaker 4

Hey, good morning. Good morning.

Speaker 5

First question I had, should we expect more branch Consolidations and restructuring charges associated with that in coming quarters?

Speaker 3

I think the short answer, Mark, would be yes. We constantly monitor our geography and opportunities for consolidation while retaining our Clients and bankers, so that process will continue and to that extent you should continue to expect that.

Speaker 5

Okay. And then how about balance sheet restructuring in the 4th Quarter, given that it looks like rates are going to stay up here for a while. Is that something that you're contemplating?

Speaker 4

Hi, Mark, it's David. Yes, we are constantly thinking about The logic of restructuring the securities portfolio were very similar to a lot of banks where the whole portfolio is underwater. It's primarily mortgage backed securities. Some of the durations have lengthened out a little bit. So as you know, very clearly, it's just taken that equity hit to Create a much better run rate going forward.

Speaker 4

The things that we think about Mostly is the future path of interest rates and the we're constantly Trying to think through whether we're close to the turn in rates and if so, it's probably not the best strategy because That equity hit is large, but it could happen Or could not happen in Q4 or even into 2024 at this point.

Speaker 5

Okay. That's a fair answer. And then I guess at a macro level, can you share with us how you're thinking about either growing or shrinking the tax Credit investments over time and maybe what the implications might be for the effective rate going forward?

Speaker 4

Yes, that's a really Good question. So we actually have a really nice high quality Tax credit portfolio, it consists of low income housing tax credits, historic tax Credit has a few new market tax credits in it and then solar tax credits. The interesting thing is that the accounting is going to change come the 1st of the year and which will Drive up our effective tax rate, but will no longer require us to Amortize, the expense of the amortization. We put those numbers in the financial tables To be very clear about the positive impact of the programs we run, but the accounting will change going forward. The economics do not change, which is important to know, but the effective tax rate will rise upon The purchase of what's called PAM accounting.

Speaker 5

So where would you expect the effective rate to settle out?

Speaker 4

We're still working through that. We will have a lot more clarity in January when we give Guidance. And the only reason I'm pushing that to January is some of our Credits reside in the State of New York, which may not allow the adoption of PAMA County, Which means we're still working through that minor issue, which will drive the final effective tax rate.

Speaker 5

Okay. And then lastly, I think last quarter, David, you said you thought the NIM would Sort of bottom out in the $315,000,000 to $320,000,000 range in the second half of the year. Given what you see today with funding challenges, Do you still feel like that's a reasonable range for the Q4?

Speaker 4

Yes. So I think even so the answer is yes. Let's think about the NIM a little broader though. I want to stop short again of talking too much about 2024. But what I would point out is the 6 basis point reduction in NIM this quarter Relative to the 34 basis point reduction last quarter.

Speaker 4

So the real positive message and news Yes. The pressure while the pressure remains on the competition around deposits And we have about half of our loan portfolio is Variable rate, mostly so far at this point, but prime as well. What I would characterize this quarter as mid single digit decline in the NIM, as we Look forward, I think that number is going to go to low single digit declines As we start to think about 2024. So I think there's a really good message embedded in that, about the Overall margin for our company, the only other nuance to that is that's really based on Forward rates, which of course has one easing today built into the back half of next year. So those comments are prefaced on the current rate environment, which has an end to The tightening cycle, but there's good news embedded in what I'm trying to say.

Speaker 5

Thank you.

Speaker 4

You're welcome.

Operator

Our next question comes from the line of Billy Young of RBC Capital Markets. Please go ahead.

Speaker 6

Hey guys, this is Travis again. Can you hear me okay?

Speaker 3

Yes, we can now, Willie. Good morning.

Speaker 6

Great. Thank you. Sorry about that technical difficulties. Just to start, maybe just a follow-up on Mark's last question.

Speaker 1

I know you don't want to

Speaker 6

give much guidance for 2024, but You kind of David alluded to low single digit declines in the NIM as we go into next year. I guess just Why is that if we kind of think the Fed if we assume the Fed is kind of done or close to done, kind of where is that incremental Pricing pressure coming from that will kind of offset asset repricing opportunities going to next year?

Speaker 4

It's more on the liability side. Just when you think about the role of the CD book, It takes a little bit of time for all of that to roll over. So we have roll I mean, yes, we've got most of the 4th quarter. And what I was telegraphing was The easing that's built into the market doesn't actually occur until the beginning of the back half of next year. So Unless the market sniffs that out earlier, economic weakness and forwards come down more, you've got Essentially almost a full pricing of the CD book That's going to have has a lag effect.

Speaker 4

It had a lag effect on the way up. So have a bit of a lag effect on the way down. Until that happens, Banks are still competing for deposits. And we see in our markets, we see some fairly aggressive Pricing from interesting to me, both larger and smaller banks. So it's simply that

Speaker 6

Understood. That makes sense. It makes sense. Okay. And then just on maybe loan growth, Maybe a 2 part question here.

Speaker 6

First, your thoughts on whether the $9,200,000,000 to $9,400,000,000 in The back half of the year, is that still a good number for you in terms of target? And then on C and I, balances have been under pressure for the Couple of quarters, I guess, what are you hearing or seeing from customers here? How does that impact your thinking on the growth mix In the near term, because I know it was I think it was 70%, 75%, commercial was kind of the target Where are you getting your growth from? Thanks.

Speaker 3

Yes. So Billy, I'll give a high level overview and then David could give more specifics. So I think Specific guidance, the number that you pointed to, 9.2% to 9.4%, I think we might be on the lower end or even slightly lower than the lower end At this point of time, we see the slowdown in the pipelines across all books. So that's going to show up in the Q4. We did.

Speaker 3

I think David did provide guidance for the second half of growth of 7% to 11%. And again, I think we'll be on the lower end That or even slightly short of that. And I think that's a good thing in the environment that we are in. The second part of your question is, yes, we do expect that the commercial book Goes from 65% to 70% over time and our teams are doing a fantastic job managing the balance sheet. And Even on our residential book, we've slowed down.

Speaker 3

We've pretty much stopped third party originations. We've slowed down on the originations and have Our ability to do secondary market sales, which were more than 20% last quarter. So I think it's a mix of activities In kind of accordance to the market environment?

Speaker 4

The only thing I would add to that is When Nitin says our pipelines are slower or lower, that's by design, Okay. So we certainly have the ability to lend more than we're lending, but we're repositioning Under the leadership in commercial of Jim Brown to work to Lend and create deposits, which is a modest Or a change in our philosophy. So fuller both sides of the balance sheet relationships It's what we're going after rather than just extending high quality credit. And I think we'll be very successful with that Over time, it takes time. Nitin referenced in his original comments that the industry disruption has allowed us To hire deposit focused commercial bankers and we will continue to try to do that.

Speaker 4

So that's the real color behind what we're trying to achieve here.

Speaker 3

Hope that helps, Willie.

Speaker 6

It does. Thank you very much for taking my questions. I'll step back now. Thanks.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Dave Bishop of Hode Group. Please go ahead.

Speaker 7

Yes. Good morning, gentlemen.

Speaker 3

Good morning, Dave. Good morning.

Speaker 2

Hey, Nit

Speaker 7

and Dave, just curious, obviously, there's been some maybe year over year pressure On data processing, technology and communication cost, and you noted the sort of the revamp of the digital banking platform. Just curious maybe Is there potential to enumerate what the savings are once that's implemented? And maybe what how much of that year over year pressure has been related to sort of That initiative?

Speaker 3

Yes. Dave, I'll ask Sean to talk about the technology kind of outlook here. Sean? Yes, there is opportunity.

Speaker 4

It's a lower unit cost going forward. So We anticipate very low single digit reduction off of where we are today.

Speaker 3

Dave, what is the second question again?

Speaker 7

Yes. In that second question, Nitin, obviously, with And maybe this is something you've thought about or pursued and just doesn't make sense in the current environment. But I appreciate the disclosures around the runoff portfolios, UPSTART and Firestone. Any potential for maybe a bulk sale there or Partial bulk sale just to accelerate the reduction of sort of those non core portfolios and maybe the expenses attributed with them?

Speaker 3

I would say, Dave, we're looking at everything, right? So I think you started with expenses. So all options on the table, Real estate procurement, suppliers, stock structures, discretionary. So that's on the expense side. Similarly, on the balance sheet side, to your question, yes, we're looking at every Optionality, we have to improve the balance sheet mix.

Speaker 3

So yes, everything is on the table.

Speaker 4

And Dave, I would just go back to I thought I had said this last Quarter. Yes. So last quarter, we were calling out the double technology expense, so to speak, because of the Narmy conversion that we talked about. So the and I mentioned that in our comments today about the reduction in our legacy deposit system. So that's about $500,000 a quarter or so.

Speaker 4

So that hasn't Come out of the run rate yet, but it will as we go through this quarter And in the next year. The problem with technology expenses, there's always more around the corner, and that's what we have to Diligent

Speaker 7

around. Got it. Then one final question, just curious, David, just new commercial origination yields where you're onboarding new commercial loans? Thanks.

Speaker 3

Yes. They're about closer to 8%, I think 7.75% to 8%.

Speaker 7

Perfect. Thank you.

Speaker 3

Thanks, Dave.

Operator

Our next question comes from the line of Chris O'Connell of KBW. Please go ahead.

Speaker 1

Hey, good morning. So wanted to Talk about the share repurchases. This quarter was a little bit less than half or so. It seems like The repurchases last quarter and I believe this plan that you're currently on Ends at the end of this year. Just wanted to know what your appetite was going into the 4th quarter, Whether you think it will look a little bit more like 3Q levels or 2Q and whether you intend To re up the plan as we move into 2024?

Speaker 4

Sure. So 2 part question. So Our approach in the Q3 was the equity markets felt a little wiffy to us, especially the sector that We all travel in. So the average price our share traded at In the Q3, it was $21.40 We have a tangible book value at the end of the quarter of 21 And $0.23 So our approach in the Q3 was mostly around price discipline. So we bought stock at $20.01 So we were a bit more focused on price And the discipline and a lot of that was just concerned about how our sector is trading.

Speaker 4

But in my comments, I did Very clearly state that our stock is undervalued. The question is, it may our stock and All of our peers, they stay undervalued for a period of time. So, that doesn't give you a lot of color to Q4, but I think we will we would have liked to have bought more stock at that price in the Q3. It just wasn't available. The second part of your question was this one this does expire and will we Come up with another program.

Speaker 4

Most likely answer to that is, yes. Yes. We still have to socialize that with the Board and go through the normal regulatory protocols. But That would be our intention as long as our Board is supportive.

Speaker 1

Great. And just on the balance sheet, on the cash levels, You guys are still, I think, a little bit elevated to historical levels today. Do you see an opportunity to kind of bring that down in the coming quarters to help out either fund some loan growth or Do some higher cost fundings?

Speaker 4

Yes, probably. As you mentioned, we brought it down quite a bit from where we were in the first half of the year. In Q2, it was a little elevated when we were going through the government shutdown business. We wanted to have a more liquid balance sheet. Who knows if we're going to be dealing with that again or not.

Speaker 4

But aside from that, generally, we would generally concur There's the ability to bring cash levels down.

Speaker 1

Okay, got it. And then just thinking about bigger picture here as we move into year 3 and you guys are moving towards Those best targets. Where do you think you have the most ability or levers to Pull in order to trend and get toward those targets. Obviously, a little bit of margin compression, but Is it balance sheet growth, expense management or any fee income opportunities? Where do you see the biggest bright spots?

Speaker 3

Yes. I think it's kind of a different order, but you spelled out the 3 components. I think expenses will be a big component of it, balance sheet, mix change and growth Will be the other part. And I think historically, if you look at the 10 year average, our margins used to be 2.7%. I think we believe there's an opportunity to have much higher margins.

Speaker 3

So there is little bit of that margin play as well. And we continue to get opportunities through the disruption that's going on in the market and the for our ability to hire Clive, client books and the bankers with deposit oriented relationships, We've seen good success constantly and I think that will get accelerated as we go into next year.

Speaker 4

I think we also have opportunities on the fee income side. I mean, it's those Are really good businesses. They take time to scale. You need the right people in the right positions. But I do think we have opportunities there over the next couple of years.

Speaker 1

Great. And then lastly, I know you guys give a lot of detail in the deck with regards to this, but Just any internal outlook or updates on your thoughts on the overall office portfolio and just the general kind of Market conditions in your areas?

Speaker 3

Greg?

Speaker 4

Sure. Yes, our overall outlook for the portfolio

Speaker 8

It's still consistent with what we've seen in the past. Obviously, we're familiar with what other banks are going through and some of the risks In the industry, but the portfolio performance still remains Solid. And we will continue to look at opportunities to revisit renewal And whether we decide to renew credits in the future or not, we think it's a very good time as we experience some of the maturities Over the next year or 2, you rebalance the portfolio.

Speaker 3

And I would add, Chris, that we're also, As part of slowing down of some of the originations, we've also seen a decline in that portfolio, roughly 5% quarter over quarter. So The portfolio is performing well and it's not growing at a fast pace. So I think that kind of bodes well for asset quality for us In this

Speaker 1

environment. Great. Appreciate the color. Thanks for taking my questions.

Speaker 3

Thanks, Chris.

Operator

Our next question comes from the line of Laurie Hunsicker of Seaport Research. Please go ahead.

Speaker 9

Great. Hi, thanks. Good morning.

Speaker 4

Hey, Laurie.

Speaker 9

I wanted to go back to your branches that you stuttered. The 4 branches, were any of those in Boston? Or where were they located in Massachusetts?

Speaker 3

Yes, they were not in Boston, 2 West and 2 East of the footprint.

Speaker 4

Yes. Yes. Laurie, really west of 495 in Massachusetts.

Speaker 9

Okay. And then as you think about your 96 branch footprint, if you were to look a year out, how do you see that? Is that 96% going to 90% is it 96% going to 80% how do you think about that?

Speaker 3

Yes. No, We can't give a specific number, Laurie, but we as we said in the earlier question as well, we constantly evaluate our branch footprint and our We serve those clients better. We have channels like MyBanker that are unique to us whereby we go to the client as opposed to clients having to come to the branch. So I think all of that is baked into the equation. We do believe, based on what we see that there is an opportunity for further consolidation.

Speaker 3

We just can't spell out a specific number at this point.

Speaker 9

Okay. Okay. And then $2,600,000 in one time Charges, what are the cost savings you're getting with these closures? And was any of that reflected in 3Q? And How much how do you think about how much of that drops to the bottom line versus a franchise reinvestment?

Speaker 4

Yes, Laurie, it's David. There's, it's a modest number that drops to the bottom line on a go forward basis. The I think of these branch some of these branch closures as cleanup, meaning They were 2 of them were closed branches, so there wasn't operating Near term or current period operating expenses, it was real estate cleanup and then 2 were operating So it's a relatively modest number.

Speaker 9

Okay. Got it. And I know you're hesitant to sort of talk about this going forward, but do you think we're going to see more branch closures in Q4 or you're looking further out in terms of rationalizing expenses?

Speaker 4

I think it's yet to be determined, but more likely to be into 2024 than Q4.

Speaker 9

Got you. Got you. Okay. Thanks. That's helpful.

Speaker 9

Okay. And then going back to office here. It looks like You had a really nice drop linked quarter. You went from $523,000,000 in the investor book down to $479,000,000 Was that A sale? Or was there a reclassification there?

Speaker 9

How should we think about what that was? I mean, you didn't really have any commercial real estate charge offs To speak of in the quarter. So I'm just trying to understand that movement.

Speaker 3

It's a combination of both, Laurie. I think one part was reclassification of companies that supply To the office space versus actual office space itself, I think that brought some of the number down. But even if you normalize for it, As I mentioned earlier to the other question, our balances in the office portfolio went down roughly by 5% or $25,000,000 Yes.

Speaker 4

We had some in our first Iteration of going through the portfolio, there were some suppliers to office Buildings that were included. So that should not have been included originally. So we Made that change this quarter, but as Nitin says, more importantly, on normalizing for that, The portfolio still was down 5% and it was not through sales or charge offs. It was simply maturities.

Speaker 9

Got you. Got you. Yes, your CRE and your Office slides in the deck are very helpful. So on Office, I know you've got another, I don't know, dollars 3.60 some odd million that are lapped. Can you talk a little bit about that's not included in that number?

Speaker 9

Is that the right number? Is there a better number? And just, I guess, specifically, how medical is holding up very well. Lab is starting to see a little bit of weakness. Are Seeing anything there that's concerning you?

Speaker 9

Or how is that portfolio looking?

Speaker 3

Yes. No concerns that we've seen so far. Greg, if you would like to provide any more color?

Speaker 8

No, Laurie. We're not seeing any like early signs of weakness in the portfolio, no increases in criticized or classified. And you can see some of our NPL and NCL rates on the portfolio and even some of the early stage, we're not seeing anything there.

Speaker 9

Okay. And then $360,000,000 is that the right number for OfficeLab or is there a better number?

Speaker 2

Laurie, this is Jeff. Sorry, go ahead, Greg.

Speaker 4

No, you mean OfficeLab, Laurie, what specifically?

Speaker 2

Yes, correct. Are you asking about education and medical, Laurie?

Speaker 9

I don't know. I was under the impression you had about $360,000,000 of OfficeLab last time I chatted with you, but maybe I got that Firm incorrect. I thought you had Cambridge last

Speaker 2

year. Yes, the education and medical Exposures were $350,000,000 at the end of the second quarter and dropped 9% to $318,000,000 at the end of the 3rd quarter.

Speaker 9

$318,000,000 Perfect, perfect. Sorry about the confusion there. Okay, great. And then I guess, just sort of very high level, Can you talk a little bit about and I realize you haven't provided 2024 guidance, but can you talk a little bit about what would be your sort of First plan of attack as you de risk the balance sheet, just in near term quarters, how we should be thinking about that when you talk about that priority?

Speaker 3

You broke up a little bit. You said first, your plan of attack to do what? Seabrisk.

Speaker 9

So in seabrisking the balance sheet, Yes. You mentioned that was a priority. Can you just in coming quarters, just very generally talk about sort of what is your first plan of attack as we look for the next couple of quarters On the derisking strategy there?

Speaker 3

Yes. I think I'll leave that when we provide the guidance because we would have better line of sight, Laurie, but I think broadly speaking to the question I answered earlier, we're looking at all components So the balance sheet and opportunities that are embedded within it, but beyond that, I think we'll have better clarity as we go forward. In the meanwhile, I think the teams are doing a fantastic job Monitoring the existing portfolios, working with the clients and keep the credit quality as pristine as we can.

Speaker 4

And if I could just jump in for a second. So I really think Nitin's comments were in response to Dave's Question. As a relative newcomer here, I would just say That the balance sheet isn't necessarily in need of de risking. I wouldn't brought that impression Out there that we feel we need to de risk our balance sheet. I see and I look Laurie, I think this was Before you started recovering us, so I probably said it in my first conference call, if I remember correctly.

Speaker 4

My impressions, my initial impressions, still my impression as I get to understand The company better is we have a really strong credit process, very well developed, especially when I think about The size of the organization, the reporting, the quality of the Discussions around the risk that we have, the risk that we take and manage. There's a few portfolios that are in runoff mode, but they're not necessarily in runoff mode Because of credit per se. So and those are a very small component Of the loan portfolio, when you think about C and I portfolio, the ABL Our residential mortgage portfolio, our commercial real estate portfolios, where the big numbers are. The point I'm trying to convey is We have very solid risk management practices around the core of the business.

Speaker 9

Great. Thank you very much for taking my question.

Speaker 3

Thank you, Lourdes.

Operator

There are no further questions at this time. Please proceed.

Speaker 3

Thank you all for joining the call today and for your interest in Berkshire Bank. Have a good one.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you disconnect your lines.

Powered by Quartr
Earnings Conference Call
Berkshire Hills Bancorp Q3 2023
00:00 / 00:00