Berkshire Hills Bancorp - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, welcome to the Berkshire Hills Bancorp Second 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Thursday, July 20th, 2023. I would now like to turn the conference over to Kevin Conn. Please go ahead, sir.

Kevin Conn (SVP of Investor Relations and Corporate Development)

Good morning, thank you for joining Berkshire Bank's Second Quarter Earnings Call. My name is Kevin Conn, Investor Relations and Corporate Development Officer. Here with me today are Nitin Mhatre, 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 statements. Please see our legal disclosure on page two 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 (CEO)

Thank you, Kevin. Good morning, everyone. I'll begin my comments on slide three, where you can see the highlights for the second quarter. We continue to make steady progress and are thankful that the heightened market uncertainty, which began on March eighth, has subsided significantly in the second quarter. We are encouraged by our deposit durability, strong liquidity, and capital position. We're also encouraged by our continued disciplined credit management, with charge-offs declining $1.1 million linked quarter, while we added $2.2 million to our loan loss allowance, commensurate with loan growth. Fee revenues were up versus first quarter, providing a modest offset to the decline in net interest income from rising funding costs.

While we intend to provide our outlook once a year on our fourth quarter earnings call each January, we've included an updated 2023 outlook slide, given the meaningfully different operating environment. David will review that in a few minutes. Operating net income of $23.9 million declined 14% linked quarter and was up 1% year over year. Operating earnings per share of $0.55 declined 13% versus first quarter and was up 8% year over year. Operating return on tangible common equity was 8.27%, a decline versus first quarter and down 21 basis points year over year. Deposits were stable in the second quarter. On an end of period basis, deposit balances were flat to first quarter and down 1% on an average balance basis.

As a comparison, Fed H.8 data shows small banks' ending deposit balances were down 1% and average deposit balances were down 3%. While we're not immune to the funding cost and mixed 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 New England market. Average loan balances were up 3% linked quarter, with commercial loan balance growth of 2% over that period. We recognize that while many banks may be pulling back or even cutting lending, we continue to serve our customers' borrowing and banking needs prudently, and to that extent, we expect continued loan growth, albeit at a slower pace in the second half of the year.

Longer term, we're targeting to have about 65%-70% of our loan stock in commercial and 30%-35% in consumer loans. On an average balance basis, commercial loans were 66% of loans this quarter. Our balance sheet remains strong. We ended the quarter with a Common Equity Tier 1 ratio of 12.1% and a tangible common equity ratio of 7.9%. Given macroeconomic trends, we remain vigilant on credit, even as our asset quality continues to remain strong. Provision expense for this quarter was $8 million. Our allowance to loans ended the quarter at 113 basis points, in line with our guided range of 110-120 basis points. A year ago, we decided to de-risk the balance sheet and run off non-strategic loan books, including Upstart and Firestone.

We continue to do so and have included updated data on those run-off books in an appendix page, which provides more details. We have also updated the appendix page that provides details on our office portfolio, which highlights how our portfolio mix is geographically diverse, granular, 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 second-year anniversary of our three-year plan. I'll provide more details on the overall progress of the program on the next slide, but a couple of additional highlights to note are: we completed the allocation of our $100 million sustainability bond in this past quarter, resulting in creation of 330 units of affordable housing with more than 200,000 sq ft of green building development.

A detailed report on this is available on our website. Slide four shows our BEST program's overall progress on five 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 on return on assets at 78 basis points and our return on tangible common equity at 8.3%. Our quarterly PPNR annualizes to $143 million. We've been tracking our customer Net Promoter Score through customer surveys that J.D. Power helped us design and administer. Our Net Promoter Score, or NPS, for the quarter came in at the highest ever level of 56.7 versus 52.8 in the first quarter and was significantly higher than our full year score of 44.

I want to use this opportunity to thank all of my 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 over the past two years. With that, I'll turn the call over to David to discuss our financials in more detail. David?

David Rosato (CFO)

Thank you, Nitin. Slide five shows an overview of the quarter. As Nitin mentioned, operating earnings, which matched GAAP earnings, were $23.9 million, or $0.55 per fully diluted share, down $0.08 linked quarter and up $0.04 year-over-year. Net interest margin was 3.24%, down 34 basis points quarter-over-quarter, and up 13 basis points year-over-year. Our June NIM was 3.19%, and we believe the worst of the NIM compression is behind us. Net interest income declined $4.8 million, or 5% linked quarter, and was up $11.4 million, or 14% year-over-year. Non-interest revenues were up $488,000, or 3% linked quarter, and up $743,000, or 5% year-over-year.

Operating expenses were up $2 million or 3% linked quarter, and up $5.6 million or 8% year-over-year. Average loans increased $276 million or 3% linked quarter. Average deposits decreased $108 million or 1%. Provision expense for the quarter was $8 million, at the midpoint of our January guidance and down $1 million from the 1st quarter. Net charge-offs were in line with expectations at $5.8 million or 26 basis points of average loans, and we increased our allowance for credit losses by $2.2 million. Slide 6 shows more detail on our average loan balances, which were up $276 million or 3% linked quarter.

Growth in residential mortgage was offset by a modest decline in our consumer book, driven by a $13 million reduction in our Upstart portfolio. CRE loans were up $117 million or 3%, and C&I loans were down $31 million or 2% linked quarter. Total commercial loans were up $86 million or 2%, below the first quarter pace of 5% as we continue to be more selective with clients. Slide seven shows our average deposit balances. Total deposits declined $108 million or 1% in the quarter, and declined $187 million or 2% year-over-year. Brokered deposits on an average balance basis increased $168 million to $321 million linked quarter and are just 3% of average total deposits.

End of period deposits in the second quarter were flat to the first quarter. 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, were 27% in the second quarter versus 28% in Q1. As expected, time deposits were up 26% versus the first quarter, and we expect growth in time deposits to continue. Deposit costs were 151 basis points, up 42 basis points from the first quarter. The total deposit beta for the second quarter was 89%, and the cumulative deposit beta is 28% through 500 basis points of total Fed tightening. We continue to anticipate that the cumulative total deposit beta will approach 40% through the rest of 2023. Turning to slide eight, we show net interest income.

Higher loan volumes provided a lift to second quarter net interest income, while higher funding costs contributed to the $4.8 million, or 5% decrease in net interest income. The $11.4 million, or 14% year-over-year growth in NII, was primarily a function of higher loan volume and higher interest rates. Slide nine shows fee income, which was up $488,000 or 3% linked quarter. Deposit-related fees were up $260,000 or 3%, driven by higher commercial cash management fees. Loan fees and other were up $720,000 on higher swap income. I'd caution that swap income is a volatile line item. Gain on sale of 44 BC SBA loans were up $416,000 versus the first quarter on increased balances sold.

Wealth management fees were down $156,000 linked quarter, primarily due to seasonal tax prep fees in the first quarter. The decline in other fee revenues mostly reflects annual credit card revenue fees of $600,000 paid in the first quarter. Slide 10 shows our expenses. Expenses were up $2 million or 3% from the first quarter, and at the high end of our January guidance. Compensation expense was up $889,000 or 2% linked quarter from new hires and from sales incentive compensation. Occupancy and equipment was down $409,000 or 4%, reflecting continued expense saves from office and branch consolidation.

Technology and communications expenses were up $994,000 or 10% versus the first quarter as we continue to invest to digitize the Bank, which is a strategic priority for us. Technology spend will normalize over the back half of the year as we complete our digital banking conversion. The increase in other expenses largely reflects increases in deposit insurance premiums. The balance of the increase in other expenses is spread over several small items. I'd like to talk about our expense base for a moment. Since joining in February, I've spent considerable time working to understand our expense base. We are committed to managing expenses with discipline and transparency. We will continue to identify opportunities for expense reduction and reinvest part of those saves in our franchise, frontline and support teams to grow revenue organically.

Including the opportunities to attract new talent stemming from market disruption, we will manage to a quarterly run rate of $73 million-$76 million, while carefully evaluating every dollar of expense. Slide 11 is a summary of our asset quality metrics. Non-performing loans were up $1.4 million from the first quarter and stand at 32 basis points of total loans. Net charge-offs of $5.8 million were down $1.1 million or 16% from the first quarter. Net charge-offs mostly consisted of C&I charge-offs of $4.2 million and consumer loans of $2.3 million. We had a net recovery of $664,000 in CRE. While current credit quality metrics are benign, we recognize that economic uncertainties exist, and we are monitoring both of our originations and portfolios very carefully.

As Nitin mentioned, we updated the page in the appendix on our office portfolio. As noted last quarter, the weighted average loan-to-value ratios are approximately 60%, and a large majority is suburban and Class A space. Last quarter, we mentioned that lease maturities for our larger office loans are not significant until 2027. I'd also note that CRE non-performing loans to end-of-period loans were three basis points in the second quarter, down from 21 basis points a year ago. We've added a page in the appendix, which shows our net loan charge-offs as a percentage of loans versus all FDIC banks. We have generally outperformed peer banks over a long timeframe. Our long-term net charge-offs to average loans averaged 38 basis points from the year 2000 to today versus 83 basis points for all FDIC-insured banks.

This data, of course, includes the great financial crisis. Over the last 10 years, as the prior slide shows, our net charge-offs have averaged 27 basis points of loans. Slide 12 shows our returns over the past five quarters on a GAAP and an operating basis. As you know, the current operating environment is presenting many headwinds, we remain focused on improving our long-term performance. Slide 13 shows details of our liquidity and capital positions. In the second quarter, we unwound the excess liquidity we prudently built in the first quarter. FHLB borrowings at quarter end were $674 million, down $230 million from March 31st. As a reminder, from our last call, we held excess liquidity on the balance sheet. We held that liquidity from March 8th through June 15th, following the resolution of the debt ceiling.

Our average FHLB balance was $1.1 billion in the quarter. The loan-to-deposit ratio at period end was 88% versus 86% in the first quarter, and our TCE ratio ended the second quarter at 7.9%, roughly flat to the first quarter, and included an AOCI mark of $186 million on an after-tax basis, which was up $22 million. Tangible book value per share ended the quarter at $21.60, down 1% versus the first quarter and flat to the second quarter of 2022. The chart on the bottom right shows stability in our tangible book value per share and an improvement in tangible book value per share, excluding AOCI. Our top capital management priority is to deploy capital to support organic loan growth. Secondly, we remain biased to opportunistic stock repurchases given our stock price.

In Q2, we repurchased a little over $12.2 million of stock at an average cost of $21.16. We believe Berkshire stock is undervalued, given our growth potential and the low-risk business model we employ. Our preferred use of capital remains to support organic loan growth, and we will continue to opportunistically repurchase stock. Slide 15 shows our updated 2023 outlook. Our refreshed outlook echoes what many banks have already reported in the second quarter. We see modestly lower loan growth and stable deposits versus the first half of the year. Lower net interest income on funding mix changes. We also expect expenses to be between $73 million and $76 million per quarter for the second half of the year, versus $71 million-$74 million prior guidance.

Given lower expected pre-tax income, we expect our tax rate to be 14%-16% for full year 2023. We also expect second half fees to be around first half levels. We have no change to our outlooks for expected credit provision or share repurchases, and we plan to provide our 2024 outlook on our fourth quarter call in January. With that, I'd like to turn it back to Nitin for further comments.

Nitin Mhatre (CEO)

Thanks, David. I'll close my remarks with comments on the economy, the industry, and our positioning. We're fortunate to be operating in the stable New England market, which continues to be on a solid footing. The sector issues of the first quarter have by and large passed, and we are prepared to face typical banking industry cyclicality issues such as NIM compression from the inverted yield curve and the credit cycle tightening. While we expect credit costs to increase through this cycle, we believe that they'll be significantly better than the losses during the GFC cycle. We also believe that the increased regulatory costs will impact the industry, but are likely to impact larger regional banks more versus community banks like Berkshire.

While we can't control the macro environment, we are focused on controlling what we can and have several levers, including opportunistic hiring, de-risking our balance sheet, and prudent expense management. Finally, as I mentioned earlier, we have a strong capital and liquidity position and are positioned to benefit from the market disruption in our footprint. 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. Operator?

Operator (participant)

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by two. If you are using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question will come from Dave Bishop at Hovde Group. Please go ahead.

Dave Bishop (Director in the Research Department)

Hey, good morning, Nitin. Dave.

Nitin Mhatre (CEO)

Morning, Dave.

David Rosato (CFO)

Morning.

Dave Bishop (Director in the Research Department)

Hey, Nitin, maybe a sort of like a holistic question here. We appreciate the growth in the residential mortgage segment here, but it appears like those average loan yields are pretty sticky, maybe up 30 basis points, you know, over a year-over-year basis and becoming, you know, a bigger part of the loan portfolio. Just curious how those are positioned to maybe reprice or maybe reprice upward. You know, it looks like they're impacting the margin, which is obviously impacting, you know, profitability. Just to, you know, curious, maybe just the decision-making there to grow that as fast at these lower yields. Are, you know, are we missing something in terms of the repricing and yield benefit there?

Nitin Mhatre (CEO)

Yeah, sure, Dave. Great question. Great observation. I think the guiding factor here is the commercial consumer mix. We stated that we would like it to be 65% commercial. This quarter was 66%, we continue to manage that at the highest level. The other part is it's a smaller portfolio, which had lower portfolio yields. The new book that we're getting for the quarter had about 5.5% yield, and the applications are about 6% yield. I think that's slowly improving the portfolio yields, it takes a while. I think what comes with it is high-quality relationships that are new customers to the bank. I think what's even more important, that's not maybe visible, is a tremendous amount of infrastructure has now been put in place.

to selling conforming production that comes through. That's going to generate higher fee income in the second half of the year. I think the overall governor here is we want to maintain our commercial consumer mix at 65%+, and in fact, as David stated, we're looking to make that 65%-70% commercial.

Dave Bishop (Director in the Research Department)

Got it. Could there be select, you know, portfolio sales to generate the income in the second half of the year, 2024?

Nitin Mhatre (CEO)

Yeah, I think just the originations, we're looking to sell about 20%-25% of production, starting pretty much the next quarter.

David Rosato (CFO)

Yeah, Hey, Dave, it's David. It's, you know, it takes time to transition. You know, gain on sale was up linked quarter. It's the relatively modest numbers. Not something we would large enough to call out, but we expect further improvement in the back half of the year. We're actively talking with the business managers about how we can generate a bit more gain on sale.

Dave Bishop (Director in the Research Department)

Got it.

David Rosato (CFO)

Yeah. Just lastly.

Dave Bishop (Director in the Research Department)

Yeah.

David Rosato (CFO)

I was just gonna say, just to add to Nitin's comments, the quality of that portfolio from an LTV, from a FICO perspective, the, you know, 50% risk-based capital perspective, it's capital efficient. It's lagging in the portfolio repricing. A lot of that is legacy purchases that predates most of the people sitting around this table, but it's on our books. The new volume that's been generated each quarter is going on at healthy spreads. As Nitin said, we're approaching, you know, just right now in the current environment, we're approaching 6% yields.

Dave Bishop (Director in the Research Department)

Got it. In terms of the guidance, in terms of the back half, it looks like it implies some balance sheet growth relative to stability deposits. The funding of loan growth, is that going to be from securities cash flow or borrowing? Just curious, how should we think about the balance sheet mix and shift into the second half of the year?

David Rosato (CFO)

Sure. You know, that's the money question for 2023. I would start by saying, I said this last quarter, I believe, was, you know, newcomer to the bank, very impressed with the retail and commercial deposit franchise. I said that three months ago, and I would say that again, and I'd say it even a little bit stronger today because of what happened in the last quarter, that our deposit base really performed nicely. The mix is changing. It's changing for us, it's changing for everyone. We still have strong non-interest-bearing deposits. It was just very little slippage there as % of total deposits. It is a challenge because loans, even in year to date and in our guidance, are growing faster than deposits.

We need to fund that, and we will fund that how we did in the last quarter, which is partially with broker deposits, partially with home loan advances, but also continuing to fight tooth and nail for consumer and commercial deposits. I called out a little bit in my expense comments around working hard on the expense front, but still making the comment around reinvesting in the franchise and some of the hires that we're doing. Those are frontline bankers that are generating deposits as well as loans. We continue to invest to build the business, and our deposit base has stood up really well, but I also believe it's going to, when the environment gets a little better, it will continue to grow reasonably, and we will get more into balance over time.

Dave Bishop (Director in the Research Department)

Got it. Just one final question, Dave, for you. I noted the, appreciate the color in the average loan advances versus end of period. Any color you can give in terms of, you know, maybe average rates or just versus maybe what the end of period borrowing rate on the loan advances were? Was it materially different, given the late quarter pay down? Thanks.

David Rosato (CFO)

No, it really wasn't. You know, back in April, the funding turmoil around First Republic Bank and Silicon Valley Bank, et cetera, it was starting to abate, but we were really early in that process. I remember calling out, we had ballooned up the balance sheet, just to harbor liquidity, and I said we would bring that down by about a third. That's what we did. However, what we didn't know back then that we experienced in the quarter was the debt ceiling turmoil. We wound up holding that liquidity, you know, call it three weeks, maybe longer than we thought we would have. Pretty marginal impact, in the grand scheme of things, especially on Net interest income. That's about the only color. The rates...

in the short end of the curve are not that differentiated. Average rate versus ending rate, really not material.

Dave Bishop (Director in the Research Department)

Got it. That's what I thought. Just wanted to confirm. Thanks, Dave. I'll hop off.

David Rosato (CFO)

You're welcome. Thanks, Dave.

Operator (participant)

Your next question will come from Bill Young at RBC Capital Markets. Please go ahead.

Bill Young (Managing Director)

Hey, good morning, guys. Can you hear me okay?

David Rosato (CFO)

Yes, Billy. Good morning. Great, Billy, thanks.

Bill Young (Managing Director)

Hey, great. First, I just wanted to apologize if I maybe missed this in your comments. What is your outlook or your guidance currently assuming in terms of Fed actions?

David Rosato (CFO)

Well, you didn't miss it 'cause we didn't say it. Let us share it. It's really not inconsistent, or I should better said, it is consistent with market forwards. One more move higher, and then an easing cycle, beginning in March of next year. Market forwards have about 125 basis points built in. And we don't really have a view different from that.

Bill Young (Managing Director)

Okay, got it. Got it. I guess, just switching over to just kind of loan growth. Could you just kind of maybe speak high level to I guess, you know, what kind of economic scenario we could be in that would, you know, maybe make you more comfortable in terms of pushing or achieving loan growth at the higher end of your $9.4 billion range? I think that's, you know, maybe about 6%.

David Rosato (CFO)

Sure. You know, I just if you think what, you know, we were all together three months ago, right? The difference from an economic perspective is the possibility of a recession at the end of 2023 is now pretty much off the table. It's been pushed out. You've seen the equity market respond quite strongly. You've seen interest rates up as well. I would never say we're not concerned about a downturn, but I would say with the data that's come in, it feels like it's been pushed out. What I would say is in our collective management of the balance sheet, there's two high-level drivers that, you know, govern almost all of our thinking.

One is the economic outlook that you're referencing, the other is just funding costs, and the ability to fund loan growth. As Nitin talked about in his comments, our originations are down linked quarter, our pipelines are reduced a bit linked quarter. We're being more selective, we want to service our customer base, especially our existing customer base. It under that overlay of what if the economic scenario gets worse? What if the Fed over-tightens, and how are we going to fund it?

Nitin Mhatre (CEO)

Yeah, agreed, Billy. I think one more thing I would add is the other part of it is relatively less controllable to the extent that what do the customers want. I think we've seen the line utilization, for example, go down significantly in the second quarter, and depending on the needs of the consumers, that might ramp up and that might show up in the balances, especially in the C&I and ABL segment.

David Rosato (CFO)

Nitin, that's a really good point. Our line utilization was down 5% in the quarter. You know, we called out muted or even down C&I books. We had an elevated level of payoffs in our ABL book. It's mostly around customers who are paying on a floating rate basis, doing everything to minimize their interest expense, right? They're maximizing their cash utilization, they're paying down lines when they can.

Bill Young (Managing Director)

Got it. Just to kind of follow up on that, the 5% down utilization rate, what is that, you know, at quarter end versus what it was in the first quarter?

David Rosato (CFO)

It was 38%.

Nitin Mhatre (CEO)

Yep

David Rosato (CFO)

on the round.

Bill Young (Managing Director)

Got it. Got it. Just one, I guess, housekeeping question. Just the 9.2%-9.4% loans, that's end of period, right? Not average.

David Rosato (CFO)

Yeah, that's ending.

Bill Young (Managing Director)

Okay.

Nitin Mhatre (CEO)

Billy, just more color on that is the delta, Billy, the delta between second quarter to the end of the year, that 9.2%-9.4%, roughly about 70%-75% of the growth would come from commercial.

Bill Young (Managing Director)

Understood. Thank you. Appreciate that color. Just one final question, and then I'll step back. you know, just following up on David's, you know, expense-based comment, are you, perhaps signaling, you know, maybe some more additional...

... cost savings actions you might take in the near future in terms of, you know, branch consolidation or headcount reduction?

Nitin Mhatre (CEO)

We're certainly looking at avenues and the levers. Within expenses, we have internally a big council to look at all of expenses and resource and projects, kind of management and prioritization. There are different levers. There's levers in procurement, levers in real estate, and there's also levers in, you know, managing to the staff growth. I think we're looking at everything. And some of those will also come through some completion of the projects that David talked about. When we complete digital banking, for example, we'll start seeing offsets coming through in the second half of the year because we'll be managing to a lower-cost platforms while providing better delivery to the customers.

Bill Young (Managing Director)

Understood. Thank you for taking my questions.

Nitin Mhatre (CEO)

Thanks, Billy. Thank you.

Operator (participant)

Your next question will come from Mark Fitzgibbon at Piper Sandler. Please go ahead.

Mark Fitzgibbon (Senior Managing Director and Head of Financial Services Group (FSG) Research)

Hey, guys. Good morning.

Nitin Mhatre (CEO)

Morning, Mark.

Mark Fitzgibbon (Senior Managing Director and Head of Financial Services Group (FSG) Research)

First question I had, David: I heard your comments about the margin with the worst being behind, but it sounds like we'll see some additional compression in the margin. You know, based on the forward curve in your modeling, when do you think the margin bottoms, and do you think it can stay above 3%?

David Rosato (CFO)

I'll limit my comments to 2023. In the first half of the year, you know, we were 3.58%, 3.24%, you know, down 34 basis points, but an average of 3.41%. We think the margin will be down in Q3 and in Q4. That range in the back half of the year is probably 3.15%-3.20%.

Mark Fitzgibbon (Senior Managing Director and Head of Financial Services Group (FSG) Research)

Okay.

David Rosato (CFO)

You know, we don't see enough deposit pressure and based on forward curves, right now, so there's no easing in 2023. We should be well above 3%, you know, full year margin and back half of the year margin. My comment was really mostly in reference to the delta between first and second quarter. We don't think we're gonna see that type of pressure again.

Mark Fitzgibbon (Senior Managing Director and Head of Financial Services Group (FSG) Research)

Okay. Next on the buyback program, you guys have obviously been very aggressive with it over the last several quarters. You know, given the economic uncertainty and the fact that your capital ratios have now gotten sort of more normalized or a little bit thinner, you know, how aggressive are you all likely to be with the buyback program, you know, say, the next couple of quarters?

David Rosato (CFO)

I wouldn't use the word aggressive, Mark. You know, we'd like to think we've been really thoughtful around this. You know, we talked about this a little bit last quarter, where we did nothing prior to the turmoil at the end of March. We bought, just bought a few shares, you know, it was $1.2 million in the first quarter. We executed on about $12.2 million-$12.3 million in this quarter, where I would... It's the word aggressive when I think about what we bought and the change in our capital levels. There was really no change in our capital levels. We didn't bring capital down. We bought shares, we earned money, we retained that capital.

You know, you're looking for what we're gonna do, you know, in the back half of the year, quarter by quarter, and, you know, we don't wanna over-signal, but our thought process is gonna be consistent.

Mark Fitzgibbon (Senior Managing Director and Head of Financial Services Group (FSG) Research)

Okay.

David Rosato (CFO)

Economic uncertainty, the worse it is, the more capital we should hold, versus the opportunity to buy our stock back at basically tangible book value.

Mark Fitzgibbon (Senior Managing Director and Head of Financial Services Group (FSG) Research)

Last question I had, Nitin, for you, your BEST program goals, in terms of ROTCE and ROA are pretty significantly below what peers are generating today, and you guys are a fair way below those goals. I guess the question I'm wondering, do you think you need to take more extreme kind of actions to drive profitability higher in the quarters ahead, maybe like selling off additional pieces of the business to try to get profitability levels, you know, over time up to something close to a peer-like level?

Nitin Mhatre (CEO)

Hey, Mark, I think I mentioned in my remarks, we completed second year of the program, entering into third year, and where we were when we started to where we are, I think we are on the trajectory that kind of matches the run rate. We're pleased but not satisfied, as I say internally all the time. Yes, we'll continue to manage and accelerate that journey. I think the aggressive part of the actions will most likely come from how tightly we manage our expenses going forward, while continuing to part invest into our revenue generation activities that support the growth. I think that's where. We're not talking about any aggressive portfolio or business sales at this point of time. We're looking at more revenue and efficiency initiatives as the acceleration path.

David Rosato (CFO)

I would just add one thought to that, Mark, which is those goals were set in an economic environment and an outlook of an economic environment that's now very different from what we're dealing with. The actions, the thought process, the goals are all the same. It's just there's a lot more headwinds than when they were set.

Mark Fitzgibbon (Senior Managing Director and Head of Financial Services Group (FSG) Research)

Okay. Thank you.

Nitin Mhatre (CEO)

Thank you, Mark.

David Rosato (CFO)

You're welcome, Mark.

Operator (participant)

Your next question will come from Chris O'Connell at KBW. Please go ahead.

Chris O'Connell (VP and Senior Equity Research Analyst)

Morning.

Nitin Mhatre (CEO)

Morning, Chris.

Chris O'Connell (VP and Senior Equity Research Analyst)

Just wanted to start off, you know, on some of the expense stuff and the items that you mentioned as far as, you know, frontline hires. Have you maybe walk us through, you know, the frontline hires that you've made so far, perhaps in the last quarter. If you've been able to take advantage of the M&A disruption in your markets, and then, you know, how many, you know, frontline hires you think there's an opportunity to add going forward, and what type of hires you'd be looking to make?

Nitin Mhatre (CEO)

Yeah, Chris, great question. I'll go back to what we started out when we announced the BEST program. We did say our frontline folks, frontline teams outside of our branch network, we were going to grow by about 40%, and that roughly translated to about, you know, four to five a quarter. We did hire about seven in the second quarter in 2023. We're managing to that run rate, and net of attrition, I think we're continuing to grow. We'll probably be at the same pace. What we're seeing increasingly, however, is the more incoming calls. Our head of commercial, Jim Brown, for example, who ran the commercial banking for Boston Private, he knows the pretty much the all of the producing bankers in the Boston Private Silicon Valley Bank, First Republic.

We will get more swings at the plate, and we believe that there'll be more opportunities to hire selectively, folks that bring in good client base and books. That might accelerate a little bit, but we're maintaining the overarching momentum that we signed up for.

Chris O'Connell (VP and Senior Equity Research Analyst)

Got it. For the ones that you hired-

David Rosato (CFO)

And-

Chris O'Connell (VP and Senior Equity Research Analyst)

Go ahead.

David Rosato (CFO)

Oh, I was just going to say, it's across wealth management, private banking, and commercial banking. Within commercial, a bit more emphasis on deposit generators. People who just have a track record of large deposit books.

Chris O'Connell (VP and Senior Equity Research Analyst)

Got it. I was just going to ask for the ones that you have hired, particularly, you know, from the, you know, Boston Private, [SVB] or FRC recently, that are deposit-focused, any sense of the size of their books, you know, at the prior institution that they can, you know, maybe get to over the long term?

Nitin Mhatre (CEO)

Yeah, Chris, we won't put those names and books sizes on the call, but suffice it to say that they're really talented, high-quality producers with outstanding relationships in the market. We're hopeful that that comes with customers and books over time. It's relatively new hires, so it takes time to build that pipeline.

Chris O'Connell (VP and Senior Equity Research Analyst)

Great. I may have missed it if you mentioned earlier, in the yield discussion, where are the, you know, commercial origination yields, coming on?

Nitin Mhatre (CEO)

The new business for commercial?

Chris O'Connell (VP and Senior Equity Research Analyst)

Yeah.

Nitin Mhatre (CEO)

Is that correct? Yeah, that was roughly about, you know, the low sevens, 7.3-ish.

Chris O'Connell (VP and Senior Equity Research Analyst)

Great. For the securities portfolio, it seems like, you know, in the near term, still, you know, some opportunity to run off. But on the yield, which has remained, you know, relatively stable here the past few quarters, any sense of where that securities yields could migrate to by year-end?

David Rosato (CFO)

Yeah, a good question. It's relatively static. It's a fixed-rate portfolio, but so the yield's not going to change. You know, it's this is another one of these fundamental questions, right? Which is we haven't bought a bond in that portfolio for a long period of time, and it's way underwater, basically like almost every other bank in the country. You've started to see some people talk about the accretion back of AOCI and laying out those cash flows, which is a really important concept. So, I can't tell you what those numbers are yet. Honestly, we haven't done the work, but we did see a tick-up, surprisingly, in prepayment activity linked quarter. It's modest, but we will...

probably share that next quarter, our cash flow expectations and AOCI build out of that. Obviously, there's a static view there, and then there's a if rates fall, like forwards suggest, it's going to accelerate dramatically in 2024. Specifically, your question is, will the yield change in the back half of the year from the front half of the year? Very marginally, because it's a fixed-rate portfolio.

Chris O'Connell (VP and Senior Equity Research Analyst)

Okay, got it. Just circling back on the, you know, [resi], you know, RE, growth and selling off 20%-25% going forward, I mean, is there any thought as to, you know, selling off more of that production, just given, you know, the marginal cost of funding, you know, versus the, you know, marginal yield of what's coming on the balance sheet there?

David Rosato (CFO)

It's a little bit more complicated than that. We're really good at originating, and a lot of it is in some of our markets, higher balance loans, so jumbos. That's a harder product to sell. We do sell some of that. There are outlets to sell some of that, but that's a harder sell than conventional Freddies and Fannies to the agencies, right? Part of it is, at the, is generating the right product and having, you know, the geography to do conforming loans and sell to the agencies, which we already do. We just want to do a bit more of that, and then while there's funding pressures, put a little bit, slow down some of the originations that hit our balance sheet.

We have to give our business people time to do that.

Nitin Mhatre (CEO)

Yeah, I think the shorter version of the answer would be, Chris, yes. I think the business leader in managing that group is working on improving the mix so that it's more conforming to that extent. Yeah, 20%-25% is the current target. If we can sell more, we will sell more in the secondary market.

Chris O'Connell (VP and Senior Equity Research Analyst)

Great. Just lastly, if you could provide any, you know, additional color as to, you know, the allocation of the $100 million sustainability bond. I mean, is that backward-looking, or is that, you know, commitments going forward? Just, yeah, any additional color there?

Nitin Mhatre (CEO)

Yeah, I think the typical models, you know, that are out there for issuance of these loans and how the proceeds are allocated, they typically give you a -2, +2 kind of construct, whereas you look at, you know, what you did, you know, two years prior to the issuance and how you deployed the proceeds in the two years. The reason why we reported this on the call is we were successful in deploying all of it within the first year, which actually we're very proud of. So, it's all done.

Big chunk of it, as I said, was 200,000 sq ft of green building development, affordable housing, and the rough mix was 41% about affordable housing, 33% for green building development, and another quarter for about financial inclusion and access to projects in LMI neighborhoods.

Chris O'Connell (VP and Senior Equity Research Analyst)

Okay, great. appreciate the color. That's all I have for now. Thank you.

Nitin Mhatre (CEO)

Thank you, Chris.

Operator (participant)

At this time, there are no further questions, so I will turn the conference back to Nitin Mhatre for any closing remarks.

Nitin Mhatre (CEO)

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

Operator (participant)

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your-