Berkshire Hills Bancorp - Earnings Call - Q2 2025

Transcript

Speaker 1

Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Berkshire Hills Bancorp second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Kevin Conn. Please go ahead.

Speaker 2

Good morning, and thank you for joining Berkshire Hills Bancorp'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, Brett Brbovic, 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 of the earnings presentation referencing forward-looking statements and non-GAAP financial measures. 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 4

Thank you, Kevin. Good morning, everyone, and thank you all for joining us today. I'll begin my comments on slide three, where you can see highlights for the second quarter. Overall, this was a very strong quarter and the best quarter yet since we began our transformational journey in early 2021. We had operating net income of $31.6 million, up 14% linked quarter and up 36% year over year. Operating earnings per share of $0.69 was up 15% from first quarter and up 25% year over year. We continued to drive expenses lower with operating expenses of $67 million, down 2% linked quarter and down 7% year over year. We had positive operating leverage of 5% linked quarter and 11% year over year, driven by both improved revenues and lower expenses. Operating ROTC was 10.76%, up about 110 basis points linked quarter and year over year.

Asset quality and balance sheet metrics remained strong. Net charge-offs and non-performing loans remained low at 14 basis points and 27 basis points of loans, respectively. We continue to make steady progress on our strategic initiatives. Our focus on the new digital deposit initiative has gained momentum and has delivered over $100 million of new deposits since inception earlier this year. Our bankers' commitment to delivering relationship-focused, personalized solutions to our clients has been at the core of our improved financial performance and has earned us yet another recognition this quarter. This time, from Time Magazine, that recognized us again amongst the top-performing mid-sized U.S. companies in 2025. As you know, in December, we announced a merger of equals with Brookline Bancorp.

The transaction improved scale and meaningfully improved profitability, as reflected in the estimated 40% and 23% accretion to Berkshire Hills Bancorp's 2026 consensus estimate on GAAP and cash basis, respectively. Berkshire Hills Bancorp's net income in the first half of 2025 annualizes to over $118 million and is tracking well ahead of the 2025 consensus net income of $101 million shared in our MOE Investor Deck in December. Our team continues to work proactively on requisite integration planning for a seamless transition. On that note, I'll turn the call over to Sean Gray to provide an overview of the merger integration planning process. Sean?

Speaker 3

Thanks, Nitin. As we await regulatory approval, there's only so much in detail we can share. I can say this: the combined organization's leadership team has made really good progress and continues to work towards our pro forma cost-save goal of 12.6%. I can speak to where our tech stack expenses are coming in as most of that work is complete and where that is coming in versus planned. I'm very pleased with the favorable outcome of where our tech stack expense is showing up, and that will bid favorably for the overall goal of the 12.6%. Thanks, Nitin.

Speaker 2

Thanks, Sean. I'll begin going over the financial details for the quarter. I'll begin on slide five, which shows an overview of the second quarter metrics. As Nitin mentioned, our operating earnings were $31.6 million or $0.69 per share. Our net interest margin was 3.27%, up three basis points linked quarter. Operating expenses were down $1.3 million or 2% linked quarter, and our efficiency ratio was 56.7%. Slide six shows our average loan balances. Average loans were up $95 million or 1% linked quarter unannualized and up $327 million or 4% year over year. Linked quarter, we had solid broad-based growth led by C&I. Slide seven shows average deposits for the quarter and up 6% year over year. Excluding payroll and broker deposits, average deposits were up 1% linked quarter and up 6% year over year. Average non-interest-bearing deposits as a percentage of total deposits remained steady at 23%.

Turning to slide eight, net interest income was up $2.2 million or 2% linked quarter and up 4% year over year. Net interest margin was up three basis points linked quarter to 3.27%. Slide nine shows operating non-interest income up $1.1 million or 5% linked quarter and up $1.6 million or 8% year over year. Loan-related fees were up linked quarter, driven by higher loan servicing fees and BOLI gains offsetting lower SBA gains in the quarter. Slide ten shows expenses. Operating expenses were down $1.3 million or down 2% linked quarter to $67 million and down $4.7 million or 7% year over year. Linked quarter and year-over-year expense declines were broad-based. Non-operating expenses of $1.5 million were primarily related to the merger. Slide 11 shows a summary of asset quality metrics.

Non-performing loans as a percentage of total loans was 27 basis points and loan reserves to NPLs was 462%. Net charge-offs of $3.3 million were down $200,000 linked quarter and our coverage ratio remained flat at 124 basis points. With that, I'll turn it back to Nitin for further comments. Nitin?

Speaker 4

Thank you, Brett. As Brett outlined, we had a very strong second quarter that has continued the EPS growth momentum over multiple quarters. This quarter was, in fact, the best quarter since we launched our transformation program in early 2021. Over the last four and a half years, our turnaround has been a journey of efficient growth and profitability while creating a positive impact for all stakeholders. We made significant strategic decisions, embraced innovation to invest in technology, reignited organic growth, and remained committed to our communities. We've not only improved our financial performance despite the macroeconomic headwinds that have impacted the industry over the last few years, but have also positioned ourselves for continued strength in the long term. Our progress is a testament to the unwavering dedication and hard work of our employees, the trust and loyalty of our clients, and the confidence and support of our shareholders.

As I reflect on our progress since we began our transformation program in early 2021, I want to express my deepest gratitude to every member of the Berkshire team, our clients, and our board of directors. Our bankers' dedication, resilience, and commitment to our clients has been the driving force behind our improved operating and financial performance. Together, we've navigated challenges, embraced change, and delivered strong results for our clients, shareholders, and communities. It has truly been an honor and a privilege to lead such an outstanding team of purpose-driven, values-guided, talented bankers. I'm incredibly proud of what we've accomplished together and excited to see what the combined company will achieve next. With that, I'll turn it over to the operator for questions. Carly?

Speaker 1

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Laura Havener Hunsicker with Seaport Research Partners.

Speaker 0

Hi, good morning.

Speaker 1

Good morning, Lori.

Speaker 0

I just wondered if we could just start with margin. You guys had that $100 million drop in FHLB. Just remind us when in the quarter that that fell, and then also your spot margin for June and just how you're thinking about it. Thanks.

Speaker 3

Hey, Lori. This is Brett. Our spot in for June was about $322.

Speaker 0

Oh.

Speaker 3

The FHLB drop.

Speaker 0

I think.

Speaker 3

Sorry, Lori.

Speaker 0

Sorry. I think there was a dead spot there. Can you start over? Thanks.

Speaker 3

Sure. The spot in for June was $322.

Speaker 0

Okay.

Speaker 3

The FHLB decline coincided with an increase in our deposits throughout the quarter. It wasn't at a specific point in time. It was just based on what we needed to borrow or what we didn't need to borrow, based on the deposit growth that we saw this quarter.

Speaker 0

Gotcha. Okay. Do you have any sort of near-term large maturities coming due in CDs or for borrowings that we think about here in the next quarter?

Speaker 3

No, nothing. I wouldn't say anything significant.

Speaker 0

Okay. Great. Just jumping over to credit, obviously, your credit is looking great. I just wondered if you can help us think about that jump in the C&I non-performers to $11.5 million from $9 million. Also, Firestone. I know it's small, but if you could just give us, you know, what is the Firestone C&I balance and how much in non-performers and charge-offs?

Speaker 4

Yeah. Greg, you want to give some color on it?

Speaker 5

Sure. Hi, Lori. How are you?

Speaker 0

Good, thanks.

Speaker 5

Sure. The jump in NPLs, it's a handful of just smaller credits, probably just a half dozen of smaller credits with just individual problems related to each business. As far as Firestone, the balance is down 15% quarter over quarter to $28 million. NPLs have historically ranged in the $1.5 million range. They're at $1.3 million right now. For NCOs, it's net $900,000 for the quarter.

Speaker 0

$900,000. Okay. You had outsized charge-offs just in the C&I bucket. Was there anything specific there that's worth calling out?

Speaker 5

No. Very similar to the NPLs, nothing noteworthy, just a handful of individual credits on the smaller side.

Speaker 0

Gotcha. Okay. I think I know the answer to this, but I just want to triple-check. Your $700 million multifamily book, anything rent-controlled in that book?

Speaker 5

There, you know, we have no rent control in our footprint. Even though New York City is technically within our footprint, we do not have any loans there.

Speaker 0

Okay. I know Nitin Mhatre, he's expressed a desire to target other markets too, i.e. Albany. Do you have any rent-controlled anywhere?

Speaker 5

We do not. Not in our footprint, no.

Speaker 0

Okay.

Speaker 5

Not in Albany.

Speaker 0

Okay. That's great. Non-interest income, the loan-related fees that were really strong. What were the BOLI gains in this quarter?

Speaker 5

They were about $800,000 above normal.

Speaker 0

Okay. Just non-recurring benefit, death benefit, or?

Speaker 5

Correct.

Speaker 0

Okay. How do we think about the drop in the gain on sale of SBA loans? How should we be thinking about that?

Speaker 5

I think we can take that, Lori. Hey, it's Sean. We've, and Brett's probably going to say the same thing. We're coming off a really good Q4 and Q1. We pulled some of that value forward, so a little bit of a move back to the mean. When we look at the core business, we look at pipeline and volume, looks very healthy.

Speaker 0

Okay. This current run rate Q2 is probably a better run rate?

Speaker 5

I would say it's in between the Q1 and Q2. Yeah.

Speaker 0

Okay. Great. How should we be thinking about tax rate going forward?

Speaker 5

Our tax rate is a bit elevated right now due to timing and merger-related aspects. I would expect it to normalize going forward.

Speaker 0

What would be a good, you know, like 23, 24%?

Speaker 5

I would say about 24%, 25%.

Speaker 0

Okay. Can you help us think about your deal tangible dilution at announcement, tangible book dilution with 17% and then a 40% earnings pickup? Can you just help us think about what the new FASB impact on CECL updates and the double count sort of means for your tangible book dilution? Can you help quantify that? Also, presumably, your tangible book dilution is something less, but your earnings pickup is also something less. How do we think about that? Also deal-related, can you help us think about the timing?

Speaker 5

Sure. Obviously, the ASU hasn't been finalized yet. It's expected to be adopted at the third or fourth quarter of this year. It will have an impact on our combined entity as we move forward. I don't think at this time we can quantify that right now on this call. It definitely will have an impact, and it's something we're continuing to analyze as we get more information on the ASU and what it's going to look like in its final state.

Speaker 0

Okay. What about deal closing? We've seen things really ramp up on the M&A side on deal closings. It's just happened really, really a lot faster. Any color on that?

Speaker 4

Yeah, Lori, I think we, in the investor materials, we did say we expect the closing to be end of September. Everything's on track so far. We're just awaiting the regulatory approval, and the teams are already working on the integration planning as Sean highlighted.

Speaker 0

Okay. Great. Thanks, Nitin. Thanks for taking my question.

Speaker 4

Thank you, Lori.

Speaker 5

Thanks, Lori.

Speaker 1

There are no further questions at this time. I will now turn the conference back over to Nitin Mhatre for closing remarks.

Speaker 4

Thank you all for joining us today for our call and for your continued interest in Berkshire Hills Bancorp. Have a great day and be well.

Speaker 1

This concludes today's conference. You may now disconnect.