Berkshire Hills Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered the strongest operating metrics since 2019: Operating EPS $0.69 (+15% QoQ, +25% YoY), GAAP EPS $0.66; net interest margin (FTE) rose to 3.27% (+3 bps QoQ), and the efficiency ratio improved to 56.7% (from 59.5% in Q1).
• Total net revenue increased 2.9% QoQ to $113.7M, driven by loan growth and lower deposit costs; operating non-interest expense fell 2% QoQ; provision declined to $4.0M (-$1.5M QoQ).
• Credit quality remained solid: net charge-offs 0.14% (annualized), NPLs 0.27% of loans, allowance coverage 462% of NPLs; delinquent and non-performing loans totaled 0.48% of loans at period end.
• Strategic catalysts: digital deposit program has delivered >$100M of new deposits since inception; Brookline MOE integration tracking to 12.6% cost saves with tech stack favorability; management expects September 2025 close pending approvals—key stock narrative driver.

What Went Well and What Went Wrong

What Went Well

• Operating leverage and profitability: “Quarterly operating income, operating EPS, and efficiency were the strongest since 2019,” driven by revenue growth and lower expenses; operating ROTCE reached 10.8%.
• NIM expansion and funding costs: CFO noted NIM rose 3 bps to 3.27% “benefiting from loan growth and lower deposit cost”; operating non-interest income increased $1.1M QoQ and operating non-interest expense decreased $1.3M QoQ.
• Core funding and growth: End-of-period deposits rose $99M QoQ (ex-payroll/brokered +$66M); loans up $70M QoQ led by C&I (+$56M, +4%); digital deposit initiative has delivered >$100M since inception.

What Went Wrong

• Non-recurring fee tailwind: Loan-related fees benefited from BOLI gains (~$0.8M above normal), which are nonrecurring and could normalize, tempering fee momentum in coming quarters.
• SBA gains normalization: After strong Q4/Q1, SBA gains moderated to $2.3M in Q2 (vs. $3.3M in Q1 and $4.6M in Q4), implying a return to trend rather than ongoing upside.
• Slight uptick in C&I NPLs: Increase driven by a handful of smaller credits; Firestone portfolio balance down 15% QoQ to ~$28M with ~$1.3M NPLs and ~$0.9M net charge-offs in the quarter.

Transcript

Operator (participant)

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 speakers' remarks, there will be a question and answer session.

Thank you. I would now like to turn the call over to Kevin Kahn. Please go ahead.

Kevin Conn (Senior MD - IR & Corporate Development)

Good morning, and thank you for joining Berkshire Bank's second quarter earnings call. My name is Kevin Khan, Investor Relations and Corporate Development Officer. Here with me today are Nitin Mahatra, Chief Executive Officer Sean Gray, Chief Operating Officer Svetl Brabowic, Chief Financial Officer and Greg Lindenruth, 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?

Nitin Mhatre (CEO & Director)

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 twenty twenty one. We had operating net income of $31,600,000 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 $67,000,000 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 ROTCE 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 new digital deposit program has gained momentum and has delivered over $100,000,000 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 US companies in 2025.

As you know, in December, we announced a merger of equals with Brookline Bancorp. The transaction improves scale and meaningfully improves profitability as reflected in the estimated 4023% accretion to Berkshire's 2026 consensus estimate on GAAP and cash basis respectively. Berkshire's net income in the 2025 annualizes to over a 118,000,000 and is tracking well ahead of the 2025 consensus net income of 101,000,000 shared in our MOE investor deck in December. Our team continues to work proactively on requisite integration planning for a seamless transition. And on that note, I'll turn the call over to Sean Gray to provide an overview of the merger integration planning process. Sean?

Sean Gray (President & COO)

Thanks, Sinton. As we await regulatory approval, there's only so much in detail we can share. But I can say this, the combined organization's leadership team has made really good progress and continues to work towards our pro form a 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. So 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, Sinton.

Brett Brbovic (EVP & CFO)

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 Nin mentioned, our operating earnings were $31,600,000 or $0.69 per share. Our net interest margin was 3.27%, up three basis points linked quarter.

Operating expenses were down $1,300,000 or 2% linked quarter and our efficiency ratio was 56.7%. Slide six shows our average loan balances. Average loans were up $95,000,000 or 1% linked quarter unannualized and up $327,000,000 or 4% year over year. Linked quarter, we had solid broad based growth led by C and I. Slide seven shows average deposits in and up 6% year over year.

Excluding payroll and broker deposits, average deposits were up 1% linked the 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 $2,200,000 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 $1,100,000 or 5% linked quarter and up $1,600,000 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 10 shows expenses. Operating expenses were down $1,300,000 or down 2% linked quarter to $67,000,000 and down $4,700,000 or 7% year over year. Linked quarter and year over year expense declines were broad based. Non operating expenses of $1,500,000 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 $3,300,000 were down $200,000 linked quarter and our coverage ratio remained flat at 124 basis points. And with that, I'll turn it back to Nitin for further comments. Nitin?

Nitin Mhatre (CEO & Director)

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 twenty twenty one.

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 I've 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 twenty twenty one, I want to express my deepest gratitude to every member of 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?

Operator (participant)

Your first question comes from Laurie Hunsicker with Seaport Research Partners.

Laurie Hunsicker (Senior Analyst)

Hi. Good morning.

Nitin Mhatre (CEO & Director)

Good morning, Lori.

Laurie Hunsicker (Senior Analyst)

Just wondered just wondered, if we could just start with with margin. You guys had that 100,000,000 drop in FHLB. Just remind us when in the quarter that fell and then also your spot margin for June and just how you're thinking about it? Thanks.

Brett Brbovic (EVP & CFO)

Hey, Laurie. This is Brett. Our our spot NIM for June, was about three twenty two.

Laurie Hunsicker (Senior Analyst)

Oh.

Brett Brbovic (EVP & CFO)

The FHL b drop oh. Sorry, Laurie?

Laurie Hunsicker (Senior Analyst)

Sorry.

I think, yeah, there was a dead spot there. Can you can you start over? Thanks.

Brett Brbovic (EVP & CFO)

Sure. The the spot NIM for June was three twenty two.

Laurie Hunsicker (Senior Analyst)

Okay.

Brett Brbovic (EVP & CFO)

And the FHLB decline coincided with an increase in our our deposits throughout the quarter. So it it wasn't, you know, at a specific point in time.

It was just based on, you know, what we needed to borrow to to or what we didn't need to borrow to, you know, based on the deposit growth that we saw this quarter.

Laurie Hunsicker (Senior Analyst)

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

Brett Brbovic (EVP & CFO)

No. Nothing. I I wouldn't say anything significant.

Laurie Hunsicker (Senior Analyst)

Okay. Okay. Great. And then, just jumping over to credit. Obviously, credit is looking great.

But just wondered if if you can help us think about that jump in the C and I non performers to 11 and a half million from 9,000,000. And then also Firestone. I know it's small, but if you could just give us, you know, what is the Firestone C and I balance and and how much in nonperformers and charge offs.

Nitin Mhatre (CEO & Director)

Yeah. Greg, you wanna give some color on it?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

Sure. Hi, Laurie. How are you?

Laurie Hunsicker (Senior Analyst)

Good. Thanks.

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

The sure. The jump in in NPLs, it's 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 28,000,000 And NPLs have historically ranged in the $1,500,000 range. They're at $1,300,000 right now. And for NCOs, it's net $900,000 for the quarter.

Laurie Hunsicker (Senior Analyst)

900,000. Okay. And then, again, you had you had outsized charge offs just in the c and I bucket. Was there was there anything specific there that that's worth calling out?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

No. Very similar to the NPLs. Nothing noteworthy. Just a handful of individual credits on the smaller side.

Laurie Hunsicker (Senior Analyst)

Gotcha. Gotcha. Okay. And then I think I know the answer to this, but I just wanna triple check. Your 700,000,000 multifamily book, anything rent controlled in that in that book?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

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

Laurie Hunsicker (Senior Analyst)

Okay. And then I know Mondami, he's expressed a desire to target other markets too, I. E, Albany. Do you have any rent controlled anywhere?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

We do not. Not in our footprint. No. And not in Albany.

Laurie Hunsicker (Senior Analyst)

Okay.

That's great. And then non interest income, the loan related fees that were really strong. What were the BOLI gains in this quarter?

Brett Brbovic (EVP & CFO)

They were about $800,000 above normal.

Laurie Hunsicker (Senior Analyst)

Okay. Just nonrecurring benefit, death benefit or Correct. Okay. Okay. And then how do we think about the the drop in the SBA loan gain on gain on sale of SBA loans? How how should we be thinking about that?

Brett Brbovic (EVP & CFO)

So I I think we can see that, Larry. Barry?

Sean Gray (President & COO)

Hey. It's Sean. You know, we and Brett's probably gonna say the same thing. You know, we're coming off a really good q four and q one. We pulled some of that value forward.

So a little bit of a a move back to the the mean. But when we look at the core business, we look at pipeline and volume, looks very healthy.

Laurie Hunsicker (Senior Analyst)

Okay. So so this current run rate two q is probably a better run rate?

Sean Gray (President & COO)

I would say it's in between, the q one, q two. Yeah.

Laurie Hunsicker (Senior Analyst)

Okay. Okay. Great. And then how should we be thinking about tax rate going forward?

Brett Brbovic (EVP & CFO)

So our our tax rate is a bit elevated, right now due to timing and and merger related aspects. You know, I would I would expect it to normalize, going forward.

Laurie Hunsicker (Senior Analyst)

Okay. And so what what would be a good, you know, like, 23, 24%?

Brett Brbovic (EVP & CFO)

I would say about 24, 25%.

Laurie Hunsicker (Senior Analyst)

Okay. Okay. And then just last sort of more high level question here. Can you help us think about, you know, your your deal tangible dilution at announcement tangible book dilution was 17% and then a 40% earnings pickup? Can you just help us think about what the new FASB impact on CECL updates, the double count sort of means for your tangible book dilution?

Can you help quantify that? And also, presumably, tangible book dilution is something less, but your earnings pickup is also something less. Just how should we think about that? And then also deal related, can you help us think about the timing?

Brett Brbovic (EVP & CFO)

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

Laurie Hunsicker (Senior Analyst)

Okay. And then what about what about deal closing? We've we've seen things really ramp up on the m and a side on deal closings just happen really, really a lot faster. Any any color on that?

Nitin Mhatre (CEO & Director)

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

Laurie Hunsicker (Senior Analyst)

Okay. Great. Thanks, Denton. Thanks for taking my questions.

Nitin Mhatre (CEO & Director)

Thank you, Laurie.

Brett Brbovic (EVP & CFO)

Thanks, Laurie.

Operator (participant)

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

Nitin Mhatre (CEO & Director)

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

Operator (participant)

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