Berkshire Hills Bancorp - Earnings Call - Q4 2024

Executive Summary

• Q4 delivered solid operating performance: Operating EPS rose to $0.60 (+3% q/q; +28% y/y) on higher fees and lower operating expenses; GAAP EPS was $0.46, reflecting $6.6M of merger-related expenses.
• Net interest margin compressed 2 bps sequentially to 3.14% as asset yields fell; funding costs declined 17 bps and deposit costs fell 12 bps, setting up expected modest NIM expansion in Q1 per management.
• Core asset quality remained strong: NCOs fell to 0.14% (q/q down from 0.24%); NPLs stable at 0.26%; delinquencies+NPLs improved to 0.52%, the lowest in nearly two decades.
• Strategic catalysts: merger-of-equals with Brookline (closing expected 2H25) and a $100M equity raise lifted CET1 to 13.0% and TCE/TA to 9.4%; dividend maintained at $0.18.
• Consensus estimate comparison: S&P Global consensus could not be retrieved via our connector at this time; management noted comfort with 2025 consensus net income cited in the Dec-16 MOE presentation.

What Went Well and What Went Wrong

• What Went Well

  • Operating leverage improved: Operating EPS up 3% q/q and 28% y/y on +8% q/q operating fee growth (SBA gains) and -2% q/q operating expenses; efficiency ratio improved to 62.4% from 63.7%.
  • Funding traction: Average deposits +3% q/q; deposit costs -12 bps; funding costs -17 bps; management expects modest NIM expansion in Q1 as rates fall.
  • Credit quality resilience: NCOs declined to 0.14% (vs. 0.24% q/q); delinquencies+NPLs at 0.52% of loans, lowest in nearly 20 years; ACL/loans stable at 1.22%.
  • Management quote: “Berkshire continued its positive momentum… a year-over-year 28% increase in fourth quarter operating EPS… benefited from strong credit discipline [and] rigorous expense management.”.

• What Went Wrong

  • NIM/earning asset yield pressure: NIM fell 2 bps to 3.14% as earning asset yield declined 20 bps and loan yields fell 23 bps; GAAP net interest income declined $1.2M q/q to $86.9M.
  • Non-interest income optics: GAAP non-interest income fell $14M q/q due to a $16M branch sale gain in Q3 (optical headwind); operating non-interest income did improve $1.7M q/q.
  • Merger costs: GAAP non-interest expenses rose $6M q/q on $6.6M merger-related costs; operating expenses were down $1.2M q/q.
  • Seasonality caveat: End-of-period deposits benefited from ~+$500M seasonal payroll balances (typical year-end pattern), inflating period-end totals versus normal levels.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Berkshire Hills Bancorp Fourth Quarter 2024 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 January 30, 2025. I would now like to turn the conference over to Kevin Kahn, Investor Relations Officer. Please go ahead.

Kevin Conn (SVP of Investor Relations & Corporate Development)

Good morning and thank you for joining Berkshire Bank's 4th quarter earnings call. My name is Kevin Kahn, Investor Relations and Corporate Development Officer. Here with me today are Nitin Mahathray, Chief Executive Officer Sean Gray, Chief Operating Officer Brett Berbovic, Chief Financial Officer and Greg Lindenmuth, Chief Risk Officer. Our remarks will include forward looking statements and refer to non GAAP financial measures. Actual results could differ materially from those statements.

Please see our legal disclosures on Page 23 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 (President and CEO)

Thank you, Kevin. Good morning, everyone, and thank you all for joining us today. I'll begin my comments on Slide 4, where you can see the highlights for the Q4 and for full year 2024.

We had a strong quarter with robust improvement in the operating earnings quarter over quarter and year over year. Operating EPS of $0.60 was up 3% linked quarter and up 28% year over year. Operating net income of $26,000,000 was up 5% linked quarter and up 29% year over year. Operating ROTCE was 9.93%, up 2 basis points linked quarter and up 103 basis points year over year. The outperformance in the quarter was driven by strong fee revenues that were up 8% linked quarter, coupled with stable credit provision expenses and lower operating expenses, which were down 2% linked quarter and down 6% year over year.

This is the 4th year in a row where we've outperformed our peer median in terms of year over year expense trend. We've included a slide in the appendix to show that expense trend data relative to our peers. Asset quality and balance sheet metrics remain strong. Net charge offs were 14 basis points of loans and our reserve to loans was flat to the 3rd quarter at 122 basis points of loans. Delinquencies and non performing loans were at 52 basis points of loans, the lowest level in almost 20 years, a solid testament to the strength of our collaborative risk culture across our frontline bankers and the risk teams.

Capital ratios were up linked quarter with CET1 at 13.0 percent and TCE at 9.4%. Average deposits were up 3% and average loan balances were up 0.4% linked quarter. Liquidity remains solid with our loans to deposit ratio at 96% on an average basis. As anticipated, our focus on deposit gathering and associated strategic initiatives for the previous few quarters have gained traction in the second half of twenty twenty four. Total deposit costs were down 12 basis points linked quarter and total funding costs were down 17 basis points linked quarter.

We expect funding costs to decline as the Fed cuts interest rates further and like many banks, we continue to move deposit rates lower in the 4th quarter. On strategy front, we made steady progress on our strategic initiatives in 2024. We've successfully executed on variety of expense optimization initiatives, sold 10 branches in New York to tighten our network, further de risked the balance sheet and invested in bankers and technology to further improve the client experience reflected in our Net Promoter Score that remained above 60 in the 4th quarter. As you know, in December, we announced a merger of Equals with Brookline Bancorp to create a preeminent Northeast franchise. Turning to Slide 5, you will see high level overview of the combined bank.

The transaction improves scale and meaningfully improves profitability as reflected in the estimated 40% 23% accretion to Berkshire's 2026 consensus EPS estimate on GAAP and cash basis, respectively. Slide 6 shows the merger rationale. The merger combines Berkshire's stable, lower cost, more rural funding base with higher growth lending markets in Eastern Massachusetts and Rhode Island of Brookline. And with the expected 12.6 percent expense sales from the synergies of the 2 organizations, the combined efficiency ratio is expected to get below 50% in 2026. We announced this merger of Equals in the 4th quarter and expect the closing in the second half of twenty twenty five, subject to requisite regulatory and shareholder approvals and closing conditions.

I want to thank all of my Berkshire Bank colleagues for their continued hard work and commitment to the bank and our clients and look forward to their continued support and commitment through this transition. We will be communicating an integration plan to our employees over the next several weeks, and we continue to maintain Berkshire Bank's standalone performance during transitions through the transaction closing in the second half of twenty twenty five. With that, I'll turn it over to Brett Brubovik to talk through our financials in more detail. Brett?

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

Thank you, Nitin. Slide 7 shows an overview of 20 24 metrics versus 2023. Our operating earnings were $94,900,000 or 2.22 dollars per share. On an annual basis, fees were up 21% and operating non interest expense was down 3%. Provision expense for credit losses were $24,000,000 down $8,000,000 from 2023, all while increasing our allowance for credit losses to 122 basis points, up 5 basis points.

Turning to Slide 8, we show 4th quarter metrics. Operating earnings were $26,000,000 or $0.60 per share, up $0.02 linked quarter and $0.13 year over year. Net interest income of $86,900,000 was down 1% linked quarter. Operating interest income was $23,200,000 up 8% linked quarter. Operating expenses were $71,000,000 down 2% linked quarter and down 6% year over year.

Our fee, credit and expense trends continue to be strong and compare favorably it appears. Net charge offs were $3,300,000 or 14 basis points of loans. Provision expense was $6,000,000 and the reserve coverage ratio of 122 basis points was flat linked quarter. Our ACL to non performing loans increased to 4 69%. Slide 9 shows our average loan balances.

Average loans were up $38,000,000 linked quarter and up $281,000,000 or 3% year over year. Average growth was lighter this quarter as we sold $47,000,000 of our Upstart consumer portfolio, had higher paydowns in the multifamily portfolio and a couple of commercial closings that were pushed to the Q1. On an end of period basis, loans were up 2% linked quarter with growth primarily in C and I and commercial real estate. We've updated a page in the appendix, which shows the Upstart and Firestone runoff portfolios. The combined runoff portfolios are down $119,000,000 or 71 percent year over year to $48,000,000 or 50 basis points of loans.

Slide 10 shows average deposit balances. Average deposits increased $299,000,000 or 3 percent linked quarter. End of period deposits were up linked quarter primarily due to seasonally high payroll money market balances. Excluding payroll and brokered CD balances, end of period deposits grew 3% quarter over quarter. Year over year deposits were down 3% or $277,000,000 primarily from the New York branch sale, which closed in the 3rd quarter.

Adjusting for the $383,000,000 of sold deposits from the branch sale, deposits were up 1% year over year. Average non interest bearing deposits as a percentage of total deposits remained at 24%, consistent with the prior two quarters. Turning to Slide 11, we show net interest income. Net interest income was down 1% linked quarter and down 2% year over year. Net interest margin was down 2 basis points linked quarter to 3.14 percent and December spot NIM was 3.18 percent.

While we have headwinds of floating rate loans repricing lower short term, we also have several tailwinds. We have $1,500,000,000 of CDs or 59 percent of that book maturing in the next 6 months. We have $600,000,000 of wholesale funding that matures over the first half of twenty twenty five. And further, we have $600,000,000 of low yield received fixed swaps maturing over 20252026 with about half in 2025. Finally, we also have low yield fixed rate securities and loans that will mature and reprice at higher yields.

Slide 12 shows our operating non interest income up $1,700,000 or 8% linked quarter and up $6,500,000 or 39% year over year. Year over year comparisons reflect the change to PAM accounting for our tax credit investment business. The growth in fees quarter over quarter was primarily driven by higher gain on SBA loan sales. We also had higher BOLI revenues and seasonal revenue sharing fees this quarter, which came in about $1,500,000 above normalized run rate. Deposit related fees declined linked quarter due to the New York branch sale.

This was the 4th quarter in a row where we've seen solid growth in overall fees. Slide 13 shows expenses. Operating expenses were down 2% linked quarter to 71,000,000 dollars and down 6% year over year. Year over year expense declines were broad based. Linked quarter, a decline in compensation and occupancy and equipment were offset by higher marketing and professional service expense.

Slide 14 is a summary of asset quality metrics. Non performing loans as a percent of loans were 26 basis points, which were flat linked quarter and up 2 basis points year over year. As Nitin mentioned, total delinquencies and non performing loans were 52 basis points of total loans, the lowest percentage in almost 20 years. Net charge offs of $3,300,000 were down $2,300,000 linked quarter and down $1,100,000 year over year. Slide 15 shows that our CRE book remains well diversified in terms of geography and collateral.

Our CRE concentration ratio was approximately 2 94% and credit quality of the CRE portfolio remains solid with non accrual loans at 22 basis points of period end loans. Slide 16 shows details on our office portfolio. As noted last quarter, the weighted average loan to value ratios are about 60% and a large majority of the portfolio was in suburban and Class A space. We have very limited exposure to Boston's financial district and no exposure to high rise office buildings. Slide 17 shows details of our multifamily portfolio.

The multifamily portfolio was $637,000,000 or 6.8 percent of loans. The book is well diversified across our footprint with a weighted average loan to value of about 65%. While current credit quality metrics are strong, we recognize that economic uncertainties exist and we are monitoring both new originations and existing portfolios carefully. Turning to capital, we have strong capital levels. Tangible book value per share was $24.82 and increased 1% linked quarter and 9% year over year.

Our CET1 ratio was up 110 basis points to 13% and our TCE ratio rose 30 basis points to 9.4%. This due to the equity offering and higher retained earnings. As you know, we raised $100,000,000 in equity in December as part of our MOE announcement. The raise improved our standalone capital ratios to support the merger and we issued about 3,400,000 shares. We were encouraged by the demand for the offering and the narrow 3.9 percent discount.

Our top capital management priority remains supporting our organic loan growth. Year to date, we've repurchased $17,400,000 of stock at an average cost of $21.94 All of our repo in 2024 was done in the first half of the year and was completed below tangible book value per share. Currently, we do not anticipate repurchasing shares going forward until our merger closes. Given the pending MOE transaction in the second half of twenty twenty five, we will not be providing line item income statement and balance sheet guidance for the upcoming year as we've done in the past. That said, we are encouraged by the momentum in our financial metrics and confirm comfort with the consensus net income cited in the December 16 merger presentation for 2025.

And with that, I'll turn it back to Nitin for further comments. Nitin?

Nitin Mhatre (President and CEO)

Thank you, Brett.

In summary, we had a strong Q4 and a solid year in a challenging macroeconomic environment. Fee revenues, expenses and credit came in ahead of our expectations from a year ago. While net interest income was down, the yield curve is deepening and this will serve as a meaningful tailwind for our NII and operating leverage in the coming year. We are entering 2025 with a strong momentum across key business metrics. I'm truly proud of what our team has accomplished and how far we've come since I joined as CEO 4 years ago.

We've streamlined our operations by exiting non core businesses and processes, optimized our footprint through consolidation and pruning of our branch network along with rationalization of legacy corporate real estate across the footprint. And we've gotten our loan growth and more recently our deposit growth engines running well. We've invested in technology and digitized our offerings to improve the client experience and relationship deepening. I'm excited about the potential for the combined Berkshire and Brookline franchises. The combined entity will provide more growth opportunities for our employees, continued commitment to our communities, enhanced products and services for our customers and significantly higher profitability and returns for our shareholders.

With that, I'll turn it over to the operator for questions. Operator?

Operator (participant)

Thank you. Your first question comes from the line of David Bishop with Hovde Group. Your line is open.

David Bishop (Director - Research Department)

Hey, good morning, gentlemen. Good morning, Dave. Hey, Nitin and Brett and Company. Just curious, a really good quarter here on the loan growth side. Just curious, I don't know if you can ring fess it maybe how much of that, what percent, what contribution was maybe from some of the new hires that you guys have been adding over the past year or so?

Nitin Mhatre (President and CEO)

Yes. I think at a high level, to begin with, the bulk of the growth came in from our commercial book. And within that, the good news part was also it was pretty well balanced. So it came on a broad based C and I grew actually faster than our CRE book. A lot of this production was again from both existing and new bankers.

So I wouldn't give a specific mix for that, but I think it's all cylinders firing at the same time.

David Bishop (Director - Research Department)

Got it. And then just curious, as you've added these senior bankers, has the average loan size and relationship they're booking moved appreciably since the beginning of the year?

Nitin Mhatre (President and CEO)

No. It's been relatively steady. Our credit box and holding limits haven't changed. So it's pretty steady through the year.

David Bishop (Director - Research Department)

Got it. And then I know the end of the quarter, as you noted, can be impacted by payroll deposits. Do Give like a dollar amount how much they were sort of elevated relative to norms?

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

Yes. I think on average they were probably up about 500,000,000 dollars from they usually are right around $1,000,000,000 on average. And I think that year end, we were up about $500,000,000

Nitin Mhatre (President and CEO)

And Dave, that's been consistent. If you look at all 3 years of 2024, 2023, 20 22, the payroll ends up at about $1,500,000,000 So that's about $500,000,000 higher as Baird said compared to the normal months in the quarter.

David Bishop (Director - Research Department)

Got it. And it looks like, obviously, with the Fed being aggressive here in the Q4 and the December margin at 3.18, it sounds like there might be some tailwinds not only on the loan side, the borrowing side, but also deposits. Just curious if you still see some progression downward on the funding cost side on the interest bearing deposits. Thanks.

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

We definitely do. We are expecting some modest expansion in the NIM as we move forward into Q1, primarily through decreases on the funding side.

David Bishop (Director - Research Department)

Great. I'll hop back in the queue.

Nitin Mhatre (President and CEO)

Thank you, Dave.

Operator (participant)

My apologies. The next question is from Billy Young of RBC. Your line is open.

Billy Young (Analyst)

Hey, good morning, guys. How are you?

Nitin Mhatre (President and CEO)

Good morning, Billy. Good. How are you?

Billy Young (Analyst)

Doing well. Doing well. Thank you. Just to follow-up on David's question just on the deposits. Understanding the seasonal lift from payrolls, the core growth still looked pretty good and seems like you're gaining some traction on kind of your deposit gathering efforts.

So can you just maybe elaborate on kind of what you think the deposit opportunity this year is? You kind of mentioned some of the wholesale fundings maturing later this year. So do you think you'll be able to kind of generate enough core deposit growth to kind of offset some of that? It just feels like you're getting a lot of momentum here on the deposit side. Thanks.

Nitin Mhatre (President and CEO)

Yes. Billy, I'll just give you a macro view of the growth itself. So the average growth, right, so that normalizes for the spikes at the end of the quarter. The average growth was 3%. And then you could look at it 2 different ways, product view and the channel view.

Products, pretty much across all products, there was growth, including DDAs growing by about 2%. And between DDA, savings, money market, CDs, the growth was about 2% to 5%. So that kind of blended to that 3%. So broad based product growth. And in terms of the channels, the biggest growth outside of payroll came from commercial and private bank, retail and also the new digital channel that was launched that roughly contributed over 15% of retail deposit generation in the quarter.

So very broad based kind of growth, and we're hoping that, that momentum continues.

Billy Young (Analyst)

Great. Thank you for that. And maybe just kind of going back to the other side of the balance sheet, just on kind of looking at loan growth drivers for the year. You mentioned a couple of modest headwinds this quarter, but underlying growth also looked pretty solid there. It seems like things are picking up on the commercial side for 2025.

So can you just talk a little bit about general commentary on just kind of underlying what you're seeing in terms of underlying activity and maybe a little bit on customer sentiment and kind of how do you balance the building strength in C and I against maybe some of the need to kind of control commercial real estate concentrations ahead of the Brookline deal?

Nitin Mhatre (President and CEO)

Yes.

I'll start off and Brett could provide more color on the forward look. So I think the growth again is broad based in the lending portfolios. C and I actually grew at a faster pace than 3. We did actually offload the part of the consumer portfolio in the quarter. So I think that kind of brought the growth rates down.

So normalized, it is about 1% or so or 2% closer to 2% growth in the quarter on an end of period basis. So we do expect to see the momentum going. The pipeline was actually lower quarter over quarter, but year over year, it was about 20% higher. So it feels like on a seasonal basis, there is momentum. Our teams are being very judicious.

Our 3 team that has done an exceptional job managing the serving our clients while managing the balance sheet judiciously. We continue to keep it at or below that 300% of risk based capital. And I think that will remain to be our kind of the operating guideline. And C and I, we're seeing some real good momentum between C and I and ABL teams. So I think that momentum should continue and Brett could give more color around how we expect that to expand the margins going forward.

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

Yes. And I think we do see that happening in the Q1. I think we expect some decent balance sheet growth heading into Q1 in 2025, allowing our NIM to expand in the Q1.

Billy Young (Analyst)

Great. Thank you. And just one final question. Any commentary on kind of near term expense expectations?

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

Yes. I think we've shown pretty good momentum on the expense side over the last few quarters. We expect to see that momentum continue into 2025 with no real significant changes in that as we move forward.

Billy Young (Analyst)

Great. Thank you. I'll step back.

Operator (participant)

The next question comes from Chris O'Connell with KBW. Your line is open.

Christopher O'Connell (Director)

Hey, good morning.

Nitin Mhatre (President and CEO)

Good morning, Chris.

Christopher O'Connell (Director)

So just wanted to start off on credit. Obviously, this quarter, after all the recent actions came out really good and kind of below the recent trends. Given the disposal of the majority of the upstart portfolio and just kind of the recent progress here, do you guys think the normalized kind of net charge off rate going forward is down a bit than the past few quarters?

Nitin Mhatre (President and CEO)

I think the normalized charge offs for us, we believe, should be in the range of 20 basis points. So we've had couple of quarters better than that, but we believe it normalizes at around 20 basis points range, Chris.

Christopher O'Connell (Director)

Okay, great. And then I know the office portfolio has been performing very strong and isn't too big for you guys. But it looks like about 22% and another 19% are maturing in 2025%, 26%. And I think the entire portfolio is about 4.7% criticized. Can you just give us a sense of how much of that criticized portion is within the 2022 or the 2025 and 26 maturities?

Nitin Mhatre (President and CEO)

Greg, you want to give some color there?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

Yes. Actually, none at all in 2025.

Christopher O'Connell (Director)

Okay, great. And nothing on 26 either?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

There is a small credit in 2026, 3,000,000

Christopher O'Connell (Director)

Okay. Thanks.

And just you guys mentioned the digital deposit efforts. I was wondering what that overall balance is and then what the cost of that is just compared to the overall deposit portfolio?

Nitin Mhatre (President and CEO)

Yes. Well, I'll ask Sean to give some color there.

Sean Gray (President & COO)

Sure.

We're very focused on pricing that portfolio similar to the offerings we have in both our retail and commercial bank. We're pleased that the average deposit size is also mirroring our retail account opening. And the average DDA size is also much better than national trends. So, the program is relatively new. We are up over $60,000,000 in digital deposits with some Nitin mentioned the good growth rates this quarter.

So we're pleased that we've got good momentum and we hope that pipeline continues into next year.

Nitin Mhatre (President and CEO)

And Chris, just to maybe add a little more color to this. I think some part of this program that was launched by the team also kind of leverages the investments that we made in our technology stack. And I think that allows us to do this more effectively. So historically, you've seen most of the banks have struggled to keep right amount of balances in digital deposits or have higher attrition or have higher fraud. And I think we addressed that.

We took all those learnings, leveraged our tech stack and have built a pretty robust program, like Sean said. We feel pretty good about the momentum we're seeing across those metrics.

Christopher O'Connell (Director)

Okay. Thanks, Fin. And then just wanted to follow-up. I know there's no full year guidance, but just getting a little bit more granular into next quarter given brand shell and kind of the various moves over the past couple of quarters. I mean, as far as just going into Q1, how you guys are thinking about the expense run rate?

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

Yes. I think we've had a lot of positive momentum with expenses over our recent history. I think we were going to continue that as we move forward. That's obviously a point of focus for us. We meet regularly to make sure that we're spending every dollar as effectively and efficiently as possible. So I would expect to see that momentum continue.

Christopher O'Connell (Director)

Okay.

Operator (participant)

The next question comes from Laura Hunsicker with Seaport Research Partners. Your line is open.

Laurie Hunsicker (Senior Analyst)

Yes. Hi, thanks. Good morning.

Nitin Mhatre (President and CEO)

Good morning, Laurie.

Laurie Hunsicker (Senior Analyst)

Maybe just starting over and your other income, the $4,900,000 how much of that was BOLI's death benefit there?

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

I think BOLI was about almost $1,000,000 higher than our normal run rate quarter over quarter.

Laurie Hunsicker (Senior Analyst)

Okay. And was there anything else non recurring in that?

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

We did have some seasonally high revenue sharing fees, but that is that's a seasonal thing that comes in usually at the end of Q4 every year. Another thing, quarter over quarter, I would say those are kind of the 2 pieces that drove the increase. But I wouldn't say anything, BOLI was probably the most significant component of that.

Laurie Hunsicker (Senior Analyst)

Okay, great. Thanks. And then just going back to sort of normalized charge offs and also Upstart and Firestone, which I'm very happy you guys continue to provide the detail, that's helpful. Can you just help us think about though, these two books have combined been half, three quarters and some quarters even more of your charge offs, right? So after that, your charge offs have been actually tracking single digits.

So I guess question on normalized charge offs, is that a stripping that out number or that's including that in when we're looking at 20 basis points? And then ahead of the Brookline MOE, again, the up Firestone bleed and it was great to see the upstart sale on October 16. But the can you just refresh us, what are the reserves on those 2 books and why not just write them off, sell them for whatever gets them done before you close so that, that headache is completely in the rearview mirror? How are you thinking about that?

Nitin Mhatre (President and CEO)

Doug, you want to start it off and I'll jump in as well?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

Sure.

Laurie, those are embedded in that expectation of normalized charge offs. Firestone has been really performing better than expected. So we don't really see any issues in the Firestone book and we actively are looking at possibly selling the remaining book of the upstart as well. Our reserves for the upstart are probably in excess of 50% of the balances that are outstanding now.

Laurie Hunsicker (Senior Analyst)

Okay, great. So basically, if we think about normalized charge offs, so that number, it's still single digits. It's not 20 basis points. Are you guys there?

Nitin Mhatre (President and CEO)

No, Laurie, I think what no, yes, we're there. Though I think 20 basis points is what we believe to be the normalized run rate. I think our 10 year average has been about 35, 37 basis points. We believe credit quality is stronger.

So I think we don't expect continue to see 7 14 basis points type of charge offs. So I think the normalized run rate could be 20 basis points.

Laurie Hunsicker (Senior Analyst)

Okay. I mean, notwithstanding the fact, Upstart has been like 3 quarters of your charge offs quarter after quarter after quarter?

Nitin Mhatre (President and CEO)

Right.

Laurie Hunsicker (Senior Analyst)

Okay. And then just last question, thinking about the closing, and I don't know if this is a Paul and Karl question, but we are seeing much, much faster approvals rolling through the latest, the 3rd largest merger announced in 2024, the AUV SASR deal, 7 weeks after filing their application, they get set approval even ahead of the state approvals, right?

So they were supposed to close in the Q3 of 2025. Now they're closing April 1, 2025. Can you help us think a little bit about the timing? Are we going to see a faster closing here? How should we be thinking about that?

Nitin Mhatre (President and CEO)

Yes.

I think, Elora, you have a good lens of this and we look at the same numbers. And yes, I believe the general feeling is that the regulatory approvals might be faster, especially in the new administration compared to the previous one. It's just impossible to predict how much that is. I think both our both of us combined parties estimated that to be the end of Q3, but it very well could be sooner, but we just can't forecast that.

Laurie Hunsicker (Senior Analyst)

Okay, great. Thanks for taking my questions.

Nitin Mhatre (President and CEO)

Thank you, Laurie.

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

Thanks, Laurie.

Operator (participant)

The next question comes from Mark Fitzgibbon with Piper Sandler. Your line is open.

Gregory Zingone (Research Analyst)

Hey, guys. This is Greg Zingone stepping in for Mark. How are you?

Nitin Mhatre (President and CEO)

Good. How are you?

Gregory Zingone (Research Analyst)

Good. Quick questions. Could we see any other balance sheet actions that you guys might do to prepare for the MOE?

Nitin Mhatre (President and CEO)

No, there is nothing on the radar.

Gregory Zingone (Research Analyst)

Okay. And secondly, just looking for the next few quarters, I saw the tax rate was elevated in 4Q. Would you kind of be able to give us an idea on how we should be thinking about it for 1Q, 2Q and 3Q?

Brett Brbovic (Senior VP and Chief Accounting Officer & Interim CFO)

Yes, sure. Taxes were a little bit elevated obviously this quarter because of some non deductible merger expenses that drove up the rate here in Q4. I think that's what pretty much drove it to the 26%. I believe we're still expecting to be around the 22%, 23% tax rate for 2025 and going forward.

Gregory Zingone (Research Analyst)

Awesome. Thank you.

Operator (participant)

The next question is a follow-up from David Bishop of Hovde Group. Your line is open.

David Bishop (Director - Research Department)

Yes, just a couple of follow ups, either for Mitt and Greg. You alluded to the change in administration here and obviously there's been a lot of table rattling in terms of downsides of the federal government, especially as it pertains to the real estate. Any exposure to the federal government or agencies that could be affected by the potential GSA downsizing within your footprint?

Nitin Mhatre (President and CEO)

Greg?

Gregory Lindenmuth (Senior EVP & Chief Risk Officer)

No, that's a good question. I mean, we do have leases with government agencies. The positive part of the leases is that they're very long term. The termination clauses in a lot of the cases will equal the amount of payments. So very steep termination clause. So we have that embedded protection built into the loans associated with any government leases.

David Bishop (Director - Research Department)

Got it. And then sticking on sort of the loan question, just curious, new originations this quarter versus last and if they've moved appreciably either up or down post quarter? Thanks. That's it for me.

Nitin Mhatre (President and CEO)

So new originations were about let me just give you one second, the exact numbers there. Yes. They were modestly higher in terms of commitments on the commercial side and as well as consumer side. So modestly higher in the Q4 compared to Q3.

David Bishop (Director - Research Department)

And they move much, I know it's early in the Q1, but has there been much movement in the Q1?

Nitin Mhatre (President and CEO)

No. But I think as Brett mentioned in the script, there were a couple of deals on the commercial side that got pushed into the Q1. So there'll be a little bit of a head start there. But the pipeline, again, year over year was up 20%. So I think that's normal.

We think it should be similar kind of a trajectory as we saw in the Q1 of last year.

David Bishop (Director - Research Department)

Great. Thank you.

Operator (participant)

This concludes the question and answer session. I'll turn the call to Nitin Mahathare for closing remarks.

Nitin Mhatre (President and CEO)

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

Operator (participant)

This concludes today's conference call. Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.