Beacon Financial Corp Q4 FY2024 Earnings Call

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 Conn, Investor Relations Officer. Please go ahead.

Good morning, and thank you for joining Berkshire Bank's fourth 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 2 and 3 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?

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 fourth quarter 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 million was up 5% linked quarter and up 29% year-over-year. Operating ROTC 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 fourth 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 third 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% 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 2024. 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 fourth quarter. On the strategy front, we made steady progress on our strategic initiatives in 2024. We've successfully executed on a 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 fourth 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 a high-level overview of the combined bank. The transaction improves scale and meaningfully improves profitability as reflected in the estimated 40% and 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% expense savings from the synergies of the two organizations, the combined efficiency ratio is expected to get below 50% in 2026. We announced this merger of equals in the fourth quarter and expect the closing in the second half of 2025, 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 2025. With that, I'll turn it over to Brett Brbovic to talk through our financials in more detail. Brett?

Thank you, Nitin. Slide 7 shows an overview of 2024 metrics versus 2023. Our operating earnings were $94.9 million or $2.22 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 million, down $8 million from 2023, all while increasing our allowance for credit losses to 122 basis points, up 5 basis points. Turning to Slide 8, we show fourth quarter metrics. Operating earnings were $26 million or $0.60 per share, up $0.02 linked quarter and $0.13 year-over-year. Net interest income of $86.9 million was down 1% linked quarter. Operating interest income was $23.2 million, up 8% linked quarter. Operating expenses were $71 million, down 2% linked quarter and down 6% year-over-year. Our fee, credit, and expense trends continue to be strong and compare favorably to peers. Net charge-offs were $3.3 million or 14 basis points of loans. Provision expense was $6 million and the reserve coverage ratio of 122 basis points was flat linked quarter. Our ACL to non-performing loans increased to 469%. Slide 9 shows our average loan balances. Average loans were up $38 million linked quarter and up $281 million or 3% year-over-year. Average growth was lighter this quarter as we sold $47 million of our Upstart consumer portfolio, had higher pay downs in the multifamily portfolio, and a couple of commercial closings that were pushed to the first quarter. On an end-of-period basis, loans were up 2% linked quarter with growth primarily in C&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 million or 71% year-over-year to $48 million or 50 basis points of loans. Slide 10 shows average deposit balances. Average deposits increased $299 million or 3% 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 million, primarily from the New York branch sale, which closed in the third quarter. Adjusting for the $383 million 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% and December spot NIM was 3.18%. While we have headwinds of floating-rate loans repricing lower short term, we also have several tailwinds. We have $1.5 billion of CDs or 59% of that book maturing in the next six months. We have $600 million of wholesale funding that matures over the first half of 2025. And further, we have $600 million of low-yield receiver fixed swaps maturing over 2025 and 2026, 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 $1.7 million or 8% linked quarter, and up $6.5 million 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 $1.5 million above normalized run rate. Deposit-related fees declined linked quarter due to the New York branch sale. This was the fourth 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 million 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 $3.3 million were down $2.3 million linked quarter and down $1.1 million 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 294% 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 million or 6.8% 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 million 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 3.4 million shares. We were encouraged by the demand for the offering and the narrow 3.9% discount. Our top capital management priority remains supporting our organic loan growth. Year-to-date, we've repurchased $17.4 million of stock at an average cost of $21.94. All of our repurchase activity 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 2025, 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?

Thank you, Brett. In summary, we had a strong fourth quarter 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 was steepening 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 four 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.

Thank you. Your first question comes from David Bishop with Hovde Group; your line is open. We invested in technology and digitized our offerings to improve the client experience and deepen relationships. I'm excited about the potential for the combined Berkshire and Brookline franchises. The combined entity will provide more growth opportunities for our employees, a 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.

Hey. Good morning, gentlemen.

Good morning, Dave.

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 break out, maybe how much of that, what percent contribution was maybe from some of the new hires that you guys have been adding over the past year or so?

Yes. 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 it was pretty well balanced. It came on a broad-based basis. C&I grew actually faster than our CRE book. A lot of this production was from both existing and new bankers. I wouldn't give a specific mix for that, but I think it's all cylinders firing at the same time.

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

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

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

Yes, I think, on average, they were probably up about $500 million from what they usually are. They're usually right around $1 billion on average, and I think at year end, we were up about $0.5 billion.

And Dave, that's been consistent. If you look at all three years of 2024, 2023, 2022, payroll ends up at about $1.5 billion. So that's about $500 million as Brett said compared to the normal months in the quarter.

Got it. And it looks like obviously with the Fed being aggressive here in the fourth quarter and the December margin at 3.18% 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.

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.

Great. I'll hop back in with you.

Thank you, Dave.

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

Hey, good morning, guys. How are you?

Good morning, Billy. Good. How are you?

Doing well. Doing well. Thank you. Just to follow up on David's question on the deposits. Understanding the seasonal lift from payrolls, the core growth still looked pretty good. It seems like you're getting some traction on kind of your deposit gathering efforts. So, can you elaborate on what you think the deposit opportunity this year is? You mentioned some of the wholesale fundings maturing later this year. Do you think you'll be able to generate enough core deposit growth to offset some of that? It feels like you're getting a lot of momentum here on the deposit side.

Thanks. I'll give you a macro view of the growth itself. The average growth normalizes for the spikes at the end of the quarter; the average growth was 3%. You could look at it two different ways: product view and the channel view. Product-wise, 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%, which blended to that 3%. So, broad-based product growth. In terms of channels, the biggest growth outside of payroll came from commercial and private bank, retail, and also the new digital channel that was launched, which roughly contributed over 15% of retail deposit generation in the quarter. So, very broad-based growth and we are hoping that momentum continues.

Great. Thank you for that. And maybe just going back to the other side of the balance sheet, on loan growth drivers for the year, you mentioned a couple of modest headwinds this quarter, but underlying growth also looked pretty solid. It seems like things are picking up on the commercial side for 2025. Can you talk about underlying activity, customer sentiment, and how you balance building strength in C&I against controlling CRE concentrations ahead of the MOE?

I'll start and Brett can provide more color. The growth was broad-based in the lending portfolio. C&I actually grew at a faster pace than CRE. We did offload part of the consumer portfolio in the quarter, which brought growth rates down somewhat; normalized, it is closer to 2% growth in the quarter on an end-of-period basis. We do expect momentum to continue. The pipeline was lower quarter over quarter, but year-over-year it was about 20% higher, so there is seasonal momentum. Our teams are being judicious. Our CRE team has done an exceptional job managing and serving clients while managing the balance sheet carefully. We continue to keep CRE at or below that 300% of risk-based capital, and that will remain our operating guideline. In C&I, we're seeing good momentum between C&I and ABL teams, so that momentum should continue. Brett can give more color around how we expect that to expand margins going forward.

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

Great. Thank you. And just one follow-up: any commentary on near-term expense expectations?

We have shown good momentum on the expense side over the last few quarters. We expect to see that momentum continue into 2025 with no significant changes as we move forward.

Great. Thank you. I'll step back.

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

Hey, good morning.

Good morning, Chris.

So, just wanted to start on credit. 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 the recent progress here, do you think the normalized net charge-off rate going forward is down a bit from the past few quarters?

We believe normalized charge-offs for us should be in the range of 20 basis points. We've had a couple of quarters better than that, but we believe it normalizes around the 20 basis points range.

Okay, great. And then I know the office portfolio has been performing very strongly and isn't too big, but it looks like about 22% and another 19% are maturing in 2025 and 2026, and I think the entire portfolio is about 4.7% criticized. Can you give a sense of how much of that criticized portion is within the 2025 or the 2026 maturities?

Greg, do you want to give some color there?

Yes. Actually, none at all in 2025.

Okay, great. And nothing on 2026 either?

There is a small credit in 2026, about $3 million.

Okay, thanks. And you mentioned the digital deposit efforts. What is that overall balance and what is the cost of that compared to the overall deposit portfolio?

I'll ask Sean to provide color.

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 mirroring our retail account openings, and the average DDA size is much better than national trends. The program is relatively new. We are over $60 million in digital deposits with good momentum, and as Nitin mentioned, we saw good growth rates this quarter. We're pleased with the progress and hope the pipeline continues into next year.

Some of this program leverages investments we've made in our technology stack, which allows us to execute more effectively. Historically, many banks have struggled with digital deposit attrition and fraud. We addressed those issues, took the learnings, leveraged our tech stack, and built a robust program. Like Sean said, we feel good about the momentum across those metrics.

Okay. Thanks, Nitin. One follow-up: I know there's no full year guidance, but as we get more granular into next quarter given branch sales and various moves, how are you thinking about the expense run rate going into Q1?

We've had a lot of positive momentum with expenses recently. We plan to continue that focus. We meet regularly to ensure every dollar is spent effectively and efficiently, so I would expect to see that momentum continue.

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

Hi, thanks. Good morning.

Good morning, Laurie.

Maybe just starting over the other income, the $4.9 million. How much of that was BOLI death benefit?

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

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

We did have some seasonally high revenue sharing fees, which is a seasonal thing that usually comes in at the end of the fourth quarter every year. Those are the two pieces that drove the increase, and I wouldn't say anything else was significant beyond that.

Thanks. On normalized charge-offs and Upstart and Firestone, you continue to provide the detail, which is helpful. These two books have combined been a large portion of your charge-offs. After that, your charge-offs have been tracking single digits. When you say normalized charge-offs at around 20 basis points, is that stripping those out or including them? And ahead of the Brookline MOE, why not sell them to remove the headache before close? What are the reserves on those two books and why not write them off or sell them to get them done before you close?

Greg, do you want to start and I'll add color?

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

Okay. So, if we think about normalized charge-offs, is that number still single digits or is it 20 basis points?

Laurie, yes, I think we believe the normalized run rate could be around 20 basis points. Our 10-year average has been about 35 to 37 basis points. We believe embedded quality is stronger now, so we don't expect to continue to see 7 and 14 basis points-type charge-offs consistently. That said, Upstart has been a meaningful contributor to charge-offs historically.

Okay. And on the closing timing, we are seeing faster approvals in some recent deals. Can you help us think about timing for your MOE? Might it close faster than your current estimate?

Laurie, we see the same signals. The general feeling is regulatory approvals might be faster in the current administration compared to the previous one, but it's impossible to predict exactly how much faster. Both parties estimated end of third quarter, but it could be sooner; we just can't forecast the exact timing.

Okay, great. Thanks for taking my questions.

Thank you, Laurie. Thanks.

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

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

Good. How are you?

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

No, there is nothing on the radar.

Okay. Secondly, looking at the tax rate, it was elevated in 4Q. How should we think about it for 1Q, 2Q and 3Q?

Taxes were a little elevated this quarter because of some non-deductible merger expenses that drove up the rate to about 26%. We expect to be around a 22% to 23% tax rate for 2025 and going forward.

Awesome. Thank you.

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

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

Greg?

No, that's a good question. We do have leases with government agencies. The positive part is they are very long-term and termination clauses in many cases will equal the amount of payment, so there are steep termination clauses. We have that embedded protection built into the loans associated with any government leases.

Got it. And sticking on loans, new originations this quarter versus last — have they moved appreciably either up or down post-quarter?

New originations were modestly higher in terms of commitments on the commercial side and the consumer side in the fourth quarter compared to the third quarter.

They moved much, I know it's early in the first quarter, but has there been much movement post-quarter?

No. A couple of commercial deals pushed into the first quarter, so there will be a little bit of a head start there. The pipeline year-over-year was up 20%, so we expect a similar trajectory to what we saw in the first quarter of last year.

Great. Thank you.

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

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

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