Participants

Kevin Conn; Senior Vice President, Investor Relations & Corporate Development; Berkshire Hills Bancorp Inc

Nitin Mhatre; President, Chief Executive Officer, Director; Berkshire Hills Bancorp Inc

Brett Brbovic; Executive Vice President and Chief financial Officer; Berkshire Hills Bancorp Inc

Sean Gray; Senior Executive Vice President, Chief Operating Officer; President of Berkshire Bank; Berkshire Hills Bancorp Inc

Gregory Lindenmuth; Senior Executive Vice President; Chief Risk Officer of Berkshire Bank; Berkshire Hills Bancorp Inc

Christopher O'Connell; Analyst; KBW

Gregory Zingone; Analyst; Piper Sandler

Presentation

Operator

Good morning ladies and gentlemen, and welcome to the Berkshire Hills Bancorp first quarter 2025 earnings conference call. (Operator Instructor). I would now like to turn the conference over to Kevin Conn, investor relations officer. Please go ahead.

Kevin Conn

Good morning and thank you for joining Berkshire Bank's first 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-gap financial measures. Actual results could differ materially from those statements. Please see our legal disclosures on page 2 and 3 of the Ernie's presentation referencing forward-looking statements and non-gap financial measures. A reconciliation of non-gap to GAAP measures is included in our news at this time. I'll turn the call over to Nitin.

Nitin Mhatre

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 1st quarter.
We had a very strong quarter with operating net income of $27.6 million, up 6% linked quarter, and up 32% year over year.
Earnings per share of $0.60 was flat to the fourth quarter, including the full quarter impact of higher share count from a December equity raise and up 22% year over year.
Our rigorous expense optimization initiatives continued to drive expenses lower with quarterly operating expense of about $68 million down 4% length quarter and down 6% year over year.
Ongoing momentum of improving revenues and declining expenses led to a positive operating leverage of 5% in quarter and 11% year over year.
Operating ROTCE of 9.66% was down 27 basis points in quarter and up 93 basis points year over year.
Overall strong financial performance was primarily driven by improved net interest income, lower expenses, and disciplined credit management. Brett will provide more details in a few moments.
Asset quality and balance sheet matrix remain strong.
They charge off for 15 basis points of loans, and I reserved the loans was up 2 basis points to 1.24%. Total loss reserves of 1.24% are now at about 500% of our total non-performing loans.
Total delinquencies and non-performing loans were 42 basis points of loans, the lowest level in about 20 years, a solid testament to the strength of our collaborative risk culture across frontline bankers and risk teams.
Liquidity remained solid with our loan to deposit ratio at 95%. That was down 1% quarter.
On strategy front, we made steady progress on our strategic initiatives in the 1st quarter.
Our focused on the deposits relationships across business lines continued, and a relatively new digital deposit initiative has gained momentum and delivered approximately $75 million of new deposits.
We sold the remaining $7 million upstart bulk and further derisked our balance sheet with total non-strategic runoff portfolios down by 76% year over year to just $34 million.
Brett will share more details on the portfolio sale in a moment.
As in December we announced a merger of equals with Brookline Bancorp to create a preeminent Northeast franchise.
This transaction improves scale and meaningfully improves profitability as reflected in the estimated 40% and 23% accretion to Berkshire's 2026 consensus estimate on GAAP and cash basis respectively.
Our team continues to work proactively on requisite integration planning for a seamless transition.
With that I'll turn over the call to Brett to cover our financials in more detail, Brett.

Brett Brbovic

Thank you, Nitin.
I'll begin on slide 5, which shows an overview of the first quarter metrics. As Nitin mentioned, our operating earnings were $27.6 million or $0.60 per share.
Our net interest margin was 324, up 10 basis points linked quarter, and our net interest income was up $2.9 million or 3% linked quarter.
Operating expenses were down $3.1 million or 4% length quarter, and our efficiency ratio was 59.5%. Slide 6 shows our average loan balances.
Average loans were up $118 million or 1% linked quarter and up 348 million or 4% year over year.
We've updated a page in the appendix which shows data on the upstart and Firestone runoff portfolios.
The combined runoff portfolios, including the upstart loan sales, are down $110 million, or 76% year over year to $34 million or just 40 basis points of loans.
Slide 7 shows average deposit balances.
Average deposits increased $188 million or 2% linked quarter and were flat year over year.
Excluding payroll deposits and brokered CD balances, average deposits were flat linked to quarter and flat year over year.
If you recall, our year over year deposits were impacted by the sale of 10 branches in upstate New York in the 3rd quarter of 2024.
Average non-interest bearing deposits as a percentage of total deposits was 23%, down 1% linked quarter.
Turning side 8, net interest income was up 3% linked quarter and up 2% year over year.
Net interest margin was up 10 basis points linked quarter to 324, and our March spot Nim was 331.
Slide 9 shows operating non-interest income, which was down $2.5 million or 11% linked quarter and up $3.4 million or 19% year over year.
Other non-interest income was down compared to the prior quarter.
During the 4th quarter, we had strong SBA gains and unusually high bully income.
In the near term, we expect SBA gains to be in line with our prior eight quarter average of $2.9 million due to uncertainty from the impact of tariffs.
Slide 10 shows expenses. Operating expenses were down $3.1 million or 4% length quarter to $68 million and down $4.5 million or 6% year over year.
Year over year expense reductions were broad-based, including our other expenses, which are an assortment of smaller items.
Non-operating expenses of $2.5 million were primarily related to the merger announced in December.
Slide 11 shows our expense outperformance versus proxy peers over the last 4 years.
This slide highlights the disciplined approach to expense management we've undertaken over that time.
Slide 12 shows a summary of asset quality metrics.
Non-performing loans as a percentage of total loans was 25 basis points.
Total delinquencies and non-performing loans were 42 basis points of total loans.
Net charge offs of $3.5 million were up 200,000 linked quarter and down 500,000 year over year.
We added $2 million to our lost reserve, increasing our coverage ratio to 124 basis points.
Our loss reserves to non-performing loans are now about 500%.
Our 5.5 million provision reflects the most recent Moody's baseline economic outlook in our ACL assumptions.
During the quarter, we sold the remaining $7 million of upstart loans for net proceeds of $5.3 million or $0.76 on the dollar.
With the sale of the Upstart book, we have significantly de-risked our balance sheet.
Our other loan books are below normal net charge off levels, and we do expect those to normalize over time based on the macroeconomic environment and outlook.
Slide 13 shows that our pre-book remains well diversified in terms of geography and collateral.
Our CRE concentration ratio was approximately 290% of risk-based capital.
And credit quality of the free portfolio remains solid with non-accrual loans at 19 basis points of period and loans.
Slide 14 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 is in suburban and Class A space.
We have very limited exposure to Boston's financial district and no exposure to high rise office buildings.
Turning to capital, we have strong capital levels. Tangible book value per share was $25.50.
Our CET1 ratio was 13.3%, and our TCE ratio was 9.9%. Our AOCI bond mark improved modestly from a negative $106 million to a negative $95 million.
Given the pending MOE transaction in the second half of 2025, we did not provide line item income statement and balance sheet guidance for the upcoming year.
That said, we are encouraged by the momentum in our financial metrics and confirm comfort with consensus net income cited in the December 16th merger presentation for 2025.
And with that I'll turn it back over to Nitin for further comments. Nitin.

Nitin Mhatre

Thank you, Brett.
Overall, we had a very strong first quarter driving a solid start to the year.
Many of our multi-year initiatives are clearly bearing fruit.
While the economic environment is uncertain given the volatility driven by tariffs and other policy initiatives, we continue to monitor the situation and communicate with clients to better understand the potential impacts to their businesses.
It's still very early and the fluidity of the news from Washington makes it difficult to predict the potential outcomes at this point, but our teams remain prepared to pivot as needed to maintain our momentum.
We're excited about the potential for the combined Berkshire and Brookline franchises.
The combined entity will provide growth opportunities for our employees, continued commitment to our communities, enhanced products for our customers, and significantly higher profitability and returns for our shareholders.
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.
On slide 15, we summarize our progress on the merger integration and next steps. In short, everything is on or slightly ahead of plan.
We filed regulatory applications in March and a shareholder proxy with the SEC in early April.
We anticipate stockholder approvals at our annual meeting on May 201st and our regulatory approvals sometime in the 3rd quarter.
So a lot of progress so far, while there's more work to do.
In closing, I'm proud of what Berkshire team has accomplished over the last 4 years in terms of financial performance improvement while delivering exceptional client experience and positive impact on the communities that we operate in.
It is their hard work that continues to be recognized across various forums, including the most recent recognition by Newsweek magazine that listed Berkshire Bank amongst the most trustworthy banks in America for the 4th consecutive year.
Thank you, Tim Burcher, for everything you do to serve our clients and earn their trust. With that, I'll turn it over to the operator for questions. Operator.

Question and Answer Session

Operator

Chris O'Connell of KBW.

Christopher O'Connell

Hey, good morning.

Nitin Mhatre

Morning Chris.
And then, so just want to start off, with the balance sheet side, I appreciate, no guidance from here and you know it's, become a little bit more shaky economic environment, so.
I was hoping to get an update on loan demand, has that changed as you guys have come into the year and over the past couple of months, and how you guys are thinking about, standalone growth, going forward.
Yes, Chris, that's a good question. Like you said, there's a lot of uncertainty out there and broadly speaking, what we're hearing from the clients is like Three different teams that are emerging. One is where there's some clients, especially commercial clients, that are loading up on the inventories, in kind of anticipation of the prices going up.
There's the other group that's kind of wait and watch approach and just kind of staying put where they are. And there is a third group that is actually looking at rationalizing and reducing expenses and so on and so forth. So it's a mixed bag, but what we see in the pipeline is that pipeline has slowed down compared to the previous quarter, just like the origination slowed down. So I think there's a net indication of slowing demand.
I think we still, I think this quarter was about 5% annualized loan growth.
I think we still probably expect to be in that range, but I will tell how the economy turns out.

Christopher O'Connell

Great, that's helpful and then.
On the expense side. I know that you said there's kind of a number of small items here, just hoping to get your guys' thoughts about, the how the expense, base grows throughout the rest of the year on a standalone basis or if it is able to remain pretty steady.

Brett Brbovic

Yes, I think we're we're very pleased with with our expense momentum that we're seeing currently and that we've seen over the last few quarters.
I am expecting it to remain, relatively stable, consistent with generally consistent with this quarter, I would say, we do hope to continue that momentum as we move forward and progress towards the towards the merger.

Christopher O'Connell

Okay, got it, and then, with, the, final upstart sale, between, this quarter last quarter, and just the overall progress on the runoff portfolios in general you're talking about kind of normalizing that charge off I mean.
Where do you think that range is now like you, now that you guys have kind of changed the balance sheet, do you think that, that's a different level than it's been historically?

Nitin Mhatre

Yes, Chris, in a normalized environment that would have been the case. So if you look at our last 5 quarters, our charge rate has ranged between 7 basis points and 24 basis points. This quarter was about 15.
So I think on the last earnings call we did say that we expected to normalize to around 20 basis points level and I think that's where we're staying at the moment because there's so much uncertainty out there, so it's tough to say. I think Brett mentioned in his remarks that we expect it to normalize and we believe that's the normalized level.

Christopher O'Connell

Great. I appreciate the time. Thank you.

Nitin Mhatre

Thank you, Chris.

Operator

Gregory Zenong, Piper Sandler.

Gregory Zingone

Hey guys, it's Greg stepping in from Mark. How are you?

Nitin Mhatre

Hey, Greg, good. How are you?

Gregory Zingone

Good, so a quick clarifying question. Did you see the spot NIM in March was 3.31%?

Brett Brbovic

That's correct, yes.

Gregory Zingone

Okay awesome and is there any update you could give us on how you're managing employee retention ahead of the MOE closing, especially for some of your key producers?

Sean Gray

Sean here, we've identified all of those key producers. We've had those conversations and both organizations have discussed, meaningful retention and retention grants as they move towards the pro forma company. So we feel we've got a good handle, but a lot of work left to do.

Gregory Lindenmuth

Okay. Thank you. And then is there any plans to align your product offerings, your deposit related strategies ahead of the legal close?

Nitin Mhatre

I think in my remarks I talked about the digital deposit initiative that we launched that's programmed to date about $75 million in deposits, and I think even more exciting outside of the absolute numbers is roughly 1 out of 5 new client relationships are coming through channels now which was our original goal.
So I think, we're pleased with that. I don't think we're going to launch new products per se, but I think the team continues to fine tune the functionalities. So just as an example, last quarter we have launched what we call the direct deposit API whereby if you open a deposit relationship with Berkshire Bank and want to move your direct deposit from another bank, it's really a couple of clicks of buttons on your phone.
And I think those kinds of functionalities will continue to be added to create that digital first type of experience.

Gregory Zingone

Awesome, thank you. And last question for me, is there a TCE ratio or create concentration level you guys are keeping in mind as you approach the MOE?

Nitin Mhatre

For 3 we've continued to stay below 300% mark, and I think this quarter we ended at about 290 TC, Bret, I don't know if you have a comment on that.

Brett Brbovic

Yes, No, I would expect TC to remain relatively stable from now basically to the merger, just trying to make sure that we put ourselves in the best position possible for, once the merger occurs, to continue going forward and grow.

Gregory Lindenmuth

Awesome, thanks so much, guys.

Operator

Thank you. I'd now like to hand the call back to Nitin Mhatre for final remarks.

Nitin Mhatre

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

Operator

Thank you for attending today's call. You may now disconnect. Goodbye.