Beacon Financial Corp. (BBT) Q4 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Berkshire Hills Bancorp Q4 Earnings Release Conference call. All participants will be in listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Gonci, Investor Relations Manager. Please go ahead.

Good morning, and thank you for joining this discussion of fourth quarter results. Our news release is available on the Investor Relations section of our Web site, berkshirebank.com, and will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our Web site at ir.berkshirebank.com, and we may refer to this in our remarks. Our remarks will include forward-looking statements, and actual results could differ materially from those statements. For detail on related factors, please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding our results and performance trends and should not be relied on as financial measures of actual results or future projections. The comparison and reconciliation to GAAP measures is included in our news release. As you know, we also released an announcement yesterday about our CEO. Our Board Chair, Bill Dunleavy is joining us for the first part of the call to comment on this announcement. And so, at this time, I’ll turn the call over to Bill.

Thanks. Thank you, David. Good morning, everyone. As David said, I am Bill Dunleavy, and it's my privilege to be the Chairman of the Board of Directors of Berkshire Hills Bancorp. Before Sean and Jamie cover our financial results, I want to share a few words with you. On our announcement yesterday, Nitin Mhatre has been named Chief Executive Officer of Berkshire Hills Bancorp and Berkshire Bank, a decision our Board made after a thorough planning process and a comprehensive national search. Nitin is the ideal face to lead the bank into the future and propel Berkshire to long-term success, fulfilling our promise to meet changing customer expectations and the demands of the 21st century banking. Nitin's track record of leadership and accomplishment at Webster Bank and Citi Group is exemplary. He has a national reputation as an innovative banking executive, who can deliver results, grow market share, and improve profitability. He has broad experience working at global banks like Citi, and shares Berkshire’s passion for community banking, and our pledge to serve the unique needs of all of our customers across our entire footprint. At Webster, Nitin was instrumental in helping the bank evolve from a mainstream mass market bank to the specialized bank it is today, serving multiple segments with tailored product offerings. He oversaw operational improvements in the branches through automation around the universal banker model, streamlining the systems, and improving customer service. He is a true pioneer in the application of data analytics, and the use of digital automation to lower cost, streamline processes, and improve the customer experience. Importantly, Nitin fully embraces Berkshire's Be FIRST values and principle-driven culture. He strongly believes in empowering employees to respect individual dignity, earn trust through ethical behavior, and give back to communities. I also want to take a moment to commend Sean Gray. Sean took on the Acting CEO role during a challenging period for the bank, and guided us through this CEO transition with a steady hand, steering the bank, and maintaining the executive team's focus on our strategic priorities. Under his leadership, the entire management team was outstanding during this period, maintaining a high level of performance, ensuring their commitment under demanding circumstances. That concludes my remarks. I am now going to excuse myself from this call and turn it back over to Sean and our management team. Thank you for your time this morning.

Thank you, Bill. Thank you very much. If I could take a moment to add to Bill's comments, first, Nitin has a distinguished reputation in the industry and is highly regarded in community banking circle. So, I'm excited about our future with Nitin leading the bank and myself continuing as President and Chief Operating Officer. We have an exceptionally capable executive team at the bank, and we are well-positioned for future success. I know Nitin is looking forward to engaging with all of you after he officially starts as CEO on Friday January 29th. Moving on to our fourth quarter 2020 financial results, let me start by mentioning with me this morning is Jamie Moses, our CFO and for Q&A, we will be joined by George Bacigalupo, our Commercial Banking Leader, Georgia Melas, Chief Credit Officer, and Greg Lindenmuth, Chief Risk Officer. I’ll start my remarks with the focus on the fourth quarter, and then I’ll ask Jamie to provide more detail on the financials. I’ll follow that by commenting on our recent strategic initiatives, and our key focus areas going into 2021. Our fourth quarter earnings were $0.30 per share and we earned $0.28 in core EPS. These results were ahead of consensus but they were down from the prior quarter primarily due to a higher non-cash pandemic credit provision. I’d like to first highlight some of our operational accomplishments. We maintained our net interest margin with a strong focus on lowering our deposit cost. We strengthened our fee income except for a normal seasonal decline in mortgage banking revenue. We reduced occupancy and technology cost and managed staffing levels, and we completed the exit of our discontinued national mortgage banking operation. Our team is adhering to the financial and operating disciplines while business conditions are currently constrained. Turning to credit, we saw further progress towards normalizing our loan portfolio. While credit conditions remained sensitive to the evolving impacts of COVID, our borrowers have continued to adjust in this environment. We saw decreases in deferred loans, criticized loans and accruing delinquent loans. Total deferrals decreased 22% in the fourth quarter and continue to decline so far in 2021. About 63% of the commercial deferrals are paying term period interest. We remain focused on a handful of COVID-sensitive industries with primary focus on hospitality and our Firestone equipment loans. We provided further information about these loans in our investor presentation. The fourth quarter was the first time in which significant pandemic impacts began to surface in our traditional asset quality metric. An increase in non-performing loans was due to two commercial credits which were classified prior to the pandemic. Net charge-offs increased due to a handful of hospitality loans. We set our allowance for credit losses at 1.71% of year-end total loans excluding PPP loans. This ratio did not change materially in the second-half of the year. Based on our outlook at year-end, we would expect the amount of the allowance to decline in 2021 as pandemic related credit losses are recognized in the future. Turning to PPP, we expect that most of these loans will be forgiven in the first-half of 2021. We’ve engaged a third-party to support a quick and efficient response to PPP loan request under the new program now being rolled out. Internally, we’re giving priority to expediting the processing -- forgiveness for first round PPP loans, we’re also anticipating strong volume for our SBA lending team based on the new hire 90% guarantee under the [indiscernible] program. And our small business teams will be focused on credit needs in our communities. We believe our teams are well positioned to respond to new credit demand in our markets based on anticipated economic improvement in 2021. With that, I'll ask Jamie to comment in further detail on our fourth quarter financials. Jamie?

Thanks, Sean. As you noted earlier, our fourth quarter earnings were $0.30 per share, and were $0.28 in core EPS. Core PPNR declined by $6 million to $24 million. In addition to pandemic impacts on our core PPNR, we also recorded $3 million in charges following an operational review of consumer loan servicing primarily related to past conversions and acquisitions, and is reflected in the increases quarter-over-quarter to the professional services and other expense categories. This project has been completed and we believe that the expense impact has been fully recognized and is limited to this quarter. Pandemic impacts on PPNR, included interest write-offs on non-accruing loans and loan workout expense, as well as constrained business volumes. I’ll take a minute to comment on the balance sheet before further elaborating on the income statement. We had an unusually high payroll deposit balances at year-end, and as a result, short-term investments were up $622 million and total assets increased by $220 million. On December 2, we announced an agreement to sell our Mid-Atlantic branches and so we transferred $617 million of deposits and $301 million of loans to held-for-sale. Adjusting for this branch sale, our loans declined by approximately $600 million or 7%. We invested some of these funds into an additional $236 million in Investment Securities. We also paid down wholesale funding, and the average balance of earning assets therefore decreased by approximately $200 million or 2%. Looking forward, we're targeting commercial loan growth ex-PPP at a mid single-digit pace in 2021. We also plan to grow the mortgage portfolio due to higher originations, slower pre-pays and purchases from in footprint correspondent banks. We expect this growth to generally offset continued runoff of indirect auto in certain commercial business we’re working down such as aircraft and some COVID sensitive types of borrowers. So the portfolio is generally expected to be stable or up slightly before the impact of PPP loans. We expect most of the $633 million in PPP loans that remain on our books to be forgiven in the first-half of the year, and therefore total loans are expected to be down for the year due to these payoffs. As Sean noted, we've engaged a third-party to expedite new PPP loans, and so these won't show up on our balance sheets. We’re hoping to see up to 50% of the volume that we handled on the first round, and expect to receive some fee income as well as the related deposits. We expect total earning assets to also reflect the PPP run-off, as well as the sales in Mid-Atlantic loan balances as part of the branch sale. Additionally, Investment Securities may come down as we allow higher costs in wholesale funds to run-off without replacement. On the liability side for the fourth quarter, adjusting for the branch sale, along with payroll deposits and broker balances, all other total deposits increased 1% for the quarter. Wholesale funds decreased to approximately $1.2 billion at year-end compared to $1.5 billion at the end of the third quarter and $2 billion at the start of the year. Looking forward, we expect to see organic deposit growth in the low single digits in 2021 while we expect to further pay down brokered deposits in borrowings with total wholesale funds decreasing to $1 billion or less by year-end. Turning back to the income statement, net interest income was down a couple percent in the fourth quarter due to the decrease in average earning assets with no change in the margin. We moved down the cost of deposits to support the margin, including reducing brokered deposits, pricing down maturing time accounts, and reclassifying the higher cost Mid-Atlantic deposits as held for sale. Loan interest income was negatively impacted by the increase in non-accruing loans and benefited from revenue recognition from PPP loan forgiveness. Looking forward, we expect to continue to see further margin benefit as we focus on deposits re-pricing down more than assets. We expect asset yields to benefit from the change in mix toward more core lending. The income benefit from this is likely to be more than offset by the impact of lower earning assets. Separately, we expect that the net interest income benefit from additional PPP loan forgiveness will be mostly recognized in the first-half of the year. The balance of unamortized deferred PPP fees stood at $13 million at year-end 2020. Moving to fee income, we had good results in the fourth quarter across most categories except for mortgage banking, which is normally seasonally lower. We continue to target $19 million to $20 million in quarterly fee income in the New Year. Moving to provision expense, we recorded $10 million in the fourth quarter. The increase from the prior quarter primarily reflected the impact of higher non-accruals on the qualitative component of our model. Future provision expense will depend significantly on the severity of the pandemic and its impact in our markets. Turning to expenses, total GAAP expense decreased primarily due to the non-core costs related to the CEO separation recorded in the third quarter. Core non-interest expense increased by $4 million, primarily due to the loan servicing related project I mentioned earlier, along with the impact of problem loan related costs. Looking forward, we're targeting to manage core non-interest expense down below $70 million per quarter in the second-half of the year after our branch initiatives are completed. The benefit from our branch initiatives is expected to initially be partially offset by loan related expense. Regarding taxes, we had a tax benefit for the year, primarily due to the higher provision expense. In 2021, we expect to have a core tax rate in the area of 15%. As we've previously noted, we expect to record a net gain on the sale of the Mid-Atlantic operations and charges related to the plan consolidation of 16 branches. We expect to report these as non-core items during the first-half of the year. Based on the asset decline from PPP loans, we expect to be operating with lower assets in 2021, while we also target earnings that will continue to build capital. Our financial focus is on improving our return on equity, and we're hopeful that conditions will be supportive of that objective as we move through 2021. Before I close, I'd like to share that I've previously had the opportunity to work alongside our new CEO and I'm looking forward to doing so again in Nitin's new role as the leader of our team here at Berkshire. With that, I'll turn the call back over to Sean.

Thanks, Jamie. Our guidance demonstrates that we're leaning in to our operating plan by tightening our focus and building our core business and our footprint and in support of our community bank mission. We announced our branch sale and consolidation initiatives during the quarter. These initiatives were under development for several months and they're consistent with the strategy of focusing on core operations and core markets. They also reflect our smart blend of technology and flexible personalized service, including our distinctive MyBanker Concierges Bankers. Our 2021 results will have some noise as we transition through these initiatives and through what we hope will be the final pandemic year. Our focus will be on strengthening our purpose driven community bank. The year 2020 has reaffirmed the premise that purposeful and constructive community engagement will attract customer preference and give us the opportunity to build market share, profitability and long run investment value. I'm very proud of our team's work this year in responding to the health and financial needs that we encounter throughout the entire pandemic. We continue to prioritize the safety of our customers and employees operating flexibly to offer the best service possible within the constraints of government guidelines and mandates. We proactively brought federal borrow relief programs to our markets including PPP loans and qualifying loan modification. We adjusted our deposit fees and transaction limits to facilitate changes in customer activity. Our employee volunteer teams continued to provide targeted community service and our foundation increased its philanthropic giving to support the organizations and people impacted the most by the pandemic. We look forward to applying the same energy, creativity and flexibility to the challenges ahead of us by implementing our initiatives and strengthening our competitive advantages in the core geographies that we serve best based on our Be FIRST values and commitment to diversity equity and social responsibility, our local regionalized decision-making and community support our previous investments in internal and customer facing technology. Our coordinated relationship service with special emphasis on our MyBanker personalized bankers, and our disciplined focus on core business activities and our growing business lines including asset based lending, SBA lending, and wealth management. Our earnings materials highlight the improved rankings that we are achieving as a socially responsible investment vehicle. We welcome further interest from shareholders who value investments in companies with solidly demonstrated performance and advancing social values. Together with our dedication to earning the cost of our capital, we believe these positions are stocked attractively as a preferred investment vehicle. I’ll close by thanking the entire organization for its support during these past three months. They came together as a team under trying circumstances and delivered well for all of our stakeholders. The passion, energy, and dedication with which you attack the hurdles set in front of us is credit to your high character and mental toughness. I will be forever grateful to have had the opportunity to be your leader during this transition. And I am looking forward to continuing to build on the positive momentum we have created. With that, I’ll ask the operator to open the lines up for questions.

[Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey guys, good morning.

Hey, Mark.

Good morning, Mark.

Given your comments around balance sheet growth looking sort of modest in the New Year and the fact that your capital ratios have continued to build, I guess I am curious at what point you would be comfortable restarting stock repurchases?

Yes, I think that’s a good question, Mark. I mean that’s something obviously that we are always looking at. We evaluate the best way possible for us to get the highest returns for our shareholders. It’s something that we always consider, and of course, from a strategic perspective, I haven’t spoken with Mitten about this. And so, I am sure he is going to have opinions about our ability to invest in either growth or capital actions like this, so likely more thoughts about that on the next call.

Okay. And then, of the $199 million of CRE deferrals that you have can you give us a sense for what types of CRE credits they are, and if they are maybe concentrated in particular part of your footprint? Thank you.

Georgia, if you don’t mind providing a little color there I think that would be great.

Sure, absolutely. Hi, Mark. Approximately about $146 million of the $199 is in the hospitality book. The remaining $40 million -- I am sorry, the remaining is just spread out amongst some -- there is a retail bit of retail in there and just smaller other credits.

Okay.

The bulk of it is hospitality.

I am sorry, I apologize, didn’t hear that.

I am sorry. The bulk of it, like I said $146 million of it is hospitality, the rest is spread out amongst various other sectors.

And is it geographically concentrated in any particular area?

Well, the hospitality portfolio is pretty diversified between Massachusetts, New York. So, I don’t have the exact breakout. But I wouldn’t say there would be any significant concentration. But we can definitely follow up with that.

Thank you.

The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

Yes. Hi, good morning. Just hoping that we can say on credit here and just some of these details and I appreciate how you have laid them out in the slide. So maybe just starting with retail, if you can give us what the balance is on retail? What the credit size is? What the non-accruals are? What the charge-offs are? And then maybe -- yes, go ahead.

Laurie, I guess some of that is -- I have kept some of that information available. The balances for retail are $864 million. And I am sure if you asked for the deferral amount on retail? About $6.5 million of that portfolio was currently in deferral. The rest has resumed active payment. And, I am sorry you also -- I don’t have the breakout of how much of that portfolio is credit size, but I can get that to you.

Okay. And then -- yes, and I was wondering how much of that is also in nonaccrual.

The non-accrual piece, again I don’t have an exact number. But I can definitely follow up with you. Yes, I don’t have the exact number for you on the non-accruals.

Okay, great. And I think there was maybe some confusion. If you could just give us a little bit of color around the retail [indiscernible], I certainly was under the impression that a quarter of it was mall exposure, but can you help us think about how much of that is actually indoor mall not to be confused with outdoor strip centers that are anchored by grocery?

Yes. Out of the $864 million, we have two components, $273 million which we call the community center malls which are the larger outdoor malls, and then, we have the neighborhood-centered and strip malls, which are also outdoor malls but just smaller in square footage. So, those two pieces make up roughly $525 million of the $864 million in retail exposure. The majority of that is either anchored by grocery, Big Box, or -- yes, pretty much most of it is anchored by either grocery or a Big Box tenant.

Okay. [Multiple speakers]…

Yes, just to be clear, Laurie, we have no like indoor type mall exposure. That’s just not something we have ever focused on. All of our retail exposure is to those outdoor type malls.

Okay, that’s very helpful. And then just one more question on that, do you have anything that you consider anchored by movie theaters?

Nothing is anchored by a movie theater. We do have a large outdoor mall that is anchored by a Costco that has a movie theater in it. But, Costco is the major anchor on that mall.

Okay, perfect. That’s super helpful. Okay, and then leisure and excluding Firestone -- can you give us the balances on leisure excluding Firestone in terms of what’s leisure, what’s the differed, what’s the credit size, what’s the nonaccrual there?

Leisure is $112. Oh, I am sorry, Sean.

No, go ahead Georgia. Give the details and I can provide a little color.

All right, yes, leisure is $112 million of exposure and $40 million of that exposure is currently in deferral.

Okay. And then do you have the credit size amount and non-accrual amount for that? Or, I can circle back with you if you don’t have that.

Yes, why don’t I get back to you on that? I just want to make sure I give you the correct number.

Okay, great. And then -- and I am sorry, Sean I cut you off. Did you have comments?

Sure. Just the leisure excluding Firestone as we look at that portfolio, very strong credits, very good collateral coverage, incredibly strong guarantors, a composition of golf course marine is of strong relationship borrowers to the bank, so very different. I know we call it leisure, but very different than the leisure that is included in Firestone. So, I just want to make that -- distinguish that difference.

Okay, that’s very helpful. Okay and then Firestone, Jamie, can you help us think about of the provision this quarter $10 million, how much of that was Firestone-related, or just -- any other color in there? The details you provided on Firestone were super helpful [in the dark] [Ph].

Yes. Sure, Laurie. I mean that’s not something that we really get into too much. I mean I would think that -- I guess I would say that some of the provision that we had this quarter was definitely related to Firestone, but not necessarily any more than anything else that we were doing. So, some piece of that was I think in general, you look at the amount of criticized loans in Firestone, so $83 million, so we have one-third of sellers there, but only five of its on non-accrual at the moment. So, I think that we think about that portfolio as certainly being of elevated risk in the same way that we look at our hospitality in restaurants, but at the moment, we are seeing pretty good performance from that portfolio especially when you consider that 94% of the deferrals that we have in that portfolio are paying interest to us right now. So, it's certainly an elevated concern, but nothing that is massively impacting our provision or allowance at the moment.

Okay. And do you have the -- what were the charges-off for the quarter in Firestone?

Yes, Laurie, that is $1.5 million.

$1.5 million, okay. Okay, great. And then, I guess just jumping over -- or just one more question on Firestone, do you have a geographical breakdown, or just even your most concentrated dates on that exposure? I don't think we've had an update on that in six years.

Laurie, this is Sean. I can take this, I can give general, and Georgia, if you've got it broken down a little greater that would be fine too. We don't have a concentration in any one state over the 11% from an overall geographies, it's predominantly the South, the Northeast and the West coast. Maybe Georgia, is there more color you can provide?

Just roughly, I think last quarter, Laurie you had asked how much of it was in our footprint. Our footprint is probably makes up 20% to 25% of the Firestone exposure. The rest is spread out amongst many, many states, like Sean said none larger than 11%.

Okay, that's helpful. And I guess just with respect to the branch consolidation and thinking; I am sorry, this is shifting gears, the brands consolidation and thinking about expenses, Jamie, can you help us think about how that's going to actually flow through a little tighter? I think you mentioned in the back-half of the year, but can you help us think about how that's going to flow through in terms of where we would actually expect to see a core run rate layering in the fact that you probably are also going to have some technology sense?

Yes. So I think that we did talk about in my remarks about $70 million expense run rate by Q4, and I think we're in a pretty good range there, I think somewhere 65 to 70 back-half of the year, and on a go-forward I think is where we're targeting at the moment.

Great, thank you. I'll leave it there.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Sean Gray for any closing remarks.

Well, thank you. Thank you all today. We will be sending out our time for our Q1 call, and appreciate your comments and questions today. So, thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.