Hello and welcome to the Berkshire Hills Bancorp. Q4 Earnings Release Conference Call. My name is Katie and I will be coordinate to your call today. If you'd like to ask a question during the presentation, you may do say by pressing star one.

I will now hand over to your host, Kevin Conn, Head of Investor Relations and Corporate Development to begin, Kevin Conn, please go ahead..

Good morning and thank you for joining Berkshire Bank Fourth Quarter earnings call. My name is Kevin Conn, Investor Relations and Corporate Development Officer. Our news release is available in the Investor Relations section of our website, berkshirebank.com and will be furnished to the SEC.

Supplemental investor information is provided in an information presentation at our website at ir.berkshirebank.com and we will refer to this in our remarks. Our remarks will include forward-looking statements and actual results could differ materially from those statements.

For details, 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 in 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. A comparison and reconciliation to GAAP measures is included in our news release.

On the call today, we have Nitin Mhatre, President and Chief Executive Officer of Berkshire Hills Bancorp; Subhadeep Basu, our Chief Financial Officer; Sean Gray, our Chief Operating Officer; and Greg Lindenmuth, our Chief Risk Officer. At this time, I'll turn the call over to our CEO, Nitin Mhatre..

Thank you, Kevin. Good morning, everyone. Happy New Year to all and welcome once again to Berkshire Bank 's Fourth Quarter Earnings Call. I'll begin my remarks on Slide 3, where you can see the highlights for the fourth quarter and full year 2021.

It was another solid quarter with strong financial performance, continued balance sheet and asset quality trend, and accelerating progress on our best strategy. In terms of financial performance, I will be speaking to the adjusted numbers. We posted fourth quarter EPS of $0.42, up 50% year-over-year.

EPS was lower than third quarter, but consistent with expectations, and the momentum for EPS drivers is encouraging. Revenues for the quarter were lower year-by-year, driven by reduction in our loan balances, including strategic exits that were consistent with our "getting better " before "getting bigger " approach outlined in our BEST program.

Expense discipline remains a focus for us, and fourth-quarter adjusted expenses were down 4% year-over-year, and full-year adjusted expenses were flat in 2021 versus 2020.

As we've said before, we will self-fund our best strategy by reinvesting eight-figure cost saves from procurement efficiencies, real estate rationalization, and other efficiency initiatives, in growth initiatives such as our bankers, customer experience, and enabling technology that drives revenue and profitability growth.

Our fourth-quarter adjusted return on tangible common equity, or ROTCE, improved with 7.3% from 5.5% a year ago.

Another key highlight for the quarter was that consistent with our guidance of seeing growth in average balance sheet in the first half of 2022, we did see our end-of-period core loan balances grow for the first time this quarter after 9 quarters of decline.

This was primarily driven by our organic growth focus that drove over 200% year-over-year growth in origination. For full-year 2021, we posted adjusted earnings of $1.69 in 2021 versus $0.60 in 2020. Net interest income pressure was partially offset by strong fee revenues, including SBA and Wealth Management fees.

You may recall, that we had a large credit provision in the first half of 2020, in response to the pandemic. And as you've seen over the last few quarters, credit has become a tailwind for Berkshire versus a headwind. Our adjusted 2021 ROTCE was 7.7% versus 3.2% in 2020. Our balance sheet remains quite strong in both absolute and relative terms.

Our trends continued to improve as our risk management actions over the past year or more have paid dividends. Non-performing assets were lower year-over-year and quarter-over-quarter. We had a provision benefit of $3 million this quarter, and we remained well-reserved.

In 2021, we returned a total of $92 million of capital or 109% of our adjusted net income to shareholders. Last night, we announced our next stock repurchase plan of $140 million, representing approximately 9% of our shares at current price level. We have ample capital to both fund expected loan growth and continued stock repurchases.

Given our relatively low stock valuation as a multiple of our tangible book value, we are prioritizing share repurchases, but we will also assess increasing our cash dividends in 2022. On the strategy front, we just completed the first six months of our 3-year best plan.

We made solid progress so far, and yet are still in the early part of our journey and profitability growth. In fourth quarter, we achieved our goal to be in the top quartile of ESG rankings nationally. We continued to make key hires in frontline and support units, including hiring new Head of Treasury and Head of Enterprise Analytics.

We started new partnerships to drive originations and franchise growth, and we completed implementation of various foundational components of technology. Board refreshment continued in the quarter as well. We added a new Independent Director, Nina Charnley. We've attached Nina 's short bio on the last page of our earnings deck.

Nina brings deep industry experience to our Board in Banking, Wealth Management, and Financial Technology. Welcome aboard Nina. For full-year 2021, as part of our BEST program launched in May, we streamlined our business model by selling non-core operations, including the sale of our insurance subsidiary and mid-Atlantic franchise.

We consolidated 16 branches, we outsourced servicing activities for efficiency, and centralized procurement activities. We launched technology initiatives to enhance customer experience and support business growth and commenced new partnerships to drive originations and customer growth.

In 2021, we also announced our Berkshire Community Comeback Initiative that highlights how our lending investments and philanthropic initiatives in the community will help our customers across the footprint, including those in low-to-moderate income neighborhoods.

This is consistent with our BEST plan as well as our vision to become the top-performing, leading, socially-responsible community bank in New England and beyond. In 2021, we added three new directors to our Board, and named David Brunelle as the Chairperson of the Board.

As we look back at 2021, it is truly gratifying that our team's progress has been recognized in our stock price. In 2021, our stock's total return, including dividends, was 69%.

Despite that recovery, we still trade close to 1.3x the tangible book value, and our current profitability is still only about half our BEST plan targets, which illustrates a significant opportunity for growth in coming years.

Finally, I would like to thank our over 100 -- 1300 employees for their passion, commitment, and hard work in 2021 as we implemented our best transformation program. Our bankers and staff are the reason why we are on a comeback trail.

And their dedication and commitment to Berkshire's customers and communities is what will continue to drive our success going forward. With that, I'll turn the call over to Subhadeep to discuss our financials in more detail.

Subhadeep?.

strong capital position that will support loan growth as well as enhanced capital return to our shareholders; above average asset sensitivity which will drive improved profitability and higher return on equity. Organic growth focus. As we start getting bigger after getting better this year.

A combination of hires, productivity growth, enabling technology initiatives and partnerships will reignite our organic origination's growth engine. And we will start seeing growth in average balance sheet in the first half of 2022. PSC and NPS focus differentiating us for our bankers, customers, communities, and investors. Hiring advantage.

We have a unique opportunity to hire talented, purpose-driven, community-dedicated bankers in our footprint from banks impacted by the M&A, MOE and other such activities. Continued efficiency ratio focus, reiterated by our commitment to reinvest, saves from procurement, real estate, and other efficiency initiatives.

In growth initiatives, supporting customer experience, banker productivity, and technology enablers. In summary, a solid quarter and a year across many fronts, improved financial returns, core loan growth, checking and deposit balances growth, fee momentum, and disciplined expense control.

And we're starting 2022 with good momentum on balance sheet and return of capital through share buyback. With that, I'll turn it over to the operator for questions. Katie..

Thank you. [Operator Instructions]. We'll pause briefly while we collect the questions. Our first question comes from Mark Fitzgibbon from Piper Sandler. Mark, your line is now open..

Hey, guys. Good morning..

Morning, Mark..

Morning..

I was wondering, I had heard your guidance on loan growth sort of low-to-mid single digit and I guess I'm curious, is that likely to be driven by C&I and commercial real estate. And also, I was curious if you think we're getting kind of to the end of the CRE prepayment activity that you and everybody has been seeing..

Hi Mark. Good morning. Great to hear your voice. So, on the prepayment activity, I would say consistent with what we're seeing in the industry, we’re noticing definitely a downward trend on that. So, I think that's helpful for us.

And then overall, I think the balance sheet’s sort of mixing in terms of growth is going to be spread across, and you know from a balance sheet mix perspective, we're going to stay fairly consistent with some marginal changes here between commercial and consumer balances..

Okay, great.

And then, shifting from the margin, I thought your comments were that it should trend upward -- can you help us think about the magnitude of the margin expansion? And in that same vein, I'm curious if you're deploying some of the cash you have on the balance sheet into securities, is that likely to pressure the margin a little bit and also reduce asset sensitivity?.

Thanks Mark. So, I think, first of all, if you notice our balance sheet, we already -- we even -- we invested a whole bunch of cash in the last quarter. But we still -- have a significant cash position that we have left in the balance sheet. We plan to deploy those between loan growth, and we have a growing balance sheet to fund as well as investments.

We’re going to see a balanced approach. And obviously, our objective will be to sort of maximize our returns, so that would be what the strategy going forward that -- and then as we go through our quarterly earnings and see that play out.

In terms of name, I think at this point, we'd like to stay with the guidance that NIM is going to trend higher during the course of the year, as we have more actuals and quarterly results, maybe we can consider giving some more specific ranges..

Okay. Great. And then I think you mentioned in the release that you've hired a number of commercial – seasoned commercial bankers.

I wonder if you could share with us how many you hired, say, in the fourth quarter?.

Mark, this is Nitin here. I'll take that. I think we've highlighted that as part of the BEST plan, we're going to grow our frontline hires by about 40% over that 3-year period. We're kind of on that exact track as we speak. The momentum for hires has improved, and the fourth quarter hires were the highest hires we made in 2021.

I won't be able to give you the specific number, but the momentum is on par with what we had anticipated in BEST, and big part of the originations growth --.

Okay. Great. And then --.

Hey Mark. And big part of the originations growth that we outlined, one of the fact there was that some of the new hires have started bringing in new pipeline in production..

And then last question is on the buyback.

I guess I'm curious how you think about the valuation of the buyback, and is there a price level at which you sort of say this doesn't make sense?.

Hey, Mark. This is Subhadeep. So, we have sort of intrinsic valuation on sort of what we think our stocks should be valued at. I think Nitin in his earlier comments talked about price to tangible and where we are valued. If you look at peer medians, so we ballpark and it takes sort of those to some of the key indicators.

We make those decisions around buybacks and what price it makes sense for us to buy those. And I think as we said, we're going to be very opportunistic in terms of getting to the buyback program..

Thank you..

Thanks Mark..

Our next question comes from David Hope from Seacorp Research Partners. David, please go ahead..

Good morning, gentlemen.

How are you?.

Very well, David, how are you doing?.

Hi, David..

Good. Thanks for taking my question. Hey, I want to circle back to Mark 's first question, in terms of the NIM guidance here, the net interest income guidance here. I know your first bullet says, it's up mid-single digits on a reported basis using what we're seeing in terms of the spot forward curve here.

What are you using as the base net interest income margin because Because I have on a fully tax equivalent basis somewhere around $297 million? Should we assume that growth mid-single digits off about that $297 million number? Just curious, how we should think about that from a modeling perspective..

Yes. I think our projection was based off $290 - ish million, and I think I would base it off that. The clarification too sort of I would like to make is on the adjusted versus reported.

The adjusted is simply just taking into account the impact of the PPP and the Mid-Atlantic sale, and then where we're actually going to likely end up from an NII basis at the end of 2022, and that's the high-single-digit number that I referred to in the guidance..

Do you have that number of the top [indiscernible]in terms of what the adjusted NII is for 2021?.

At this point. I think sort of without giving out a specific number as we are staying consistent with the guidance, I think we can sort of, I'd say mid-single-digit growth in NII..

Okay. Maybe also just sticking with that topic. I think you said that guidance assumes for Fed rate hikes from an interest rate risk perspective, asset-sensitive activity positioned any sense.

What a 25-basis-point move in the Fed would have from a margin perspective, I know it's a high-level question, but maybe rough ballpark, what each what each 25 basis points translates to on the margin..

Dave, I think, I can probably give you some of the other analytics around the shocks and the impact on NII. So 100 basis points of barreled shock, that has about like a 5.6% positive impact on our NII. And so, we'll have more disclosures and a 200nbasis point barrel shock has about 13.1% impact on our NII, 1 year..

Over one year. Okay. Got it. And then sticking with that same chart there, the same question in terms of the fee revenue.

What base are you using there? Is that fee revenues adjusted to exclude insurance fees or is that the all-in about $91 million in terms of fee income?.

So the fee revenue guidance is sort of obviously excludes insurance revenues. And that's one of the principal reasons we maintain the guidance around what we have today..

Got it.

And then remind us again, what the opportunity is on the sub-debt retirement?.

And so our sub-debt, $75 million of it is redeemable in third quarter of 2022. So our intention is, to call that when the right time comes in the third quarter..

Got it.

And that had a high 6% coupon in it, correct?.

Yes, 6.875% coupon..

Got it. And then maybe one more. I noted that the downward trend in terms of CD.

How much is left, in terms of near-term repricing on the time deposit front?.

Yes. We have around 1. -- in our total CD book, just to give you some ideas, around $1.7 billion, right? And so --.

Yeah..

-- we have, from a maturity perspective, $1.2 billion maturing. Of that, we have retail CDs around -- so $1.2 billion maturing in 2022. Of that, we have around a couple of $100 million or so brokered, and the rest, $1 billion of retail CDs that gets repriced the course of 2022..

Great. Appreciate the color..

Hey David, just to add a little more color on that, just to highlight the success on the retail CD front. Even while we brought down our thoughts to deposits and runoff those CD balances, we've been able to retain about 92% of our customers in the bank..

102% okay..

Our next question comes from Christopher Acano from KBW. Christopher, your line is now open..

Good morning, gentlemen..

Good morning, Chris..

Good morning, Chris..

So just wanted to start with a follow-up on the fees and to make sure I'm understanding it correctly.

Do you guys have a number for what the baseline is? The low-single-digit decline is out of?.

So that'll be based off our overall total in year, you see number for that could disclose as part of our earnings release, Chris..

Okay. Got it.

So that $90 million to $91 million is about right for that? As the base?.

Yep..

Great. Thanks. And then was hoping to drill down a little bit more on the NII guide. In specifically, you guys deployed a bunch of cash this quarter, but still have pretty high balances here. What's the timing or level where you guys want to get the cash to as a percentage of assets over time..

So I think we have -- we have this actively considered part of our balance sheet strategy, in terms of what those levels should be. We obviously consider into that all scenarios around liquidity, stress situations and all of that. I would say, probably by the end of the year, we'll end up sum in the range of maybe $600 to $700 million of cash.

But that's what we anticipate for now. And we'll have further details and further modifications to that, as warranted. And you will find out more in our subsequent quarterly earnings calls..

Got it. Great.

Assuming the vast majority outside of the loan growth guide that is going to securities, what is -- what's the yield that you guys are putting on for new securities at this point?.

So Chris, we typically don't give out yields on new securities or loans that we book. But happy to talk about overall yields on the book. And I think, we have published some of the information here. I think it's worthwhile, probably with as expected rising interest rates, you're going to see, like an uptick in yields.

But obviously, that has to be balanced by the liquidity that we have and the environment and all of that..

Okay. Got it. And then just wanted to confirm the guide around credit and trending toward day one CECL reserves by 3Q 22.

I guess just trying to you know parcel in what gets like, what are what's the process or what's going into getting you down to close to that 1% level? And is that 1% level where you think you can get your world end up settling a little bit higher, given some newer types of consumer loans that you guys are putting on for this year..

Sure, Chris. Great question. I think, consistent with what we have maintained all along, I think, we will hit our Day 1 CECL reserves. And I would like to clarify, that's -- I will consider our core portfolio, basically our portfolio composition at the end of the year. It will actually expect to end up, let's say, 100 -- little of 100 basis points.

However, as you correctly pointed out, we are putting on consumer loans, right? And again, its higher-margin and higher -- probably in the losses. So you'll see some of that balance playing out towards the latter half of the year. Again, it's a gradual ramp up.

It's not going to be a significant portion of the balance sheet during the course of our transformation. But having said that, are -- you're going to see that ratio keep up as it put on more principal balances..

Okay. Got it. That's all I have for now, Thank you..

Thanks, Chris..

We'll take our next question from Laurie Havener Hunsicker from Compass Point Research. Laurie, your line is open..

Hi, thanks. Good morning..

Good morning, Laurie..

Good morning. Good morning Laurie..

Good morning..

If we could just say on where we are with consumer growth, I think on the last call you said, you plan to add $100 million or so in Upstart loans.

Can you just give us a refresh? Is that still the plan for this year, any changes, any other consumer buckets that you're adding? Can you help us think about that?.

No, Laurie, you're right. It is about a $100 million a year and that stays the same. But just for a context there, it is going to be less than 3% of our originations overall as a bank.

And I think what we're going to generate out of that, is tremendous learnings out of deployment of new technologies for surge to servicing, as we call it, using technology. So the volume remains the same, it's relatively small and I think the learnings from the program are enormous..

And are there any other consumer options right now that you're considering adding on balance sheet? Or how are you thinking about that?.

Yes, we are looking at different ways to do that. One through digital account opening process, enhancing our work force and incentive plans, and also looking at other partnerships. So I think it's multiple distribution channel kind of approach to this..

Okay. And then when we spoke, I guess on the last earnings call back in October, you had mentioned a potential net charge-off guide around that a $100 million per year bucket of 4% to 5%.

Is that still a good number or have you tightened that down? How should we think about that?.

Can you repeat that? Laurie, you're breaking up a little bit.

Could you repeat the numbers again?.

Yes, sure. On the $100 million or so per year of Upstart loans. You had mentioned back in October, up intentional net charge-off guide on those loans of 4% to 5%.

Is that still a good number or do you have a tightened number around that?.

That still stays the same..

That still stays the same, okay. Perfect.

And then, can you just remind me the sale of business operations or assets that took place this quarter for $1.1 million gain? What was that?.

There's a loss fee recorded, a restructuring charge. That basically was technology assets, servers and others, which we have upgraded to, obviously, the newer generations..

Okay, so right the $864,000 that was, actually that was another question I had.

So that was the restructuring charge related to what?.

Laurie, so the $850,000 of restructuring charges that you were looking at, that was as I -- all that was related to real estate charges that we -- pertaining to branch consolidation and then the write off we took. And then Mark, I just want to clarify, I thought you were referring to expense part of the chart.

That's with $1.1 million write-down in technology assets..

Okay. I'm so sorry.

I thought you had a gain on sale of businesses of $1.057 million, did I read that wrong?.

Yeah. Sorry it was --.

Maybe I read that wrong..

Yes, you're right Laurie. Sorry. It was the big sort of employee benefits that business that we sold before that's as part contracts will be since that's the game that we will do record this year. And then it was all on out from that, basically..

Okay. Great Thanks. And then just going back to your restructuring charges. Obviously, we've wrapped up 2021.

How should we think about that in 2022, are we likely to announce the -- a clean look or are you still tweaking things? How are you thinking about that?.

Hi, Laurie. I think -- I can't comment on sort of the exact nature of what the restructuring charges could be if there is any. I think as a company, we -- obviously, our preference is to keep on a go-forward basis as clean as possible. And it will be guided by our strategy and the actions that might have to undertake in the coming quarters.

But that's kind of where our thoughts are at this point..

Great. Okay. Thanks. And then one last question. Just going back to your net interest income guide, can you refresh us on what you're thinking about in terms of accretion income in that number? And just -- comparatively, your accretion income, it looks like it was about $7.5 million for 2021.

Can you help us think about that?.

Sorry, Laurie. The audio is a little bit low.

Can you speak a bit louder maybe, but on the question?.

Sure.

Accretion income, can you help us think about what that looks like for 2022?.

Sure. Sure. I think you know what you see in the sort of the current quarter that's going to reflect, you're going to see probably $1 million to $2 million per quarter on that. And you know, barring other surprises. But that's going down. So also,.

Okay thanks. I'll leave it there..

Thank you..

Thanks, Laurie.

This now concludes our Q&A portion of the call. I will hand it back to A - Nitin Mhatre, CEO for any closing remarks..

Thank you for joining us today on our call and for your interest in Berkshire Bank. Wishing everyone a happy, healthy, and a prosperous new year. Have a great day and be well. Katie, you can close the call now..

Thank you. So this now concludes today's call. Thank you all for joining. You may now disconnect your lines..