Berkshire Hills (BHLB) Q2 2025 Earnings Transcript

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DATE

• Thursday, July 24, 2025, at 9 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Nitin Mhatre
• President — Sean Gray
• Chief Financial Officer — Brett Brbovic
• Chief Credit Officer — Gregory Zingone

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TAKEAWAYS

• Operating Net Income: $31.6 million for Q2 2025, up 14% from the first quarter and up 36% year over year.
• Operating Earnings Per Share: $0.69, up 15% from the first quarter and up 25% year over year.
• Operating Expenses: $67 million, down 2% from the first quarter and down 7% year over year, reflecting ongoing cost control.
• Operating Leverage: Positive operating leverage of 5% from the first quarter to the second quarter and 11% year over year.
• Operating ROTCE: 10.76%, up approximately 110 basis points from the first quarter and year over year.
• Net Charge-Offs and Nonperforming Loans: Net charge-offs were 14 basis points of loans; nonperforming loans totaled 27 basis points of loans for Q2 2025.
• Digital Deposit Program: Over $100 million in new deposits added since inception earlier in 2025.
• Merger with Brookline Bancorp: Estimated 23% earnings accretion to 2026 consensus (GAAP and cash basis).
• Annualized Net Income: Net income for 2025 annualizes to more than $118 million, surpassing the prior consensus of $101 million for 2025 as referenced in merger materials.
• Merger Cost Synergies: Pro forma cost save target set at 12.6%; technology stack integration progress described as "very pleased with the favorable outcome."
• Net Interest Margin: Net interest margin was 3.27% in the second quarter; June spot margin was 3.22%, up three basis points from the first quarter.
• Average Loans: Average loans increased $95 million (1% annualized) from the first quarter and $327 million (4%) year over year, with growth led by commercial and industrial lending.
• Average Deposits: Average deposits (excluding payroll and broker deposits) increased 1% from the first quarter and 6% year over year; average noninterest-bearing deposits as a percentage of total deposits remained steady at 23% in the second quarter.
• Net Interest Income: Net interest income rose $2.2 million (2%) from the first quarter and increased 4% year over year.
• Non-Interest Income: Operating non-interest income grew $1.1 million (5%) from the first quarter and $1.6 million (8%) year over year; loan-related fees increased in Q2 2025 due to loan servicing and BOLI gains, offset by reduced SBA gains.
• Efficiency Ratio: Efficiency ratio was 56.7% in the second quarter.
• Nonoperating Expenses: $1.5 million in nonoperating expenses primarily related to the merger for Q2 2025.
• Loan Loss Allowance: Reserve coverage to nonperforming loans reached 462% for Q2 2025; coverage ratio remained flat at 124 basis points.
• Firestone C&I Portfolio: Outstanding balance was $28 million as of the second quarter, down 15% from the first quarter; nonperforming loans in the Firestone C&I portfolio were $1.3 million; net charge-offs in the Firestone C&I portfolio were $900,000 in the second quarter.
• BOLI Gains: BOLI gains were about $800,000 above normal and nonrecurring.
• Tax Rate Guidance: Expected to normalize to "about 24, 25%."
• Tangible Book Value Dilution—Merger Impact: Prior guidance of 17% tangible book dilution and 40% earnings pickup at deal announcement may revise pending final FASB (CECL) rule adoption, which management cannot yet quantify.
• Multifamily Loan Portfolio: $700 million multifamily loan portfolio, confirmed to have no rent-controlled exposure in company footprint or in New York City.
• Merger Closing Timing: Targeted for September, per management, dependent on regulatory approval.

SUMMARY

Berkshire Hills Bancorp (NYSE:BHLB) reported operating earnings growth of 14% from the first to the second quarter of 2025 and 36% year over year in the second quarter. This was driven by stronger net interest income and a sequential rise in net interest margin, attributed to deposit growth and lower reliance on FHLB borrowing. Management highlighted that expense reduction was broad-based. The bank's new digital deposit initiative drove notable deposit growth, contributing to reduced borrowing costs and reinforcing balance sheet strength. Asset quality remained resilient, with confirmed absence of rent-controlled loan exposure in the lending book.

• CEO Mhatre said, "The merger with Brookline Bancorp is expected to deliver meaningful profitability."
• President Gray said, "Cost synergy realization is progressing favorably, especially in technology," positioning the bank to achieve its 12.6% pro forma cost save goal.
• Management noted annualized net income projections for 2025 currently exceed merger deck consensus by more than $17 million (GAAP), indicating potential outperformance relative to earlier 2025 consensus net income forecasts.
• Chief Financial Officer Brbovic said, "Our spot NIM for June 2025 was approximately 3.22," clarifying the sequential margin dynamics as deposits replaced higher-cost funding.
• On guidance, Brbovic gave a tax rate expectation of "about 24, 25%" going forward, normalizing from the merger-driven elevated level this quarter.
• Future tangible book value dilution and earnings accretion from the merger remain partially unquantified pending FASB CECL guidance, which management continues to monitor but cannot finalize at this time.
• Integration planning and regulatory approval are both on schedule for a September merger closing, pursuant to management's public guidance.

INDUSTRY GLOSSARY

• BOLI (Bank-Owned Life Insurance): Insurance policies owned by the bank on executives' or employees' lives, generating non-interest income for the bank.
• FHLB (Federal Home Loan Bank) Borrowing: Funding banks obtain from the FHLB system to manage liquidity needs.
• CECL (Current Expected Credit Loss): FASB accounting standard requiring banks to recognize expected lifetime losses on loans up front.
• NPL (Nonperforming Loan): Loan for which the borrower is not making interest payments or repaying principal as scheduled.
• NCO (Net Charge-Off): The amount of loan principal written off as uncollectible, net of recoveries.
• ROTCE (Return on Tangible Common Equity): A measure of profitability based on income returned on shareholders' tangible equity, excluding intangible assets.

Full Conference Call Transcript

Nitin Mhatre: Thank you, Kevin. Good morning, everyone, and thank you all for joining us today. I'll begin my comments on Slide three, where you can see highlights for the second quarter. Overall, this was a very strong quarter and the best quarter yet since we began our transformational journey in early 2021. We had operating net income of $31.6 million, up 14% linked quarter and up 36% year over year. Operating earnings per share of $0.69 was up 15% from the first quarter and up 25% year over year. We continue to drive expenses lower with operating expenses of $67 million, down 2% linked quarter and down 7% year over year.

We had positive operating leverage of 5% linked quarter and 11% year over year driven by both improved revenues and lower expenses. Operating ROTCE was 10.76%, up about 110 basis points linked quarter and year over year. Asset quality and balance sheet metrics remain strong. Net charge-offs and nonperforming loans remained low at 14 basis points and 27 basis points of loans respectively. We continue to make steady progress on our strategic initiatives. Our focus on the new digital deposit program has gained momentum and has delivered over $100 million of new deposits since inception earlier this year.

Our bankers' commitment to delivering relationship-focused personalized solutions to our clients has been at the core of our improved financial performance and has earned us yet another recognition this quarter. This time, from Time Magazine that recognized us again amongst the top-performing midsized US companies in 2025. As you know, in December, we announced a merger of equals with Brookline Bancorp. The transaction improved scale and meaningfully improves profitability as reflected in the estimated 23% accretion to Berkshire's 2026 consensus estimate on GAAP and cash basis, respectively. Berkshire's net income in 2025 annualizes to over $118 million and it's tracking well ahead of the 2025 consensus net income of $101 million shared in our MOE investor deck in December.

Our team continues to work proactively on requisite integration planning for a seamless transition. And on that note, I'll turn the call over to Sean Gray to provide an overview of the merger integration planning process. Sean?

Sean Gray: Thanks, Nitin. You know, as we await regulatory approval, there's only so much in detail we can share. But I can say this, the combined organization's leadership team has made really good progress and continues to work towards our pro forma cost save goal of 12.6%. I can speak to where our tech stack expenses are coming as most of that work is complete. And where that is coming in versus plan. So I'm very pleased with the favorable outcome of where our tech stack expense is showing up and that will bid favorably for the overall goal of the 12.6%. Thanks, Nitin. Thanks, Sean. I'll begin going over the financial details for the quarter.

I'll begin on Slide five, which shows an overview of the second quarter metrics. As Nitin mentioned, our operating earnings were $31.6 million or $0.69 per share. Our net interest margin was 3.27, up three basis points linked quarter. Operating expenses were down $1.3 million or 2% linked quarter and our efficiency ratio was 56.7%. Slide six shows our average loan balances. Average loans were up $95 million or 1% linked quarter on annualized and up $327 million or 4% year over year. Linked quarter, we had solid broad-based growth led by C&I. Slide seven shows average quarter and up 6% year over year.

Excluding payroll and broker deposits, average deposits were up 1% linked quarter and up 6% year over year. Average noninterest-bearing deposits as a percentage of total deposits remained steady at 23%.

Brett Brbovic: Turning to Slide eight. Net interest income was up $2.2 million or 2% linked quarter, and up 4% year over year. Net interest margin was up three basis points linked quarter to 3.27. Slide nine shows operating non-interest income up $1.1 million or 5% linked quarter and up $1.6 million or 8% year over year. Loan-related fees were up linked quarter driven by higher loan servicing fees and BOLI gains offsetting lower SBA gains in the quarter. Slide 10 shows expenses. Operating expenses were down $1.3 million or down 2% linked quarter to $67 million and down $4.7 million or 7% year over year. Linked quarter and year over year expense declines were broad-based.

Nonoperating expenses of $1.5 million were primarily related to the merger. Slide 11 shows a summary of asset quality metrics. Nonperforming loans as a percentage of total loans was 27 basis points and loan reserves to NPLs 462%. Net charge-offs of $3.3 million were down $200,000 linked quarter. And our coverage ratio remained flat at 124 basis points. And with that, I'll turn it back to Nitin for further comments. Nitin?

Nitin Mhatre: Thank you, Greg. As Brett outlined, we had a very strong second quarter. That has continued the EPS growth momentum over multiple quarters. This quarter was in fact the best quarter since we launched our transformation program in early 2021. Over the last four and a half years, our turnaround has been a journey of efficient growth and profitability while creating a positive impact for all stakeholders. We made significant strategic decisions, embraced innovation to invest in technology, reignited organic growth, and remained committed to our communities. We've not only improved our financial performance, despite the macroeconomic headwinds that have impacted the industry over the last few years, but have also positioned ourselves for continued strength in the long term.

Our progress is a testament to the unwavering dedication and hard work of our employees, the trust and loyalty of our clients, and the confidence and support of our shareholders. As I reflect on our progress since we began our transformation program in early 2021, I want to express my deepest gratitude to every member of the Berkshire team, our clients, and our board of directors. Our bankers' dedication, resilience, and commitment to our clients has been the driving force behind our improved operating and financial performance. Together, we've navigated challenges, embraced change, and delivered strong results for our clients, shareholders, and communities.

It has truly been an honor and a privilege to lead such an outstanding team of purpose-driven, values-guided, talented bankers. I'm incredibly proud of what we've accomplished together and excited to see what the combined company will achieve next. With that, I'll turn it over to the operator for questions. Carly?

Operator: Your first question comes from Laurie Hunsicker with Seaport Research Partners. Hi. Good morning.

Laurie Hunsicker: Hello, Laurie. I just wondered if we could just start with margin. You guys had that $100 million drop in FHLB. Just remind us when in the quarter that fell and then also your spot margin for June and just how you're thinking about it?

Brett Brbovic: Thanks. Hey, Laurie. This is Brett. Our spot NIM for June was about $3.22. The FHLB drop...

Laurie Hunsicker: Sorry, Laurie. Sorry. I think there was a dead spot there. Can you start over? Thanks.

Brett Brbovic: Sure. The spot NIM for June was $3.22. And the FHLB decline coincided with an increase in our deposits throughout the quarter, so it was just based on what we needed to borrow or what we didn't need to borrow based on the deposit growth that we saw this quarter.

Laurie Hunsicker: Gotcha. Okay. Gotcha. And do you have any sort of near-term large maturities coming due in CDs or for borrowings that we think about here in the next quarter?

Brett Brbovic: No. Nothing. I wouldn't say anything significant.

Laurie Hunsicker: Okay. Great. And then just jumping over to credit, obviously, your credit is looking great. But just wondered if you can help us think about that jump in the C&I nonperformers to $11 million from $9 million. And then also Firestone. I know it's small, but if you could just give us what is the Firestone C&I balance and how much are nonperformers and charge-offs?

Greg Lindenmuth: Greg, you want to give some color on it?

Gregory Zingone: Sure. Hi, Laurie. How are you? The jump in NPLs, it's a handful of just smaller credits. Probably just a half dozen of smaller credits with just individual problems related to each business. As far as Firestone, the balance is down 15% quarter over quarter to $28 million. And NPLs have historically ranged in the $1.5 million range. They're at $1.3 million right now. And for NCOs, there's a net $900,000 for the quarter.

Laurie Hunsicker: $900,000. Okay. And then again, you had outsized charge-offs just in the C&I bucket. Was there anything specific there that's worth calling out?

Gregory Zingone: No. Very similar to the NPL. Nothing noteworthy. Just a handful of individual credits on the smaller side.

Laurie Hunsicker: Gotcha. Okay. And then I think I know the answer to this, but I just want to triple-check. Your $700 million multifamily book, anything rent-controlled in that book?

Gregory Zingone: No. We have no rent control in our footprint. Even though New York City is technically within our footprint, we do not have any loans there.

Laurie Hunsicker: Okay. And then I know Mondami has expressed a desire to target other markets too, i.e., Albany. Do you have any rent-controlled anywhere?

Gregory Zingone: We do not. Not in our footprint. No. And not in the company.

Laurie Hunsicker: Okay. That's great. And then non-interest income, the loan-related fees that were really strong. What were the BOLI gains in this quarter?

Brett Brbovic: They were about $800,000 above normal. Just nonrecurring.

Laurie Hunsicker: Benefit. Death benefit? Or Correct. Okay. And then how do we think about the drop in the SBA loan? Gain on sale of SBA loans? How should we be thinking about that?

Sean Gray: So I think we can take that large, Barry. Hey. It's Sean. You know, we and Brett's probably gonna say the same thing. We're coming off a really good Q4 and Q1. We pulled some of that value forward. So a little bit of a move back to the mean. But when we look at the core business, we look at pipeline and volume, it looks very healthy.

Laurie Hunsicker: Okay. So this current run rate Q2 is probably a better run rate?

Sean Gray: I would say it's in between the Q1, Q2.

Laurie Hunsicker: Okay. Great. And then how should we be thinking about the tax rate going forward?

Brett Brbovic: So our tax rate is a bit elevated right now due to timing and merger-related aspects. I would expect it to normalize going forward.

Laurie Hunsicker: Okay. And so what would be a good, you know, like, 23, 24%?

Brett Brbovic: I would say about 24, 25%.

Laurie Hunsicker: Okay. And then just last sort of more high-level question. Here. Can you help us think about your deal tangible solution at announcement tangible book dilution was 17% and then a 40% earnings pickup. Can you just help us think about what the new FASB impact on CECL updates, the double count sort of means for your tangible book dilution? You help quantify that? And, also, you know, presumably, your tangible book dilution is something less, but your earnings pickup is also something less. Just how should we think about that? And then also deal-related, can you help us think about the timing?

Brett Brbovic: Sure. So obviously, the ASU hasn't been finalized yet. You know, it's expected to be adopted at the third or fourth quarter of this year. It will have an impact on the combined entity as we move forward. I don't think at this time, you know, we can quantify that right now on this call. But it definitely will have an impact, and it's something we're continuing to analyze as we get more information on the ASU. What it's gonna look like in its final state.

Laurie Hunsicker: Okay. And then what about deal closing? We've seen things really ramp up on the M&A side on deal closings just happen really, really a lot faster. Any color on that?

Nitin Mhatre: Yeah. Laurie, I think we in the investor materials, we did say we expect the closing to be September. Everything's on track so far, so we're just awaiting the regulatory approval. And the teams are already working on the integration planning, as Sean outlined.

Laurie Hunsicker: Okay. Great. Thanks, Nitin, for taking my question.

Nitin Mhatre: Thank you, Laurie. Thanks, Laurie.

Operator: There are no further questions at this time. I will now turn the conference back over to Nitin Mhatre for closing remarks.

Nitin Mhatre: Thank you all for joining us today for our call and for your continued interest in Berkshire Hills Bancorp. Have a great day, and be well.

Operator: This concludes today's conference. You may now disconnect.

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