Berkshire Hills Bancorp Highlights Progress Amid Integration Costs

Berkshire Hills Bancorp ((BBT)) has held its Q4 earnings call. Read on for the main highlights of the call.

Berkshire Hills Bancorp’s earnings call painted a broadly constructive picture: management highlighted improved profitability, margin expansion and a stronger balance sheet, while acknowledging near‑term drags from merger costs, a delayed systems conversion and elevated commercial real estate (CRE) exposure. Overall tone was that of a franchise in transition but on firmer footing, with risks framed as manageable and largely temporary rather than structural.

Net Interest Margin Expansion and Income Growth

Berkshire reported a notably stronger net interest margin (NIM), which climbed to 3.82% in the fourth quarter, helped by 26 basis points of purchase accounting benefit. Net interest income reached $199.7 million, including $13.8 million of purchase accounting accretion. For investors, this underscores that the core banking engine is performing well in a still-challenging rate environment, though some of the uplift is nonrecurring and will fade over time.

Operating Profitability Remains Solid

Excluding merger-related charges, operating profitability was robust. Operating earnings came in at $89.6 million, or $0.79 per share, translating to an operating return on assets of 1.13% and a roughly 13.4% return on tangible equity. These metrics position Berkshire firmly in the higher-performing regional bank peer group and indicate that, beneath the merger noise, the franchise is generating healthy returns.

Scale, Liquidity and Payroll Deposits Strengthen the Balance Sheet

The combined company ended the quarter with $23.2 billion in assets, $19.5 billion in deposits and $18.0 billion in loans. Liquidity was a clear bright spot: payroll-related deposits averaged $800–$900 million and spiked to about $1.9 billion at quarter-end, while cash and short-term investments totaled around $2 billion. This balance-sheet scale and funding profile provide flexibility to absorb credit normalization and integration costs without stressing liquidity.

Efficiency Gains and Ongoing Capital Return

Berkshire’s efficiency ratio landed at 56.7% in Q4, or 52.8% on a core basis excluding noncash intangible amortization, signaling improving cost discipline even ahead of full merger synergies. The board maintained its capital return commitment with a quarterly dividend of $0.3225 per share, implying a yield of roughly 4.5%. For shareholders, this combination of improving efficiency and a solid dividend stream offers a tangible payoff while the integration plays out.

Credit Reserves Positioned for Normalization

On the credit side, the allowance for loan losses stood near $253 million, providing about 140 basis points of coverage. The general reserve was roughly $177 million (about 100 bps of the total portfolio), complemented by $76 million of specific reserves against around $354 million of substandard loans, for about 22% coverage. Management’s stance is that reserve levels are appropriate for current conditions, giving the bank room to work through problem credits as they arise.

ASU Adoption Boosts Equity and Tangible Book Value

The early adoption of a new FASB accounting standard (ASU 2025-08) had an immediate positive impact on capital. By removing the anticipated day‑one hit on acquired purchased credit-deteriorated loans, Berkshire increased equity by about $49 million and added roughly $0.55 to tangible book value per share at adoption. This provides a capital cushion but comes with trade-offs for future earnings power.

Integration on Track, Systems Conversion Pushed to 2026

Management emphasized that integration of the recent merger is progressing well, with a key milestone—the core systems conversion—now scheduled for February 2026. The team expects remaining cost synergies to materialize largely after that conversion and expressed confidence in client retention and operational readiness. Investors should view 2025 and early 2026 as heavy-lift integration years, with the full benefits realized thereafter.

Merger Charges Weigh on GAAP Earnings

On a GAAP basis, Berkshire’s reported results were visibly affected by merger-related costs. Including $14.4 million of such charges, the company posted Q4 earnings of $53.4 million, or $0.64 per share. Management flagged an additional $10–$13 million of merger-related charges expected in the first quarter of 2026 due to the delayed systems conversion, reinforcing that GAAP results will remain noisy until the integration is complete.

Loan Contraction and Elevated CRE Concentration

Total loans declined by $275 million during the quarter, with commercial real estate responsible for roughly $235 million of the pullback. Investor CRE concentration remains high at about 333% of total risk-based capital—a level regulators and investors watch closely. Management is targeting a gradual reduction to around 300% by year-end 2026, implying continued discipline in CRE lending and potentially slower balance-sheet growth in that segment.

Office Exposure and Nonperforming Loan Uptick

Credit quality headlines were dominated by office-related stress. Nonaccrual loans increased, driven largely by a single approximately $9 million central business district office credit with vacancy challenges, now 56% reserved. Criticized office exposure totals about $137 million, indicating that office remains a key watch area. While not alarming at current levels, this portfolio will be a focal point for investors tracking future credit migration.

Trade-Off from ASU: Higher Capital, Lower Future EPS

The same accounting standard that boosted equity also removed a stream of future accretion income. Management noted that the ASU eliminates previously expected pretax accretion of roughly $10–$13 million per year and trims longer-term EPS projections by about $0.17 per share, from an estimated $3.85 to around $3.68 in operating EPS. The move effectively trades some future earnings for greater capital strength and transparency today.

Provisioning and Charge-Off Trends

Provision for credit losses was $8.1 million in the quarter, while net charge-offs were $9 million, or about 20 basis points on an annualized basis. Looking ahead, management expects quarterly provisions in the $5–$9 million range and indicated that charge-offs are likely to run ahead of provisions as they intentionally work down existing substandard credits. This suggests a controlled but active cleanup phase rather than a broad-based deterioration.

Capital Structure Adjustments on the Horizon

Berkshire also flagged future capital management issues around legacy subordinated debt. Portions of a $75 million legacy Brookline issue will gradually lose regulatory capital recognition, and a separate $100 million legacy Berkshire issue faces changes in 2027. Once the integration is complete and the bank posts a “clean” quarter after conversion, management may pursue refinancing or other capital actions to optimize the capital stack.

Synergy Realization Delayed, Near-Term Costs Elevated

The pushback of the systems conversion from November 2025 to February 2026 delays some anticipated cost synergies and shifts additional merger charges into early 2026. In the interim, Berkshire expects higher near-term expenses as it spends on integration, technology and branding. The full run-rate savings, therefore, are back-end loaded, meaning investors will need patience before the earnings uplift fully surfaces.

Outlook and Guidance: Steady Core, Gradual De-Risking

Management’s guidance calls for steady operating performance with controlled risk. Quarterly provision expense is projected in the $5–$9 million band, with remaining merger charges of about $10–$13 million in Q1 2026. After the February 2026 conversion, cost synergies are expected to show through, with post-synergy expense growth running a modest 3.0–3.5%. Loan growth is targeted at mid- to lower-single-digit rates in 2026, while NIM is guided to hold in the high-3% area (about 3.85–4.00%). The bank aims to bring investor CRE concentration down to near 300% of total risk-based capital by the end of 2026. Management now frames long-run operating EPS around $3.68—slightly above the current analyst consensus range—supported by a $23.2 billion asset base, $19.5 billion in deposits, $18.0 billion in loans, a $253 million allowance and a dividend yield of roughly 4.5%.

In closing, Berkshire Hills Bancorp’s latest earnings call balanced solid underlying performance with a candid discussion of transition-related frictions. Strong margins, healthy operating returns, ample liquidity and a reinforced capital base provide a supportive backdrop, even as merger expenses, CRE concentration and office risk temper the near-term story. The message to investors was clear: this is a franchise in the middle innings of a complex integration and portfolio reshaping, but one that expects its strategic moves to translate into more durable earnings power once the dust settles.