KBRA Affirms Ratings for Berkshire Hills Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Berkshire Hills Bancorp, Inc. (NYSE: BHLB)(“the company”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Berkshire Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

KBRA holds a favorable view of BHLB’s recent multi-year strategy to strengthen the balance sheet and improve the company’s long-term performance. This included right sizing the balance sheet, exiting of less profitable business lines, and gaining efficiencies through various branch sales or consolidations. As such, BHLB has meaningfully reshaped the funding profile as reflected by its comparatively lower usage of wholesale funding and lower average cost of deposits (2.29% for 1Q24). Historically, earnings have lagged peers, in part, due to a below average NIM and elevated operating expenses. More recently, while BHLB has certainly experienced earnings pressure related to rising funding costs, with NIM falling ~70 bps since 4Q22 to 3.15% in 1Q24, the company’s operating performance has tracked more closely to peer averages (operating ROAA of 0.8% for 2023 and 0.7% for 1Q24), driven by an above average NIM, partially offsetting the company’s higher operating costs.

BHLB reported favorable trends regarding credit losses in recent quarters, though its NCO ratio remained moderately elevated ranging from 0.2% - 0.3%. Above-average credit losses were partially related to the company’s Upstart and Firestone loans, with each portfolio in run-off, totaling less than 2% of total loans at 1Q24. The company's CRE exposure was relatively moderate representing 264% of risk-based capital at 4Q23. The office exposure was manageable, totaling $500 million, or 6%, of total loans at 1Q24, with no exposure to any major metro areas other than Boston and no large tower exposure.

Capital ratios have fluctuated in recent years, primarily due to the previously mentioned balance sheet restructuring. BHLB's capital measures increased as the company went through its restructuring phase that included the shrinking of the balance sheet. With the company near the close of its restructuring phase, capital ratios decreased to more peer-like levels. While the company has not provided specific capital targets, it is likely that capital ratios track more in line with peers over the medium term, including a CET1 ratio in the mid-11% range.

Rating Sensitivities

The Stable Outlook is reflective of KBRA's view that a rating change is unlikely in the medium term. Positive rating momentum could occur over time should BHLB continue to improve its financial performance and achieve earnings targets that are commensurate with higher rated peers coupled with improved credit quality. Conversely, credit deterioration, where credit losses push materially higher, leading to diminished profitability or the degradation of capital measures could lead to negative rating action.

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