Business context and reporting period
The supplied filing is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2019—not a filing identified as Beacon Financial Corp. Berkshire is a bank holding company operating Berkshire Bank and Berkshire Insurance Group. Unless noted, income-statement comparisons are with Q1 2018; balance-sheet comparisons are with December 31, 2018.
Key financial results and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period |
|---|---|---|
| Net interest income, continuing operations | $85.5 million | $84.8 million in Q1 2018 |
| Net revenue, continuing operations | $107.2 million | $103.6 million in Q1 2018 |
| Net income | $23.6 million; diluted EPS $0.51 | $25.2 million; diluted EPS $0.55 in Q1 2018 |
| Adjusted net income and diluted EPS (non-GAAP) | $27.7 million; $0.60 | $30.0 million; $0.65 in Q1 2018 |
| Provision for loan losses | $4.0 million | $5.6 million in Q1 2018 |
| Fully taxable-equivalent net interest margin | 3.17% | 3.36% in Q1 2018 |
| Non-interest expense, continuing operations | $72.0 million | $65.4 million in Q1 2018 |
| Total assets | $12.17 billion | $12.21 billion at December 31, 2018 |
| Total loans / deposits | $8.95 billion / $9.17 billion | $9.04 billion / $8.98 billion at December 31, 2018 |
| Total borrowings | $1.21 billion | $1.52 billion at December 31, 2018 |
| Cash and cash equivalents | $167.6 million | $183.2 million at December 31, 2018 |
Interest and dividend income rose to $121.1 million from $106.1 million, while interest expense increased to $35.7 million from $21.4 million. Fee income fell 2% year over year; securities gains were $2.6 million versus a $1.5 million loss in Q1 2018. The efficiency ratio was 59.5%, compared with 55.1% a year earlier. GAAP return on assets was 0.78%; return on equity was 5.97%.
Continuing-operations operating cash flow was $24.7 million, versus $30.9 million in Q1 2018. Total operating cash flow was negative $20.2 million, primarily reflecting $44.9 million used by discontinued operations. Investing activities provided $139.5 million and financing activities used $134.8 million. The allowance for loan losses was $62.0 million, or 0.69% of loans. Annualized net charge-offs were 0.15% of average loans, nonperforming assets were 0.26% of assets, and criticized loans were 2.3% of total loans, up from 2.1% at year-end.
Bank regulatory capital ratios exceeded well-capitalized minimums: total risk-based capital 12.2%, common equity tier 1 11.6%, and Tier 1 leverage 9.0%. The company reported equity-to-assets of 13.0% and tangible equity-to-tangible assets of 8.8% (non-GAAP). Liquidity indicators improved: loans-to-deposits fell to 98% from 101%, wholesale funding-to-assets to 21% from 23%, and available FHLB borrowing capacity was $1.5 billion.
Material changes versus comparable periods
- GAAP and adjusted earnings per share declined 7% and 8%, respectively. Management attributed the decline primarily to lower acquired-loan accretion and higher expenses.
- Net interest margin contracted 19 basis points year over year. Before acquired-loan accretion, management said margin was down 11 basis points; higher funding costs and a flatter yield curve weighed on results.
- Loan balances decreased 1% from year-end, while deposits increased 2% and borrowings declined 20%. Securities decreased 1%, primarily from runoff.
- Other comprehensive income was $10.6 million, versus a $14.2 million loss in Q1 2018, principally reflecting bond valuation gains as long-term rates fell.
- Shareholders’ equity increased 2% from year-end, supported by retained earnings and unrealized securities gains. Book value per common share was $33.75 versus $32.12 a year earlier; tangible book value was $21.66 versus $19.86.
Outlook, management commentary, risks and unusual items
- Management expects acquired-loan accretion to decline in 2019 as the portfolio seasons. It aims to transition to organic EPS and profitability growth beginning in 2020; no specific 2020 earnings guidance is provided.
- The company is pursuing the sale of First Choice Loan Services’ national mortgage banking operations, classified as discontinued operations. The sale was expected to close within 12 months. FCLS recorded a $0.6 million after-tax loss in Q1 2019, compared with $0.1 million in Q1 2018.
- Berkshire ceased indirect auto-loan originations and plans to exit aircraft lending. It also plans to reduce its mortgage-backed securities portfolio by about $450 million over two years and release approximately $1 billion in less profitable interest-earning assets over several years, with proceeds intended in part to reduce higher-cost wholesale funding.
- Management targeted a 5% reduction in core non-interest expense run-rate and a 55% efficiency ratio by year-end. Six branches were consolidated during the quarter; further consolidations were under review.
- The SI Financial Group acquisition was targeted to close in Q2 2019, subject to approvals and other conditions. SI Financial shareholders approved the merger in April. Berkshire estimated total merger costs of $29 million pre-tax and $23 million after-tax, and targeted $12.5 million of annual cost efficiencies, or 30%. Integration was targeted for Q4 2019.
- The Board authorized a repurchase of up to 2.4 million shares, subject to regulatory approval; no shares had been repurchased under the new authorization as of March 31. The quarterly common dividend was increased 5% to $0.23 per share.
- CECL adoption was planned for January 1, 2020. Management expected an increase in the credit-loss allowance and a negative retained-earnings adjustment, but had not determined the amount.
- Unusual items included $7.0 million of acquisition, restructuring and other expense, including $1.6 million of SI Financial merger costs and restructuring charges. A $3.0 million accrual was recorded for a proposed class-action settlement. Other pending litigation includes fiduciary-duty claims and shareholder suits related to the SI Financial merger; management said it would defend the claims.
- Key disclosed risks include economic and competitive conditions, interest-rate changes, financial-market movements, and legislative or regulatory changes. Management reported no major changes in risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer identity: the supplied 10-Q is for Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
- Track progress, closing conditions, costs, share issuance, and realization of the SI Financial merger’s targeted cost savings.
- Monitor the FCLS sale process and the continuing financial and cash-flow effects of discontinued operations.
- Assess whether planned asset runoff, portfolio reductions, and lower wholesale funding improve margins without weakening deposits, loan growth, or liquidity.
- Review credit trends, including rising criticized loans, acquired and taxi-medallion exposures, and the expected CECL allowance and retained-earnings impact.
- Evaluate whether expense-reduction and efficiency targets are achieved, and whether the repurchase authorization receives approval and is used prudently.