Business context and reporting period
The filing is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2022; this differs from the “Beacon Financial Corp” name in the request metadata. Berkshire is the holding company for Berkshire Bank, a regional community bank with approximately $11.3 billion in assets and 100 branches in New England and New York. Comparisons below are year over year unless stated otherwise; balance-sheet comparisons are with December 31, 2021.
Financial results and condition
| Metric | Q3 2022 | First nine months 2022 |
|---|---|---|
| Net interest income | $92.1 million, up 29% | $242.5 million, up 9% |
| Net revenue | $108.3 million, down 25% | $295.8 million, down 14% |
| Net income | $18.7 million, versus $63.7 million | $62.0 million, down 37% |
| Diluted EPS | $0.42, versus $1.31 | $1.34, versus $1.97 |
| Adjusted net income / diluted EPS (non-GAAP) | $27.9 million / $0.62 | $72.3 million / $1.56 |
| FTE net interest margin | 3.48%, versus 2.56% | 3.05%, versus 2.60% |
- Revenue and expenses: Q3 adjusted operating revenue was $108.8 million, up 17%; adjusted non-interest expense was $70.2 million. GAAP results were affected by the $51.9 million gain from selling insurance and Mid-Atlantic branch operations in Q3 2021. Q3 2022 also included $11.5 million of acquisition, restructuring and other expenses. Adjusted measures are non-GAAP and should be considered alongside GAAP results.
- Balance sheet and liquidity: Total assets were $11.32 billion; loans were $7.94 billion, up 16% from year-end; deposits were $9.99 billion, down 1%. Loans-to-deposits rose to 80% from 68% at year-end. Cash and cash equivalents fell to $694.9 million from $1.63 billion as cash and securities funded loan growth. The company reported $1.2 billion of available FHLB borrowing capacity and $590.5 million of Federal Reserve borrowing capacity.
- Cash flow: For the first nine months, operating activities provided $88.2 million; investing activities used $922.5 million, principally reflecting a $1.13 billion net increase in loans; financing activities used $98.7 million. Cash and cash equivalents declined $932.9 million over the period.
- Capital and securities: Shareholders’ equity was $942.6 million, down 20% from year-end. Common equity Tier 1 was 12.7%, versus 15.0%; the Bank remained well capitalized. Available-for-sale securities had $248.4 million of gross unrealized losses at quarter-end, contributing to a $185.3 million nine-month other comprehensive loss and lower book value. Management said these unrealized losses did not reduce regulatory capital and it did not expect to sell the securities before recovery.
- Credit: The allowance for loan losses was $96.0 million, or 1.21% of loans, versus $106.1 million, or 1.55%, at year-end. Nonaccrual loans were 0.48% of loans; annualized net charge-offs were 0.16% for the first nine months. Total criticized loans were $196.0 million, or 2.5% of loans, down from $242.0 million, or 3.5%, at year-end.
- Debt and capital returns: In June, the company issued $100 million of 10-year subordinated notes at a 5.50% fixed rate for five years, then floating; in September it called $75 million of older subordinated notes. It repurchased $104.5 million of shares in the first nine months. The quarterly dividend was raised after quarter-end, from $0.12 to $0.18 per share.
Material changes, outlook and risks
- Management attributed stronger net interest income and margin to rising rates, loan growth and reinvestment of excess cash. It described the balance sheet as asset-sensitive: a modeled parallel +100-basis-point shock increased first-year net interest income by 2.4%, while a -100-basis-point shock reduced it by 4.9%. These are model estimates, not forecasts; the company noted that higher rates could also raise deposit and wholesale funding costs.
- The company’s BEST strategic plan emphasizes core markets, frontline staffing, technology and profitability. Management generally targeted quarterly operating expenses of $68–$70 million. No specific full-year earnings or revenue guidance was provided.
- Loan demand moderated in Q3 amid higher interest rates and recession concerns. Inflation, further rate increases, possible recession, deposit competition, credit deterioration, and securities’ unrealized losses were identified as risks. COVID-19 effects remained uncertain; two active pandemic-modified loans totaling $12.5 million remained at quarter-end.
- The company stopped new originations through its Upstart consumer-lending partnership in July and planned to run off its Firestone specialty-finance portfolio. It also reported approximately $2.0 billion of LIBOR-based commercial loans, including $1.8 billion maturing after LIBOR cessation, and said it was working to convert them to SOFR.
- After quarter-end, CFO Subhadeep Basu resigned effective October 7, 2022; an interim CFO was appointed while the company searched for a permanent replacement. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- Material legal proceedings were not anticipated by management, but disclosed matters included a bank claim seeking approximately $16 million from another bank, an employment dispute proceeding toward arbitration, and a threatened bankruptcy-trustee action for which no formal complaint had been filed.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
- Review the GAAP-to-adjusted reconciliations, particularly the effect of the 2021 business-sale gain and 2022 restructuring costs on reported comparisons.
- Monitor deposit pricing, funding mix, loan growth and the assumptions behind management’s interest-rate sensitivity models.
- Track the pace of securities-loss recovery or realization, regulatory capital, liquidity, and the effect of continued buybacks and the higher dividend.
- Follow credit trends, including the concentrated commercial-and-industrial nonaccrual exposure, and the disclosed legal matters and LIBOR-to-SOFR conversion.