Filing overview
The supplied filing is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2021—not a filing for Beacon Financial Corp. Berkshire is the bank holding company for Berkshire Bank and Berkshire Insurance Group. Unless noted otherwise, income-statement comparisons are with Q1 2020 and balance-sheet comparisons with December 31, 2020.
Financial performance and condition
- Earnings and revenue: Net income was $13.0 million, or $0.26 per diluted share, versus a net loss of $19.9 million, or $0.40 per share, in Q1 2020. Continuing-operations net income was $13.0 million versus a $12.1 million loss. Net revenue from continuing operations was $101.3 million, up from $92.1 million; excluding securities gains and losses, revenue was essentially flat at $101.3 million versus $101.8 million. Non-GAAP adjusted net income was $16.0 million, or $0.32 per diluted share, versus an adjusted loss of $3.6 million, or $0.07 per share.
- Net interest and margins: Net interest income was $75.1 million, down from $86.4 million. Fully taxable-equivalent net interest margin was 2.62%, compared with 3.04%. Lower asset yields and a shift toward short-term investments weighed on results; lower deposit and funding costs partly offset this. PPP loan forgiveness contributed $3.5 million of deferred revenue recognition and an estimated 11 basis points to margin, including the loans’ coupon income.
- Credit costs and expenses: Provision for credit losses fell to $6.5 million from $34.8 million. Non-interest expense increased to $78.2 million from $71.3 million, including $3.5 million of acquisition, restructuring, and other expenses. The efficiency ratio worsened to 71.32% from 66.92%.
- Cash flow: Operating activities provided $23.6 million; investing activities provided $353.1 million, principally reflecting loan runoff; financing activities used $34.9 million. Cash and cash equivalents increased $341.7 million to $1.90 billion.
- Balance sheet and liquidity: Total assets were $12.76 billion. Deposits were $10.24 billion, up modestly from year-end, while total borrowings declined to $448.7 million from $571.6 million. Loans were $7.66 billion, down $422.7 million; the loan-to-deposit ratio declined to 75% from 79%. Short-term investments rose to $1.82 billion. Wholesale funding fell 26% to $880 million, or 7% of assets.
- Credit quality and capital: The allowance for credit losses on loans was $123.8 million, or 1.62% of loans. Nonperforming loans were $55.8 million, 0.73% of loans, versus 0.80% at year-end; annualized net charge-offs were 0.51% of average loans. Shareholders’ equity was $1.18 billion. Book value per share was $23.05 and tangible book value per share was $22.39. The Common Equity Tier 1 ratio was reported at 14.2%, up from 13.8% at year-end.
Material changes and management commentary
- Q1 2020 results included a $9.7 million securities loss and an $8 million after-tax loss from discontinued national mortgage banking operations. The national mortgage banking business was sold and wound down in 2020; there was no discontinued-operations result in Q1 2021.
- Higher interest rates during Q1 reduced unrealized gains on available-for-sale securities; accumulated other comprehensive income fell by $20.2 million after tax. Total comprehensive loss was $7.1 million despite positive net income.
- Management said most key loan-performance measures improved and that the 2020 pandemic-related provisioning was expected to absorb credit losses under current conditions and forecasts. It cautioned that future provision needs depend on economic forecasts, loan performance, and portfolio mix; no formal full-year earnings guidance was provided.
- COVID-19 remained a material uncertainty. Active modified loans totaled $173 million at quarter-end, down from $316 million at year-end; the broader total including in-process modifications was $214 million. Management highlighted hospitality, specialty equipment lending, restaurants, and nursing/assisted-living as sensitive sectors. Hospitality recovery remained dependent on travel activity.
- The company consolidated nine branches in Q1 and planned to consolidate 16 branches during 2021. It had agreed to sell eight Mid-Atlantic branches, including approximately $284 million of loans and $647 million of deposits, with completion targeted for the first half of 2021. Management expected to use about $300 million of liquidity to complete the sale.
- Management expected most of the $444 million of remaining PPP loans to be repaid through SBA forgiveness during 2021, and approximately $475 million of maturing wholesale funding to be repaid over the remainder of the year. It also announced a post-quarter authorization to repurchase up to 2.5 million shares through April 30, 2022; the authorization is not a commitment to buy shares.
- Other risks include interest-rate and market exposure, regional economic conditions, credit and collateral deterioration, and the uncertain effects of the pandemic. The filing disclosed pending legal matters, including a bank claim seeking approximately $16 million and other employment and mortgage-fee disputes; management did not identify proceedings it believed material to the company’s financial condition or results.
Important facts for investors to verify
- Whether the Mid-Atlantic branch sale closed as planned, and the final deposit premium and transaction effects.
- PPP forgiveness timing and the effect of runoff on loan balances, net interest income, and revenue recognition.
- Subsequent credit performance in criticized and modified loans, particularly hospitality and specialty equipment lending, and whether the allowance remains adequate.
- Actual repayment of planned wholesale maturities and the use of liquidity for the branch sale, dividends, or share repurchases.
- Execution and costs of the branch-consolidation and strategic plans, and whether operating expenses and profitability improve.
- Changes in interest rates, securities valuations, deposit pricing, and the value or collateral needs of derivative positions.