Beacon Financial Corp annual report, FY2022

SEC filing summary

Filing and period: Annual report (Form 10-K) for the fiscal year ended December 31, 2022, filed March 1, 2023. The filing identifies the registrant as Berkshire Hills Bancorp, Inc. (NYSE: BHLB), not Beacon Financial Corp; verify that this is the intended company. The report includes unaudited quarterly data, including fourth-quarter 2022 results.

Business context and financial results

Berkshire Hills Bancorp is a Boston-based bank holding company operating Berkshire Bank, with 100 full-service financial centers across New England and New York. Its businesses include commercial and consumer banking, mortgage lending, wealth management, and SBA lending.

Metric	2022	2021
Total net revenue	$413.5 million	$434.4 million
Net interest income	$344.6 million	$291.2 million
Net income	$92.5 million	$118.7 million
Diluted earnings per share	$2.02	$2.39
Net interest margin, fully taxable equivalent	3.26%	2.60%
Return on assets	0.82%	0.98%
Efficiency ratio	64.3%	70.0%

Management’s non-GAAP adjusted net income was $100.5 million, versus $84.0 million in 2021; adjusted diluted EPS was $2.19 versus $1.69. These measures exclude items management considers non-operating, including the 2021 business-sale gain and restructuring costs. Fourth-quarter 2022 net income was $30.5 million, or $0.69 per diluted share; management described quarterly revenue and EPS as records.

Balance sheet, credit, liquidity, and capital

Assets and lending: Total assets were $11.66 billion, slightly above $11.55 billion in 2021. Loans rose 22% to $8.34 billion, led by residential real estate loans, up 55% to $2.31 billion. Deposits increased 3% to $10.33 billion; the loans-to-deposits ratio rose to 81% from 68%.
Cash flow: Operating activities provided $123.2 million. Investing activities used $1.27 billion, primarily reflecting loan growth; financing activities provided $207.7 million. Cash and cash equivalents declined $942.5 million to $685.4 million.
Credit quality: The allowance for loan losses was $96.3 million, or 1.15% of loans, down from $106.1 million, or 1.55%. Nonaccrual loans were 0.37% of loans versus 0.52%; net charge-offs were 0.27% of average loans versus 0.29%. Criticized loans declined to $187.9 million from $242.0 million. The filing attributes reserve reductions partly to improving credit conditions and pandemic-related losses not materializing as previously expected.
Funding and liquidity: Estimated uninsured deposits were $3.8 billion, up from $3.7 billion. Payroll deposits were $1.48 billion at year-end and fluctuate substantially. The Bank reported $2.1 billion of total borrowing availability from the FHLB and Federal Reserve, and the parent held $90 million in cash. Management said liquidity was sufficient but noted deposit competition, potential outflows, and limits on using securities with unrealized losses.
Debt: Total borrowings were $125.5 million, including $100 million of newly issued subordinated notes (reported net of issuance costs), trust preferred obligations, and FHLB advances. The company issued $100 million of 5.5% subordinated notes in June and repaid $75 million of older subordinated debt in September.
Capital and securities: Company Common Equity Tier 1 ratio was 12.35%, down from 15.01%; the Bank’s ratio was 12.64%, and it remained well-capitalized. Shareholders’ equity fell 19% to $954.1 million, mainly reflecting a $177.8 million after-tax other comprehensive loss, largely from unrealized available-for-sale securities losses. The AFS portfolio’s unrealized loss was $238.6 million before tax; management said it did not intend or expect to need to sell the securities before recovery.
Shareholder returns: The company repurchased $124.5 million of stock in 2022 and paid $24.5 million in common dividends. The quarterly dividend was raised 50% to $0.18 in the fourth quarter. A new $50 million repurchase authorization was announced for 2023.

Material changes versus 2021

GAAP net income declined 22%, largely because 2021 included approximately $53 million of pre-tax gains from the sale of insurance and Mid-Atlantic branch operations. Adjusted net income increased 20%.
Net interest income rose 18%, as higher rates and a shift from short-term investments into loans more than offset higher interest expense. The net interest margin increased 66 basis points.
Fee income fell 24%, including the effect of the insurance business sale, lower SBA-related loan revenue, and lower mortgage banking income.
Loan growth and higher rates reduced excess cash and securities balances. The securities portfolio declined 20%, while its average life lengthened to 6.9 years from 4.6 years as mortgage prepayments slowed.
Unrealized securities losses substantially reduced reported book value and equity, though management said these losses were excluded from regulatory capital.

Outlook, management commentary, and risks

Outlook: The filing provides no formal earnings or revenue guidance. Management anticipated further deposit-cost increases, with a full-cycle deposit beta estimated at 30%–40%, and said this could pressure margins. It expected the higher-rate environment to potentially slow loan growth and increase recession risk, while targeting further profitable growth, digital investment, and operating efficiencies.
Interest-rate exposure: At year-end, modeled net interest income sensitivity was modestly asset-sensitive: a parallel +100 basis-point shock was estimated to increase first-year NII 0.8%, while a −100 basis-point shock was estimated to reduce it 1.6%. A −200 basis-point shock was estimated to reduce first-year NII 5.2%. Actual outcomes depend on customer and market behavior and model assumptions.
Strategic changes: The company stopped new Firestone specialty-lending originations in mid-2022 and is running off its $133 million portfolio. It also suspended new Upstart-partnership consumer lending in mid-2022. A new digital and mobile banking platform was planned for 2023.
LIBOR transition: The company disclosed more than $5 billion of LIBOR-indexed notional instruments. At year-end, approximately $1.9 billion of commercial loans were LIBOR-based, including $1.8 billion maturing after the anticipated mid-2023 cessation; $333 million had been converted. Transition execution and customer fallback terms remain areas to monitor.
Key risks: Concentration in real estate and commercial lending; recession, inflation, higher rates, deposit competition and uninsured funding; securities-value declines and possible capital effects if losses are realized; cyber, technology, vendor, and third-party lending risks; and regulatory limits on Bank dividends to the parent. The company also noted heightened monitoring of commercial office exposure; it reported approximately $548 million of such loans and none delinquent at year-end.
Contingencies and unusual matters: Management reported no pending legal proceedings believed material to financial condition or results. Two matters described include a loan-participation dispute seeking approximately $16 million (with no additional recovery accrued) and an employment-related case expected to proceed to arbitration in the second half of 2023. The auditors issued unqualified opinions on the financial statements and internal controls; the allowance for credit losses was identified as a critical audit matter.

Most important facts for investors to verify

Confirm the intended issuer: the supplied filing is for Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
Track deposit mix, uninsured and payroll deposit balances, funding costs, deposit beta, and liquidity under further rate changes or deposit outflows.
Assess the scale and duration of securities unrealized losses, management’s ability to hold securities to recovery, and potential capital consequences if sales become necessary.
Monitor commercial real estate and office exposure, loan performance, charge-offs, and whether the lower allowance remains adequate if economic conditions deteriorate.
Evaluate execution of the LIBOR-to-SOFR transition and the company’s 2023 digital-platform and capital-return plans.