Beacon Financial Corp quarterly report, Q3 FY2020

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Business context and reporting period

The supplied filing is Berkshire Hills Bancorp, Inc. (NYSE: BHLB), not Beacon Financial Corp. It is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Berkshire is the holding company for Berkshire Bank and Berkshire Insurance Group. Its national mortgage banking operations, First Choice Loan Services (FCLS), were reported as discontinued operations; certain FCLS assets and liabilities were sold in May 2020, with the wind-down continuing.

Financial performance and condition

  • Third-quarter results: Continuing-operations revenue was $97.0 million, down 18% from $118.3 million a year earlier. Net interest income was $77.1 million, down 20%; fully taxable equivalent net interest margin was 2.61%, versus 3.22%. Net income was $21.2 million ($0.42 per diluted share), compared with $22.6 million ($0.44) in Q3 2019. Adjusted net income, a non-GAAP measure, was $26.4 million ($0.53 per diluted share).
  • Nine-month results: Net loss was $548.0 million, versus net income of $71.7 million in 2019; diluted loss per share was $10.90. The loss included a $553.8 million noncash goodwill impairment and $65.9 million provision for credit losses. Continuing-operations revenue declined 15% to $284.1 million.
  • Expenses and credit costs: Q3 provision for credit losses was $1.2 million, compared with $22.6 million in Q3 2019. Nine-month provision was $65.9 million, versus $30.1 million. Q3 continuing-operations noninterest expense was $72.8 million, up from $71.0 million; nine-month expense was $768.4 million, including goodwill impairment. Q3 efficiency ratio was 65.39%, versus 53.37%.
  • Balance sheet at September 30: Total assets were $12.61 billion, compared with $13.22 billion at December 2019; total loans were $8.98 billion, down from $9.50 billion; deposits were $10.47 billion, up from $10.34 billion. Cash and cash equivalents were $935.3 million, versus $579.8 million. Shareholders’ equity was $1.18 billion, down from $1.76 billion, largely because of the goodwill charge and credit-loss expense.
  • Credit quality: Allowance for credit losses on loans was $134.4 million, or 1.50% of loans; the company reported $47.4 million of nonaccrual loans at quarter-end. COVID-related modifications had been made to 5,884 loans with a carrying value of $1.6 billion; 728 active modified loans totaled $231.7 million. The company originated $708.1 million of SBA-guaranteed PPP loans.
  • Liquidity, funding and capital: Total borrowings were $702.7 million, down from $827.6 million at year-end. The company reported $1.6 billion of available FHLB borrowing capacity and $870.2 million of Federal Reserve borrowing capacity. The bank met regulatory “well capitalized” standards; bank total risk-based capital was 14.3% and common equity Tier 1 was 13.2%. Nine-month operating cash flow was $194.8 million, including $109.9 million from discontinued operations; continuing-operations operating cash flow was $84.9 million.

Material changes versus the prior comparable period

  • Q3 revenue and net interest income declined year over year, principally due to lower interest rates, margin compression and pandemic-related changes in business activity. Deposit and borrowing costs also fell.
  • The nine-month comparison was dominated by the 2020 goodwill impairment and higher credit provisioning. Excluding the impairment, management reported adjusted nine-month income of $16.3 million, versus $83.5 million in 2019; this is a non-GAAP measure.
  • Loans contracted while deposits and cash balances rose. Total securities increased to $1.99 billion from $1.77 billion at year-end, while borrowings declined. Management attributed these shifts largely to loan runoff, customer liquidity accumulation and its decision to reduce wholesale funding.
  • Goodwill fell from $553.8 million to zero after the full impairment. Tangible equity was $1.14 billion, down 2% from year-end, according to management’s non-GAAP calculation.
  • The quarterly common dividend was reduced to $0.12 per share from $0.23 a year earlier. Share repurchases were suspended, and the prior authorization expired.

Outlook, management commentary and risks

  • Management said third-quarter results showed progress toward normalization after first-half pandemic disruption, but expected net interest income to remain pressured by asset-yield compression and loan runoff. It also anticipated higher credit-loss provisions and tax expense than the unusually low Q3 levels.
  • In October 2020, the company announced initiatives targeting $10 million to $15 million in annualized operating expense reductions, intended to be fully effective in the second half of 2021. It also described digital account-opening, call-center and e-signature investments. No earnings or revenue guidance was provided in the supplied text.
  • Management identified hospitality, specialty equipment lending, restaurants, and nursing/assisted-living as COVID-sensitive commercial exposures totaling $912 million. Criticized loans rose to $395 million, and management expected asset-quality measures to deteriorate in coming quarters. The timing and extent of borrower stress, deferrals and charge-offs remain uncertain.
  • The pandemic, near-zero interest rates, economic conditions, government support measures, collateral values, unemployment and customer deposit behavior were cited as key uncertainties. Management warned of potential further impairment or credit losses and possible adverse effects on liquidity, earnings and capital.
  • CEO Richard M. Marotta stepped down in August; Sean A. Gray became acting CEO while the board conducted a search. Future dividends may require regulatory approval or non-objection due to the 2020 loss.
  • FCLS reported a nine-month discontinued-operations loss of $16.0 million. The company intended to complete the wind-down and transfer remaining licenses and intellectual property by year-end. Legal matters include a surviving consumer-protection claim in a trust dispute, a $16 million claim against Pioneer Bank for which no further recovery was accrued, and a mortgage-fee demand letter asserting claims for a putative class; no class action had been served as of the filing.

Important facts for investors to verify

  1. Confirm that Berkshire Hills Bancorp (BHLB), rather than Beacon Financial Corp, is the intended issuer and filing.
  2. Track credit performance after deferrals, especially criticized loans, COVID-sensitive sectors, allowance adequacy and realized charge-offs.
  3. Assess whether loan and deposit trends, deposit pricing, PPP forgiveness and deferred PPP fees support net interest income and the stated expense-reduction plan.
  4. Review capital and liquidity headroom, regulatory constraints on dividends, and the sustainability of the reduced dividend.
  5. Follow completion and costs of the FCLS wind-down, the CEO search, and developments in the disclosed litigation and demand letter.