Business context and reporting period
This is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018—not a filing by Beacon Financial Corp. Berkshire’s disclosures note its earlier acquisition of Beacon Federal Bancorp; the 2018 results also include Commerce Bancshares, acquired in October 2017. Amounts below are U.S. dollars.
Financial results and condition
- Second-quarter performance: Net revenue was $121.2 million, up 18% year over year; net income was $34.0 million, up 73%; diluted EPS was $0.74, up 40%. Six-month net revenue was $236.1 million and net income was $59.3 million, up 16% and 69%, respectively. Six-month diluted EPS was $1.28 versus $0.96.
- Interest income and margins: Q2 net interest income rose 31% to $91.1 million. Fully taxable equivalent net interest margin increased to 3.50% from 3.36%; higher purchased-loan accretion contributed to the improvement. Q2 provision for loan losses was $6.5 million, versus $4.9 million.
- Fees, expenses, and returns: Q2 non-interest income declined to $30.0 million from $32.8 million, including lower mortgage banking income. Non-interest expense increased 4% to $72.3 million. The efficiency ratio improved to 56.37% from 61.72%; return on assets was 1.17% versus 0.84%.
- Balance sheet and funding: At June 30, assets were $11.90 billion, loans $8.71 billion, deposits $8.84 billion, and total borrowings $1.36 billion. Since year-end 2017, loans increased about $411 million, deposits $89 million, and borrowings $227 million. Cash and cash equivalents fell to $139.1 million from $248.8 million; loans-to-deposits rose to 99% from 95%. The Bank reported $1.2 billion of unused FHLB borrowing availability.
- Cash flow and capital: First-half operating cash flow was $66.0 million, investing cash flow was negative $471.9 million, and financing cash flow was positive $296.3 million. The Bank exceeded regulatory well-capitalized minimums; its total capital ratio was 12.0% and CET1 ratio 11.1%. Shareholders’ equity was $1.52 billion.
- Credit quality: Nonperforming assets were 0.20% of assets, and annualized first-half net charge-offs were 0.19% of average loans. The allowance was 0.64% of loans. Criticized loans were 1.8% of total assets, compared with 1.6% at year-end.
Material changes, outlook, and risks
- Year-over-year earnings benefited from Commerce’s acquired operations, loan growth, higher rates and purchased-loan accretion, and a lower effective tax rate following federal tax reform. The first-half effective tax rate was 21%, compared with 30% a year earlier.
- Mortgage banking revenue fell 30% in the first half, mainly amid lower demand as interest rates rose. Management said the company’s card-processing fees would decline under the Durbin Amendment effective July 1, 2018, estimating an annualized revenue reduction of about $5 million.
- Management described market conditions as favorable and interest-rate sensitivity as slightly asset-sensitive, while noting that the yield curve had flattened and deposit costs were rising. No specific earnings or revenue guidance was provided.
- The company was assessing consolidation of approximately six branches over the next several quarters, with an initial restructuring charge expected. Management also anticipated about $1.3 million in additional annual FDIC insurance expense beginning in Q4 2018 because the company exceeded the $10 billion asset threshold. A subsequent $35 million subordinated-note conversion into Bank equity was reported as further capital support.
- Available-for-sale securities had $35.8 million of gross unrealized losses at quarter-end; accumulated other comprehensive income was a $21.3 million loss, primarily reflecting bond-price declines as rates rose. Management said it expected to recover amortized cost and did not intend or expect to need to sell securities in unrealized-loss positions before recovery.
- Two lawsuits were described, including a purported depositor class action and a trust-beneficiary fiduciary-duty claim. The company denied the allegations and was defending them; management said a probable future loss estimate could not be made. The filing reported no major changes to risk factors.
Important facts for investors to verify
- Confirm the issuer identity: the filing is Berkshire Hills Bancorp’s, notwithstanding the Beacon Financial Corp request metadata.
- Assess how much earnings growth came from Commerce, purchased-loan accretion, and tax-rate changes, versus recurring organic growth.
- Monitor deposit pricing, brokered-deposit reliance, borrowing growth, liquidity, and the effect of the 99% loans-to-deposits ratio.
- Track criticized and delinquent commercial real estate loans, the allowance, and acquired or purchased-credit-impaired loan resolution.
- Verify the realized impact of the Durbin fee reduction, planned branch actions, and incremental regulatory and FDIC costs.