Business context and reporting period
This is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018—not a filing identified in the text as Beacon Financial Corp. Berkshire is the holding company for Berkshire Bank and Berkshire Insurance Group. Its October 2017 acquisition of Commerce Bancshares expanded its Greater Boston presence; 2018 year-over-year comparisons therefore include Commerce while the 2017 periods generally do not.
Financial performance and condition
- Third-quarter results: Net revenue was $118.6 million, up 18% from $100.8 million. Net income rose 41% to $32.2 million from $22.9 million; diluted EPS increased to $0.70 from $0.57. Adjusted diluted EPS was also $0.70, versus $0.59.
- Nine-month results: Net revenue was $354.8 million, up 16%; net income was $91.5 million, up 58%. Diluted EPS rose to $1.98 from $1.54; adjusted diluted EPS was $2.08 versus $1.71.
- Interest income and margins: Third-quarter net interest income increased 24% to $89.3 million; nine-month net interest income increased 28% to $265.9 million. Fully taxable-equivalent net interest margin was 3.32% for the quarter, down from 3.36%, and 3.39% for nine months, up from 3.35%.
- Fees, costs, and credit provision: Third-quarter non-interest income was $29.3 million versus $28.8 million; nine-month non-interest income declined to $88.8 million from $96.4 million, partly reflecting prior-year securities gains and mortgage banking contraction. Non-interest expense rose 8% for the quarter and 5% for nine months. Loan-loss provision was $6.6 million for the quarter and $18.7 million for nine months.
- Balance sheet at September 30: Assets were $12.03 billion, up 4% from year-end 2017. Loans totaled $8.90 billion, up 7%; deposits were $8.77 billion, essentially flat; borrowings rose 35% to $1.54 billion. Cash and cash equivalents were $135.7 million, down from $248.8 million at year-end.
- Cash flow and liquidity: Nine-month operating cash flow was $181.7 million, investing cash outflow $684.5 million, and financing cash inflow $389.8 million. The loans-to-deposits ratio was 102%, versus 95% at year-end; wholesale funding, including borrowings and brokered time deposits, was $2.9 billion, or 24% of assets. Management reported $0.8 billion of unused FHLB borrowing availability.
- Capital and asset quality: Shareholders’ equity was $1.53 billion; the equity-to-assets ratio was 12.74%, and tangible equity to tangible assets was 8.53%. The Bank exceeded regulatory minimums and was classified as well capitalized. The allowance for loan losses was $58.5 million, or 0.66% of loans. Annualized net charge-offs were 0.19%; nonperforming assets were 0.30% of assets.
Material changes versus comparable periods
- Growth in assets, loans, revenue, and earnings reflects both Commerce’s acquisition and organic expansion; the acquisition makes simple year-over-year comparisons less comparable.
- Higher market rates lifted loan yields and interest income but also increased deposit and borrowing costs. Third-quarter deposit cost was 0.96%, up from 0.66% in fourth-quarter 2017; total cost of funds reached 1.16% from 0.81%.
- Unrealized losses on available-for-sale securities drove nine-month other comprehensive loss of $27.5 million and reduced accumulated other comprehensive income to a loss of $28.6 million from income of $4.2 million at year-end.
- Mortgage banking revenue declined year over year as higher rates reduced demand. The Durbin Amendment reduced debit-card fee income beginning July 1, 2018, with a reported $1.2 million decline versus the prior quarter.
- Brokered deposits increased to $1.4 billion from $1.1 billion at year-end, while total deposits remained broadly unchanged. Short-term borrowings increased to $1.19 billion from $667 million.
Outlook, commentary, risks, and unusual items
- Management described market conditions as sound and highlighted Greater Boston, Albany, and the Mid-Atlantic as priority markets. It cited stronger business-line activity, record quarterly loan-related fee income, and continued focus on deposit acquisition and operating efficiencies. The filing gives no specific earnings or revenue guidance.
- Management noted pressure on margins from competition, a flattening yield curve, higher funding costs, business mix, and growth funded partly by higher-cost borrowings. Interest-rate modeling indicated a generally neutral profile; modeled net interest income was approximately flat in the second year of a 200-basis-point upward rate ramp.
- Management planned to pursue consolidation of approximately six branches. It expected FDIC insurance expense to increase by about $1.3 million annually beginning in fourth-quarter 2018, following the crossing of the $10 billion asset threshold.
- One commercial real estate relationship accounted for approximately 45% of the $36 million period-end nonperforming-asset balance; management said it was adequately secured and required no specific impaired-loan reserve. Total criticized loans rose to $215.9 million from $188.3 million at year-end.
- The expected-credit-loss standard (CECL), planned for adoption in 2020, was expected to increase the allowance and reduce retained earnings; the amount was not yet determined. Interest-rate, deposit-funding, credit, regulatory, integration, and regional economic risks remain relevant.
- The filing disclosed two lawsuits being vigorously defended: a purported depositor class action alleging electronic-funds-transfer and consumer-protection violations, and a trust-beneficiary action alleging fiduciary-duty and consumer-protection violations. Management could not estimate probable future losses for the matters discussed.
- Non-GAAP adjusted results exclude items such as acquisition and restructuring costs and securities gains or losses; they should be considered alongside GAAP results. Federal tax reform reduced the nine-month effective tax rate to 21% from 28% and benefited nine-month EPS by approximately $0.17.
Important facts for investors to verify
- Separate Commerce-related growth from organic growth, and assess whether revenue and earnings gains persist after integration.
- Track net interest margin, deposit pricing and mix, brokered deposits, wholesale funding, and liquidity as rates and competition change.
- Review criticized and nonperforming credits, especially the identified commercial real estate relationship, and monitor reserve adequacy and CECL’s eventual impact.
- Evaluate securities-related unrealized losses and their effect on accumulated other comprehensive income and capital.
- Check the progress and costs of branch consolidations, regulatory compliance, and expected FDIC expense increases.
- Monitor outcomes or developments in the disclosed litigation; the filing does not quantify potential exposure.