Beacon Financial Corp quarterly report, Q2 FY2019

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Business context and reporting period

The supplied filing is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2019—not a filing identified as Beacon Financial Corp. Berkshire Hills Bancorp is a bank holding company. Results include SI Financial Group (SIFI) from its May 17, 2019 acquisition date; amounts below are in U.S. dollars.

Financial performance and position

  • Second-quarter results: Continuing-operations revenue was $109.1 million, down 0.7% year over year. Net income was $25.4 million versus $34.0 million; diluted EPS was $0.52 versus $0.74. Adjusted net income, a non-GAAP measure, was $32.1 million versus $33.8 million, and adjusted diluted EPS was $0.65 versus $0.73.
  • Six-month results: Continuing-operations revenue was $216.3 million versus $213.6 million. Net income was $49.1 million versus $59.3 million; diluted EPS was $1.03 versus $1.28. Adjusted net income was $59.8 million versus $63.8 million, and adjusted diluted EPS was $1.25 versus $1.38.
  • Net interest and margins: Second-quarter continuing net interest income increased to $91.6 million from $90.3 million, while fully taxable-equivalent net interest margin fell to 3.19% from 3.50%. Management cited lower purchase-accounting accretion, a flattening yield curve, and higher funding costs.
  • Expenses and credit costs: Second-quarter provision for loan losses was $3.5 million versus $6.5 million. Continuing non-interest expense rose to $76.6 million from $61.5 million, including $11.2 million of acquisition, restructuring, and other expenses. The reported efficiency ratio was 56.4%; management’s adjusted measure was 56.4%.
  • Balance sheet at June 30: Assets were $13.65 billion, loans $9.94 billion, deposits $10.57 billion, total borrowings $1.00 billion, and shareholders’ equity $1.78 billion. Versus December 31, 2018, assets rose 12%, loans 10%, and deposits 18%; the SIFI acquisition contributed materially to these changes. Total borrowings fell 34%.
  • Liquidity, capital, and cash flow: Cash and cash equivalents were $229.3 million. For the first half, cash from continuing operating activities was $55.8 million, but total operating cash flow was negative $26.1 million, principally reflecting $81.8 million used by discontinued operations. Investing cash flow was positive $516.4 million and financing cash flow negative $444.2 million. The Bank’s total risk-based capital ratio was 12.1% and it met the well-capitalized standard. Management reported $1.0 billion of unencumbered liquid assets and $1.4 billion of FHLB borrowing availability.
  • Credit quality: The allowance for loan losses was $62.2 million, or 0.63% of total loans. Non-performing assets were 0.27% of assets. Criticized loans increased to $267 million from $189 million at year-end, mainly due to an increase in special-mention commercial relationships, which management said did not indicate systemic risk.

Material changes versus comparable periods

  • Year-over-year GAAP earnings declined, driven chiefly by merger and restructuring costs; adjusted earnings also declined, primarily reflecting lower purchase-accounting accretion and margin pressure.
  • The SIFI acquisition added 23 branches in eastern Connecticut and Rhode Island, approximately $1.7 billion of assets, and 5.69 million Berkshire common shares issued as consideration. Preliminary purchase accounting recorded $36.4 million of goodwill and $18.0 million of core deposit intangibles.
  • Management pursued balance-sheet and business-line changes: it discontinued indirect auto originations, designated a $176 million commercial aircraft loan portfolio for sale, and began seeking a buyer for its national mortgage banking operation, First Choice Loan Services (FCLS).
  • Net unrealized securities gains lifted first-half other comprehensive income to $24.8 million, versus a $20.1 million loss in the first half of 2018. First-half comprehensive income was $73.9 million versus net income of $49.1 million.

Outlook, commentary, risks, and unusual items

  • Management targeted return on assets above 1% and an adjusted efficiency ratio in the 54%–56% range. It expected merger and restructuring charges to affect second-half 2019 results; it gave no precise earnings guidance in the filing.
  • For SIFI, management targeted approximately $12 million in annual cost savings and expected total pre-tax transaction costs of approximately $29 million. Systems conversion was targeted for early fourth quarter 2019. Integration and cost-savings execution remain important uncertainties.
  • Management said falling rates and the implied forward curve could continue to pressure margins. Its interest-rate model projected net interest income up 5% in a +200-basis-point scenario, but down 7% in a −100-basis-point scenario and 14% in a −200-basis-point scenario. These are model estimates, not forecasts.
  • The company planned to adopt CECL on January 1, 2020. It expected an increase in the credit-loss allowance and a negative retained-earnings adjustment, but had not quantified the impact.
  • FCLS was classified as discontinued operations, with a potential sale expected within 12 months. Its first-half net income was $0.9 million. The filing reports $212.7 million of FCLS assets and $26.3 million of liabilities at June 30.
  • A $3.0 million class-action settlement was accrued; the court granted preliminary approval in July 2019. The company also disclosed a separate SIFI shareholder lawsuit and a trust-related fiduciary-duty lawsuit, both of which it said it would defend.

Important facts for investors to verify

  1. Confirm the issuer: the request names Beacon Financial Corp, while the supplied 10-Q identifies Berkshire Hills Bancorp, Inc. (NYSE: BHLB).
  2. Track SIFI integration, the timing and realization of the $12 million savings target, transaction costs, and final purchase-price allocation.
  3. Monitor margin trends, funding costs, and the effect of interest-rate movements on earnings and liquidity.
  4. Review criticized and non-performing loans, purchased credit-impaired loan collections, and the eventual CECL transition impact.
  5. Confirm progress on the FCLS sale and aircraft-loan disposition, and follow developments in the disclosed litigation.