Business context and reporting period
This is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018—not a filing under the name Beacon Financial Corp. The bank holding company’s first quarter included a full quarter of operations from Commerce Bancshares, acquired in October 2017. That acquisition expanded the company into Worcester and Greater Boston and brought total assets above the $10 billion threshold for additional regulatory requirements.
Financial performance and condition
- Earnings and revenue: Net income was $25.2 million, up 63% year over year; diluted EPS was $0.55, up 25%. Net revenue was $115.0 million, up 13%. Adjusted net income and adjusted diluted EPS, non-GAAP measures, were $29.9 million and $0.65, respectively.
- Interest income and margins: Net interest income increased 28% to $85.5 million. Fully taxable equivalent net interest margin was 3.36%, compared with 3.33% a year earlier. The efficiency ratio improved to 59.5% from 61.9%.
- Fees and expenses: Total non-interest income declined to $29.5 million from $34.8 million, principally reflecting the prior-year securities gains and hedge-termination accounting. Non-interest expense rose 3% to $76.9 million; acquisition, restructuring and other expenses were $5.1 million, versus $11.7 million in the prior-year quarter.
- Credit and loans: Loans totaled $8.38 billion, up $77 million from year-end; the allowance for loan losses was $53.9 million, or 0.64% of loans. Provision expense was $5.6 million. Annualized net charge-offs were 0.17% of average loans; nonperforming assets were 0.27% of assets. Nonaccrual loans rose to $29.3 million from $22.8 million at year-end, and criticized loans increased to $203.0 million from $188.3 million.
- Deposits, debt and liquidity: Deposits were $8.68 billion, down $66 million from year-end; borrowings were $1.22 billion, up $78 million. Cash and cash equivalents declined to $123.9 million from $248.8 million. Cash flows were $85.6 million provided by operations, $212.6 million used in investing and $2.1 million provided by financing. The company reported $951 million of FHLB borrowing availability and $70 million of holding-company cash and liquid investments. Brokered deposits totaled $1.3 billion.
- Capital and comprehensive income: Shareholders’ equity was $1.50 billion; equity to assets was 13.0%, and tangible equity to tangible assets was 8.6% (non-GAAP). The Bank exceeded regulatory minimums and was classified as well capitalized. Comprehensive income was $11.0 million, below net income due to $14.2 million of after-tax other comprehensive losses, primarily unrealized securities losses.
Material changes, outlook and risks
- Year-over-year growth reflects the Commerce acquisition, organic growth and a lower federal tax rate; comparisons also reflect prior-year hedge termination and restructuring costs. The effective tax rate was 22%, versus 30%.
- Management reported positive operating leverage: non-GAAP operating revenue increased 21%, exceeding the 15% increase in non-GAAP operating expenses. Adjusted return on assets was 1.04%; management said this was the first time in several years it exceeded 1%.
- Management anticipated quarterly card-related revenue would decline by approximately $1.25 million beginning in the third quarter of 2018 because of the Durbin Amendment, and annual FDIC insurance expense would increase by approximately $1.3 million beginning in the fourth quarter. No formal earnings or revenue guidance is provided.
- Rising rates contributed to unrealized securities losses and higher funding costs; management noted a flattening yield curve and some reversal of interest-rate sensitivity as loan lives lengthened and wholesale funding increased. A modeled 200-basis-point rate increase implied a 1.3% increase in second-year net interest income and a 6% decline in economic value of equity.
- Credit risks include local economic and real-estate conditions, acquired-loan valuation and credit estimates, and the increase in nonaccrual and criticized loans. The company said it did not expect to sell securities in unrealized-loss positions before recovery of amortized cost. Two lawsuits are disclosed, including depositor claims and a trust-administration fiduciary-duty complaint; management denies the allegations and is defending them. No material change in risk factors was reported.
- The Commerce loan valuation remained subject to measurement-period review; management reported no material first-quarter adjustment. The company expects the forthcoming expected-credit-loss standard to increase its allowance and reduce retained earnings at adoption, but the amount is not specified.
Important facts to verify
- Confirm the issuer identity: the supplied filing is for Berkshire Hills Bancorp, Inc., despite the request metadata naming Beacon Financial Corp.
- Assess how much earnings growth is recurring versus acquisition-related, tax-rate effects, and non-GAAP adjustments.
- Review deposit mix and costs, brokered-deposit reliance, borrowing levels and availability, and the effect of rising rates on margins and liquidity.
- Track credit quality, especially nonaccrual and criticized loans, acquired Commerce and taxi-medallion exposures, and reserve adequacy.
- Validate the expected timing and impact of Durbin-related revenue reductions, higher FDIC expenses, and expected-credit-loss accounting.