Filing summary
Entity clarification: The supplied filing is Berkshire Hills Bancorp, Inc. (NYSE: BHLB), not Beacon Financial Corp. It is a Form 10-Q for the quarter and six months ended June 30, 2020. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and reporting period
Berkshire Hills Bancorp is the holding company for Berkshire Bank and Berkshire Insurance Group. COVID-19, associated economic disruption, and exceptionally low interest rates shaped first-half results. The company also continued the wind-down and sale of its national mortgage banking operations, reported as discontinued operations.
Key financial metrics
| Metric | Q2 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Continuing-operations net interest income | $77.6 million | $164.0 million |
| Continuing-operations net revenue | $95.0 million | $187.0 million |
| Provision for credit losses | $29.9 million | $64.7 million |
| Goodwill impairment | $553.8 million | $553.8 million |
| Consolidated net loss | $549.4 million | $569.3 million |
| Diluted loss per common share | $10.93 | $11.33 |
| Adjusted PPNR, non-GAAP | $23.6 million | $54.1 million |
Q2 net interest margin on a fully taxable-equivalent basis was 2.62%, versus 3.19% a year earlier. Continuing-operations net interest income declined 15% year over year in Q2 and 7% in the first half. Adjusted net income was a loss of $6.5 million in Q2 and $10.1 million for the half-year; these non-GAAP figures exclude specified items and should be considered alongside GAAP results.
At June 30, total assets were $13.06 billion, total loans $9.37 billion, deposits $10.78 billion, borrowings $816.8 million, and shareholders’ equity $1.16 billion. Cash and cash equivalents were $1.04 billion, including $942.0 million in short-term investments. The loan-to-deposit ratio was 87%. The loan allowance was $139.4 million, or 1.49% of loans.
First-half cash provided by operating activities was $177.2 million, including $63.8 million from continuing operations and $113.3 million from discontinued operations. Cash and cash equivalents increased $464.3 million during the period. The Bank’s June 30 capital ratios included 13.7% total risk-based capital and 12.5% common equity tier 1; it met the regulatory well-capitalized thresholds.
Material changes versus comparable periods
- Continuing-operations revenue fell 13% in Q2 and 14% in the first half year over year. Management cited net interest margin pressure from rate cuts, lower yields on loans and short-term investments, and reduced activity-related fees.
- The $553.8 million goodwill write-off was the principal driver of the reported loss. Management attributed it to pandemic-related economic and industry uncertainty, lower market valuations, and increased credit-loss expectations.
- The first-half credit-loss provision rose to $64.7 million from $7.5 million in the prior-year period. The allowance increased from $63.6 million at year-end 2019 to $139.4 million at June 30, including the impact of adopting CECL.
- Total loans declined $132 million from year-end. This included $706.1 million of PPP lending; excluding PPP loans, other loans fell $838 million. Deposits rose $440 million, while cash and short-term investments grew substantially.
- Total shareholders’ equity decreased $594 million from year-end, principally reflecting the goodwill impairment and credit provision. The company reported tangible book value per common share of $21.94, down from $22.56 at year-end according to MD&A.
Outlook, risks, contingencies, and unusual items
- Management targeted progressive improvement in adjusted PPNR in the second half of 2020, citing lower funding costs, PPP fee recognition, expense management, and expected economic improvement. This is management’s outlook, not a guarantee.
- The company expected most PPP balances to decline by year-end, with repayment proceeds used in part to reduce wholesale funding. It reported $19 million of deferred PPP fees to be recognized in net interest income as loans are forgiven or repaid.
- Management warned that asset quality could deteriorate and additional credit-loss provisions may be needed. Its allowance forecast depended on uncertain pandemic, unemployment, economic stimulus, and macroeconomic assumptions.
- As of June 30, 5,753 loans totaling $1.5 billion had COVID-related payment deferrals; $1.3 billion was commercial lending. Management estimated 60–70% of modified balances would return to scheduled payments, and said customers seeking further relief would be reviewed case by case.
- COVID-sensitive exposures included hospitality, leisure, restaurants, retail, healthcare, and construction. Criticized loans increased $103 million in the first half to $340 million, with hospitality a principal source of downgrades.
- Short-term deferrals meeting applicable CARES Act and regulatory criteria were generally not treated as TDRs; loans were to be reassessed after deferral periods. Investors should note that reported delinquencies and risk ratings may not yet reflect the full effects of these modifications.
- Future dividends face regulatory constraints following the reported loss: Bank dividends require state approval and company shareholder dividends require Federal Reserve non-objection. The share repurchase program was suspended and its authorization expired.
- The May 7 sale of certain FCLS assets and liabilities was completed; the wind-down was expected to continue through Q3, with a further transaction for licenses and intellectual property intended by year-end. Management targeted discontinued-operation losses below $1 million per quarter in the second half.
- After quarter-end, the company announced that CEO Richard M. Marotta had stepped down; Sean A. Gray was named acting CEO while the Board began a CEO search. A legal matter involving a trust had one claim dismissed in July while another was allowed to proceed; a separate approximately $16 million loan-participation lawsuit had no additional recovery accrued beyond a partial recovery already recognized.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
- Review subsequent credit performance, particularly modified loans, criticized loans, COVID-sensitive sectors, and any changes to the CECL allowance or charge-offs.
- Track PPP forgiveness, deferred-fee recognition, and whether proceeds reduce borrowings and brokered deposits as management anticipated.
- Assess the effect of sustained low rates and asset sensitivity on net interest margin, revenue, and management’s second-half adjusted PPNR outlook.
- Monitor regulatory approvals or non-objection for dividends, capital levels, and the outcomes of the remaining legal matters and FCLS wind-down.