Filing summary
Issuer identification: The supplied filing is Berkshire Hills Bancorp, Inc. (NYSE: BHLB), not Beacon Financial Corp. It is a Form 10-Q for the quarter ended September 30, 2019; figures below are in U.S. dollars and generally in millions unless noted.
Business context and reporting period
Berkshire is a bank holding company. Results include Savings Institute/SI Financial Group (SIFI) from its May 17, 2019 acquisition; the third quarter was the first full quarter including SIFI. The company classified its national mortgage banking business, First Choice Loan Services (FCLS), as discontinued operations while seeking a buyer.
Financial performance and condition
- Third-quarter revenue and earnings: Continuing-operations net revenue was $118.3 million, up 9% year over year. Net income was $22.6 million versus $32.2 million; diluted EPS was $0.44 versus $0.70. Continuing-operations net income was $20.7 million.
- Nine-month results: Continuing-operations net revenue was $334.6 million versus $322.0 million. Net income was $71.7 million versus $91.5 million, and diluted EPS was $1.46 versus $1.98. Adjusted diluted EPS, a company-defined non-GAAP measure, was $1.70 versus $2.08.
- Net interest and margin: Third-quarter net interest income was $96.9 million, up 10%; nine-month net interest income was $273.9 million, up 4%. Fully taxable-equivalent net interest margin was 3.22% for the quarter, down 10 basis points year over year, and 3.19% for the nine months, down 20 basis points.
- Credit costs and expenses: Provision for loan losses was $22.6 million in the quarter and $30.1 million year to date. Non-interest expense was $71.0 million in the quarter and $219.6 million year to date, including acquisition, restructuring and other charges of $4.2 million and $22.3 million, respectively.
- Balance sheet at September 30: Assets were $13.53 billion; loans $9.72 billion; deposits $10.42 billion; borrowings $1.00 billion; and shareholders’ equity $1.77 billion. Total loans grew 8% from year-end 2018, substantially reflecting SIFI; deposits rose 16%, also including acquired deposits. Cash and cash equivalents were $302.1 million, versus $183.2 million at year-end.
- Liquidity, debt and capital: Borrowings declined $516.7 million from year-end, while loans-to-deposits improved to 93% from 102%. Wholesale funds were 18% of assets versus 23% at year-end. Unencumbered liquid assets were 7.1% of assets versus 2.0%. The Bank reported a 12.2% total risk-based capital ratio and remained “well capitalized.”
- Cash flow: For the first nine months, continuing-operations operating cash flow was $107.7 million, but total operating cash flow was $3.7 million after $104.0 million used by discontinued operations. Investing activities provided $737.1 million and financing activities used $621.9 million; cash increased $118.9 million.
Material changes and unusual items
- A $16 million commercial loan participation was charged off in September following a default involving potential borrower fraud. Management said it reduced third-quarter adjusted EPS by $0.23. Excluding this charge-off, adjusted EPS was $0.69, versus $0.72 a year earlier.
- Other credit indicators were mixed: nonperforming assets were 0.28% of assets; criticized loans increased to $284.7 million from $189.1 million at year-end. Management said other credit performance remained generally favorable and the criticized-loan increase did not indicate a significant increase in expected losses.
- SIFI added 23 branches and approximately $1.7 billion of assets. Consideration was primarily 5.7 million Berkshire shares; goodwill of $36 million and core deposit intangibles of $18 million were recorded. The purchase-price allocation remained provisional.
- The company is pursuing a strategic shift toward relationship banking, exiting indirect auto lending, reducing selected lower-return assets and wholesale funding, and conducting efficiency measures. It repurchased 910,000 shares for $28 million through September 30 under a 2.4 million-share authorization.
- FCLS generated $2.0 million of discontinued-operations net income in the quarter and $2.8 million year to date. Its sale was expected within 12 months of the decision to pursue a sale; timing and sale proceeds were not specified.
Outlook, management commentary and risks
- Management expected to complete SIFI integration and record remaining merger costs in the fourth quarter of 2019, while remaining within the estimated $29 million total pretax transaction-cost target. It targeted approximately $12 million of annual SIFI cost savings, or about 30% of SIFI’s reported 2018 non-interest expense, with savings expected by year-end 2019. The acquisition was expected to become EPS-accretive after cost savings were completed.
- Management cited deposit-cost pressure, a lower net interest margin and potentially declining purchase-accounting accretion as profitability headwinds. It estimated that forward interest-rate expectations could continue to pressure margin.
- The company planned to adopt CECL on January 1, 2020. Management expected an increase in the credit-loss allowance and a negative retained-earnings adjustment, but had not provided a clear quantitative estimate of the impact.
- Interest-rate modeling showed net interest income up 5% under a 200-basis-point upward rate ramp, but down 6% under a 100-basis-point decline and 12% under a 200-basis-point decline, compared with an unchanged-rate baseline. Management cautioned that actual market behavior may differ from model assumptions.
- Risks include execution of strategic changes and merger savings, the potential costs or losses associated with selling FCLS, credit deterioration, interest-rate and deposit competition, and market and regulatory conditions. A $3 million class-action settlement accrual was recorded; other disclosed litigation was being contested. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm issuer identity: this filing is for Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
- Track credit developments related to the $16 million charge-off, criticized loans, acquired credit-impaired loans and the allowance following CECL adoption.
- Assess whether SIFI integration, targeted cost savings and the remaining merger expenses meet management’s stated expectations.
- Monitor the FCLS sale process, proceeds, timing and any additional costs or impairment.
- Evaluate deposit pricing, net interest margin and sensitivity to falling rates against management’s scenarios.
- Review the reported cash-flow distinction between continuing and discontinued operations, as total operating cash flow was substantially lower than continuing-operations cash flow.