Beacon Financial Corp quarterly report, Q3 FY2017

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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, 2017. The filing identifies Berkshire Hills Bancorp—not Beacon Financial Corp—as the registrant, so the company identity in the request metadata does not match the filing.

Berkshire is a regional bank and financial-services company headquartered in Massachusetts. Its strategy emphasized organic growth, acquisitions, and expansion in Boston and eastern Massachusetts. The October 13, 2017 Commerce Bancshares acquisition occurred after quarter-end and is described as a subsequent event.

Financial results and condition

  • Third quarter: Net revenue was $100.8 million, up 31% year over year; net income was $22.9 million, up 40%; diluted EPS was $0.57 versus $0.53. Net interest income was $72.0 million, and net interest margin was 3.36% on a fully taxable-equivalent basis.
  • First nine months: Net revenue was $304.8 million, up 37%; net income was $58.1 million, up 20%. Diluted EPS was $1.54 versus $1.57, while adjusted diluted EPS, a non-GAAP measure, increased to $1.71 from $1.64.
  • Profitability and costs: Third-quarter return on assets was 0.95% and the efficiency ratio was 59.3% (both reported ratios are annualized where applicable). Non-interest expense was $65.8 million for the quarter and $209.7 million year to date. Management estimated a 55% efficiency ratio excluding mortgage banking.
  • Credit: The nine-month provision for loan losses was $14.9 million versus $13.3 million. The allowance was $49.0 million, or 0.71% of loans. Non-performing assets were 0.23% of assets; annualized net charge-offs were 0.20% of average loans year to date. Criticized loans were 1.3% of total assets.
  • Balance sheet at September 30: Assets were $9.77 billion, loans $6.95 billion, deposits $6.79 billion, borrowings $1.49 billion, and shareholders’ equity $1.28 billion. Since December 31, 2016, total loans increased $398 million and deposits increased $168 million; total borrowings increased $175 million. Loans-to-deposits was 102%.
  • Liquidity and cash flow: Cash and cash equivalents were $92.0 million, down from $113.1 million at year-end. Nine-month operating cash flow was $56.1 million, investing cash outflow $550.1 million, and financing cash inflow $473.0 million, resulting in a $21.0 million decrease in cash. The Bank reported $766 million of FHLB borrowing availability at quarter-end.
  • Capital: Consolidated total risk-based capital was 14.3%; the Bank’s was 11.7%. Both exceeded applicable well-capitalized regulatory minimums. A May stock offering generated $153 million net proceeds.

Material changes versus the prior comparable period

  • Quarterly net interest margin rose to 3.36% from 3.27%, which management attributed mainly to higher short-term rates and asset sensitivity. Management said most benefit from recent rate increases had been absorbed.
  • Fee income rose 70% in the quarter and 89% year to date, primarily reflecting acquired mortgage-banking operations; mortgage banking originations income increased substantially from the prior year.
  • Growth in revenue and expenses largely reflected 2016 acquisitions and business expansion. Year-to-date expenses included $16.0 million of acquisition, restructuring, and other costs. Increased share count from prior acquisition consideration and the May 2017 stock offering affected per-share comparisons.
  • Loan growth was broad-based; commercial and industrial loans increased $193 million from year-end. Time deposits rose $240 million, while transaction and money-market balances partly offset that increase. Brokered deposits were $1.1 billion, versus $0.9 billion at year-end.

Outlook, commentary, risks, and unusual items

  • Commerce acquisition: Commerce added approximately $1.9 billion of assets, $1.4 billion of loans, and $1.7 billion of deposits at closing. Consideration was approximately $229 million in Berkshire common and preferred stock. Management cited targeted cost savings of about $8 million and expected $32 million of pre-tax transaction costs through planned integration in 2018; anticipated accretion is conditional on integration and realizing expected benefits.
  • The acquisition took the company above the $10 billion asset threshold, bringing additional regulatory and compliance requirements. Management expected Durbin Amendment changes to reduce card-related revenue by approximately $5 million annually beginning in the second half of 2018, and said acquisition benefits were expected to offset threshold-related effects.
  • Key risks include successful integration, retention of key employees, systems and payroll-processing continuity, realization of projected synergies, and valuation and collection of Commerce’s taxi-medallion loans. The filing also notes interest-rate, deposit-cost, credit, regulatory, and market risks.
  • Year-to-date unusual items included a $12.6 million net securities gain and a $6.6 million loss on termination of cash-flow hedges, as well as acquisition, restructuring, and other costs. Management’s adjusted results exclude specified items and are non-GAAP.
  • The filing reports a pending purported class action alleging Electronic Funds Transfer Act and Massachusetts consumer-protection violations; the company denies the allegations and is defending the case. Management stated that other pending matters were not believed, in aggregate, to have a material adverse effect.
  • No specific earnings or revenue guidance was provided. Forward-looking statements are subject to economic, competitive, interest-rate, regulatory, and integration uncertainties.

Important facts for investors to verify

  1. Confirm the intended issuer: the supplied filing is for Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
  2. Review Commerce’s post-close financial contribution, integration progress, actual transaction costs, and realization of targeted savings and earnings accretion.
  3. Assess credit quality trends, especially criticized and impaired loans, taxi-medallion exposure, charge-offs, and adequacy of the loan-loss allowance.
  4. Track deposit pricing, brokered-deposit reliance, borrowing levels, liquidity availability, and sensitivity of margins to further rate changes.
  5. Evaluate the effect of crossing the $10 billion threshold, including compliance costs and the expected card-fee reduction, against acquisition benefits.
  6. Distinguish GAAP results from adjusted non-GAAP measures and assess the effect of securities gains, hedge termination, acquisition costs, and share issuance on reported EPS.