Berkshire Hills Bancorp(US:BHLB)2023-05-09 16:00PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Berkshire Hills Bancorp, Inc. as of March 31, 2023, and for the three months then ended, compared with prior periods. It includes the Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Changes in Shareholders' Equity, and Cash Flows, along with detailed notes covering the basis of presentation, accounting policies, and specific financial statement line items Consolidated Balance Sheets Total assets reached $12.32 billion by March 31, 2023, primarily due to increased cash and net loans, with liabilities rising from higher borrowings and shareholders' equity improving to $995.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $12,319,976 | $11,662,864 | | Total cash and cash equivalents | $1,006,562 | $685,355 | | Net loans | $8,583,976 | $8,239,039 | | Total securities | $2,045,778 | $2,033,436 | | Total Liabilities | $11,324,496 | $10,708,802 | | Total deposits | $10,067,545 | $10,327,269 | | Total borrowings | $1,025,571 | $125,509 | | Total Shareholders' Equity | $995,480 | $954,062 | Consolidated Statements of Income For the three months ended March 31, 2023, the company reported net income of $27.6 million, a significant increase from $20.2 million in the same period of 2022, driven by a substantial rise in net interest income despite higher provision for credit losses Income Statement Summary (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Interest Income | $97,533 | $69,063 | | Provision for Credit Losses | $8,999 | ($4,000) | | Total Non-interest Income | $16,606 | $20,681 | | Total Non-interest Expense | $71,955 | $68,550 | | Net Income | $27,637 | $20,196 | | Diluted EPS | $0.63 | $0.42 | Consolidated Statements of Comprehensive Income/(Loss) Total comprehensive income for Q1 2023 was $49.6 million, a significant turnaround from a $54.8 million loss in Q1 2022, driven by net income and positive other comprehensive income Comprehensive Income/(Loss) (in thousands) | Component | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income | $27,637 | $20,196 | | Other Comprehensive Income/(Loss) | $21,986 | ($74,994) | | Total Comprehensive Income/(Loss) | $49,623 | ($54,798) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $995.5 million by March 31, 2023, primarily due to comprehensive income, partially offset by cash dividends and share repurchases - Key drivers of the change in shareholders' equity in Q1 2023 were net income of $27.6 million and other comprehensive income of $22.0 million344 - The company declared cash dividends of $0.18 per share, totaling $8.0 million344 - Treasury shares were repurchased for $1.2 million during the quarter344 Consolidated Statements of Cash Flows Net cash increased by $321.2 million in Q1 2023, driven by significant cash provided by financing activities, which offset cash used in investing activities for loan growth Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $37,314 | $13,351 | | Net cash from investing activities | ($339,993) | ($672,075) | | Net cash from financing activities | $623,886 | $638,168 | | Net change in cash | $321,207 | ($20,556) | Notes to Consolidated Financial Statements (Unaudited) The notes detail accounting policies and financial data, covering securities, loans, deposits, borrowings, derivatives, leases, capital ratios, EPS, stock compensation, and fair value measurements - Effective January 1, 2023, the Company adopted ASU No. 2022-02, which eliminated the troubled debt restructuring (TDR) accounting model and enhanced disclosure requirements for loan restructurings for borrowers in financial difficulty372396 - The company's allowance for credit losses on loans (ACLL) methodology uses a static pool migration analysis over a 7-quarter forecast period with a 1-year reversion, supplemented by qualitative factors425 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial performance, highlighting increased net income driven by net interest income growth and margin expansion, alongside analysis of financial condition, liquidity, and capital resources - Q1 2023 net income was $27.6 million ($0.63/share), up from $20.2 million ($0.42/share) in Q1 2022, driven by loan growth, higher interest rates, expense control, and share repurchases230 - The net interest margin expanded by 97 basis points year-over-year to 3.58% in Q1 2023, benefiting from a positive interest rate sensitivity profile209212 - The provision for credit losses was an expense of $9.0 million in Q1 2023, compared to a $4.0 million benefit in Q1 2022, reflecting loan growth and a changed economic outlook210217 - Total assets grew by $657 million during the quarter to $12.3 billion, primarily due to a $321 million increase in cash and a $347 million increase in loans, funded mainly by a $900 million increase in borrowings265266 Comparison of Operating Results (Q1 2023 vs. Q1 2022) Q1 2023 operating results improved significantly year-over-year, with FTE net interest income rising to $99.4 million and the efficiency ratio improving to 59.5%, despite increased non-interest expenses Key Performance Metrics (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | FTE Net Interest Income | $99.4M | $70.6M | | Net Interest Margin (FTE) | 3.58% | 2.61% | | Non-Interest Income | $16.6M | $20.7M | | Non-Interest Expense | $72.0M | $68.6M | | Efficiency Ratio | 59.51% | 72.61% | - The increase in FTE net interest income was driven by a $57.5 million rise in interest income, partially offset by a $29.0 million increase in interest expense, reflecting the higher interest rate environment213 - The cost of total funding liabilities increased by 113 basis points to 1.36%, reflecting higher market rates and a shift in deposit mix240 Comparison of Financial Condition (Mar 31, 2023 vs. Dec 31, 2022) The company's financial condition strengthened by March 31, 2023, with total assets growing to $12.3 billion, funded by increased borrowings, while loans expanded and shareholders' equity improved - Total loans increased by $347 million during the quarter, with commercial loans up $216 million and retail loans up $131 million246247268 - Total deposits decreased by $260 million to $10.1 billion, reflecting customer utilization of excess liquidity and shifts to higher-yielding investments270 - Borrowings increased by $900 million to $1.0 billion, primarily through FHLB advances to fortify liquidity252 - The allowance for credit losses to total loans ratio was 1.13% at March 31, 2023, compared to 1.15% at year-end 2022248 Liquidity and Capital Resources The company maintained strong liquidity and capital, bolstering cash with FHLB borrowings and holding capital ratios well above regulatory minimums, while returning capital to shareholders - The company views its liquidity as satisfactory for current conditions and stressed scenarios, with total unused borrowing capacity of $3.1 billion from the FHLBB and FRB, plus $519 million from correspondent banks273274 Key Capital Ratios | Ratio | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.1% | 12.4% | | Total Risk-Based Capital | 14.4% | 14.6% | | Tier 1 Capital Leverage | 9.9% | 10.2% | - The company's capital management goal is to maintain a 'well-capitalized' status while supporting organic growth and shareholder distributions296 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages Interest Rate Risk (IRR) through NII and EVE simulations, showing a modest asset-sensitive NII profile and modest negative EVE sensitivity, with no significant change in the modeled IRR profile Estimated % Change in Net Interest Income (NII) at Risk (1-Year) | Parallel Rate Shock (bps) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | +200 | 1.6% | 1.8% | | +100 | 0.8% | 0.8% | | -100 | (1.3%) | (1.6%) | Estimated % Change in Economic Value of Equity (EVE) at Risk | Parallel Rate Shock (bps) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | +200 | (1.9%) | — | | +100 | (0.9%) | — | | -100 | (0.3%) | (1.5%) | - The NII simulation results indicate a modest asset-sensitive position to parallel rate shocks, with falling rate exposure declining due to upward pressure on deposit costs290 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The principal executive officers concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023312 - No changes occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting329 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in legal proceedings, including a $16.0 million lawsuit against Pioneer Bank and an arbitration with a former employee, none of which are deemed material to financial condition - The Bank is in litigation with Pioneer Bank, seeking ~$16.0 million in damages for alleged breaches of loan participation agreements. Discovery is ongoing314 - A former employee of subsidiary FCLS has filed a complaint for wrongful termination, which is proceeding to arbitration in the second half of 2023332 Item 1A. Risk Factors A new material risk factor highlights the systemic impact of recent bank failures, causing market volatility and increased scrutiny on liquidity, deposits, and capital, potentially adversely affecting the company - Recent failures of other banks (Silvergate, Silicon Valley Bank, Signature Bank, First Republic Bank) have created a new systemic risk317 - The company's stock price and financial condition may be negatively impacted by volatility and negative depositor confidence in the banking sector, with increased scrutiny on liquidity, uninsured deposits, and capital295318 - Banking regulators are expected to increase premiums for FDIC deposit insurance and may implement stricter regulatory requirements, which could materially impact the business334 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company had no unregistered equity sales in Q1 2023 but repurchased 47,275 shares at $25.17 each, with approximately 1.95 million shares remaining authorized under the program Share Repurchases in Q1 2023 | Period | Total Shares Purchased | Average Price Paid | Shares Remaining in Program | | :--- | :--- | :--- | :--- | | Jan 2023 | — | — | 1,995,211 | | Feb 2023 | — | — | 1,995,211 | | Mar 2023 | 47,275 | $25.17 | 1,947,936 | | Total | 47,275 | $25.17 | 1,947,936 | - On January 25, 2023, the Board approved a stock repurchase program authorizing up to $50 million in repurchases through December 31, 2023321 Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - There were no defaults upon senior securities during the reporting period335 Item 4. Mine Safety Disclosures This disclosure item is not applicable to the company's operations - This item is not applicable to the company322 Item 5. Other Information No additional information is reported under this item - There is no other information to report for this item323 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, Sarbanes-Oxley certifications, and Inline XBRL financial statements - The report includes standard corporate governance documents, Sarbanes-Oxley certifications (302 and 906), and Inline XBRL data files as exhibits337 Signatures