Berkshire Hills Bancorp(BHLB) - 2023 Q2 - Quarterly Report

Part I Consolidated Financial Statements (unaudited) Unaudited consolidated financial statements conform to US GAAP, include all necessary adjustments, and reflect the non-material impact of ASU No. 2022-02 adoption - Interim financial statements are prepared under US GAAP and should be read with the 2022 Annual Report on Form 10-K[331][351][352] - Effective January 1, 2023, the Company adopted ASU No. 2022-02, eliminating the TDR accounting model, which did not materially impact financial statements[354][379] Note 1. Basis of Presentation Consolidated financial statements are prepared under US GAAP, include all necessary adjustments, and reflect the non-material impact of ASU No. 2022-02 adoption - The financial statements consolidate the Company and its subsidiaries, eliminating all significant intercompany transactions[351] - The adoption of ASU No. 2022-02 on January 1, 2023, eliminated the TDR accounting model without materially affecting the Company's financial statements[354][379] Note 2. Trading Securities The Company holds a single tax-advantaged economic development bond as a trading security, hedged with an interest rate swap to mitigate risk Trading Security Details (in thousands) | Date | Amortized Cost | Fair Value | | :--- | :--- | :--- | | June 30, 2023 | $6,600 | $6,400 | | December 31, 2022 | $7,100 | $6,700 | - The Company entered into a swap contract to convert the fixed rate of the trading security into a variable rate as a risk management strategy[358] Note 3. Securities Available for Sale, Held to Maturity, and Equity Securities The securities portfolio includes $1.34 billion AFS and $0.56 billion HTM, with unrealized losses primarily from interest rate changes, not credit deterioration Securities Portfolio Summary as of June 30, 2023 (in thousands) | Security Type | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :--- | :--- | :--- | :--- | :--- | | Available for Sale | $1,578,544 | $404 | ($238,617) | $1,340,331 | | Held to Maturity | $563,765 | $408 | ($76,213) | $487,960 | | Marketable Equity | $15,035 | $— | ($2,167) | $12,868 | Securities with Unrealized Losses by Duration as of June 30, 2023 (in thousands) | Duration of Loss | Gross Unrealized Losses | Fair Value | | :--- | :--- | :--- | | AFS Securities | | | | Less Than Twelve Months | $52,392 | $1,257,842 | | Over Twelve Months | $235,691 | $1,310,234 | | HTM Securities | | | | Less Than Twelve Months | $123,807 | $288,625 | | Over Twelve Months | $72,794 | $412,432 | - The Company does not intend to sell securities in an unrealized loss position and anticipates it will not be required to sell them before recovery of the amortized cost basis, supported by the company's strong capital and liquidity[423] - Unrealized losses in the AFS and HTM portfolios are primarily driven by changes in market interest rates rather than credit deterioration, with contractual cash flows of all mortgage-backed securities guaranteed by FNMA, FHLMC, and GNMA[367][370][392] Note 4. Loans and Allowance for Credit Losses Total loans grew to $8.88 billion, with ACLL at $100.2 million or 1.13%, based on a static pool migration analysis and qualitative factors Total Loans (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Construction | $443,856 | $319,452 | | Commercial multifamily | $597,472 | $620,088 | | Commercial real estate owner occupied | $696,771 | $640,489 | | Commercial real estate non-owner occupied | $2,557,036 | $2,496,237 | | Commercial and industrial | $1,438,062 | $1,445,236 | | Residential real estate | $2,677,053 | $2,312,447 | | Home equity | $225,434 | $227,450 | | Consumer other | $246,718 | $273,910 | | Total loans | $8,882,402 | $8,335,309 | Allowance for Credit Losses on Loans (ACLL) Activity - Six Months Ended June 30, 2023 (in thousands) | | Amount | | :--- | :--- | | Balance at Beginning of Period | $96,270 | | Adoption of ASU No. 2022-02 | ($401) | | Charge-offs | ($15,621) | | Recoveries | $2,952 | | Provision for Credit Losses | $17,019 | | Balance at End of Period | $100,219 | - The Allowance for Credit Losses for Loans (ACLL) is management's estimate of expected credit losses over the life of the loans, using a static pool migration analysis, a 7-quarter forecast period, and qualitative overlays[12] Loans Past Due Status as of June 30, 2023 (in thousands) | Days Past Due | Amount | | :--- | :--- | | 30-59 Days | $9,219 | | 60-89 Days | $5,928 | | 90+ Days | $36,200 | | Total Past Due | $51,347 | | Current | $8,831,055 | | Total Loans | $8,882,402 | Note 5. Deposits Total time deposits increased to $2.44 billion from $1.63 billion, with significant growth in the $100,000 to $250,000 tranche Time Deposits Breakdown (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Time less than $100,000 | $669,592 | $549,265 | | Time $100,000 through $250,000 | $1,102,571 | $642,600 | | Time more than $250,000 | $663,455 | $441,842 | | Total time deposits | $2,435,618 | $1,633,707 | Note 6. Borrowed Funds Total borrowed funds significantly increased to $795.6 million, driven by FHLB advances, with $3.6 billion in total available borrowing capacity Borrowed Funds Summary (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Short-term borrowings | $470,000 | $— | | FHLB Advances | $470,000 | $— | | Long-term borrowings | $325,583 | $125,509 | | FHLB Advances and other | $204,345 | $4,445 | | Subordinated borrowings | $121,238 | $121,064 | | Total Borrowings | $795,583 | $125,509 | - The Bank's available borrowing capacity was $2.2 billion with the FHLB and $1.4 billion with the Federal Reserve Bank as of June 30, 2023[456][483] - In June 2022, the Company issued $100.0 million in ten-year subordinated notes with a fixed rate of 5.50% for the first five years, after which it becomes callable and switches to a floating rate[486] Note 7. Derivative Financial Instruments and Hedging Activities The Company held $4.5 billion in derivatives, including cash flow and economic hedges, to mitigate interest rate risk, with a net fair value liability of $41.9 million Derivative Portfolio Summary as of June 30, 2023 (in thousands) | Derivative Type | Notional Amount | Estimated Fair Value (Asset/(Liability)) | | :--- | :--- | :--- | | Cash flow hedges | $800,000 | $1,495 | | Interest rate swaps | $600,000 | $714 | | Interest rate collars | $200,000 | $781 | | Economic hedges | $3,730,449 | ($43,452) | | Non-hedging derivatives | $9,369 | $37 | | Total | $4,539,818 | ($41,920) | - The Company uses interest rate swaps as cash flow hedges to convert variable-rate commercial loans to fixed rates, protecting against interest rate variability[492] - Economic hedges are used to facilitate customer needs, such as converting a variable-rate loan to a fixed rate, with the Company entering into offsetting mirror-image derivatives with third-party institutions to hedge its own risk[494] - The Company is party to master netting arrangements with its financial institution counterparties, which provide for a single net settlement in the event of default, though assets and liabilities are not offset for presentation purposes[55] Note 8. Leases The Company's leases, primarily operating, had ROU assets of $54.2 million and liabilities of $63.3 million, with an 8.7-year weighted-average term Lease Assets and Liabilities (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Lease Right-of-Use Assets | | | | Operating lease ROU assets | $48,305 | $46,411 | | Finance lease ROU assets | $5,857 | $6,151 | | Total Lease ROU Assets | $54,162 | $52,562 | | Lease Liabilities | | | | Operating lease liabilities | $54,315 | $53,736 | | Finance lease liabilities | $8,979 | $9,306 | | Total Lease Liabilities | $63,294 | $63,042 | Weighted-Average Lease Term and Discount Rate | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Remaining Lease Term (years) | | | | Operating leases | 8.7 | 9.3 | | Finance leases | 11.3 | 11.8 | | Discount Rate | | | | Operating leases | 2.78% | 2.56% | | Finance leases | 5.00% | 5.00% | Note 9. Capital Ratios and Shareholders' Equity Both the Company and Bank exceeded all regulatory capital requirements, with the Bank 'well capitalized' and CET1 at 12.1%, despite increased AOCL Company (Consolidated) Capital Ratios | Ratio | June 30, 2023 | Dec 31, 2022 | Minimum Requirement | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital | 12.1% | 12.4% | 4.5% | | Tier 1 capital to risk-weighted assets | 12.3% | 12.6% | 6.0% | | Total capital to risk-weighted assets | 14.4% | 14.6% | 8.0% | | Tier 1 capital to average assets | 9.6% | 10.2% | 4.0% | - At June 30, 2023, the capital levels for both the Company and the Bank exceeded all regulatory requirements, including the 2.5% capital conservation buffer, with the Bank's ratios above the minimums to be considered 'well capitalized'[65][509] Changes in Accumulated Other Comprehensive Loss (AOCL) - Six Months Ended June 30, 2023 (in thousands) | Component | Beginning Balance | Other Comprehensive Loss | Ending Balance | | :--- | :--- | :--- | :--- | | Net unrealized loss on Securities | ($175,557) | ($717) | ($176,274) | | Net effective loss on cash flow hedging derivatives | ($4,878) | ($4,471) | ($9,349) | | Net unrealized loss on pension plans | ($617) | $— | ($617) | | Total AOCL | ($181,052) | ($5,188) | ($186,240) | Note 10. Earnings per Share For H1 2023, basic and diluted EPS were $1.18 and $0.92 respectively, with anti-dilutive stock awards excluded from diluted EPS calculation Earnings Per Share Calculation (Six Months Ended) | (in thousands, except per share data) | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $51,498 | $43,311 | | Average basic shares outstanding | 43,564 | 46,733 | | Dilutive effect of stock awards/options | 216 | 341 | | Average diluted shares outstanding | 43,780 | 47,074 | | Basic EPS | $1.18 | $0.93 | | Diluted EPS | $1.18 | $0.92 | - For the six months ended June 30, 2023, 563 thousand shares of unvested restricted stock and 49 thousand outstanding options were anti-dilutive and excluded from the EPS calculation[102] Note 11. Stock-Based Compensation Plans Stock-based compensation expense was $3.5 million for H1 2023, with 392,000 non-vested awards granted and 178,000 shares vested Stock Award and Option Activity (Shares in thousands) | | Non-Vested Stock Awards | Stock Options | | :--- | :--- | :--- | | Balance at Dec 31, 2022 | 704 | 49 | | Granted | 392 | — | | Vested | (178) | — | | Forfeited | (49) | — | | Balance at June 30, 2023 | 869 | 49 | - Stock-based compensation expense was $3.5 million for the six months ended June 30, 2023, compared to $3.9 million for the same period in 2022[519] Note 12. Fair Value Measurements The Company uses a fair value hierarchy, with most instruments valued using Level 2 inputs, and Level 3 inputs for certain assets like capitalized servicing rights Recurring Fair Value Measurements as of June 30, 2023 (in thousands) | Category | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Trading securities | $— | $— | $6,708 | $6,708 | | Securities available for sale | $11,973 | $1,324,335 | $4,000 | $1,340,308 | | Derivative assets | $— | $54,216 | $25 | $54,241 | | Liabilities | | | | | | Derivative liabilities | $— | $97,030 | $— | $97,030 | - Level 1 inputs are quoted prices in active markets, Level 2 inputs are based on models using standard factors like dealer quotes and yield curves, and Level 3 inputs are unobservable to market participants[134][520] - Non-recurring fair value adjustments are periodically recorded for certain assets, such as collateral-dependent loans, based on the fair value of underlying collateral, generally classified as Level 3 due to significant judgment and unobservable data in appraisals[117][143] Non-Recurring Fair Value Measurements (Level 3) (in thousands) | Assets | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Individually evaluated loans | $5,773 | $14,571 | | Capitalized servicing rights | $11,223 | $11,201 | | Total | $16,996 | $29,141 | Note 13. Net Interest Income after Provision/(Benefit) for Credit Losses Net interest income increased to $190.3 million for H1 2023, with a $17.0 million provision for credit losses compared to a $4.0 million benefit in H1 2022 Net Interest Income & Provision Summary (in thousands) | | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net interest income | $190,292 | $150,421 | | Provision/(benefit) for credit losses | $16,999 | ($4,000) | | Net interest after provision | $173,293 | $154,421 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income rose to $51.5 million for H1 2023, driven by higher net interest income and expanded NIM, with strong capital and completed sustainability bond allocation - The company's vision is to be a leading socially responsible omni-channel community bank in New England and beyond, providing a range of banking, mortgage, and wealth management services[164] - The discussion and analysis should be read in conjunction with the consolidated financial statements in this report and the 2022 Annual Report on Form 10-K[190] Financial Overview Net income increased to $23.9 million in Q2 2023 and $51.5 million in H1 2023, driven by higher net interest income despite increased credit loss provisions Key Performance Metrics - Q2 2023 vs Q2 2022 | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Net Income (millions) | $23.9 | $23.1 | | Diluted EPS | $0.55 | $0.50 | | Return on Average Assets (GAAP) | 0.78% | 0.82% | | Return on Avg. Tangible Common Equity (Operating) | 8.27% | 8.48% | Key Performance Metrics - H1 2023 vs H1 2022 | Metric | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Net Income (millions) | $51.5 | $43.3 | | Diluted EPS | $1.18 | $0.92 | | Return on Average Assets (GAAP) | 0.86% | 0.76% | | Return on Avg. Tangible Common Equity (Operating) | 8.92% | 7.99% | Net Interest Income Net interest margin (FTE) expanded to 3.24% in Q2 2023 and 3.40% in H1 2023, driven by rising rates and loan growth funded by increased borrowings - The increase in net interest margin was attributed to reinvesting funds into higher-yielding loans and the positive impact of rising market interest rates, as the Federal Funds rate increased from 0.25% in Q1 2022 to 5.16% in Q2 2023[174][198] - In Q2 2023 vs Q2 2022, average earning assets increased by $998 million, driven by a $1.30 billion increase in average loans, funded by a $941 million increase in average funding liabilities, primarily a $1.13 billion increase in borrowings, which offset a $187 million decrease in average deposits[168][175][176] - Deposit mix shifted towards higher-cost time deposits, which grew to 24% of average deposits in Q2 2023 from 15% in Q2 2022, while non-interest-bearing deposits decreased from 30% to 27% of the mix[177][178] Provision for Credit Losses The Company recorded a $8.0 million provision for credit losses in Q2 2023 and $17.0 million in H1 2023, reflecting loan portfolio growth - The provision expense in 2023 was primarily driven by growth in the loan portfolio[220] - The provision benefit in 2022 reflected a notable improvement in pandemic-related expected credit losses[197][220] Non-Interest Income and Expense Non-interest income increased by $0.7 million in Q2 2023, while expenses rose by $5.6 million, yet the efficiency ratio improved to 63.6% due to revenue growth - Q2 2023 non-interest income increased due to higher deposit-related fees and commercial loan interest rate swap activity, partially offset by lower gains on SBA loan sales and wealth management fees[179] - Non-interest expense increased year-over-year due to hiring of frontline bankers, investments in technology to digitize the bank, and higher FDIC deposit insurance premiums, partially offset by lower occupancy costs from branch consolidation[221][222] - The efficiency ratio improved to 63.6% in Q2 2023 from 66.6% in Q2 2022, and 61.5% in H1 2023 from 69.5% in H1 2022, because operating revenue growth outpaced operating expense growth[170][223] Comparison of Financial Condition Total assets grew to $12.1 billion, driven by $547 million loan growth funded by increased borrowings, while nonaccrual loans decreased - Total assets grew by $427 million to $12.1 billion in the first half of 2023, primarily due to a $547 million increase in total loans[207] - Total liabilities increased by $408 million, reflecting a $670 million increase in borrowings (mainly FHLB advances) that more than offset a $259 million decrease in total deposits[208][212] - Nonaccrual loans decreased by $2.7 million to $28.4 million during the first half of 2023, and the allowance for credit losses as a percentage of nonaccrual loans improved to 353% from 309% at year-end 2022[225] Shareholders' Equity, Capital Resources, and Liquidity Shareholders' equity increased to $973 million, supported by net income, with strong liquidity and capital ratios exceeding regulatory requirements - Shareholders' equity increased by $19 million to $973 million in H1 2023, driven by $51 million in net income, offset by $16 million in dividends and $14 million in share repurchases[257] - The Company's long-term goal is to maintain an efficient capital structure, support organic growth, and provide shareholder returns through dividends and stock repurchases[236][260] - The Company has strong liquidity, with $0.6 billion in cash, $1.3 billion in AFS securities, and $3.6 billion in unused borrowing capacity from the FHLB and Federal Reserve Bank as of June 30, 2023[214][259] - The Company manages capital based on regulatory ratios, focusing on the Common Equity Tier 1 (CET1) ratio, and excludes changes in Accumulated Other Comprehensive Income (AOCI) from regulatory capital calculations[261][262] Environmental, Social, Governance (ESG) Berkshire integrates ESG, fully allocated its $100 million Sustainability Bond to green buildings, affordable housing, and financial inclusion, and maintains a top-quartile ESG rating - The company was one of the first U.S. banks to establish a dedicated Board committee for ESG and the first community bank holding company under $150 billion in assets to issue a Sustainability Bond[241] - The company completed the allocation of its $100 million sustainability bond, with proceeds funding green buildings, affordable/workforce housing, and financial access/inclusion projects[243][268][269] - Berkshire maintained its top quartile ESG rating and received the LGBT Corporate Ally Award from the Boston Business Journal[270] NON-GAAP FINANCIAL MEASURES The Company uses non-GAAP measures like operating earnings to provide supplemental performance insights, excluding non-recurring items for better trend analysis - Management uses non-GAAP measures to evaluate operating trends by excluding items like restructuring costs and, in prior periods, certain fair value adjustments, which they believe facilitates comparison with peers[129][158][186] Reconciliation of GAAP to Non-GAAP Net Income (in thousands) | | H1 2023 | H1 2022 | | :--- | :--- | :--- | | GAAP Net income | $51,498 | $43,311 | | Adj: Fair value adjustments on securities | — | $1,718 | | Adj: Restructuring and other expense | ($15) | $53 | | Adj: Income taxes | $3 | ($731) | | Total operating income (non-GAAP) | $51,486 | $44,351 | Quantitative and Qualitative Disclosures about Market Risk The Company manages Interest Rate Risk (IRR) using NII and EVE simulations, showing a neutral risk profile as of June 30, 2023, due to portfolio shifts - The company's main market risk is Interest Rate Risk (IRR) resulting from its core business of making loans and accepting deposits, managed using Net Interest Income (NII) at Risk and Economic Value of Equity (EVE) at Risk simulations[246][289] Estimated Percent Change in Net Interest Income (NII) | Rate Shock (bps) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | +200 | (0.3)% | 1.8% | | +100 | (0.3)% | 0.8% | | -100 | (0.5)% | (1.6)% | | -200 | (2.5)% | (5.2)% | Estimated Percent Change in Economic Value of Equity (EVE) | Rate Shock (bps) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | +200 | (3.1)% | —% | | +100 | (1.5)% | —% | | -100 | 0.4% | (1.5)% | | -200 | (1.0)% | (5.4)% | - The NII risk profile shifted from modestly asset sensitive at year-end 2022 to a neutral interest rate risk profile by June 30, 2023, due to growth in the residential mortgage portfolio and a shift in deposit mix towards interest-bearing accounts[274] Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the last quarter - The principal executive and financial officers concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report[277] - No changes occurred in the Company's internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls[252] Part II Legal Proceedings The Company is not involved in material legal proceedings but is actively defending a $16.0 million lawsuit against Pioneer Bank and an arbitration with a former employee - The Bank filed a complaint against Pioneer Bank seeking approximately $16.0 million in damages related to alleged breaches of loan participation agreements, with the case ongoing and discovery in progress[297] - A former employee of subsidiary FCLS filed a complaint alleging wrongful termination, with the case compelled to arbitration, expected to occur in the second half of 2023[279] Risk Factors Stakeholders should review risk factors in the Company's Annual Report on Form 10-K and subsequent quarterly reports, as unforeseen risks may arise - Readers are directed to review the risk factors set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and subsequent quarterly reports[280] Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities The Company repurchased 580,730 shares at $21.16 average price in Q2 2023 under a $50 million program, with 1.8 million shares remaining Issuer Purchases of Equity Securities - Q2 2023 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | Max Shares Remaining Under Program | | :--- | :--- | :--- | :--- | :--- | | April 1-30, 2023 | 208,563 | $22.42 | 208,563 | 2,156,125 | | May 1-31, 2023 | 317,562 | $20.24 | 317,562 | 1,838,563 | | June 1-30, 2023 | 54,605 | $21.68 | 54,605 | 1,783,958 | | Total | 580,730 | $21.16 | 580,730 | 1,783,958 | - On January 25, 2023, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $50 million of common stock through December 31, 2023[301] Exhibits This section lists exhibits, including corporate documents, stock certificates, CEO/CFO certifications, and financial statements in Inline XBRL format - The report includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[286] - Financial statements from the Form 10-Q are provided in Inline XBRL format[286]