Berkshire Hills Bancorp(BHLB) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) The unaudited consolidated financial statements present the company's financial position, operations, and cash flows, with total assets increasing to $12.14 billion and nine-month net income rising to $71.0 million Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $12,139,953 | $11,662,864 | | Net Loans | $8,881,585 | $8,239,039 | | Total Deposits | $9,980,544 | $10,327,269 | | Total Liabilities | $11,188,944 | $10,708,802 | | Total Shareholders' Equity | $951,009 | $954,062 | Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $90,334 | $92,084 | $280,626 | $242,505 | | Provision for Credit Losses | $8,000 | $3,000 | $24,999 | ($1,000) | | Net Income | $19,545 | $18,717 | $71,043 | $62,028 | | Diluted EPS | $0.45 | $0.42 | $1.63 | $1.34 | Consolidated Statements of Cash Flows Highlights (Nine Months Ended, in thousands) | Cash Flow Category | September 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $104,706 | $88,227 | | Net Cash (Used) by Investing Activities | ($497,083) | ($922,467) | | Net Cash Provided by (Used in) Financing Activities | $412,262 | ($98,654) | | Net Change in Cash and Cash Equivalents | ($21,885) | ($932,894) | Notes to Consolidated Financial Statements The notes detail accounting policies and financial statement breakdowns, revealing significant unrealized losses in the securities portfolio, growth in loans, increased credit loss allowance, a shift to higher-cost deposits, substantial FHLB borrowings, and capital ratios above regulatory minimums - The company adopted ASU No. 2022-02 regarding Troubled Debt Restructurings and Vintage Disclosures, which did not have a material impact on the financial statements[78][107] Securities Portfolio Summary (Amortized Cost, in thousands) | Security Type | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Securities available for sale | $1,538,851 | $1,661,196 | | Securities held to maturity | $552,981 | $583,453 | - The company holds significant unrealized losses in its AFS and HTM portfolios but expects to recover the amortized cost basis and does not intend to sell these securities before recovery[119][140] Loan Portfolio Composition (in thousands) | Loan Category | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Commercial (CRE, C&I, Construction) | $5,791,594 | $5,521,502 | | Residential real estate | $2,729,411 | $2,312,447 | | Consumer (Home equity, other) | $463,372 | $501,360 | | Total Loans | $8,984,377 | $8,335,309 | - The Allowance for Credit Losses on Loans (ACLL) increased to $102.8 million at September 30, 2023, from $96.3 million at year-end 2022, with the allowance as a percentage of total loans at 1.14%[412][471] - Total borrowings increased significantly to $925.6 million from $125.5 million at year-end 2022, primarily due to a $670 million increase in short-term FHLB advances[210][237] Regulatory Capital Ratios (Company, Consolidated) | Ratio | September 30, 2023 | Minimum Requirement | | :--- | :--- | :--- | | Common equity tier 1 capital | 12.1% | 4.5% | | Tier 1 capital | 12.3% | 6.0% | | Total capital | 14.4% | 8.0% | | Tier 1 leverage | 9.8% | 4.0% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes Q3 2023 results to a challenging interest rate environment, with declining net interest income and margin due to rising funding costs, strong loan growth funded by increased borrowings, higher provision for credit losses, and rising operating expenses, while maintaining strong capital and liquidity Q3 2023 vs Q3 2022 Performance | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income (GAAP) | $19.5M | $18.7M | +4.3% | | Diluted EPS (GAAP) | $0.45 | $0.42 | +7.1% | | Operating Income (Non-GAAP) | $21.5M | $27.9M | -22.9% | | FTE Net Interest Income | $92.3M | $93.8M | -1.6% | | Net Interest Margin (FTE) | 3.18% | 3.48% | -30 bps | - The decrease in net interest margin was driven by a 149 basis point increase in the cost of funding liabilities, which outpaced the 128 basis point increase in the yield on earning assets[42][434] - Total assets grew by $477 million since year-end 2022, primarily from a $649 million increase in loans, funded by an $800 million increase in borrowings offsetting a $347 million decrease in deposits[439][452] - The provision for credit losses was $8.0 million in Q3 2023, up from $3.0 million in Q3 2022, mainly reflecting growth in the loan portfolio[412][435] - The company's effective tax rate for Q3 2023 was 16.1%, down from 20.9% in Q3 2022, due to increased benefits from tax credit investments[450] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is Interest Rate Risk, with its profile shifting to modestly liability sensitive as of September 30, 2023, where a 100 basis point upward rate shift would decrease net interest income by 1.5% and economic value of equity by 2.9% - The company has shifted from a modestly asset-sensitive position at year-end 2022 to a modestly liability-sensitive position as of September 30, 2023[496] Net Interest Income (NII) Sensitivity Analysis | Parallel Interest Rate Shock (bps) | Estimated % Change in NII (Sep 30, 2023) | Estimated % Change in NII (Dec 31, 2022) | | :--- | :--- | :--- | | +200 | (3.1)% | 1.8% | | +100 | (1.5)% | 0.8% | | -100 | 1.2% | (1.6)% | Economic Value of Equity (EVE) Sensitivity Analysis | Parallel Rate Shock (bps) | Estimated % Change in EVE (Sep 30, 2023) | Estimated % Change in EVE (Dec 31, 2022) | | :--- | :--- | :--- | | +200 | (6.0)% | 0.0% | | +100 | (2.9)% | 0.0% | | -100 | 2.6% | (1.5)% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The principal executive and financial officers concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023[13] - No material changes to the Company's internal control over financial reporting occurred during the third quarter of 2023[489] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not involved in any material pending legal proceedings, though two non-material cases are disclosed: a wrongful termination suit proceeding to arbitration and a $16.0 million complaint against Pioneer Bank for alleged breaches of loan participation agreements - Management does not believe any pending legal proceedings are material to the Company's financial condition or results of operations[499] - A wrongful termination complaint by a former employee of subsidiary FCLS was dismissed by the court in favor of compelling arbitration, which is expected in the second half of 2023[9] - The Bank is in litigation with Pioneer Bank, seeking damages of approximately $16.0 million related to alleged breaches of loan participation agreements, with the Company writing down the credit loss in 2019 but recognizing a partial recovery of $1.7 million in 2020[14] Item 1A. Risk Factors No new risk factors are disclosed in this report, with the company referring to those previously detailed in its 2022 Annual Report on Form 10-K and subsequent 10-Q filings - The report directs readers to the risk factors detailed in the Company's 2022 Annual Report on Form 10-K and subsequent 10-Q filings, indicating no material changes or additions in this period[15][500] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities During Q3 2023, the company had no unregistered security sales and repurchased 178,747 shares at an average price of $20.02, with 1,687,014 shares remaining available under the $50 million repurchase program - No unregistered securities were sold during the three months ended September 30, 2023[10] Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Maximum Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | | July 1-31, 2023 | 7,821 | $20.36 | 1,857,940 | | August 1-31, 2023 | — | — | 1,857,940 | | September 1-30, 2023 | 170,926 | $20.00 | 1,687,014 | | Total | 178,747 | $20.02 | 1,687,014 | - On January 25, 2023, the Board of Directors approved a stock repurchase program authorizing up to $50 million in share repurchases through December 31, 2023[17] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None[19] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[20] Item 5. Other Information During the third quarter of 2023, none of the company's directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or any non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted or terminated any Rule 10b5-1(c) trading plans or other non-Rule 10b5-1 trading arrangements during the third quarter of 2023[18] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Certificate of Incorporation, Bylaws, CEO and CFO certifications pursuant to the Sarbanes-Oxley Act, and financial statements formatted in Inline XBRL - The exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and financial statements formatted in Inline XBRL[21][24] Signatures The report was duly signed on November 9, 2023, by Nitin J. Mhatre, President and Chief Executive Officer, and R. David Rosato, Senior Executive Vice President and Chief Financial Officer - The report was duly signed on November 9, 2023, by Nitin J. Mhatre, President and Chief Executive Officer, and R. David Rosato, Senior Executive Vice President and Chief Financial Officer[23][34][504]