BERKSHIRE HILLS BANCORP, INC.
SELECTED FINANCIAL DATA
The following summary data is based in part on the consolidated financial
statements and accompanying notes and other information appearing elsewhere in
this or prior Forms 10-Q.
At or for the At or for the
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
NOMINAL AND PER SHARE DATA
Net earnings per common share, diluted $ 0.50 $ 0.43 $ 0.92 $ 0.69
Adjusted earnings per common share, diluted (1)(2) 0.51 0.44 0.94 0.75
Net income, (thousands) 23,115 21,636 43,311 34,667
Adjusted net income, (thousands) (1)(2) 23,562 22,104 44,351 38,119
Total common shares outstanding, (thousands) 45,788 50,453 45,788 50,453
Average diluted shares, (thousands) 46,102 50,608 47,074 50,588
Total book value per common share 22.15 23.30 22.15 23.30
Tangible book value per common share (2) 21.56 22.66 21.56 22.66
Dividends per common share 0.12 0.12 0.24 0.24
Full-time equivalent staff, continuing operations 1,322 1,417 1,322 1,417
PERFORMANCE RATIOS (3)
Return on equity 7.82 % 7.37 % 7.31 % 5.95 %
Adjusted return on equity (1)(2) 7.97 7.53 7.49 6.54
Return on tangible common equity (1)(2) 8.33 7.92 7.81 6.46
Adjusted return on tangible common equity (1)(2) 8.48 8.08 7.99 7.07
Return on assets 0.82 0.70 0.76 0.56
Adjusted return on assets (1)(2) 0.84 0.71 0.78 0.61
Net interest margin, fully taxable equivalent (FTE) 3.11 2.62 2.86 2.62
(4)(5)
Efficiency ratio (1)(2) 66.60 67.82 69.48 69.60
FINANCIAL DATA (in millions, end of period)
Total assets $ 11,579 $ 12,273 $ 11,579 $ 12,273
Total earning assets 10,849 11,571 10,849 11,571
Total loans 7,803 7,233 7,803 7,233
Total deposits 10,115 9,914 10,115 9,914
Loans/deposits (%) 77 % 73 % 77 % 73 %
ASSET QUALITY
Allowance for credit losses, (millions) $ 99 $ 119 $ 99 $ 119
Net charge-offs, (millions) - (5) (3) (15)
Net charge-offs (QTD annualized)/average loans 0.02 % 0.26 % 0.08 % 0.39 %
Provision (benefit)/expense, (millions) $ -
$ - $ (4)
Non-accruing loans/total loans 0.34 % 0.66 % 0.34 % 0.66 %
Allowance for credit losses/non-accruing loans 368 250 368 250
Allowance for credit losses/total loans 1.27 1.65 1.27 1.65
CAPITAL RATIOS
Common equity tier 1 capital to risk-weighted assets 12.9 % 14.3 % 12.9 % 14.3 %
Tier 1 capital leverage ratio 10.2 9.5 10.2 9.5
Tangible common shareholders' equity/tangible assets 8.5 9.3 8.5 9.3
(2)
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At or for the At or for the
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
FOR THE PERIOD: (In thousands)
Net interest income $ 81,358 $ 75,393 $ 150,421 $ 150,486
Non-interest income 16,351 22,011 37,032 48,204
Net revenue 97,709 97,404 187,453 198,690
(Benefit)/provision for credit losses - - (4,000) 6,500
Non-interest expense 68,475 68,872 137,025 147,026
Net income 23,115 21,636 43,311 34,667
Adjusted income (1)(2) 23,562 22,104 44,351 38,116
____________________________________________________________________________________________
(1) Adjusted measurements are non-GAAP financial measures that are adjusted to exclude net non-operating charges primarily related to acquisitions and restructuring activities. Refer to "Reconciliation of Non-GAAP Financial Measures" for additional information. (2) Non-GAAP financial measure. Refer to "Reconciliation of Non-GAAP Financial Measures" for additional information. (3) All performance ratios are annualized and are based on average balance sheet amounts, where applicable. (4) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans. (5) The effect of purchase accounting accretion for loans, time deposits, and borrowings on the net interest margin was an increase in all periods presented. The increase for the three months endedJune 30, 2022 and 2021 was 0.03% and 0.08%, respectively. The increase for the six months endedJune 30, 2022 and 2021 was 0.03% and 0.06%, respectively.
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AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following table presents average balances and an analysis of average rates
and yields on an annualized fully taxable equivalent basis for the periods
included:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in millions) Average Yield/Rate Average Yield/Rate Average Yield/Rate Average Yield/Rate
Balance (FTE basis) Balance (FTE basis) Balance (FTE basis) Balance (FTE basis)
Assets
Loans:
Commercial real estate $ 3,831 3.79 % $ 3,625 3.46 % $ 3,741 3.57 % $ 3,628 3.37 %
Commercial and industrial loans 1,447 4.46 1,605 4.74 1,410 4.30 1,735 4.68
Residential mortgages 1,652 3.57 1,604 3.79 1,545 3.57 1,672 3.75
Consumer loans 562 5.41 582 3.80 538 4.82 608 3.80
Total loans (1) 7,492 3.99 7,416 3.84 7,234 3.80 7,643 3.78
Investment securities (2) 2,621 1.97 2,259 2.17 2,635 1.96 2,227 2.27
Short-term investments & loans held for sale 476 0.57 1,750 0.10 837 0.37 1,551 0.11
(3)
Mid-Atlantic region loans held for sale (4) - - 269 3.96 - - 282 4.03 Total interest-earning assets 10,589 3.34 11,694 2.96 10,706 3.08 11,703 3.01 Intangible assets 27 33 28 33 Other non-interest earning assets 644 690 642 707 Total assets$ 11,260 $ 12,417 $ 11,376 $ 12,443 Liabilities and shareholders' equity Deposits: NOW and other$ 1,454 0.12 %$ 1,389 0.07 %$ 1,455 0.08 %$ 1,357 0.11 % Money market 2,811 0.19 2,751 0.18 2,841 0.17 2,776 0.23 Savings 1,127 0.03 1,054 0.05 1,122 0.03 1,029 0.06 Time 1,460 0.64 2,013 0.94 1,542 0.67 2,140 1.03 Total interest-bearing deposits 6,852 0.24 7,207 0.35 6,960 0.24 7,302 0.42 Borrowings and notes (5) 160 4.61 381 3.12 132 4.91 441 2.95 Mid-Atlantic region interest-bearing deposits - - 517 0.51 - - 517 0.56
(4)
Total interest-bearing liabilities 7,012 0.34 8,105 0.49 7,092 0.33 8,260 0.56 Non-interest-bearing demand deposits 2,903 2,787 2,935 2,662 Other non-interest earning liabilities 163 351 164 355 Liabilities from discontinued operations - - - - Total liabilities 10,078 11,243 10,191 11,277 Total common shareholders' equity 1,182 1,174 1,185 1,166 Total shareholders' equity (2) 1,182 1,174 1,185 1,166 Total liabilities and stockholders' equity$ 11,260 $ 12,417 $ 11,376 $ 12,443 62
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Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Average Yield/Rate Average Yield/Rate Average Balance Yield/Rate (FTE Average Yield/Rate (FTE
Balance (FTE basis) Balance (FTE basis) basis) Balance basis)
Net interest spread 3.00 % 2.47 % 2.75 % 2.45 %
Net interest margin (6) 3.11 2.62 2.86 2.62
Cost of funds 0.24 0.36 0.23 0.42
Cost of deposits 0.17 0.25 0.17 0.31
Supplementary data
Total deposits (In millions) $ 9,755 $ 9,994 $ 9,895 $ 9,964
Fully taxable equivalent 1,560 1,660 3,084 3,154
income adj. (In thousands) (7)
____________________________________
(1) The average balances of loans include nonaccrual loans and deferred fees and costs. As ofJune 30, 2022 , deferred fees related to PPP loans was not considered material. As ofJune 30, 2021 , deferred fees related to PPP loans totaled$0.2 million . (2) The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment. (3) Interest income on loans held for sale is included in loan interest income on the income statement. (4) The Bank sold its Mid-Atlantic branch operations and insurance operations in the third quarter of 2021. The Mid-Atlantic region loans are not included in the loan yields; however they are included in the total earning assets yield and the net interest margin. The Mid-Atlantic region deposits are not included in the deposit costs; however, they are included in the total interest-bearing liabilities cost and the net interest margin. (5) The average balances of borrowings include the capital lease obligation presented under other liabilities on the consolidated balance sheet. (6) Purchase accounting accretion totaled$0.7 million and$2.2 million for the three months endedJune 30, 2022 and 2021, respectively. Purchase accounting accretion totaled$1.5 million and$3.5 million for the three months endedJune 30, 2022 and 2021, respectively. (7) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans. The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 27%.
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NON-GAAP FINANCIAL MEASURES
This document contains certain non-GAAP financial measures in addition to
results presented in accordance with Generally Accepted Accounting Principles
("GAAP"). These non-GAAP measures are intended to provide the reader with
additional supplemental perspectives on operating results, performance trends,
and financial condition. Non-GAAP financial measures are not a substitute for
GAAP measures; they should be read and used in conjunction with the Company's
GAAP financial information. A reconciliation of non-GAAP financial measures to
GAAP measures is provided below. In all cases, it should be understood that
non-GAAP measures do not depict amounts that accrue directly to the benefit of
shareholders. An item which management excludes when computing non-GAAP adjusted
earnings can be of substantial importance to the Company's results for any
particular quarter or year. The Company's non-GAAP adjusted earnings information
set forth is not necessarily comparable to non- GAAP information which may be
presented by other companies. Each non-GAAP measure used by the Company in this
report as supplemental financial data should be considered in conjunction with
the Company's GAAP financial information.
The Company utilizes the non-GAAP measure of adjusted earnings in evaluating
operating trends, including components for operating revenue and expense. These
measures exclude amounts which the Company views as unrelated to its normalized
operations. These items primarily include securities gains/losses, merger costs,
restructuring costs, goodwill impairment, and discontinued operations. Merger
costs consist primarily of severance/benefit related expenses, contract
termination costs, systems conversion costs, variable compensation expenses, and
professional fees. Restructuring costs generally consist of costs and losses
associated with the disposition of assets and liabilities and lease
terminations, including costs related to branch sales. Restructuring costs also
include severance and consulting expenses related to the Company's strategic
review.
The Company also calculates adjusted earnings per share based on its measure of
adjusted earnings and diluted common shares. The Company views these amounts as
important to understanding its operating trends, particularly due to the impact
of accounting standards related to merger and acquisition activity. Analysts
also rely on these measures in estimating and evaluating the Company's
performance. Expense adjustments in 2021 were primarily related to branch
consolidations. Net losses on securities in 2022 were primarily due to
unrealized equity securities losses due to changes in market conditions.
Management believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items recorded for
the periods indicated:
At or for the Three Months At or for the Six
Ended June 30, Months Ended June 30,
(In thousands) 2022 2021 2022 2021
GAAP Net income $
23,115
973 484 1,718 515
Adj: Restructuring and other expense 35 6 53 3,492
Adj: Income taxes (561) (22) (731) (555)
Total adjusted income/(loss) (non-GAAP) (2) (A) $
23,562
GAAP Total revenue $
97,709
973 484 1,718 515
Total operating revenue (non-GAAP) (2) (B) $
98,682
GAAP Total non-interest expense $
68,475
(35) (6) (53) (3,492)
Operating non-interest expense (non-GAAP) (2) (C) $
68,440
(In millions, except per share data) Total average assets (D) $
11,260
(E) 1,182 1,174 1,185 1,166
Total average tangible shareholders' equity (F) 1,155 1,141 1,157 1,133
(2)
Total average tangible common shareholders' (G) 1,155 1,141 1,157 1,133 equity (2) Total tangible shareholders' equity, (H) 987 1,143 987 1,143 period-end (2)(3) Total tangible common shareholders' equity, (I) 987 1,143 987 1,143 period-end (2)(3) Total tangible assets, period-end (2)(3) (J) 11,552 12,241 11,552 12,241 Total common shares outstanding, period-end (K) 45,788 50,453 45,788 50,453
(thousands)
Average diluted shares outstanding (thousands) (L) 46,102 50,608 47,074 50,588 Earnings per common share, diluted $
0.50
(A/L) 0.51 0.44 0.94 0.75
(2)
Book value per common share, period-end 22.15 23.30 22.15 23.30
Tangible book value per common share, (I/K) 21.56 22.66 21.56 22.66
period-end (2)
Total shareholders' equity/total assets 8.76 9.57 8.76 9.57
Total tangible shareholder's equity/total (H/J) 8.54 9.34 8.54 9.34
tangible assets (2)
Performance ratios (4)
GAAP return on equity 7.82 % 7.37 % 7.31 % 5.95 %
Adjusted return on equity (2) (A/E) 7.97 7.53 7.49 6.54
Return on tangible common equity (2)(5) 8.33 7.92 7.81 6.46
Adjusted return on tangible common equity (A+O)/(G) 8.48 8.08 7.99 7.07
(2)(5)
GAAP return on assets 0.82 0.70 0.76 0.56
Adjusted return on assets (2) (A/D) 0.84 0.71 0.78 0.61
Efficiency ratio (2) (C-O)/(B+M+P) 66.60 67.82 69.48 69.60
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Table of Contents (in thousands) Supplementary data (In thousands) Tax benefit on tax-credit investments (6) (M)$ 595 $ 79 $ 1,191 $ 120 Non-interest income charge on tax-credit (N) (351) (175) (708) (207) investments (7) Net income on tax-credit investments (M+N) 244 (96) 483 (87) Intangible amortization (O) 1,286 1,297 2,572 2,616 Fully taxable equivalent income (P) 1,560 1,660 3,084 3,154 adjustment
_________________________________________________________________________________________
(1) Net securities losses for the periods endingJune 30, 2022 and 2021 include the change in fair value of the Company's equity securities in compliance with the Company's adoption of ASU 2016-01. (2) Non-GAAP financial measure. (3) Total tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end. (4) Ratios are annualized and based on average balance sheet amounts, where applicable. (5) Adjusted return on tangible common equity is computed by dividing the total adjusted income adjusted for the tax-affected amortization of intangible assets, assuming a 27% marginal rate, by tangible equity. (6) The tax benefit is the direct reduction to the income tax provision due to tax credits and deductions generated from investments in historic rehabilitation and low-income housing. (7) The non-interest income charge is the reduction to the tax-advantaged commercial project investments, which are incurred as the tax credits are generated.
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Table of Contents GENERAL Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company's consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2021 Annual Report on Form 10-K. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the year 2022 or any future period. In management's discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. References to loan categories in the financial statements are based on collateralization. Tax-equivalent adjustments are the result of increasing income from tax-advantaged loans and securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 27% marginal rate (including state income taxes net of federal benefit). In the discussion, unless otherwise specified, references to earnings per share and "EPS" refer to diluted earnings per common share.Berkshire Hills Bancorp, Inc. ("Berkshire" or "the Company") is aDelaware corporation headquartered inBoston and the holding company forBerkshire Bank ("the Bank"). Established in 1846, the Bank operates as a commercial bank under aMassachusetts trust company charter. The Bank seeks to transform what it means to bank its neighbors socially, humanly, and digitally to empower the financial potential of people, families, and businesses in its communities as it pursues its vision of being a leading socially responsible omni-channel community bank inNew England and beyond.Berkshire Bank provides business and consumer banking, mortgage, wealth management, and investment services. Headquartered inBoston ,Berkshire has approximately$11.6 billion in assets and operates 105 branch offices inNew England andNew York .
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our outlook for earnings, net interest margin, fees, expenses, tax rates, capital and liquidity levels and other matters regarding or affectingBerkshire and its future business or operations. You can identify these statements from the use of the words "may," "will," "should," "could," "would," "outlook," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. Such statements further include statements about expectations regarding inflation and interest rates, economic activity, supply chains, the Russian invasion ofUkraine , market conditions, and stock repurchases. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce our volume of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary market, legislative and regulatory change, changes in the financial markets, the effects of the COVID-19 pandemic, including impacts on the Company, its customers, and the communities where it operates, international conflict inEurope and elsewhere, and other risks and uncertainties disclosed from time to time in documents thatBerkshire Hills Bancorp files with theSecurities and Exchange Commission , including the Risk Factors included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , as updated by subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition,Berkshire's past results of operations do not necessarily indicateBerkshire's combined future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made.Berkshire is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law.Berkshire qualifies all of its forward-looking statements by these cautionary statements.
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SUMMARY
Berkshire's revenue and earnings advanced in the most recent quarter as the Company has begun to generate improved growth and profitability under its BEST strategic plan which was initiated at midyear 2021. Results have also benefited from a strong credit environment and from market interest rate increases which began after the start of 2022. The Company's interest rate risk profile is positioned to benefit earnings from further interest rate increases expected by the markets through the rest of the year. The BEST plan targeted getting better before getting bigger, and this was a primary focus in the second half of 2021 as various expense and profitability initiatives were undertaken and less strategic operations were ended, including the sale of Mid-Atlantic branch operations and insurance operations in the third quarter of 2021. The refocus on core markets and operations and the reinvestment of resources into frontline bankers and technology contributed to the resumption of loan growth in 2022. Share repurchases over the last year to return excess capital to shareholders produced a 9% decrease in outstanding shares over the last twelve months, which has further supported growth in per share earnings and return on equity. Earnings per share (on a diluted basis) increased year-over-year by 16% to$0.50 in the second quarter and by 33% to$0.92 in the first half of the year. The key profitability metrics tracked by the Company under its BEST plan improved year-over-year in the second quarter. Second quarter 2022 return on assets measured 0.82% and return on tangible common equity measured 8.3%. The measure of pre-tax pre-provision net revenue increased year-over-year by 2% and totaled$117 million on an annualized basis in the most recent quarter.
Second quarter 2022 financial highlights are shown below. Comparisons are year-over-year unless otherwise noted:
•16% increase in EPS •Broad-based increase in total loans since year-end 2021 based on both end-of-period and average balances •3.11% net interest margin, increased from 2.62% •8% increase in net interest income •1% decrease in non-interest expense (generally stable over last five quarters) •0.02% net charge-offs/average loans •0.25% non-performing assets/assets - sixth sequential quarterly improvement •$100 million investment grade subordinated debt issuance - first Sustainability Bond issued by a publicU.S. community bank •9% reduction in period-end shares outstanding year-over-year reflecting stock buybacks Credit metrics remained strong and improving, and earnings benefited from a release of the credit loss allowance in the first quarter of 2022, and no provision expense in the most recent quarter. The allowance continues to provide comparatively strong coverage of the loan portfolio. The Company's balance sheet positioning includes: •Significant liquidity available through short and long term investments and off-balance sheet sources. Loans/deposits measured 77% at midyear •Positive asset sensitivity to rising interest rates, with a 4% modeled benefit to first year net interest income compared to a static scenario in the event of a 100 basis point upward shock to net interest income •Stock repurchase plan approved for up to$140 million in repurchases, with$84 million completed in the first half of 2022 •Strong regulatory capital metrics, with a 12.9% period-end common equity tier 1 capital ratio During the second quarter of 2022, Moody's Investors Service assigned first time issuer ratings with an investment grade rating of Baa3 toBerkshire Hills Bancorp andBerkshire Bank , with a positive outlook. Moody's assigned an A3 long-term deposit rating to the Bank. Also, in the second quarter, KBRA (Kroll Bond Rating Agency ) affirmed senior unsecured investment grade ratings of BBB forBerkshire Hills Bancorp and BBB+ forBerkshire Bank , with a stable outlook. KBRA affirmed a BBB+ deposit rating for the Bank. In conjunction with the issuance of its subordinated Sustainability Bond, the Company implemented its Sustainable Financing Framework, which received a favorable rating from Sustainalytics, a leading ESG ratings firm.
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Table of Contents In accordance with its BEST plan,Berkshire continued recruiting front line bankers and developing technology initiatives in the first half of 2022. The Company continues to promote employees from within the organization and to bring on board knowledgeable bankers to deepen long-term relationships with its customers.Berkshire Bank recently announced an expanded partnership with fintech Narmi to create a best-in-class digital banking experience for consumers and small businesses, which is targeted for implementation in 2023. For more information about the BEST plan, please see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's most recent report on Form 10-K. Since year-end 2021, inflation has continued to accelerate, reaching 9.1% for the twelve months endedJune 2022 . In response, theFederal Reserve Bank has embarked on monetary tightening policies, resulting in increased interest rates. TheFederal Reserve has indicated that further tightening is anticipated. As ofJuly 28, 2022 , GDP was reported as declining for the first two quarters of 2022. Business conditions remained relatively favorable through midyear 2022 in the Company's markets. The Company is pursuing its plans for growth under its BEST plan based on its favorable niche in a consolidating regional market and its distinctive strategy based on its DigitouchSM approach to customer engagement and its community service message that where you bank matters.
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Table of Contents COMPARISON OF FINANCIAL CONDITION ATJUNE 30, 2022 ANDDECEMBER 31, 2021 Summary: Total assets were unchanged at$11.6 billion at midyear 2022, compared to year-end 2021. A$1.0 billion increase in loans was funded by a$0.8 billion reduction in cash and equivalents and a$0.2 billion reduction in investment securities. Cash and cash equivalents decreased to 8% of assets from 14%. Major measures of asset quality continued to strengthen and generally were improved over pre-pandemic levels.
Total deposits were stable and the loan/deposit ratio increased to 77% from 68%.
Berkshire issued an investment grade rate$100 million subordinated note offering which was the first public community bank Sustainability Bond issued in theU.S. Shareholders' equity decreased by$168 million including the impact of$120 million in after-tax unrealized bond losses and$84 million in common stock repurchases. The ratio of tangible common equity to tangible assets decreased to 8.5% from 10.0%. The ratio of common equity tier one capital to risk weighted assets decreased to 12.9% from 15.0%. The Company views its liquidity and capital, including the contribution of retained earnings, as well positioned to support ongoing organic growth and shareholder distributions. Sustainability Bond Issuance: OnJune 30, 2022 ,Berkshire completed the sale at par of$100 million in subordinated notes bearing interest at a fixed rate of 5.5% for the first five years. The notes will then reset quarterly to a floating rate per annum equal to a benchmark rate which is expected to be the Three-Month Term SOFR, plus 249 basis points. The notes have a ten year final maturity and generally may be called at par after five years. The Company has$75 million in existing subordinated notes bearing interest at 6.875% which are callable at par onSeptember 28, 2022 , which the Company intends to call.Berkshire is the first publicU.S. community bank holding company with under$150 billion in total assets to issue a Sustainability Bond. The Company intends to use an amount equal to the net proceeds of its sustainability bond issuance to finance or refinance new or existing social and environmental projects consistent with its Sustainable Financing Framework. Sustainalytics, aMorningstar Company , and the global leader in high-quality ESG research, ratings, and data, has independently verified thatBerkshire's Sustainable Financing Framework" is credible and impactful and in alignment with"International Capital Market Association (ICMA) guidelines and principles. Investments: The portfolio of investment securities decreased by$219 million , or 9%, to$2.33 billion during the first half of the year primarily due to the decrease in the fair value of available for sale securities resulting from interest rate increases in the first half of 2022. The unrealized loss on securities available for sale increased from$4 million , or 0.2% of book value, at year-end 2021 to$165 million , or 8.9% of book value, at midyear 2022. The average life of the bond portfolio increased to 6.5 years from 4.6 years due primarily to slower prepayments of mortgage related securities in the rising rate environment. The investment portfolio is viewed as a significant source of liquidity for the Bank, as 93% of the$1.7 billion available for sale portfolio consists of Agency mortgage related products andTreasury notes. The investment portfolio yield was 1.97% in the second quarter of 2022, which was down from 2.04% in the fourth quarter of 2021, including the impact of treasury securities held pending planned loan growth. Loans: Total loans increased by$978 million , or 14%, to$7.8 billion in the first half of 2022, including 7% growth in each of the two quarters. This increase offset attrition in the second half of 2021, with the result that second quarter average loans increased by 1% year-over-year. Loans increased in all major categories as a result of the Company's BEST initiatives in the second half of 2021 which included stronger production from frontline bankers, talent recruitment, and channel expansion. Prepayments slowed in the rising rate environment. The Company anticipates that loan growth may moderate in the second half of the year compared to the first half. Commercial real estate loans increased in the first half by$322 million , or 9%, including a$116 million increase in multifamily loans and a$171 million increase in non-owner occupied property loans. Commercial and industrial loans grew by$141 million , or 11%, which was driven by increased asset-based lending which reflected both account growth and higher line usage. The Company continues to maintain its commercial underwriting standards and growth is managed within a detailed system of hold limits based on industry and loan type. Variable rate loan underwriting includes a test of debt service coverage for up to a 300 basis point upward interest rate shock, and many commercial borrowers use interest rate swaps to reduce the risk of rising interest rates. After the end of the most recent quarter, the Company announced that it will cease originating new loans in its Firestone Financial
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Table of Contents specialty lending operation and allow the portfolio to run-off. This was a strategic decision in the context ofBerkshire's BEST plan to focus on core markets and products. The Firestone portfolio stood at$165 million at midyear 2022 and continues to have strong credit performance in line with its long history. Residential mortgage loans increased by$427 million , or 31%, in the first half of the year. In accordance with its BEST initiative,Berkshire invested in expanding its retail originations team and its correspondent platform. The Company also purchased residential mortgages from area lenders. Most mortgage originations were held for investment; the Company targets to expand the retail origination of loans held for sale in the second half of the year. Consumer loans increased by$87 million , or 17%, in the first half of the year. Growth was driven by consumer unsecured loans originated through the Company's partnership with the fintech Upstart. This portfolio totaled$152 million at midyear, and most of these loans were originated during the first half of the year and were generally subject to the Company's prime underwriting standards. InJuly 2022 the Company announced that, due to the prevailing economic uncertainty, it will cease new originations through this partnership. Credit performance of this portfolio has exceeded the Company's expectations. The yield on the loan portfolio increased to 3.99% in the second quarter of 2022 from 3.76% in the fourth quarter of 2021 due primarily to the impact of rising interest rates on prime and LIBOR indexed loans. Loans repricing within three months totaled$3.3 billion , or 42% of total loans at midyear 2022. The Company anticipates that further increases in market interest rates will lead to higher loan yields in future periods. Asset Quality and Credit Loss Allowance: Major asset quality metrics improved in the first half of 2022, with many metrics improving to better levels than pre-pandemic. Non-accruing loans decreased to 0.34% of total loans at midyear, totaling$27 million , of which$8 million was added in the first half of the year. Annualized net loan charge-offs declined to 0.02% of average loans in the most recent quarter. Accruing delinquent loans measured 0.55% of total loans at midyear, compared to 0.63% at year-end 2021. At midyear, accruing troubled debt restructurings totaled$9 million and accruing loans over 90 days delinquent totaled$7 million . Total criticized loans decreased to 2.7% of loans from 3.5% of loans, including classified loans which decreased to 2.0% of loans from 2.1% of loans. Classified loans include accruing substandard loans, which are regarded as potential problem loans and which remained unchanged at 1.6% of total loans. The allowance for credit losses on loans decreased in the first half of 2022 to$99 million from$106 million . The ratio of the allowance to total loans decreased to 1.27% from 1.55%. This decline was primarily due to improvements in the qualitative factors of the allowance methodology mainly as a result of improved asset quality metrics. It also reflected a reduction in the potential losses from economic and social disruptions related to COVID-19 conditions. Considering loan and allowance balances, the magnitude of the improvement was most reflected in the allowances related to residential mortgages, commercial non-owner occupied property loans, multifamily loans, and construction loans. This was partially offset by higher consumer reserves related to the consumer unsecured lending during the period.
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Table of Contents Deposits and Borrowings: Total deposits of$10.1 billion were unchanged at midyear 2022 compared to year-end 2021. A mix shift between NOW and money market balances was primarily due to the timing of payroll cycles as they affect the Company's payroll deposit business. Payroll deposits totaled$1.3 billion at midyear 2022 compared to$1.0 billion at year-end 2021. The Company has been reducing its brokered deposits, which decreased to$113 million from$228 million on these respective dates. The Company evaluates its total deposits adjusted to exclude payroll and brokered deposits in evaluating its market activities. These adjusted deposits totaled$8.7 billion at midyear 2022, which was a 1% decrease from$8.8 billion at year-end 2021. This includes the impact of increased customer spending rates as well as market competition from higher yielding investment instruments in the rising interest rate environment. The cost of deposits decreased to 0.17% in the second quarter of 2022 from 0.19% in the fourth quarter of 2021. This included the benefit of maturing higher cost time deposits, including brokered deposits. The Company anticipates that further increases in market interest rates will lead to higher deposit costs in future periods. Borrowings increased primarily due to the subordinated note offering previously described. This offering was completed onJune 30, 2022 , and the proceeds were held in cash and cash equivalents at that date. The Company has a$75 million subordinated debt obligation bearing interest at 6.875% which becomes callable inSeptember 2022 . The Company expects to call this instrument at par after it becomes callable. Derivative Financial Instruments: There were no material changes in the portfolio of outstanding derivative financial instruments, which totaled$3.8 billion in notional amount at period-end. The estimated fair value of these instruments was a liability of$18 million at period-end, which decreased from an asset of$43 million at year-end 2021 due to the impact of changes in interest rates on the value of outstanding commercial loan interest rate swaps.
Please see the Company's most recent report on Form 10-K for additional information regarding the LIBOR transition.
Shareholders' Equity: Total shareholders' equity decreased by$168 million , or 14%, to$1.01 billion during the first half of 2022. This included the impact of$84 million in stock repurchases pursuant to the Company's$140 million authorized repurchase program, leaving$56 million in remaining repurchases authorized by year-end 2022. Shareholders' equity also decreased due to the impact of fair market value discounts on the available for sale securities portfolio as previously described. The after-tax impact of these charges totaled$120 million for the first six months of 2022, which was recorded to the accumulated other comprehensive loss component of shareholders' equity. Of note, the charge for bond discounts is accreted back into equity as the related securities amortize over the 6.5 year average life of the related securities.
The Company's 7.3% return on equity in the first half of 2022 partially offset
the reductions described above, net of
The 2022 first half decrease to 8.5% from 10.0% in the ratio of tangible common equity to tangible assets reflected the reduction in equity compared to stable assets. The charge to equity related to bond value discounts is not included as a component of the calculation of regulatory equity, which is the Company's primary focus in capital management. The increase in loans in 2022 had an impact of increasing the regulatory measure of risk weighted assets. Including this impact, together with stock repurchase impact, the ratio of common equity tier one capital to risk weighted assets decreased to 12.9% from 15.0%. The Company monitors the impacts of rising rates, credit stress scenarios, and organic growth in assessing its capital adequacy and plans. The Company's capital ratios were viewed by management as strong at midyear 2022. At that date, book value per share totaled$22.15 and tangible book value per share totaled$21.56 .
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Table of Contents COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDEDJUNE 30, 2022 ANDJUNE 30, 2021 Summary:Berkshire's second quarter net income increased year-over-year by 7% to$23 million . Net interest income increased by 8% year-over-year reflecting the Company's BEST strategy to reinvest resources into balance sheet growth which has also benefited from the rising interest rate environment. First half net income increased year-over-year by 25% to$43 million due primarily to a$7 million year-over-year improvement in first quarter results. This reflected a benefit recorded to the first quarter 2022 credit loss provision as well as a decline in non-interest expense from elevated costs in the first quarter of 2021. On a per share basis, second quarter net income increased by 16% to$0.50 . First half per share results increased by 33% to$0.92 per diluted share. Per share earnings benefited from share repurchases over these periods, with average diluted shares decreasing year-over-year by 9% in the second quarter and by 7% for the first half of the year.
Non-GAAP financial measures are discussed above in the section of "Non-GAAP
Financial Measures". Quarterly adjusted EPS was
Total second quarter net revenue was unchanged year-over-year at approximately$97.5 million , and second quarter non-interest expense decreased by 1% to$68.5 million . For the first half of the year, total revenue decreased by 6%, to$187 million and non-interest expense decreased by 7% to$137 million . Year-over-year changes in revenue and expense include the impact of insurance and branch operations sold near the end of the third quarter of 2021. The second quarter efficiency ratio in 2022 measured 66.6%, compared to 67.8% in 2021. The Company's overall strategy is to reinvest expense savings into bankers and technology to support higher future revenue in the context of its BEST plan. Net Interest Income: Second quarter net interest income increased year-over-year by 8%, to$81 million . First half net interest income was unchanged at$150 million in both years. Due primarily to loan runoff, this income decreased sequentially in the quarters following the second quarter of 2021, declining to$69 million in the first quarter of 2022 before rebounding in the most recent quarter due primarily to 2022 loan growth and market interest rate increases. The net interest margin increased to 3.11% in the second quarter of 2022, compared to 2.62% in the second quarter of 2021. This reflected a 38 basis point improvement in the earning asset yield and a 12 basis point reduction in the cost of funds. The earning asset yield improvement reflected a 15 basis point improvement in the loan yield due primarily to rising interest rates, as well as the reduction in low yielding short-term investments. The cost of funds improvement was primarily due to reductions of higher cost wholesale funds, along with a shift in retail deposits from higher cost time accounts into other lower cost deposit accounts. Second quarter 2022 net interest income increased by 18% over the linked quarter, mirroring the 19% quarter-over-quarter change in the net interest margin to 3.11% from 2.61%. Net interest income responded rapidly to the market rate increases, while also benefiting from stable deposit costs and from loan growth. At midyear 2022, the Company remained asset sensitive and was positioned to benefit from further increases in market interest rates in 2022 based on market forecasts. This is discussed below in Item 3 "Quantitative and Qualitative Disclosures About Market Risk". Non-Interest Income: Non-interest income decreased year-over-year by 26% to$16 million in the second quarter and by 23% to$37 million for the year-to-date. This decrease included the elimination of insurance revenue in 2022 following the sale of these operations in the third quarter of 2021. The decrease was also impacted by a decline in loan fees and revenues from elevated levels in 2021. Higher loan related revenues in 2021 included elevated SBA related income which benefited from pandemic related SBA program changes. 2021 first quarter results also benefited from PPP referral fees earned during the second round of the PPP loan program that operated in the first half of last year.
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Table of Contents Despite the sale of the Mid-Atlantic branch operations in the third quarter of 2021, first half deposit related fees advanced year-over-year by 5%, and wealth management fees grew by 2%. Mortgage banking revenue declined as 2022 originations were mostly held for investment. Higher securities losses in 2022 primarily related to fair market value discounts on bond instruments held in mutual funds. Provision for Credit Losses on Loans: There was no provision for credit losses on loans recorded in the second quarter of 2022 and 2021. As a result of first quarter activity, for six months the provision was a benefit of$4 million in 2022 and an expense of$6 million in 2021. The year-over-year improvement reflects the improved credit performance and outlook as previously discussed regarding the allowance for credit losses on loans. If significant recession conditions emerge, under the current expected credit losses methodology, the potential emergent future losses could be reflected in future provision expense. Non-Interest Expense and Tax Expense: Non-interest expense decreased year-over-year by 1% to$68.5 million in the second quarter and by 7% to$137 million in the first half. First quarter 2021 expenses included$3 million in non-operating related restructuring charges, and$3 million in elevated professional services expense for legal, financial, and other advisory services related to management and board matters in that period. Excluding the above items, first half non-interest expense decreased by 2% year-over-year. Expense spending in 2022 has benefited from branch consolidations and restructuring activities, as well as the sale of the Mid-Atlantic branch operations and insurance operations in the third quarter of 2021. Second quarter spending changes illustrate disciplined growth in compensation and technology expense which was offset by lower occupancy expense. This is in alignment with the BEST plan to reinvest savings from efficiency initiatives into bankers and technology. The Company is in the process of consolidating 5 of the current 105 branch offices during the second half of 2022, and is moving forward with plans to reduce other real estate properties as part of its hybrid workforce initiative to reduce occupancy costs in conjunction with its work from home initiatives. Full-time equivalent staff totaled 1,322 positions at period-end, compared to 1,319 positions at the start of the 2022 and 1,505 positions at the start of 2021. The first half effective tax rate was 20% in 2022 compared to 23% in 2021 and compared to 20% for the full year 2021. The higher rate in the first half of 2021 reflected a delay in the initiation of tax credit investments which benefited the tax rate in the second half of the year. The full year rate in 2021 included the impact of the pre-tax income from the sale of business operations in the third quarter. In 2022, higher pre-tax income in the first half relates to organic growth in earnings. Total Comprehensive Income: Total comprehensive income includes net income together with other comprehensive income, which primarily consists of unrealized gains/losses on debt securities available for sale, after tax. Total first half comprehensive income was a loss of$76 million in 2022, compared to income of$19 million in 2021, reflecting the impact in both periods of rising medium term interest rates on the bond portfolio. Liquidity and Cash Flows: Please see ""Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Cash Flows" in the most recent report on Form10-K for a more expansive discussion of these topics. For the first half of 2022, loan growth was the primary use of cash, which was primarily sourced from short-term investments and investment securities. The ratio of cash and cash equivalents decreased to 8% from 14% over this period. Cash included$100 million raised through the subordinated note offering at period-end. The Company expects to call its preexisting$75 million subordinated notes at par after they become callable. Brokered deposits were reduced by$115 million in the first half, and had a$113 million remaining balance at midyear. The Company borrowed$50 million in FHLBB advances near the end of the period. Unused FHLBB borrowing availability stood at$1.3 billion at midyear. Cash at the parent company stood at$173 million at midyear 2022. The Company continues to view itself as having sufficient liquidity with a high quality and liquid securities portfolio and well-positioned wholesale funding sources. The new Moody's ratings introduced during the quarter, including the A3 long-term bank deposit rating, supportBerkshire's liquidity profile. The stability of deposit costs
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Table of Contents during the first half of the year has also been positive as an indicator of core funding stability in the Company's markets. Capital Resources: Please see the "Shareholders' Equity" section of the Comparison of Financial Condition for a discussion of shareholders' equity together with Note 10 - Capital Ratios and Shareholders' Equity in the notes to the consolidated financial statements. Additional information about capital resources and regulatory capital is contained in the notes to the consolidated financial statements and in the Company's most recent Form 10-K. The Company's BEST plan includes the optimization of capital, including reducing excess capital through organic growth and capital returns to shareholders. The operation of this plan was evidenced in the first half of the year through the 14% loan growth and$84 million in share repurchases. Capital optimization was also supported through the subordinated debt issuance, reducing the coupon compared to the present debt which is planned to be repaid later in 2022. The Company primarily focuses on regulatory capital measures in assessing capital, including the common equity Tier 1 capital ratio. This ratio stood at 12.9% at midyear, compared to the general 11% target established in the BEST plan. Including its improved profitability, the Company continues to pursue its capital management goals within its BEST strategy. This also includes ongoing assessment of the shareholder cash dividend in relationship to earnings and to competitive practices. In acting as a source of strength for the Bank, the Company relies in the long term on capital distributions from the Bank in order to provide operating and capital service for the Company, which in turn can access national financial markets to provide financial support to the Bank. Capital distributions from the Bank to the parent company presently require approval by theFDIC and theMassachusetts Division of Banking . Increased distributions from the Company to shareholders require notice to and nonobjection from theFederal Reserve Bank .
CORPORATE RESPONSIBILITY UPDATE
Our Commitment to Environmental, Social, Governance (ESG) & Corporate Responsibility
Berkshire is committed to purpose-driven, community-centered banking that enhances value for all stakeholders as it pursues its vision of being a high-performing, leading socially responsible community bank inNew England and beyond.Berkshire provides an ecosystem of socially responsible financial solutions, actively engages with its communities, and harnesses the power of its business to support the economy, empower financial access and success, and invest in a low-carbon future. ESG factors are integral to our vision, mission, risk management practices, andBerkshire's Exciting Strategic Transformation (BEST). Because our vision is to be a high-performing, leading socially responsible community bank inNew England and beyond, we were one of the first banks in the country to establish a dedicated committee of our Board of Directors to oversee ESG matters and the a leader among community banks in integrating ESG standards into our business strategy and operations. We continue to engage directly with our stakeholders to share information about the progress we've made in our ESG performance, including through our Corporate Responsibility website, corporate annual report, and proxy statement. Additionally, our annual Corporate Responsibility Report, which is aligned withSustainability Accounting Standards Board ("SASB") commercial bank disclosure topics, details the Company's ESG efforts and programs.
Climate Change & Sustainability
Climate change poses unprecedented risks and opportunities to the world.Berkshire expects that its efforts to manage its environmental footprint, mitigate the risks and impacts associated with climate change, and finance the transition will allow it to strengthen its positioning as a high-performing, leading socially responsible community bank. The Company continues to evolve its practices to reflect its community bank mission as well as the size, scope, and complexity of its operations. 75
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Key ESG & Corporate Responsibility Quarterly Developments
•Sustainability Bond:Berkshire completed the public offering and sale of its inaugural$100 million Sustainability Bond becoming the firstU.S. community bank holding company with under$150 billion in assets to issue a Sustainability Bond. The Company intends to use an amount equal to the amount of the offering to finance or refinance projects consistent with the Company's Sustainable Financing Framework including renewable electricity generation; green buildings; renewable energy technology, storage and manufacturing; energy efficiency in commercial, residential and public buildings; affordable housing; workforce housing; and financial inclusion and access activities. •BEST Community Comeback & Comeback Tour: Company executives completed visits to each of its markets across five states including every branch meeting with stakeholders to highlight its "BEST Community Comeback" commitment. The multi-year plan focuses on four key areas: fueling small businesses, community financing and philanthropy, financial access and empowerment, and funding environmental sustainability. As a result of the collective efforts of its employees,Berkshire is making steady progress towards the achievement of its goals. Additional information can be found at berkshirebank.com/comeback. •Launch of theCenter for Women, Wellness and Wealth :Berkshire launched theCenter for Women , Wellness, and Wealth (CWWW) to provide tools that instill greater confidence and create a future for women enriched with financial stability, balance and growth. The Center, through partnerships with community organizations, specialized experts and thought leaders, will offer events on wellness and financial planning, philanthropic coaching and development support, and complimentary portfolio reviews through Berkshire Bank Wealth Management. •Xtraordinary Day: The Company completed its signature Xtraordinary Day of service onJune 8 during which the Bank closed its offices for the afternoon to give back to the community. This year,Berkshire Bank partnered with 39 non-profit organizations and over 1,000 Berkshire Bankers, 80% of the Company, invested the afternoon volunteering for 46 community projects across MA, NY, CT, RI, and VT. In total, employees contributed over 5,000 hours of service. •Current ESG Performance: The Company maintained its top 22% performance in leading ESG indexes in theU.S. for its Environmental, Social and Governance (ESG) ratings. As ofJune 30, 2022 the Company has ratings of: MSCI ESG- BBB; ISS ESG Quality Score - Environment: 2, Social: 1, Governance: 2; and Bloomberg ESG Disclosure- 59.62. The Company is also rated by Sustainalytics.Berkshire's increased score from Bloomberg moved it into the top ranking forU.S. banks. 76
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Table of Contents APPLICATION OF CRITICAL ACCOUNTING POLICIES The Company's significant accounting policies are described in Note 1 to the consolidated financial statements included in its most recent Annual Report on Form 10-K. Modifications to significant accounting policies made during the year are described in Note 1 to the consolidated financial statements included in Item 1 of this report. The preparation of the consolidated financial statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Management has identified the Company's most critical accounting policies as related to:
• Allowance for Credit Losses on Loans
• Fair Value Measurements
These policies are considered most critical in that they are important to the Company's financial condition and results, and they require management's subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. Both of these policies were significant in determining income and financial condition in the financial statements. There is further discussion of the application of these policies in the Form 10-K. ENTERPRISE RISK MANAGEMENT Following sections of this report on Form 10-Q include discussion of market risk and risk factors. Risk management is overseen by the Company'sChief Risk Officer , who reports directly to the CEO. This position oversees risk management policy, credit, loan review, and information security. Enterprise risk assessments are brought to the Company's Enterprise Risk Management Committee, and then are reported to the Board's Risk Management, Capital, and Compliance Committee. The high level corporate risk assessment includes the following material business risks: credit risk, interest rate risk, price risk, liquidity risk, operational risk, compliance risk, strategic risk, and reputation risk, with the credit risk category having the highest weighting.
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