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. Stockprice information is for Berkshire'scommon shares traded on the New York Stock exchange under the symbol "BHLB". At or for the Three Months Ended March,31, 2022 2021 NOMINAL AND PER SHARE DATA Net earnings per common share, diluted $ 0.42 $ 0.26Adjusted earnings per common share, diluted (1)(2) 0.43 0.32 Net income, (thousands) 20,196 13,031 Adjusted net income, (thousands) (1)(2) 20,789 16,015 Total common shares outstanding, (thousands) 47,792 50,988 Average diluted shares, (thousands) 48,067 50,565 Total book value per common share 22.89 23.05 Tangible book value per common share (2) 22.30 22.39 Dividends per common share 0.12 0.12 Full-time equivalent staff, continuing operations 1,333 1,467 PERFORMANCE RATIOS (3) Return on equity 6.79 % 4.50 % Adjusted return on equity (1)(2) 6.99 5.53 Return on tangible common equity (1)(2) 7.29 4.98 Adjusted return on tangible common equity (1)(2) 7.49 6.04 Return on assets 0.70 0.42 Adjusted return on assets (1)(2) 0.72 0.51 Net interest margin, fully taxable equivalent (FTE) (4)(6) 2.61 2.62 Efficiency ratio (1)(2) 72.61 71.32 FINANCIAL DATA (in millions, end of period) Total assets $ 12,097 $ 12,757Total earning assets 11,401 12,071 Total loans 7,267 7,659 Total deposits 10,699 10,244 Loans/deposits (%) 68 % 75 % ASSET QUALITY (5) Allowance for credit losses, (millions) $ 99 $ 124Net charge-offs, (millions) (3) (10) Net charge-offs (QTD annualized)/average loans 0.15 % 0.51 % Provision (benefit)/expense, (millions)
Non-accruing loans/total loans 0.41 % 0.73 % Allowance for credit losses/non-accruing loans 335 222 Allowance for credit losses/total loans 1.37 1.62 CAPITAL RATIOS Common equity tier 1 capital to risk-weighted assets 13.9 % 14.2 % Tier 1 capital leverage ratio 10.3 9.5 Tangible common shareholders' equity/tangible assets (2) 8.8 9.0 54
Table of Contents At or for the Three Months Ended March 31, 2022 2021 FOR THE PERIOD: (In thousands) Net interest income
$ 69,063 $ 75,093Non-interest income 20,681 26,193 Net revenue 89,744 101,286 (Benefit)/provision for credit losses (4,000) 6,500 Non-interest expense 68,550 78,154 Net income 20,196 13,031 Adjusted income (1)(2) 20,789 16,015
(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 the Reconciliation of non-GAAP Financial Measures for additional information. (2) Non-GAAP financial measure. Refer to the 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 ended
March 31, 2022and 2021 was 0.03% and 0.05%, respectively.
Table of Contents 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 March,31, 2022 2021 (Dollars in millions) Average Yield/Rate Average Yield/Rate Balance (FTE basis) Balance (FTE basis) Assets Loans: Commercial real estate
$ 3,6513.35 % $ 3,6303.27 % Commercial and industrial loans 1,373 4.14 1,865 4.62 Residential mortgages 1,436 3.56 1,740 3.71 Consumer loans 514 4.24 634 3.79 Total loans (1) 6,974 3.61 7,869 3.73 Investment securities (2) 2,649 1.95 2,195 2.36 Short-term investments & loans held for sale (3) 1,202 0.17 1,351 0.13 Mid-Atlantic region loans held for sale(4) - - 295 4.09 Total interest-earning assets 10,825 2.82 11,710 3.07 Intangible assets 29 X 34 Other non-interest earning assets 639 724 Total assets $ 11,493 $ 12,468Liabilities and shareholders' equity Deposits: NOW and other $ 1,4560.04 % $ 1,3250.15 % Money market 2,871 0.16 2,802 0.27 Savings 1,117 0.03 1,003 0.08 Time 1,624 0.71 2,266 1.12 Total interest-bearing deposits 7,068 0.24 7,396 0.48 Borrowings and notes (5) 122 5.21 511 2.78 Mid-Atlantic region interest-bearing deposits(4) - - 518 0.60 Total interest-bearing liabilities 7,190 0.32 8,425 0.63 Non-interest-bearing demand deposits 2,968 2,537 Other non-interest earning liabilities 146 347 Liabilities from discontinued operations - - Total liabilities 10,304 11,309 Total common shareholders' equity 1,189 1,159 Total shareholders' equity (2) 1,189 1,159 Total liabilities and stockholders' equity $ 11,493 $ 12,46856
Table of Contents Three Months Ended March 31, 2022 2021 Average Yield/Rate Average Yield/Rate Balance (FTE basis) Balance (FTE basis) Net interest spread 2.50 % 2.44 % Net interest margin (6) 2.61 2.62 Cost of funds 0.23 0.48 Cost of deposits 0.17 0.36 Supplementary data Total deposits (In millions)
$ 10,037 $ 9,932Fully taxable equivalent income adj. (In thousands) (7) 1,524 1,494
(1) The average balances of loans include nonaccrual loans and deferred fees and costs. (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 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 includes the capital lease obligation presented under other liabilities on the consolidated balance sheet. (6) Purchase accounting accretion totaled
$0.7and $1.3 millionfor the three months ended March 31, 2022and 2021, respectively. (7) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.
Table of Contents 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. For 2021, the net gains on sale of business operations and assets was related to the sale of the insurance subsidiary and the Mid-Atlantic branch operations. 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 the first quarter 2021 were primarily related to branch consolidations. Net losses on securities in the first quarter of 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.
Table of Contents 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 Ended March 31, (In thousands) 2022 2021 GAAP Net income/(loss)
$ 20,196 $ 13,031Adj: Net losses on securities (1) 745 31 Adj: Restructuring and other expense 18 3,486 Adj: Income taxes (170) (533) Total adjusted income/(loss) (non-GAAP) (2) (A) $ 20,789 $ 16,015GAAP Total revenue $ 89,744 $ 101,286Adj: Losses on securities, net (1) 745 31 Adj: Net (gains) on sale of business operations and assets - - Total operating revenue (non-GAAP) (2) (B) $ 90,489 $ 101,317GAAP Total non-interest expense $ 68,550 $ 78,154Less: Total non-operating expense (see above) (18) (3,486) Operating non-interest expense (non-GAAP) (2) (C) $ 68,532 $ 74,668 (In millions, except per share data) Total average assets (D) $ 11,493 $ 12,468Total average shareholders' equity (E) 1,189 1,159 Total average tangible shareholders' equity (2) (F) 1,160 1,125 Total average tangible common shareholders' equity (2) (G) 1,160 1,125 Total tangible shareholders' equity, period-end (2)(3) (H) 1,066 1,142 Total tangible common shareholders' equity, period-end (2)(3) (I) 1,066 1,142 Total tangible assets, period-end (2)(3) (J) 12,069 12,724 Total common shares outstanding, period-end (thousands) (K) 47,792 50,988 Average diluted shares outstanding (thousands) (L) 48,067 50,565 Earnings per common share, diluted $ 0.42 $ 0.26Adjusted earnings per common share, diluted (2) (A/L) 0.43 0.32 Book value per common share, period-end 22.89 23.05 Tangible book value per common share, period-end (2) (I/K) 22.30 22.39 Total shareholders' equity/total assets 9.04 9.21 Total tangible shareholder's equity/total tangible assets (2) (H/J) 8.83 8.98 Performance ratios (4) GAAP return on equity 6.79 % 4.50 % Adjusted return on equity (2) (A/E) 6.99 5.53 Return on tangible common equity (2)(5) 7.29 4.98 Adjusted return on tangible common equity (2)(5) (A+O)/(G) 7.49 6.04 GAAP return on assets 0.70 0.42 Adjusted return on assets (2) (A/D) 0.72 0.51 Efficiency ratio (2) (C-O)/(B+M+P) 72.61 71.32 (in thousands) Supplementary data (In thousands) Tax benefit on tax-credit investments (6) (M) $ 596 $ 41Non-interest income charge on tax-credit investments (7) (N) (357) (33) Net income on tax-credit investments (M+N) 239 8 Intangible amortization (O) 1,286 1,319 Fully taxable equivalent income adjustment (P) 1,524 1,494 59
Table of Contents _________________________________________________________________________________________ (1) Net securities losses/(gains) for the periods ending
March 31, 2022and 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.
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. 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 a Delawarecorporation headquartered in Bostonand the holding company for Berkshire Bank("the Bank"). Established in 1846, the Bank operates as a commercial bank under a Massachusettstrust 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 in New Englandand beyond. Berkshire Bankprovides business and consumer banking, mortgage, wealth management, and investment services. Headquartered in Boston, Berkshirehas approximately $12.1 billionin assets and operates 105 branch offices in New Englandand New York.
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 affecting
Berkshireand 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, the Russian invasion of Ukraine, 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, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that Berkshire Hills Bancorpfiles with the Securities and Exchange Commission, including the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021and the Risk Factors in Item 1A of this report. Additionally, the COVID-19 pandemic may have further adverse impacts on the Company, its customers, and the communities where it operates, with possible adverse impacts on the Company's business, results of operations and financial condition for an indefinite period of time. Because of these and other uncertainties, Berkshire'sactual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, Berkshire'spast results of operations do not necessarily indicate Berkshire'scombined 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. Berkshireis 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. Berkshirequalifies all of its forward-looking statements by these cautionary statements.
Table of Contents SUMMARY
Berkshirerecorded $20 millionin first quarter net income in 2022, which was a 55 percent increase over results in the first quarter of 2021. Results in 2021 reflected higher credit loss provisioning due to the pandemic and restructuring charges. Results in 2022 included a provision benefit as pandemic related loss reserves are being released, as well as financial benefits from the restructuring actions in 2021. First quarter financial highlights included: •62% year-over-year increase in earnings per share, including the benefit of share repurchases •6% increase in total loans quarter-over-quarter •2.61% net interest margin, stable year-over-year •0.11% reduction in PPP loan contribution offset by reduction in cost of funds •$4 million benefit to the credit loss provision due to a release of the credit loss allowance •0.41% non-accruing loans/loans - fifth sequential quarterly improvement •6% reduction in period-end shares outstanding year-over-year reflecting stock buybacks Strong growth in loan balances benefited from higher loan originations from existing and new bankers, and new bankers, and from new partnership channels developed in the second half of 2021. Credit metrics remained strong and improving, and earnings benefited from a release of the credit loss allowance, which continues to provide comparatively strong coverage of the loan portfolio. The Company's balance sheet positioning includes: •Strong levels of liquidity available to support planned loan growth. Cash and equivalents totaled 11% of average total assets in the most recent quarter •Positive asset sensitivity to rising interest rates, with a 4% modeled benefit to net interest income compared to a static scenario in the event of a 100 basis point upward shock to net interest income •Higher cost funds targeted to further reset down in 2022, including maturing time deposits and callable subordinated debt •Stock repurchase plan approved for $140 million•Relatively strong regulatory capital metrics, with a 13.9% period-end common equity tier 1 capital ratio In accordance with its BEST plan, Berkshirecontinued recruiting front line bankers and developing technology initiatives in the first quarter. The Company continues to promote employees from within the organization and bring on board knowledgeable bankers to deepen long-term relationships with its customers. Berkshire Bankrecently 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. During the quarter, the Company announced the appointment of Dr. Mihir Desaito its board of directors. Dr. Desaiis a Professor of Finance at Harvard Business Schooland Professor of Law at Harvard Law School. For more information about the BEST plan, please see Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's most recent report on Form 10- K. Duringthe most recent quarter, the Federal Reserve Bankincreased the target Federal Funds rate by 25 basis points, which was the first increase since it was dropped to near zero approximately two years ago at the start of the pandemic. Inflation has reached a forty-year high, and labor and supply chain challenges have been heightened by the global impacts of the Russian invasion of Ukraine. During the quarter, the three-month treasury interest rate increased by 0.46% to 0.52%, the two year rate increased by 1.55% to 2.28%, and the ten year rate increased by 0.80% to 2.32%. GDP declined in the most recent quarter and the markets anticipate further monetary tightening through rate hikes and quantitative tightening. 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.
Table of Contents COMPARISON OF FINANCIAL CONDITION AT
MARCH 31, 2022AND DECEMBER 31, 2021Summary: Total assets increased by $0.5 billion, or 5%, to $12.1 billionprimarily due to $0.4 billionin loan growth, reflecting increases in all major loan categories. Deposits grew by $0.6 billiondue to an increase in period-end fluctuating payroll deposit balances. The balance of cash and equivalents totaled $1.6 billionat period-end, and the average cash and equivalents measured 11% of average total assets in the first quarter. Stock repurchases were resumed under a newly approved program to repurchase approximately 9% of outstanding shares in 2022, with 2% repurchased during the quarter. The common equity tier 1 capital ratio remained comparatively strong at 13.9% at period-end. Including the impact of unrealized bond losses resulting from higher interest rates, the book value of shareholders' equity decreased by 8% during the quarter. Major measures of asset quality continued to strengthen and generally were improved over pre-pandemic levels. Investments: The portfolio of investment securities increased by $129 million, or 5%, to $2.68 billionduring the first quarter. The balance of shorter duration treasury securities increased by $231 millionas cash was invested to earn higher yields pending reinvestment in planned future loan growth. This increase was partially offset by unrealized losses in the fair value of available-for-sale bonds, reflecting the impact of higher interest rates on fixed rate bond values. The period-end net unrealized loss on available for sale securities measured $105 million, or 4.9% of cost, compared to a net loss of $4 million, or 0.2% of cost, at year-end 2021. The first quarter yield on investment securities declined to 1.95% compared to 2.04% in the linked quarter, including the impact of the treasury securities purchased during the first quarter. The average life of the portfolio increased during the quarter to 5.6 years from 4.6 years, primarily due to slower projected prepayment speeds in the environment of higher interest rates. Loans: Total loans increased by $441 million, or 6%, to $7.27 billionduring the first quarter, reflecting growth in all major categories. Commercial loans benefited from strong growth in asset based lending, commercial multifamily, and other commercial real estate loans. Loan production increased strongly quarter over quarter, including contributions from new commercial bankers recruited in the second half of 2021. Asset based lending growth was primarily driven by higher line borrowings. The commercial pipeline at period-end reflected continued strong demand.
Residential mortgage growth included contributions from the expanded
originations team along with higher wholesale volume including correspondent
banking. Consumer loan growth was primarily due to loans originated through
The loan yield decreased to 3.61% in the most recent quarter from 3.76% in the linked quarter. Roll-off of higher yielding loans and lower yields on new residential mortgages combined to reduce the overall portfolio yield. The Company's loans repricing within three months totaled
$3.76 billionat quarter-end, measuring 52% of total loans. Increases in the prime and LIBOR index rates late in the first quarter and anticipated in future quarters are expected to contribute to higher loan yields in future periods. On a year-over-year basis, total loans decreased 5%, due to payoffs and reduced demand during the pandemic. Loan growth was positive before the impact of planned or targeted reductions in certain runoff portfolios. The Company's strong planned originations volume is targeted to result in solid future loan growth, with diminished future impact from these run-off portfolios. Asset Quality and Credit Loss Allowance: Major asset quality metrics improved in the first quarter of 2022, with many metrics improving to better levels than pre-pandemic. Non-accruing loans decreased quarter-over-quarter by 16%, measuring 0.41% of period-end total loans. Annualized net loan charge-offs measured 0.15% of average loans, down from 0.29% for the year 2021. Accruing delinquent loans declined to a near five quarter low of 0.28% of total loans. Accruing troubled debt restructurings improved to 0.24% of total loans. The allowance for credit losses on loans decreased quarter-over-quarter by $7 millionto $99 million, measuring 1.37% of total loans, which was a decrease from 1.55% at the start of the year. This reflected improved credit
Table of Contents metrics and internal forecasts as well as other qualitative factors. The Company anticipates that the allowance ratio may decline in the current year, depending on economic and qualitative factors, and depending on the portfolio mix. Deposits and Borrowings: Period-end total deposits increased by
$630 million, or 6%, to $10.7 billionin the first quarter of 2022. This increase was concentrated in payroll deposits, which fluctuate daily. Shifts in balances between the NOW and money market categories also relate to payroll deposits. Total average deposits increased by 1% during this period. The Company has been reducing higher cost time deposits, including brokered deposits, which declined by 20% quarter-over-quarter based on average balances. Total average non-maturity deposits increased by 3% quarter-over-quarter. The first quarter 2022 total cost of deposits decreased to 0.17%, compared 0.19% in the linked quarter. There were no significant changes in borrowings during the quarter. The Company has a $75 millionsubordinated debt obligation bearing interest at 6.875% which becomes callable in September 2022. The Company expects to explore options for refinancing this obligation. Derivative Financial Instruments: There were no material changes in the portfolio of outstanding derivative financial instruments, which totaled $3.7 billionin notional amount at period-end. The estimated fair value of these instruments was a liability of $4 millionat period-end, which decreased from an asset of $43 millionat 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 report on Form 10-K regarding the LIBOR transition. Shareholders' Equity: Total shareholders' equity decreased by $89 million, or 7%, to $1.09 billionduring the first quarter of 2022. This reflected the impact of share repurchases and a $75 millionreduction in the most recent quarter reflecting the lower after-tax fair value of the available for sale bond portfolio because of higher interest rates. The Company returned a total of $35 millionto shareholders during the quarter through share repurchases and dividends, reducing excess capital while still having a comparatively elevated 13.9% common equity tier 1 capital ratio at period end. During the quarter, the Board approved a $140 millionshare repurchase program, representing approximately 9% of outstanding shares when approved. The Company repurchased approximately 2% of shares during the quarter. The ratio of equity/assets decreased quarter-over- quarter to 9.0% from 10.2%. This primarily reflected the increase in assets from loan growth and the impact on accumulated other comprehensive income of the change in bond values. The non-GAAP measure of tangible common equity to tangible assets decreased to 8.8% from 10.0%. The Company monitors the impact of bond values on this ratio considering projections of further interest rate increases. The fair value of the high-quality liquid bond portfolio is expected to return to par as bonds mature, with the current discount accreted back into comprehensive income over time.
At quarter-end, book value per share was
tangible book value per share was
Table of Contents COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
MARCH 31, 2022AND MARCH 31, 2021Summary: Berkshirerecorded net income of $20 million, or $0.42per share, in the first quarter of 2022. Net income increased by 55% from $13 million, or $0.26per share, in the first quarter of 2022. The improvement reflected a $11 millionnet change in the provision for credit losses on loans and a $3 millionreduction in restructuring and other expenses. The Company uses the non-GAAP measure of adjusted earnings to assess its performance. This measure excludes items not viewed as related to ongoing operations, including restructuring and other expenses in 2021 and an equity securities loss. First quarter adjusted earnings totaled $21 million, or $0.43per share, in 2022 compared to $16 million, or $0.32per share, in 2021. Earnings per share in 2022 also benefited from share repurchases in both years, with total average diluted shares decreasing year-over-year by 5%. The first quarter efficiency ratio measured 72.6% in 2022, compared to 71.3% in 2021, primarily reflecting lower loan interest income. Revenue and expense in 2022 also include the impact of insurance and branch operations sold near the end of the third quarter of 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.
The first quarter 2022 return on tangible common equity measured 7.3% and the
non-GAAP measure of adjusted return on tangible common equity measured 7.5%.
Net Interest Income: First quarter net interest income decreased year-over-year by
$6 million, or 8%, reflecting an 8% decrease in average earning assets, primarily driven by PPP loan prepayments, as well as the sale of certain branch operations, in 2021. The first quarter net interest margin was generally stable, measuring 2.61% in 2022 compared to 2.62% in 2021. The yield on PPP loans was elevated in 2021 due to the recognition of deferred origination fees at the time of prepayment. PPP loans contributed 11 basis points to the first quarter net interest margin in 2021, with no significant contribution in 2022. Measured before this contribution, the net interest margin increased by 10 basis points year-over-year, primarily reflecting the Company's balance sheet restructuring to reduce higher cost wholesale funds. The cost of funds decreased by 25 basis points year-over-year, to 0.23% from 0.48%. The cost of deposits decreased by 19 basis points, to 0.17% from 0.36%. The cost of time deposits decreased quarter-over-quarter by 9 basis points to 0.71% in the most recent quarter and is anticipated to decline further due to repricing of higher cost time deposits, most of which mature over the next year. The Company's net interest income is modeled as positively sensitive to interest rate increases, as the interest bearing assets are more sensitive to interest rate increases, compared to liabilities. This is discussed further in the later discussion of Market Risk Factors. Based on market forecasts of interest rate increases throughout 2022, net interest income is modeled to benefit from these increases. Additionally, the targeted reinvestment of cash and short-term treasury securities into planned loan growth is also targeted to contribute to future growth in net interest income. Non-Interest Income: Non-interest income decreased year-over-year by $6 million, or 21%. This largely reflected the sale of insurance operations, which produced $3 millionof income in the first quarter of 2021, and approximately $1.5 millionin PPP referral fees earned in that period for originating PPP loan referrals in the second phase of the PPP program. Mortgage banking revenue decreased by $1 millionas new loan originations were mostly held for investment in 2022 rather than for sale in 2021. Provision for Credit Losses on Loans: Berkshirerecorded a $4 millionbenefit to the first quarter 2022 provision, compared to a $6.5 millioncharge in the first quarter of 2021. The $4 millionbenefit resulted from a $7 millionrelease of the credit loss allowance net of $3 millionin net loan charge-offs. The year-over-year improvement reflected improved credit metrics and internal forecasts as well as other qualitative factors. Major asset quality metrics were significantly improved year-over-year, including a reduction in first quarter net loan charge-offs to $3
Table of Contents million from
$10 million. The Company continues to maintain a relatively higher allowance compared to loans based on its methodology. If circumstances remain supportive, the Company's methodology may result in a further reduction in the level of the allowance compared to loans, with potential favorable impact on the provision. This could be offset based on the volume and mix of loan originations. Non-Interest Expense and Tax Expense: Non-interest expense decreased year-over-year by $10 million, or 12%. This included a $3 millionreduction in restructuring expense costs including borrowings prepayment fees, real estate consolidation plans, and severance including costs related to branch consolidations. There was a $4 millionreduction in professional services expense which was elevated in 2021 including legal, financial, and other advisory services related to management and board matters during the quarter. Most other categories of expense declined, including the impact of insurance and branch operations sold, and the consolidation of 16 branch offices during 2021. Full-time equivalent staff totaled 1,333 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 quarter effective tax rate was 20% in 2022, compared to 22% in 2021, and compared to 20% for the full year 2021. 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 comprehensive income was a loss of $55 millionin the first quarter of 2022, compared to a loss of $7 millionin the first quarter of 2021, reflecting the impact in both periods of rising medium term interest rates on the bond portfolio. Liquidity and Cash Flows: Please see the discussion of Liquidity and Cash Flows in the most recent report on Form10-K for a more expansive discussion of these topics. Growth in loans and investment securities were the primary uses of cash in the most recent quarter, and the primary source was higher deposits. The increase in deposits was mostly due to elevated payroll deposits at period-end. These elevated balances were expected to normalize, with the reduction to be funded from cash and cash equivalents, which totaled $1.6 billionat period-end. The Company views itself as having strong liquidity to support loan growth during 2022. Capital Resources: Please see the "Shareholders' Equity" section of the Comparison of Financial Condition for a discussion of shareholders' equity together with the note on Shareholders' Equity in 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. Duringthe first quarter of 2022, the Company initiated stock repurchases under its newly approved $140 millionstock repurchase plan, which was targeted to repurchase approximately 9% of outstanding shares. The Company initiated repurchases under this plan during the quarter and repurchased approximately 2% of shares during the quarter. As a result of rising interest rates, bond portfolios in banks are subject to unrealized losses which result in charges against other comprehensive income ("AOCI") and reduce the book value of shareholders' equity. Like many of its peers, the Company utilizes an option in reporting its regulatory equity which excludes changes in AOCI in the calculation of regulatory capital. The unrealized bond losses that arose in the most recent quarter had no impact on regulatory capital metrics, which remain comparatively strong. Reductions in bond valuations due to changes in market interest rates are reversed as bonds approach maturity. These reversals are accreted to AOCI over time, restoring the book value of equity. While the Company monitors the book value of equity and related metrics, it primarily manages capital based on regulatory capital measures, with a focus on the common equity tier 1 capital ratio. The Company continues to view itself as having excess capital which it plans to utilize to support loan growth as well as stock repurchases under its approved repurchase plan. The Company regularly evaluates the level of its quarterly cash dividend to common shareholders. The dividend was cut in half in the third quarter of 2020 due to uncertainties related to the onset of the pandemic. The Company's long run goal is to increase the dividend as profitability improves under its BEST plan.
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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 the
FDICand the Massachusetts Division of Banking.
CORPORATE RESPONSIBILITY UPDATE
Our Commitment to Environmental, Social, Governance (ESG) & Corporate Responsibility:
Berkshireis 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 in New Englandand beyond. Berkshire'sgoal is to provide an ecosystem of socially responsible financial solutions, actively engages with its communities, and harness the power of its business to fuel the economy, create thriving neighborhoods, empower financial access and success, and invest in a low-carbon future. The Bank believes that where you bank matters and that building stronger communities requires a better approach to banking. As such, ESG factors are central to the Bank's vision, mission, risk management practices, and Berkshire'sExciting Strategic Transformation (BEST). Berkshirewas a leader among community banks in establishing a dedicated committee of its Board of Directors to oversee ESG matters and have been a leader as a community bank in thoroughly integrating ESG standards into its business strategy and operations. Berkshireshares information about its ESG performance, including through the Bank's Corporate Responsibility website, corporate annual report, and proxy statement. Additionally, the annual Corporate Responsibility Report, which is aligned with Sustainability 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, including Berkshire, its customers and communities. As the transition to a low-carbon economy accelerates, new policy emerges, and market dynamics shift, Berkshireexpects 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 towards its goal of being 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.
Key ESG & Corporate Responsibility Quarterly Developments
•BEST Community Comeback –
Comeback, a transformational multibillion commitment to empower our
stakeholders’ financial potential. Through this far-reaching initiative,
achieve the dream of owning a home, and aid communities in becoming more
environmentally efficient and eco-friendly. Further information is provided
online at berkshirebank.com/comeback and in public relations announcements.
•Corporate Responsibility Report - In
April 2022, the Company released its 2021 Corporate Responsibility Report, Empowering Community Comebacks. The report highlights Berkshire'sperformance on environmental, social, and governance matters along with its progress on its BEST Community Comeback. Detailed on the pages of the report are examples of how the simple decision of where you bank can have an outsized impact in your community. •Standing with Ukraine: Berkshiretook several actions along with its employees and customers in response to the ongoing humanitarian crisis in Ukraineincluding making a $50,000contribution, through its Foundation, to the Ukrainian Federation of America. In addition, Berkshireis refunding outgoing wire transfer fees to individuals who are sending money to family and non-profit organizations in Ukraine; matching employee contributions to non-profits working to aid in relief efforts; and activating a virtual supply drive to provide critical supplies to organizations working to assist in Ukraineand neighboring countries. 67
Table of Contents •Awards & Recognition: The Company was named to Newsweek's list of America's Most Trusted Companies 2022 and ranked #9 for banks. Earlier in the quarter
Berkshirewas also listed in Bloomberg's Gender Equality Index and named a Best Place to Work for LGBTQ+ Equality by the Human Rights Campaign. Finally, Berkshirereceived a 2022 Communitas Award for Leadership in Corporate Responsibility for its BEST Community Comeback program recognizing its early progress on the multi-year commitment. •Current ESG Performance: The Company moved into the top 22% of leading ESG indexes in the U.S.for its Environmental, Social and Governance (ESG) ratings. As of March 31, 2022the Company received ratings of: MSCI ESG- BBB; ISS ESG Quality Score - Environment: 3, Social: 1, Governance: 3; and Bloomberg ESG Disclosure- 47.81. The Company is also rated by Sustainalytics. 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
• 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's
Chief Risk Officer, who reports directly to the CEO. This position oversees risk management policy, credit, compliance, 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 and Capital Committee. The high level corporate risk assessment focuses on 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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