BBT - NYSE

Thank you for standing by, and welcome to the Beacon Financial Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Dario Hernandez, Corporate Counsel. You may begin.

Thank you, Rob, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, beaconfinancialcorporation.com, and has been filed with the SEC. This afternoon's call will be hosted by Paul Perrault, Carl Carlson and will be joined by Mark Meiklejohn as well. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Beacon Financial Corporation. Please refer to Page 2 of our earnings presentation for our forward-looking statement disclaimer. Also, please refer to our other filings with the SEC, which contain risk factors that could cause actual results to differ materially from these forward-looking statements. Any references made during this presentation to non-GAAP measures are only made to assist you in understanding Beacon Financial's results and performance trends and should not be relied on as financial measures of actual results or future predictions. For a comparison and reconciliation to GAAP earnings, please see our earnings release. At this time, I'm pleased to introduce Beacon Financial's President and Chief Executive Officer, Paul Perrault.

Thanks, Dario, and good afternoon, everyone. Thank you for joining us for our fourth quarter earnings call, which represents the first full quarter of results for Beacon Financial Corporation. We finished the quarter and the year with $23.2 billion in assets, $19.5 billion in deposits and $18 billion in loans. Our net interest margin improved to 3.82% with fourth quarter operating earnings of approximately $66 million or $0.79 per share before merger expenses and special charges. We also continued our record of returning capital to stockholders with a $0.32 per share quarterly dividend. Our balance sheet and asset quality remains solid. Operating performance improved with fourth quarter return on assets of 1.13% and return on tangible equity of 13.43%. These results exclude the full benefit of projected cost savings announced at the time of the merger. Overall, the strategic and financial goals outlined in our initial merger announcement are already materializing, and I fully expect to meet our remaining targets as intended. The entire integration remains on course, and we are scheduled to complete our core systems conversions in February 2026. Our highly experienced teams have spent many months preparing for this milestone by developing robust integration plans, testing technology and training of colleagues. We continue to speak with our clients and introduce the new Beacon Bank brand so that they are fully prepared for a seamless transition. I'm pleased with the positive responses to date, which gives me added confidence that we will execute a successful conversion with strong client retention next month. I'm proud of the hard work and dedication of our colleagues who continue to provide exceptional service to support our clients and are working to drive meaningful performance improvements across the entire organization. Their leadership, resilience and collaboration are integral to our ability to support those we serve, create greater value for our stockholders and generate long-term success. I will now turn you over to Carl, who will review the company's fourth quarter results in detail.

Thank you, Paul. Before I get into the fourth quarter, I'd like to briefly cover 2 items. First, the early adoption of FASB's ASU; and second, how the early adoption changes expectations for the merger since our original announcement back in December 2024. As we mentioned in our press release, we chose to early adopt FASB's new ASU 2025-08 related to purchased loans. The FASB finalized this update in November, and it fixes what many in the industry refer to as the CECL double count. By adopting the new standard for 2025, purchase credit deteriorated loans for our merger of equals are treated the same as non-PCD loans. In financial terms, that means there's no day 1 hit to the income statement. Therefore, equity increases immediately. However, we no longer accrete the credit mark into income over the life of the loan. For Beacon, the day 1 impact was an increase of roughly $49 million to equity and about $0.55 to tangible book value per share. Estimated pretax annual credit mark accretion of $10 million to $13 million is foregone. Both the balance sheet and income statement for Q3 and year-to-date have been updated to reflect this. Since this is our first full quarter of combined results and there have been a few changes since we announced the merger, I thought a brief reconciliation of expectations might be helpful. Back in December 2024, our announcement provided a reconciliation of 2026 earnings per share on Page 29 of that presentation. Based on analyst expectations at the time, we projected a 2028 GAAP EPS of $3.85. As I just mentioned, the FASB issued the ASU impacting the accounting for acquired PCD loans. At the time of the merger announcement, the annual after-tax impact was estimated at $13.9 million. This reduces the EPS projection $0.17 per share to $3.68, which I would consider operating. At announcement, we also estimated a November 2025 systems conversion, which was moved to February 2026, which delayed some of the timing on synergies and pushed some of the merger charges to the first quarter of 2026, which will lower GAAP EPS estimates. Based on the 6 analysts covering Beacon, which I track, the average EPS for 2026 was $3.62 with a high of $3.75 and a low of $3.49, with stock prices ranging from $28 to $39. I believe all of these are operating EPS estimates and exclude Q1 merger charges. Turning to Q4. Total assets were up $353 million in the quarter, mainly due to higher cash and equivalents tied to strong period-end payroll fulfillment deposits. Loans declined $275 million with commercial real estate making up $235 million of that decrease. Investor commercial real estate declined to 333% of total risk-based capital. Loan originations and draws were just over $1 billion with a weighted average coupon of 631 basis points. 49% of originations were floating rate. On the funding side, customer deposits grew by $262 million, driven by $127 million of DDA growth. Broker deposits and borrowings both moved lower, down $496 million and $293 million, respectively. Our loan-to-deposit ratio ended the quarter at 92.4%. I'd like to take a minute and discuss the payroll fulfillment deposits. This business works with various payroll processing companies, which process payrolls for hundreds of companies and pay thousands of employees. Funds are transferred in for payroll, taxes and benefits with ACH payments to employees shortly thereafter. The average balance of payroll deposits are in the range of $800 million to $900 million. For liquidity purposes, we maintain balances over $500 million at the Fed. Depending on the day of the week the quarter ends on, payroll deposits can fluctuate significantly. A more informative calculation of the loan-to-deposit ratio uses average balances. Our average loans to average deposits was 96.8% at year-end. The allowance for loan losses close to $253 million or 140 basis points of coverage. This includes $76 million of specific reserves on about $354 million of substandard loans, for a coverage rate of 22%. The general reserve of $177 million represents a coverage level of about 100 basis points on the balance of the portfolio. Given the strong reserve position and the current environment and improving risk rating trends, we continue to see the quarterly provision running in the $5 million to $9 million range. We expect the coverage ratio to gradually trend lower as charge-offs will likely exceed provision as we work through existing substandard credits. Net charge-offs were $9 million for the quarter or 20 basis points annualized, all about $1.4 million of that had already been reserved. Turning to the income statement. This was our first full quarter of combined results. On a GAAP basis, including $14.4 million of merger-related charges, we earned $53.4 million or $0.64 per share, that translates to a 94 basis point ROA and 11.2% return on tangible equity. Our net interest margin came in at 382 basis points which included a 26 basis point lift from purchase accounting. Net interest income was $199.7 million, which included $13.8 million of purchase accounting accretion. Of that amount, only a net $1.9 million came from loan prepayments on purchased loans. Noninterest income was $25.9 million, noninterest expense was $119.1 million, and the provision for credit losses was $8.1 million. Excluding the $14.1 million of merger charges, operating earnings were $89.6 million or $0.79 per share. That's an operating ROA of 113 basis points, a 13.4% return on tangible equity and efficiency ratio of 56.7%. Excluding noncash intangible amortization, our core efficiency ratio was 52.8%. We'll continue to see merger-related charges in the first quarter as we complete our core systems, integrations and realize the remaining cost synergies. I want to recognize the Beacon teams for the work they've done preparing for the upcoming systems conversions. They've partnered closely with our vendors, and we're all looking forward to getting to the other side of this process. The strategic and economic benefits of the merger are already showing up greater diversification, better balance, lower overall risk, stronger efficiency along with a focused regional leadership and customer service. Yesterday, the Board approved a quarterly dividend of $0.3225 per share payable February 27 to stockholders of record on February 13. That represents a dividend yield of about 4.5%. That concludes my comments. Back to you, Paul.

Thanks, Carl. We will now be joined by our Chief Credit Officer, Mark Meiklejohn, and we will open it up for questions.

[Operator Instructions] Your first question comes from the line of Karl Shepherd from RBC.

I guess my first question is on capital. I think you had a nice build with the accounting change and some of the CRE pay downs. And you kept the language in the deck around keeping exploring opportunities to optimize capital. Just how do you want us to think about that and kind of any landmarks over the next couple of quarters after you get past the conversion?

Sure. So I'm more specifically talking to the sub debt, both at legacy Brookline. Legacy Brookline at $75 million of sub debt. And it's already about 40% of it does not count as regulatory capital at this point. And come September of this year, another 20% declines. Legacy Berkshire has $100 million of sub debt that starts to go into that kind of same discount factor come next year in 2027. So we'll be looking at refinancing. I think I want to get a good quarter of results, a clean quarter once we get all our cost savings included before we go out and refinance that. I want to try to get the best rate on that. So I think that's kind of how I'm looking at that. We all know the tools around common equity stock buybacks and things of that nature. And that's always something that we keep top of mind if we think that's right, the right thing to do at any particular time. But we also -- I've said this before, so any new shareholders, we feel capital is very precious, and we want to be very, very thoughtful about that as we move forward.

Okay. And then, I guess, as a follow-up here, you kept the loan growth guidance, I think in -- you had obviously a lot of CRE declines, which I think you'd welcome. But just kind of anything surprise you in terms of maybe the pace of CRE declines? And how should we think about maybe core C&I and maybe when could we inflect, I guess, from a net number?

Well, we are targeting to get down to the 300% level by the end of next year. In the meantime, we want to be able to take very good care of our very important, our very good customers who are the backbone, the legacy Brookline's real estate families. And one of the tools that we're going to use to do that is legacy Berkshire had brought in a significant amount of participations led by other banks. As those mature, we will kindly bow out of the refinance. And in the meantime, the normal order of business, the real estate is in Metro Boston does seem to be stabilizing a little bit. And so I think we'll have a good pace of originations and paydowns which will keep us on track and keep our customers happy.

Your next question comes from the line of Mark Fitzgibbon from Piper Sandler.

First question I had for you, Carl, is you have a little over $2 billion of cash today in short-term investments on the balance sheet. I guess I'm curious what your target for that is and maybe how long it takes you to get cash balances back to the appropriate level?

Well, that happens very, very quickly, Mark. So -- and I'll go over this a little bit, again, folks that really followed Berkshire kind of know the business of the payroll deposits. But it was -- it's a nice business that they have, and we love the fee income associated with it. The efficiency around what they were able to build, and it's a great part of the new Beacon Financial Corporation. But the payroll deposits are highly volatile. They come in and then they go out. It's very, very predictable. They know exactly what's coming in. They know exactly what's going out, but it's deposits. It's in and out. And so on average, those balances range around $800 million to $900 million on an average basis. And that's kind of why I was trying to start pointing people towards a very common thing to look at is the loan-to-deposit ratio. And for us, I think a better measure is an average loan to average deposit ratio because that kind of tells more of a story. We finished the year at just under $1.9 billion in deposits, payroll deposits, which was up $800 million or so from the prior quarter. When I talk about the predictability, yesterday, our payroll deposits were up $600 million. Today, they're around $2 billion. So they fluctuate quite a bit. Money comes in and then it goes out. So what we do, we consider a portion of that core, about $500 million, and that's core. That can fund loans, that can fund securities, that can fund the balance sheet. The balance of it, we like to keep in at the Fed. So we make a little bit of a spread on it there, but it's not something that we're putting to use, and it's just going in and out. I hope that answers your question.

It does. Just one other question for me. I guess you guys have talked in the past about the opportunity to do some larger loans with new and existing customers given the increased size in the balance sheet. I guess I'm curious, is that baked into your projections of mid- to lower single-digit loan growth for 2026?

I think a little bit. We will still look to try to syndicate some of the largest loans as we have in the past. So we will walk through glue on the size thing. We don't want to move too fast, but we are interested in looking at somewhat larger loans.

Your next question comes from the line of Laura Hunsicker from Seaport.

Yes, just wanted to go back to the buyback. I wanted to understand that a little bit more. Certainly, a lot of your peers are actively buying back stock, and you're sitting with a plethora of capital, right? Your CET1 is 11%. So how do you think about that? I mean, obviously, I realize price is a consideration and other uses. But where do you want that CET1 ratio? Or how is it that you look at it? What is it that would get you excited and say, okay, now we have to be back in the market. How should we think about that?

I think you only go back in the market and buy back your stock when, number one, the stock is just not doing well and it doesn't represent the value of the organization. And you're not able to grow and use the capital for growth. Now the first thing that we easily hit that number because that's -- just going to what the analysts expect us to be trading at, we're very undervalued in that sense. Not that I'm saying we're undervalued. I'm just saying the analysts are saying that. I bought back some -- I bought some stock personally, but that's different. It's something that -- but as far as making sure that we think about this for the long term, it's not a short-term thing it's a long-term thing. And right now, we're focused on getting to that 300% of capital for our ICRE portfolio concentration numbers. And growth in capital gets us there. And so we expect to see that capital growth, but also growth in loans. So if we don't for some reason, get the growth of loans that we expect, we understand that that's an opportunity to pull on. We also understand that when we do raise some sub debt, there may be opportunities to use some of those proceeds for common stock buyback if it makes sense. These are all big hits. But that's -- hopefully, that's helpful. We do provide our capital ratios in the deck and where we feel comfortable with them.

Sorry, I see them provided in the deck. Can you name a target? Did I missed that?

We have operating targets that we're very comfortable with. Our stress tests show that we could operate at that level. That doesn't mean that we're going to go right down to that level because you also have to consider the market and what peers are doing and things of that nature as well as other uses of capital. You always need capital for growth.

I mean, just one more thing. I mean, it would also seem your dividend yield there, I mean, I agree with you. I think, obviously, your stock is cheap, but your dividend yield here is so high. And so that's also an expensive cost that if you retire those shares, it's not there. Is that -- is that part of the thinking? I mean...

It goes into the -- yes, it does go into the calculus whenever you're thinking about doing buybacks.

Okay. Okay. And then just jumping over to credit. You -- obviously, you had a small jump here in your CRE nonperformers. It looks like that was all office. Just wondered on that, if there was any color on that $10 million increase? And then also on office, the $137 million of criticized, how much of that is set to mature this year in 2026?

So Laura, to your answer to your question, the jump on the nonaccruals was a single office property CBD. It was about a $9 million loan, vacancy issues there, and we have a very strong reserve on that. It's 56% reserved.

Okay...

And I apologize. I missed the second part of your question?

Yes, the $137 million you have of criticized office and by the way, I really appreciate all the disclosures here. How much of that is set to mature this year?

Very little actually. We had 2 in our -- in the 5 quarters, including the current quarter, we only had 2 criticized loans scheduled to mature. One is the loan that I just described to you. And then the second loan is a special mention loan, so it's not a substandard loan, and that is not until the third quarter of '26. And frankly, I don't expect any issues with that loan.

Okay. Okay. Great. And then the reserves to loans, you mentioned that's obviously nice and high at 1.4%, and you'd expect that to obviously come down. Where do you see that ending up as we look throughout 2026. Where could we see it in the fourth quarter?

Yes. I would probably hesitate to give you a number because that's being driven by some of the specific reserves, as Carl mentioned that we have on our substandard loan portfolio. Some of those loans are long-term workout loans. We have strategies with all of those that we're working through. But it's hard for me to say exactly when we -- we've said that we expect elevated charge-offs based upon the level of provision we have. It's hard for me to predict on when those may actually occur. But I think over the next 4 to 6 quarters, we'll see it ride down into the [ 125% ] range.

Okay. Okay. That Great. Okay. And then last question, onetime charges by my math, there's about $10 million or so remaining for the first quarter. Is that still a good number? Or is there a better number to be using?

I think it's -- yes, it's in the $10 million to $13 million, I think, range.

Your next question comes from the line of David Konrad from KBW.

Carl, thanks for your comments earlier in the call regarding the accounting change. But I wanted to take it another way with your guidance. You were 15 to 20 accretive yield prior with the 3.90% to 4% NIM. I was interpreting the 15% to be with the new accounting change. And so now your accretable yield is estimated to be 15% and the guide now is 3.85% to 3.95% for the NIM. So I kind of get why the high end would be reduced, but maybe am I interpreting the accounting change and why do we drop to the 3.85% NIM on the low end, that makes sense.

Sure. Well, as you know, we came in -- this is the guidance I gave almost exactly for last quarter. And -- but I gave, as you said, the 3.90% to 4%. The -- and I was always thinking when I think about prepayments on the -- on the loans that were marked with the merger of equals, I was -- I was just thinking about the upside, and so we were estimating about $3 million of benefit from loans being prepaid. And that's kind of what our baseline guestimate, and I'll say, guesstimate because it is mostly a guess on prepayments. Our prepayments would have been actually a little higher than that, but it was knocked down because we had 1 large loan that prepaid that actually had a premium on it. And so I wasn't really thinking about the loans with premiums on them. And that actually had a big impact on what we actually realized this quarter on interest, so knocked us down to 13% and change. And so I think a better adjust my -- take that into a little bit of that into consideration. So you are right, the $15 million did exclude the impact -- the FASB impact because we knew it was coming or we were very hopeful that it was coming. And -- but prepayments are a little bit more volatile. I wanted to give myself a little bit more room there.

Got it. Okay. And then on the expenses, 1 quick question. Amortization expense came in at $8.8 million, I think, which is a little bit higher than I thought. Is that a good number to think about going forward?

Yes. That's a good number. I mean it does step down over time because we do it on a -- some years digits basis. I think if the CDI component is over 12 years, so it does step down over time. And we've got a wealth amortization component of that as well.

And then last one, as you achieve all the cost saves in the 2Q '26 area, what should we expect for like the back half of the year expense growth rate once all the cost saves are down?

Well, I think we would stay in that 3% to 3.5% growth after we get -- realized our cost savings. I mean we do have a lot of work going into our branding efforts right now. So that will be in the run rate basically. It will be -- it will start in the run rate, I'd say, in Q1, but you'll see the impact in Q2. So we'll have a net impact in Q2 of all the cost savings as well as some of the investments in the organization.

Lot of signs.

There's a lot of sings. We're doing some upgrades to some of our systems, but there's also a lot of savings around -- around systems and vendors and things of that nature as well.

Our next question comes from the line of Steve Moss from Raymond James.

Maybe just, Paul, so maybe just starting on kind of how to think about the loan runoff portfolios. Just on the equipment finance and the Berkshire Hills commercial real estate participations, kind of curious if you could size up how much you're looking to carve out over the next -- or let go over the next kind of 12 to 18 months?

Mark? They get the 3 portfolios that are running off that we're not in those businesses anymore.

Yes. So for Eastern funding, the tow portfolio is down to about $190 million. Macro lease is about $150 million and the aircraft or -- I'm sorry, the Firestone is just under $20 million. In terms of runoff on those, we've got tow at about $27 a quarter, macro lease at $19 a quarter and Firestone at $2 million to $3 million per quarter. So those are running off quite quickly. In terms of the participation side, I don't think we can put a number on that because there are lot of factors involved with that, the maturity of the loans, the desirability of those loans in the marketplace when they do mature, and then our ability to sort of work our way out of those. So it's a stated strategic goal for us, but it would be -- it would be inappropriate for me to put a number on that.

Okay. Got you. Appreciate that. And then in terms of just the office loan, I apologize if I missed it. Just kind of curious as to how you're thinking about the timing of resolution around that $9 million NPL?

Currently on that, that's the new nonaccrual that we discussed. We're working. The sponsor is very amenable to working with the bank on a potential sale of that property. So we think there's some interest, and we're hopeful.

Okay. And then a third one here, just in terms of -- I know it's a disclosure on the rent control multifamily properties in New York. Just wondering if you could size up how large that portfolio is?

Yes. I think we had talked about this last quarter. If I recall correctly, we -- I believe we have 7 loans in that portfolio. The total is about $18 million or $19 million. So it's a really very small population of loans, and it comes out of our -- formerly the PCSB bank.

Okay. Appreciate that. And then I guess a question for Carl here. Just kind of curious as you have the balance sheet combined here, you've laid out your expectations for growth. Kind of curious how you're thinking about positioning the balance sheet for rates? How a 25 basis point rate cut could impact you guys these days and if there's anything you're looking to in terms of adjusting balance sheet positioning?

Yes, I'd say we like the position of the balance sheet right now. It is a little bit on the asset-sensitive side in the very near term. So when rates move quickly, the rates on our loans and our assets move a little faster than our deposit side. But deposits tend to catch up fairly quickly. It may not be in the quarter, but pretty quickly. So we like where we're positioned. You can see the duration of loans is short. The duration of the securities portfolio is short and the size of the securities portfolio is minimal to support the organization in very vanilla and what they're invested in. But -- and the deposit portfolio just continues to get better and better.

But from a strategic point of view, Steve, we work to try to be neutral. We don't like to take a guess on where interest rates are going to go and then take action on the balance sheet, that you may or may not realize that. So we'll make our money the old-fashioned way.

Your next question comes from the line of David Bishop from Hovde Group.

Curious from an economic backdrop perspective, I think, Paul, maybe you mentioned this in the preamble. Maybe just an update in terms of what you're seeing in terms of the health of the Boston commercial real estate market. I know life science is pausing up there in terms of available space, maybe what you're seeing from a macro level perspective on the commercial real estate side?

Yes, certainly, this is Mark. Certainly, there continues to be stress in the portfolio, both -- in the market, I should say, both in terms of office and lab. I think there are quality lease opportunities out there. There are quality tenants out there, and they've got a lot of leverage right now. So we are seeing values drop. We've seen that in the resolution of some of our problem assets. But I think we're generally seeing that stress in the marketplace as it relates to price per square foot type values. And I expect that stress to continue. But I think the new news or the green shoots, if you will, in the market is that there are people out there. We're seeing some -- particularly on the Life Science side some of the tenants starting to be successful with the rounds of finance -- rounds of funding, I should say. So that's creating some opportunities in the marketplace for sort of buy the lease market a little bit, if you will.

I would just add, David, that the core business district in Boston has gone through some pain, probably has to go through some more pain, but it does seem to be coming back green shoots. I think Mark mentioned and some life science stuff, which got overbuilt in the past few years where we don't have all that much in that. I think that continues to suffer. But in our entire footprint, the rest of the stuff is really pretty good. That's all going pretty well. When I talk about Rhode Island and even Western Mass and all many places like that they are all holding up pretty well.

Got it. And then maybe back to the loan side of the equation on the yields. Just curious what you're seeing in terms of new origination yields, how this trended quarter-over-quarter?

So like I said, we originated a little over $1 billion at 631 basis points on average. Now remember we had 3 rate moves in the quarter as well. So we saw the impact on that on not only just the originations, 49% of our originations are basically floating rate, but also on the balance sheet of those loans that reprice. So if there's any particular category you're interested in, C&I loans were coming in on a weighted average base of 701 basis points, consumer loans around 549 basis points and commercial real estate, 607 basis points.

Eastern fund, I appreciate that color.

Yes, the Eastern funding, as far as equipment financing, that's as a subset of commercial loans, 853 basis points on that book.

Got it. Then maybe 1 final question. Turning back to capital. Carl, you probably saw maybe 1 of your peers last week, I think, announced they did a credit risk transfer. Any thoughts? Is that something that could ever enter the capital management equation?

I never want to say never, but it's not something that we're really interested in. And God the bid, I said I was interested. I get 400 calls.

That ends our question-and-answer session. I will now turn the call back over to Paul Perrault for closing remarks.

Thanks, Rob, and thank you all for joining us today, and we will look forward to talking with you next quarter.