Beacon Financial Corp (BBT) Q3 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to the Beacon Financial Corporation third quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Dario Hernandez, Corporate Counsel. Please go ahead.

Thank you, Samantha, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, DeaconFinancialCorporation.com, and has been filed with the SEC. This afternoon's call will be hosted by Sean A. Gray, our Chief Executive Officer, Carl M. Carlson, our Chief Financial Strategy Officer. During the question and answer session, they will also be joined by our Chief Credit Officer, Mark Mickeljohn, and our Chief Banking Officer, Michael McCurdy. 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 two of our earnings presentation for our forward looking statement disclaimer. Also, please refer to our other filings with the Securities and Exchange Commission, 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 released. At this time, I'm pleased to introduce Beacon Financial's Chief Executive Officer, Sean Gray.

Thank you, Dario, and good afternoon, everyone. Welcome to Beacon Financial Corporation's third quarter earnings call. I'm Sean Gray, Chief Executive Officer of Beacon Financial Corp. and Beacon Bank. I stepped into the role in September after previously serving as Chief Operating Officer. I'm pleased to join you today for my first earnings call as CEO. Before turning to a quarterly result and the direction I see for Beacon, I'd like to share some more on my background and experience. I spent the past 19 years with Berkshire Bank, following our merger with Beacon Bank as well. At Berkshire, I served as interim CEO from 2020 into early 2021 and as president of Berkshire Bank for seven years. I led commercial banking for six years and retail banking for 19 years and managed support functions including IT, marketing, HR, risk, and compliance. I'm fortunate to have managed and recruited many of our commercial banking teams, private banking, and our digital banking channel. Following the completion of our merger of equals last September, I also led the team through our systems integration in the first quarter of this year. Over the past month, I've appreciated the opportunity to speak with investors clients employees and our market teams my experience working directly in our markets with our leadership team employee and clients has allowed me to re-engage quickly and build immediately on existing momentum this is not a reset it is a transition built with urgency and for disciplined execution over my first 90 days I have been and will continue to listen to our key stakeholders align our senior leaders around the highest impact opportunities, and translate our priorities into a thoughtful 2027 plan with measurable financial and operating goals. While the operating environment remains challenging, Beacon has meaningful scale, an attractive footprint, and distinct strengths we can build upon. Before I discuss our financial results, I'd also like to recognize Paul Peralt for his many years of service and leadership. Paul played an instrumental role in building both Brookline and Beacon, and his contributions to the banking industry span a remarkable 50-year career. Paul, thank you for your leadership and your many contributions. Our third quarter results demonstrate the strength of our diversified business model and our ability to generate consistent profitability. We delivered earnings of $0.73 per share on a GAAP basis, with operating earnings of $0.77 $0.77 per share, reflecting disciplined execution across our franchise. The quarter had several positive developments. Net interest income increased $3.9 million sequentially, driven by improved net interest margin. Our net interest margin expanded to 3.85 percent, driven by loan yields up 14 basis points and stable funding costs. Operating PPNR was up 4 percent link quarter. Our capital position strengthened further during the quarter with tangible common equity of 9.35% of tangible assets, well above regulatory minimums. This capital strength provides us with flexibility to invest in growth while returning capital to shareholders through our dividend and stock buybacks. I'll now turn the call over to Carl to review our third quarter results in more detail.

Thank you, Sean. Third quarter net income totaled $61.2 million on a gap basis, or $0.73 per share, compared to $64.4 million, or $0.77 per share, in the second quarter. On an operating basis, which excludes restructuring charges and gains on asset sales, third quarter earnings were $64.7 million, or $0.77 per share. The sequential decline in GAAP EPS primarily reflects nonrecurring charges related to the CEO transition as well as a net gain recognized from the sale of free facilities. Return on average assets declined 6 basis points to 1.11 percent, and return on tangible common equity decreased 82 basis points to 12.02 percent. excluding the non-recurring items, core operating return on assets and return on tangible common equity remained stable at 1.17% and 12.69% respectively. Net interest income increased $3.9 million sequentially to $197.2 million, benefiting from margin expansion and an additional day in the quarter. A net interest margin expanded four basis points to 3.85%, reflect an expansion in the yield on interest-earning assets of 11 basis points as funding costs increased one basis point. The yield on a loan portfolio increased 14 basis points to 6.13%, driven by originations of $1,040,000,000 at a weighted average coupon of 6.4%, 64% of which are floating rate. Looking ahead, we expect net interest margin to be in the range of 3.85% to 3.9%. Purchase counting accretion contributes approximately $12 million per quarter, based on contractual cash flows, and will fluctuate based on prepayment activity. Our base case currently does not reflect future changes to the Fed funds rate. Non-interest income remains stable across our diversified revenue streams, reflecting consistent performance in wealth management, loan level, derivative income, and service charges. Operating expense totaled $119.5 million, excluding restructuring charges and intangibles. This compares to $118.9 million in the prior quarter, which reflects higher marketing, loan servicing, and fraud costs in the quarter. Our core efficiency ratio improved to 53.5%, demonstrating the operational momentum from our completed merger integration. Turning to the balance sheet, our total assets declined $375 million to $21.9 billion from the prior quarter, driven by a combination of factors. Cash and equivalents decreased $445 million to $771 million, reflecting normal daily volatility and payroll fulfillment deposits. Loans declined $170 million to $17.7 billion, with CRE, consumer, and equipment finance loans declining $270 million combined, offset by a growth in commercial loans of $100 million. Deposits declined $303 million to $18.2 billion, predominantly driven by payroll deposits of $327 million. dollars. Our loan-to-deposit ratio was 97% at quarter end. Credit quality remains strong and well-managed. Non-performing loans increased approximately 8 million to 91 basis points of total loans. Net charge-offs totaled 13.5 million, or 30 basis points annualized. Provision expense was 8.9 million, resulting in the reserve coverage of 132 basis points of loans and leases. Our capital position strengthened further during the quarter with total risk-based capital ratio of 14.6% as we issued $175 million of 10-year non-qual five-year subordinated debt with a coupon of 6.25% while retiring $75 million of floating rate debt, which had a cost around $7.25, and was scheduled to drop to 40% qualifying Tier 2 capital on September 15. The growth in common equity and Tier 2 regulatory capital combined with the reduction in the investment commercial real estate portfolio resulted in an I-CRE concentration ratio of 295% at the end of the quarter. These capital metrics provide significant capacity for organic growth and continued capital returns to shareholders. That concludes my preparer remarks. I'll turn it back to Sean.

Thank you, Carl. As the quarter's results demonstrate, we are making progress in several important areas, but we also recognize that there is more work to do. With this transition comes an opportunity to align on what matters most. Today, I'd like to outline the priorities that will guide our work together. As we complete our strategic planning and budget work in the fourth quarter, we will provide additional detail on our plan during our fourth quarter call in January. Our objective is clear to be the Northeast's premier commercial relationship bank. Achieving that objective will require disciplined execution across our balance sheet, revenue mix, expense base, and capital allocation. Our first priority is to improve the composition and profitability of our balance sheet. On the asset side, we will accelerate quality, relationship-led loan growth and improve the composition of our loan portfolio with greater emphasis on C&I and owner-occupied commercial real estate lending. As Carl noted, we ended the quarter with an iCree to risk-based capital ratio of 295%, achieving the goal we set when we announced the merger, and C&I loans grew 1% on a linked quarter basis and 4% annualized, marking the second consecutive quarter of solid C&I loan growth. Our pipeline is healthy, and now that the Cree concentration is under our 300% goal, we expect to redeploy capacity into high-quality, appropriately-priced credits. We will deepen relationships and businesses where we already perform well. We'll scale proven verticals and add middle market bankers. At the same time, new production must meet our credit and risk-adjusted return standards. On the funding side, we will reduce our reliance on wholesale borrowings, growing core relationship deposits, and improve our deposit mix. Our market-facing teams, private banking teams, and digital deposit engine give us a proven scalable path to core deposit growth. We are slightly asset sensitive, but we are not relying on rates alone. We are focused on controlling funding costs, improving loan and deposit mix, and disciplined pricing to protect spread and improve profitability. Our second priority is to make fee income a larger part of our earnings mix and reduce our reliance on spread income. Fee revenue currently represents approximately 11% of total revenue, and our goal is to increase that contribution to the mid-teams over time. Our primary opportunities include cash management, wealth management, including Clarendon Private, payments, and SBA loan sales through 44 Business Capital. 44 Business Capital demonstrates our ability to identify a specialized fee income opportunity and build the platform and scale it. Our third priority is to improve efficiency. We've delivered on the original expense targets established in our merger of equals plan. Now that we are past the integration, additional opportunity remains. Our objective is not only to improve the efficiency ratio, but to also lower our nominal dollar expense run rate. We are pursuing the next layer of opportunity through organizational simplification, further optimization of our branch network, and simplification of our operating platforms. And that's without under-investing in growth, talent, or client-facing capabilities. Our fourth priority is to maintain a disciplined, shareholder focus to capital management. We will put capital where it creates the best long-term value. Our first use of capital is to support organic growth. We remain committed to maintaining our dividend, increasing buybacks, while preserving balance sheet strength. We will remain open to team liftouts that add proven client-facing talent and support organic growth. We will not pursue whole bank acquisitions. We believe our shares remain significantly undervalued. Our board approved a $50 million share repurchase authorization in April and an additional $75 million yesterday, bringing our total authorization to $125 million, or approximately 5% of our market capitalization. The board also approved a quarterly dividend of $0.752 per share, reflecting a 4.7% dividend yield. Over time, our goal is to reduce our share count as part of a more structured approach that supports organic growth, balance sheet strength, and shareholder returns. Our fifth priority is to maintain proactive credit management. Credit remains stable, well understood, and actively managed. About half of the portfolio was credit marked at the close of the merger, providing additional protection as we work through the current environment. Over time, and subject to portfolio performance and economic conditions, we believe there is an opportunity to modestly reduce our reserves-to-loans ratio. We will remain conservative, disciplined, and proactive. Our sixth priority is to use the technology the merger has already afforded us to expand how we serve clients and improve how we operate. We will continue to bring the capabilities of the branch to our clients through digital channels, making it easier for them to bank with us when and how they choose. We also see meaningful opportunity to use artificial intelligence responsibly for operational efficiency and workforce enablement. Our seventh priority is people. We are targeting top quartile employee and client retention because engaged employees and durable client relationships are fundamental to consistent growth. We will continue to retain, attract, and deploy top client-facing talent to deepen relationships and scale the businesses where we have proven capabilities. Taken together, these priorities, supported by the scale of our combined franchise and management-controllable levers, provide a path to stronger returns. We have not yet achieved the performance levels contemplating our merger of equals plan. However, we believe a mid-teens ROTC in an appropriate near term will provide greater detail on our expectations and timing as we finalize our strategic plan. Finally, I want to thank our employees for their continued commitment to our customers. Their engagement and the trust and loyalty of our clients will be critical as we execute our priorities and build a stronger, higher-performing beacon. With that, we'll now be joined by Mark Mickeljohn and Mike McCurdy, and we'll open it up for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If necessary, you may rejoin the queue. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Fetty Strickland with Havdi Group. Fetty, your line is open. Please go ahead.

Hey, good afternoon, everybody. If I could, I wanted to start on credit, just ask about some of the drivers in the decline and criticized and classified in the quarter, as well as the three larger CRE loans that moved. Can you talk about the puts and takes on both the moves and non-approval, and could we possibly see more declines and criticized and classifieds in future quarters?

So this is Mark Nickeljohn. I'll take that. And there's a few things wrapped in there. So if I don't hit everything, you can remind me. So we did see a small increase in NPLs for the quarter, about $8 million. Two larger real estate loans migrated into NPL. One is an office property in Connecticut, and the second is an industrial property in Boston. Both of those were loans that we had identified as problem loans and have been working on for some time. We expect the industrial property to be resolved in the next quarter or two. We're currently working on a short sale, and I think we've got an agreement on that deal, so we should be in pretty decent shape there. That loan has been reserved down to appropriate levels. With respect to the Connecticut property, that's an office property, as I mentioned it's in stanford um they are about 80 occupied but have some pretty significant tenant role and um we're uh working with them to to help re-tenant the property or address that tenant role i should say there's some significant ti that needs to be done there so we think that's a longer term um solution but we think we're you know we're in pretty good shape on that one also um as it relates to the criticized and classified you know we were you know happy and you know to see that decline um we're hoping that that represents you know a stabilization in the market um you know having said that you know there's a number of credits that you know we continue to work through and that we believe we're properly reserved for so um i may have missed something in to your question.

No, it was a long question, but you hit it all. Thank you very much. All right. And just one quick follow-up for me is just, on the repurchases, can you help us think through kind of what the pace could be, whether there's a baseline on Common Equity Cure One or just managing that CRE concentration, keeping that below 300%, I mean, what should we think about as kind of, I guess, a guiding light on the repurchases in future quarters? Sure.

The DEC does provide on slide 10, I think highlights meaningful excess capital. So I do believe at these levels, we will be very active. So whether you look at it to regulatory limits, or you look at a board set targets and management targets, we feel we have excess. process and we feel the authorization of $125 million is the right amount at this time and we can be active in the market.

Great. Thanks for taking my question.

Your next question comes from the line of Justin Crowley with Piper Sandler. Justin, your line is open. Please go ahead.

Hey, good afternoon, everyone. Just wanted to start off on loan growth. And, you know, I think last quarter you guys referenced it was a pretty healthy pipeline, and, you know, it looked like that helped out with a nice pickup in originations, but I guess the offset here was paydowns, and so how do you see that dynamic evolving just given where rates have moved to and with potentially a couple more hikes on the way?

Yeah, good question. That's definitely what's on everybody's mind right now. You know, as Sean mentioned earlier, we think the pipeline does remain healthy. Currently, we have about $610 million in net new funding anticipated fourth the quarter. But note, as you referenced earlier, that excludes paydowns, regular amortization. And that's the critical right now. You know, the market remains challenging and unsettled. Spreads are thin. Opportunities are highly competitive with overly aggressive rates and terms, not to mention the market is extremely sensitive right now to the changes in interest rates that have occurred over the last 30 to 60 days.

And with that question remaining an open question going through q4 we're still going to be dealing with that okay and and do you think like the pace of paydowns could slow um just given what we're seeing in rates and you know is there a path to you know putting up some sort of net growth um you know into the end of the year and through next year or how are you thinking about that no that is that's a fair statement right i mean we we do expect that paydowns will slow down given that interest rates have ticked back up it's hard to gauge that.

It's hard to estimate that in particular, but no question that there's going to be a slowdown, I would suspect.

Okay, helpful. And if I could just squeeze in one more. And Carl, I appreciate some of the outlook you gave on the margin. But if we think about that potential for a couple more hikes out of the Fed, any thoughts on how the NIMH could behave under that scenario?

Yeah, I think, as Sean mentioned, we're slightly asset sensitive. So I think it will benefit us as we move forward, and particularly as rates are rising. I think we typically get a nice expansion early up front and then with a little bit lag on the pricing of our funding. So I do expect to see that over time, margin expanding.

Okay, great. I will leave it there. Thanks so much.

Your next question comes from the line of Carl Shepard with RBC Capital Markets. Carl, your line is open. Please go ahead.

Hey, good afternoon, guys, and congratulations, Sean.

Thanks, Carl.

I guess I just wanted to start, I think you referenced some of the remixing underneath, whether it's clients or the loan portfolio. And you guys obviously made a lot of progress getting under 300% Cree this quarter. But how do you want us to think about the size of the remixing to be done? And how does that kind of impact net balance sheet growth maybe over the next couple of quarters or a year?

Sure. So we're very confident with the teams we have, with the capabilities we have, with our value proposition, that we can maintain New England type growth metrics. So, with that said, the good news is the headwind is behind us. Getting down to the 295 I-CREE level represented more than $500 million in runoff. So, we're happy we're ahead of target, and we don't think that headwind exists anymore. So, we can get back to more of a normalized pipeline, normalized growth rate. You know, as far as the type of business, it's going to be, you know, really good sponsors, known sponsors, high quality, and we can be selective, right? We can be selective as we refill that bucket. We feel very comfortable maintaining a 300% iCreed to risk-based capital level. With current amortization, we can be active in the markets and still be participating and growing. So all in all, we feel the headwinds are behind us. We feel there is good business to be had. We have running room at the level we're at right now, so our teams can be very selective out there in the markets. I hope that helps a bit.

Yeah, that's great, Collar. and as a follow-up the priority slide for 2027 discussed is continuing to bring the reserve down I know reserving is very formulaic but can you just talk about conceptually is that just a matter of resolving credits that already have a specific reserve or is it improvement in the portfolio is it the market just help us understand that a little bit more thank you yeah so I think it's important to kind of understand a little bit of the component of the reserve.

So, you know, it's been consistent over the last several quarters in terms of the message that we've been providing and kind of where we are. You know, we have about $70 million in specific reserves in place, about $350 million in substandard loans. We've already taken some significant charges within that $350 million. So, you know, while that $70 million represents about 20% coverage, you know, really, we feel like we're in pretty good shape as it relates to those problem assets. Our, you know, sort of collective coverage is running around 93 basis points. It was 94 last quarter. It was 92 the quarter before that. So, you know, we expect, you know, that we will see some elevated charge-offs as we continue to work through those specific reserves and those problems that we do have while maintaining a solid coverage on our base portfolio.

Okay, great. And thanks again for the 2027 priority slide and looking forward to hearing more in January.

Thank you.

Your next question comes from the line of David Conrad with KBW. David, your line is open. Please go ahead.

Yeah, thanks. Good afternoon. Sean, in the slide deck, there's a couple mentions of branch efficiency, branch optimization. Just wanted to get your philosophy or views on the branch network. You're pretty dense in New England, maybe less so in other markets. Is it a matter of MSA market share, or maybe in the dense markets, it's better to serve some of those digitally? Just think what you're thinking about with the branch footprint.

No, I think you're right. In the dense markets, to continue to serve and enhance with digital. And I would say the markets where we may not be as dense to really leverage banker-led private banking, we've talked about things like MyBanker in the past, or digital instead of additional brick and mortar. So filling in the network will be done with people and digital. As far as how we look at our branch network, I think a management team should always be proactively evaluating branch counts, looking at profitability, looking at changing traffic to customer behaviors. And it's something we've had success in the past from, you know, with legacy BHLB, we did trim the branch count from about 132 to mid 80s, right, while maintaining deposits and growing in some stead. so there's a proven track now do i expect that level no but we do look at ourselves and the number of branches we have and the deposits per branch and look at our peers and we're going to be proactive in how we manage those counts great thank you appreciate it your next question comes from the line of steve moss with raymond james steve your line is open please go ahead good

Good afternoon. Maybe just following up on the priority slide in the deck here, you know, I'm just curious here when you talk about team list outs, are there any business lines you would like to enhance or add or any targets in particular that you'd give us color on?

Nothing that we're looking to add at this point, but I do see one of our greatest opportunities is we do some things in some regions very well. So we have an opportunity to port certain CNI or business banking or ABL or SBA from a region that's doing really well and replicate that in really a like-type region or opportunity. So we haven't really filled in the coverage of our most profitable businesses in totality yet. You know, a smaller example is that in Hudson Valley, we don't have a tremendous amount of wealth management coverage down there, yet the market indicates opportunity for us. So it's things like that that I think are most important. And in the comments and in the script, it's really leveraging proven businesses where we know we win, where we know we can compete, and where we know we already have the talent that can be scaled.

Okay, great. that's helpful and then i guess the other thing that caught my attention on that slide you know in terms of target top quartile employee and client retention just curious you know have there been some challenges in terms of of retention here post the merger and maybe that's just a greater emphasis um you know just kind of curious on that and you know does that also mean maybe there's we're going to see a step up in terms of of expenses that you guys make more investments over the next 12 months? I know you guys talk about expenses lower over time, but is there maybe a need to remix some of the expenses? I think you should phrase it that way.

No, no, good question. I don't think we need to remix expenses. When we do talk about adding teams and using capital to be tactical on that front, it would be more one-offs. We're not expecting any new business at this point. You know, in regards to retention, I can say this, and I talked a little bit about it. I've had the fortune to either recruit and manage many of our commercial teams, about half our regional presidents, ABL, Wealth Management, SBA. And I've gotten to know over the last year some of the talent on the legacy Brookline side, of which I'm incredibly impressed with the regional leadership in both Boston and Rhode Island. So I think we've got the necessary talent. We're spending the time leveraging that talent. And I feel good about retention at this point.

Okay, great. Thank you very much. I'll step back in the queue here.

Your next question comes from Lori Hunsicker with Seaport Research Partners. Lori, your line is open. Please go ahead. Great. Hi, thanks. Good afternoon.

But, Sean, I'm hoping you can just circle back on expenses here. I just, you know, kind of want a higher-level read. Obviously, at Berkshire Hales, as you mentioned, you were a huge part of branch production. And, you know, the branch footprint got reduced close to 40%.

So can you help us think of your 145 branches sitting currently, what that number looks like, you know, a year from now, two years from now? so laurie we will provide more of that detail in the january plan um and be very specific right now i can say it's more one-offs there isn't any specific market um and and it's really just doing the work doing the necessary work to understand um understand if we even have branch overlap that we may not have considered in the original uh merger of equals so um you know i i I wouldn't be saying it, but I didn't think it'd be meaningful, but it will be more one-offs and we'll announce more detail as we move into January. Okay, perfect.

And then just staying with expenses here, the other expense line, that $13.4 million was elevated. Is there anything in that non-recurring?

And then I guess specifically, what was workout expense in that figure? thanks thanks laurie uh i wouldn't say anything were one-offs in that uh there are some things that that uh come and go with uh uh higher and lower so for instance fraud fraud expense was about 600 000 in the quarter uh from prior quarters but that can you know that comes comes and goes as things pick up and we find ways of fixing them. Sometimes we get recoveries out of that. So we'll see how that goes. But I wouldn't say nothing in particular. You know, we are marketing expenses, but that's not in other. We do expect that to accelerate into, you know, into the fourth quarter. And FDIC insurance is something we'll, as a larger institution now, will be under a different calculation, so we'll see how that comes out.

Okay, and then what was workout expense in the quarter?

The loan workout expense, it was 1.6 million this quarter? It was 1.2 million this quarter.

Okay, great, and then thank you, and then my last question, just around office, you know, as we're looking at that 9% bucket, that, you know, roughly 100 million or so coming due in the fourth quarter. Is any of the $193 million of criticized, is any of that set to mature in the fourth quarter? And if so, how much?

Thanks. Lori, it's Mark. So on that, within that maturing bucket in the fourth quarter, there are two criticized loans, a total $32 million. One of those is in the process right now of being extended out so that maturity will will come off um and then the others being worked on i expect that will also be extended um also so you know plan in place for both of those um so i think we're pretty good shape there and there are no criticized and classified maturing in the first quarter perfect thanks for taking my question thanks laurie your final question comes from I'm Daniel Cardenas with Breen Capital.

Daniel, your line is open. Please go ahead.

Good afternoon, everybody. Most of my questions have been asked and answered. Just a quick one on the few revenue side.

Your growth expectations, do you plan to do that purely organically, or are you open to doing maybe selected non-bank acquisitions to help you get to your mid-team goal? we organic um we have done the work we've started to dig in i gave an example of uh better wealth management and broker dealer coverage in all of our markets um so it will be some team one-offs it will be leveraging the businesses like sba that we we have um that we see prospects in in some regions and markets that haven't put an emphasis on it but we believe it to be organic Mike.

Great. Appreciate the answer. Thank you.

We have reached the end of the Q&A session. I will now turn the call back to Sean Gray for closing remarks.

Thank you. And thank you all for joining us today. We appreciate your interest in Beacon and look forward to speaking with you again next quarter. Thanks again.

This concludes today's call. Thank you for attending. You may now disconnect.