Beacon Financial Corporation Common stock

Thank you for standing by and welcome to the Beacon Financial Corporation fourth quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star one. Thank you. 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 as is filed with the SEC. This afternoon's call will be hosted by Paul Farrell, Paul Carlson, and will be joined by Mark Migglejohn 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 two 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's financials. results, and performance trends, and should not be relied on as financial measures of actual results or future predictions. For 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 Perl.

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 79 cents per share, before merger expenses and special charges. We also continued our record of returning capital to stockholders with a 32-cent per share quarterly dividend. Our balance sheet and asset quality remain 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 two items. First, the early adoption of SASB'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 one 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 one impact was an increase of roughly $49 million to equity and about 55 cents to tangible book value per share. Estimated pre-tax annual credit mark accretion of $10 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 gap 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 17 cents 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 push some of the merger charges to the first quarter of 2026, which will lower GAAP EPS estimates. Based on the six analysts covering Beacon, which I track, the average EPS for 2026 was $3.62, with a high of 375 and a low of 349, 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 and 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 draw 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 payrolls, taxes, and benefits, with ACH payments to employees shortly thereafter. The average balance of payroll deposits are in the range of $800 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 loss is 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 base 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 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 but $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 gap 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 purchase accounting accretion. Of that amount, only a net 1.9 million came from loan prepayments on purchased loans. Non-interest income was $25.9 million. Non-interest 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 an efficiency ratio of 56.7%. Excluding non-cash 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 in customer service. Yesterday, the board approved a quarterly dividend of 32.25 cents per share, payable February 27th to stockholders of record on February 13th. 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 McEljohn. and we will open it up for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 in your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Carl Shepard from RBC. Your line is open.

Hey, good afternoon, guys. Hi, Carl. You know, I guess my first question is on capital. I think you had a nice build with the accounting change and some of the CRE paydowns. 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 has $75 million of sub debt. it's already about 40% of it does not count as regulatory capital at this point. And come September of this year, you know, 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 – 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 equities, 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. I've said this before to 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 Yeah, 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 CNI 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.

Okay. Thank you both.

Your next question comes from the line-up, Mark Fitzgibbon from Piper Sandler. Your line is open.

Hey, guys. Hey, guys. Good afternoon. Nice quarter.

Thank you.

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.

Oh, that happens very, very quickly, Mark. So 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'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 Deakin 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 come 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 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 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 and change, 800 million or so from the prior quarter. When I talk about the predictability, yesterday our payroll deposit was around 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 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. Thank you. 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 sort of the increased size in the balance sheet. I guess I'm curious, does that bake into your – you know, your projections of sort of mid to lower single-digit loan growth for 2026?

I think a little bit. You know, we will still look to try to syndicate some of the largest loans as we have in the past, so we will sort of 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.

Thank you. Your next question comes from a line of Lori Hunsaker from Seaport. Your line is open.

Yeah, hi. Thanks. Good afternoon. Hi, Lori. Yeah, just wanted to go back to the buyback. Wanted to understand that a little bit more. Certainly, a lot of your peers are actively buying back stock, and you're sitting with the plethora of capital, right? Your C21 is 11%. So how do you think about that? I mean, obviously, I realize prices of 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 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've 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 and 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 ifs, but hopefully that's helpful. We do provide our capital ratios in the debt. and where we feel comfortable with them.

Sorry. I see them provided in the deck. Do you need a target? Did I miss 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, what else is being your dividend yield here? 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 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 CREE non-performers. 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. Thanks.

So, Lori, to answer your question, the jump on the non-accruals was a single office property, CBDA. It was about a $9 million loan. Vacancy issues there, and we have a very strong reserve on that, 56% reserve.

Okay.

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

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

Oh, very little, actually. We had two in the five quarters, including the current quarter, we only had two 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 is 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?

Yeah, I would probably hesitate to give you a number because, you know, 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, you know, 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 four to six quarters, we'll see it ride down into the 125 range.

Okay. Okay. Great. Okay. And then last question, one-time 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 in the 10 to 13 million, I think, range. Okay.

Okay. Great. Thanks so much for taking my questions.

Okay, Laurie.

Your next question comes from a line of David Conrad from KBW. Your line is open.

Good afternoon. Carl, thanks for your comments earlier in the call. regarding the accounting change, excuse me, but I want to take it another way with your guidance. Excuse me. You were 15 to 20 accretable yield prior with the 390 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 guy now is 385 to 395 for the NIM. So, I kind of get why the high end would be reduced, but, you know, maybe am I interpreting the accounting change, and why do we drop to the 385 NIM on the low end? Does that make sense?

Sure. Well, as you know, we came in our, like, this is the guys I gave almost exactly for last quarter, but I gave, as you said, The 390 to 4. And I was always thinking, when I think about prepayments on the loans that were marked with the merger of equals, 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 was. guesstimate 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 one large loan that prepaid that actually had a premium on it. And so I wasn't really thinking about the loans and premiums on them. And that actually had a big impact on what we actually realized this quarter. on, on, uh, I'm interested, knock this down to 13 and change. Uh, and so I figured, you know what, I better, I better, uh, adjust my, take that into a little bit of that at the consideration. Uh, so you are right. The 15 million did exclude the, the impact, uh, the FASB impact because we knew it was coming or were very hopeful that it was coming. And, uh, and, uh, 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, one quick question. Amortization expense came in at 8.88, 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 do it on a some of the year's digits basis. I think it's 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 2Q26 area, What should we expect for, like, the back half of your expense growth rate, you know, once all the costs are down?

I think we would stay in that 3% to 3.5% growth after we realize our cost savings. I mean, we do have a lot of work going into our branding efforts right now, so that'll be in the run rate, basically. You know, it'll 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.

A lot of signs.

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

Okay, perfect. Thank you.

Your next question comes from the line of Steve Moss from Raymond James. Your line is open.

Good afternoon.

Hey, Paul. So maybe just starting on kind of how to think about the loan runoff portfolios, just on the equivalent finance and the Berkshire Hills commercial real estate participation. I'm kind of curious if you could size up, you know, 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 got the three portfolios that are running off. We're not in those businesses anymore.

Yeah. So, you know, for Eastern funding, the tow portfolio is down to about $190 million. Mac release is about $150 million. And the aircraft portfolio, I'm sorry, the Firestone is just under $20 million. In terms of runoff on those, we've got tow at about $27.25 million. MAC release at $19.25, and Firestone at $2 to $3 million per quarter. So those are running off quite quickly. In terms of the participation side, you know, I don't think we can put a number on that because, you know, there's a lot of factors involved with that, you know, 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 I would be, it would be inappropriate for me to put a number on that. Okay.

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

Currently on that, that's the new non-accrual 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'd size up how large that portfolio is.

Yeah, I think we had talked about this last quarter. If I recall correctly, I believe we have seven loans in that portfolio. The total is about $18 or $19 million. So, you know, 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, you know, as you have the balance sheets combined here, You know, you've laid out your expectations for growth. Kind of curious, you know, how you're thinking about positioning the balance sheet for rates, you know, how a 25-base point rate cut could impact you guys these days and, you know, if there's anything you're looking to in terms of adjusting balance sheet positioning.

Yeah, 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 securities portfolios is, you know, minimal to support the organization and very vanilla. and what they're invested in. And the deposit portfolio just continues to get better and better.

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. You may or may not realize that. So we'll make our money the old-fashioned way.

Okay. I appreciate all the color there. Thank you very much, guys.

Okay, Stoop.

Our next question comes from the line of David Bishop from Hoad Group. Your line is open.

Yeah, good afternoon, gentlemen. I'm 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 Sciences is focusing on it up there in terms of available space. Maybe what you're seeing from a macro level perspective on the commercial real estate side.

Yeah, 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 leases. opportunities out there. There are quality tenants out there. And, you know, they've got a lot of leverage right now. So, you know, we are seeing values drop. We've seen that in the resolution of some of our problem assets. But I think we're, you know, we're generally seeing that stress in the marketplace as it relates to, you know, price per square foot type values. And, you know, 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 You know, there are people out there. We're seeing some, particularly on the life science side, some of the tenants starting to be successful with rounds of funding, I should say. So that's creating some opportunities in the marketplace for, you know, to sort of bully 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. It's all going pretty well. When I talk about Rhode Island and even Western Mass and Albany, places like that, they're 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 those trended quarter over quarter.

So, like I said, we originated a little over a billion dollars at 631 basis points on average. Now, remember, we had three 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 repriced. So if there's any particular category you're interested in, you know, C&I loans were coming in on a weighted average basis about 701 basis points. consumer loans around 549 basis points, and commercial real estate, 607 basis points.

Eastern Funding. Let me see that color.

Yeah, the Eastern Funding, as far as equipment financing, that's as a subset of commercial loans, 853 basis points in that book.

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

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

And that ends our question and answer session. I will now turn the call back over to Paul Perls for closing remarks.

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

This concludes today's conference call. Thank you for your participation, and you may now disconnect.