Business context and reporting period
Registrant identification: The supplied filing is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017, not a filing for Beacon Financial Corp. Confirm the issuer before relying on this summary.
Berkshire Hills is a regional financial services company operating Berkshire Bank and Berkshire Insurance Group. The quarter included the first full quarter of First Choice Bank, acquired December 2, 2016, and completion of its systems conversion. Year-over-year comparisons therefore reflect the acquisition and are not fully like-for-like. Dollar amounts below are in millions unless stated otherwise.
Key financial and operating metrics
| Metric | Q1 2017 | Comparison |
|---|---|---|
| Total net revenue | $101.6 | Up 39% year over year |
| Net interest income | $66.9 | Up 16% year over year |
| Net interest margin, FTE | 3.33% | 3.33% in Q1 2016; 3.21% in prior quarter |
| Net income | $15.5 | Down 3% year over year |
| Diluted EPS | $0.44 | Down 15% year over year |
| Adjusted net income / diluted EPS (non-GAAP) | $19.4 / $0.55 | Adjusted income up 18%; adjusted EPS up 2% |
| Provision for loan losses | $5.1 | Versus $4.0 in Q1 2016 |
| Operating cash flow | $55.2 | Versus $9.3 in Q1 2016 |
Fee income was $28.7 million, up 87% year over year, led by mortgage banking revenue, including First Choice Loan Services. Revenue also included $12.6 million in net securities gains and a $6.6 million hedge-termination loss. Non-interest expense was $74.3 million, up 58%, including $11.7 million in acquisition, restructuring, and conversion costs. The reported efficiency ratio was 61.94%, versus 59.27% a year earlier.
At March 31, total assets were $9.30 billion, loans $6.66 billion, deposits $6.66 billion, and shareholders’ equity $1.10 billion. The allowance for loan losses was $45.8 million, or 0.69% of loans. Cash and cash equivalents were $93.3 million, down from $113.1 million at year-end 2016. Total borrowings were $1.38 billion, up from $1.31 billion; the average rate on total borrowings was 1.33%, versus 1.19% at year-end. The loans-to-deposits ratio was 100%.
Quarterly cash flows were $55.2 million provided by operations, $170.6 million used in investing, and $95.6 million provided by financing; cash and equivalents declined by $19.7 million. Investing outflows included loan growth and purchases of available-for-sale securities. Regulatory capital ratios remained above well-capitalized minimums: consolidated total capital was 11.8%, and the Bank’s was 11.1%.
Material changes versus comparable periods
- Loan balances increased $106 million from year-end, with 15% annualized commercial loan growth; deposits grew 2% annualized. Total assets increased $135 million to $9.3 billion.
- Mortgage banking originations revenue rose substantially with First Choice’s contribution. Commercial loans and average earning assets also grew, supporting higher net interest income.
- GAAP earnings fell modestly despite revenue growth, primarily because of integration and restructuring expenses and a larger share count following acquisition-related stock issuance. Adjusted earnings improved.
- The company sold $25 million of equity securities and recognized $12.6 million of securities gains. It terminated $300 million of cash-flow hedges and recognized a $6.6 million loss in earnings; management said the gain and loss were previously reflected in accumulated other comprehensive income.
- Criticized loans increased to $157 million from $129 million at year-end; non-accrual loans rose to 0.38% of total loans from 0.34%. Annualized net charge-offs improved to 0.20% from 0.21% in the prior quarter.
Outlook, management commentary, risks, and unusual items
Management expected the March 2017 Federal Reserve rate increase to benefit second-quarter results and described the balance sheet as modestly asset-sensitive. It targeted a 3.38% securities portfolio yield near the current level during 2017. Management also targeted completion of First Choice’s $15 million cost-savings program by midyear and expected further merger-related charges in Q2 while aiming to remain within initial total deal-cost goals. No formal earnings or revenue guidance was provided in the supplied filing text.
Management noted that mortgage banking revenue is seasonal, typically strongest in the second and third quarters, and that related operating costs are also expected to rise seasonally. Growth toward the $10 billion asset threshold could bring additional compliance and FDIC costs and reduce certain card-related fee income. Management stated that capital and liquidity metrics declined slightly with strong loan growth, but both the company and Bank remained well capitalized. The company reported no new material risk factors and no material changes in market-risk measurement.
Principal risks include interest-rate and market changes, competition, economic conditions, regulatory changes, credit quality, acquisition integration, and judgments in loan-loss, acquired-loan, tax, goodwill, and fair-value estimates. The filing describes pending depositor lawsuits, including a purported class action, and a separate $1.4 million wire-transfer dispute; the company denies the allegations and is defending them. In a separate Massachusetts Insurers Insolvency Fund case, the state’s highest court ruled for the Fund on liability and remanded the matter to determine damages; the amount was not yet established in the filing.
Important facts for investors to verify
- Confirm that Berkshire Hills Bancorp, Inc., rather than Beacon Financial Corp, is the intended registrant.
- Assess the sustainability and comparability of growth and fee income given First Choice’s acquisition and mortgage banking’s seasonal, lower-margin profile.
- Track integration charges and delivery of the targeted $15 million in First Choice cost savings, as well as the company’s efficiency ratio.
- Monitor criticized and non-accrual loans, charge-offs, provision levels, and the adequacy of the allowance, particularly as commercial lending expands.
- Review funding mix and liquidity, including brokered time deposits of $953.8 million, short-term FHLB borrowings, and the 100% loans-to-deposits ratio.
- Follow the unresolved litigation exposures and the potential costs associated with crossing the $10 billion asset threshold.