Filing summary: Berkshire Hills Bancorp, Inc. — FY ended December 31, 2014
Entity note: The supplied filing is Berkshire Hills Bancorp, Inc.’s 2014 Form 10-K, not a filing for “Beacon Financial Corp.” Beacon Federal Bancorp is referenced as a prior acquisition. The filing reports the full fiscal year; fourth-quarter results are noted separately below.
Business context
Berkshire is a regional banking and financial-services holding company headquartered in Pittsfield, Massachusetts, with banking and insurance segments. At year-end it operated 91 full-service branches across its New England and New York footprint. In January 2014 it acquired 20 New York branches; the filing also describes a pending acquisition of Hampden Bancorp.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets | $6.50 billion | $5.67 billion |
| Total loans | $4.68 billion | $4.18 billion |
| Total deposits | $4.65 billion | $3.85 billion |
| Net interest income | $178.7 million | $168.8 million |
| Total net revenue | $226.5 million | $227.0 million |
| Net income | $33.7 million; diluted EPS $1.36 | $41.1 million; diluted EPS $1.65 |
| Adjusted net income, non-GAAP | $44.7 million; adjusted diluted EPS $1.80 | $46.7 million; adjusted diluted EPS $1.87 |
| Net interest margin | 3.26% | 3.63% |
| Net charge-offs / average loans | 0.29% | 0.29% |
Fourth-quarter 2014 net income was $11.4 million, or diluted EPS of $0.46, compared with $10.5 million, or $0.42, in fourth-quarter 2013. Adjusted diluted EPS was $0.48 versus $0.40.
Revenue was essentially flat year over year. Net interest income grew 6%, but loan interest income fell as yields compressed and purchased-loan accretion declined; higher securities income and lower funding costs partly offset this. Annual net interest margin narrowed to 3.26% from 3.63%. Non-interest income included an $8.8 million hedge-termination loss; fee income rose 6%, including higher deposit and wealth-management fees, while mortgage-banking income fell 51% to $2.6 million.
Non-interest expense rose 5% to $166.0 million, including costs associated with branch acquisition and growth. Provision for loan losses increased to $15.0 million from $11.4 million. Cash and cash equivalents were $71.8 million at year-end. The company generated $55.8 million of operating cash flow, used $369.3 million in investing activities, and received $309.7 million from financing activities.
Borrowings and subordinated notes totaled $1.05 billion, down slightly from $1.06 billion. Stockholders’ equity was $709.3 million. The Bank’s total risk-based capital ratio was 10.78% and its Tier 1 leverage ratio was 7.18%; both the Bank and Company met the filing’s year-end “well-capitalized” standards. The loan-to-deposit ratio was 101%. Management reported $246 million of potential FHLB borrowing capacity at year-end and stated that brokered deposits had become a more significant funding source.
Asset quality improved on several measures: non-performing assets were $23.8 million, or 0.37% of assets, versus $30.2 million, or 0.53%, a year earlier. The allowance for loan losses was $35.7 million, or 0.76% of loans, compared with 0.80%. Accruing troubled debt restructurings rose to $12.6 million; total carrying value of TDRs was $16.7 million.
Material changes versus the prior year
- Assets increased 15%, loans 12%, and deposits 21%, with growth reflecting the New York branch purchase, organic activity, and increased brokered deposits.
- Net income declined about 18% and diluted EPS fell from $1.65 to $1.36. Management attributed the decline primarily to higher non-operating acquisition-related charges and margin pressure.
- Net interest margin fell 37 basis points; purchased-loan accretion dropped to $6.7 million from $18.1 million.
- Non-performing assets declined, while the allowance-to-loans ratio also declined. Criticized loans fell to approximately $130 million from $165 million.
- The company’s equity-to-assets ratio decreased to 10.9% from 12.0% as the balance sheet expanded. Book value per share rose 4% to $28.17.
Outlook, management commentary, risks and unusual items
- Management expects net interest margin to decline in 2015, principally as purchased-loan accretion runs off. It aims to limit further margin compression before accretion and to pursue earnings growth through volume, expense discipline, and the planned Hampden acquisition. No quantified earnings guidance is provided.
- The Hampden transaction, announced in November 2014, was expected to close in the second quarter of 2015, subject to regulatory approvals. Hampden had approximately $711 million of assets at year-end. Consideration is stock at 0.81 Berkshire share per Hampden share, with approximately 4 million new Berkshire shares expected. Berkshire planned to consolidate three acquired branches.
- A Hampden shareholder lawsuit names Berkshire and alleges, among other things, aiding and abetting fiduciary breaches. Berkshire said it was vigorously defending the claims and could not predict the outcome; management did not expect a material adverse effect.
- Key risks include sensitivity to interest rates and deposit pricing, commercial real estate and commercial-lending exposure, dependence on wholesale and brokered funding, acquisition integration and acquired-deposit retention, regulatory and capital changes, and cybersecurity/technology disruption. The $300 million of forward-starting borrowing swaps are expected to become effective in 2016 and may increase funding costs.
- Unusual items included the $8.8 million hedge-termination loss tied to the New York branch acquisition and $8.5 million of acquisition, restructuring, and conversion expenses. A $1.4 million correction to prior-period acquired-loan interest income was recorded in first-quarter 2014; management concluded prior statements were not materially misstated and no restatement was required.
- The filing states that the independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for Berkshire Hills Bancorp, Inc., despite the request metadata naming Beacon Financial Corp.
- Verify Hampden’s closing status, integration progress, realized cost savings, share issuance, and the outcome or effect of the shareholder litigation.
- Track margin performance, purchased-loan accretion runoff, and the cost and stability of brokered and other wholesale funding.
- Review subsequent asset-quality trends, TDR performance, and allowance adequacy, noting that acquired-loan accounting affects period comparability.
- Assess the effect of the 2016 swap reset and new regulatory capital requirements on earnings, capital, and distributions.