Business context and reporting period
This is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013—not a filing by Beacon Financial Corp. Berkshire’s report identifies Beacon Federal Bancorp as an acquired operation. Confirm the intended issuer before relying on this summary.
Berkshire is a regional financial services company with banking and insurance operations. Results include acquisitions completed in 2012, including Beacon Federal, so year-over-year comparisons reflect a larger business as well as organic performance.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $56.7 million | $47.3 million | $113.4 million | $88.3 million |
| Net interest income | $41.1 million | $35.1 million | $83.0 million | $66.2 million |
| Net income | $12.0 million | $8.0 million | $22.5 million | $13.8 million |
| Diluted EPS | $0.48 | $0.37 | $0.90 | $0.65 |
| Provision for loan losses | $2.7 million | $2.3 million | $5.1 million | $4.3 million |
- Q2 net revenue rose about 20% and net income about 51% year over year; first-half revenue rose 28% and net income 63%. First-half 2012 net income included a $0.6 million loss from discontinued operations.
- Q2 return on average assets was 0.93% versus 0.73%; return on average common equity was 7.21% versus 5.58%. Fully taxable-equivalent net interest margin was 3.63% versus 3.70%; first-half margin was 3.68% versus 3.66%.
- At June 30, total assets were $5.22 billion, down $73 million from year-end 2012. Loans were $3.87 billion, down $118 million; deposits were $3.82 billion, down $285 million. Stockholders’ equity was $673 million, up $6 million.
- Total borrowings rose to $680 million from $448 million at year-end, including short-term borrowings of $416 million versus $163 million. Cash and cash equivalents were $80 million, down from $98 million; management reported about $493 million of additional FHLB borrowing availability. The loan-to-deposit ratio was 101%.
- Six-month operating cash flow was $43.0 million; investing activities provided $4.3 million and financing activities used $65.5 million. Cash declined by $18.1 million over the period.
- The allowance for loan losses was $33.2 million, or 0.86% of total loans. Annualized first-half net charge-offs were 0.25% of average loans; nonperforming assets were 0.56% of assets. The Bank met the stated “well capitalized” thresholds: total risk-based capital 12.3%, Tier 1 risk-based capital 10.5%, and Tier 1 leverage 8.3%.
Material changes and management commentary
- Profit growth benefited from acquisitions, business development, and lower merger and conversion costs. Q2 merger and conversion expense fell to $0.8 million from $4.1 million a year earlier. Management said earnings per share before these costs declined from the prior two quarters, reflecting lower revenue and higher underlying expenses.
- Loan purchase-accounting accretion contributed $3.4 million to Q2 and $7.2 million to first-half net interest income. First-half accretion included $4.7 million of recoveries on acquired impaired loans; management said the remaining $3.3 million of accretable yield was mostly expected to be recognized over the next three quarters under existing schedules.
- A steepening yield curve reduced mortgage banking volume and margins and lowered the value of available-for-sale securities. Q2 mortgage banking revenue did not reach the expected seasonal increase; Q2 also included $1.0 million of securities-sale gains. First-half other comprehensive income was a loss of $3.2 million, including an after-tax decline in unrealized AFS securities gains, partly offset by improved derivative values.
- Management said it was allowing some residential and commercial mortgage balances to run off while targeting double-digit annualized growth in commercial business lending. Commercial business loans grew 7% from year-end; commitments to originate new commercial loans increased to $183 million from $45 million. One $18 million commercial real estate relationship contributed to an increase in potential problem loans, which totaled $75 million.
- Management targeted a 4–5% reduction in ongoing operating expenses through restructuring, with charges expected in the second half of 2013. The company’s stated long-term goals were return on assets above 1.10% and return on equity above 10%. Management expected commercial loan originations and restructuring benefits to support improving operating results, with further benefits in 2014; these are expectations, not guarantees.
- After quarter-end, Berkshire Bank agreed to acquire 20 Bank of America branches with approximately $640 million of deposits and $5 million of commercial business loans. Closing was expected in early 2014, subject to approvals and customary conditions. The company described the transaction as intended to be accretive to operating EPS before transaction costs and expected about $5 million of after-tax merger-related charges, mostly in Q1 2014.
- The CFO and the EVP of Commercial Banking resigned after quarter-end; the company reported interim financial-reporting oversight while recruiting a new CFO. Management stated disclosure controls were effective and the executive transition had not materially affected, or was reasonably likely to materially affect, internal control over financial reporting.
Outlook, risks and contingencies
Key risks identified include interest-rate and market changes, competition, economic and real-estate conditions in Berkshire’s lending markets, credit losses and estimates of acquired-loan cash flows, integration and customer-retention risks associated with the pending branch purchase, executive transitions, restructuring effects on revenue or staff retention, and additional regulatory and capital requirements. The company also disclosed that unrealized losses on certain securities were considered temporary and said it intended and expected to be able to hold the affected securities until recovery; that assessment depends on future conditions.
The July 2013 federal capital rule changes were expected to apply to the Bank beginning January 1, 2015, with the capital conservation buffer phased in through 2019. The filing states that the company was still assessing the potential impact.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
- Assess earnings quality, including acquisition effects, purchase-accounting accretion and recoveries, securities gains, and lower merger costs.
- Track the elevated short-term borrowing balance, deposit outflows, 101% loan-to-deposit ratio, and liquidity available from the FHLB.
- Review credit trends, particularly the $75 million of potential problem loans, the cited $18 million commercial real estate exposure, acquired-loan performance, and reserve adequacy.
- Verify execution and cost of the expense restructuring, management succession, and the pending branch acquisition, including regulatory approval, deposit retention, and integration costs.
- Monitor interest-rate exposure and securities valuations: management’s estimated benefit from a ramped 200-basis-point rate increase had moved from about 1% of first-year net interest income at year-end 2012 to near break-even at midyear 2013.