Filing summary
Entity note: The supplied filing is Berkshire Hills Bancorp, Inc.’s Form 10-K, not a filing identifying Beacon Financial Corp as the registrant. It discusses Beacon Federal Bancorp, which Berkshire acquired in October 2012.
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, filed March 17, 2014. Berkshire is a regional banking and financial services company operating through banking and insurance segments, with 92 full-service offices at year-end (before the January 2014 branch acquisition). Its activities include commercial and retail banking, wealth management, and insurance.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total net revenue | $227.0 million | $197.4 million |
| Net interest income | $168.8 million | $143.4 million |
| Net income | $41.1 million | $33.2 million |
| Diluted EPS | $1.65 | $1.49 |
| Net interest margin | 3.63% | 3.62% |
| Total assets | $5.67 billion | $5.30 billion |
| Total loans | $4.18 billion | $3.99 billion |
| Deposits | $3.85 billion | $4.10 billion |
| Borrowings and subordinated notes | $1.06 billion | $448.1 million |
- Non-interest income was $58.2 million, up from $54.1 million; mortgage banking income fell to $5.2 million from $12.4 million. Net securities gains rose to $4.8 million from $0.3 million.
- Non-interest expense rose 12% to $157.4 million, below the 15% increase in revenue. It included $14.8 million in merger, restructuring, and conversion costs.
- Provision for loan losses was $11.4 million; net charge-offs were $11.3 million, or 0.29% of average loans. The allowance was $33.3 million, 0.80% of total loans.
- Non-performing assets were $30.2 million, or 0.53% of assets, versus $27.4 million, or 0.52%, a year earlier. Accruing troubled debt restructurings increased to $8.3 million from $3.6 million.
- Cash and cash equivalents were $75.5 million at year-end. Cash from operations was $127.4 million; investing activities used $515.2 million and financing activities provided $365.1 million, resulting in a $22.7 million decrease in cash.
- Stockholders’ equity was $678.1 million; equity-to-assets was 12.0% and tangible common equity-to-tangible assets was 7.54%. The Bank’s total risk-based capital ratio was 11.62%, and it met the regulatory “well-capitalized” criteria.
- Annual dividends were $0.72 per share. The Bank had $416 million of potential FHLB borrowing capacity at year-end; the parent’s $10 million unsecured working-capital line was fully drawn.
Material changes versus prior period
- Net income increased 24% and diluted EPS increased 11%; total net revenue rose 15%. Growth included a full year of Beacon and CBT operations.
- Total loans increased 5%, while loans from Berkshire’s own business activities rose 21%; acquired loans ran off 26%. Commercial business loans grew 15% year over year.
- Deposits declined 6% during 2013 as the company reduced certain non-relationship balances. Borrowings rose by $616 million, primarily through short-term FHLB advances, to fund loan and securities growth and deposit reductions.
- Securities increased 52% to $870 million. Higher rates drove available-for-sale securities from a $10.7 million unrealized gain at year-end 2012 to a $9.3 million unrealized loss at year-end 2013; no securities were deemed other-than-temporarily impaired.
- Net charge-offs increased to 0.29% from 0.26%, while non-performing assets edged up to 0.53% of assets from 0.52%. Criticized loans declined to $165 million from $187 million.
- Net interest margin was nearly flat for the year, but fourth-quarter margin declined to 3.26% from 3.67% a year earlier. Fourth-quarter diluted EPS was $0.42, compared with $0.38 in fourth-quarter 2012.
Outlook, commentary, risks, and unusual items
- Management said it planned to resume earnings growth in 2014, citing expected positive operating leverage, organic growth, expense discipline, and benefits from the New York branch acquisition. This is management’s outlook, not a quantified earnings forecast.
- On January 17, 2014, Berkshire completed its purchase of 20 Central New York branches, assuming approximately $441 million of deposits. Management expected the acquired deposits to cost approximately 0.15%–0.20%. The acquired operations’ fair values and any resulting goodwill were still being evaluated.
- Management attributed 2013 pressures to higher long-term rates and a sharp mortgage-volume decline, as well as accelerated runoff of acquired impaired and non-relationship commercial loans. Mortgage operations were restructured; compensation, occupancy, and technology costs fell 7% in fourth quarter versus second quarter.
- Purchased-loan accretion was unusually high at $18.1 million, versus $6.3 million in 2012, including collections of acquired impaired loans. The remaining accretable yield on impaired loans was $2.6 million and was expected to be substantially amortized in 2014; further recoveries were uncertain.
- The company recorded 2013 out-of-period adjustments, including $2.2 million of prior-period acquired-loan interest income and corrections involving state tax credits. Management concluded prior-period financial statements were not materially misstated and no restatement was required.
- Key risks include commercial real estate and business credit exposure, interest-rate and securities valuation changes, reliance on short-term wholesale funding, integration and deposit retention for acquisitions, and regulatory and compliance costs. A potential withdrawal from the Massachusetts Depositors Insurance Fund could require charter and holding-company changes; FDIC coverage would remain.
- New capital rules were scheduled to take effect beginning in 2015, with the capital conservation buffer phased in thereafter. Berkshire said it was assessing the impact and did not anticipate a material operational impact at that time.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and internal controls at year-end.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Berkshire Hills Bancorp, Inc.; Beacon Federal is an acquired institution, not the registrant.
- Assess the sustainability of earnings apart from $18.1 million of purchased-loan accretion, securities gains, out-of-period items, and merger/restructuring charges.
- Review the funding mix and maturity concentration: deposits fell while borrowings rose sharply, including $892.5 million of FHLB obligations due within one year under the contractual-obligations table.
- Track credit quality, including the increase in accruing TDRs and potential problem loans, and evaluate allowance coverage in light of acquired-loan accounting.
- Check actual results and integration of the 20-branch New York acquisition, including deposit retention, costs, and the expected funding-cost benefit.
- Evaluate sensitivity to rising rates, securities unrealized losses, and the stated modeling assumptions for non-maturity deposit repricing.