Beacon Financial Corp quarterly report, Q3 FY2012

Filing and reporting period

Entity mismatch: The supplied filing is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2012—not a filing by Beacon Financial Corp. Beacon Federal Bancorp is discussed as a subsequent acquisition; the financial results below are Berkshire’s and do not include Beacon’s operations.

Financial performance and condition

Amounts are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.

At September 30, assets were $4.63bn versus $3.99bn at year-end 2011; loans were $3.42bn versus $2.96bn, deposits $3.45bn versus $3.10bn, and stockholders’ equity $590.9m versus $553.4m. The allowance for loan losses was $33.1m, or 0.97% of loans. The quarter’s net interest margin was 3.50% versus 3.74% a year earlier; the nine-month margin was 3.62% versus 3.52% (MD&A gives 3.61%). Return on average assets was 0.88% for Q3 and 0.73% year to date.

Nine-month operating cash flow was negative $12.0m, compared with positive $32.1m in 2011; investing cash flow was negative $370.8m (including acquisitions and loan growth), while financing provided $389.1m, including deposit growth and borrowings. Period-end cash and equivalents were $82.0m. Total borrowings were $536.8m, including $311.9m short-term debt and $89.6m subordinated debentures. The bank remained “well capitalized”: total risk-based capital was 11.2%, Tier 1 risk-based capital 10.1%, and Tier 1 leverage 7.7%. Management reported approximately $470m of additional FHLB borrowing capacity.

Material changes and business developments

• Q3 net income rose 128% and diluted EPS rose 109% year over year; nine-month net income increased 162%. Growth reflects organic expansion and acquisitions, so periods are not fully comparable.
• Net interest income increased, while quarterly margin contracted amid low rates and loan-prepayment effects. Fee income rose substantially, notably mortgage origination fees: $4.3m in Q3 versus $0.1m a year earlier.
• Loans increased 16% from year-end, including acquired CBT loans; deposits rose 11%. Commercial business loans grew 39% year to date. The company acquired The Connecticut Bank and Trust Company in April and Greenpark Mortgage operations in April.
• On September 28, Berkshire issued $75m of subordinated notes at a 6.875% fixed coupon for ten years, then floating, with maturity in 2027. Proceeds helped fund the subsequent Beacon transaction.
• On October 19, after quarter-end, Berkshire acquired Beacon Federal Bancorp for approximately 2.7m Berkshire shares and $60m cash. Beacon had approximately $822.7m in assets, $697.6m in loans, and $622.2m in deposits. Purchase accounting values and goodwill were not yet determined.

Outlook, risks, and unusual items

No formal earnings guidance was provided. Management described objectives of achieving return on assets above 1% and return on equity above 10%, and said Beacon was expected to support further progress. It reported Q3 core ROA of 1.00% excluding $2.2m of systems-conversion and merger-related charges; reported ROA was 0.88%. The company declared a Q3 dividend of $0.17 per share and announced an increase to $0.18 for payment in November.

Key risks include continued low-rate margin pressure, credit losses and uncertainty in acquired-loan estimates, integration of acquisitions and newly converted banking and accounting systems, and greater mortgage-related derivative and counterparty exposure. Management said interest-rate sensitivity remained asset-sensitive but had declined by about half during the first nine months. A pooled trust-preferred security had suspended interest payments and an unrealized loss of $1.8m; management considered the impairment temporary. Prior-period tax over-accrual corrections increased first- and second-quarter 2012 net income by $0.2m and $0.5m, respectively; management deemed them immaterial and did not restate prior periods. No pending legal proceeding was identified as material; disclosure controls were reported effective.

Investor verification priorities

• Confirm the intended issuer: this filing is Berkshire Hills Bancorp’s, while Beacon is an acquired company.
• Review Beacon’s completed acquisition accounting, integration costs, purchase marks, and resulting capital, funding, and share dilution in subsequent filings.
• Assess whether mortgage-fee growth and acquisition contributions can persist as refinancing demand and interest rates change.
• Track credit quality, acquired-loan performance, allowance adequacy, and the suspended-payment trust-preferred security.
• Monitor the $75m subordinated debt’s servicing cost, regulatory-capital treatment, and parent-company liquidity, along with system-conversion and derivative-control risks.