Business context and reporting period
This is a Form 10-K for the fiscal year ended December 31, 2011, filed March 15, 2012. The filing identifies the registrant as Berkshire Hills Bancorp, Inc., not Beacon Financial Corp; confirm the company identity before relying on this summary. Berkshire is a regional banking and financial services holding company with banking and insurance segments, headquartered in Pittsfield, Massachusetts.
In 2011, Berkshire acquired Rome Bancorp and Legacy Bancorp, expanding its footprint and adding branches, loans, deposits, and employees. The company operated 60 full-service banking offices at year-end. It also had a pending agreement to acquire Connecticut Bank & Trust Company (CBT).
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets | $3.99 billion | $2.88 billion |
| Total net revenue | $142.3 million | $106.7 million |
| Net interest income | $106.5 million | $76.9 million |
| Net income | $17.6 million | $13.9 million |
| Diluted EPS | $0.98 | $1.00 |
| Net interest margin | 3.57% | 3.28% |
| Return on average assets / equity | 0.50% / 3.69% | 0.51% / 3.62% |
| Loans / deposits at year-end | 95% | 97% |
- Revenue and earnings: Revenue rose 33% and net income rose 27%, largely reflecting the acquisitions as well as organic growth. Diluted EPS fell slightly as shares outstanding increased about 50% to 21.1 million due to merger consideration. Management reported fourth-quarter net income of $8.5 million versus $3.6 million a year earlier, and fourth-quarter EPS of $0.40 versus $0.26.
- Margins and costs: Net interest margin improved as funding costs fell; average earning-asset yield declined to 4.61% from 4.73%, while the cost of interest-bearing liabilities declined to 1.23% from 1.72%. Non-interest expense rose 42% to $116.1 million, including $19.9 million of non-recurring expenses. The filing’s non-GAAP recurring net income was $27.9 million, or $1.56 per share; reported net income was $17.6 million.
- Credit quality: Provision for loan losses was $7.6 million, down from $8.5 million; net charge-offs were $7.0 million, or 0.27% of average loans, versus $8.4 million and 0.42%. Non-performing assets increased to $26.1 million, or 0.65% of assets, from $17.1 million, or 0.59%. Acquired-loan accounting makes some year-over-year credit metrics less comparable.
- Liquidity, funding and capital: Deposits grew 41% to $3.10 billion, including acquisitions; organic deposit growth was 10%. Borrowings declined $23 million to $237.4 million. The bank had $667 million of potential FHLB borrowing capacity and reported an 11.29% total risk-based capital ratio, meeting the “well capitalized” standard. Total stockholders’ equity was $553.4 million, up 42%.
- Cash flow: Operating cash flow was $40.2 million; investing cash flow was negative $34.1 million and financing cash flow was positive $25.6 million. The cash flow statement reports a $31.6 million increase in cash and cash equivalents. Its stated ending balance ($75.8 million) differs from the balance-sheet total cash and cash equivalents ($75.4 million).
- Debt and shareholder returns: Borrowings and subordinated debentures totaled $237.4 million, including $15.5 million of junior subordinated debentures. The annual common dividend was $0.65 per share; the quarterly dividend increased to $0.17 in the fourth quarter.
Material changes versus the prior period
Rome and Legacy acquisitions drove much of the balance-sheet expansion: loans rose 38% to $2.96 billion and deposits rose 41%. Excluding acquisition and divestiture effects, loans grew 2% and deposits 10%. Revenue growth outpaced reported expense growth, while merger-related and other non-recurring costs weighed on GAAP earnings. Net income increased, but EPS declined slightly because of share issuance. The company also completed a divestiture of four Massachusetts branches and classified four New York branches as discontinued operations; those branches were sold in January 2012.
Outlook, commentary, risks and unusual items
- Management’s longer-term objectives were return on assets above 1%, return on equity above 10%, and net interest margin above 3.50%. These are objectives, not formal earnings guidance. Management expected merger benefits to continue and targeted completion of the CBT acquisition in the second quarter of 2012, subject to approvals.
- CBT was valued at approximately $30 million, with expected consideration of about 965,000 Berkshire shares and $10 million cash. A separate Eastern Massachusetts mortgage business acquisition was also expected to close in 2012. The bank planned a core processing system conversion in 2012.
- Principal risks include economic and real estate weakness, commercial lending and credit concentrations, adequacy of loan-loss estimates, acquisition integration and execution, competition, interest-rate changes, liquidity and deposit retention, technology and operational disruption, regulatory changes, and goodwill impairment.
- Year-end non-performing assets were higher than a year earlier. Berkshire also disclosed a $2.6 million pooled trust-preferred security with a $0.5 million fair value, an unrealized loss of about 81% of book value, and suspended interest payments; management did not deem it other-than-temporarily impaired.
- A CBT shareholder class action filed in January 2012 alleged fiduciary-duty breaches and aiding and abetting. Berkshire and the other defendants denied the allegations and intended to defend the case; management did not expect a material adverse effect.
- The filing reports an immaterial correction to prior-period tax-credit accounting and restated certain 2009–2010 figures. PwC issued unqualified opinions on the 2011 financial statements and internal control; management also concluded controls were effective.
Important facts for investors to verify
- Confirm the registrant and ticker: the supplied filing is for Berkshire Hills Bancorp (BHLB), despite the request metadata naming Beacon Financial Corp.
- Reconcile the cash-flow statement’s reported ending cash balance with the balance-sheet cash and cash-equivalents amount.
- Assess recurring earnings independently of management’s non-GAAP adjustments, including the $19.9 million of non-recurring expenses and acquisition-related purchase-accounting effects.
- Review acquired-loan performance, non-performing and criticized assets, allowance coverage, and the suspended-interest pooled trust-preferred investment.
- Track execution and costs of the CBT transaction, mortgage-business acquisition, branch integration, and core systems conversion, as well as regulatory approvals and litigation developments.