Business context and reporting period
The supplied filing is Berkshire Hills Bancorp, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2016; it is not a filing by Beacon Financial Corp. Berkshire is a regional bank and financial services company headquartered in Pittsfield, Massachusetts. Year-over-year results include the effects of the 2015 Hampden Bancorp and Firestone acquisitions.
Financial performance and condition
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 2016 | Q1 2015 or prior year-end |
|---|---|---|
| Net interest income | $57.7 | $45.5 |
| Non-interest income | $15.6 | $12.6 |
| Total net revenue | $73.3 | $58.1 |
| Provision for loan losses | $4.0 | $3.9 |
| Non-interest expense | $47.1 | $45.1 |
| Net income | $16.0 | $8.8 |
| Diluted EPS | $0.52 | $0.35 |
| Adjusted diluted EPS (non-GAAP) | $0.54 | $0.50 |
| Net interest margin, FTE | 3.33% | 3.18% |
| Efficiency ratio | 59.9% | 63.3% |
- Revenue grew 26% year over year, net income 83%, and GAAP diluted EPS from $0.35 to $0.52. Adjusted EPS increased 8%; acquisition-related growth contributed materially to revenue and average balances.
- Q1 operating cash flow was $9.3 million, versus $3.8 million a year earlier. Cash and cash equivalents fell to $68.8 million from $103.6 million at year-end; investing activities provided $29.3 million and financing activities used $73.4 million.
- At March 31, assets were $7.81 billion, loans $5.73 billion, deposits $5.58 billion, and shareholders’ equity $905.8 million. Total assets, loans, and deposits were broadly stable from year-end.
- Total borrowings declined to $1.17 billion from $1.26 billion. The loans-to-deposits ratio was 102.5%. Management reported approximately $722 million of FHLB borrowing availability; the parent’s $10 million correspondent-bank revolving line was fully utilized at quarter-end.
- The allowance for loan losses was $40.1 million, or 0.70% of loans. Annualized net charge-offs were 0.23% of average loans; nonperforming assets were 0.28% of assets. Nonaccrual loans totaled $20.7 million.
- Consolidated total capital ratio was 11.8%, CET1 9.7%, and Tier 1 leverage 7.7%. The Bank and Company met regulatory “well capitalized” requirements. The quarterly dividend was $0.20 per share.
Material changes versus comparable periods
- Compared with Q1 2015, net interest income rose 27%, non-interest income 24%, and total expense 4%. The efficiency ratio improved, while the provision for loan losses increased 4%.
- The effective tax rate rose to 28% from 3%, chiefly because tax-credit benefits were lower than in Q1 2015. Acquisition and restructuring charges were also substantially lower: $0.8 million in Q1 2016 versus $4.4 million.
- Compared with December 31, 2015, loans were nearly unchanged. Commercial real estate and consumer growth was offset by lower residential mortgages, including $65 million of seasoned mortgage sales. Borrowings decreased $93 million, while cash declined $34.7 million.
- Unrealized gains on available-for-sale securities increased with lower long-term rates; accumulated other comprehensive income moved from a $3.3 million loss to $4.8 million income.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expects continued margin pressure in 2016 from low rates, funding-cost increases, asset-yield compression, and declining purchased-loan accretion. It expects the remaining interest-rate swaps to add to funding costs in Q2 and Q3.
- Management described the company as modestly asset-sensitive in most parallel-rate scenarios, while cautioning that interest-rate models have limitations and are not income forecasts. Its stated priorities include fee-income development, balance-sheet management, and diversified commercial lending. Its long-term goal is to increase fee income to 30% of revenue from 21% in Q1.
- On April 29, 2016, Berkshire acquired the business platform and certain assets of 44 Business Capital and Parke Bank’s SBA 7(a) operations for $56.9 million cash and $1.2 million in stock. The acquisition is expected to support SBA lending, servicing and fee income; purchase accounting and goodwill/intangible values were still being evaluated.
- The company had agreed to sell two small New York branches, with completion targeted for Q3 2016; management expected no material gain, loss, or operating impact. Approximately $30 million of deposits related to the branches was classified as held for sale.
- A purported depositor class action alleging Electronic Funds Transfer Act and related violations was filed April 28, 2016. The company and Bank deny the allegations and intend to defend the case; the filing does not quantify potential exposure.
- Other risks include credit losses tied to regional economic and real-estate conditions, interest-rate and liquidity risks, and estimates around acquired loans, tax-credit investments, deferred tax assets, and fair values. Management said there were no material changes to reported risk factors and that disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer: the provided 10-Q is for Berkshire Hills Bancorp, Inc., not Beacon Financial Corp.
- Assess how much of the reported year-over-year growth reflects the Hampden and Firestone acquisitions versus organic performance, and review the company’s non-GAAP adjustments.
- Track net interest margin, funding costs, purchased-loan accretion, and the effect of swaps as the remaining hedges become effective.
- Review credit quality trends, allowance adequacy, criticized and nonaccrual loans, and the concentration of lending in regional real estate and commercial borrowers.
- Monitor deposit mix and brokered deposits, borrowing availability and use, and the elevated loans-to-deposits ratio.
- Follow the 44 Business Capital acquisition’s final purchase accounting and contribution, the branch-sale completion, and developments in the depositor class action.