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, 2016. The filing registrant is Berkshire Hills Bancorp, Inc.; this differs from the “Beacon Financial Corp” company label in the request metadata. Berkshire is a regional financial services company operating Berkshire Bank and Berkshire Insurance Group. Results include the April 2016 acquisition of certain 44 Business Capital SBA lending operations; comparisons are also affected by the 2015 Hampden and Firestone acquisitions.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $57.4m | $52.6m | $115.1m | $98.1m |
| Total net revenue | $72.0m | $69.4m | $145.3m | $127.5m |
| Provision for loan losses | $4.5m | $4.2m | $8.5m | $8.1m |
| Non-interest expense | $46.3m | $54.0m | $93.4m | $99.2m |
| Net income | $16.0m | $10.0m | $32.0m | $18.8m |
| Diluted EPS | $0.52 | $0.35 | $1.04 | $0.70 |
- Q2 net revenue rose 4% year over year; excluding securities gains, management reported growth of 7%. Six-month revenue rose 14%. Adjusted diluted EPS, a non-GAAP measure, was $0.54 for Q2 and $1.07 for the first half, up 6% in both comparisons.
- Q2 fully taxable-equivalent net interest margin was 3.31%, versus 3.30%; excluding purchased-loan accretion, it was 3.20%, versus 3.16%. The non-GAAP efficiency ratio improved to 58.7% from 61.5%. Six-month ROA was 0.82%, versus 0.55%.
- At June 30, total assets were $8.04bn, loans $6.00bn, deposits $5.66bn, borrowings $1.32bn and shareholders’ equity $923m. Since year-end 2015, assets rose 3%, loans 5%, deposits 1%, borrowings 5% and equity 4%. Loans were 106% of deposits.
- Cash and cash equivalents were $74.6m, down from $103.6m at year-end. For the first half, operating cash flow was $29.7m, investing cash outflow $202.1m and financing cash inflow $143.4m; cash declined $29.0m. The filing reports approximately $513m of Federal Home Loan Bank borrowing availability at midyear.
- The allowance for loan losses was $41.4m, or 0.69% of loans, versus 0.70% at year-end. Q2 annualized net charge-offs were 0.22% of average loans; non-performing assets were 0.26% of assets. Criticized loans totaled $127.6m, down from $145.3m at year-end.
- Consolidated capital ratios were 11.4% total risk-based, 9.3% common equity Tier 1, 9.5% Tier 1 risk-based and 7.7% Tier 1 leverage. The company and bank met the filing’s “well capitalized” standards.
Material changes, outlook, and risks
- Loan growth was broad-based, with commercial real estate and consumer lending notable contributors. Management expects loan growth to moderate from the elevated Q2 pace as secondary-market strategies develop and seasonal and timing factors change.
- Management expects margin pressure to continue amid low rates and asset-yield compression. It anticipated a Q3 margin decline, partly reflecting the activation of interest-rate swaps; management estimated the active swaps reduced margin by about 8–9 basis points and EPS by about $0.10 compared with year-end 2015 conditions.
- The effective tax rate was 25% in Q2 and 26% for the first half, up from 10% and 7%, respectively. Management expects a higher second-half tax rate and reduced future benefit from tax-credit investments following IRS guidance issued after midyear.
- On June 24, Berkshire agreed to acquire First Choice Bank for Berkshire shares, with approximately 4.3m shares expected to be issued. Closing was expected in Q4 2016, subject to regulatory and shareholder approvals. Management projected approximately $9bn of assets by year-end and said the transaction was intended to improve liquidity and support future earnings; it also moves the company toward the $10bn regulatory threshold, with estimated annual bank-card interchange revenue exposure of $5–6m upon crossing it.
- The 44 Business Capital acquisition added $16.3m of goodwill. Management estimated $0.52 per-share tangible-book-value dilution, targeted earn-back within five years and an internal rate of return above 15%; these are management targets, not guarantees.
- Other risks include execution and integration of acquisitions, interest-rate and liquidity exposure, credit losses and real-estate market conditions, and the uncertain effects of tax-credit rules. A purported depositor class action alleges Electronic Funds Transfer Act and Massachusetts consumer-protection violations; the company denies the claims and is defending the case. The CFO changed shortly after quarter-end. Management reported disclosure controls were effective and no material change in internal control.
- Management’s forward-looking statements are subject to economic, competitive, interest-rate, regulatory and market risks. The filing provides no formal earnings guidance.
Important facts for investors to verify
- Track core earnings against reported earnings: acquisition-related costs, securities gains, purchased-loan accretion and tax-credit benefits materially affect comparisons; adjusted results are non-GAAP.
- Monitor margin, funding costs, brokered deposits and the 106% loans-to-deposits ratio, including the expected effect of First Choice and active swaps on liquidity and earnings.
- Assess First Choice closing conditions, share issuance, integration progress, projected synergies and the costs and revenue effects of approaching the $10bn regulatory threshold.
- Review credit quality and reserve adequacy as the loan book expands, including criticized loans, acquired loans and regional commercial-real-estate exposure.
- Follow the tax-credit investment outlook, second-half effective tax rate, depositor lawsuit and leadership transition.