BHLB Berkshire Hills Bancorp Inc

PITTSFIELD, Mass., Oct. 28, 2013 /PRNewswire/ -- Berkshire Hills Bancorp, Inc. (NYSE: BHLB) reported that, for the first nine months of the year, core income increased by 18% to $36.7 million from $31.0 million due to the benefit of organic and acquisition growth initiatives.  Nine month core earnings per share increased by 3% to $1.47 from $1.43.  The benefit of business expansion has more than offset pricing pressures in the low interest rate environment. 

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Third quarter core earnings totaled $10.7 million in 2013 compared to $11.4 million in 2012.  The widely publicized reduction in residential mortgage refinancing demand led to a $0.10 per share after-tax reduction in mortgage banking fees.  As a result, third quarter core earnings per share decreased to $0.43 in 2013, compared to $0.52 in the third quarter of 2012.   Results in the most recent quarter included 16% annualized loan growth and a 4% reduction in core non-interest expense, compared to the linked quarter, reflecting Berkshire's recent initiatives in response to the mortgage changes. 

Nine month GAAP net income increased to $30.6 million in 2013 from $23.9 million in 2012.   These amounts include net non-core charges primarily related to mergers, systems integration, and restructuring expenses.  They also include a third quarter 2013 net non-core credit adjustment posted as an out-of-period correction to recognize prior period interest income on loans acquired in bank acquisitions, net of related taxes and a variable compensation adjustment.  Nine month GAAP net income increased to $1.22 per share in 2013 from $1.10 in 2012.  Third quarter GAAP net income was $8.1 million and $10.0 million in 2013 and 2012, while third quarter GAAP earnings per share were $0.33 and $0.46 per share, respectively.   Non-core charges in the most recent quarter were primarily due to restructuring charges intended to reduce ongoing operating expenses and improve future profitability.

THIRD QUARTER FINANCIAL HIGHLIGHTS

• 16% annualized increase in commercial business loans and in total loans
• 8% annualized increase in total commercial loans
• 7% annualized increase in total deposits
• 16% annualized increase in demand deposits
• 3.93% net interest margin
• 4% decrease in core non-interest expense compared to prior quarter
• 0.58% non-performing assets/total assets
• 0.32% net loan charge-offs/average loans

CEO Michael Daly stated, "We had a good quarter and our business expansion initiatives have driven year-to-date earnings growth despite the headwinds resulting from the interest rate environment.  At the beginning of the third quarter, we took action to further consolidate the benefits from our expansion.  We renewed loan growth while trimming core expenses, achieving near-term core earnings and profitability targets."

Mr. Daly continued, "We expect to accomplish our long term objectives through market share growth in our New England and New York footprint. We've attracted a strong team and assembled the infrastructure to enable us to be the preferred provider of financial solutions.  Recently, George Bacigalupo was promoted to the position of EVP – Commercial Banking.  George is an accomplished regional commercial banking executive serving middle market businesses.  Our commercial market managers produced strong loan growth in the quarter and business development prospects remain encouraging for the months ahead."

Mr. Daly concluded, "We are restructuring targeted operations to drive additional efficiencies arising from expansion and infrastructure investment.  Non-core restructuring charges were recorded during the quarter, enabling us to lower ongoing operating expenses as demonstrated by our third quarter results.  In addition, there has been good progress towards completing the purchase of 20 New York branches from Bank of America in January.  We are targeting overall positive operating leverage in 2014 based on revenue growth and efficiency goals."

DIVIDEND DECLARED

The Board of Directors voted to declare a cash dividend of $0.18 per share to shareholders of record at the close of business on November 14, 2013, payable on November 27, 2013. This dividend equates to a 2.7% annualized yield based on the $26.21 average closing price of Berkshire's common stock during the third quarter of 2013.   

NOTE ON ACCOUNTING CORRECTION

During the most recent quarter, the Company recorded a correction to recognize $2.2 million of prior period revenue that was primarily related to interest income earned on loans acquired in bank acquisitions, together with an income tax adjustment.  This included $0.9 million in additional revenue for the first half of 2013, with the remainder representing revenue which was not previously recorded in 2011 and 2012.  After evaluating the quantitative and qualitative aspects of these adjustments, the Company concluded that prior period statements were not materially misstated, and therefore no restatement was required and no revision was necessary in the disclosure of the level and trend of earnings. The Company classified this revenue as non-core in its determination of core earnings.

FINANCIAL CONDITION

Berkshire increased its earning assets by $227 million (5%) in the most recent quarter including growth of $153 million (16% annualized) in total loans, with growth registered in most major loan categories.  Loan growth was funded in part with a $67 million increase (7% annualized) in deposits, and Berkshire made progress towards its goal of completing the purchase of more than $600 million in deposits from Bank of America in January.   Measures of asset quality, liquidity, and capital remained within targets and the Company continued to maintain an asset sensitive interest rate risk profile.  Tangible book value per share increased to $16.08 and total book value per share grew to $26.98.

Earning asset growth included the benefit of ongoing business development as well as targeted asset purchases, primarily consisting of medium duration government agency mortgage backed securities.  Run-off of commercial real estate related loans decreased and total commercial mortgage loans increased at a 4% annualized rate.  Commercial business loans continued to grow strongly, increasing at a 16% annualized rate for the quarter and 15% year-to-date.  As a result, total loan growth turned positive for the year-to-date.  A significant portion of residential mortgage production was retained in the portfolio, benefiting from promotion of 10/1 adjustable rate mortgages as an alternative to higher cost 30-year fixed rate mortgages.  Consumer loans advanced at a 21% annualized rate in the quarter, mostly due to higher originations of prime indirect automobile loans by Berkshire's Syracuse based consumer lending team.  Based on quarter-end lending pipelines, the Company expects to produce further net loan growth during the remainder of the year.

Asset quality metrics remained favorable in the most recent quarter.  Quarterly annualized net loan charge-offs measured 0.32% of average loans.  Quarter-end non-performing assets were 0.58% of total assets, compared to 0.52% at the start of the year.  Accruing delinquent loans were 0.71% of total loans after nine months, compared to 1.11% at the start of the year.  The loan loss allowance measured 0.83% of total loans at both of the above dates.

The 7% annualized third quarter increase in total deposits included 16% annualized growth in demand deposits and 19% annualized growth in money market balances.  Due to short term promotions, the cost of deposits increased slightly to 0.55% from 0.52% in the prior quarter.  Deposit growth included a $49 million increase in commercial deposits, including the benefit of ongoing commercial relationship expansion.  Total borrowings increased by $149 million as short term funds were used to support earning asset growth pending the completion of the deposit acquisition.  The loan/deposit ratio measured 104% at quarter-end.  Berkshire improved the utilization of its capital to support higher earning assets, with the result that the ratio of tangible equity/assets stood at 7.7% at quarter-end, compared to 8.1% at the start of the quarter.   The ratio of total equity/assets stood at 12.4% and 12.9% at these dates, respectively. 

RESULTS OF OPERATIONS

Berkshire posted year-over-year growth in net revenue totaling 17% in the third quarter and 24% for the first nine months of the year due primarily to its organic and acquisition growth strategies.  Most categories of income and expense increased year-over-year including the impact of acquisitions.  Core earnings increased by 18% for the first nine months with the benefit of overall business expansion.  Berkshire achieved these results while bearing the costs of maintaining its asset sensitive interest rate risk profile, absorbing charges related to its branch and team expansion, and investing in technology and other infrastructure.  GAAP earnings include the impact of net non-core charges related to mergers, systems conversion, restructuring, and securities gains.  The reconciliation of net income and core income, together with related financial measures, is shown on tables F-9 and F-10 of the financial tables.  The core return on assets measured 0.81% in the most recent quarter while the GAAP return on assets measured 0.61% after the non-core items.  The core return on tangible equity measured 11.2% during the quarter, while the GAAP return on equity measured 4.7%.

Compared to the linked quarter, Berkshire's third quarter net revenue increased by 2%.  Core net revenue decreased by 1% due to lower mortgage banking fee revenue.  Net interest income increased by 12% while non-interest income declined by 22%, including a decrease in realized equity securities gains.

Average earning assets increased by 2% in the most recent quarter.  Most of the growth came later in the quarter, resulting in a 5% increase in period-end balances.  In addition to earning asset growth, net interest income benefited from an improvement in the net interest margin to 3.93%.  Net interest income during the quarter included $8.5 million in purchased loan accounting accretion, including $4.8 million related to recoveries on acquired impaired loans and $2.2 million related to the out-of-period accounting adjustment.  Excluding purchased loan accounting accretion, the net interest margin measured 3.21% during the quarter, compared to 3.34% in the prior quarter due to the ongoing impact of the low interest rate environment on earning asset yields and changes in the asset mix. 

Non-interest income decreased to $12.1 million in the third quarter of 2013, compared to $15.6 million in the linked quarter.  This included a $1.7 million decrease in mortgage banking fees and a $1.3 million decrease in other loan fees related primarily to loan sales in the earlier quarter.  The decrease in mortgage banking revenue resulted from lower refinancing demand, tighter margins on secondary market activity, and higher retention of adjustable rate mortgages in the mortgage portfolio. 

The third quarter provision for loan losses increased to $3.2 million in 2013 from $2.7 million in the linked quarter and from $2.5 million in the third quarter of 2012.  Net loan charge-offs totaled $3.2 million, $2.7 million, and $2.3 million for these periods, respectively.  There were no significant changes in the Company's charge-off metrics, which remain low compared to long term industry standards.  Following the loan loss provision, the loan loss allowance remained unchanged at $33.2 million during the most recent quarter and for the first nine months of the year. 

Third quarter core non-interest expense decreased by $1.4 million (4%) compared to the linked quarter due to cost saving initiatives that were undertaken in the third quarter.  Most major categories of expense declined.  Full time equivalent staff decreased by 7% to 948 from 1,014 during the quarter.  Compensation expense did not fully reflect the declining run rate during the quarter, and this was offset by higher variable compensation related to increased business production and the increased prior period revenue recognition.

Total GAAP non-interest expense increased to $42.8 million from $37.9 million in the linked quarter due to $6.5 million of non-recurring charges in the most recent quarter, including $1.0 million related to the upcoming acquisition of Bank of America branches, $2.4 million in severance costs, and $2.8 million related to facilities restructuring costs.  The latter charge related to nine properties that are being closed or consolidated.  Two branches are being consolidated in the fourth quarter, and for the year, Berkshire will have consolidated five branch offices (7% of the total) to achieve greater efficiency following its acquisitions.  The Company continues to evaluate restructuring opportunities in order to improve efficiency.  The efficiency ratio improved to 61.0% in the most recent quarter.  The effective income tax rate was 32.6% in the most recent quarter, which was generally in line with the Company's expectations.

CONFERENCE CALL

Berkshire will conduct a conference call/webcast at 10:00 a.m. eastern time on Tuesday, October 29, 2013 to discuss the results for the quarter and provide guidance about expected future results.  Participants should dial-in to the call a few minutes before it begins.  Information about the conference call follows:

A telephone replay of the call will be available through Wednesday, November 6, 2013 by calling 877-344-7529 and entering conference number: 10034938.  The webcast and a podcast will be available at Berkshire's website above for an extended period.  A PDF version of this release is available at Berkshire's Investor Relations web site.

BACKGROUND

Berkshire Hills Bancorp is the parent of Berkshire Bank – America's Most Exciting Bank^®. The Company has approximately $5.5 billion in assets and 74 full service branch offices in Massachusetts, New York, Connecticut, and Vermont providing personal and business banking, insurance, and wealth management services. 

FORWARD LOOKING STATEMENTS

This document contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.  There are several factors that could cause actual results to differ significantly from expectations described in the forward-looking statements. For a discussion of such factors, please see Berkshire's most recent reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission and available on the SEC's website at www.sec.gov.  Berkshire does not undertake any obligation to update forward-looking statements.

NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles ("GAAP").  These non-GAAP measures provide supplemental perspectives on operating results, performance trends, and financial condition.  They are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information.  A reconciliation of non-GAAP financial measures to GAAP measures is included in the accompanying financial tables.  In all cases, it should be understood that non-GAAP per share measures do not depict amounts that accrue directly to the benefit of shareholders.  The Company utilizes the non-GAAP measure of core earnings in evaluating operating trends, including components for core revenue and expense.  These measures exclude amounts which the Company views as unrelated to its normalized operations, including merger costs, restructuring costs, and systems conversion costs.  Similarly, the efficiency ratio is also adjusted for these non-core items and for tax preference items.  The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.  Non-GAAP expense adjustments are primarily related to charges related to merger and acquisition activity.  These charges consist primarily of severance/benefit related expenses, contract termination costs, and professional fees.  There are additionally non-GAAP adjustments related to non-recurring securities gains, discontinued operations, the disposition of excess properties, and core systems conversion costs.  In the most recent period, non-core restructuring charges are related to severance costs as a result of management and staffing changes, along with facilities costs related to excess facilities where the bank is exiting its occupancy and investment.  As discussed previously, non-core items recorded in the third quarter of 2013 also included the after-tax impact of the out-of-period accounting adjustment, along with an adjustment of variable compensation based on the additional revenue recognition.

CONTACTS
Investor Relations Contact
Allison O'Rourke; Vice President - Investor Relations; 413-236-3149

Media Contact
Ray Smith, Assistant Vice President – Marketing; 413-236-3756