Berkshire Hills Reports 40% Growth in Second Quarter Core EPS

PITTSFIELD, Mass., July 26, 2011 /PRNewswire/ -- Berkshire Hills Bancorp, Inc. (NASDAQ: BHLB) reported second quarter 2011 core earnings per share totaling $0.35, increasing by 40% compared to $0.25 in the second quarter of 2010.  This increase resulted from strong ongoing organic growth together with the benefits of the acquisition of Rome Bancorp, which was completed on April 1, 2011.

(Logo:  http://photos.prnewswire.com/prnh/20101018/BERKSHIRELOGO )

Berkshire also completed the acquisition of Legacy Bancorp on July 21, 2011.  This event will be reported in Berkshire's third quarter financial results.  Berkshire incurred non-core merger related expenses in the second quarter for both the Rome and Legacy transactions.  Net of these expenses, which totaled $0.24 per share after-tax, GAAP earnings per share were $0.11 during the quarter.  

Including the Legacy acquisition in July, Berkshire's total assets have now grown by more than 40% this year to over $4 billion, and Berkshire's total common shares outstanding have increased by about 50% to approximately 21.1 million.  Based on the $23.06 closing price of Berkshire's common stock on July 20, 2011, Berkshire's total market capitalization exceeds $480 million.

SECOND QUARTER FINANCIAL HIGHLIGHTS (Revenue and expense comparisons are to the prior year second quarter, unless otherwise noted.  Second quarter results include the operations of Rome Bancorp.  Organic growth numbers exclude acquired Rome balances.)

• 40% increase in core earnings per share
• 16% organic annualized commercial loan growth
• 9% organic annualized total loan growth
• 3% organic annualized deposit growth
• 3.52% net interest margin, improved from 3.30% in the first quarter of 2011
• 22% increase in wealth management fee income
• 0.52% non-performing assets/total assets
• 0.24% annualized net loan charge-offs/average loans
• 0.62% accruing delinquent loans/loans

Berkshire President and CEO, Michael P. Daly, stated, "Our solid core earnings growth reflects strong organic growth and sensible bank acquisitions that are improving the strength of our franchise and shareholder value.  We have completed the Rome and Legacy acquisitions as planned.  We fully expect to achieve the cost savings and earnings targets that we have previously set out for these mergers and for our overall operations, and we are also benefiting from a higher net interest margin.  Our tangible book value per share at mid-year improved from where it was before we announced these acquisitions, reflecting our financial disciplines to produce strong earnings accretion while carefully managing any impact on tangible equity."

Mr. Daly continued, "All major business lines produced solid organic growth in the second quarter.  Growth has been led by the commercial lending teams recruited in recent years, as Berkshire continues to increase its market share in supporting business activity in our regional markets.  Our annualized organic core earnings per share growth continues to exceed 25%.  Our core return on assets has increased by 41% over 2010, and we are moving strongly towards our medium term goal to produce an annualized return on assets exceeding 1%.  For the quarter, our marginal core return on equity exceeded 10% on the additional capital that we utilized in the second quarter, which is consistent with our investment objectives.  Our asset quality metrics continue to be favorable and our capital ratios are strong and have improved during the year.  We continue to take advantage of the opportunities to take our company to the next level in serving our markets and in our attractiveness to the investment community."

DIVIDEND DECLARED

The Board of Directors maintained the cash dividend on Berkshire's common stock, declaring a dividend of $0.16 per share to stockholders of record at the close of business on August 11, 2011 and payable on August 25, 2011.   This dividend equates to a 2.95% annualized yield based on the average closing price of Berkshire's common stock in the second quarter of 2011.

FINANCIAL CONDITION

Changes in financial condition in the second quarter reflected the Rome acquisition at the start of the quarter, together with the ongoing benefit of organic loan and deposit growth.  Total assets increased to $3.2 billion, including the addition of $0.3 billion in Rome assets.  Total loans increased by 14% during the second quarter, including the benefit of 9% annualized organic loan growth.  Commercial business loans increased at a 16% annualized organic rate in the second quarter, including the benefit of higher asset based loans.  Residential mortgage balances increased at a 6% organic annualized rate, offsetting the impact of planned runoff of indirect auto loans.

Second quarter asset quality metrics remain favorable and continue to improve.  Non-performing assets decreased to 0.52% of total assets, and annualized net loan charge-offs decreased to 0.24% of average loans.  Accruing delinquent loans also remained favorable, decreasing to 0.62% of total loans.  

Total deposits increased by 11% in the second quarter with the benefit of the Rome acquisition.  Annualized organic deposit growth was 3% for the quarter.  The loan/deposit ratio was 99% at mid-year, reflecting the Bank's ongoing strong liquidity.

Berkshire issued 2.7 million shares for the Rome acquisition at an average value of $20.83 based on the closing price of Berkshire's stock prior to the acquisition.  Total shareholders' equity increased by $54 million primarily due to the benefit of this stock issuance.  Total intangible assets increased by $20 million as a result of the Rome purchase accounting.  Tangible book value per share was $15.07 at mid-year, declining slightly from $15.35 at the start of the year.  Total book value per share decreased to $26.61 from $27.61 during this period, primarily reflecting the $20.83 per share book value of the new shares issued.  The ratio of tangible equity/assets increased to 8.3% from 8.0% during the first half of the year including the benefit of the Rome acquisition.  

RESULTS OF OPERATIONS

The second quarter of 2011 was the first period including the benefits of the Rome operations acquired at the start of the quarter.  As a result, most categories of income and expense increased due to the Rome merger.  Most core profitability measurements improved due to the benefit of this merger.  Results in the most recent quarter include an estimated $0.03 per share accretive core earnings benefit from the Rome acquisition.  Earnings per share were affected by the issuance of additional Berkshire common shares related to the Rome acquisition.  

Second quarter core earnings increased by 69% to $5.8 million in 2011 compared to 2010, and core earnings per share increased by 40% to $0.35 (including the impact of the newly issued shares).  Excluding the $0.03 estimated Rome-related core EPS accretion, core EPS grew at a 27% organic annualized rate compared to the prior quarter.  This ongoing organic growth in core EPS reflects the benefit of positive operating leverage resulting from revenue growth and disciplined expense management.  

GAAP income results in 2011 included the impact of merger related non-core items listed on page F-9 of the accompanying tables, adjusted for tax accruals.  Second quarter 2011 GAAP earnings per share were $0.11, net of $0.24 per share in net after-tax merger related non-core items.  Including the benefits of the Rome merger, the core return on assets improved to 0.72% in the most recent quarter.  Net of merger related charges, GAAP return on assets measured 0.23%.  The efficiency ratio improved including the benefits of the merger and organic growth.  

Second quarter total net revenue increased by 22% in 2011 compared to 2010.  The net interest margin improved to 3.52% from 3.30% in the prior quarter and 3.25% in the second quarter of 2010.  This improvement was primarily due to the higher margin of the acquired Rome operations, along with the continuing benefit of disciplined pricing of loans and deposits.  Second quarter wealth management revenue increased organically by 22% in 2011 compared to 2010, including the benefit of new business development at a 13% annualized rate for the first half of the year.  Including the wealth management business acquired after mid-year with the Legacy acquisition, Berkshire's total assets under management now exceed $900 million for its combined wealth management business.  Second quarter insurance commissions increased 4% year-to-year, including the benefit of commercial account growth.  Second quarter revenue included the impact of a $0.5 million year-to-year reduction in insurance contingency income as a result of lower payouts from major carriers due to industry conditions.

The provision for loan losses decreased in the most recent quarter compared to the prior quarter and to the second quarter of 2010, reflecting the continuing strong performance of the loan portfolio.   Under current accounting standards for business combinations, the Rome loan loss allowance was not transferred to Berkshire along with the Rome loans.  Estimated losses inherent in Rome's loan portfolio were recorded as charges against the fair value of Rome loans on the merger date.  Berkshire's loan loss allowance remained unchanged at $31.9 million during the second quarter.  The ratio of the allowance to total loans was 1.30% at mid-year 2011, and the ratio of the allowance to nonperforming loans was 212%.  

Second quarter non-interest expense totaled $28.6 million, including $5.5 million in non-core merger related expenses.  Core non-interest expense totaled $23.2 million, which was a 16% increase over the second quarter of 2010.  This increase includes the impact of the core Rome operating expenses.  Berkshire is proceeding with its plans to achieve cost savings related to this merger, which are expected to be further realized in upcoming quarters.  FDIC insurance expense decreased due to the benefit of new FDIC industry assessment rates which became effective at the beginning of the second quarter.  This partially offset a write-down on a foreclosed property in anticipation of its sale.  Second quarter income tax expense decreased in 2011 compared to 2010 due to the lower pre-tax earnings as a result of the merger related expenses recorded in the most recent quarter.

UNAUDITED SELECTED FINANCIAL HIGHLIGHTS OF LEGACY BANCORP

Included in the financial exhibits to this news release are unaudited selected second quarter financial highlights of Legacy Bancorp.  This information does not include all items which will affect the final financial statements of Legacy as of the acquisition date.  Activity in the second quarter was in line with the Company's expectations and transitioning in anticipation of the merger.  Additional financial information about Legacy Bancorp will be provided in the notes to the financial statements of Berkshire as of September 30, 2011, which will reflect the acquisition of Legacy as of July 21, 2011.  In conjunction with the acquisition of Legacy, a deposit divestiture agreement was entered into with NBT Bancorp to divest four Berkshire County Legacy branch offices with deposits totaling approximately $158 million.  It is anticipated that this divestiture will be completed by October 31, 2011.

NOTE ON ACCOUNTING CORRECTION

Based on a review of its tax credit investment limited partnership interests in the most recent quarter, Berkshire determined that its net income had been understated by an immaterial amount in prior periods.  These interests primarily relate to low income housing, community development, and solar energy related investments.  The Company has corrected its accounting for these interests, including adjustments to non-interest income to reflect book losses in these interests, which are more than offset by the reduction of income tax expense resulting from federal income tax credits.  The enclosed financial statements include the impact of the correction of these immaterial errors to current and prior period financial information presented.  

CONFERENCE CALL

Berkshire will conduct a conference call/webcast at 10:00 A.M. eastern time on Wednesday, July 27, 2011 to discuss the results for the quarter, the Legacy acquisition, and guidance about expected future results.  Information about the conference call follows:

A telephone replay of the call will be available through August 7, 2011 by calling

877-344-7529 and entering conference number: 451775.  The webcast and a podcast will be available at Berkshire's website above for an extended period of time.  

BACKGROUND

Berkshire Hills Bancorp is the parent of Berkshire Bank, America's Most Exciting Bank(SM), and now has more than $4 billion in assets after the Legacy acquisition.    The Company has more than 60 full service branch offices in Massachusetts, New York, and Vermont providing personal and business banking, insurance, and wealth management services.  Berkshire Bank provides 100% deposit insurance protection for all deposit accounts, regardless of amount, based on a combination of FDIC insurance and the Depositors Insurance Fund (DIF).  For more information, visit www.berkshirebank.com or call 800-773-5601.  

FORWARD LOOKING STATEMENTS

This document may contain 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 made in this document.

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 and restructuring costs.  Similarly, the efficiency ratio is also adjusted for these non-core 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 adjustments in 2010 and 2011 are primarily related to expense charges related to the Rome and Legacy mergers.  These charges consist primarily of severance/benefit related expenses and professional fees.  Tax adjustments are based on an analysis of tax accruals for core income and for GAAP income, with the net difference included with non-core items and reflecting the timing impacts of tax expense estimates.