Berkshire Hills Reports Record Quarterly and Annual Core Earnings; Dividend Announced; Annual Meeting Set
PITTSFIELD, Mass., Jan. 28, 2013 /PRNewswire/ -- Berkshire Hills Bancorp, Inc. (NYSE: BHLB) reported record core earnings of $13.2 million for the fourth quarter and $44.2 million for the year 2012. Berkshire produced $0.54 in core earnings per share during the quarter, which was a 23% improvement over the prior year fourth quarter and a 4% increase over the third quarter of 2012. For the full year 2012, Berkshire reported $1.98 in core earnings per share, which was a 29% increase over 2011 core results of $1.54. Berkshire has posted three years of consecutive quarterly core earnings growth due to ongoing business expansion and improved profitability.
Operations in the last two years have benefited from acquisitions, including Beacon Federal Bancorp which was acquired on October 19, 2012. GAAP earnings include the impact of net non-core charges for mergers and systems conversions. GAAP net income totaled $9.3 million ($0.38 per share) for the fourth quarter and a record $33.2 million ($1.49 per share) for the full year in 2012.
FOURTH QUARTER FINANCIAL HIGHLIGHTS
- 14% increase in total assets to $5.3 billion, compared to the prior quarter
- 23% increase in core earnings per share, compared to fourth quarter of 2011
- 4% increase in core earnings per share, compared to the prior quarter
- 20% revenue growth, compared to the prior quarter
- 3.67% net interest margin
- 13% annualized organic non-maturity deposit growth
- 10% organic demand deposit growth
- 0.52% non-performing assets/total assets
- 0.28% annualized net loan charge-offs/average loans
- 1.02% core ROA (0.72% GAAP ROA)
- 8.2% core ROE (5.8% GAAP ROE)
Berkshire Chairman and CEO Michael P. Daly stated, "The success of our business initiatives produced record core earnings and a double digit total stock return for our shareholders in 2012. We maintained strong organic growth while successfully integrating our bank acquisitions in Northern Connecticut and Central New York, and expanding our lending in Eastern Massachusetts. Our fourth quarter net interest margin increased and our core return on equity rose above 8%. With these achievements, we raised our quarterly dividend to the highest level in our history."
Mr. Daly continued, "We have produced these results through positive core operating leverage based on disciplined growth. We achieved 49% year over year revenue growth in the fourth quarter. Our total assets reached $5.3 billion, placing us among the 100 largest exchange traded banks in the U.S. This scale has enabled ongoing infrastructure investment in products and services which we deliver with a responsive local focus in our regions. We have a competitive advantage that we expect will result in sustainable market share growth delivered with increased efficiency and profitability."
Mr. Daly concluded, "We augmented our balance sheet strength in 2012 while improving our capital efficiency. Our performance oriented team is focused on the drivers of customer preference and shareholder returns. We recently set out ambitious three year goals to maintain our market and financial momentum, including double digit metrics for annual growth in per share core earnings and core return on shareholder equity by the end of the plan period. We are dedicated to delivering on the potential of this franchise and on the promise of our brand and culture as America's Most Exciting Bank®."
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 February 14, 2013, payable on February 28, 2013. The dividend was increased in the prior quarter by 6% from the previous $0.17 per share level. This dividend equates to a 3.1% annualized yield based on the $23.03 average closing price of Berkshire's common stock in the fourth quarter of 2012.
ANNUAL MEETING DATE SET
The Board of Directors has voted that the Annual Meeting of Shareholders shall be held on May 9, 2013 at the Crowne Plaza Hotel, One West Street, Pittsfield, Massachusetts at 10:00 a.m. The date of March 14, 2013 was established as the record date for the determination of the shareholders entitled to notice of, and to vote at, the Annual Meeting.
Assets totaled $5.3 billion at year-end 2012, including $0.8 billion from the Beacon acquisition in October. For the year 2012, total assets grew by $1.3 billion (33%) from $4.0 billion including the benefit of organic growth together with acquisitions. Overall measures of asset quality, capital, and liquidity remained strong throughout the year. Total shares outstanding increased in 2012 by 4 million (19%) to approximately 25.1 million shares primarily as a result of merger consideration.
For the year, organic loan growth was $156 million (5%), reflecting growth in commercial business loans and residential mortgages. Including merger impacts, total loan growth was 35% for the year and 17% for the fourth quarter. Most fourth quarter residential mortgage originations were sold to the secondary market in the low rate environment, and selected commercial loans outstanding were reduced as the Company rebalanced the portfolio composition while absorbing merger related growth.
Berkshire continues to employ its capital to support the credit needs of its markets and generate shareholder returns. Organic commercial business loan growth totaled $101 million (25%) for the year. Berkshire is building business loan volume in its markets as it targets banking relationships with middle market customers who need a full range of products and services provided by a responsive local banking partner. Berkshire also expanded its small business lending program to facilitate lending across its footprint. Commercial business loans increased to $600 million during the year, comprising 30% of all commercial loans and 15% of total loans at year-end.
Organic residential mortgage loan growth totaled $125 million (12%) for the year, including the benefit of Berkshire's expanded Eastern Massachusetts mortgage lending team. Berkshire's mortgage loan originations exceeded $1.1 billion in 2012, responding to strong demand related to improved housing market conditions and low mortgage interest rates. With the Beacon acquisition, total consumer loans outstanding grew by $282 million (77%) in the fourth quarter. Beacon's strong consumer lending operations are expected to be a significant new source of loan production for Berkshire as merger integration is accomplished in 2013.
Asset quality metrics remained favorable throughout the year and at year-end. Non-performing assets were 0.52% of year-end assets. Fourth quarter annualized net loan charge-offs were 0.28% of average loans Year-end accruing delinquent loans were 1.11% of loans, increasing modestly from 0.89% at the start of the year including the impact of acquired banks. The loan loss allowance increased by 2% during the year, while decreasing in comparison to total loans due to the impact of acquired loans recorded at net fair value, which comprised 34% of total year-end loans.
For the year, organic deposit growth totaled $166 million (5%) primarily due to an increase in low cost transaction account balances. This was principally in demand deposit balances which posted 27% organic growth for the year, with the largest increase coming in the fourth quarter. Demand deposits are the focus of relationship based business development for retail and business accounts. Total commercial deposits increased to $1.3 billion at year-end, providing nearly a third of total deposit funds. Reflecting customer liquidity preference in the current low rate environment, ongoing transfers of maturing time deposits combined with strong account growth to produce 8% organic savings deposit growth and 7% organic money market account growth for the year. During the fourth quarter, Berkshire opened additional New York branches in Slingerlands and Wilton, continuing its de novo branch expansion in the greater Albany market where it now has 17 total branch offices.
Total year-end shareholders' equity increased to $666 million in 2012, including $90 million recorded for bank merger equity consideration. Year-end tangible book value per share increased to $15.56, as capital generation more than offset the impact of merger intangibles resulting from the accretive earnings streams acquired. Total book value per share increased to $26.53 due mainly to retained earnings. Berkshire utilized subordinated debt as a significant source of merger consideration in order to take advantage of attractive fixed rate capital available in the low rate environment. This resulted in the more efficient utilization of equity capital. Tangible equity/assets remained strong at 7.8% at year-end, compared to 8.7% at the start of the year.
RESULTS OF OPERATIONS
Berkshire posted strong core growth in revenue, earnings, and earnings per share for the fourth quarter and the year in 2012. Core profitability improved as a result of the positive operating leverage attributable to revenue growth and disciplined expense management. Berkshire is achieving these results while bearing the costs of maintaining its asset sensitive interest rate risk profile and absorbing the charges related to its branch and team expansion, and its investment in technology and other infrastructure. The fourth quarter was the first quarter to include the combined operations of the year's acquisitions, and year-to-year increases include the impact of 2011 acquisitions.
The fourth quarter core return on equity was 8.2%. GAAP net income in most periods also reflected non-core charges which were primarily merger related, together with systems conversion costs. The reconciliation of net income and core income is shown on table F-9 of the financial tables. Non-core charges in the most recent quarter were primarily related to the Beacon merger. For the year, non-core charges were within the range of management expectations. The Company does not view these non-core items as a component of its ongoing operating costs. Including the impact of non-core items, the fourth quarter GAAP return on equity was 5.8%.
Berkshire's total fourth quarter net revenue increased by $10.1 million to $59.6 million compared to the linked quarter. Higher revenues included the benefit of Beacon operations, which produced $6.6 million in revenue for the comparable period in the prior quarter (based on the number of days that Beacon was owned in the fourth quarter). Fourth quarter revenues also included $1.4 million in net securities gains primarily on Beacon stock held by Berkshire on the merger date. Excluding the non-core securities gains, core revenues were $58.2 million or $9.54 per share annualized in the most recent quarter. This is a 26% increase from $7.59 in the fourth quarter of 2011, demonstrating the top line accretive benefit to shareholders from acquisition activities and organic growth.
The net interest margin improved to 3.67% in the most recent quarter, compared to 3.50% in the prior quarter and to 3.61% in the fourth quarter of 2011. The total fourth quarter net benefit from loan purchase accounting accretion was $3.2 million compared to $1.1 million in the prior quarter. This increase contributed 0.18% to the fourth quarter net interest margin and was primarily due to cash recoveries on a small number of acquired impaired loans. The quarterly net interest margin has varied throughout the year based on the impact of loan prepayments and recoveries on deferred balances and purchase accounting entries. The cost of deposits decreased to 0.59% in the fourth quarter compared to 0.66% in the prior quarter. This included the benefit of demand deposit growth, together with the Beacon deposits. Berkshire continues to maintain its asset sensitive interest rate risk profile in order to enhance its long-term earnings.
Fourth quarter fee income totaled $15.8 million, increasing by $1.9 million over the prior quarter. This was primarily due to the benefit of Beacon operations, which produced $1.2 million in fee income in the comparable period of the prior quarter. Berkshire's fee income in the second half of 2012 has benefited from higher mortgage origination revenues related to increased refinancing demand in the current low rate environment. Net mortgage origination revenue totaled $5.9 million in the fourth quarter, compared to $4.3 million in the prior quarter. Fourth quarter insurance revenues increased compared to the prior year primarily due to a managed change in seasonal contingency income. Near-record quarterly wealth management revenue was achieved in the fourth quarter due to organic growth and improved market conditions.
The fourth quarter provision for loans losses increased to $2.8 million from $2.5 million in the prior quarter. Net loan charge-offs totaled $2.7 million and $2.3 million in these periods, respectively. There were no significant changes in the Bank's favorable charge-off metrics or in the metrics related to the loan loss allowance, which increased by $0.1 million to $33.2 million during the quarter.
Fourth quarter core non-interest expense totaled $36.8 million, increasing by $6.8 million from the prior quarter. This included the impact of the Beacon operations which generated $4.3 million in non-interest expense in the comparable period of the prior quarter. As Berkshire completes the integration of Beacon operations in 2013, it expects to achieve annual net Beacon related cost savings of $5.5 million based on a 30% gross cost saving target. The efficiency ratio measured 59.7% in the most recent quarter, increasing from the prior quarter as the Company absorbed additional variable costs related to expansion and integration in anticipation of further efficiency gains in 2013. Fourth quarter non-recurring and merger related expense totaled $7.5 million and was primarily a result of Beacon merger related expense. The core effective income tax rate was 29% in the fourth quarter and 30% for the year 2012. The GAAP effective income tax rate on continuing operations was 25% and 28% for the same periods, respectively, reflecting the higher proportionate benefit of tax preference items on GAAP earnings net of non-core merger charges.
NOTE ON ACCOUNTING CORRECTION
Based on a review of its lease agreements in the most recent quarter, the Company determined that its net income had been overstated by an immaterial amount in prior periods. The expense recorded for leases with contractual cost escalators has been corrected to reflect a level cost over the contractual lease period, rather than based on the actual current period cost which was previously recorded. As a result, non-interest expense has been increased, and income tax expense has been decreased based on the tax rate effective for this correction. This correction was posted to 2012 income in the most recent quarter and to 2011 annual income; it was immaterial to prior quarterly results. Related adjustments have been made to the balance sheets presented for retained earnings, other liabilities, and the tax asset.
Berkshire will conduct a conference call/webcast at 10:00 a.m. eastern time on Tuesday, January 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:
Elite Entry Number:
A telephone replay of the call will be available through Tuesday, February 5, 2013 by calling 877-344-7529 and entering conference number: 10023105. The webcast and a podcast will be available at Berkshire's website above for an extended period of time.
Berkshire Hills Bancorp is the parent of Berkshire Bank – America's Most Exciting Bank®. The Company has approximately $5.3 billion in assets and 75 full service branch offices in Massachusetts, New York, Connecticut, 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).
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, 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. 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.
Investor Relations Contact
David Gonci; Investor Relations Officer; 413-281-1973