Berkshire Hills Reports Second Quarter Results; Dividend Declared

BOSTON, July 23, 2019 /PRNewswire/ -- Berkshire Hills Bancorp, Inc. (NYSE: BHLB) reported GAAP net income of $25 million, or $0.52 per share, in the second quarter of 2019.  The non-GAAP measure of core earnings totaled $32 million, or $0.65 per share.  Net non-core charges were primarily related to the acquisition of Willimantic, CT based SI Financial Group, Inc. on May 17, 2019 and are net of discontinued operations.  GAAP EPS increased by 2% compared to the prior quarter, while core EPS increased by 8% due to the benefits of the Company's initiatives. 

SECOND QUARTER FINANCIAL HIGHLIGHTS (income statement metrics are compared to the prior quarter):

• 2% increase in GAAP EPS; 8% increase in core EPS
• 2% increase in net revenue from continuing operations
• 3.19% net interest margin
• 56.4% efficiency ratio, improved from 59.5%
• 0.14% net loan charge-offs/average loans
• 0.27% non-performing assets/assets

CEO Richard Marotta stated, "Our teams had a good quarter and contributed to improving the profitability of our operations based on revenue driven positive operating leverage.  Several critical initiatives were accomplished in the most recent quarter.  We completed the acquisition of SI Financial Group, which added the Savings Institute operations consisting of 23 branches and $1.7 billion in total assets in eastern Connecticut and Rhode Island.  This was completed on time and on plan, including the issuance of 5.7 million Berkshire shares as merger consideration.  The systems conversion remains targeted for early in the fourth quarter."

Mr. Marotta continued, "We completed our strategic review and moved forward on several fronts.  Our commercial aircraft portfolio is in the process of being sold, and our FCLS national mortgage banking operations are being marketed for sale.  We're seeing the benefits of our efficiency initiatives, and we're also investing in targeted areas, including our growing SBA lending team.   Repurchases of common stock have begun under our recent 2.4 million share repurchase authorization."

Mr. Marotta concluded with comments about recent governance and culture initiatives.  "We were pleased to add three new Board members in June:  Baye Adofo-Wilson, Rheo Brouillard, and William Hughes.  They represent our newer markets, enhance our diversity, and add new expertise in technology and community development finance.  Longtime community organizer and activist, Malia Lazu, was appointed as EVP/Chief Experience and Culture Officer, and SVP Jacqueline Courtwright was promoted to Chief Human Resources Officer.  In May, the Bank announced its Be FIRST values program, including initiatives for new community storefronts based around our MyBanker program, a new community deposit and loan product, and enhanced diversity and inclusion programs for employee recruitment and development.   In June, over 90% of our employees joined together in our fourth annual Xtraordinary Day of Service, donating more than 6,000 hours of service at 37 projects throughout our footprint.  Berkshire Bank was recently named as the winner of the 2019 North American Employee Engagement Award for Social Responsibility."

DIVIDEND DECLARED

The Board of Directors approved a quarterly cash dividend of $0.23 per common share to shareholders of record at the close of business on August 8, 2019, payable on August 22, 2019.  The dividend equates to a 3.1% annualized yield based on the $29.85 average closing price of Berkshire Hills Bancorp during the second quarter of 2019.  Effective on the same dates, the Board also approved a quarterly cash dividend on preferred stock totaling $0.46 per share.  The Board had approved a 5% increase in the common and preferred dividend following the start of the year.

ACQUISITION OF SI FINANCIAL GROUP

Berkshire completed the acquisition of SI Financial Group ("SIFI") on May 17, 2019.  At the acquisition date, SIFI had assets with a gross fair value totaling $1.7 billion and a net fair value of $140 million net of liabilities.  Berkshire recorded $176 million in total merger consideration, consisting primarily of the issuance of 5.69 million Berkshire common shares.   Goodwill was recorded in the amount of $35 million, and the core deposit intangible was recorded at $18 million.  For the first quarter of 2019, SIFI reported $57 million in annualized revenue and $39 million in annualized operating expense.  For that period, it recorded a 3.00% net interest margin, with a 4.35% loan yield and a 1.29% interest-bearing deposit cost.  Most Berkshire consolidated balance sheet and income statement categories increased as a result of the merger.

Berkshire targets to achieve cost savings related efficiencies totaling approximately $12 million, or 30% of SIFI annualized non-interest expense.  The Company continues to expect that it will remain within its target of approximately $23 million in total after-tax transaction costs.  Including all purchase accounting and targeted transaction costs the Company estimates that the transaction will be approximately $0.45 dilutive to tangible book value per share.  Projected dilution per share is less than originally anticipated due to changes in market conditions affecting purchase accounting. 

FINANCIAL CONDITION

Total assets were $13.7 billion at midyear 2019, increasing by $1.5 billion, or 12%, during the quarter and including the SIFI merger.  Investment securities increased by $24 million, or 1%.  The SIFI merger added $143 million and there were $119 million in net reductions as a result of the Company's strategic review, along with the integration of the SIFI securities.  Total loans increased in the second quarter by $1.0 billion, or 11%, to $9.9 billion including $1.3 billion in SIFI loans.  The $178 million portfolio of commercial aircraft loans was designated as held-for-sale.  The Company expects to complete the sale of these loans in the third quarter.  Total loans decreased organically in the quarter and year-to-date.  This reflects the Company's strategic review and emphasis on adjusting the level and mix of assets to improve capital returns and to integrate the acquired SIFI portfolio.  Total deposits increased by $1.4 billion, or 15%, in the second quarter to $10.6 billion including $1.3 billion in SIFI deposits.  Payroll related balances decreased by $82 million to $480 million in the second quarter.  Deposits increased organically before changes related to SIFI and payroll accounts.  Ratio metrics of capital, liquidity, and asset quality improved modestly during the most recent quarter.  The SIFI loans were recorded at a $42 million (or 3.1%) discount to gross carrying value, including a $31 million credit discount and an $11 million interest rate discount.  Near quarter-end, the Company initiated purchases of common stock under its recently approved 2.4 million share repurchase program.  The Company repurchased 110 thousand shares in the second quarter and repurchases are expected to continue.   Book value per common share increased by 1% to $34.05 from $33.75 in the most recent quarter, and the non-GAAP measure of tangible book value per common share increased by 3% to $22.25 from $21.66, more than offsetting the dilution from the acquisition.     

RESULTS OF OPERATIONS

GAAP earnings were $0.52 per share in the most recent quarter, compared to $0.51 in the prior quarter.  Results in the second quarter were reduced by non-core charges related to the SIFI acquisition, restructuring charges, and discontinued operations.  

The non-GAAP measure of core earnings totaled $0.65 per share in the most recent quarter, increasing by 8% from $0.60 in the prior quarter.  Revenue driven positive operating leverage contributed to improving core profitability.  This reflected initial benefits from the SIFI acquisition and the Company's strategic initiatives.  The return on equity measured 6.1% in the most recent quarter, and the non-GAAP metric of core return on tangible common equity measured 12.2%.

Compared to the prior quarter, total net revenue from continuing operations increased by $2 million, or 2%, and the non-GAAP measure of core revenue increased by $4 million, or 4%.  The net interest margin was 3.19% in the most recent quarter, increasing by 0.02% from the prior quarter, including the benefit of higher accretion related to the SIFI acquisition.   Fee income was down 3% from the prior quarter due to lower loan related revenue.  Non-interest income decreased due to higher tax credit amortization charges which were more than offset by the benefit to income tax expense from tax credits received on projects completed during the quarter.    

Non-interest expense increased quarter-over-quarter including the acquired SIFI operations and higher merger related charges.  Compared to the prior quarter, non- interest expense increased by $5 million, or 6%, while the non-GAAP measure of core expense increased by $400 thousand, or 1%.  The efficiency ratio improved to 56% from 60%.  Excluding SIFI and the FCLS operations, full time equivalent staff decreased to 1,391 at midyear, compared to 1,485 at the start of the year.  FCLS staff totaled 416 at midyear, compared to 432 at the start of the year.  Staff in the acquired SIFI operations totaled 230 at midyear.  The effective income tax rate decreased to 18% in the most recent quarter from 22% in the prior quarter due to higher tax credit benefits resulting from tax credit investment projects that came into service during the quarter.  Net of the related amortization charges to non-interest income previously mentioned, these projects contributed $0.01 to earnings per share during the quarter.

The FCLS national mortgage banking operations contributed $0.03 in non-core EPS during the most recent quarter, as industry business volumes improved following the decrease in long term interest rates that developed during the quarter.  These operations generated $15 million in fee revenue, which was an increase of 56% quarter-over-quarter and 47% year-over-year due to improved market conditions.  The Company generated $719 million in held-for-sale residential mortgages in the most recent quarter, compared to $398 million in the prior quarter and to $626 million in the second quarter of 2018.  Due to the decision to sell the FCLS operations, they are accounted for as discontinued in the financial statements, and most references to revenue and expense refer to continuing operations and exclude FCLS revenue and expense.

INVESTOR CONFERENCE CALL AND INVESTOR PRESENTATION

Berkshire will conduct a conference call/webcast at 10:00 a.m. eastern time on Wednesday, July 24, 2019 to discuss the results for the quarter and provide guidance about expected future results.  Prior to the call, the Company will post a presentation at its website with updates on its strategic initiatives.   Participants are encouraged to pre-register for the conference call using the following link:  http://dpregister.com/10133134.  Callers who pre-register will be given dial-in instructions and a unique PIN to gain immediate access to the call.  Participants may pre-register at any time prior to the call, and will immediately receive simple instructions via email.  Additionally, participants may reach the registration link and access the webcast by logging in through the investor section of Berkshire's website at http://ir.berkshirebank.com.  Those parties who do not have internet access or are otherwise unable to pre-register for this event, may still participate at the above time by dialing 1-844-792-3726 and asking the Operator to join the Berkshire Hills Bancorp (BHLB) earnings call.  A telephone replay of the call will be available through Wednesday, July 31, 2019 by dialing 877-344-7529 and entering access number 10133134.  The webcast will be available on Berkshire's website for an extended period of time.

BACKGROUND

Berkshire Hills Bancorp is the parent of Berkshire Bank, a premier regional bank distinguished by its local responsiveness and engagement. With corporate headquarters in Boston, the Company operates in seven Northeastern states, with approximately $13.7 billion in assets and 132 banking offices.  Berkshire Bank is recognized for its entrepreneurial approach, relationship customer experience, and distinctive culture embracing and celebrating the diversity of all customers, employees and, suppliers.

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 on pages F-9 and F-10 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 items which the Company does not view as related to its normalized operations.  These items primarily include securities gains/losses, merger costs, restructuring costs, and discontinued operations.  Merger costs consist primarily of severance/benefit related expenses, contract termination costs, systems conversion costs, variable compensation expenses, and professional fees.  Merger costs in 2018 and 2019 are primarily related to the acquisitions of Commerce Bancshares Corp. and SI Financial Group.  Restructuring costs generally consist of costs and losses associated with the disposition of assets and liabilities and lease terminations, including costs related to branch sales.  Restructuring costs also include severance and consulting expenses related to the Company's strategic review.   Discontinued operations are the Company's national mortgage banking operations for which the Company is pursuing sale opportunities.  In 2018, the Company recorded $8 million in charges related to the restructuring of banking systems vendor relationships.  The Company recorded a $3 million cost for the settlement of an existing legal proceeding with a plaintiff claiming to be representing a class of depositors.  Non-core charges in 2018 also included a $1.5 million net charge related to the CEO transition. 

Non-core adjustments are presented net of an adjustment for income tax expense.  This adjustment is determined as the difference between the GAAP tax rate and the effective tax rate applicable to core income.  The efficiency ratio is adjusted for non-core revenue and expense items and for tax preference items.  The Company also calculates measures related to tangible equity, which adjust equity (and assets where applicable) to exclude intangible assets due to the importance of these measures to the investment community. 

CONTACTS

Investor Relations Contact

Erin E. Duggan; Investor Relations Manager; 413-236-3773

Media Contact

Cassandra Giovanni; Corporate Communications Manager; 860-428-9561