Berkshire Hills Reports Third Quarter Results

BOSTON, Oct. 20, 2022 /PRNewswire/ -- Berkshire Hills Bancorp, Inc. (NYSE: BHLB) today reported third quarter 2022 earnings per share ("EPS") totaling $0.42.  The non-GAAP measure of adjusted EPS totaled $0.62 for this period.

GAAP EPS decreased from $0.50 in the prior quarter due to $11 million in third quarter charges primarily consisting of branch restructuring costs following the completion of the previously announced branch consolidation program.  

Excluding these charges, adjusted EPS increased by 21% from $0.51 in the prior quarter.  Results benefited from a 13% increase in net interest income driven by a 37 basis point increase in the net interest margin due to loan growth and higher market interest rates.

Third quarter GAAP EPS decreased from $1.31 in 2021 due to $52 million in gains recorded on the sale of branch and insurance operations in 2021.  Excluding these gains, adjusted EPS increased year-over-year by 18%.  Berkshire's 2022 results demonstrate positive operating leverage from its BEST strategic transformation initiatives.

THIRD QUARTER FINANCIAL HIGHLIGHTS (Changes are quarter-over-quarter unless otherwise stated.  Non-GAAP measures are reconciled on pages F-9 and F-10).

• 6.8% return on tangible common equity and 9.9% adjusted return on tangible common equity
• 11% increase quarter-over-quarter in total net revenue; 10% increase in adjusted net revenue
• 3.48% net interest margin, increased from 3.11% in 2Q22 and 2.56% in 3Q21
• 62% efficiency ratio, improved from 67% in 2Q22 and 69% in 3Q21
• 2% end-of-period loan growth quarter-over-quarter; 16% growth year-over-year
• 0.74% delinquent and non-accrual loans/loans
• 7% reduction in period-end shares outstanding year-over-year reflecting stock buybacks
• Prepayment of $75 million in subordinated debt in September 2022

CEO Nitin Mhatre stated "Berkshire posted strong revenue growth in the third quarter and achieved the highest adjusted per share earnings since 2019.  We're ahead of our BEST strategic transformation plan targets for performance improvement and accelerating our progress towards our vision of becoming a high-performing, leading socially responsible community bank."

"Berkshire posted another quarter of loan growth and asset quality remains strong.  Our balance sheet remains positioned to benefit from further increases in market interest rates.  The Company's expense discipline continues to support positive operating leverage and improved efficiency, allowing us to reinvest in targeted business lines.  Our focused capital management has improved our capital returns to shareholders while also maintaining a strong capital base to support further franchise growth."

Mr. Mhatre concluded, "We continue to evolve our organization to meet shifting consumer, business, community, and employee expectations while enhancing our Digitouch^SM model of customer engagement.  We've increased our base pay rates, announced a number of promotions, and continue targeted recruiting of frontline bankers.  Our teams are finding opportunities to add new relationships in the changing local banking landscape.  We're making steady progress in our multi-billion BEST Community Comeback program along with our ESG activities and are encouraged by the ongoing momentum within our organization and communities."

RESULTS OF OPERATIONS

Earnings:  Third quarter EPS of $0.42 decreased from $0.50 quarter-over-quarter, while adjusted EPS increased by 21% to $0.62 from $0.51. Third quarter EPS decreased from $1.31 in 2021 due to gains recorded on the sale of business operations in 2021. Third quarter adjusted EPS increased from $0.53 in 2021.

The improvement in adjusted earnings reflects positive operating leverage, with 11% revenue growth and 3% growth in adjusted operating expense compared to the prior quarter.  The efficiency ratio improved to 62% in the most recent quarter, compared to 67% in the linked quarter and to 69% in the third quarter of 2021. 

The third quarter 2022 return on tangible common equity measured 6.8% and the non-GAAP measure of adjusted return on tangible common equity measured 9.9%, The return on assets measured 0.66% and the non-GAAP measure of adjusted return on assets measured 0.99%.

The Company also utilizes the financial measure of Pre-tax Pre-Provision Net Revenue ("PPNR") to evaluate the results of operations before the impact of the provision and tax expense. Compared to the prior quarter, PPNR decreased by $2 million to $27 million due to the restructuring expenses.  The non-GAAP measure of adjusted PPNR increased by 28% to $39 million. Adjusted PPNR increased by 53% on a year-over-year basis.

Earnings per share benefited from share repurchases in most quarters during 2021 and 2022.  At period-end, the Company had approximately $35 million remaining in its 2022 share repurchase authorization. 

Revenue and expense comparisons to the third quarter of 2021 include the impact of the sale of branch and insurance operations at the end of that period.  Revenue and expense related to those operations were components of operating income in that period and in prior periods.

Revenue:  Total net revenue increased by 11% quarter-over-quarter and decreased by 25% year-over-year, due to the gains recorded on the sale of operations in the third quarter of 2021.   The Company's non-GAAP measure of adjusted revenue increased by 10% and 17% for the above periods. 

Net interest income has been the primary driver of revenue growth in recent periods.  Third quarter net interest income increased by $11 million, or 13%, compared to the linked quarter and by $21 million, or 29%, compared to the third quarter of 2021.  After several quarters of relative stability, including a 2.56% margin in the third quarter of 2021, the margin expanded strongly to 3.11% in the second quarter of 2022, and then rose further to 3.48% in the third quarter of 2022. 

This improvement primarily reflected the impact of rapidly rising market interest rates which the Company was positioned to benefit from due to the positive asset sensitivity of its balance sheet.  The margin also reflected the benefit of the reduction in higher cost wholesale funds as well as the reinvestment of excess cash into loan growth.  The interest margin has also benefited from a lag in the responsiveness of deposit costs to the initial upward move in market interest rates.

The yield on average earning assets improved quarter-over-quarter to 3.91% from 3.34%.  The cost of funds increased to 0.46% from 0.24%, while the cost of deposits increased to 0.33% from 0.17%.  The Company's interest rate sensitivity remained positive at period-end and was positioned to benefit from further interest rate increases anticipated by the market. 

Deposit fees increased 5% quarter-over-quarter and 9% year-over-year, reflecting increased customer activity.  Most lending related fees were down due to lower commercial activity in the most recent quarter.

Provision for Credit Losses on Loans:  Berkshire recorded a $3 million provision for credit losses in the third quarter of 2022, compared to a zero provision in the second quarter of 2022 and a credit of $4 million in the third quarter of 2021. The Company continues to maintain strong credit quality, and the allowance for credit losses on loans decreased by $3 million to $96 million during the quarter. 

Non-Interest Expense:  Berkshire has maintained quarterly operating non-interest expenses generally stable within a targeted range of $68-70 million for more than a year, with a goal of reinvesting expense savings into frontline bankers and technology.  Total expense increased to $82 million in the most recent quarter, primarily due to the $11 million charge for restructuring and other expense.  The non-GAAP measure of adjusted non-interest expense totaled $70 million during this quarter.  Total compensation expense increased by $2 million quarter-over-quarter including wage increases and increased performance based compensation. Full time equivalent staff totaled 1,300 positions at period-end, compared to 1,319 positions at the start of the year.  The effective tax rate was 21% in the most recent quarter, which was an increase from 20% for the year 2021. 

BALANCE SHEET (references are to period-end balances unless otherwise stated)

Summary:  Total loans grew by 2% quarter over quarter and by 16% year-over-year, including increases near double digits or greater across all major categories.  Total deposits decreased by 1% quarter-over-quarter and 4% year-over-year, due primarily due to reductions of brokered deposits and overnight payroll deposits.  Period-end liquidity and capital remained strong, with the ratio of loans/deposits measuring 80% and tangible common equity/tangible assets measuring 8.1%. The Company remained positively sensitive to interest rate increases based on its asset/liability profile at period-end.

Loans:  Quarter-over-quarter loan growth was concentrated in a 12% increase in residential mortgages.  Year-over-year loan growth was concentrated in a 41% increase in residential mortgages and a 10% increase in commercial loans.  Berkshire has expanded its mortgage origination team and its in-footprint relationship bank channel.  The Company expanded its commercial teams over the last year, and business volumes and credit usage have benefited from improved market demand.  Loan growth has also benefited from a decline in prepayments in the prevailing rising rate environment.  

Asset Quality:   Asset quality metrics remained within historically favorable ranges through the third quarter. Period-end non-performing assets measured 0.35% of total assets, and total delinquent and non-accruing loans were 0.74% of total loans.  Annualized net loan charge-offs measured 0.16% of average loans for the first nine months of the year. The ratio of the allowance for loan credit losses on loans to total loans decreased to 1.21% from 1.27% at midyear and from 1.55% at the start of the year.

Deposits and Borrowings:  Total deposits decreased by 1% quarter-over-quarter and 4% year-over-year.  Excluding changes in overnight payroll deposits and changes in brokered deposits, total deposits increased by 1% and decreased by 1% for these respective periods.  During the third quarter, Berkshire prepaid its ten-year-old 6.875% $75 million subordinated note.  The Company completed the issuance of an investment grade rated $100 million sustainable subordinated bond offering in June 2022.

Equity:  The $71 million, or 7%, quarter-over-quarter decrease in shareholders' equity included a $61 million net decrease due to after-tax unrealized bond losses caused by rising interest rates. Stock buybacks in the most recent quarter totaled approximately $20 million consisting of approximately 705,000 shares.  At period-end, book value per share totaled $20.93 and tangible book value per share totaled $20.36.

ESG & CORPORATE RESPONSIBILITY UPDATE 

Berkshire Bank is committed to purpose-driven, community-centered banking that enhances value for all stakeholders as it pursues its vision of being a high-performing, leading socially responsible community bank in New England and beyond. Learn more about the steps Berkshire is taking at berkshirebank.com/csr and in its most recent Corporate Responsibility Report.

Key developments in the quarter include:

• BEST Community Comeback: As a result of the collective efforts of its employees, Berkshire is making steady progress towards the achievement of its "BEST Community Comeback" goals. The multi-year plan focuses on four key areas: fueling small businesses, community financing and philanthropy, financial access and empowerment, and funding environmental sustainability. Additional information can be found at berkshirebank.com/comeback.
• Current ESG Performance: The Company remained within its BEST ESG goal with a top 23% composite performance in leading ESG indexes in the U.S. for its Environmental, Social and Governance (ESG) ratings. As of September 30, 2022 the Company has ratings of: MSCI ESG- BBB; ISS ESG Quality Score - Environment: 2, Social: 1, Governance: 2; and Bloomberg ESG Disclosure- 62.81. The Company also receives a rating by Sustainalytics. Berkshire continues to rank among the top 1% of all U.S. Banks for ESG in Bloomberg this year.
• Recognition & Continued Community Impact: The Boston Business Journal named Berkshire one of Massachusetts' Top Charitable Contributors for the tenth consecutive year. The honor further demonstrates Berkshire's deep commitment to lifting-up its communities which includes recent announcements of $100,000 in scholarships to forty (40) students continuing in their pursuit of an undergraduate degree from an accredited non-profit college or technical school and more than $600,000 in third quarter philanthropic contributions through Berkshire's Foundation to support projects enhancing the quality of life and economic vibrancy in communities where the bank operates.

INVESTOR CONFERENCE CALL AND INVESTOR PRESENTATION

Berkshire will conduct a conference call/webcast at 10:00 a.m. Eastern time on Thursday, October 20, 2022 to discuss results for the quarter and provide guidance about expected future results. Participants are encouraged to pre-register for the conference call using the following link:

https://www.netroadshow.com/events/login?show=4f8bbd69&confId=42577

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 relations section of Berkshire's website at 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 844-200-6205 and using participant access code: 197166.  Participants are requested to dial-in a few minutes before the scheduled start of the call. A telephone replay of the call will be available for one week by dialing 866-813-9403 and using access code: 027908. The webcast will be available on Berkshire's website for an extended period of time.

ABOUT BERKSHIRE HILLS BANCORP

Berkshire Hills Bancorp is the parent of Berkshire Bank. The Bank's goal is to be a high-performing, leading socially responsible community bank in New England, Upstate New York, and beyond. Berkshire Bank provides business and consumer banking, mortgage, wealth management, and investment services. Headquartered in Boston, Berkshire has approximately $11.3 billion in assets and operates 100 financial centers in New England and New York, and is a member of the Bloomberg Gender-Equality Index. To learn more, call 800-773-5601 or follow us on Facebook, Twitter, Instagram, and LinkedIn.

FORWARD-LOOKING STATEMENTS

This document contains "forward-looking statements" within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements from the use of the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "remain," "target" and similar expressions. There are many 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. You should not place undue reliance on forward-looking statements, which reflect our expectations only as of the date of this document. 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 adjusted earnings in evaluating operating trends, including components for adjusted 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, other gains/losses, merger costs, restructuring costs, goodwill impairment, and discontinued operations. In 2021, the Company recorded a third quarter net gain of $52 million on the sale of the Company's insurance subsidiary and the Mid-Atlantic branch operations. Expense adjustments in the first quarter 2021 were primarily related to branch consolidations. Third quarter 2021 adjustments included Federal Home Loan Bank borrowings prepayment costs. They also included other restructuring charges for efficiency initiatives in operations areas including write-downs on real estate moved to held for sale and severance related to staff reductions. The fourth quarter 2021 revenue adjustment was primarily related to trailing revenue on a previously reported sale, and the expense adjustment was due primarily to branch restructuring costs. The revenue adjustments in 2022 were related to fair market value changes in equity and trading investments. The restructuring expense adjustment in third quarter of 2022 primarily related to the termination of leasehold interests and the write-down of related right of use assets and leasehold improvements in conjunction with branch consolidations and real estate reductions.

The Company utilizes Adjusted Pre-Provision Net Revenue ("Adjusted PPNR") which measures adjusted income before credit loss provision and tax expense. PPNR is used by the investment community due to the volatility and variability across banks related to credit loss provision expense under the Current Expected Credit Loss accounting standard. The Company also calculates Adjusted PPNR/assets in order to utilize the PPNR measure in assessing its comparative operating profitability.

Non-GAAP 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 adjusted income. The efficiency ratio is adjusted for adjusted 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 Contacts

Kevin Conn, SVP, Investor Relations & Corporate Development
Email: [email protected] 
Tel: (617) 641-9206

David Gonci, Capital Markets Director
Email: [email protected] 
Tel: (413) 281-1973

Media Contact:

Gary Levante, SVP, Corporate Responsibility & Communications
Email: [email protected] 
Tel: (413) 447-1737