Berkshire Hills Announces Second Quarter Results

BOSTON, July 29, 2020 /PRNewswire/ -- Berkshire Hills Bancorp, Inc. (NYSE: BHLB) today reported a second quarter loss due to non-cash charges related to goodwill impairment and the provision for credit losses, both stemming from the COVID-19 pandemic.   These charges had no material impact on cash flow, liquidity, or regulatory capital.  Berkshire generated positive cash earnings before these charges and the Bank continued to strengthen its regulatory capital ratios and liquidity while growing its loans and deposits. 

Due to the macroeconomic impacts of the pandemic and the related decline in the value of bank stocks, including the Company's stock, the Company wrote off the goodwill on its balance sheet, which was primarily related to past bank acquisitions.   This resulted in the Company recording a $554 million non-cash goodwill impairment charge, or $11.02 per share, during the second quarter. 

The Company also recorded a $30 million non-cash charge, or $0.59 per share, to provide for greater projected credit losses related to the pandemic, in accordance with the Current Expected Credit Losses ("CECL") accounting methodology.  Through midyear, the Company's overall credit quality metrics remained within normal and historical industry ranges. 

Reflecting the above charges totaling $584 million, the Company recorded a second quarter 2020 net loss of $549 million, or $10.93 per share.   The Company's core earnings, a non-GAAP financial measure which includes the $30 million credit loss provision, was a loss of $6 million, or $0.13 per share. 

Pre-tax pre-provision net revenue from continuing operations ("PPNR") was ($10.53).  The Company's measure of Core PPNR was $0.47 per share.  Core measures are non-GAAP financial measures of the Company's ongoing operations before impairment, discontinued operations and securities losses. 

SECOND QUARTER FINANCIAL HIGHLIGHTS (Changes are compared to the prior quarter-end.  Measures identified as non-GAAP are reconciled on pages F-9 and F-10)

• Total deposits up $704 million, or 7%
• $706 million in PPP loans outstanding at quarter-end
• Loans to deposits ratio improved to 87% from 92%
• Book value per share of $22.79; tangible book value per share of $21.94 (non-GAAP)
• Equity/assets ratio of 8.9%; tangible equity/tangible assets ratio of 8.6% (non-GAAP)
• Allowance for credit losses on loans of 1.49% (1.61% excluding PPP loans)
• 0.17% annualized net charge-offs/loans
• 0.36% non-performing assets/assets

CEO Richard Marotta stated, "In a challenging environment for many of our employees, customers and the communities we serve and live in, Berkshire's ongoing transformation into an innovative 21^st century community bank has never been more relevant to our stakeholders and the Bank's long-term opportunity.  Guided by our Be FIRST principles, last quarter we continued to foster a more inclusive, innovative and supportive culture, which is positioning Berkshire to deliver a differentiated and compelling community banking experience to everyone in our communities, including those who have been traditionally underbanked.

"As we pursue this significant opportunity to realize our values and profitably grow, we remain diligently focused on day-to-day execution and strengthening the foundations of our business.  While last quarter Berkshire recorded non-cash charges, including to write-off goodwill from past acquisitions, that were ultimately related to the pandemic, the Bank produced solid cash results in a challenging interest rate environment.  We continued to strengthen our liquidity and regulatory capital metrics.  We lowered our operating expenses even while incurring costs to expedite a substantial volume of PPP loans and to maintain our staff and compensation structure.  We are well positioned to continue serving our communities in the current environment and to grow our core business results as public health and the economy begin to improve."

Last quarter, Berkshire was committed to safely supporting its communities, and its branches are mostly back to normal operating availability. Berkshire provided borrower assistance through the federal initiatives for Paycheck Protection Program ("PPP") loans and short-term loan payment modifications.  The Bank continues to communicate closely with its borrowers, assessing the sensitivities of its exposures, and adjusting its underwriting, administration, and collections procedures as appropriate in the current environment.

FINANCIAL CONDITION

Total assets held level at $13.1 billion in the second quarter, as earning asset growth was generally offset by the impairment of goodwill.  The balance of PPP loans increased to $706 million and is included in commercial and industrial loans.  Net loans in other categories decreased due to elevated prepayments and decreased loan demand, reflecting the economic slowdown and higher customer liquidity including funds from government programs.  Commercial loans totaling $43 million were recorded as held for sale at period-end.  Reflecting higher customer liquidity, total deposits increased by $0.7 billion to $10.8 billion during the quarter, with growth concentrated in demand deposit accounts.  As a result, the Company increased its holdings of short-term investments and decreased its use of borrowed funds.   The Company's liquidity is well positioned and remains adequate for all anticipated uses in all modeled liquidity stress scenarios.

The majority of PPP loans were originated in the second quarter to existing borrowers to provide payroll support during the pandemic shutdown. Additionally, the Company provided loan modifications in accordance with government guidelines, generally consisting of three month deferrals of principal and interest payments.  Including the benefit of these programs, most problem asset related metrics only changed modestly in the first half of the year and remained within historical industry ranges, including charge-offs, delinquencies, non-accruals, troubled debt restructurings, criticized assets, and classified assets. 

The Company recorded a $30 million provision for credit losses in the second quarter.  The allowance for credit losses on loans increased by $26 million to $139 million, measuring 1.49% of total loans, compared to 1.22% at the prior quarter-end.  The allowance measured 1.61% of total loans excluding PPP balances at midyear.   The increase in the allowance was mostly due to a more severe recession included in the national economic baseline forecast at midyear compared to the end of the first quarter.   This took into account the progression of the COVID-19 disease as well as the benefit of government programs to support the economy. 

As previously noted, the Company conducted a goodwill impairment assessment during the most recent quarter. The Company had a balance of $554 million in goodwill primarily from past bank acquisitions which generally consisted of an exchange of shares recorded based on stock market valuations at the time of acquisition.  Due to the pandemic, industry-wide stock prices and earnings expectations have declined significantly, and the Company concluded that the goodwill balance was no longer supported by its estimate of the Company's fair value.   The entire goodwill balance was therefore written off as a non-cash expense that was deemed non-core by the Company.  This charge had no material impact on cash flows, liquidity, tangible equity, or regulatory capital. 

The PPP loans are government guaranteed and the runoff of other loan balances contributed positively to the Company's regulatory capital ratios.  The Company conducts equity stress analyses, including severe adverse pandemic loss scenarios provided by third parties, in addition to Dodd-Frank stress testing.  The Company believes that its capital is well cushioned above the Well Capitalized metrics in the adverse modeling scenarios based on the assumptions utilized.

RESULTS OF OPERATIONS

Berkshire reported a second quarter 2020 GAAP net loss of $549 million, or $10.93 per share.   This included an impairment charge of $554 million, or $11.02 per share, for the goodwill write-off.    Pre-tax pre-provision net revenue from continuing operations ("PPNR") measured ($529) million, or ($10.53) per share.   Second quarter Core PPNR totaled $24 million, or $0.47 per share, and excludes goodwill impairment and the loss on discontinued operations.   Compared to the linked quarter, Core PPNR decreased by $7 million, or $0.14 per share, due to a $9 million, or 10%, decrease in net interest income.   The net interest margin decreased to 2.62% from 3.04% in the prior quarter.  This primarily reflected a 0.58% decrease in the yield on earning assets related to lower short-term rates, runoff of higher fixed rate assets, and growth in lower yielding short-term investments and PPP loans.   The second quarter was the first full quarter to reflect the impact of the 1.5% general decrease in short-term interest rates that occurred in the first quarter.  The decline in asset yields was partially offset by a 0.17% quarter-over-quarter decrease in average deposit costs to 0.79%.  The balance of net deferred PPP loan origination fees was $19 million at midyear; much of this balance is expected to be recognized in net interest income during the second half of the year.  The revenue impact of lower net interest income was partially offset by a $2 million increase in fee income over the first quarter due to $3 million in mark to market charges recorded in the first quarter.   Second quarter fee income benefited from higher loan origination and swap volumes, which was offset by lower deposit fee revenue due to lower activity and waived charges.   The provision for credit losses decreased quarter-over-quarter to $30 million from $35 million due a decrease in total loans excluding PPP loans, and to lower net loan charge-offs. 

Non-interest expense increased quarter-over quarter by $553 million due to the $554 million non-cash goodwill impairment charge.  Second quarter expense included $2 million in discretionary expense related to PPP loans which was mostly the result of a bonus accrual to compensate staff for expediting PPP loan processing.     Full-time equivalent staff in continuing operations totaled 1,511 positions at midyear, compared to 1,550 positions at the start of the year.  The Company recorded a second quarter $16 million income tax benefit from continuing operations which was mostly related to the tax-deductible portion of the goodwill write-off.  The Company recorded a second quarter $6 million net after-tax loss on discontinued operations representing wind-down costs related to the sale and disposition of these operations.   This loss was reduced from $8 million in the prior quarter.  The Company plans to fully exit these operations by the end of 2020.

DIVIDEND UPDATE

Last quarter, the Board changed its procedure for declaring the payment of dividends.  Going forward, the Company will now generally target the third month of the quarter to announce its determinations regarding dividend declarations, rather than concurrent with the earnings release.

BE FIRST CORPORATE RESPONSIBILITY UPDATE

Berkshire is committed to delivering purpose-driven performance. Learn more about the steps Berkshire is taking to be a values-based brand for all its stakeholders at www.berkshirebank.com/csr and in its most recent Corporate Responsibility Report.

Key developments in the quarter include:

• Supporting its People:Berkshire launched a series of employee engagement and wellness initiatives including a health and wellness resource group and is providing holistic support through its employee assistance program. In addition, the You FIRST Employee Assistance Fund, launched in May, is providing critical financial support to employees facing hardships.
• Helping its Customers: As of June 30, Berkshire associates contacted over 16,000 customers to ensure they were healthy, safe and answer any financial questions. In addition, Berkshire continued to provide critical funding to small businesses, including black and brown owned enterprises and non-customers, through the Paycheck Protection Program helping nearly 5,000 organizations with approximately $706 million in loans.
• Investing in Recovery & Resiliency: Berkshire Bank Foundation, the philanthropic arm of the bank, provided more than $1 million in COVID-19 support, exceeding its previously announced commitment in response to widespread need. Berkshire employees also came together to raise funds to support local non-profit organizations and continued providing virtual volunteer services to address community needs.
• Fostering Dialogue on Racial Equity: The "Reimagining America Town Hall Series," hosted by Berkshire, featured The Future Of The Black Economy, The Future Of The Latinx Economy and How to be a Strong Ally. The town halls highlighted the significant racial injustices and economic inequities that exist in the country and affirmed Berkshire's commitment to serving and creating economic opportunities for all members of the community, especially those in the Black and Brown communities who have been traditionally underserved by banks.
• Honoring Juneteenth: The Company dedicatedJune 19th, also known as Juneteenth – the oldest national commemoration of the ending of slavery in the United States, as a day for intentional learning, reflection and a holiday. Bank branches closed at 2PM and employees received a "floating" day off to be used during the year. The Company also hosted a conversation for its people managers on creating safe and inclusive spaces for their teams.
• Launching ReevxLabs.com: Reevx Labs, powered by Berkshire Bank, announced the launch of its new online hub, ReevxLabs.com. Created for local communities and the people who live and work in them, ReevxLabs.com offers resources and support for emerging entrepreneurs, artists, and small non-profit organizations. The Labs operate with a commitment to banking the underbanked with dignity and a guiding belief that by disrupting the traditional barriers to resources, the Labs can build new economies that change communities and the world. The Reevx Labs ecosystem provides many ways to get involved and support movements. From utilizing the suite of socially responsible 21st century banking products, to unique programs allowing for direct contributions to local communities, Reevx Labs empowers everyone to be part of the solution.
• ESG Ratings Updates: The Company enhanced its Environmental, Social & Governance (ESG) disclosure scores from prominent third parties, receiving an updated rating of 41.67 from Bloomberg and an Environmental Quality Score of 2 and a Social Quality Score of 1 from ISS. Both scores reflect above average performance compared to peers.

INVESTOR CONFERENCE CALL AND INVESTOR PRESENTATION

Berkshire will conduct a conference call/webcast at 10:00 a.m. eastern time on Thursday, July 30, 2020 to discuss the results for the quarter and provide guidance about expected future results.  Berkshire will also place an investor presentation at its website at ir.berkshirebank.com before the conference call.  Participants are encouraged to pre-register for the conference call using the following link:  http://dpregister.com/10146228.  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 our 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.  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 through Thursday, August 6, 2020 by dialing 877-344-7529 and entering access number 10146228.  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 which is transforming into a 21^st century community bank pursuing purpose driven performance based on its Be FIRST corporate responsibility culture.  Headquartered in Boston, Berkshire operates 130 banking offices in seven Northeastern states, with approximately $13.1 billion in assets. Berkshire Bank serves the underbanked through the Reevx Labs™ platform. 

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," "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.

Further, given its ongoing and dynamic nature, it is difficult to predict what continued effects the COVID-19 pandemic will have on our business and results of operations. The pandemic and the related local and national economic disruption may result in a continued decline in demand for our products and services; increased levels of loan delinquencies, problem assets and foreclosures; an increase in our allowance for loan losses; a decline in the value of loan collateral, including real estate; a greater decline in the yield on our interest-earning assets than the decline in the cost of our interest-bearing liabilities; and increased cybersecurity risks, as employees increasingly work remotely.

Accordingly, 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 page F-9 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, goodwill impairment, and discontinued operations.  Discontinued operations are the Company's national mortgage banking operations which the Company is exiting pursuant to a sales agreement.  Merger costs consist primarily of severance/benefit related expenses, contract termination costs, systems conversion costs, variable compensation expenses, and professional fees.  Merger costs in 2019 were primarily related to the acquisition of 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.  They also include costs related to the consolidation of branches, including eight branches for the full year of 2019. 

The Company has introduced the measure of Core Pre-Provision Net Revenue ("Core PPNR") to which measures core income before credit loss provision and tax expense.   Due to the non-cash projections introduced into the calculation of income by the new CECL accounting standard, the investment community is placing more emphasis on PPNR in order to measure the results of operations and to compare them across banks which may have widely varying estimates of future economic conditions that affect their provision expense and reported earnings.  The Company also calculates core PPNR per share and core PPNR/assets in order to utilize the PPNR measure in assessing its comparative operating profitability.

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. References to organic growth and organic change exclude balances acquired in bank mergers. 

CONTACTS

Investor Relations Contact
David Gonci; Capital Markets Director; 413-281-1973

Media Contact
Jeffrey Mathews; Communications Contact; (646) 569-5711