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October 26, 2000
Community Banks & Thrifts
Berkshire Hills Bancorp, Inc (BHL - $15)
BHL continues to offer the most value of all recent New England thrift conversions.
Loan Portfolio Pushes Margins
1) Berkshire Hills Bancorp, Inc. reported EPS of $0.35 for 3Q00. This was $0.02 ahead of consensus and FBR estimates. Core earnings were $0.37; $0.05 more than our core estimate.
2) Loan growth occurred across the board, with the exception of construction. The most notable increases came in the commercial real estate and consumer categories.
3) Margins expanded during the quarter to 4.45%, primarily as a result of the investment of offering proceeds. This number was still ahead of our projections.
4) We raise our 2000 operating estimate from $1.31 to $1.36, and our 2001 operating estimate from $1.41 to $1.53, due to continued margin strength.
5) Recommendation. We reiterate our BUY rating and raise our 12-month price target from $16 to $20, which represents book value and 13x 2001 operating estimates. Trading at 67% of book value and 8.9x 2001 operating estimates, BHL is attractive priced relative to other New England community banks and thrifts, which trade on average between 130-150% of book value and 8-10x 2001 estimates.
IPO Date: 28-Jun-00
52-Week Range: $15.00-$12.13
Current Price: $13.63
Market Cap (mil): $104.6
Stated Book Value: $20.30
Price/Stated Book: 67%
Tangible Book Value: $19.47
Price/Tang. Book: 70%
Annual Dividend: $0.40
Dividend Yield: 2.93%
Earnings Per Share
2000 E - 1Q Mar: Rpt. $0.30A; Oper. $0.30A; Core $0.28A
2001 E – 1Q Mar: Oper. $0.36; Core $0.35
2000 E – 2Q Jun: Rpt. $(0.17)A; Oper. $0.34A; Core $0.34A
2001 E – 2Q Jun: Oper. $0.37; Core $0.36
2000 E – 3Q Sep: Rpt. $0.35A; Oper. $0.35A; Core $0.37A
2001 E – 3Q Sep: Oper. $0.39; Core $0.38
2000 E – 4Q Dec: Rpt. $0.37; Oper. $0.37; Core $0.36
2001 E – 4Q Dec: Oper. $0.41; Core $0.40
2000 E – EPS: Rpt. $0.85; Oper. $1.36; Core $1.35
2001 E – EPS: Oper. $1.53; Core $1.49
2000 E – P/E: Rpt. 16.0x; Oper. 10.0x; Core 10.1x
2001 E – P/E: Oper. 8.9x; Core 9.2x
Financials as of 9/00
Total Assets (mil): $983
Total Deposits (mil): $702
Core Deposits: 57%
Tang. Equity/Assets: 15.3%
YTD Stock Performance: 36.3%
YTD FBR Medium Thrift Index: 1.4%
Dir. & Mgt.: 2.9%
ESOP & MRP: 12.0%
Berkshire Hills Bancorp, Inc. reported net income of $2.5 million, or $0.35 per share for 3Q00. This was $0.03 better than consensus estimates, and $0.02 ahead of FBR’s estimate. On a per share basis, excluding securities gains and nonrecurring expenses, core earnings were $2.6 million, or $0.37 per share. This was $0.05 more than our core estimate. All income lines, with the exception of securities gains, were above our estimates.
Net interest income was strong, coming in above our projection on higher margins and strong earning asset growth. Margins were helped in a large part by interest income from the proceeds of the offering, however they were still above our projections. Core non-interest income was driven by increases in trust fees. Increases in expenses were comprised of $152,000 due to ESOP expenses, as well as one-time charges associated with an office closing and data processing related early termination fees.
On September 27, 2000, the company announced a $0.10 quarterly cash dividend. We are reassured by the issuance of this dividend that management will continue to control its excess capital. While a dividend is positive for shareholders, opening up more investors to the stock, and providing a measure of downside protection for existing shareholders, we continue to prefer a stock repurchase program as the preferred way to manage capital. We believe that shareholders will vote to approve the 4% MRP at the six-month anniversary of conversion at the end of December, and that the company will be in the market in 1Q01 buying those shares, in addition to management looking for regulatory approval to repurchase 5% of shares.
In the recent past, the company has begun to restructure its loan portfolio and the underwriting standards for consumer loans, especially indirect auto loans. Going forward, the company will risk adjust the coupon paid by customers based on criteria including FICO scores.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
1001 Nineteenth Street North, Arlington, VA 22209-1722
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