Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended: September 30,
2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _________ to __________
Commission
File Number: 000-51584
BERKSHIRE
HILLS BANCORP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
04-3510455
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
24 North Street, Pittsfield, Massachusetts
|
|
01201
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrant’s
telephone number, including area code: (413) 443-5601
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
Large
Accelerated Filer ¨ Accelerated
Filer x Non-Accelerated
Filer ¨ Smaller
Reporting Company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes ¨ No x
The
Registrant had 14,044,403 shares of common stock, par value $0.01 per share,
outstanding as of November 3, 2010.
BERKSHIRE
HILLS BANCORP, INC.
FORM
10-Q
INDEX
|
|
Page
|
PART I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item 1.
|
Consolidated
Financial Statements (unaudited)
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2010 and December 31,
2009
|
3
|
|
|
|
|
Consolidated
Statements of Income for the Three and Nine Months Ended September 30,
2010 and 2009
|
4
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Nine Months Ended
September 30, 2010 and 2009
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
2009
|
6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
29
|
|
|
|
|
Selected
Financial Data
|
33
|
|
|
|
|
Average
Balances and Average Yields/Rates
|
34
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
42
|
|
|
|
Item 4.
|
Controls
and Procedures
|
42
|
|
|
|
PART II.
|
OTHER
INFORMATION
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
43
|
Item 1A.
|
Risk
Factors
|
43
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
44
|
Item 3.
|
Defaults
Upon Senior Securities
|
44
|
Item 4.
|
Removed
and Reserved
|
45
|
Item 5.
|
Other
Information
|
45
|
Item 6.
|
Exhibits
|
45
|
|
|
|
Signatures
|
46
|
PART
I
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands, except share
data)
|
|
2010
|
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
26,817 |
|
|
$ |
25,770 |
|
Short-term
investments
|
|
|
11,565 |
|
|
|
6,838 |
|
Total
cash and cash equivalents
|
|
|
38,382 |
|
|
|
32,608 |
|
|
|
|
|
|
|
|
|
|
Trading
security
|
|
|
17,398 |
|
|
|
15,880 |
|
Securities
available for sale, at fair value
|
|
|
315,213 |
|
|
|
324,345 |
|
Securities
held to maturity (fair values of $58,790 and $58,567)
|
|
|
57,476 |
|
|
|
57,621 |
|
Federal
Home Loan Bank stock and other restricted securities
|
|
|
23,120 |
|
|
|
23,120 |
|
Total
securities
|
|
|
413,207 |
|
|
|
420,966 |
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
3,445 |
|
|
|
4,146 |
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
|
638,829 |
|
|
|
609,007 |
|
Commercial
mortgages
|
|
|
895,519 |
|
|
|
851,828 |
|
Commercial
business loans
|
|
|
226,625 |
|
|
|
186,044 |
|
Consumer
loans
|
|
|
293,136 |
|
|
|
314,779 |
|
Total
loans
|
|
|
2,054,109 |
|
|
|
1,961,658 |
|
Less: Allowance
for loan losses
|
|
|
(31,836 |
) |
|
|
(31,816 |
) |
Net
loans
|
|
|
2,022,273 |
|
|
|
1,929,842 |
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
37,858 |
|
|
|
37,390 |
|
Other
real estate owned
|
|
|
2,900 |
|
|
|
30 |
|
Goodwill
|
|
|
161,725 |
|
|
|
161,725 |
|
Other
intangible assets
|
|
|
12,071 |
|
|
|
14,375 |
|
Cash
surrender value of bank-owned life insurance policies
|
|
|
38,170 |
|
|
|
36,904 |
|
Other
assets
|
|
|
68,408 |
|
|
|
62,438 |
|
Total
assets
|
|
$ |
2,798,439 |
|
|
$ |
2,700,424 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
278,165 |
|
|
$ |
276,587 |
|
NOW
deposits
|
|
|
213,734 |
|
|
|
197,176 |
|
Money
market deposits
|
|
|
609,255 |
|
|
|
532,840 |
|
Savings
deposits
|
|
|
220,564 |
|
|
|
208,597 |
|
Time
deposits
|
|
|
747,029 |
|
|
|
771,562 |
|
Total
deposits
|
|
|
2,068,747 |
|
|
|
1,986,762 |
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
96,125 |
|
|
|
83,860 |
|
Long-term
Federal Home Loan Bank advances
|
|
|
197,687 |
|
|
|
207,344 |
|
Junior
subordinated debentures
|
|
|
15,464 |
|
|
|
15,464 |
|
Total
borrowings
|
|
|
309,276 |
|
|
|
306,668 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
37,501 |
|
|
|
22,413 |
|
Total
liabilities
|
|
|
2,415,524 |
|
|
|
2,315,843 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value; 26,000,000 shares authorized; 15,848,825 shares
issued and 14,035,838 shares outstanding in 2010; 15,848,825 shares issued
and 13,916,094 shares outstanding in 2009)
|
|
|
158 |
|
|
|
158 |
|
Additional
paid-in capital
|
|
|
337,670 |
|
|
|
338,822 |
|
Unearned
compensation
|
|
|
(2,114 |
) |
|
|
(1,318 |
) |
Retained
earnings
|
|
|
102,270 |
|
|
|
99,033 |
|
Accumulated
other comprehensive loss
|
|
|
(9,204 |
) |
|
|
(2,968 |
) |
Treasury
stock, at cost (1,812,987 shares in 2010 and 1,932,731 shares in
2009)
|
|
|
(45,865 |
) |
|
|
(49,146 |
) |
Total
stockholders' equity
|
|
|
382,915 |
|
|
|
384,581 |
|
Total
liabilities and stockholders' equity
|
|
$ |
2,798,439 |
|
|
$ |
2,700,424 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share
data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
24,917 |
|
|
$ |
25,034 |
|
|
$ |
73,354 |
|
|
$ |
76,836 |
|
Securities
and other
|
|
|
3,546 |
|
|
|
3,426 |
|
|
|
10,554 |
|
|
|
10,269 |
|
Total
interest and dividend income
|
|
|
28,463 |
|
|
|
28,460 |
|
|
|
83,908 |
|
|
|
87,105 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
6,512 |
|
|
|
8,045 |
|
|
|
20,195 |
|
|
|
25,195 |
|
Borrowings
and junior subordinated debentures
|
|
|
2,267 |
|
|
|
3,250 |
|
|
|
6,861 |
|
|
|
10,310 |
|
Total
interest expense
|
|
|
8,779 |
|
|
|
11,295 |
|
|
|
27,056 |
|
|
|
35,505 |
|
Net
interest income
|
|
|
19,684 |
|
|
|
17,165 |
|
|
|
56,852 |
|
|
|
51,600 |
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit,
loan and interest rate swap fees
|
|
|
3,279 |
|
|
|
3,286 |
|
|
|
10,270 |
|
|
|
8,220 |
|
Insurance
commissions and fees
|
|
|
2,316 |
|
|
|
2,337 |
|
|
|
8,986 |
|
|
|
10,180 |
|
Wealth
management fees
|
|
|
1,090 |
|
|
|
1,369 |
|
|
|
3,406 |
|
|
|
3,671 |
|
Total
fee income
|
|
|
6,685 |
|
|
|
6,992 |
|
|
|
22,662 |
|
|
|
22,071 |
|
Other
|
|
|
230 |
|
|
|
272 |
|
|
|
714 |
|
|
|
1,092 |
|
Loss
on sale of securities, net
|
|
|
- |
|
|
|
(5 |
) |
|
|
- |
|
|
|
(4 |
) |
Non-recurring
income
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
1,178 |
|
Total
non-interest income
|
|
|
6,915 |
|
|
|
7,260 |
|
|
|
23,376 |
|
|
|
24,337 |
|
Total
net revenue
|
|
|
26,599 |
|
|
|
24,425 |
|
|
|
80,228 |
|
|
|
75,937 |
|
Provision
for loan losses
|
|
|
2,000 |
|
|
|
4,300 |
|
|
|
6,526 |
|
|
|
9,000 |
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
10,870 |
|
|
|
9,757 |
|
|
|
32,827 |
|
|
|
28,011 |
|
Occupancy
and equipment
|
|
|
2,988 |
|
|
|
2,674 |
|
|
|
8,986 |
|
|
|
8,661 |
|
Technology
and communications
|
|
|
1,458 |
|
|
|
1,371 |
|
|
|
4,214 |
|
|
|
4,026 |
|
Marketing
and professional services
|
|
|
1,253 |
|
|
|
1,446 |
|
|
|
3,666 |
|
|
|
3,648 |
|
Supplies,
postage and delivery
|
|
|
520 |
|
|
|
702 |
|
|
|
1,635 |
|
|
|
2,087 |
|
FDIC
premiums and assessments
|
|
|
893 |
|
|
|
669 |
|
|
|
2,540 |
|
|
|
3,748 |
|
Other
real estate owned
|
|
|
100 |
|
|
|
15 |
|
|
|
127 |
|
|
|
177 |
|
Amortization
of intangible assets
|
|
|
768 |
|
|
|
833 |
|
|
|
2,304 |
|
|
|
2,499 |
|
Non-recurring
expenses
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
|
|
601 |
|
Other
|
|
|
1,244 |
|
|
|
1,477 |
|
|
|
3,994 |
|
|
|
3,917 |
|
Total
non-interest expense
|
|
|
20,094 |
|
|
|
18,944 |
|
|
|
60,314 |
|
|
|
57,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
4,505 |
|
|
|
1,181 |
|
|
|
13,388 |
|
|
|
9,562 |
|
Income
tax expense (benefit)
|
|
|
1,081 |
|
|
|
(741 |
) |
|
|
3,220 |
|
|
|
1,426 |
|
Net
income
|
|
$ |
3,424 |
|
|
$ |
1,922 |
|
|
$ |
10,168 |
|
|
$ |
8,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Cumulative preferred stock dividend and accretion
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,030 |
|
Less:
Deemed dividend resulting from preferred stock repayment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,954 |
|
Net
income available to common stockholders
|
|
$ |
3,424 |
|
|
$ |
1,922 |
|
|
$ |
10,168 |
|
|
$ |
4,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.25 |
|
|
$ |
0.14 |
|
|
$ |
0.73 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
0.25 |
|
|
$ |
0.14 |
|
|
$ |
0.73 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,865 |
|
|
|
13,806 |
|
|
|
13,852 |
|
|
|
12,977 |
|
Diluted
|
|
|
13,893 |
|
|
|
13,857 |
|
|
|
13,883 |
|
|
|
13,145 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
Preferred
|
|
|
paid-in
|
|
|
compen-
|
|
|
Retained
|
|
|
rehensive
|
|
|
Treasury
|
|
|
|
|
(In
thousands)
|
|
Shares
|
|
|
Amount
|
|
|
stock
|
|
|
capital
|
|
|
sation
|
|
|
earnings
|
|
|
loss
|
|
|
stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
12,253 |
|
|
$ |
142 |
|
|
$ |
36,822 |
|
|
$ |
307,620 |
|
|
$ |
(1,905 |
) |
|
$ |
127,773 |
|
|
$ |
(11,574 |
) |
|
$ |
(50,453 |
) |
|
$ |
408,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,136 |
|
|
|
- |
|
|
|
- |
|
|
|
8,136 |
|
Other
net comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,195 |
|
|
|
- |
|
|
|
8,196 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,332 |
|
Redemption
of preferred stock, including deemed dividend of $2,954
|
|
|
- |
|
|
|
- |
|
|
|
(37,046 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,954 |
) |
|
|
- |
|
|
|
- |
|
|
|
(40,000 |
) |
Preferred
stock discount accretion and dividends
|
|
|
- |
|
|
|
- |
|
|
|
224 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,030 |
) |
|
|
- |
|
|
|
- |
|
|
|
(806 |
) |
Repurchase
of warrant issued with preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,040 |
) |
Issuance
of common stock, net of issuance costs of $2,266
|
|
|
1,610 |
|
|
|
16 |
|
|
|
- |
|
|
|
32,349 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
32,365 |
|
Cash
dividends declared ($0.48 per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,161 |
) |
|
|
- |
|
|
|
- |
|
|
|
(6,161 |
) |
Forfeited
shares
|
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
|
|
(30 |
) |
|
|
227 |
|
|
|
- |
|
|
|
- |
|
|
|
(197 |
) |
|
|
- |
|
Exercise
of stock options
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(189 |
) |
|
|
- |
|
|
|
505 |
|
|
|
316 |
|
Restricted
stock grants
|
|
|
57 |
|
|
|
- |
|
|
|
- |
|
|
|
(131 |
) |
|
|
(1,309 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,440 |
|
|
|
- |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
42 |
|
|
|
1,041 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,083 |
|
Other,
net
|
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
|
|
- |
|
|
|
(63 |
) |
|
|
- |
|
|
|
(138 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
13,928 |
|
|
$ |
158 |
|
|
$ |
- |
|
|
$ |
338,803 |
|
|
$ |
(1,946 |
) |
|
$ |
125,512 |
|
|
$ |
(3,379 |
) |
|
$ |
(48,843 |
) |
|
$ |
410,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
13,916 |
|
|
$ |
158 |
|
|
$ |
- |
|
|
$ |
338,822 |
|
|
$ |
(1,318 |
) |
|
$ |
99,033 |
|
|
$ |
(2,968 |
) |
|
$ |
(49,146 |
) |
|
$ |
384,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,168 |
|
|
|
- |
|
|
|
- |
|
|
|
10,168 |
|
Other
net comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,236 |
) |
|
|
- |
|
|
|
(6,236 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,932 |
|
Cash
dividends declared ($0.48 per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,741 |
) |
|
|
- |
|
|
|
- |
|
|
|
(6,741 |
) |
Forfeited
shares
|
|
|
(13 |
) |
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
254 |
|
|
|
- |
|
|
|
- |
|
|
|
(258 |
) |
|
|
- |
|
Exercise
of stock options
|
|
|
24 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(206 |
) |
|
|
- |
|
|
|
609 |
|
|
|
403 |
|
Restricted
stock grants
|
|
|
132 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,160 |
) |
|
|
(2,201 |
) |
|
|
- |
|
|
|
- |
|
|
|
3,361 |
|
|
|
- |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
1,151 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,155 |
|
Other,
net
|
|
|
(23 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
(431 |
) |
|
|
(415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
|
14,036 |
|
|
$ |
158 |
|
|
$ |
- |
|
|
$ |
337,670 |
|
|
$ |
(2,114 |
) |
|
$ |
102,270 |
|
|
$ |
(9,204 |
) |
|
$ |
(45,865 |
) |
|
$ |
382,915 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended September
30,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
10,168 |
|
|
$ |
8,136 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
6,526 |
|
|
|
9,000 |
|
Net
amortization of securities
|
|
|
1,942 |
|
|
|
1,187 |
|
Change
in unamortized net loan costs and premiums
|
|
|
872 |
|
|
|
664 |
|
Premises
depreciation and amortization expense
|
|
|
2,832 |
|
|
|
2,846 |
|
Stock-based
compensation expense
|
|
|
1,155 |
|
|
|
1,083 |
|
Amortization
of other intangibles
|
|
|
2,304 |
|
|
|
2,499 |
|
Income
from cash surrender value of bank-owned life insurance
policies
|
|
|
(884 |
) |
|
|
(901 |
) |
Loss
on sales of securities, net
|
|
|
- |
|
|
|
4 |
|
Net
decrease in loans held for sale
|
|
|
701 |
|
|
|
268 |
|
Net
change in other
|
|
|
(1,117 |
) |
|
|
(3,882 |
) |
Net
cash provided by operating activities
|
|
|
24,499 |
|
|
|
20,904 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Trading
security:
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls and prepayments
|
|
|
327 |
|
|
|
- |
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
Sales
|
|
|
3,159 |
|
|
|
11,479 |
|
Proceeds
from maturities, calls and prepayments
|
|
|
88,626 |
|
|
|
42,072 |
|
Purchases
|
|
|
(82,653 |
) |
|
|
(120,221 |
) |
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls and prepayments
|
|
|
15,967 |
|
|
|
12,237 |
|
Purchases
|
|
|
(15,823 |
) |
|
|
(17,900 |
) |
|
|
|
|
|
|
|
|
|
Loan
(originations) and principal repayments, net
|
|
|
(102,854 |
) |
|
|
12,563 |
|
Proceeds
from surrender of bank-owned life insurance
|
|
|
2,217 |
|
|
|
- |
|
Purchase
of bank-owned life insurance
|
|
|
(2,599 |
) |
|
|
- |
|
Capital
expenditures
|
|
|
(3,347 |
) |
|
|
(1,787 |
) |
Net
cash used by investing activities
|
|
|
(96,980 |
) |
|
|
(61,557 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
81,985 |
|
|
|
137,238 |
|
Proceeds
from Federal Home Loan Bank advances and other borrowings
|
|
|
212,505 |
|
|
|
85,000 |
|
Repayments
of Federal Home Loan Bank advances and other borrowings
|
|
|
(209,897 |
) |
|
|
(184,602 |
) |
Net
proceeds from common stock issuance
|
|
|
- |
|
|
|
32,365 |
|
Net
proceeds from reissuance of treasury stock
|
|
|
403 |
|
|
|
316 |
|
Common
stock cash dividends paid
|
|
|
(6,741 |
) |
|
|
(6,161 |
) |
Net
impact of preferred stock and warrant including repurchase and
dividends
|
|
|
- |
|
|
|
(41,846 |
) |
Net
cash provided by financing activities
|
|
|
78,255 |
|
|
|
22,310 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
5,774 |
|
|
|
(18,343 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
32,608 |
|
|
|
44,798 |
|
Cash
and cash equivalents at end of period
|
|
$ |
38,382 |
|
|
$ |
26,455 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
|
20,626 |
|
|
|
25,211 |
|
Interest
paid on borrowed funds
|
|
|
6,888 |
|
|
|
10,579 |
|
Income
taxes(refunded) paid, net
|
|
|
(117 |
) |
|
|
1,952 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
1. GENERAL
Basis of presentation and
consolidation
The
consolidated financial statements (the “financial statements”) of Berkshire
Hills Bancorp, Inc. (the “Company” or “Berkshire”) have been prepared in
conformity with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form 10-Q adopted by
the Securities and Exchange Commission (“SEC”). Accordingly, these financial
statements, including year-end consolidated balance sheet data presented, do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation are reflected in the interim financial statements and
consist of normal recurring entries. These financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Berkshire Insurance
Group, Inc. (“BIG”) and Berkshire Bank (the “Bank”), together with the Bank’s
consolidated subsidiaries. One of the Bank’s consolidated subsidiaries is
Berkshire Bank Municipal Bank, a New York chartered limited-purpose commercial
bank. All significant inter-company transactions have been eliminated in
consolidation. The results of operations for the nine months ended September 30,
2010 are not necessarily indicative of the results which may be expected for the
year. These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
Business
Through
its wholly-owned subsidiaries, the Company provides a variety of financial
services to individuals, businesses, not-for-profit organizations, and
municipalities in and around western Massachusetts, southern Vermont and
northeastern New York. The Company also provides asset based middle market
commercial lending throughout New England and its New York markets. Its primary
deposit products are checking, NOW, money market, savings, and time deposit
accounts. Its primary lending products are residential mortgages, commercial
mortgages, commercial business loans and consumer loans. The Company offers
electronic banking, cash management, and other transaction and reporting
services; it also offers interest rate swap contracts to commercial customers.
The Company offers private banking services and wealth management services
including trust, financial planning, and investment services. The Company is an
agent for complete lines of property and casualty, life, disability, and health
insurance to individuals and businesses.
Business
segments
An
operating segment is a component of a business for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and evaluate performance.
The Company has two reportable operating segments, Banking and Insurance, which
are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp, Inc.
Banking includes the activities of Berkshire Bank and its subsidiaries, which
provide commercial and consumer banking services. Insurance includes the
activities of Berkshire Insurance Group, Inc., which provides commercial and
consumer insurance services. The only other consolidated financial activity of
the Company consists of the transactions of Berkshire Hills Bancorp,
Inc.
Use
of estimates
In
preparing the financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated balance sheets and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses; the valuation of deferred tax
assets; the estimates related to the initial measurement of goodwill and other
intangible assets and subsequent impairment analyses; the determination of
other-than-temporary impairment of securities; and the determination of the fair
value of assets and liabilities.
Earnings
Per Common Share
Earnings
per common share have been computed based on the following (average diluted
shares outstanding are calculated using the treasury stock method):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share
data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,424 |
|
|
$ |
1,922 |
|
|
$ |
10,168 |
|
|
$ |
8,136 |
|
Less:
Cumulative preferred stock dividends and accretion
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,030 |
|
Less:
Deemed dividend resulting from preferred stock repayment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,954 |
|
Net
income available to common stockholders
|
|
$ |
3,424 |
|
|
$ |
1,922 |
|
|
$ |
10,168 |
|
|
$ |
4,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
14,037 |
|
|
|
13,926 |
|
|
|
14,020 |
|
|
|
13,100 |
|
Less:
average number of unvested stock award shares
|
|
|
(172 |
) |
|
|
(120 |
) |
|
|
(168 |
) |
|
|
(123 |
) |
Average
number of basic shares outstanding
|
|
|
13,865 |
|
|
|
13,806 |
|
|
|
13,852 |
|
|
|
12,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus:
average number of dilutive unvested stock award shares
|
|
|
22 |
|
|
|
13 |
|
|
|
20 |
|
|
|
134 |
|
Plus:
average number of dilutive stock options
|
|
|
6 |
|
|
|
38 |
|
|
|
11 |
|
|
|
34 |
|
Average
number of diluted shares outstanding
|
|
|
13,893 |
|
|
|
13,857 |
|
|
|
13,883 |
|
|
|
13,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.25 |
|
|
$ |
0.14 |
|
|
$ |
0.73 |
|
|
$ |
0.32 |
|
Diluted
earnings per common share
|
|
$ |
0.25 |
|
|
$ |
0.14 |
|
|
$ |
0.73 |
|
|
$ |
0.32 |
|
For the
quarter ended September 30, 2010, 145 thousand shares of restricted stock and
117 thousand options were anti-dilutive and therefore excluded from the earnings
per share calculations. For the quarter ended September 30, 2009, 107 thousand
shares of restricted stock and 121 thousand options were anti-dilutive and
therefore excluded from the earnings per share calculations.
Recent accounting
pronouncements
Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation”.
New authoritative accounting guidance under ASC Topic 810 amends prior
guidance to provide more relevant and reliable information to users of financial
statements by enterprises involved with variable interest entities. This
accounting guidance became effective for the Company on January 1, 2010 and did
not have a significant impact on the Company’s financial
statements.
FASB ASC Topic 860, “Transfers and
Servicing”. New authoritative accounting guidance under ASC Topic 860
amends prior accounting guidance to enhance reporting about transfers of
financial assets, including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. The new
authoritative accounting guidance eliminates the concept of a “qualifying
special-purpose entity” and changes the requirements for derecognizing financial
assets. The new authoritative accounting guidance also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the
period. This accounting guidance became effective for the Company on January 1,
2010 and did not have a significant impact on the Company’s financial
statements.
FASB Accounting Standards Update
(“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements”.
New authoritative accounting guidance under ASU No. 2010-06 provides
guidance that requires more robust disclosures about (1) the different classes
of assets and liabilities measured at fair value, (2) the valuation techniques
and inputs used, (3) the activity in Level 3 fair value measurements, and (4)
the transfers between Levels 1, 2, and 3. This guidance became effective for the
Company on January 1, 2010 and did not have a material impact on the Company’s
financial statements.
FASB ASU No. 2010-20, “Receivables
(Topic 310), Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses”. In July 2010, the FASB issued ASU
2010-20 which requires an entity to provide disclosures that facilitate
financial statement users’ evaluation of (1) the nature of credit risk inherent
in the entity’s loan portfolio (2) how that risk is analyzed and assessed in
arriving at the allowance for loan and lease losses and (3) the changes and
reasons for those changes in the allowance for loan and lease losses. For public
entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or after December 15,
2010. The adoption of this guidance will require significant additional
disclosures in the December 31, 2010 financial statements and subsequent
financial statements.
2. TRADING
ACCOUNT SECURITY
The
Company holds a tax advantaged economic development bond that is being accounted
for at fair value. The security had an amortized cost of $14.7 million and $15.0
million and a fair value of $17.4 million and $15.9 million at September 30,
2010 and December 31, 2009, respectively. As discussed further in Note
10-Derivative Financial Instruments and Hedging Activities, the Company has
entered into a swap contract to swap-out the fixed rate of the security in
exchange for a variable rate. The Company does not purchase securities with the
intent of selling them in the near term, and there are no other securities in
the trading portfolio at September 30, 2010.
3. SECURITIES
AVAILABLE FOR SALE AND HELD TO MATURITY
The
following is a summary of securities available for sale and held to
maturity:
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
September
30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
80,654 |
|
|
$ |
4,175 |
|
|
$ |
(22 |
) |
|
$ |
84,807 |
|
Government
guaranteed residential mortgage-backed securities
|
|
|
21,551 |
|
|
|
398 |
|
|
|
- |
|
|
|
21,949 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
142,502 |
|
|
|
3,581 |
|
|
|
(76 |
) |
|
|
146,007 |
|
Corporate
bonds
|
|
|
26,430 |
|
|
|
191 |
|
|
|
(54 |
) |
|
|
26,567 |
|
Trust
preferred securities
|
|
|
22,253 |
|
|
|
361 |
|
|
|
(1,726 |
) |
|
|
20,888 |
|
Other
bonds and obligations
|
|
|
421 |
|
|
|
2 |
|
|
|
- |
|
|
|
423 |
|
Total
debt securities
|
|
|
293,811 |
|
|
|
8,708 |
|
|
|
(1,878 |
) |
|
|
300,641 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities
|
|
|
15,374 |
|
|
|
53 |
|
|
|
(855 |
) |
|
|
14,572 |
|
Total
securities available for sale
|
|
|
309,185 |
|
|
|
8,761 |
|
|
|
(2,733 |
) |
|
|
315,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
6,592 |
|
|
|
- |
|
|
|
- |
|
|
|
6,592 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
84 |
|
|
|
4 |
|
|
|
- |
|
|
|
88 |
|
Tax
advantaged economic development bonds
|
|
|
50,627 |
|
|
|
1,425 |
|
|
|
(115 |
) |
|
|
51,937 |
|
Other
bonds and obligations
|
|
|
173 |
|
|
|
- |
|
|
|
- |
|
|
|
173 |
|
Total
securities held to maturity
|
|
|
57,476 |
|
|
|
1,429 |
|
|
|
(115 |
) |
|
|
58,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
366,661 |
|
|
$ |
10,190 |
|
|
$ |
(2,848 |
) |
|
$ |
374,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
73,277 |
|
|
$ |
1,836 |
|
|
$ |
(329 |
) |
|
$ |
74,784 |
|
Government
guaranteed residential mortgage-backed securities
|
|
|
12,923 |
|
|
|
224 |
|
|
|
(116 |
) |
|
|
13,031 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
179,674 |
|
|
|
4,714 |
|
|
|
(143 |
) |
|
|
184,245 |
|
Corporate
bonds
|
|
|
36,941 |
|
|
|
641 |
|
|
|
(245 |
) |
|
|
37,337 |
|
Trust
preferred securities
|
|
|
9,285 |
|
|
|
- |
|
|
|
(2,370 |
) |
|
|
6,915 |
|
Other
bonds and obligations
|
|
|
5,481 |
|
|
|
9 |
|
|
|
(20 |
) |
|
|
5,470 |
|
Total
debt securities
|
|
|
317,581 |
|
|
|
7,424 |
|
|
|
(3,223 |
) |
|
|
321,782 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities
|
|
|
2,679 |
|
|
|
55 |
|
|
|
(171 |
) |
|
|
2,563 |
|
Total
securities available for sale
|
|
|
320,260 |
|
|
|
7,479 |
|
|
|
(3,394 |
) |
|
|
324,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
14,737 |
|
|
|
- |
|
|
|
- |
|
|
|
14,737 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
139 |
|
|
|
3 |
|
|
|
- |
|
|
|
142 |
|
Tax
advantaged economic development bonds
|
|
|
42,572 |
|
|
|
951 |
|
|
|
(8 |
) |
|
|
43,515 |
|
Other
bonds and obligations
|
|
|
173 |
|
|
|
- |
|
|
|
- |
|
|
|
173 |
|
Total
securities held to maturity
|
|
|
57,621 |
|
|
|
954 |
|
|
|
(8 |
) |
|
|
58,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
377,881 |
|
|
$ |
8,433 |
|
|
$ |
(3,402 |
) |
|
$ |
382,912 |
|
The
amortized cost and estimated fair value of available for sale (“AFS”) and held
to maturity (“HTM”) securities, segregated by contractual maturity at September
30, 2010 are presented below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
Mortgage-backed securities are shown in total, as their maturities are highly
variable. Equity securities have no maturity and are also shown in
total.
|
|
Available for sale
|
|
|
Held to maturity
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
1 year
|
|
$ |
24,029 |
|
|
$ |
24,254 |
|
|
$ |
3,699 |
|
|
$ |
3,699 |
|
Over
1 year to 5 years
|
|
|
3,374 |
|
|
|
3,329 |
|
|
|
1,701 |
|
|
|
1,701 |
|
Over
5 years to 10 years
|
|
|
24,600 |
|
|
|
25,339 |
|
|
|
30,742 |
|
|
|
31,509 |
|
Over
10 years
|
|
|
77,755 |
|
|
|
79,763 |
|
|
|
21,250 |
|
|
|
21,793 |
|
Total
bonds and obligations
|
|
|
129,758 |
|
|
|
132,685 |
|
|
|
57,392 |
|
|
|
58,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities
|
|
|
15,374 |
|
|
|
14,572 |
|
|
|
- |
|
|
|
- |
|
Residential
mortgage-backed securities
|
|
|
164,053 |
|
|
|
167,956 |
|
|
|
84 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
309,185 |
|
|
$ |
315,213 |
|
|
$ |
57,476 |
|
|
$ |
58,790 |
|
Securities
with unrealized losses, segregated by the duration of their continuous
unrealized loss positions, are summarized as follows:
|
|
Less
Than Twelve Months
|
|
|
Over
Twelve Months
|
|
|
Total
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
(In
thousands)
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
September
30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
4 |
|
|
$ |
2,217 |
|
|
$ |
18 |
|
|
$ |
1,237 |
|
|
$ |
22 |
|
|
$ |
3,454 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
76 |
|
|
|
24,990 |
|
|
|
- |
|
|
|
- |
|
|
|
76 |
|
|
|
24,990 |
|
Corporate
bonds
|
|
|
4 |
|
|
|
5,000 |
|
|
|
50 |
|
|
|
2,945 |
|
|
|
54 |
|
|
|
7,945 |
|
Trust
preferred securities
|
|
|
- |
|
|
|
- |
|
|
|
1,726 |
|
|
|
5,485 |
|
|
|
1,726 |
|
|
|
5,485 |
|
Other
bonds and obligations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
319 |
|
|
|
- |
|
|
|
319 |
|
Total
debt securities
|
|
|
84 |
|
|
|
32,207 |
|
|
|
1,794 |
|
|
|
9,986 |
|
|
|
1,878 |
|
|
|
42,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities
|
|
|
840 |
|
|
|
12,175 |
|
|
|
15 |
|
|
|
1,485 |
|
|
|
855 |
|
|
|
13,660 |
|
Total
securities available for sale
|
|
|
924 |
|
|
|
44,382 |
|
|
|
1,809 |
|
|
|
11,471 |
|
|
|
2,733 |
|
|
|
55,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
residential mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
- |
|
|
|
15 |
|
Tax
advantaged economic development bonds
|
|
|
- |
|
|
|
- |
|
|
|
115 |
|
|
|
1,413 |
|
|
|
115 |
|
|
|
1,413 |
|
Total
securities held to maturity
|
|
|
- |
|
|
|
- |
|
|
|
115 |
|
|
|
1,428 |
|
|
|
115 |
|
|
|
1,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
924 |
|
|
$ |
44,382 |
|
|
$ |
1,924 |
|
|
$ |
12,899 |
|
|
$ |
2,848 |
|
|
$ |
57,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
17 |
|
|
$ |
2,984 |
|
|
$ |
312 |
|
|
$ |
7,128 |
|
|
$ |
329 |
|
|
$ |
10,112 |
|
Government
guaranteed residential mortgage-backed securities
|
|
|
116 |
|
|
|
5,113 |
|
|
|
- |
|
|
|
- |
|
|
|
116 |
|
|
|
5,113 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
143 |
|
|
|
21,610 |
|
|
|
- |
|
|
|
- |
|
|
|
143 |
|
|
|
21,610 |
|
Corporate
bonds
|
|
|
- |
|
|
|
- |
|
|
|
245 |
|
|
|
2,748 |
|
|
|
245 |
|
|
|
2,748 |
|
Trust
preferred securities
|
|
|
- |
|
|
|
- |
|
|
|
2,370 |
|
|
|
6,915 |
|
|
|
2,370 |
|
|
|
6,915 |
|
Other
bonds and obligations
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
|
|
440 |
|
|
|
20 |
|
|
|
440 |
|
Total
debt securities
|
|
|
276 |
|
|
|
29,707 |
|
|
|
2,947 |
|
|
|
17,231 |
|
|
|
3,223 |
|
|
|
46,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities
|
|
|
- |
|
|
|
- |
|
|
|
171 |
|
|
|
1,104 |
|
|
|
171 |
|
|
|
1,104 |
|
Total
securities available for sale
|
|
|
276 |
|
|
|
29,707 |
|
|
|
3,118 |
|
|
|
18,335 |
|
|
|
3,394 |
|
|
|
48,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
advantaged economic development bonds
|
|
|
8 |
|
|
|
1,569 |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
1,569 |
|
Total
securities held to maturity
|
|
|
8 |
|
|
|
1,569 |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
1,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
284 |
|
|
$ |
31,276 |
|
|
$ |
3,118 |
|
|
$ |
18,335 |
|
|
$ |
3,402 |
|
|
$ |
49,611 |
|
Debt
Securities
The
Company expects to recover its amortized cost basis on all debt securities in
its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor
does it anticipate that it will be required to sell any of its securities in an
unrealized loss position as of September 30, 2010, prior to this recovery. The
Company’s ability and intent to hold these securities until recovery is
supported by the Company’s strong capital and liquidity positions as well as its
historical low portfolio turnover. The following summarizes, by investment
security type, the basis for the conclusion that the debt securities in an
unrealized loss position within the Company’s AFS and HTM portfolios were not
other-than-temporarily impaired at September 30, 2010:
AFS municipal bonds and
obligations
At
September 30, 2010, 4 out of a total of 142 securities in the Company’s
portfolio of AFS municipal bonds and obligations were in unrealized loss
positions. Aggregate unrealized losses represented less than 1% of the amortized
cost of securities in unrealized loss positions. The 4 securities in unrealized
loss positions are all investment grade rated and all have insurance except for
one bond, which is AAA rated. There were no material underlying credit
downgrades during 2010. All securities are considered performing.
AFS and HTM residential
mortgage-backed securities
At
September 30, 2010, 7 out of a total of 102 securities in the Company’s
portfolios of AFS residential mortgage-backed and 2 out of a total of 4
securities in the Company’s portfolios of HTM residential mortgage-backed were
in unrealized loss positions. Aggregate unrealized losses represented less than
1% of the amortized cost of securities in unrealized loss positions within both
portfolios. The Federal National Mortgage Association (“FNMA”), Federal Home
Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association
(“GNMA”) guarantee the contractual cash flows of all of the Company’s
residential mortgage-backed securities. The securities are investment grade
rated and there were no material underlying credit downgrades during 2010. All
securities are considered performing.
AFS corporate
bonds
At
September 30, 2010, 3 out of a total of 14 securities in the Company’s portfolio
of AFS corporate bonds were in an unrealized loss position. The aggregate
unrealized loss represented less than 1% of the amortized cost of the
securities. The securities are investment grade rated, and there was no material
underlying credit downgrade during the third quarter of 2010. The securities are
considered performing.
AFS trust preferred
securities
At
September 30, 2010, 4 out of a total of 7 securities in the Company’s portfolio
of AFS trust preferred securities were in unrealized loss positions. Aggregate
unrealized losses represented 24% of the amortized cost of securities in
unrealized loss positions. The Company’s evaluation of the present value of
expected cash flows on these securities supports its conclusions about the
recoverability of the securities’ amortized cost bases.
At
September 30, 2010, $1.5 million of the total unrealized losses was attributable
to a $2.6 million investment in a Mezzanine Class B tranche of a $360 million
pooled trust preferred security issued by banking and insurance entities. The
Company evaluated the security, with a Level 3 fair value of $1.1 million, for
potential other-than-temporary-impairment (“OTTI”) at September 30, 2010 and
determined that OTTI was not evident based on both the Company’s more likely
than not ability to hold the security until the recovery of its remaining
amortized cost and the protection from credit loss afforded by $35 million in
excess subordination above current and projected losses. The security is
considered performing.
AFS other bonds and
obligations
At
September 30, 2010, 4 out of a total of 7 securities in the Company’s portfolio
of other bonds and obligations were in unrealized loss positions. Aggregate
unrealized losses represented less than 1% of the book value of the securities
in unrealized loss positions. The securities are investment grade rated and
there were no material underlying credit downgrades during 2010. All securities
are considered performing.
HTM tax advantaged economic
development bonds
At
September 30, 2010, 1 out of a total of 11 securities in the Company’s portfolio
of tax advantaged economic development bonds was in an unrealized loss position.
Aggregate unrealized loss represented 8% of the amortized cost of the security
in unrealized loss positions. The security is performing to terms and there were
no underlying internal credit downgrades during 2010. The security is considered
performing.
Marketable
Equity Securities
In
evaluating its marketable equity securities portfolio for OTTI, the Company
considers its more likely than not ability to hold an equity security to
recovery of its cost basis in addition to various other factors, including the
length of time and the extent to which the fair value has been less than cost
and the financial condition and near term prospects of the issuer. Any OTTI is
recognized immediately through earnings.
At
September 30, 2010, 10 out of a total of 14 securities in the Company’s
portfolio of marketable equity securities were in an unrealized loss position.
The unrealized loss represented 6% of the cost of the impaired securities. The
Company has the intent and ability to hold the securities until a recovery of
their cost bases and does not consider the securities other-than-temporarily
impaired at September 30, 2010. As new information becomes available in future
periods, changes to the Company’s assumptions may be warranted and could lead to
a different conclusion regarding the OTTI of these securities.
4. LOANS
Loans consist of the
following:
(In thousands)
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Total
residential mortgages
|
|
$ |
638,829 |
|
|
$ |
609,007 |
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
114,854 |
|
|
|
110,703 |
|
Single
and multi-family
|
|
|
80,987 |
|
|
|
80,624 |
|
Commercial
real estate
|
|
|
699,678 |
|
|
|
660,501 |
|
Total
commercial mortgages
|
|
|
895,519 |
|
|
|
851,828 |
|
|
|
|
|
|
|
|
|
|
Commercial
business loans:
|
|
|
|
|
|
|
|
|
Asset-based
lending
|
|
|
68,143 |
|
|
|
- |
|
Other
commercial business loans
|
|
|
158,482 |
|
|
|
186,044 |
|
Total
commercial business loans
|
|
|
226,625 |
|
|
|
186,044 |
|
|
|
|
|
|
|
|
|
|
Total
commercial loans
|
|
|
1,122,144 |
|
|
|
1,037,872 |
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
Auto
|
|
|
43,757 |
|
|
|
76,861 |
|
Home
equity and other
|
|
|
249,379 |
|
|
|
237,918 |
|
Total
consumer loans
|
|
|
293,136 |
|
|
|
314,779 |
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$ |
2,054,109 |
|
|
$ |
1,961,658 |
|
5.
LOAN LOSS
ALLOWANCE
Activity
in the allowance for loan losses is as follows:
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
31,848 |
|
|
$ |
22,917 |
|
|
$ |
31,816 |
|
|
$ |
22,908 |
|
Charged-off
loans
|
|
|
(2,121 |
) |
|
|
(2,955 |
) |
|
|
(8,468 |
) |
|
|
(7,889 |
) |
Recoveries
on charged-off loans
|
|
|
109 |
|
|
|
35 |
|
|
|
1,962 |
|
|
|
278 |
|
Net
loans charged-off
|
|
|
(2,012 |
) |
|
|
(2,920 |
) |
|
|
(6,506 |
) |
|
|
(7,611 |
) |
Provision
for loan losses
|
|
|
2,000 |
|
|
|
4,300 |
|
|
|
6,526 |
|
|
|
9,000 |
|
Balance
at end of period
|
|
$ |
31,836 |
|
|
$ |
24,297 |
|
|
$ |
31,836 |
|
|
$ |
24,297 |
|
Impaired
loans totaled $16.4 million and $56.9 million at September 30, 2010 and December
31, 2009, respectively. Based on collateral values or discounted cash flow
analyses, impaired loans with a carrying value of $10.0 million and $29.9
million were determined to require a valuation allowance of $2.7 million and
$6.4 million at September 30, 2010 and December 31, 2009,
respectively.
A summary
of time deposits is as follows:
(In thousands)
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Time
less than $100,000
|
|
$ |
376,275 |
|
|
$ |
381,141 |
|
Time
$100,000 or more
|
|
|
370,754 |
|
|
|
390,421 |
|
Total
time deposits
|
|
$ |
747,029 |
|
|
$ |
771,562 |
|
The
Bank’s actual and required capital ratios were as follows:
|
|
|
|
|
|
|
|
FDIC
Minimum
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
to be Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
|
|
10.8
|
% |
|
|
10.7
|
% |
|
|
10.0
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets
|
|
|
9.5 |
|
|
|
9.5 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
8.1 |
|
|
|
7.9 |
|
|
|
5.0 |
|
At each
date shown, Berkshire Bank met the conditions to be classified as “well
capitalized” under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, an institution must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table above.
8. STOCK-BASED
COMPENSATION PLANS
A
combined summary of activity in the Company’s stock award and stock option plans
for the nine months ended September 30, 2010 is presented in the following
table:
|
|
Non-vested
Stock
|
|
|
|
|
|
|
|
|
|
Awards Outstanding
|
|
|
Stock Options Outstanding
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Grant
Date
|
|
|
Number
of
|
|
|
Exercise
|
|
(Shares in thousands)
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Price
|
|
Balance
as of December 31, 2009
|
|
|
99 |
|
|
$ |
24.49 |
|
|
|
430 |
|
|
$ |
23.35 |
|
Granted
|
|
|
132 |
|
|
|
16.65 |
|
|
|
- |
|
|
|
- |
|
Stock
options exercised
|
|
|
- |
|
|
|
- |
|
|
|
(24 |
) |
|
|
16.75 |
|
Stock
awards vested
|
|
|
(49 |
) |
|
|
24.81 |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(13 |
) |
|
|
19.53 |
|
|
|
(65 |
) |
|
|
16.75 |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
(151 |
) |
|
|
27.73 |
|
Balance
as of September 30, 2010
|
|
|
169 |
|
|
$ |
18.69 |
|
|
|
190 |
|
|
$ |
22.97 |
|
During
the nine months ended September 30, 2010, proceeds from stock option exercises
totaled $403 thousand. During the nine months ended September 30, 2010, there
were 49 thousand shares issued in connection with vested stock awards. All of
these shares were issued from available treasury stock. Stock-based compensation
expense totaled $1.2 million and $1.1 million during the nine months ended
September 30, 2010 and 2009, respectively. Stock-based compensation expense is
recognized ratably over the requisite service period for all
awards.
The
Company has two reportable operating segments, Banking and Insurance, which are
delineated by the consolidated subsidiaries of Berkshire Hills Bancorp, Inc.
Banking includes the activities of Berkshire Bank and its subsidiaries, which
provide commercial and consumer banking services. Insurance includes the
activities of Berkshire Insurance Group, Inc. which provides commercial and
consumer insurance services. The only other consolidated financial activity of
the Company is the Parent, which consists of the transactions of Berkshire Hills
Bancorp, Inc. Management fees for corporate services provided by the Bank to
Berkshire Insurance Group, Inc. and the Parent are eliminated.
The
accounting policies of each reportable segment are the same as those of the
Company. The Insurance segment and the Parent reimburse the Bank for
administrative services provided to them. Income tax expense for the individual
segments is calculated based on the activity of the segments, and the Parent
records the tax expense or benefit necessary to reconcile to the consolidated
total. The Parent does not allocate capital costs. Average assets include
securities available-for-sale based on amortized cost.
A summary
of the Company’s operating segments was as follows:
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
Three
months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$ |
19,897 |
|
|
$ |
- |
|
|
$ |
(213 |
) |
|
$ |
- |
|
|
$ |
19,684 |
|
Provision
for loan losses
|
|
|
2,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,000 |
|
Non-interest
income
|
|
|
4,584 |
|
|
|
2,331 |
|
|
|
3,678 |
|
|
|
(3,678 |
) |
|
|
6,915 |
|
Non-interest
expense
|
|
|
17,558 |
|
|
|
2,323 |
|
|
|
212 |
|
|
|
1 |
|
|
|
20,094 |
|
Income
before income taxes
|
|
|
4,923 |
|
|
|
8 |
|
|
|
3,253 |
|
|
|
(3,679 |
) |
|
|
4,505 |
|
Income
tax expense (benefit)
|
|
|
1,248 |
|
|
|
5 |
|
|
|
(172 |
) |
|
|
- |
|
|
|
1,081 |
|
Net
income
|
|
$ |
3,675 |
|
|
$ |
3 |
|
|
$ |
3,425 |
|
|
$ |
(3,679 |
) |
|
$ |
3,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,724 |
|
|
$ |
33 |
|
|
$ |
360 |
|
|
$ |
(349 |
) |
|
$ |
2,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$ |
17,419 |
|
|
$ |
- |
|
|
$ |
(254 |
) |
|
|
- |
|
|
$ |
17,165 |
|
Provision
for loan losses
|
|
|
4,300 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,300 |
|
Non-interest
income
|
|
|
4,905 |
|
|
|
2,354 |
|
|
|
- |
|
|
|
1 |
|
|
|
7,260 |
|
Non-interest
expense
|
|
|
15,996 |
|
|
|
2,501 |
|
|
|
448 |
|
|
|
(1 |
) |
|
|
18,944 |
|
Income
(loss) before income taxes
|
|
|
2,028 |
|
|
|
(147 |
) |
|
|
(702 |
) |
|
|
2 |
|
|
|
1,181 |
|
Income
tax expense (benefit)
|
|
|
(393 |
) |
|
|
(60 |
) |
|
|
(289 |
) |
|
|
1 |
|
|
|
(741 |
) |
Net
income (loss)
|
|
$ |
2,421 |
|
|
$ |
(87 |
) |
|
$ |
(413 |
) |
|
$ |
1 |
|
|
$ |
1,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,634 |
|
|
$ |
34 |
|
|
$ |
392 |
|
|
$ |
(393 |
) |
|
$ |
2,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$ |
57,495 |
|
|
$ |
- |
|
|
$ |
(643 |
) |
|
$ |
- |
|
|
$ |
56,852 |
|
Provision
for loan losses
|
|
|
6,526 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,526 |
|
Non-interest
income
|
|
|
14,348 |
|
|
|
9,028 |
|
|
|
11,012 |
|
|
|
(11,012 |
) |
|
|
23,376 |
|
Non-interest
expense
|
|
|
52,601 |
|
|
|
6,933 |
|
|
|
778 |
|
|
|
2 |
|
|
|
60,314 |
|
Income
before income taxes
|
|
|
12,716 |
|
|
|
2,095 |
|
|
|
9,591 |
|
|
|
(11,014 |
) |
|
|
13,388 |
|
Income
tax expense (benefit)
|
|
|
2,938 |
|
|
|
860 |
|
|
|
(579 |
) |
|
|
1 |
|
|
|
3,220 |
|
Net
income
|
|
$ |
9,778 |
|
|
$ |
1,235 |
|
|
$ |
10,170 |
|
|
$ |
(11,015 |
) |
|
$ |
10,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,667 |
|
|
$ |
32 |
|
|
$ |
362 |
|
|
$ |
(350 |
) |
|
$ |
2,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$ |
52,456 |
|
|
$ |
- |
|
|
$ |
(856 |
) |
|
$ |
- |
|
|
$ |
51,600 |
|
Provision
for loan losses
|
|
|
9,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,000 |
|
Non-interest
income
|
|
|
14,087 |
|
|
|
10,249 |
|
|
|
- |
|
|
|
1 |
|
|
|
24,337 |
|
Non-interest
expense
|
|
|
48,816 |
|
|
|
7,598 |
|
|
|
962 |
|
|
|
(1 |
) |
|
|
57,375 |
|
Income
(loss) before income taxes
|
|
|
8,727 |
|
|
|
2,651 |
|
|
|
(1,818 |
) |
|
|
2 |
|
|
|
9,562 |
|
Income
tax expense (benefit)
|
|
|
1,085 |
|
|
|
1,087 |
|
|
|
(746 |
) |
|
|
- |
|
|
|
1,426 |
|
Net
income (loss)
|
|
$ |
7,642 |
|
|
$ |
1,564 |
|
|
$ |
(1,072 |
) |
|
$ |
2 |
|
|
$ |
8,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,639 |
|
|
$ |
33 |
|
|
$ |
324 |
|
|
$ |
(323 |
) |
|
$ |
2,673 |
|
10. DERIVATIVE
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As of
September 30, 2010, the Company held derivatives with a total notional amount of
$519 million. Of this total, interest rate swaps with a combined notional amount
of $160 million were designated as cash flow hedges and $287 million have been
designated as economic hedges. The remaining $72 million notional amount
represents commitments to originate residential mortgage loans for sale and
commitments to sell residential mortgage loans, which are also accounted for as
derivative financial instruments. At September 30, 2010, no derivatives were
designated as hedges of net investments in foreign
operations. Additionally, the Company does not use derivatives for trading
or speculative purposes.
As part
of the Company’s risk management strategy, the Company enters into interest rate
swap agreements to mitigate the interest rate risk inherent in certain of the
Company’s assets and liabilities. Interest rate swap agreements involve the risk
of dealing with both Bank customers and institutional derivative counterparties
and their ability to meet contractual terms. The agreements are entered into
with counterparties that meet established credit standards and contain master
netting and collateral provisions protecting the at-risk party. The derivatives
program is overseen by the Risk Management Committee of the Company’s Board of
Directors. Based on adherence to the Company’s credit standards and the presence
of the netting and collateral provisions, the Company believes that the credit
risk inherent in these contracts was not significant at September 30,
2010.
The
Company pledged collateral to derivative counterparties in the form of cash
totaling $7.5 million and securities with an amortized cost of $31.9 million and
a fair value of $33.0 million as of September 30, 2010. No collateral was posted
from counterparties to the Company as of September 30, 2010. The Company may
need to post additional collateral in the future in proportion to potential
increases in unrealized loss positions. Currently, there are no contingent
features that would require the Company to post additional
collateral.
Information
about interest rate swap agreements and non-hedging derivative assets and
liabilities at September 30, 2010, follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Notional
|
|
|
Average
|
|
|
Weighted Average Rate
|
|
|
Fair
Value
|
|
|
|
Amount
|
|
|
Maturity
|
|
|
Received
|
|
|
Paid
|
|
|
Asset (Liability)
|
|
|
|
(In
thousands)
|
|
|
(In
years)
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps on FHLBB borrowings
|
|
$ |
105,000 |
|
|
|
2.9 |
|
|
|
0.36
|
% |
|
|
4.00
|
% |
|
$ |
(9,470 |
) |
Forward-starting
interest rate swaps on FHLBB borrowings
|
|
|
40,000 |
|
|
|
3.0 |
|
|
|
- |
|
|
|
3.13 |
|
|
|
(667 |
) |
Interest
rate swaps on junior subordinated debentures
|
|
|
15,000 |
|
|
|
3.6 |
|
|
|
2.19 |
|
|
|
5.54 |
|
|
|
(1,437 |
) |
Total
cash flow hedges
|
|
|
160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap on industrial revenue bond
|
|
|
14,672 |
|
|
|
19.2 |
|
|
|
0.63 |
|
|
|
5.09 |
|
|
|
(2,926 |
) |
Interest
rate swaps on loans with commercial loan customers
|
|
|
135,989 |
|
|
|
6.7 |
|
|
|
2.91 |
|
|
|
6.12 |
|
|
|
(12,546 |
) |
Reverse
interest rate swaps on loans with commercial loan
customers
|
|
|
135,989 |
|
|
|
6.7 |
|
|
|
6.12 |
|
|
|
2.91 |
|
|
|
12,514 |
|
Total
economic hedges
|
|
|
286,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to originate residential mortgage loans to be sold
|
|
|
36,356 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
Commitments
to sell residential mortgage loans
|
|
|
36,356 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
59 |
|
Total
non-hedging derivatives
|
|
|
72,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
519,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(14,527 |
) |
Information
about interest rate swap agreements and non-hedging derivative assets and
liabilities at December 31, 2009, follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Notional
|
|
|
Average
|
|
|
Weighted Average Rate
|
|
|
Fair
Value
|
|
|
|
Amount
|
|
|
Maturity
|
|
|
Received
|
|
|
Paid
|
|
|
Asset (Liability)
|
|
|
|
(In
thousands)
|
|
|
(In
years)
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps on FHLBB borrowings
|
|
$ |
145,000 |
|
|
|
4.7 |
|
|
|
0.28
|
% |
|
|
4.15
|
% |
|
$ |
(8,874 |
) |
Interest
rate swaps on junior subordinated debentures
|
|
|
15,000 |
|
|
|
4.4 |
|
|
|
2.12 |
|
|
|
5.54 |
|
|
|
(668 |
) |
Total
cash flow hedges
|
|
|
160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap on industrial revenue bond
|
|
|
15,000 |
|
|
|
19.9 |
|
|
|
0.60 |
|
|
|
5.09 |
|
|
|
(1,018 |
) |
Interest
rate swaps on loans with commercial loan customers
|
|
|
93,962 |
|
|
|
7.0 |
|
|
|
2.50 |
|
|
|
6.32 |
|
|
|
(2,887 |
) |
Reverse
interest rate swaps on loans with commercial loan
customers
|
|
|
93,962 |
|
|
|
7.0 |
|
|
|
6.32 |
|
|
|
2.50 |
|
|
|
2,962 |
|
Total
economic hedges
|
|
|
202,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to originate residential mortgage loans to be sold
|
|
|
22,668 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
(273 |
) |
Commitments
to sell residential mortgage loans
|
|
|
22,668 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
305 |
|
Total
non-hedging derivatives
|
|
|
45,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
408,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,453 |
) |
Cash
flow hedges
The
effective portion of unrealized changes in the fair value of derivatives
accounted for as cash flow hedges are reported in other comprehensive income and
subsequently reclassified to earnings when gains or losses are realized. Each
quarter, the Company assesses the effectiveness of each hedging relationship by
comparing the changes in cash flows of the derivative hedging instrument with
the changes in cash flows of the designated hedged item or transaction. The
ineffective portion of changes in the fair value of the derivatives is
recognized directly in earnings.
The
Company has entered into several interest rate swaps with an aggregate notional
amount of $105 million to convert the LIBOR based floating interest rates on a
$105 million portfolio of FHLBB advances to fixed rates, with the objective of
fixing the Company’s monthly interest expense on these borrowings. In the third
quarter of 2010, Berkshire terminated $40 million notional amount of interest
rate swaps that were used to convert floating based FHLBB advances to a fixed
rate. Berkshire has retained the floating rate advances. Management’s decision
to terminate the swaps was based on its assessment that these hedges were no
longer needed to execute management’s strategy for balance sheet
management.
The
Company has also entered into four forward-starting interest rate swaps each
with a notional value of $10 million. Two of these swaps take effect in April
2012 and the other two take effect in April 2013. All swaps have a one year
duration. This hedge strategy converts the LIBOR based rate of interest on
certain FHLB advances to fixed interest rates, thereby protecting the Company
from floating interest rate variability.
The
Company has also entered into an interest rate swap with a notional value of $15
million to convert the floating rate interest on its junior subordinated
debentures to a fixed rate of interest. The purpose of the hedge was to protect
the Company from the risk of variability arising from the floating rate interest
on the debentures.
Amounts
included in the Consolidated Statements of Income and in the other comprehensive
income section of the Consolidated Statements of Changes in Stockholders’ Equity
related to interest rate derivatives designated as hedges of cash flows, were as
follows:
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps on FHLBB borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain recognized in accumulated other comprehensive
loss
|
|
$ |
(1,794 |
) |
|
$ |
(1,886 |
) |
|
$ |
(7,098 |
) |
|
$ |
4,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
of unrealized loss for termination of swaps
|
|
|
5,448 |
|
|
|
- |
|
|
|
5,448 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
loss recognized in accumulated other comprehensive loss for termination of
swaps
|
|
|
(6,382 |
) |
|
|
- |
|
|
|
(6,382 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of realized loss from accumulated other comprehensive loss to interest
expense for termination of swaps
|
|
|
84 |
|
|
|
- |
|
|
|
84 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of realized gain from accumulated other comprehensive loss to other
non-interest income for termination of swaps
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of unrealized (gain) loss from accumulated other comprehensive loss to
other non-interest income for hedge ineffectiveness
|
|
|
- |
|
|
|
(103 |
) |
|
|
- |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tax (expense) benefit on items recognized in accumulated other
comprehensive loss
|
|
|
(1,236 |
) |
|
|
846 |
|
|
|
2,545 |
|
|
|
(1,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps on junior subordinated debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain recognized in accumulated other comprehensive
loss
|
|
|
(287 |
) |
|
|
(248 |
) |
|
|
(769 |
) |
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tax benefit (expense) on items recognized in accumulated other
comprehensive loss
|
|
|
490 |
|
|
|
103 |
|
|
|
319 |
|
|
|
(124 |
) |
Other
comprehensive (loss) income recorded in accumulated other comprehensive
loss, net of reclassification adjustments and tax effects
|
|
$ |
(3,677 |
) |
|
$ |
(1,288 |
) |
|
$ |
(5,853 |
) |
|
$ |
2,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense recognized in interest expense on hedged FHLBB
borrowings
|
|
$ |
1,281 |
|
|
$ |
(1,258 |
) |
|
$ |
4,102 |
|
|
$ |
(3,228 |
) |
Net
interest expense recognized in interest expense on junior subordinated
debentures
|
|
$ |
125 |
|
|
$ |
(119 |
) |
|
$ |
380 |
|
|
$ |
(292 |
) |
The
Company’s accumulated other comprehensive loss totaled $9.2 million at September
30, 2010. Of this loss, $17.9 million was attributable to accumulated losses on
cash flow hedges, net of deferred taxes of $5.5 million, and $6.0 million was
attributable to accumulated gains on available-for-sale securities, net of
deferred taxes of $2.8 million.
The
Company’s accumulated other comprehensive loss totaled $3.0 million at December
31, 2009. Of this loss, $5.2 million was attributable to accumulated losses on
cash flow hedges, net of deferred taxes of $4.3 million, and $2.2 million was
attributable to accumulated gains on available-for-sale securities, net of
deferred taxes of $1.8 million.
Hedge
ineffectiveness on interest rate swaps designated as cash flow hedges was
immaterial to the Company’s financial statements during the nine months ended
September 30, 2010 and 2009. The Company does not anticipate material
events or transactions within the next twelve months that are likely to result
in a reclassification of unrealized gains or losses from accumulated other
comprehensive loss to earnings.
Amounts
reported in accumulated other comprehensive loss related to derivatives will be
reclassified to interest expense as interest payments are
made on the Company’s variable-rate liabilities. During the next twelve months,
the Company estimates that $5.3 million will be reclassified as an increase to
interest expense.
Economic
hedges and non-hedging derivatives
The
Company has an interest rate swap with a $14.7 million notional amount to swap
out the fixed rate of interest on an economic development bond bearing a fixed
rate of 5.09%, currently within the Company’s trading portfolio under the fair
value option, in exchange for a LIBOR-based floating rate. The intent of the
economic hedge is to improve the Company’s asset sensitivity to changing
interest rates in anticipation of favorable average floating rates of interest
over the 21-year life of the bond. The fair value changes of the economic
development bond are mostly offset by fair value changes of the related interest
rate swap.
The
Company also offers certain derivative products directly to qualified commercial
borrowers. The Company economically hedges derivative transactions executed
with commercial borrowers by entering into mirror-image, offsetting derivatives
with third-party financial institutions. The transaction allows the
Company’s customer to convert a variable-rate loan to a fixed rate loan. Because
the Company acts as an intermediary for its customer, changes in the fair value
of the underlying derivative contracts mostly offset each other in earnings.
Credit valuation adjustments arising from the difference in credit worthiness of
the commercial loan and financial institution counterparties totaled $(32)
thousand as of September 30, 2010 and were not material to the financial
statements. The interest income and expense on these mirror image swaps
exactly offset each other.
The
Company enters into commitments with certain of its retail customers to
originate fixed rate mortgage loans and simultaneously enters into an agreement
to sell these fixed rate mortgage loans to the Federal National Mortgage
Association. These commitments are considered derivative financial
instruments and are recorded at fair value with any changes in fair value
recorded through earnings.
Amounts
included in the Consolidated Statements of Income related to economic hedges and
non-hedging derivatives were as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(In
thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap on industrial revenue bond:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense recognized in interest and dividend income on
securities
|
|
$ |
(166 |
) |
|
$ |
(170 |
) |
|
$ |
(500 |
) |
|
$ |
(493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain recognized in other non-interest income
|
|
|
(614 |
) |
|
|
(500 |
) |
|
|
(1,908 |
) |
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps on loans with commercial loan customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain recognized in other non-interest income
|
|
|
3,081 |
|
|
|
1,445 |
|
|
|
9,659 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse
interest rate swaps on loans with commercial loan
customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss recognized in other non-interest income
|
|
|
(3,081 |
) |
|
|
(1,445 |
) |
|
|
(9,659 |
) |
|
|
(348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unfavorable)
favorable change in credit valuation adjustment recognized in other
non-interest income
|
|
$ |
(54 |
) |
|
$ |
(29 |
) |
|
$ |
(107 |
) |
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to originate residential mortgage loans to be sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss recognized in other non-interest income
|
|
$ |
(54 |
) |
|
$ |
(14 |
) |
|
$ |
(239 |
) |
|
$ |
(357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to sell residential mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain recognized in other non-interest income
|
|
$ |
59 |
|
|
$ |
62 |
|
|
$ |
268 |
|
|
$ |
463 |
|
11. FAIR
VALUE MEASUREMENTS
A
description of the valuation methodologies used for assets and liabilities
measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy, is set forth below. These
valuation methodologies were applied to all of the Company's financial assets
and financial liabilities that are carried at fair value.
Recurring fair value
measurements
The following table summarizes assets
and financial liabilities measured at fair value on a recurring basis as of
September 30, 2010 and December 31, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value.
There were no transfers between levels during the nine months ended September
30, 2010.
|
|
September 30, 2010
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
(In thousands)
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
account security
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
17,398 |
|
|
$ |
17,398 |
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
- |
|
|
|
84,807 |
|
|
|
- |
|
|
|
84,807 |
|
Governmentguaranteed
residential mortgage-backed securities
|
|
|
- |
|
|
|
21,949 |
|
|
|
- |
|
|
|
21,949 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
- |
|
|
|
146,007 |
|
|
|
- |
|
|
|
146,007 |
|
Corporate
bonds
|
|
|
- |
|
|
|
26,567 |
|
|
|
- |
|
|
|
26,567 |
|
Trust
preferred securities
|
|
|
- |
|
|
|
19,752 |
|
|
|
1,136 |
|
|
|
20,888 |
|
Other
bonds and obligations
|
|
|
- |
|
|
|
423 |
|
|
|
- |
|
|
|
423 |
|
Marketable
equity securities
|
|
|
13,041 |
|
|
|
- |
|
|
|
1,531 |
|
|
|
14,572 |
|
Derivative
assets
|
|
|
- |
|
|
|
12,573 |
|
|
|
- |
|
|
|
12,573 |
|
Derivative
liabilities
|
|
|
- |
|
|
|
27,046 |
|
|
|
54 |
|
|
|
27,100 |
|
|
|
December 31, 2009
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
(In thousands)
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
account security
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
15,880 |
|
|
$ |
15,880 |
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
- |
|
|
|
74,784 |
|
|
|
- |
|
|
|
74,784 |
|
Government
guaranteed residential mortgage-backed securities
|
|
|
- |
|
|
|
13,031 |
|
|
|
- |
|
|
|
13,031 |
|
Government-sponsored
residential mortgage-backed securities
|
|
|
- |
|
|
|
184,245 |
|
|
|
- |
|
|
|
184,245 |
|
Corporate
bonds
|
|
|
- |
|
|
|
37,337 |
|
|
|
- |
|
|
|
37,337 |
|
Trust
preferred securities
|
|
|
- |
|
|
|
6,051 |
|
|
|
864 |
|
|
|
6,915 |
|
Other
bonds and obligations
|
|
|
- |
|
|
|
5,470 |
|
|
|
- |
|
|
|
5,470 |
|
Marketable
equity securities
|
|
|
1,411 |
|
|
|
- |
|
|
|
1,152 |
|
|
|
2,563 |
|
Derivative
assets
|
|
|
- |
|
|
|
3,267 |
|
|
|
- |
|
|
|
3,267 |
|
Derivative
liabilities
|
|
|
- |
|
|
|
13,447 |
|
|
|
273 |
|
|
|
13,720 |
|
Trading Security
at Fair Value. The Company holds one security designated as a trading
security. It is a tax advantaged economic development bond issued by the Company
to a local nonprofit organization which provides wellness and health programs.
The determination of the fair value for this security is determined based on a
discounted cash flow methodology. Certain inputs to the fair value calculation
are unobservable and there is little to no market activity in the security,
therefore, the security meets the definition of a Level 3 security and has been
classified as such.
Securities
Available for Sale. AFS securities classified as Level 1 consist of
publicly-traded equity securities for which the fair values can be obtained
through quoted market prices in active exchange markets. AFS securities
classified as Level 2 include most of the Company’s debt securities. The pricing
on Level 2 was primarily sourced from third-party pricing services and is based
on models that consider standard input factors such as dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit information and the
bond's terms and condition, among other things. The Company holds one trust
preferred security and two limited partnership securities in its AFS portfolio
which are classified as Level 3. The securities’ fair values are based on
unobservable issuer-provided financial information and discounted cash flow
models derived from the underlying structured pool.
Derivative Assets
and Liabilities. The valuation of the Company’s interest rate swaps is
obtained from a third-party pricing service and is determined using a discounted
cash flow analysis on the expected cash flows of each derivative. The pricing
analysis is based on observable inputs for the contractual terms of the
derivatives, including the period to maturity and interest rate
curves.
The
Company incorporates credit valuation adjustments to appropriately reflect both
its own nonperformance risk and the respective counterparty’s nonperformance
risk in the fair value measurements. In adjusting the fair value of its
derivative contracts for the effect of nonperformance risk, the Company has
considered the impact of netting and any applicable credit enhancements, such as
collateral postings.
Although
the Company has determined that the majority of the inputs used to value its
interest rate derivatives fall within Level 2 of the fair value hierarchy, the
credit valuation adjustments associated with its derivatives utilize Level 3
inputs, such as estimates of current credit spreads to evaluate the likelihood
of default by itself and its counterparties. However, as of September 30, 2010,
the Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.
The
Company enters into various commitments to originate residential mortgage loans
for sale and commitments to sell residential mortgage loans. Such commitments
are considered to be derivative financial instruments and are carried at
estimated fair value on the consolidated balance sheets.
The
estimated fair value of commitments to originate residential mortgage loans for
sale is adjusted to reflect estimates for fall-out rates, associated servicing
and origination costs. These assumptions are considered significant unobservable
inputs resulting in a Level 3 classification. As of September 30, 2010,
liabilities derived from commitments to originate residential mortgage loans for
sale totaled $54 thousand. The estimated fair values of commitments to sell
residential mortgage loans were calculated by reference to prices quoted by the
Federal National Mortgage Association in secondary markets. These valuations
result in a Level 2 classification. As of September 30, 2010, assets derived
from commitments to sell residential mortgage loans totaled $59
thousand.
The table
below presents the changes in Level 3 assets that were measured at fair value on
a recurring basis at September 30, 2010 and 2009.
|
|
Assets
|
|
|
Liabilities
|
|
|
|
Trading
|
|
|
Securities
|
|
|
|
|
|
|
Account
|
|
|
Available
|
|
|
Derivative
|
|
(In thousands)
|
|
Security
|
|
|
for Sale
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2009
|
|
$ |
15,880 |
|
|
$ |
2,016 |
|
|
$ |
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain recognized in other non-interest income
|
|
|
46 |
|
|
|
- |
|
|
|
241 |
|
Unrealized
gain included in accumulated other comprehensive loss
|
|
|
- |
|
|
|
267 |
|
|
|
- |
|
Amortization
of trading account security
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
Balance
as of March 31, 2010
|
|
$ |
15,816 |
|
|
$ |
2,283 |
|
|
$ |
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) recognized in other non-interest income
|
|
|
1,206 |
|
|
|
- |
|
|
|
(121 |
) |
Unrealized
gain included in accumulated other comprehensive loss
|
|
|
- |
|
|
|
348 |
|
|
|
- |
|
Amortization
of trading account security
|
|
|
(108 |
) |
|
|
|
|
|
|
|
|
Balance
as of June 30, 2010
|
|
$ |
16,914 |
|
|
$ |
2,631 |
|
|
$ |
(153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain recognized in other non-interest income
|
|
|
593 |
|
|
|
- |
|
|
|
99 |
|
Unrealized
gain included in accumulated other comprehensive loss
|
|
|
- |
|
|
|
36 |
|
|
|
- |
|
Amortization
of trading account security
|
|
|
(109 |
) |
|
|
|
|
|
|
|
|
Balance
as of September 30, 2010
|
|
$ |
17,398 |
|
|
$ |
2,667 |
|
|
$ |
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) relating to instruments still held at September 30,
2010
|
|
$ |
2,725 |
|
|
$ |
(1,475 |
) |
|
$ |
(54 |
) |
|
|
Assets
|
|
|
Liabilities
|
|
|
|
Trading
|
|
|
Securities
|
|
|
|
|
|
|
Account
|
|
|
Available
|
|
|
Derivative
|
|
(In
thousands)
|
|
Security
|
|
|
for Sale
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2008
|
|
$ |
18,144 |
|
|
$ |
1,446 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss recognized in other non-interest income
|
|
|
(579 |
) |
|
|
- |
|
|
|
- |
|
Unrealized
loss included in accumulated other comprehensive loss
|
|
|
- |
|
|
|
(385 |
) |
|
|
- |
|
Balance
as of March 31, 2009
|
|
$ |
17,565 |
|
|
$ |
1,061 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss recognized in other non-interest income
|
|
|
(1,318 |
) |
|
|
- |
|
|
|
(343 |
) |
Unrealized
gain included in accumulated other comprehensive loss
|
|
|
- |
|
|
|
282 |
|
|
|
- |
|
Balance
as of June 30, 2009
|
|
$ |
16,247 |
|
|
$ |
1,343 |
|
|
$ |
(343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain recognized in other non-interest income
|
|
|
394 |
|
|
|
- |
|
|
|
329 |
|
Unrealized
gain included in accumulated other comprehensive loss
|
|
|
- |
|
|
|
725 |
|
|
|
- |
|
Balance
as of September 30, 2009
|
|
$ |
16,641 |
|
|
$ |
2,068 |
|
|
$ |
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) relating to instruments still held at September 30,
2009
|
|
$ |
1,641 |
|
|
$ |
(1,898 |
) |
|
$ |
(14 |
) |
Non-recurring
fair value measurements
The
Company is required, on a non-recurring basis, to adjust the carrying value or
provide valuation allowances for certain assets using fair value measurements in
accordance with GAAP. The following is a summary of applicable non-recurring
fair value measurements. There are no liabilities measured at fair value on a
non-recurring basis.
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2010
|
|
|
September 30, 2010
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Total
|
|
(In thousands)
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Losses
|
|
|
Losses
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,310 |
|
|
$ |
(837 |
) |
|
$ |
(1,708 |
) |
Other real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
2,900 |
|
|
|
(100 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,210 |
|
|
$ |
(937 |
) |
|
$ |
(1,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2009
|
|
|
September 30, 2009
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Total
|
|
(In thousands)
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Losses
|
|
|
Losses
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
11,671 |
|
|
$ |
(1,048 |
) |
|
$ |
(1,612 |
) |
Other real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
130 |
|
|
|
- |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
11,801 |
|
|
$ |
(1,048 |
) |
|
$ |
(1,739 |
) |
Securities held
to maturity. Held to maturity
securities are recorded at amortized cost and are evaluated periodically for
impairment. No impairments were recorded on securities held to maturity during
the nine months ended September 30, 2010 and 2009. Held to maturity securities
are valued using the same methodologies applied to the available for sales
securities portfolio. Most securities in the held to maturity portfolio
consist of economic development bonds and issues to local municipalities that
are not actively traded and are priced using a discounted cash flows
model. The Company views these as Level 3 pricing.
Restricted equity
securities. The Company’s restricted
equity securities balance is primarily composed of Federal Home Loan Bank of
Boston (“FHLBB”) stock having a carrying value of $21.1 million as of September
30, 2010. FHLBB stock is recorded at par and periodically evaluated for
impairment. The FHLBB is a cooperative that provides services to its member
banking institutions. The primary reason for joining the FHLBB was to obtain
funding from the FHLBB and the purchase of stock in the FHLBB is a requirement
for a member to gain access to funding. The Company purchases FHLBB stock
proportional to the volume of funding received and views the purchases as a
necessary long-term investment for the purposes of balance sheet liquidity and
not for investment return.
In
February 2009, the FHLBB announced that it indefinitely suspended its dividend
payment beginning in the first quarter of 2009, and will continue the
moratorium, put into effect during the fourth quarter of 2008, on all excess
stock repurchases in an effort to help preserve capital. In addition, the FHLBB
reported a net loss for the years ended December 31, 2008 and
2009. However, the FHLBB has reported positive net income for the first
three quarters of 2010. These factors were considered by the Company’s
management when determining if an other-than-temporary impairment exists with
respect to the Company’s investment in FHLBB. The Company also reviewed recent
public filings, rating agency’s analysis which showed investment-grade ratings,
capital position which exceeds all required capital levels, and other factors.
As a result of the Company’s review for OTTI, management deemed the investment
in the FHLBB stock not to be OTTI as of September 30, 2010 and it will continue
to be monitored closely. There can be no assurance as to the outcome of
management’s future evaluation of the Company’s investment in the
FHLBB.
Loans.
Loans are generally not recorded at fair value on a recurring basis.
Periodically, the Company records non-recurring adjustments to the carrying
value of loans based on fair value measurements for partial charge-offs of the
uncollectible portions of those loans. Non-recurring adjustments can also
include certain impairment amounts for collateral-dependent loans calculated
when establishing the allowance for credit losses. Such amounts are generally
based on the fair value of the underlying collateral supporting the loan and, as
a result, the carrying value of the loan less the calculated valuation amount
does not necessarily represent the fair value of the loan. Real estate
collateral is typically valued using appraisals or other indications of value
based on recent comparable sales of similar properties or assumptions generally
observable in the marketplace. However, the choice of observable data is
subject to significant judgment, and there are often adjustments based on
judgment in order to make observable data comparable and to consider the impact
of time, the condition of properties, interest rates, and other market factors
on current values. Additionally, commercial real estate appraisals
frequently involve discounting of projected cash flows, which relies inherently
on unobservable data. Therefore, real estate collateral related
nonrecurring fair value measurement adjustments have generally been classified
as Level 3. Estimates of fair value used for other collateral supporting
commercial loans generally are based on assumptions not observable in the
marketplace and therefore such valuations have been classified as
Level 3.
Loans held for
sale. Loans originated and held for sale are carried at the lower of
aggregate cost or market value. No fair value adjustments were recorded on loans
held for sale during the nine month periods ended September 30, 2010 and 2009.
The Company holds loans in the held for sale category for a period generally
less than 3 months and as a result fair value approximates carrying
value.
Capitalized
mortgage loan servicing rights. A loan servicing right asset
represents the amount by which the present value of the estimated future net
cash flows to be received from servicing loans are expected to more than
adequately compensate the Company for performing the servicing. The fair value
of servicing rights is estimated using a present value cash flow model. The most
important assumptions used in the valuation model are the anticipated rate of
the loan prepayments and discount rates. Adjustments are only recorded when the
discounted cash flows derived from the valuation model are less than the
carrying value of the asset. Although some assumptions in determining fair value
are based on standards used by market participants, some are based on
unobservable inputs and therefore are classified in Level 3 of the valuation
hierarchy. Write-downs on capitalized mortgage loan servicing rights totaled
$178 thousand and $144 thousand for the nine months ended September 30, 2010 and
2009, respectively.
Other real estate
owned (“OREO”). OREO results from the foreclosure process on residential
or commercial loans issued by the Bank. Upon assuming the real estate, the
Company records the property at the fair value of the asset less the estimated
sales costs. Thereafter, OREO properties are recorded at the lower of cost or
fair value. OREO fair values are primarily determined based on Level 3 data
including sales comparables and appraisals.
Intangible assets
and goodwill. The Company’s other intangible assets totaled $12.1 million
and $14.4 million as of September 30, 2010 and December 31, 2009, respectively.
Other intangible assets include core deposit intangibles, insurance customer
relationships, and non-compete agreements assumed by the Company as part of
historical acquisitions. Other intangibles are initially recorded at fair value
based on Level 3 data, such as internal appraisals and customized discounted
criteria, and are amortized over their estimated lives on a straight-line or
accelerated basis ranging from five to ten years. No impairment was recorded on
other intangible assets during the nine month periods ended September 30, 2010
and 2009.
The
Company’s goodwill balance as of September 30, 2010 and December 31, 2009 was
$161.7 million. The Company tests goodwill impairment annually in the fourth
quarter or more frequently if events or changes in circumstances indicate that
impairment is possible. No impairment was recorded on goodwill during the nine
months ended September 30, 2010 and 2009.
Summary
of estimated fair values of financial instruments
The
estimated fair values, and related carrying amounts, of the Company’s financial
instruments follow. Accordingly, the aggregate fair value amounts presented
herein may not necessarily represent the underlying fair value of the
Company.
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
38,382 |
|
|
$ |
38,382 |
|
|
$ |
32,608 |
|
|
$ |
32,608 |
|
Trading
security
|
|
|
17,398 |
|
|
|
17,398 |
|
|
|
15,880 |
|
|
|
15,880 |
|
Securities
available for sale
|
|
|
315,213 |
|
|
|
315,213 |
|
|
|
324,345 |
|
|
|
324,345 |
|
Securities
held to maturity
|
|
|
57,476 |
|
|
|
58,790 |
|
|
|
57,621 |
|
|
|
58,567 |
|
Restricted
equity securities
|
|
|
23,120 |
|
|
|
23,120 |
|
|
|
23,120 |
|
|
|
23,120 |
|
Net
loans
|
|
|
2,022,273 |
|
|
|
1,963,137 |
|
|
|
1,929,842 |
|
|
|
1,833,404 |
|
Loans
held for sale
|
|
|
3,445 |
|
|
|
3,445 |
|
|
|
4,146 |
|
|
|
4,146 |
|
Capitalized
mortgage servicing rights
|
|
|
1,867 |
|
|
|
1,867 |
|
|
|
1,620 |
|
|
|
1,620 |
|
Accrued
interest receivable
|
|
|
9,066 |
|
|
|
9,066 |
|
|
|
8,498 |
|
|
|
8,498 |
|
Cash
surrender value of bank-owned life insurance policies
|
|
|
38,170 |
|
|
|
38,170 |
|
|
|
36,904 |
|
|
|
36,904 |
|
Derivative
assets
|
|
|
12,573 |
|
|
|
12,573 |
|
|
|
3,267 |
|
|
|
3,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
2,068,747 |
|
|
$ |
2,084,537 |
|
|
$ |
1,986,762 |
|
|
$ |
2,007,774 |
|
Short-term
debt
|
|
|
96,125 |
|
|
|
96,125 |
|
|
|
83,860 |
|
|
|
83,860 |
|
Long-term
Federal Home Loan Bank advances
|
|
|
197,687 |
|
|
|
202,732 |
|
|
|
207,344 |
|
|
|
208,831 |
|
Junior
subordinated debentures
|
|
|
15,464 |
|
|
|
9,193 |
|
|
|
15,464 |
|
|
|
9,462 |
|
Derivative
liabilities
|
|
|
27,100 |
|
|
|
27,100 |
|
|
|
13,720 |
|
|
|
13,720 |
|
Other
than as discussed above, the following methods and assumptions were used by
management to estimate the fair value of significant classes of financial
instruments for which it is practicable to estimate that value.
Cash and cash
equivalents. Carrying value is assumed to represent fair value for cash
and cash equivalents that have original maturities of ninety days or
less.
Restricted equity
securities. Carrying value approximates fair value based on the
redemption provisions of the issuers.
Cash surrender
value of life insurance policies. Carrying value
approximates fair value.
Loans, net.
The carrying value of the loans in the loan portfolio is based on the
cash flows of the loans discounted over their respective loan rates. The rates
are adjusted for substandard and special mention loans to factor the impact of
declines in the loan’s credit standing. The fair value of the loans is estimated
by discounting future cash flows using the current interest rates at which
similar loans with similar terms would be made to borrowers of similar credit
quality.
Accrued interest
receivable. Carrying value
approximates fair value.
Deposits.
The fair value of demand, interest bearing checking, savings and money
market deposits is determined as the amount payable on demand at the reporting
date. The fair value of time deposits is estimated by discounting the estimated
future cash flows using market rates offered for deposits of similar remaining
maturities.
Borrowed funds.
The fair value of borrowed funds is estimated by discounting the future
cash flows using market rates for similar borrowings. Such funds
include all categories of debt and debentures in the table
above.
Junior
subordinated debentures. The Company utilizes a pricing service along
with internal models to estimate the valuation of its junior subordinated
debentures. The junior subordinated debentures re-price every ninety
days.
Off-balance-sheet
financial instruments. Off-balance-sheet financial instruments include
standby letters of credit and other financial guarantees and commitments
considered immaterial to the Company’s financial statements.
On
October 12, 2010, Berkshire and Rome Bancorp, Inc. (“Rome”), the parent company
of The Rome Savings Bank (“Rome Bank”), entered into an Agreement and Plan of
Merger pursuant to which Rome will merge with and into the Company. Concurrent
with the merger, it is expected that Rome Bank will merge with and into
Berkshire Bank.
Under the
terms of the merger agreement, 70% of the outstanding shares of Rome common
stock will be converted into the right to receive 0.5658 shares of Company
common stock for each share of Rome and the remaining 30% of outstanding shares
of Rome will be exchanged for $11.25 in cash. Rome stockholders
will have the right to elect to receive cash or Company common stock as
outlined above, subject to 70% of Rome common stock receiving Company stock and
the proration procedures contained in the Merger Agreement.
The
transaction is subject to customary closing conditions, including the receipt of
regulatory approvals and approval by the shareholders of Rome. The merger is
currently expected to be completed in the first quarter of 2011. The
directors and executive officers of Rome have agreed to vote their shares in
favor of the approval of the Merger Agreement at the shareholders meeting to be
held to vote on the proposed transaction. If the merger is not consummated under
certain circumstances, Rome has agreed to pay the Company a termination fee of
$3.5 million.
This
merger agreement had no significant effect on the Company's financial statements
for the periods presented.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Management’s
discussion and analysis of financial condition and results of operations is
intended to assist in understanding the financial condition and results of
operations of the Company. The following discussion and analysis should be read
in conjunction with the Company’s consolidated financial statements and the
notes thereto appearing in Part I, Item 1 of this document and with
Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in the 2009 Annual Report on Form 10-K. In the following
discussion, income statement comparisons are against the same period of the
previous year and balance sheet comparisons are against the previous fiscal
year-end, unless otherwise noted. Operating results discussed herein are not
necessarily indicative of the results for the year 2010 or any future period. In
management’s discussion and analysis of financial condition and results of
operations, certain reclassifications have been made to make prior periods
comparable. Tax-equivalent adjustments are the result of increasing income from
tax-advantaged securities by an amount equal to the taxes that would be paid if
the income were fully taxable based on a 41.5% effective income tax
rate.
Berkshire
Hills Bancorp (“the Company” or “Berkshire”) is headquartered in Pittsfield,
Massachusetts. It had $2.8 billion in assets at September 30, 2010 and is
the parent of Berkshire Bank — America’s Most Exciting BankSM (“the
Bank”). The Company provides personal and business banking,
insurance, investment, and wealth management services through 41 full service
financial centers in western Massachusetts, northeastern New York, and southern
Vermont. Berkshire has entered into a definitive merger agreement to
acquire Rome Bancorp, Inc. (“Rome”), which is located in central New York,
northwest of Utica. Berkshire Bank provides 100% deposit insurance
protection on all deposit accounts, regardless of amount, based on a combination
of FDIC insurance and membership in the Depositors Insurance Fund (DIF). For
more information, visit www.berkshirebank.com
or call 800-773-5601.
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements that are based on assumptions and may
describe future plans, strategies and expectations of Berkshire Hills Bancorp,
Inc., Berkshire Bank and Berkshire Insurance Group, Inc. This
document may include forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations of the
Company, are generally identified by use of the words “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “seek,” “strive,” “try,” or
future or conditional verbs such as “will,” “would,” “should,” “could,” “may,”
or similar expressions. Our ability to predict results or the actual effects of
our plans and strategies is inherently uncertain. Actual results, performance or
achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained in this Form 10-Q. Important
factors that could cause actual results to differ materially from our
forward-looking statements are set forth under Item 1A. — “Risk Factors” in
our annual report on Form 10-K for the year ended December 31, 2009 and in
this report and in other reports filed with the Securities and Exchange
Commission. You should not place undue reliance on these
forward-looking statements, which reflect our expectations only as of the date
of this report. We do not assume any obligation to revise
forward-looking statements except as may be required by law.
APPLICATION OF CRITICAL ACCOUNTING
POLICIES AND ACCOUNTING ESTIMATES, AND NEW ACCOUNTING
PRONOUNCEMENTS
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements in the 2009 Form 10-K. Please see those
policies in conjunction with this discussion. The accounting and reporting
policies followed by the Company conform, in all material respects, to
accounting principles generally accepted in the United States and to general
practices within the financial services industry. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. While
the Company bases estimates on historical experience, current information and
other factors deemed to be relevant, actual results could differ from those
estimates. The Company considers accounting estimates to be critical
to reported financial results if (i) the accounting estimate requires
management to make assumptions about matters that are highly uncertain and
(ii) different estimates that management reasonably could have used for the
accounting estimate in the current period, or changes in the accounting estimate
that are reasonably likely to occur from period to period, could have a material
impact on the Company’s financial statements. Accounting policies related to the
allowance for loan losses, the valuation of deferred tax assets, the estimates
related to the initial measurement of goodwill and intangible assets and
subsequent impairment analyses, the determination of other-than-temporary
impairment of investment securities, and the determination of fair value of
financial instruments are considered to be critical. For additional
information regarding critical accounting policies, refer to Note 1 — Summary of
Significant Accounting Policies in the notes to consolidated financial
statements and the sections captioned “Critical Accounting Policies” and “Loan
Loss Allowance” in Management’s Discussion and Analysis of Financial Condition
and Results of Operations included in the 2009 Form 10-K. There have been no
significant changes in the Company’s application of critical accounting policies
since year-end 2009. Please refer to the note on Recent Accounting
Pronouncements in Note 1 to the consolidated financial statements of this report
for a detailed discussion of new accounting pronouncements. The Company performs
an annual impairment test of goodwill or more frequently if events or changes in
circumstances indicate that impairment is possible. There have been no such
events or changes in circumstance since the Company’s most recent report on Form
10-K.
RECENT
EVENTS
During
the first nine months of 2010, economic conditions in the United States
continued to improve, although the pace of improvement began to show signs of
slowing beginning around the middle of the year. Liquidity has
returned to most of the financial markets, with continued normalization of
credit spreads. The prolonged period of low Federal funds rates
continues to put pressure on spreads earned on bank deposits. Housing
prices came back under pressure in many markets in the third quarter after the
expiration of government sponsored first-time homebuyer tax credit
programs. Improved market conditions have resulted in recovery during
the first nine months of 2010 of some of the valuation losses previously
recorded on several asset classes during 2008 and into 2009.
The job
market also continued to improve in the first nine months of 2010, as the
economy began to add jobs in March. However, the U.S. unemployment
rate has remained high in the 9.5 – 9.6% range in recent
months. Additionally, a significant number of U.S. residents are no
longer looking for work and, therefore, are not reflected in the U.S.
unemployment rates. Concerns about the future of the U.S. economy,
including the pace and magnitude of recovery from the recent economic recession,
consumer confidence, volatility in energy prices, impacts of monetary policy,
and volatility experienced by the credit markets including the impacts of the
recent European sovereign debt crisis will continue to influence the U.S.
economic recovery and the capital markets. In particular, unemployment and the
U.S. housing markets are critical influences on further U.S. economic recovery.
Additionally, there is uncertainty as to the future course and efficacy of
monetary and fiscal policy, and the impact of growing government
indebtedness. These conditions in combination with general economic
weakness and the impact of recent and proposed regulatory changes may impact the
Company’s future results depending in part on the nature and timing of the
economic recovery in the nation and in the Company’s markets.
Financial
Regulatory Reform Legislation
On July
21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the “Act”) into law. The Act comprehensively
reforms the regulation of financial institutions, products and services.
Among other things, the Act provides for new capital standards that eliminate
the treatment of trust preferred securities as Tier 1 capital. Existing
trust preferred securities are grandfathered for banking entities with less than
$15 billion of assets, such as the Company. The Act permanently raises
deposit insurance levels to $250,000, retroactive to January 1, 2008, and
extends for two years the Transaction Account Guarantee Program, which will
become mandatory for all insured depository institutions. Pursuant to
modifications under the Act, deposit insurance assessments will be calculated
based on an insured depository institution’s assets rather than its insured
deposits and the minimum reserve ratio will be raised to 1.35%. In
addition, the Act authorizes the Federal Reserve Board to regulate interchange
fees for debit card transactions and establishes new minimum mortgage
underwriting standards for residential mortgages. The Act also establishes
the Bureau of Consumer Financial Protection (“CFPB”) as an independent bureau of
the FRB. The CFPB has the exclusive authority to prescribe rules governing
the provision of consumer financial products and services. The Act
establishes a timeline for the consolidation of the activities of the Office of
Thrift Supervision (“OTS”) into other existing bank regulatory
agencies. The OTS is currently the regulator of the holding company,
Berkshire Hills Bancorp, Inc. It is expected that regulation of the
holding company will transfer to the Federal Reserve Board of Governors by the
end of 2011. The Federal Reserve has different regulations, including
quantitative minimum consolidated capital ratios, which have not previously
applied to the holding company. The Company is not presently aware of
any material negative impact expected as a result of this change in the holding
company’s regulation.
The Act
grants the SEC express authority to adopt rules granting proxy access for
shareholder nominees, and grants shareholders a non-binding vote on executive
compensation and “golden parachute” payments. Pursuant to modifications of
the proxy rules under the Act, the Company will be required to disclose the
relationship between executive pay and financial performance, the ratio of the
median pay of all employees to the pay of the chief executive officer, and
employee and director hedging activities. The Act also requires that stock
exchanges amend their listing rules (i) to require, among other things, that
each listed company’s compensation committee be granted the authority and
funding to retain independent advisors and (ii) to prohibit the listing of any
security of an issuer that does not adopt policies governing the claw back of
excess executive compensation based on inaccurate financial
statements. The Company is evaluating the Act and has not presently
formed conclusions about the impact of the Act on its operations and financial
position.
The
following summary data is based in part on the consolidated financial statements
and accompanying notes, and other information appearing elsewhere in this Form
10-Q.
|
|
At or for the Three Months Ended
|
|
|
At or for the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE
RATIOS (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
0.49 |
% |
|
|
0.29 |
% |
|
|
0.50 |
% |
|
|
0.41 |
% |
Return
on average common equity
|
|
|
3.53 |
|
|
|
1.86 |
|
|
|
3.49 |
|
|
|
2.64 |
|
Net
interest margin, fully taxable equivalent
|
|
|
3.30 |
|
|
|
2.96 |
|
|
|
3.26 |
|
|
|
2.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET
QUALITY RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (current quarter annualized)/average loans
|
|
|
0.40 |
% |
|
|
0.59 |
% |
|
|
0.43 |
% |
|
|
0.52 |
% |
Non-performing
assets/total assets
|
|
|
0.69 |
|
|
|
0.85 |
|
|
|
0.69 |
|
|
|
0.85 |
|
Allowance
for loan losses/total loans
|
|
|
1.55 |
|
|
|
1.22 |
|
|
|
1.55 |
|
|
|
1.22 |
|
Allowance
for loan losses/non-accruing loans
|
|
|
194 |
|
|
|
107 |
|
|
|
194 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL
RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity to total assets
|
|
|
13.68 |
% |
|
|
15.31 |
% |
|
|
13.68 |
% |
|
|
15.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER
COMMON SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings, diluted
|
|
$ |
0.25 |
|
|
$ |
0.14 |
|
|
$ |
0.73 |
|
|
$ |
0.32 |
|
Total
common book value
|
|
|
27.28 |
|
|
|
29.46 |
|
|
|
27.28 |
|
|
|
29.46 |
|
Dividends
|
|
|
0.16 |
|
|
|
0.16 |
|
|
|
0.48 |
|
|
|
0.48 |
|
Common
stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
20.94 |
|
|
|
24.61 |
|
|
|
22.84 |
|
|
|
31.15 |
|
Low
|
|
|
17.08 |
|
|
|
20.26 |
|
|
|
16.20 |
|
|
|
19.00 |
|
Close
|
|
|
18.96 |
|
|
|
21.94 |
|
|
|
18.96 |
|
|
|
21.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL DATA: (In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,798 |
|
|
$ |
2,681 |
|
|
$ |
2,798 |
|
|
$ |
2,681 |
|
Total
loans
|
|
|
2,054 |
|
|
|
1,986 |
|
|
|
2,054 |
|
|
|
1,980 |
|
Allowance
for loan losses
|
|
|
32 |
|
|
|
24 |
|
|
|
32 |
|
|
|
24 |
|
Other
earning assets
|
|
|
428 |
|
|
|
406 |
|
|
|
428 |
|
|
|
406 |
|
Total
intangible assets
|
|
|
174 |
|
|
|
177 |
|
|
|
174 |
|
|
|
177 |
|
Total
deposits
|
|
|
2,069 |
|
|
|
1,967 |
|
|
|
2,069 |
|
|
|
1,967 |
|
Total
borrowings and debentures
|
|
|
309 |
|
|
|
275 |
|
|
|
309 |
|
|
|
275 |
|
Total
common stockholders' equity
|
|
|
383 |
|
|
|
410 |
|
|
|
383 |
|
|
|
410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE PERIOD: (In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
19,684 |
|
|
$ |
17,165 |
|
|
$ |
56,852 |
|
|
$ |
51,600 |
|
Provision
for loan losses
|
|
|
2,000 |
|
|
|
4,300 |
|
|
|
6,526 |
|
|
|
9,000 |
|
Non-interest
income
|
|
|
6,915 |
|
|
|
7,260 |
|
|
|
23,376 |
|
|
|
24,337 |
|
Non-interest
expense
|
|
|
20,094 |
|
|
|
18,944 |
|
|
|
60,314 |
|
|
|
57,375 |
|
Net
income
|
|
|
3,424 |
|
|
|
1,922 |
|
|
|
10,168 |
|
|
|
8,136 |
|
(1)
All performance ratios are annualized and are based on average balance sheet
amounts, where applicable.
AVERAGE
BALANCES AND AVERAGE YIELDS/RATES
The
following table presents average balances and an analysis of average rates and
yields on an annualized fully taxable equivalent basis for the periods
included.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
($ In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
Average
Balance
|
|
|
Yield/Rate
(FTE basis)
|
|
|
Average
Balance
|
|
|
Yield/Rate
(FTE basis)
|
|
|
Average
Balance
|
|
|
Yield/Rate
(FTE basis)
|
|
|
Average
Balance
|
|
|
Yield/Rate
(FTE basis)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
634 |
|
|
|
5.17
|
% |
|
$ |
622 |
|
|
|
5.38
|
% |
|
$ |
628 |
|
|
|
5.25
|
% |
|
$ |
645 |
|
|
|
5.47
|
% |
Commercial
mortgages
|
|
|
891 |
|
|
|
4.89 |
|
|
|
833 |
|
|
|
5.02 |
|
|
|
875 |
|
|
|
4.92 |
|
|
|
816 |
|
|
|
5.19 |
|
Commercial
business loans
|
|
|
213 |
|
|
|
5.21 |
|
|
|
178 |
|
|
|
5.53 |
|
|
|
188 |
|
|
|
4.39 |
|
|
|
175 |
|
|
|
5.75 |
|
Consumer
loans
|
|
|
297 |
|
|
|
3.83 |
|
|
|
329 |
|
|
|
4.33 |
|
|
|
304 |
|
|
|
3.93 |
|
|
|
337 |
|
|
|
4.48 |
|
Total
loans
|
|
|
2,035 |
|
|
|
4.86 |
|
|
|
1,962 |
|
|
|
5.06 |
|
|
|
1,995 |
|
|
|
4.89 |
|
|
|
1,973 |
|
|
|
5.21 |
|
Securities
|
|
|
403 |
|
|
|
4.19 |
|
|
|
384 |
|
|
|
4.11 |
|
|
|
407 |
|
|
|
4.11 |
|
|
|
355 |
|
|
|
4.46 |
|
Fed
funds sold & short-term investments
|
|
|
14 |
|
|
|
0.15 |
|
|
|
31 |
|
|
|
0.24 |
|
|
|
11 |
|
|
|
0.15 |
|
|
|
52 |
|
|
|
0.21 |
|
Total
earning assets
|
|
|
2,452 |
|
|
|
4.72 |
|
|
|
2,377 |
|
|
|
4.84 |
|
|
|
2,413 |
|
|
|
4.74 |
|
|
|
2,380 |
|
|
|
4.99 |
|
Other
assets
|
|
|
316 |
|
|
|
|
|
|
|
292 |
|
|
|
|
|
|
|
309 |
|
|
|
|
|
|
|
295 |
|
|
|
|
|
Total
assets
|
|
$ |
2,768 |
|
|
|
|
|
|
$ |
2,669 |
|
|
|
|
|
|
$ |
2,722 |
|
|
|
|
|
|
$ |
2,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$ |
196 |
|
|
|
0.32
|
% |
|
$ |
180 |
|
|
|
0.36
|
% |
|
$ |
196 |
|
|
|
0.35
|
% |
|
$ |
187 |
|
|
|
0.40
|
% |
Money
market
|
|
|
612 |
|
|
|
0.87 |
|
|
|
511 |
|
|
|
1.25 |
|
|
|
584 |
|
|
|
0.96 |
|
|
|
486 |
|
|
|
1.35 |
|
Savings
|
|
|
220 |
|
|
|
0.22 |
|
|
|
213 |
|
|
|
0.30 |
|
|
|
221 |
|
|
|
0.27 |
|
|
|
212 |
|
|
|
0.36 |
|
Time
|
|
|
749 |
|
|
|
2.59 |
|
|
|
782 |
|
|
|
3.10 |
|
|
|
752 |
|
|
|
2.66 |
|
|
|
780 |
|
|
|
3.28 |
|
Total
interest-bearing deposits
|
|
|
1,777 |
|
|
|
1.45 |
|
|
|
1,686 |
|
|
|
1.89 |
|
|
|
1,753 |
|
|
|
1.53 |
|
|
|
1,665 |
|
|
|
2.03 |
|
Borrowings
and debentures
|
|
|
288 |
|
|
|
3.12 |
|
|
|
288 |
|
|
|
4.48 |
|
|
|
279 |
|
|
|
3.28 |
|
|
|
321 |
|
|
|
4.29 |
|
Total
interest-bearing liabilities
|
|
|
2,065 |
|
|
|
1.69 |
|
|
|
1,974 |
|
|
|
2.27 |
|
|
|
2,032 |
|
|
|
1.77 |
|
|
|
1,986 |
|
|
|
2.39 |
|
Non-interest-bearing
demand deposits
|
|
|
281 |
|
|
|
|
|
|
|
262 |
|
|
|
|
|
|
|
275 |
|
|
|
|
|
|
|
249 |
|
|
|
|
|
Other
liabilities
|
|
|
34 |
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
Total
liabilities
|
|
|
2,380 |
|
|
|
|
|
|
|
2,259 |
|
|
|
|
|
|
|
2,334 |
|
|
|
|
|
|
|
2,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
388 |
|
|
|
|
|
|
|
410 |
|
|
|
|
|
|
|
388 |
|
|
|
|
|
|
|
412 |
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
2,768 |
|
|
|
|
|
|
$ |
2,669 |
|
|
|
|
|
|
$ |
2,722 |
|
|
|
|
|
|
$ |
2,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
3.03
|
% |
|
|
|
|
|
|
2.57
|
% |
|
|
|
|
|
|
2.97
|
% |
|
|
|
|
|
|
2.60
|
% |
Net
interest margin
|
|
|
|
|
|
|
3.30
|
% |
|
|
|
|
|
|
2.96
|
% |
|
|
|
|
|
|
3.26
|
% |
|
|
|
|
|
|
2.99
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits (In millions)
|
|
$ |
2,058 |
|
|
|
|
|
|
$ |
1,947 |
|
|
|
|
|
|
$ |
2,028 |
|
|
|
|
|
|
$ |
1,913 |
|
|
|
|
|
Fully
taxable equivalent income adj. (In thousands)
|
|
$ |
709 |
|
|
|
|
|
|
$ |
555 |
|
|
|
|
|
|
$ |
2,048 |
|
|
|
|
|
|
$ |
1,683 |
|
|
|
|
|
Cost
of funds
|
|
|
|
|
|
|
1.48
|
% |
|
|
|
|
|
|
2.00
|
% |
|
|
|
|
|
|
1.56
|
% |
|
|
|
|
|
|
2.13
|
% |
Cost
of deposits
|
|
|
|
|
|
|
1.26
|
% |
|
|
|
|
|
|
1.64
|
% |
|
|
|
|
|
|
1.32
|
% |
|
|
|
|
|
|
1.76
|
% |
(1) The
average balances of loans include nonaccrual loans, loans held for sale, and
deferred fees and costs.
(2) The
average balance for securities available for sale is based on amortized
cost.
SUMMARY
Berkshire
reported net income of $3.4 million, or $0.25 per share, in the third quarter of
2010. This was a 78% increase over third quarter 2009 net income of
$1.9 million, or $0.14 per share, and included the benefit of positive operating
leverage from strong revenue growth. For the first nine months of the
year, Berkshire’s net income increased by 25% to $10.2 million in 2010 from $8.1
million in 2009.
The
Company’s earnings per share in 2009 were reduced by preferred stock dividends,
including a $0.22 per share one-time deemed dividend charge related to the
retirement of the preferred stock. This deemed dividend had no impact
on cash or stockholders’ equity. The Company’s earnings per share
were $0.32 for the first nine months of 2009, or $0.54 per share adjusted to
exclude the deemed dividend charge. The Company’s earnings per share
were $0.73 for the first nine months of 2010, which represented a 35%
increase compared to these prior year adjusted nine month results.
Third Quarter Financial Highlights
(revenue and expense comparisons are to prior year third quarter, unless
otherwise noted):
Revenue
Growth
|
·
|
15%
growth in net interest income
|
|
·
|
9%
growth in total net revenue
|
Loan
and Deposit Growth
|
·
|
15%
annualized growth in total commercial
loans
|
|
·
|
7%
annualized growth in total loans
|
|
·
|
6%
annualized growth in total deposits
|
Net
Interest Margin
|
·
|
3.30%
net interest margin, compared to 2.96% in the prior year third quarter and
to 3.25% in the second quarter of
2010
|
Asset
Quality
|
·
|
0.69%
non-performing assets to total
assets
|
|
·
|
0.40%
annualized net loan charge-offs/average
loans
|
Growth in
net interest income and a reduction in the loan loss provision were the primary
contributors to improved earnings both for the third quarter and for the
year-to-date in 2010 compared to 2009. Growth in loans and in lower
cost deposits were the key contributors to net interest income
growth. The lower loan loss provision reflects the resolution
of problem and potential problem loan situations as a result of Berkshire’s loan
quality initiatives. Problem assets, delinquent loans, and net
charge-offs were all at favorable levels compared to industry averages at the
end of the third quarter. By combining revenue growth and minimizing
expense growth compared to the prior quarter, Berkshire has maintained the
positive momentum of improved operating leverage. Berkshire
achieved these results while absorbing the start-up costs of its new asset based
lending and private banking groups, along with the costs of ongoing branch
expansion. Berkshire is opening two new branches in its New York
region in the latter part of 2010.
In
October, Berkshire announced that it had entered into a definitive merger
agreement with Rome Bancorp, Inc. of Rome, New York, which merger is subject to
the receipt of regulatory approvals and the approval of Rome’s
stockholders. Rome operates five branches serving central New York,
with access to Utica and proximity to Syracuse. Rome had
approximately $330 million in total assets as of September 30,
2010. The Route 90 corridor in New York is a logical expansion for
Berkshire’s New York region, which will grow to 17 out of a total of 47
Berkshire Bank branches with this merger and the announced new branch
openings. The Company plans to complete the merger transaction in the
first quarter of 2011. Berkshire continues to pursue opportunities
for both strong organic growth and growth through partnerships that deliver
benefits to its constituencies.
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
Summary. Total assets
increased slightly to $2.8 billion at September 30, 2010 from $2.7 billion at
year-end 2009. There was little change in total equity, which totaled
$383 million at the most recent quarter-end. The loan/deposit ratio
remained unchanged at 99% over the first nine months of
2010. Non-performing assets decreased to 0.69% of total assets after
nine months from 1.43% at the start of the year, as the Company moved forward
with problem asset resolution strategies which were targeted at the start of the
year.
Securities. Total
securities decreased by $8 million (2% annualized) during the first nine months
of 2010 due primarily to a decrease in mortgage-backed securities as a result of
run-off in the ongoing low rate environment, together with maturities of short
term corporate bonds. The Company partially offset this runoff with
increases in trust preferred securities issued by investment grade national
banks and in bank common equity securities which provide higher yields,
together with an $8
million increase in held to maturity development bonds due to the origination of
a bond for a local non-profit entity. The net unrealized gain on all
securities available for sale and held to maturity increased in 2010 by $2
million to $7 million at the most recent quarter-end due to higher values of
long duration municipal and development bonds as a result of near-record low
long term rates at the most recent quarter-end.
At
September 30, 2010, there are no major categories of securities with net
unrealized losses exceeding 5% of amortized cost, except for the $22 million
portfolio of trust preferred securities and the $15 million portfolio of
marketable equity securities. The trust preferred portfolio had a
$1.4 million (6%) net unrealized loss due primarily to the only pooled trust
preferred security held by the Company, which had a $1.5 million (58%)
unrealized loss compared to its $2.6 million amortized cost. The
unrealized loss on this security decreased from 65% at the prior year-end and
this impairment is not viewed as other than temporary. The marketable
equity securities portfolio had a $0.8 million (5%) net unrealized loss due
primarily to unrealized losses less than twelve months old which were not judged
as other than temporary as of quarter-end.
All
available for sale debt securities had investment grade ratings as of the most
recent quarter-end except for the above trust preferred security, which was
rated Caa1, and one unrated municipal security totaling $2 million which was
performing. Securities held to maturity consisted largely of unrated
local municipal and development bonds which were performing. The
duration of the available for sale debt securities portfolio was estimated at
2.6 years at the end of the third quarter, which was little changed from 2.5
years at the start of the year. The yield on all securities
increased to 4.19% in the third quarter of 2010 from 4.11% in the
third quarter of 2009. The securities yield increased in the most
recent quarter compared to prior quarters, including the benefit of recent
securities purchases and including about 0.07% in yield related to an annual
dividend received from the Bank’s investment in a mutually owned
industry-affiliated life insurance company.
Loans. Total
loans increased in the most recent quarter by $34 million (7% annualized),
bringing the nine month increase to $92 million (6% annualized), which accounts
for most of the increase in total assets for the year-to-date. Most
of this growth has been due to increases in commercial loans, which grew at a
15% annualized rate in the third quarter and at an 11% annualized rate for the
year-to-date. Berkshire continues to adhere to strong
underwriting and pricing disciplines as it captures larger market share with
high grade loan originations in all of its commercial lending
areas. This growth has offset the impact of lower demand from some of
the Company’s traditional borrowers as well as planned reductions associated
with the Company’s risk management strategies. For the year-to-date,
$68 million of the $84 million total increase in commercial loans has been in
asset based loans outstanding. Berkshire’s new Asset Based Lending
Group was assembled in the first quarter of 2010 with its headquarters in
Woburn, north of Boston. This unit is expected to originate up to
$100 million per year in asset based loans to middle market businesses in New
England and Northeastern New York. This group has expanded and
diversified Berkshire’s lending geography and industry exposure with strong and
established new commercial relationships that are well known to the seasoned
asset based lending team. These asset based loans are
advanced against borrowing bases which are fully secured with full-follow
collateral monitoring. The Company conservatively reserves for losses
on these loans at the same rate as its other commercial business
loans.
Berkshire’s
consumer lending also has remained strong in 2010, with $165 million in
residential mortgage originations and $36 million in new home equity credit
bookings for the year-to-date. Berkshire continues to sell most of
its fixed rate mortgages to federal agencies in order to minimize interest rate
risk in the current low rate environment. Mortgage prepayments
generally remain elevated due to the current low interest rate
environment. The $30 million year-to-date increase in residential
mortgage outstandings in 2010 includes $32 million in residential mortgages
purchased in the first quarter. The purchased mortgages were prime,
seasoned thirty year fixed rate Massachusetts residential mortgages purchased
from another sound institution in the state. Auto loans decreased by
$33 million to $44 million for the first nine months of 2010, due to planned
run-off of the indirect auto loan portfolio. The portfolio of home
equity and other consumer loans increased by $11 million at a 6% annualized rate
for the 2010 year-to-date. The third quarter 2010 yield on total loans decreased
compared to the yield in the third quarter of 2009 and for the first nine months
of 2010, due to the ongoing impact of near-record low interest rates as loans
reprice and are refinanced.
Nonperforming
assets were reduced by 50% to $19 million in the first nine months of 2010,
reflecting the benefit of the resolution strategies that the Company had in
place at the start of the year. Nonperforming assets declined to
0.69% of total assets from 1.43% of assets during this period. Gross
year-to-date charge-offs totaled $8 million, generally offsetting additions to
nonperforming assets during the year. Loans reclassified to
performing status totaled $8 million. At the most recent quarter-end,
all nonperforming loans were under $2 million except for one $6 million loan
that was restructured and which was current in its payments. Other
real estate owned consisted primarily of one commercial property which is being
marketed for sale. Performing troubled debt restructurings totaled $2
million at quarter-end, which was down from $18 million at year-end 2009 as a
result of the reclassification of a number of loans to a non-troubled status at
the start of the fiscal year based on payment histories and market level risk
adjusted loan interest rates. Most of the loans that were
reclassified were loans restructured as part of the Company’s loan initiative in
the fourth quarter of 2009.
At
quarter-end, total accruing delinquent loans were 0.31% of total loans, which
was down from 0.36% at the start of the year. For the first nine
months of the year, annualized net loan charge-offs measured 0.43% of average
loans in 2010 compared to 0.52% in the same period of 2009.
Potential
problem loans are loans which are currently performing, but where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms and which may result in disclosure of such in the
future as problem loans. Potential problem loans are typically commercial loans
that are performing but are classified by the Company’s loan rating system as
“substandard.” The Company also tracks “special mention” loans with
identified weaknesses. The total of special mention and potential problem
loans decreased during the last nine months to $130 million from $141 million at
the start of the year. Taken together with the decrease in
nonperforming assets, this demonstrates an improving trend in total loan related
assets in rating categories which are below the Company’s “pass rated” loan
related assets. Similarly, the special reserves assigned to impaired
loans decreased to $3 million from $6 million during this nine month period. The
Company had $88 million in substandard performing loans at the most
recent quarter-end, compared to $61 million at the beginning of the
year. This increase was primarily in relation to the reclassification
of loans from the “special mention” category; these loans decreased to $42
million from $80 million at the start of the year. The increase in
substandard performing loans also included upgrades of loans previously
classified as non-accruing.
Loan Loss
Allowance. The allowance was unchanged at $32 million at
September 30, 2010, compared to the start of the year. The allowance
decreased slightly to 1.55% of total loans from 1.62% during this
period. Due to the decrease in non-accruing loans, the ratio of the
allowance to non-accruing loans improved to 194% from 82% and the specific
allowance on impaired loans decreased as noted above. General pool
reserves increased including the impact of loan growth.
Deposits,
Borrowings, and Other Liabilities. Total deposits increased
at a 6% annualized growth rate in the third quarter and for the first nine
months of the year, with the nine month increase totaling $82
million. This growth included a $43 million increase to $321 million
in New York region deposits as this de novo region continues to
mature. Berkshire opened its 11th New
York office in September, adding its second Albany branch, and has plans to open
a new branch located in Latham in the coming months. Deposit growth
in 2010 also included $33 million in balances generated by the Private Banking
Group which was formed in Berkshire’s Springfield region in
2010. Annualized deposit growth for the first nine months of 2010
included 19% growth in money market balances, 5% growth in transaction account
balances, and 8% growth in savings account balances. Time deposits
declined at a 4% annualized rate as the Bank deemphasized higher cost jumbo time
deposit accounts. Berkshire has focused its promotions on money
market accounts which offer more relationship cross sale opportunities and which
offer more pricing flexibility to the Bank. Berkshire also promotes
transaction accounts which have lower interest rates along with other
relationship cross sale opportunities.
The
Dodd-Frank legislation permanently raised deposit insurance levels to $250,000,
retroactive to January 1, 2008, and extended for two years the Transaction
Account Guarantee Program, which became mandatory for all insured depository
institutions. The cost of deposits continued to decrease, falling to
1.26% in the most recent quarter, compared to 1.64% in the third quarter of
2009. The Company is managing deposit pricing with a goal of
maintaining the net interest margin near current levels. The Bank has
$162 million in time deposits repricing in the fourth quarter, compared
to $165 million in the third quarter. Whereas the repricings in
the third quarter contributed to an improvement in the net interest margin, the
reduced amount of repricings in the fourth quarter is not expected to contribute
to further margin improvement due to the offsetting impact of asset
repricings.
Total
borrowings increased by $24 million in the most recent quarter, with proceeds
used to fund securities purchases. This third quarter growth in
borrowings reversed a $21 million decline in the first half of the year as a
result of securities run-off. The Company has emphasized short term
borrowings to match current variable rate loan originations, and has purchased
$40 million in forward starting interest rate swaps which will have the effect
of extending protection from rising rates in future
years. Additionally, in the most recent quarter, the Company
terminated $40 million of cash flow hedges maturing in 6-8 years based on a
determination that this level of protection against rising interest rates was
not necessary given the Company’s continuing asset sensitive interest rate risk
profile. The average cost of borrowings decreased to 3.12% in the
most recent quarter from 4.48% in the third quarter of 2009. Other
liabilities increased by $15 million during the first nine months of the year
due primarily to higher interest rate swap valuation liabilities reflecting
near-record low interest rates.
Stockholders’
Equity. Stockholders’ equity decreased slightly to $383
million from $385 million during the first nine months of 2010. The
benefit of retained earnings was offset by the impact of unrealized losses on
interest rate swaps. Restricted stock grants totaling 132,000 shares
were awarded, including 26,000 performance based shares, with vesting scheduled
over a 2-3 year period. Capital ratios declined slightly but remain
strong, with period-end tangible equity/assets measuring 8.0% and total
equity/assets measuring 13.7%. Period-end tangible book value per
share measured $14.89, while total book value per share measured
$27.28. The Bank remained well capitalized, with a 10.8% total risk
based capital ratio and an 8.1% tier one leverage ratio.
COMPARISON
OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND
2009
Third
quarter net income of $3.4 million was 78% higher in 2010 than the $1.9 million
result in 2009. Nine month net income of $10.2 million was 25% higher
in 2010 than the $8.1 million result in 2009. Nine month results in
2009 included non-recurring items related to the termination of a merger
agreement, along with certain restructuring charges. Results in that
period also included a one-time $1.3 million special assessment by the FDIC
which was charged to all banks to bolster the insurance fund. Before
these items, nine month 2009 net income was $8.6 million, and 2010 results were
19% higher than this adjusted amount. Earnings growth in both the
three and nine month periods included the benefit of positive operating leverage
from strong revenue growth and the benefit of a lower loan loss provision
related to improved asset quality. Berkshire achieved these results
while absorbing the start-up costs in 2010 of its new asset based lending and
private banking groups, along with the costs of ongoing branch
expansion.
Third
quarter earnings per share were $0.25 in 2010, which was a 79% increase over
$0.14 per share in the third quarter of 2009. Nine month earnings per
share were $0.73 in 2010, increasing 128% over $0.32 in 2009. In
2009, earnings available to common shareholders were net of preferred stock
dividends and accretion. Additionally, in the second quarter of 2009,
the Company repaid its U.S. Treasury preferred stock and recorded a one-time
non-cash deemed dividend which had no impact on stockholders’
equity. Also, in that quarter, the Company conducted a successful
common stock offering which increased total common shares
outstanding. Including the impacts of these events, the Company
recorded a loss of $0.08 per share in the second quarter of 2009. The
Company’s 2009 nine month earnings per share were $0.54 before the deemed
dividend. The Company’s nine month 2010 earnings per share of $0.73
represented a 35% increase compared to this adjusted 2009 result before the
deemed dividend. Berkshire maintained the quarterly cash dividend at
$0.16 per quarter in both years, which represents a 3.4% dividend yield based on
the $18.96 closing price of Berkshire’s common stock as of September 30,
2010.
Reflecting
the improved earnings, the return on assets was 0.50% in the first nine months
of 2010 and the return on average common equity was 3.49%. These
results were improved from 0.41% and 2.64% in the first nine months of
2009. Berkshire has maintained a modest asset sensitive interest rate
risk profile and has sacrificed higher current income in order to avoid the
negative impact of anticipated future interest rate increases. The
Company’s long term objectives are to produce a return on assets exceeding 1%
and a return on equity exceeding 10%.
Revenue. Total
net revenue increased by $2.2 million (9%) in the third quarter and by $4.3
million (6%) in the first nine months of 2010 compared to the same period in
2009. Revenue growth was driven by net interest income, which
increased by $2.5 million (15%) and $5.3 million (10%) for these same periods,
respectively. Non-recurring revenue in 2009 resulted from a merger
termination fee and a gain on the termination of an interest rate
swap.
Net Interest
Income. The growth in net interest income noted above was
primarily due to a higher net interest margin, along with the benefit of loan
and deposit growth. The net interest margin improved to 3.30% in the
most recent quarter, from 2.96% in the third quarter of 2009. The net
interest margin had decreased from a high of 3.48% in the third quarter of 2008
to a low of 2.91% in the second quarter of 2009, reflecting the impact of
unanticipated near-record low interest rates while the Company was positioned
for higher rates with a modestly asset sensitive interest rate risk
profile. The net interest margin has increased sequentially in each
quarter since the second quarter of 2009. These increases result from
the Company’s efforts to adjust its pricing and asset/liability mix in the
current environment to offset the impact of low interest rates, while still
maintaining a modestly asset sensitive interest rate risk
profile. The Company is continually focused on maximizing the spread
between loans and deposits, and it has also benefited from the restructuring of
its borrowings at the end of 2009 and from the restructuring of certain cash
flow hedges in the most recent quarter to lower borrowing costs. The
Company has minimized the compression of its yield on earning assets over the
last several quarters, and most of the improvement in the net interest margin
has been due to the cost of funds, which has improved sequentially in each of
the last four quarters. In addition to the margin improvement,
Berkshire has also benefited from the contribution of loan growth to higher
earning assets. Average earning assets increased year-to-year by 3%
in the third quarter and by 1% for the first nine months of 2010 compared to
2009. Average earning assets increased at a 6% annualized rate in the
most recent quarter compared to the second quarter of 2010. Together
with the margin improvement, this produced a 17% annualized increase in net
interest income between these sequential quarters.
Non-Interest
Income. Loan and
deposit fee income increased by $2.1 million (29%) in the first nine months of
2010 compared to 2009. This included a $0.5 million improvement in
net residential mortgage loan sale income, a $0.5 million increase in
residential mortgage servicing income, a $0.3 million increase in other loan
related fee income, and a $0.6 million increase in overdraft fee
income. Third quarter overdraft fees increased by 6% despite the
impact of the implementation during the quarter of the new Regulation E
affecting industry overdraft service charge procedures. The $1.0
million decrease in total nine month non-interest income was due to $1.2 million
of nonrecurring revenues recorded in 2009, primarily related to a merger
termination. Excluding non-recurring items, nine month non-interest
income increased by $0.2 million (1%) in 2010 compared to 2009. The
strong $2.1 million nine month growth in loan and deposit fee income offset
decreases of $1.2 million (12%) in insurance fee income and $0.3 million (7%) in
wealth management fee income in 2010 compared to 2009. The insurance
results reflected lower revenues related to the soft pricing and profitability
conditions in the property casualty insurance business. Insurance
results also include the impact of lower premium volumes as a result of the
recession and competitive auto insurance conditions, which was partially offset
by growth in commercial insurance accounts in
2010. Wealth management revenues declined due to
competitive factors. In October, the Company announced organization
changes in this business line, and the Company is taking steps to increase
wealth management fee revenues. An unfavorable $0.3 million change in
hedge revaluations caused the decrease in all other non-interest
income.
Loan Loss
Provision. The provision
for loan losses is a charge to earnings in an amount sufficient to maintain the
allowance for loan losses at a level deemed adequate by the Company. The level
of the allowance is a critical accounting estimate, which is subject to
uncertainty. The level of the allowance was included in the discussion of
financial condition. The third quarter provision was down by $2.3 million from
year-to-year, while the nine month provision was down by $2.5 million in 2010
compared to 2009. These reductions were primarily due to higher
provision expense in the third quarter of 2009 related to increases in problem
assets at that time. They also reflect the impact of the reduction of
problem assets in 2010 as a result of the Company’s risk mitigation
strategies. The amount of the loan loss provision was
approximately equal to the amount of net loan charge-offs in the most recent
quarter, whereas it exceeded the amount of net loan charge-offs in the third
quarter of 2009, resulting in a $1.4 million increase in the loan loss allowance
during that period.
Non-Interest
Expense and Income Tax Expense. Non-interest expense increased
by $1.2 million (6%) in the third quarter and by $2.9 million (5%) in the first
nine months of 2010 compared to 2009. Results in 2009 included
certain first half non-recurring expenses related to a merger termination and
restructuring charges, as well as a $1.3 million charge for a one-time FDIC
special assessment fee. Excluding these items, adjusted non-interest
expense increased by $4.8 million (9%) in the first nine months of 2010 compared
to 2009. This increase was primarily due to compensation related
expense, which also increased by $4.8 million over this period. In
addition to business growth, compensation related expense increases included a
$1.8 million increase for the restoration of incentive compensation and a $1.1
million increase as a result of unusually high levels of compensation costs
charged against fee income related to loan sales in the mortgage refinancing
wave in 2009. Excluding these two items, all other compensation
related expense increased by $1.9 million, which was equivalent to a 6.8%
increase over the nine month 2009 total compensation expense. The
Company had 606 full-time equivalent employees at the most recent quarter-end,
compared to 622 at the end of 2009. Excluding compensation and FDIC related
expense, all other recurring nine month non-interest expense decreased by
$0.1 million in 2010 compared to 2009. This reflects the ongoing
expense management disciplines of the Company. These results were
obtained in 2010 while Berkshire has added the asset based lending and private
banking business units and has recently opened new branches, all of which are
initially operating at losses as new revenues are built. Due to the
previously noted growth in total core operating revenues, Berkshire has produced
positive operating leverage which has contributed to net income growth and to an
improvement in the efficiency ratio. In 2010, the effective income
tax rate was 24% for both the third quarter and first nine months of the
year. The effective tax rate in 2009 was unusually low due to an
income tax benefit recorded in the third quarter reflecting the nine month
impact of a reduction in anticipated taxable income for the year. The
2010 effective tax rate is based on an expectation of a full year tax rate of
24% in 2010, reflecting the expectation of higher pre-tax profits and a
resulting lower proportion of tax advantaged revenue sources which benefit the
overall effective rate.
Results of
Segment Operations. The Company has designated two operating segments for
financial statement disclosure: banking and insurance. Additional information
about the Company’s accounting for segment operations is contained in the notes
to the financial statements. The Bank’s results reflected the same general
trends as the consolidated results previously reported, with higher revenues and
earnings for the third quarter and year-to-date. The insurance
segment earns most of its profit in the first six months of the year, including
seasonal contingency revenues. Due to soft conditions in the property
casualty insurance industry, insurance net income decreased in
2010. The impact of lower revenues was partially offset by expense
reductions as a result of a reorganization which has also positioned the
insurance segment to better leverage potential future growth. In the
most recent quarter, revenue and expense reductions generally offset each other,
and net income was slightly positive in the third quarter of
2010. The parent’s results in 2010 primarily reflected equity in
undistributed income of subsidiaries; no dividends were paid to the parent by
the subsidiaries in the nine months of 2010.
Comprehensive
Income. Accumulated other comprehensive income is a component of total
stockholders’ equity on the balance sheet. Comprehensive income includes net
income and changes in accumulated other comprehensive income, which consists
principally of changes (after-tax) in the unrealized market gains and losses of
investment securities available for sale and interest rate swaps designated as
cash flow hedges. The Company recorded a $6.2 million increase in the
accumulated other comprehensive loss in the first nine months of 2010 due
primarily to a decrease in the fair value of its interest rate swaps as a result
of near-record low interest rates. Total comprehensive income was
therefore $3.9 million for the first nine months of 2010, including the $10.2 in
net income. In 2009, the change in accumulated other comprehensive
loss in the first nine months of the year was a decrease of $8.2
million. The decreased loss in 2009 primarily reflected improved
conditions in the financial markets following the near-crisis conditions that
prevailed near the end of 2008. The movement in the markets towards
normalization resulted in improved market values both for the Company’s interest
rate swaps and for its securities portfolio. Including net income and the change
in accumulated other comprehensive loss, the Company recorded total
comprehensive income of $16.3 million in the first nine months of
2009.
Liquidity and
Cash Flows. The Company’s primary source of funds was deposit growth in
the first nine months of 2010, and the primary use of funds was net loan
growth, These are also expected to be the primary sources and uses of
funds during the remainder of the year. Borrowings from
the Federal Home Loan Bank are a significant source of liquidity for daily
operations and for borrowings targeted for specific asset/liability purposes.
The Company also uses interest rate swaps in managing its funds sources and
uses.
Berkshire
Hills Bancorp had a cash balance totaling $16 million at quarter-end, and this
cash was expected to fund all routine uses of cash for dividends, debt service,
and operating costs. The primary long run routine sources of funds
for the holding company are expected to be dividends from Berkshire Bank and
Berkshire Insurance Group, as well as cash from the exercise of stock
options. For 2010, there are no dividends expected to be paid by
these subsidiaries. As a result of the loss recorded in 2009,
Berkshire Bank is not currently eligible to pay dividends to its parent under
Massachusetts state banking statutes. The Company expects that, as a result of
current and anticipated retained earnings, the Bank will again become eligible
to pay dividends according to these statutes in 2011. As noted above,
the Company expects to meet all of its routine cash needs prior to that time
from existing cash balances on hand, including anticipated shareowner cash
dividends. Additional discussion about the Company’s liquidity and cash flows is
contained in the Company’s 2009 Form 10-K in Item 7.
The
Company has entered into a definitive agreement to purchase Rome Bancorp, Inc.
for consideration comprised 70% of stock and 30% of cash. The cash
component is expected to total approximately $23 million. Additionally, direct
costs of the merger are expected to total about $7.5 million. The
cash for these expenditures is expected to be provided primarily from the sale
of liquid assets, together with borrowings by the Rome Savings Bank, which is
expected to provide a cash dividend to its parent, Rome Bancorp, Inc. in
conjunction with the closing of the merger transaction.
Capital
Resources. Please see the “Equity” section of the Comparison of Financial
Condition for a discussion of stockholders’ equity. At September 30, 2010,
Berkshire Bank continued to be classified as “well capitalized.” Additional
information about regulatory capital is contained in the notes to the
consolidated financial statements and in the 2009 Form 10-K.
As
discussed in Part II, Item 1A of this report, there are financial system reforms
which became federal law in July 2010 and which constitute the most significant
regulatory and systemic reform since the 1930’s. It cannot be
determined at this time what the full impacts of the reforms will
be. Some of the reforms are intended to increase required capital
levels in the banking system. As noted above, the Company expects to
issue stock in exchange for 70% of the shares of Rome Bancorp, Inc. according to
the terms of the pending merger agreement.
Off-Balance Sheet
Arrangements and Contractual Obligations. In the normal course of
operations, the Company engages in a variety of financial transactions that, in
accordance with generally accepted accounting principles, are not recorded in
the Company’s financial statements. These transactions involve, to
varying degrees, elements of credit, interest rate and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and
take the form of loan commitments and lines of credit. A further presentation of
the Company’s off-balance sheet arrangements is presented in the Company’s 2009
Form 10-K. Information relating to payments due under contractual obligations is
presented in the 2009 Form 10-K. There were no material changes in the Company’s
payments due under contractual obligations during the first nine months of 2010,
except for derivatives transactions. The Company entered into $42 million in net
additional interest rate swaps on commercial loans, with an equal net increase
in back-to-back swaps with institutional third parties. The Company also entered
into an additional $40 million of additional interest rate swaps on FHLBB
borrowings. These were forward starting swaps, and the Company pays a
fixed rate and receives a floating rate. Their goal is to extend
protection from rising rates in future years after certain existing interest
rate swaps expire. The weighted average maturity of these forward
starting swaps was 3.0 years at September 30, 2010. During the third
quarter, the Company terminated $40 million of interest rate swaps on FHLBB
borrowings which were in place at the start of the year. Based on
current conditions, the Company determined that these swaps were not necessary
to achieve the Company’s asset liability objectives. The termination
of these swaps lowers the Company’s current cost of funds. Total
swaps against these FHLBB borrowings decreased during the most recent nine
months from $145 million to $105 million, and the weighted average maturity
decreased from 4.7 years to 2.9 years. See note 10 on Derivative
Financial Instruments and Hedging Activities for additional information related
to interest rate swaps. In October 2010, Berkshire entered into a
definitive merger agreement with Rome Bancorp, Inc. The impact of the
Rome acquisition is discussed further in the Company’s SEC filings related to
this transaction.
Fair Value
Measurements. The Company records fair value measurements of certain
assets and liabilities, as described in the related note in the financial
statements. There were no material changes in most instances in the
difference between fair value and book value of financial instruments at
September 30, 2010 compared to the prior year-end. The fair value of
net loans improved to a discount of $59 million from a discount of $96 million
on these dates, respectively. This reflected lower market interest
rates and an improvement in the credit profile of the portfolio. The
fair value of deposits exceeded book value by $16 million compared to $21
million on these dates, respectively. This reflected lower rates and
balances in the time deposit portfolio. Both of these changes
indicate an improvement in the economic value of the Company’s equity. The fair
value of FHLBB advances exceed book value by $5 million compared to $1 million
on these dates, reducing the economic value of equity as a result of the impact
of lower market rates compared to fixed-rate advances outstanding.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
There
have been no material changes to the way that the Company measures market risk
or in the Company’s market risk position during the first nine months of
2010. For further discussion about the Company’s Quantitative and
Qualitative Aspects of Market Risk, please review Item 7A of the Report 10-K
filed for the fiscal year ended December 31, 2009.
As
discussed in Item 2, Berkshire has a targeted position to maintain a moderately
asset sensitive interest rate profile. Federal interventions to avoid
a financial crisis unexpectedly drove short-term interest rates to near zero
where they have remained since the fourth quarter of 2008. Berkshire
maintains a discipline to avoid undue risks to the market value of equity which
would result from taking on excessive fixed rate assets in the current
environment. As of September 30, 2010, the Company’s model indicated
that at current rates and volumes, net interest income would decrease by
approximately 5% in the second year of a two year period, compared to
current levels, and assuming no growth or change in mix. This
reflects the long term impact of asset repricings in the current near-record low
interest rate environment. The Company would expect to take steps to
avoid this type of income contraction in this scenario, as it has done during
2010 to offset the impact of current low rates. If rates were to
gradually rise 200 basis points over twelve months in this no growth
scenario, then net interest income would increase by about 2% in the second year
of a two year period, compared to current levels. This shows the
modest asset sensitivity that the Company has targeted in positioning its
balance sheet. This asset sensitivity has decreased in 2010 as the
Company has taken steps to improve the current net interest margin, and in light
of current expectations that market rate increases will develop more gradually
than the Company expected at the start of the year. The Company
believes that rates will rise modestly over the next two years, and that net
interest income will increase in the future both due to higher rates, and to
increases in volume and to favorable changes in
mix. Additionally, the Company is evaluating the
retention of more fixed rate assets, as shown by the purchase of fixed rate
mortgages and trust preferred securities in the first nine months of the
year. These actions have helped to offset the impact of commercial
loan originations, which have been mostly variable rate in 2010. The
Company may achieve a better balance of adjustable and fixed rate originations
in the coming months, while still maintaining an overall asset sensitive
position. Any such shift would be targeted towards supporting the net
interest margin in the remainder of 2010 and 2011.
Management
also believes that net interest income might increase by more than the modeled
amount in the expected scenarios of rising interest
rates. Management might decide to retain more, longer
duration assets, after interest rates increase, and this would contribute
additional income in the case of a parallel shift in the yield
curve. Also, the Company has experienced certain market floors on
deposit pricing in the current near zero short-term interest rate
environment. In the case of rising rates, deposits might not increase
in rate as quickly as they are modeled since they are presently above other
comparable market rates in some cases.
Of
further note, the Company’s fee income has been reduced by the economic and
financial market conditions which prompted federal interest rate reductions, and
higher future rates would in some cases be related to a normalization of
economic and market conditions, with the potential result that non-interest
income could also increase in addition to the interest income changes which are
modeled.
ITEM 4. CONTROLS AND PROCEDURES
As of the
end of the period covered by this Quarterly Report on Form 10-Q, an evaluation
was carried out by the Company's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective as of the end of the period covered by
this report. No change in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) occurred during the last fiscal quarter that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART
II
ITEM 1. LEGAL PROCEEDINGS
Following
the public announcement of the execution of the merger agreement between Rome
Bancorp and Berkshire Hills Bancorp, on October 18, 2010, Stephen Bushansky
filed a stockholder class action lawsuit in the Supreme Court of the State of
New York, County of the Bronx, and, on October 27, 2010, James and Liliana
DiCastro filed a stockholder class action lawsuit in the Chancery Court of the
State of Delaware, each against Rome Bancorp, Inc., Berkshire Hills Bancorp,
Inc., and the directors of Rome Bancorp, Inc. Each lawsuit purports to be
brought on behalf of all of Rome Bancorp's public stockholders and alleges that
the directors of Rome Bancorp breached their fiduciary duties to Rome Bancorp's
stockholders by failing to take steps necessary to obtain a fair and adequate
price for Rome Bancorp's common stock and that Berkshire Hills Bancorp knowingly
aided and abetted Rome Bancorp directors’ breach of fiduciary duty.
The
lawsuits seek to enjoin the proposed merger from proceeding and seek
unspecified compensatory and/or rescissory damages on behalf of Rome Bancorp's
stockholders. Each lawsuit is in a preliminary stage. Berkshire Hills Bancorp
believes that the lawsuits are meritless and intends to vigorously defend itself
against the allegations.
Except
for the lawsuits described above, the Company is not involved in any legal
proceedings other than routine legal proceedings occurring in the normal course
of business. Such routine proceedings, in the aggregate, are believed
by management to be immaterial to the Company’s financial condition or results
of operations.
The
following risk factors represent a material update and addition to the risk
factors previously disclosed in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009 (“Form 10-K”). In addition to the other
information set forth in this report, the matters discussed below should be read
in conjunction with the risk factors and other information disclosed in our Form
10-K. These risk factors could materially affect our business,
financial condition or future results. Additional risks not presently
known to us, or that we currently deem immaterial, may also adversely affect our
business, financial condition or results of operations.
In
October 2010, Berkshire entered into a definitive merger agreement with Rome
Bancorp, Inc. which includes the issuance of additional shares of the Company’s
common stock. Risk factors related to this transaction will be described in the
Company’s planned SEC filing on Form S-4.
Changes in Laws and Regulation Could
Result in Reduced Earnings. Laws, regulations, and their
interpretation by regulatory agencies may change or generate enhanced scrutiny
of particular activities. Those changes or enhanced emphasis can impose costs or
otherwise affect our ability to compete successfully. The disruption in
financial markets may produce regulatory changes in the U.S. and elsewhere, the
effects of which are difficult to predict. For example, the U.S. Congress
recently passed the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”), which may, among other things, affect our leverage
limits and risk-based capital and liquidity requirements, require us to pay
higher assessments, and restrict or increase the regulation of certain of our
business activities. We cannot determine the ultimate effect that legislation,
or subsequent implementing regulations, if enacted, would have upon our earnings
and financial position.
Compliance with Evolving Regulations
Applicable to Banks and Other Financial Services Companies May Impact Us in Ways
that are Difficult to Predict. In light of current
economic conditions, banks and other financial services companies will continue
to be subject to enhanced regulatory and enforcement scrutiny and evolving
legislation and regulations in the U.S. and other countries. Evolving
regulations, such as the Basel capital regime and liquidity related regulations,
regulations that may be promulgated pursuant to the Dodd-Frank Act and other
regulations that generate increased scrutiny of particular activities, such as
anti-money laundering procedures and certain financial services and products,
require significant time, effort, and resources on our part to ensure compliance
in a rapidly changing environment. We often must meet significant milestones in
complying with these regulatory requirements. Failure to meet these requirements
and milestones could significantly and negatively affect our business. In
addition, our required regulatory capital may be affected by these or other
regulatory or legislative initiatives, such as Basel capital initiatives, and
regulations that may be promulgated pursuant to the Dodd-Frank Act, potentially
resulting in changes to the cost and composition of our regulatory capital. The
full scope and impact of possible enhanced regulatory and enforcement scrutiny
and evolving legislation and regulation is uncertain and difficult to
predict.
International Financial System Risk
May Increase. During 2010, concerns increased about the potential for
defaults among sovereign debt issuers in the European debt
markets. The Company has no significant direct exposure to these
markets, but these risks have caused increased volatility in the world’s
financial markets and there are increased risks of financial turmoil or systemic
dysfunction that could affect the world’s financial markets. Such
events could affect U.S. financial markets and potentially could cause future
federal interventions in the U.S. or abroad, and could affect the debt ratings
of other public and private debt issuers in addition to those in
Europe.
Proposed Financial Accounting
Standards May Increase Financial Statement
Volatility. On May 26, 2010, FASB issued an Exposure
Draft of a proposed Accounting Standards Update (ASU) intended to improve
accounting for financial instruments. The FASB also issued for public
comment a separate, but integral proposed ASU that would require total
comprehensive income and its components in two parts—net income and other
comprehensive income—be displayed in a continuous statement of financial
performance. The exposure draft outlines that financial
institutions will no longer be able to use held-to-maturity accounting for
financial instruments, replacing it with fair value through net income and fair
value through other comprehensive income. This proposal, if adopted,
could introduce new volatility to reported financial condition and results, and
could increase the volatility of financial markets.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
(a)
|
No
Company unregistered securities were sold by the Company during the
quarter ended September 30, 2010.
|
(c)
|
The
following table provides certain information with regard to shares
repurchased by the Company in the third quarter of
2010.
|
|
|
|
|
|
|
|
|
Total number of shares
|
|
|
Maximum number of
|
|
|
|
|
|
|
|
|
|
purchased as part of
|
|
|
shares that may yet
|
|
|
|
Total number of
|
|
|
Average price
|
|
|
publicly announced
|
|
|
be purchased under
|
|
Period
|
|
shares purchased
|
|
|
paid per share
|
|
|
plans or programs
|
|
|
the plans or programs
|
|
July
1-31, 2010
|
(1) |
|
1,726 |
|
|
$ |
19.43 |
|
|
|
- |
|
|
|
97,993 |
|
Aug
1-31, 2010
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97,993 |
|
Sept 1-30, 2010
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97,993 |
|
Total
|
|
|
1,726 |
|
|
$ |
19.73 |
|
|
|
- |
|
|
|
97,993 |
|
On
December 14, 2007, the Company authorized the purchase of up to 300,000
additional shares, from time to time, subject to market conditions. The
repurchase plan will continue until it is completed or terminated by the Board
of Directors. The Company has no plans that it has elected to
terminate prior to expiration or under which it does not intend to make further
purchases.
(1)
Shares represent common stock withheld by the Company to satisfy tax withholding
requirements on the vesting of shares under the Company’s benefit
plans.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4. REMOVED AND RESERVED
Not
applicable.
ITEM 5. OTHER INFORMATION
None.
2.1
|
Agreement
and Plan of merger dated as of October 12, 2010 by and between Berkshire
Hills Bancorp, Inc. and Rome Bancorp, Inc.(1)
|
3.1
|
Certificate
of Incorporation of Berkshire Hills Bancorp, Inc.(2)
|
3.2
|
Bylaws
of Berkshire Hills Bancorp, Inc.(3)
|
4.1
|
Form
of Common Stock Certificate of Berkshire Hills Bancorp, Inc.
(2)
|
10.1
|
Amended
and Restated Employment Agreement by and among Berkshire Bank, Berkshire
Hills Bancorp, Inc. and Michael P. Daly(4)
|
10.2
|
Amended
and Restated Three Year Change in Control Agreement by and among Berkshire
Bank, Berkshire Hills Bancorp, Inc. and Kevin P. Riley(4)
|
10.3
|
Amended
and Restated Three Year Change in Control Agreement by and among Berkshire
Bank, Berkshire Hills Bancorp, Inc. and Michael J. Oleksak(4)
|
10.4
|
Non-Solicitation
and Non-Competition Agreement between Berkshire Hills Bancorp, Inc. and
Thomas W. Barney(5)
|
10.5
|
Non-Solicitation
and Non-Competition Agreement between Berkshire Hills Bancorp, Inc. and
David B. Farrell(6)
|
10.6
|
Amended
and Restated Supplemental Executive Retirement Agreement between Berkshire
Bank and Michael P. Daly(7)
|
10.7
|
Amended
and Restated Berkshire Hills Bancorp, Inc. 2003 Equity Compensation
Plan(8)
|
10.8
|
Form
of Berkshire Bank Employee Severance Compensation Plan(11)
|
10.9
|
Berkshire
Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(9)
|
10.10
|
Woronoco
Bancorp, Inc. 1999 Stock-Based Incentive Plan(10)
|
10.11
|
Woronoco
Bancorp, Inc. 2001 Stock Option Plan(11)
|
10.12
|
Woronoco
Bancorp, Inc. 2004 Equity Compensation Plan(12)
|
10.13
|
Factory
Point Bancorp, Inc. 1999 Non-Employee Directors Stock Option Plan, as
amended and restated(12)
|
10.14
|
Factory
Point Bancorp, Inc. 1999 Stock Incentive Plan(13)
|
10.15
|
Factory
Point Bancorp, Inc. 2004 Stock Incentive Plan, as amended and
restated(12)
|
10.16
|
Berkshire
Hills Bancorp, Inc. Management Incentive Compensation Plan(14)
|
10.17
|
Three
year change in control agreement by and among Berkshire Bank, Berkshire
Hills Bancorp, Inc. and Richard M. Marotta(14)
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Section
1350 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
(1)
|
Incorporated
by reference from the Exhibits to the Form 8-K filed on October 12,
2010.
|
(2)
|
Incorporated
herein by reference from the Exhibits to Form S-1, Registration Statement
and amendments thereto, initially filed on March 10, 2000, Registration
No. 333-32146.
|
(3)
|
Incorporated
herein by reference from the Exhibits to the Form 8-K as filed on
February 29, 2008.
|
(4)
|
Incorporated
by reference from the Exhibits to the Form 8-K filed on January 6,
2009.
|
(5)
|
Incorporated
by reference from the Exhibits to the Form 8-K filed on October 25,
2010.
|
(6)
|
Incorporated
by reference from the Exhibits to the Form 8-K filed on April 22,
2010.
|
(7)
|
Incorporated
by reference from the Exhibits to Form 10-K filed on March 16,
2009.
|
(8)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as filed on
April 3, 2008.
|
(9)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as filed on
December 7, 2000.
|
(10)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 20,
2000 by Woronoco Bancorp, Inc.
|
(11)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 12,
2001 by Woronoco Bancorp, Inc.
|
(12)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 22,
2004 by Woronoco Bancorp, Inc.
|
(13)
|
Incorporated
herein by reference from the exhibits to the registration statement on
Form S-8 as filed on October 10, 2007, registration
No. 333-146604.
|
(14)
|
Incorporated
by reference from the Exhibits to the Form 10-K filed on March 16,
2010.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
BERKSHIRE
HILLS BANCORP, INC.
|
|
|
Dated:
November 9, 2010
|
By:
|
/s/ Michael P. Daly
|
|
|
Michael
P. Daly
|
|
|
President
and Chief Executive Officer
|
|
|
|
Dated:
November 9, 2010
|
By:
|
/s/ Kevin P. Riley
|
|
|
Kevin
P. Riley
|
|
|
Executive
Vice President and Chief Financial
|
|
|
Officer
|