UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 30, 2006
OR
[
]
|
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 0-51584
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)
|
(413)
443-5601
|
(Registrant’s
telephone number, including area code)
|
Not
Applicable
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer [ ] Accelerated filer [X ] Non-accelerated
filer [ ]
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 8,631,220 shares of
common
stock, par value $0.01 per share, outstanding as of August 3, 2006.
BERKSHIRE
HILLS BANCORP, INC.
FORM
10-Q
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Page
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3
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4
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5
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6
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7
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15
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17
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18
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23
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24
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25
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25
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25
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26
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26
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26
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26
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27
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BERKSHIRE
HILLS BANCORP, INC.
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
(In
thousands, except share data)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
29,055
|
|
$
|
31,087
|
|
Securities
available for sale, at fair value
|
|
|
353,322
|
|
|
390,876
|
|
Securities
held to maturity, at amortized cost
|
|
|
42,524
|
|
|
29,908
|
|
Loans
held for sale
|
|
|
-
|
|
|
2,093
|
|
Total
loans
|
|
|
1,551,112
|
|
|
1,416,449
|
|
Less:
Allowance for loan losses
|
|
|
(13,537
|
)
|
|
(13,001
|
)
|
Net
loans
|
|
|
1,537,575
|
|
|
1,403,448
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
28,005
|
|
|
26,236
|
|
Accrued
interest receivable
|
|
|
8,361
|
|
|
8,508
|
|
Goodwill
|
|
|
88,544
|
|
|
88,092
|
|
Other
intangible assets
|
|
|
10,556
|
|
|
11,524
|
|
Bank-owned
life insurance
|
|
|
19,402
|
|
|
19,002
|
|
Cash
surrender value - other life insurance
|
|
|
10,418
|
|
|
11,503
|
|
Other
assets
|
|
|
20,227
|
|
|
13,276
|
|
Total
assets
|
|
$
|
2,147,989
|
|
$
|
2,035,553
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,463,545
|
|
$
|
1,371,218
|
|
Borrowings
|
|
|
412,641
|
|
|
397,453
|
|
Junior
subordinated debentures
|
|
|
15,464
|
|
|
15,464
|
|
Other
liabilities
|
|
|
8,089
|
|
|
5,352
|
|
Total
liabilities
|
|
|
1,899,739
|
|
|
1,789,487
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock ($.01 par value; 1,000,000 shares
|
|
|
|
|
|
|
|
authorized;
none issued)
|
|
|
-
|
|
|
-
|
|
Common
stock ($.01 par value; 26,000,000 shares authorized;
|
|
|
|
|
|
|
|
10,600,472
shares issued)
|
|
|
106
|
|
|
106
|
|
Additional
paid-in capital
|
|
|
200,123
|
|
|
198,667
|
|
Unearned
compensation
|
|
|
(2,409
|
)
|
|
(1,435
|
)
|
Retained
earnings
|
|
|
105,033
|
|
|
99,429
|
|
Accumulated
other comprehensive loss
|
|
|
(6,427
|
)
|
|
(2,239
|
)
|
Treasury
stock, at cost (1,978,242 shares in 2006
|
|
|
|
|
|
|
|
and
2,060,604 in 2005)
|
|
|
(48,176
|
)
|
|
(48,462
|
)
|
Total
stockholders' equity
|
|
|
248,250
|
|
|
246,066
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,147,989
|
|
$
|
2,035,553
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
24,017
|
|
$
|
15,226
|
|
$
|
46,373
|
|
$
|
27,142
|
|
Securities
|
|
|
4,180
|
|
|
4,100
|
|
|
8,877
|
|
|
8,210
|
|
Short-term
investments
|
|
|
15
|
|
|
22
|
|
|
32
|
|
|
38
|
|
Total
interest and dividend income
|
|
|
28,212
|
|
|
19,348
|
|
|
55,282
|
|
|
35,390
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,843
|
|
|
4,318
|
|
|
18,599
|
|
|
7,691
|
|
Borrowings
|
|
|
3,911
|
|
|
3,522
|
|
|
7,617
|
|
|
6,159
|
|
Total
interest expense
|
|
|
13,754
|
|
|
7,840
|
|
|
26,216
|
|
|
13,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
14,458
|
|
|
11,508
|
|
|
29,066
|
|
|
21,540
|
|
Provision
for loan losses
|
|
|
600
|
|
|
300
|
|
|
890
|
|
|
793
|
|
Net
interest income, after provision for loan losses
|
|
|
13,858
|
|
|
11,208
|
|
|
28,176
|
|
|
20,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
fees
|
|
|
1,383
|
|
|
1,033
|
|
|
2,669
|
|
|
1,648
|
|
Wealth
management fees
|
|
|
772
|
|
|
663
|
|
|
1,528
|
|
|
1,333
|
|
Insurance
fees
|
|
|
581
|
|
|
175
|
|
|
1,489
|
|
|
207
|
|
Loan
fees
|
|
|
125
|
|
|
198
|
|
|
351
|
|
|
372
|
|
Increase
in cash surrender value of life insurance
|
|
|
247
|
|
|
200
|
|
|
540
|
|
|
403
|
|
Gain
on sales of securities, net
|
|
|
529
|
|
|
1,388
|
|
|
1,026
|
|
|
1,817
|
|
Gain
on sale of loans and securitized loans, net
|
|
|
-
|
|
|
162
|
|
|
-
|
|
|
751
|
|
Other
|
|
|
273
|
|
|
97
|
|
|
397
|
|
|
125
|
|
Total
non-interest income
|
|
|
3,910
|
|
|
3,916
|
|
|
8,000
|
|
|
6,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
5,758
|
|
|
4,485
|
|
|
11,411
|
|
|
8,820
|
|
Occupancy
and equipment
|
|
|
1,822
|
|
|
1,212
|
|
|
3,753
|
|
|
2,352
|
|
Marketing
and advertising
|
|
|
350
|
|
|
200
|
|
|
593
|
|
|
361
|
|
Data
processing and telecommunications
|
|
|
813
|
|
|
635
|
|
|
1,697
|
|
|
1,127
|
|
Professional
services
|
|
|
432
|
|
|
363
|
|
|
935
|
|
|
838
|
|
Foreclosed
real estate and other loans, net
|
|
|
105
|
|
|
218
|
|
|
137
|
|
|
312
|
|
Amortization
of intangible assets
|
|
|
478
|
|
|
156
|
|
|
956
|
|
|
186
|
|
Other
recurring expense
|
|
|
1,495
|
|
|
1,162
|
|
|
2,995
|
|
|
1,972
|
|
Termination
of Employee Stock Ownership Plan
|
|
|
-
|
|
|
8,667
|
|
|
-
|
|
|
8,667
|
|
Other
non-recurring expense
|
|
|
385
|
|
|
963
|
|
|
385
|
|
|
963
|
|
Total
non-interest expense
|
|
|
11,638
|
|
|
18,061
|
|
|
22,862
|
|
|
25,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
6,130
|
|
|
(2,937
|
)
|
|
13,314
|
|
|
1,805
|
|
Income
tax expense
|
|
|
1,888
|
|
|
1,671
|
|
|
4,254
|
|
|
3,161
|
|
Net
income (loss) from continuing operations
|
|
|
4,242
|
|
|
(4,608
|
)
|
|
9,060
|
|
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
|
359
|
|
|
-
|
|
|
359
|
|
|
-
|
|
Income
tax expense
|
|
|
138
|
|
|
-
|
|
|
138
|
|
|
-
|
|
Net
income from discontinued operations
|
|
|
221
|
|
|
-
|
|
|
221
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
4,463
|
|
$
|
(4,608
|
)
|
$
|
9,281
|
|
$
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.52
|
|
$
|
(0.74
|
)
|
$
|
1.09
|
|
$
|
(0.23
|
)
|
Diluted
|
|
$
|
0.51
|
|
$
|
(0.74
|
)
|
$
|
1.06
|
|
$
|
(0.23
|
)
|
Average
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,513
|
|
|
6,257
|
|
|
8,492
|
|
|
5,782
|
|
Diluted
|
|
|
8,760
|
|
|
6,257
|
|
|
8,758
|
|
|
5,782
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at beginning of period
|
|
$
|
246,066
|
|
$
|
131,736
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
9,281
|
|
|
(1,356
|
)
|
Change
in net unrealized loss on securities available-for-sale,
|
|
|
|
|
|
|
|
net
of reclassification adjustments and tax effects
|
|
|
(4,152
|
)
|
|
(2,146
|
)
|
Net
loss on derivative instruments
|
|
|
(36
|
)
|
|
(8
|
)
|
Total
comprehensive income (loss)
|
|
|
5,093
|
|
|
(3,510
|
)
|
|
|
|
|
|
|
|
|
Cash
dividends declared ( $0.42 per share in 2006 and
|
|
|
|
|
|
|
|
$0.24
per share in 2005)
|
|
|
(3,613
|
)
|
|
(1,304
|
)
|
Treasury
stock purchased/transferred
|
|
|
(2,279
|
)
|
|
(10,382
|
)
|
Exercise
of stock options
|
|
|
1,655
|
|
|
914
|
|
Reissuance
of treasury stock-other
|
|
|
1,608
|
|
|
905
|
|
Share-based
compensation
|
|
|
120
|
|
|
-
|
|
Tax
benefit from stock compensation
|
|
|
574
|
|
|
279
|
|
Change
in unearned compensation
|
|
|
(974
|
)
|
|
380
|
|
Acquisition
of Woronoco Bancorp, Inc.
|
|
|
-
|
|
|
111,915
|
|
Termination
of Employee Stock Ownership Plan
|
|
|
-
|
|
|
13,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at end of period
|
|
$
|
248,250
|
|
$
|
244,497
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
|
|
Six
Months Ended June 30,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
9,281
|
|
$
|
(1,356
|
)
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
continuing
operating activities :
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
890
|
|
|
793
|
|
Depreciation,
amortization, and deferrals, net
|
|
|
249
|
|
|
1,449
|
|
Share-based
compensation and ESOP expense
|
|
|
756
|
|
|
8,789
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
(574
|
)
|
|
(279
|
)
|
Increase
in cash surrender value of bank-owned life insurance
|
|
|
(540
|
)
|
|
(403
|
)
|
Net
gains on sales of securities and loans, net
|
|
|
(1,026
|
)
|
|
(2,568
|
)
|
Deferred
income tax (benefit) provision, net
|
|
|
(103
|
)
|
|
93
|
|
Net
change in loans held for sale
|
|
|
2,093
|
|
|
(785
|
)
|
Net
change in all other assets
|
|
|
(1,959
|
)
|
|
1,674
|
|
Net
change in other liabilities
|
|
|
1,530
|
|
|
1,229
|
|
Net
cash provided by continuing operating activities
|
|
|
10,597
|
|
|
8,636
|
|
Net
cash provided by discontinued operating activities
|
|
|
359
|
|
|
-
|
|
Total
net cash provided by operating activities
|
|
|
10,956
|
|
|
8,636
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Sales
of securities available for sale
|
|
|
17,243
|
|
|
122,755
|
|
Payments
on securities available for sale
|
|
|
28,961
|
|
|
38,552
|
|
Purchases
of securities available for sale
|
|
|
(14,209
|
)
|
|
(16,093
|
)
|
Payments
on securities held to maturity
|
|
|
7,700
|
|
|
15,650
|
|
Purchases
of securities held to maturity
|
|
|
(20,318
|
)
|
|
(8,633
|
)
|
Increase
in loans, net
|
|
|
(135,803
|
)
|
|
(58,404
|
)
|
Capital
expenditures
|
|
|
(3,617
|
)
|
|
(1,838
|
)
|
Proceeds
from sale of fixed assets
|
|
|
370
|
|
|
-
|
|
Acquisition
of Woronoco Bancorp, Inc. net of cash acquired
|
|
|
-
|
|
|
(21,316
|
)
|
Total
net cash (used) provided by investing activities
|
|
|
(119,673
|
)
|
|
70,673
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
92,285
|
|
|
17,279
|
|
Proceeds
from Federal Home Loan Bank advances
|
|
|
177,014
|
|
|
387,512
|
|
Repayments
of Federal Home Loan Bank advances
|
|
|
(161,766
|
)
|
|
(454,317
|
)
|
Treasury
stock purchased
|
|
|
(2,279
|
)
|
|
(5,485
|
)
|
Proceeds
from reissuance of treasury stock
|
|
|
3,263
|
|
|
1,819
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
574
|
|
|
279
|
|
Cash
dividends paid
|
|
|
(2,406
|
)
|
|
(1,304
|
)
|
Net
cash provided (used) by financing activities
|
|
|
106,685
|
|
|
(54,217
|
)
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(2,032
|
)
|
|
25,092
|
|
Cash
and cash equivalents at beginning of period
|
|
|
31,087
|
|
|
17,902
|
|
Cash
and cash equivalents at end of period
|
|
$
|
29,055
|
|
$
|
42,994
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
$
|
18,550
|
|
$
|
7,023
|
|
Interest
paid on borrowed funds
|
|
|
7,765
|
|
|
5,503
|
|
Income
taxes paid, net
|
|
|
1,239
|
|
|
2,952
|
|
Non-cash
transfer of shares to treasury to pay-off ESOP loan
|
|
|
-
|
|
|
4,897
|
|
Fair
value of non-cash assets acquired
|
|
|
-
|
|
|
827,780
|
|
Fair
value of liabilities acquired
|
|
|
-
|
|
|
702,622
|
|
Fair
value of common stock acquired
|
|
|
-
|
|
|
108,318
|
|
See accompanying notes to consolidated financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
1. GENERAL
Basis
of Presentation and Consolidation, and Use of
Estimates
The
consolidated financial statements include the accounts of Berkshire Hills
Bancorp, Inc. ("Berkshire" or the "Company") and its wholly-owned subsidiaries
including its principal wholly-owned subsidiary, Berkshire Bank (the "Bank"),
but excluding its wholly-owned subsidiary Berkshire Hills Capital Trust I,
which
is accounted for using the equity method. The consolidated financial statements
and notes thereto have been prepared in conformity with U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do
not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All significant
intercompany transactions have been eliminated in consolidation. The results
of
operations for the three and six months ended June 30, 2006 are not necessarily
indicative of the results which may be expected for the year as a whole or
any
other period.
The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities, as of the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses for the periods presented. Actual results could differ from those
estimates. Material estimates that are susceptible to near-term changes include
the determination of the allowance for loan losses and deferred tax accounts.
These consolidated financial statements should be read in conjunction with
the
audited consolidated financial statements and notes thereto included in
Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2005.
Business
Berkshire
is a Delaware corporation and the holding company for Berkshire Bank, a
state-chartered savings bank headquartered in Pittsfield, Massachusetts. The
Company provides a variety of financial services to individuals, municipalities
and businesses through its offices in Western Massachusetts and Northeastern
New
York. Its primary deposit products are checking accounts, NOW accounts, money
market accounts, savings accounts, and time certificates of deposit accounts,
and its primary lending products are residential and commercial mortgage loans,
commercial loans, and automobile loans. The Company offers wealth management
services including trust, financial planning, and investment services, as well
as full-service insurance agency products.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings
(loss) Per Common Share
Earnings
(loss) per common share have been computed based on the following (average
diluted shares outstanding are calculated using the treasury stock
method):
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
4,463
|
|
$
|
(4,608
|
)
|
$
|
9,281
|
|
$
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
8,613
|
|
|
6,796
|
|
|
8,596
|
|
|
6,330
|
|
Adjustment
for average unallocated SERP and ESOP shares
|
|
|
-
|
|
|
(407
|
)
|
|
-
|
|
|
(408
|
)
|
Less:
average number of unvested stock award shares
|
|
|
(100
|
)
|
|
(132
|
)
|
|
(104
|
)
|
|
(140
|
)
|
Average
number of basic shares outstanding
|
|
|
8,513
|
|
|
6,257
|
|
|
8,492
|
|
|
5,782
|
|
Plus:
average number of unvested stock award shares
|
|
|
100
|
|
|
-
|
|
|
104
|
|
|
-
|
|
Plus:
average number of dilutive shares based on stock options
|
|
|
147
|
|
|
-
|
|
|
162
|
|
|
-
|
|
Average
number of diluted shares outstanding
|
|
|
8,760
|
|
|
6,257
|
|
|
8,758
|
|
|
5,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
0.52
|
|
$
|
(0.74
|
)
|
$
|
1.09
|
|
$
|
(0.23
|
)
|
Diluted
earnings (loss) per share
|
|
$
|
0.51
|
|
$
|
(0.74
|
)
|
$
|
1.06
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based
Payment (Revised 2004)”
(SFAS
123R). See
Note
7 for further information on the Company’s share-based compensation plans.
In
March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 156, "Accounting
for Servicing of Financial Assets"
(SFAS
156). This statement amends SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,"
with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. Consistent with SFAS No. 140, SFAS 156 requires companies
to recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset by entering into a servicing contract.
However, the statement permits a company to choose either the amortized cost
method or fair value measurement method for each class of separately recognized
servicing assets. This statement is effective as of the beginning of the
company’s first fiscal year after September 15, 2006. The Company plans to adopt
SFAS 156 at the beginning of 2007 and does not expect the adoption of this
statement to have a material impact on its consolidated financial statements.
In
June
2006, the FASB issued Financial Accounting Standards Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes”
(FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement No.
109, “Accounting
for Income Taxes.”
FIN
48
prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently analyzing the
effects of FIN 48.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES
A
summary
of securities follows:
|
|
June
30, 2006
|
|
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
(In
thousands)
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
59
|
|
$
|
54
|
|
Municipal
bonds and obligations
|
|
|
63,903
|
|
|
62,658
|
|
Mortgage-backed
securities
|
|
|
249,732
|
|
|
239,439
|
|
Other
bonds and obligations
|
|
|
24,218
|
|
|
24,071
|
|
Total
debt securities
|
|
|
337,912
|
|
|
326,222
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
21,183
|
|
|
21,183
|
|
Other
equity securities
|
|
|
3,918
|
|
|
5,917
|
|
Total
equity securities
|
|
|
25,101
|
|
|
27,100
|
|
Total
securities available for sale
|
|
|
363,013
|
|
|
353,322
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
37,304
|
|
|
37,304
|
|
Mortgage-backed
securities
|
|
|
5,220
|
|
|
5,030
|
|
Total
securities held to maturity
|
|
|
42,524
|
|
|
42,334
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
$
|
405,537
|
|
$
|
395,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
69
|
|
$
|
63
|
|
Municipal
bonds and obligations
|
|
|
63,701
|
|
|
63,673
|
|
Mortgage-backed
securities
|
|
|
264,705
|
|
|
258,504
|
|
Other
bonds and obligations
|
|
|
24,356
|
|
|
24,703
|
|
Total
debt securities
|
|
|
352,831
|
|
|
346,943
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
36,717
|
|
|
36,717
|
|
Other
equity securities
|
|
|
4,950
|
|
|
7,216
|
|
Total
equity securities
|
|
|
41,667
|
|
|
43,933
|
|
Total
securities available for sale
|
|
|
394,498
|
|
|
390,876
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
23,851
|
|
|
23,851
|
|
Mortgage-backed
securities
|
|
|
6,057
|
|
|
5,912
|
|
Total
securities held to maturity
|
|
|
29,908
|
|
|
29,763
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
$
|
424,406
|
|
$
|
420,639
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS
Loans
consist of the following:
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Balance
|
|
of
total
|
|
Balance
|
|
of
total
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
-
4 family
|
|
$
|
535
|
|
|
34
|
%
|
$
|
514
|
|
|
37
|
%
|
Construction
|
|
|
34
|
|
|
2
|
|
|
35
|
|
|
2
|
|
Total
residential mortgages
|
|
|
569
|
|
|
36
|
|
|
549
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
87
|
|
|
6
|
|
|
59
|
|
|
4
|
|
Single
and multi-family
|
|
|
66
|
|
|
4
|
|
|
69
|
|
|
5
|
|
Other
commercial real estate
|
|
|
322
|
|
|
21
|
|
|
283
|
|
|
20
|
|
Total
commercial mortgages
|
|
|
475
|
|
|
31
|
|
|
411
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
184
|
|
|
12
|
|
|
159
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
168
|
|
|
11
|
|
|
148
|
|
|
10
|
|
Home
equity and other
|
|
|
155
|
|
|
10
|
|
|
149
|
|
|
11
|
|
Total
consumer loans
|
|
|
323
|
|
|
21
|
|
|
297
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$
|
1,551
|
|
|
100
|
%
|
$
|
1,416
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. LOAN
LOSS ALLOWANCE AND NONACCRUAL LOANS
Activity
in the allowance for loan losses is as follows:
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
13,001
|
|
$
|
9,337
|
|
Provision
for loan losses
|
|
|
890
|
|
|
793
|
|
Allowance
attributed to acquired loans
|
|
|
-
|
|
|
3,321
|
|
Loans
charged-off
|
|
|
(695
|
)
|
|
(719
|
)
|
Recoveries
|
|
|
341
|
|
|
312
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
13,537
|
|
$
|
13,044
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a summary of information pertaining to impaired and nonaccrual
loans:
|
|
|
|
|
|
|
|
June
30, 2006
|
|
December
31, 2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans with no valuation allowance
|
|
$
|
4,073
|
|
$
|
1,430
|
|
Impaired
loans with a valuation allowance
|
|
|
348
|
|
|
484
|
|
Total
impaired loans
|
|
$
|
4,421
|
|
$
|
1,914
|
|
|
|
|
|
|
|
|
|
Specific
valuation allowance allocated to impaired loans
|
|
$
|
157
|
|
$
|
257
|
|
|
|
|
|
|
|
|
|
Total
nonaccrual loans
|
|
$
|
772
|
|
$
|
1,186
|
|
|
|
|
|
|
|
|
|
Total
loans past due ninety days or more and still accruing
|
|
$
|
20
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. DEPOSITS
A
summary
of deposit balances, by type, is as follows:
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Balance
|
|
of
deposits
|
|
Balance
|
|
of
deposits
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
188
|
|
|
13
|
%
|
$
|
180
|
|
|
13
|
%
|
NOW
|
|
|
137
|
|
|
9
|
|
|
149
|
|
|
11
|
|
Money
market
|
|
|
274
|
|
|
19
|
|
|
245
|
|
|
18
|
|
Savings
|
|
|
207
|
|
|
14
|
|
|
222
|
|
|
16
|
|
Total
non-maturity (core) deposits
|
|
|
806
|
|
|
55
|
|
|
796
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits less than 100 thousand
|
|
|
355
|
|
|
24
|
|
|
308
|
|
|
23
|
|
Time
deposits 100 thousand or more
|
|
|
253
|
|
|
17
|
|
|
210
|
|
|
15
|
|
Brokered
time deposits
|
|
|
50
|
|
|
4
|
|
|
57
|
|
|
4
|
|
Total
time deposits
|
|
|
658
|
|
|
45
|
|
|
575
|
|
|
42
|
|
Total
deposits
|
|
$
|
1,464
|
|
|
100
|
%
|
$
|
1,371
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. REGULATORY
CAPITAL
The
Bank’s actual and required capital ratios are as follows:
|
|
|
|
|
|
|
|
|
FDIC
Minimums
|
|
June
30, 2006
|
|
December
31, 2005
|
|
to
be Well-Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
|
10.5
|
%
|
|
|
11.1
|
%
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets
|
|
9.6
|
|
|
|
10.2
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
7.9
|
|
|
|
7.8
|
|
|
|
5.0
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
7. SHARE-BASED
COMPENSATION PLANS AND EMPLOYEE STOCK-OWNERSHIP PLAN
The
Company has share-based compensation plans under which incentive and
nonqualified stock options may be granted to certain employees and directors.
The options are granted at an exercise price equal to the fair value of the
underlying shares at the date of grant and have a contractual life of ten years.
The options vest based on continued service with the Company in accordance
with
vesting periods which generally range from two to five years following the
grant
date. Restricted stock awards may also be granted under these compensation
plans. The restricted stock awards generally have vesting periods ranging from
two to five years, during which time the holder receives dividends and has
full
voting rights beginning on the grant date. Certain option and share awards
provide for accelerated vesting if there is a change in control as defined
in
the compensation plans. The Company generally issues shares awarded under its
share-based compensation plans from shares held in treasury. The Company’s
share-based compensation plans are described more fully in Note 15 to the
Company’s consolidated financial statements in its 2005 Form 10-K. The Company
utilizes the Black-Scholes option pricing model to estimate the fair value
of
each option grant as of the date of the grant. Assumptions made in relation
to
prior grants have been previously disclosed in the Company’s prior
filings.
The
Company adopted Statement of Financial Accounting Standards No. 123R,
Share-Based
Payment (SFAS
123R), on January 1, 2006 using the “modified prospective” method. Under this
method, awards that are granted, modified, or settled after December 31, 2005,
are measured and accounted for in accordance with SFAS 123R. Also under this
method, expense is recognized for awards that were granted prior to January
1,
2006 but vest after January 1, 2006, based on the fair value determined at
the
grant date under SFAS 123, Accounting
for Stock-Based Compensation
(SFAS
123). Prior to the adoption of SFAS 123R, the Company accounted for stock
compensation under the intrinsic value method permitted by Accounting Principles
Board Opinion No. 25, Accounting
for Stock Issued to Employees
(APB 25)
and related interpretations. Accordingly, the Company previously recognized
no
compensation cost for employee stock options that were granted with an exercise
price equal to the market value of the underlying common stock on the date
of
grant.
As
a
result of applying the provisions of SFAS 123R during the three and six
months ended June 30, 2006, the Company recognized additional stock-based
compensation expense related to stock options of $36 thousand, or $31 thousand
net of tax, and $120 thousand, or $101 thousand net of tax, respectively. The
increase in stock-based compensation expense related to stock options, resulted
in no change in both basic and diluted earnings per share during the three
months ended June 30, 2006, and a $0.01 decrease in both basic and diluted
earnings per share during the six months ended June 30, 2006. Cash flows
from financing activities for the six months ended June 30, 2006 included
$574 thousand in cash inflows from excess tax benefits related to stock
compensation. Such cash flows were previously reported as operating
activities.
A
combined summary of activity in the Company’s stock award and stock option plans
for the six months ended June 30, 2006 is presented in the following
table:
|
|
|
|
|
|
Stock
Options Outstanding
|
|
|
|
|
|
Non-vested
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
Stock
|
|
|
|
Average
|
|
|
|
Available
|
|
Awards
|
|
Number
of
|
|
Exercise
|
|
|
|
for
Grant
|
|
Outstanding
|
|
Shares
|
|
Price
|
|
Balance
at December 31, 2005
|
|
|
307,592
|
|
|
112,752
|
|
|
790,984
|
|
$
|
19.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(47,600
|
)
|
|
47,600
|
|
|
-
|
|
|
-
|
|
Stock
options exercised
|
|
|
-
|
|
|
-
|
|
|
(90,753
|
)
|
|
18.16
|
|
Shares
vested
|
|
|
-
|
|
|
(62,720
|
)
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
5,100
|
|
|
(1,600
|
)
|
|
(3,500
|
)
|
|
22.30
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
|
265,092
|
|
|
96,032
|
|
|
696,731
|
|
$
|
19.99
|
|
The
total
grant date fair value of unvested stock awards outstanding at December 31,
2005
was $2.73 million. For the six months ended June 30, 2006, there were 47,600
restricted stock awards granted. These shares were valued at $33.78 per
share, with a total grant date fair value of $1.61 million. Stock awards
vested during this period totaled 62,720 shares, with a total grant date fair
value of $1.34 million. At June 30, 2006, the total grant date fair value
of unvested restricted stock awards was $2.94 million. Stock options vested
during this period totaled 157,720 shares, with a total grant date fair value
of
$740 thousand.
A
summary
of mid-year 2006 options outstanding is as follows:
|
|
Stock
Options
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
Total
number of shares
|
|
|
696,731
|
|
|
647,224
|
|
Weighted
average exercise price
|
|
$
|
19.99
|
|
$
|
19.68
|
|
Aggregate
intrinsic value (in
thousands)
|
|
$
|
10,793
|
|
$
|
10,223
|
|
Weighted
average remaining contractual term
|
|
|
5.8
years
|
|
|
5.7
years
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense totaled $336 thousand and $756 thousand during the three
and six months ended June 30, 2006, respectively. Stock-based compensation
expense is recognized ratably over the requisite service period for all awards.
Unrecognized stock-based compensation expense related to stock options totaled
$314 thousand at June 30, 2006. At such date, the weighted-average period
over which this unrecognized expense is expected to be recognized was 1.7 years.
Unrecognized stock-based compensation expense related to non-vested stock awards
was $2.41 million at June 30, 2006. At such date, the weighted-average
period over which this unrecognized expense was expected to be recognized was
2.1 years.
The
following pro forma information presents net loss and loss per share for the
three and six months ended June 30, 2005 as if the fair value method of
SFAS 123R had been used to measure compensation cost for stock-based employee
compensation expense.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(In
thousands, except per share data)
|
|
June
30, 2005
|
|
June
30, 2005
|
|
Net
loss as reported
|
|
$
|
(4,608
|
)
|
$
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense included
|
|
|
|
|
|
|
|
in
reported net loss, net of related tax effects
|
|
|
237
|
|
|
461
|
|
|
|
|
|
|
|
|
|
Less:
Total stock-based employee compensation expense
|
|
|
|
|
|
|
|
determined
under fair value method for all awards, net of
|
|
|
|
|
|
|
|
related
tax effects
|
|
|
(395
|
)
|
|
(769
|
)
|
Pro
forma net loss
|
|
$
|
(4,766
|
)
|
$
|
(1,664
|
)
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
(0.74
|
)
|
$
|
(0.23
|
)
|
Basic
- pro forma
|
|
|
(0.76
|
)
|
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
|
(0.74
|
)
|
|
(0.23
|
)
|
Diluted
- pro forma
|
|
|
(0.76
|
)
|
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2006 and 2005, proceeds from stock option
exercises totaled $1.66 million and $914 thousand, respectively. The total
intrinsic value of these exercises was $1.39 million and $1.38 million in these
periods, respectively. During the six months ended June 30, 2006 and 2005,
90,753 shares and 66,843 shares were issued in connection with stock option
exercises, respectively. During the six months ended June 30, 2006 and 2005,
all
shares issued in connection with stock option exercises and stock awards were
issued from available treasury stock.
The
Bank
had established an Employee Stock Ownership Plan, which was terminated by the
Bank as of June 30, 2005. Total expense applicable to the termination of the
plan was recorded in the amount of $8.67 million in the first six months of
2005. The effect on capital of this expense was offset by credits to unearned
compensation and additional paid in capital in stockholders' equity. The Bank
recorded an additional $168 thousand in expense related to the termination
of
the ESOP supplementary executive retirement plan. Total compensation expense
applicable to the operation of the plan prior to its termination was $340
thousand in the first six months of 2005.
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 analysis discusses changes in the
financial condition and results of operations at and for the three and six
months ended June 30, 2006 and 2005, and 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. This discussion and analysis update should
be
read in conjunction with Management’s Discussion and Analysis included in the
2005 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.
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. and Berkshire Bank. These forward-looking statements are generally
identified by use of the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “project,” or similar expressions. The Company and the
Bank’s ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations of Berkshire and its subsidiaries include, but are
not
limited to, changes in interest rates, national and regional economic
conditions, legislative and regulatory changes, monetary and fiscal policies
of
the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality and composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Bank’s market area, changes in real estate market values in the
Bank’s market area, and changes in relevant accounting principles and
guidelines. Additional factors that may affect our results are discussed in
the
Form 10-K and this Form 10-Q under Item 1A. Risk Factors. These risks and
uncertainties should be considered in evaluating forward-looking statements
and
undue reliance should not be placed on such statements. Except as required
by
applicable law or regulation, Berkshire does not undertake, and specifically
disclaims any obligation to release publicly the result of any revisions which
may be made to any forward-looking statements to reflect events or circumstances
after the date of the statements or to reflect the occurrence of anticipated
or
unanticipated events.
General
Berkshire
Hills Bancorp, Inc. is the holding company for Berkshire Bank. Established
in
1846, Berkshire Bank is one of Massachusetts' oldest and largest independent
banks and the largest banking institution based in Western Massachusetts. The
Bank is headquartered in Pittsfield, Massachusetts with branches serving
communities throughout Western Massachusetts and Northeastern New York. The
Bank
is transitioning into a regional bank and positioning itself as the financial
institution of choice in its retail and commercial markets, delivering
exceptional customer service and a broad array of competitively priced deposit,
loan, insurance, wealth management and trust services, and investment products.
Critical
Accounting Policies
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements in the 2005 Form 10-K. Please see those
policies in conjunction with this discussion. Critical accounting policies
are
those that contain significant judgments and uncertainties, and could
potentially result in materially different results under different assumptions
and conditions. Management believes that the Company’s most critical accounting
policies, which involve the most complex or subjective decisions or assessments,
are as follows:
Allowance
for Loan Losses.
Arriving at an appropriate level of allowance for loan losses involves a high
degree of judgment. The allowance for loan losses provides for probable losses
based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information, as well as current economic data, to
assess the adequacy of the allowance for loan losses as it is affected by
changing economic conditions and various external factors, which may impact
the
portfolio in ways currently unforeseen. Although we believe that we use the
appropriate information available to establish the allowance for loan losses,
future additions to the allowance may be necessary if certain future events
occur that cause actual results to differ from the assumptions used in making
the
evaluation.
For example, a downturn in the local economy could cause an increase in
non-performing loans. Additionally, a decline in real estate values could cause
some of our loans to become inadequately collateralized. In either case, this
may require us to increase our provision for loan losses, which would negatively
impact earnings. The allowance for loan losses discussion in Item 1 of the
2005
Form 10-K provides additional information about the allowance.
Income
Taxes.
Management considers accounting for income taxes as a critical accounting policy
due to the subjective nature of certain estimates that are involved in the
calculation and evaluation of the timing and recognition of resulting tax
liabilities and assets. Management uses the asset and liability method of
accounting for income taxes in which deferred tax assets and liabilities are
established for the temporary differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities. Management must
assess the realizability of the deferred tax asset and to the extent that
management believes that recovery is not likely, a valuation allowance is
established. Adjustments to increase or decrease the valuation allowance are
generally charged or credited, respectively, to income tax expense.
Goodwill
and Identifiable Intangible Assets.
In
conjunction with the acquisition of Woronoco Bancorp in 2005, goodwill was
recorded as an intangible asset equal to the excess of the purchase price over
the estimated fair value of the net assets acquired. Other intangible assets
were recorded for the fair value of core deposits and non-compete agreements.
The valuation techniques used by management to determine the carrying value
of
assets acquired in the acquisition and the estimated lives of identifiable
intangible assets involve estimates for discount rates, projected future cash
flows, and time period calculations, all of which are susceptible to change
based on changes in economic conditions and other factors. Future events or
changes in the estimates which were used to determine the carrying value of
goodwill and identifiable intangible assets or which otherwise adversely affect
their value or estimated lives could have a material adverse impact on future
results of operations.
Impact
of New Accounting Pronouncements
Please
refer to the note on Recent Accounting Pronouncements in Note 1 to the financial
statements of this report for a detailed discussion of new accounting
pronouncements.
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. Historical data is also based in part on, and should be read in
conjunction with, the Company’s prior filings with the SEC. Data includes the
impact of the acquisition of Woronoco Bancorp on June 1, 2005 and the
termination of the Employee Stock Ownership Plan on June 30, 2005.
|
|
At
or for the Three Months Ended
|
|
At
or for the Six Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) - diluted
|
|
$
|
0.51
|
|
$
|
(0.74
|
)
|
$
|
1.06
|
|
$
|
(0.23
|
)
|
Dividends
declared
|
|
|
0.28
|
|
|
0.12
|
|
|
0.42
|
|
|
0.24
|
|
Book
value
|
|
|
28.79
|
|
|
28.45
|
|
|
28.79
|
|
|
28.45
|
|
Tangible
book value
|
|
|
17.30
|
|
|
16.56
|
|
|
17.30
|
|
|
16.56
|
|
Common
stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
36.39
|
|
|
34.90
|
|
|
36.39
|
|
|
37.64
|
|
Low
|
|
|
32.77
|
|
|
30.97
|
|
|
32.37
|
|
|
30.97
|
|
Close
|
|
|
35.48
|
|
|
33.32
|
|
|
35.48
|
|
|
33.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average assets
|
|
|
0.85
|
%
|
|
(1.19
|
)%
|
|
0.90
|
%
|
|
(0.20
|
)%
|
Return
(loss) on average equity
|
|
|
7.00
|
|
|
(11.26
|
)
|
|
7.36
|
|
|
(1.88
|
)
|
Net
interest margin
|
|
|
3.16
|
|
|
3.26
|
|
|
3.21
|
|
|
3.30
|
|
Stockholders'
equity/total assets
|
|
|
11.56
|
|
|
11.80
|
|
|
11.56
|
|
|
11.80
|
|
Tangible
stockholders' equity/tangible assets
|
|
|
7.28
|
|
|
7.25
|
|
|
7.28
|
|
|
7.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
Year-To-Date Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
28
|
% |
|
262
|
% |
|
19
|
% |
|
142
|
% |
Total
deposits
|
|
|
4
|
|
|
216
|
|
|
14
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
Period End: (In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,148
|
|
$
|
2,067
|
|
$
|
2,148
|
|
$
|
2,067
|
|
Total
loans
|
|
|
1,551
|
|
|
1,416
|
|
|
1,551
|
|
|
1,416
|
|
Other
earning assets
|
|
|
397
|
|
|
445
|
|
|
397
|
|
|
445
|
|
Total
intangible assets
|
|
|
99
|
|
|
102
|
|
|
99
|
|
|
102
|
|
Deposits
|
|
|
1,464
|
|
|
1,306
|
|
|
1,464
|
|
|
1,306
|
|
Borrowings
and debentures
|
|
|
428
|
|
|
504
|
|
|
428
|
|
|
504
|
|
Stockholders'
equity
|
|
|
248
|
|
|
244
|
|
|
248
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Period: (In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
14,458
|
|
$
|
11,508
|
|
$
|
29,066
|
|
$
|
21,540
|
|
Provision
for loan losses
|
|
|
600
|
|
|
300
|
|
|
890
|
|
|
793
|
|
Non-interest
income
|
|
|
3,910
|
|
|
3,916
|
|
|
8,000
|
|
|
6,656
|
|
Non-interest
expense
|
|
|
11,638
|
|
|
18,061
|
|
|
22,862
|
|
|
25,598
|
|
Net
income (loss)
|
|
|
4,463
|
|
|
(4,608
|
)
|
|
9,281
|
|
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized)/average loans
|
|
|
0.04
|
%
|
|
0.08
|
%
|
|
0.05
|
%
|
|
0.08
|
%
|
Loan
loss allowance/total loans
|
|
|
0.87
|
|
|
0.92
|
|
|
0.87
|
|
|
0.92
|
|
Non-performing
assets/total assets
|
|
|
0.04
|
|
|
0.08
|
|
|
0.04
|
|
|
0.08
|
|
______________________________________________
(1)
All operating ratios are based on average balance sheet amounts
where
applicable.
|
(2)
Tangible equity or book value is total stockholders' equity less
goodwill and other intangible assets. Tangible assets are total
assets less goodwill and other intangible
assets.
|
(3)
No
revenue was recorded in the second quarter of 2006 for the Federal
Home
Loan Bank dividend due to a change in the dividend declaration
schedule.
|
(4)
Results
for 2005 include non-cash charges totaling $8.7 million for the
termination of the Employee Stock Ownership Plan and other non-recurring
expenses consisting of merger and systems conversion charges
related to
the Woronoco acquisition.
|
|
The
following table presents an analysis of average rates and yields on a fully
taxable equivalent basis for the periods included.
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
|
(Dollars
in millions)
|
|
Balance
|
|
(FTE
basis)
|
|
Balance
|
|
(FTE
basis)
|
|
Balance
|
|
(FTE
basis)
|
|
Balance
|
|
(FTE
basis)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$
|
561
|
|
|
5.19
|
%
|
$
|
353
|
|
|
5.04
|
%
|
$
|
558
|
|
|
5.14
|
%
|
$
|
297
|
|
|
5.07
|
%
|
Commercial
mortgages
|
|
|
450
|
|
|
7.32
|
|
|
315
|
|
|
6.34
|
|
|
440
|
|
|
7.28
|
|
|
296
|
|
|
6.15
|
|
Commercial
business loans
|
|
|
162
|
|
|
8.07
|
|
|
154
|
|
|
6.51
|
|
|
157
|
|
|
7.78
|
|
|
147
|
|
|
6.47
|
|
Consumer
loans
|
|
|
313
|
|
|
6.74
|
|
|
225
|
|
|
5.87
|
|
|
305
|
|
|
6.68
|
|
|
204
|
|
|
5.77
|
|
Total
loans
|
|
|
1,486
|
|
|
6.46
|
|
|
1,047
|
|
|
5.83
|
|
|
1,460
|
|
|
6.34
|
|
|
944
|
|
|
5.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
408
|
|
|
4.59
|
|
|
394
|
|
|
4.40
|
|
|
414
|
|
|
4.75
|
|
|
395
|
|
|
4.41
|
|
Short-term
investments
|
|
|
1
|
|
|
4.94
|
|
|
2
|
|
|
2.91
|
|
|
1
|
|
|
4.70
|
|
|
2
|
|
|
2.80
|
|
Total
earning assets
|
|
|
1,895
|
|
|
6.07
|
|
|
1,443
|
|
|
5.44
|
|
|
1,875
|
|
|
6.03
|
|
|
1,341
|
|
|
5.38
|
|
Intangible
assets
|
|
|
99
|
|
|
|
|
|
39
|
|
|
|
|
|
99
|
|
|
|
|
|
22
|
|
|
|
|
Other
assets
|
|
|
95
|
|
|
|
|
|
82
|
|
|
|
|
|
92
|
|
|
|
|
|
75
|
|
|
|
|
Total
assets
|
|
$
|
2,089
|
|
|
|
|
$
|
1,564
|
|
|
|
|
$
|
2,066
|
|
|
|
|
$
|
1,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
140
|
|
|
1.02
|
%
|
$
|
113
|
|
|
0.18
|
%
|
$
|
141
|
|
|
1.01
|
%
|
$
|
104
|
|
|
0.18
|
%
|
Money
Market
|
|
|
284
|
|
|
3.36
|
|
|
183
|
|
|
1.98
|
|
|
277
|
|
|
3.24
|
|
|
171
|
|
|
1.82
|
|
Savings
|
|
|
208
|
|
|
0.78
|
|
|
192
|
|
|
1.03
|
|
|
213
|
|
|
0.77
|
|
|
178
|
|
|
1.02
|
|
Time
|
|
|
644
|
|
|
4.17
|
|
|
385
|
|
|
2.99
|
|
|
627
|
|
|
4.02
|
|
|
352
|
|
|
2.95
|
|
Total
interest-bearing deposits
|
|
|
1,276
|
|
|
3.09
|
|
|
873
|
|
|
1.98
|
|
|
1,258
|
|
|
2.96
|
|
|
805
|
|
|
1.92
|
|
Borrowings
and debentures
|
|
|
380
|
|
|
4.13
|
|
|
387
|
|
|
3.65
|
|
|
380
|
|
|
4.04
|
|
|
359
|
|
|
3.46
|
|
Total
interest-bearing liabilities
|
|
|
1,656
|
|
|
3.33
|
|
|
1,260
|
|
|
2.50
|
|
|
1,638
|
|
|
3.23
|
|
|
1,164
|
|
|
2.40
|
|
Non-interest-bearing
demand deposits
|
|
|
172
|
|
|
|
|
|
130
|
|
|
|
|
|
170
|
|
|
|
|
|
119
|
|
|
|
|
Other
liabilities
|
|
|
6
|
|
|
|
|
|
9
|
|
|
|
|
|
6
|
|
|
|
|
|
7
|
|
|
|
|
Total
liabilities
|
|
|
1,834
|
|
|
|
|
|
1,399
|
|
|
|
|
|
1,814
|
|
|
|
|
|
1,290
|
|
|
|
|
Stockholders'
equity
|
|
|
255
|
|
|
|
|
|
165
|
|
|
|
|
|
252
|
|
|
|
|
|
148
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
2,089
|
|
|
|
|
$
|
1,564
|
|
|
|
|
$
|
2,066
|
|
|
|
|
$
|
1,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
2.74
|
%
|
|
|
|
|
2.94
|
%
|
|
|
|
|
2.80
|
%
|
|
|
|
|
2.98
|
%
|
Net
interest margin
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
3.26
|
%
|
|
|
|
|
3.21
|
%
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of funds
|
|
|
|
|
|
3.02
|
%
|
|
|
|
|
2.24
|
%
|
|
|
|
|
2.92
|
%
|
|
|
|
|
2.16
|
%
|
Total
core deposits
|
|
$
|
804
|
|
|
|
|
$
|
618
|
|
|
|
|
$
|
801
|
|
|
|
|
$
|
572
|
|
|
|
|
Total
deposits
|
|
|
1,448
|
|
|
|
|
|
1,003
|
|
|
|
|
|
1,428
|
|
|
|
|
|
924
|
|
|
|
|
Total
deposits and borrowings
|
|
|
1,828
|
|
|
|
|
|
1,390
|
|
|
|
|
|
1,808
|
|
|
|
|
|
1,283
|
|
|
|
|
Fully
taxable equivalent income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
(in
thousands)
|
|
|
506
|
|
|
|
|
|
240
|
|
|
|
|
|
1,000
|
|
|
|
|
|
450
|
|
|
|
|
_______________________________________________
(1)
|
The
average balances of loans include nonaccrual loans, loans held for
sale,
and deferred fees and costs.
|
(2)
|
The
average balance of investment securities is based on amortized
cost.
|
(3)
|
Cost
of funds includes all deposits and borrowings and
debentures.
|
(4)
|
No
revenue was recorded in the second quarter of 2006 for the Federal
Home
Loan Bank dividend due to a change in the dividend declaration
schedule.
|
Summary
The
Company reported second quarter net income of $4.5 million in 2006, compared
to
a net loss of $4.6 million in 2005. Earnings included the benefit of the
acquisition of Woronoco Bancorp in June 2005, together with the benefit of
organic growth. The 2005 loss was due primarily to an $8.7 million non-cash
charge related to the termination of the Employee Stock Ownership Program
(“ESOP”). This charge had no negative impact on total stockholders’ equity
because it was offset by credits to unearned compensation and additional paid-in
capital. Results of operations in 2005 also included Woronoco merger and systems
conversion related expenses totaling $1.0 million. Second quarter earnings
per
diluted share totaled $0.51 in 2006, compared to a loss of $0.74 in 2005.
Earnings per share reflected the issuance of shares for the Woronoco
acquisition.
Second
quarter 2006 income excluded any revenue related to dividends from the Federal
Home Loan Bank of Boston (the “FHLBB") due to a timing change in the FHLBB
dividend declaration schedule. Such revenue would normally have been about
$400
thousand ($0.03 per diluted share after tax). The FHLBB has announced that
it
expects to declare two dividends in the third quarter, with a catch-up for
the
delayed dividend. However, this catch-up has not yet been declared and could
be
eliminated by proposed regulations. All FHLBB dividends are subject to a number
of factors, including FHLBB earnings.
Second
quarter financial highlights included:
|
·
|
48%
annualized growth in total commercial
loans
|
|
·
|
28%
annualized growth in total loans
|
|
·
|
22%
annualized increase linked quarter in combined deposit and wealth
management fees |
During
the most recent quarter, the Company opened full-service branches in the New
York towns of Delmar, East Greenbush, and Guilderland. It received regulatory
approvals for new full-service branches in the New York towns of Halfmoon and
Colonie. Additionally, in July it filed regulatory applications for new
full-service branches in Glenville and Guilderland. For the fifth consecutive
year, it was recognized by the Boston Globe as one of the top performing
publicly traded companies in Massachusetts.
The
Company reported first half net income of $9.3 million in 2006 ($1.06 per
diluted share), compared to a net loss of $1.4 million ($0.23 per diluted share)
in 2005. Changes between the six month periods resulted principally from the
same factors that affected earnings for the second quarter, described above,
including the FHLBB dividend change.
Financial
highlights for the first half of the year included:
|
·
|
31%
annualized growth in total commercial
loans
|
|
·
|
19%
annualized growth in total loans
|
|
·
|
14%
annualized growth in total deposits
|
Comparison
of Financial Condition at June 30, 2006 and December 31,
2005
Assets.
Total
assets were $2.15 billion at mid-year, increasing by $112 million at an 11%
annualized rate since year-end 2005. Total loans grew at a 19% annualized rate,
while total investment securities declined at a 12% annualized
rate.
Loans.
Loans
totaled $1.55 billion at mid-year, increasing by $135 million in the first
six
months of 2006. Most major categories of loans increased during this time,
with
most of the growth recorded in commercial loans, which grew by $89 million
(31%
annualized). Commercial loans are the chief focus of the Bank’s lending
strategy, and the Bank feels it has a competitive advantage as a locally
headquartered regional bank. The Bank recruited regional presidents for its
New
York and Pioneer Valley regions around year-end 2005, and these regional
presidents assembled expanded commercial lending teams in these markets. The
Bank recorded double digit annualized commercial loan growth in all three of
its
regional markets. The highest growth was in the New York commercial loan
portfolio, which increased by $60 million in the first half of 2006. This is
also the region where the Bank is opening new branches. Growth in the Bank’s
commercial loan portfolio was spread among construction loans,
commercial
mortgages, and commercial business loans. In addition to commercial loans,
other
portfolios with significant first half growth were residential mortgages ($20
million) and automobile loans ($20 million). Residential mortgages increased
at
a 7% annualized rate, even though the Bank sells most of its fixed rate
mortgages at the time of origination. The automobile loan portfolio grew at
a
27% annualized rate due to continued expansion of the sourcing network for
the
Bank’s indirect automobile lending program.
Asset
Quality.
For the
first half of 2006, annualized net charge-offs measured 0.05% of average loans
and mid-year non-performing assets measured 0.04% of total assets.
Non-performing assets decreased by $309 thousand to $877 thousand during the
first half of the year. The total allowance for loan losses increased to $13.5
million from $13.0 million during the first half of the year, primarily due
to
loan growth. Because new commercial loans typically have a lower calculated
allowance than the overall commercial portfolio, the ratio of the total
allowance to total loans decreased to 0.87% from 0.92% during the first half
of
the year. The ratio of adversely criticized loans to total loans at mid-year
was
unchanged at 0.69%. Impaired loans increased to $4.42 million from $1.91 million
due primarily to three commercial relationships. These relationships were all
deemed adequately collateralized, and therefore did not contribute to an
increase in the allowance for impaired loans. Total loans delinquent 30-89
days
were 0.40% and 0.30% of total loans at these same dates, respectively.
Investment
Securities.
Investment securities totaled $396 million at mid-year, compared to $421 million
at the previous year-end. The Company has allowed the portfolio to decline
through run-off due to the high rate of loan growth. Securities purchases for
the first six months of the year totaled $35 million, including $20 million
of
securities held to maturity which consisted primarily of locally originated
industrial revenue bonds and other local municipal securities. Industrial
revenue bonds are generally originated by the commercial lending division as
part of the overall commercial banking plan. The Bank decreased its holdings
of
FHLBB stock by $16 million to $21 million due to the impact of changes in the
FHLB system. As previously noted, the customary FHLBB dividend was not declared
in the second quarter, and the FHLBB announced its intention to catch-up for
this dividend in the third quarter, which will depend on regulatory and other
developments. During the first half of the year, the Bank recorded net
securities gains of $1.0 million, related primarily to the sale of equity
securities with a total fair value of $1.7 million. The Company has a portfolio
of exchange traded equity securities which has been decreasing as part of a
program to reduce price risk. At mid-year, this portfolio had a net fair value
of $5.9 million, with net unrealized gains totaling $2.0 million.
The
total
net unrealized loss on investment securities was $9.9 million (2.5% of cost)
at
mid-year, compared to $3.8 million (0.9% of cost) at year-end 2005. The increase
in the unrealized loss was primarily due to the impact of higher interest rates
on bond prices. Management had determined that there were no losses which were
other than temporary at mid-year.
Other
Assets.
The net
book value of premises increased by $1.8 million in the first half of 2006
due
primarily to the de-novo branching program in the Company’s New York market.
Goodwill increased by $452 thousand due to fair value adjustments recorded
for
assets and liabilities acquired as a result of the Woronoco acquisition. Total
other assets increased by $7.0 million due to a $2.4 million increase in tax
assets and a community development tax credit investment which totaled $3.9
million at mid-year.
Deposits.
Total
deposits were $1.46 billion at mid-year, increasing by $93 million at an
annualized rate of 14% during the first half of the year. Most of the growth
was
recorded in money market and time accounts (excluding brokered deposits), which
together grew by $119 million. The rates paid on these accounts increased more
quickly than the rates paid on the other account categories due to higher
prevailing interest rates and competitive conditions. The average cost of time
deposits exceeded the average cost of borrowings in the second quarter of 2006.
Migrations of balances from lower yielding accounts were a significant factor
contributing to the higher funding costs. Deposit growth was recorded in all
of
the Bank’s regions, with the largest increase of $40 million recorded in the New
York region where the Bank is expanding through its de-novo branching program.
Three new New York branches were opened in the latter part of the second quarter
and therefore were just beginning to contribute to deposit growth. The two
New
York branches opened in June and September of 2005 had total deposits of $58
million as of mid-year 2006. The Company continues to promote transaction
accounts which have a lower cost and more opportunities for fee income and
other
relationship cross-sales. Excluding a $12 million overnight deposit at mid-year,
total demand deposit balances increased at a 17% annualized rate in the second
quarter, reflecting growth in personal and commercial accounts. The total number
of demand deposit accounts increased at a 7% annualized rate for the first
half
of 2006.
Borrowings.
Total
borrowings were $413 million at mid-year, increasing by $15 million since
year-end 2005. Borrowings were used to supplement deposit growth in funding
the
growth of the loan portfolio in the first half of the year. During the first
half of 2006, the Bank borrowed a total of $25 million in two-three year notes
to help fund growth of loans with intermediate term pricing
durations.
Equity.
Total
stockholders’ equity increased to $248 million at mid-year, increasing by $2
million from year-end 2005. Most of the increase in retained earnings was offset
by accumulated other comprehensive losses related to unrealized losses on the
bond portfolio. Due to timing factors, the Company declared the normal third
quarter dividend on June 30, with the result that three quarterly dividends
were
charged against retained earnings in the first half of the year. Additionally,
unearned compensation was charged in the amount of $1.7 million for stock awards
of 48,000 shares granted in the first half of the year. During the first six
months of the year, treasury stock purchases totaling 59,000 shares and $2.3
million were mostly offset by stock option exercises totaling 91,000 shares
and
$1.6 million. During the first quarter, the Company completed a previously
announced plan for the purchase of 150,000 shares and announced a new stock
repurchase plan totaling 300,000 shares. No purchases had been made under this
new plan as of mid-year.
The
ratio
of tangible stockholders’ equity/assets decreased to 7.3% at mid-year from 7.6%
at year-end 2005 due to loan growth. Total equity/assets decreased to 11.6%
from
12.0%. Reflecting loan growth and the Bank’s $5 million first quarter dividend
to the holding company, the Bank’s risk-based capital ratio decreased to 10.5%
at mid-year from 11.1% at year-end 2005, remaining in excess of the 10.0%
requirement for a “well-capitalized” status. Total book value per share was
$28.79 at mid-year, down slightly from $28.81 at year-end. Tangible book value
per share increased slightly to $17.30 from $17.15 at these dates.
Comparison
of Operating Results for the Three and Six Months Ended June 30, 2006 and
2005
Net
Income.
All
major categories of income and expense increased in the second quarter and
first
half of 2006, compared to the comparable periods of 2005, primarily due to
the
acquisition of Woronoco Bancorp in June 2005, together with the benefit of
organic growth. Second quarter net income increased to $4.5 million in 2006
compared to a net loss of $4.6 million in 2005. The 2005 loss was due to charges
discussed previously in the Summary section of management’s discussion. For the
first six months, net income was $9.3 million in 2006, compared to a net loss
of
$1.4 million in 2005. The 2005 loss was due to the second quarter charges noted
above.
The
return on assets was 0.85% in the second quarter of 2006 and 0.90% in the first
half of 2006. The return was negatively affected by 0.05% in the second quarter
due to the FHLBB dividend delay. The return on equity was 7.0% and 7.3% for
these periods, respectively. This return was about 0.42% lower due to the FHLBB
dividend delay. Return ratios were negative in the comparable periods of 2005
due to the second quarter charges.
Net
Interest Income.
Net
interest income increased by $3.0 million (26%) and $7.5 million (35%) in the
second quarter and first half of 2006 compared to 2005. This increase was due
to
higher average earning assets resulting both from the merger and from organic
growth. Average earning assets increased by $452 million (31%) and by $534
million (40%) for the second quarter and second half of 2006, compared to 2005.
Loan growth accounted for nearly all of this increase, with average loans
increasing by $439 million (42%) and $516 million (55%) for these respective
periods. Due to the high loan growth and the flat yield curve, management has
not sought to significantly increase the securities portfolio, which grew in
the
4-5% range on average for these periods. Most of the asset growth was funded
by
higher interest-bearing average deposits, which increased by $403 million (46%)
and $453 million (56%) for these periods. Most of the rest of the growth was
funded by additional equity issued in conjunction with the Woronoco acquisition.
Average stockholders’ equity increased by $90 million (55%) and $104 million
(70%) for these periods. Due to the growth in deposits and equity, second
quarter average borrowings declined by 2%, while first half borrowings increased
by 6% in 2006 compared to 2005.
Short-term
interest rates continued increasing, rising by approximately 1% in the first
half of 2006. Longer-term rates also increased, but the yield curve was
generally flat at mid-year. As previously discussed, deposit rate competition
increased and there was unusual migration from lower cost deposit accounts
to
higher cost accounts - primarily money market and time accounts. These
conditions caused the net interest spread to narrow. The net interest spread
was
2.74% in the second quarter of 2006, and would have been 2.82% if the normal
dividend income on FHLBB stock was recorded. The second quarter net interest
margin was 3.16% in 2006 and would have been
3.24%
with the normal FHLBB dividend. The impact on the margin of the decreased spread
was mostly offset by higher non-interest bearing funds sources. These sources
included a 32% increase in average demand deposit balances and the 55% increase
in average equity. The margin in the most recent quarter was down from a
quarterly high of 3.36% in the fourth quarter of 2005. While the Bank has
previously maintained a slight asset sensitivity to higher interest rates,
the
shift in balances from non-maturity accounts to time accounts generally maturing
in a year or less has shifted the Bank to a slight liability sensitivity during
the first half of 2006.
Provision
for Loan Losses.
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 discussed in the previous
section on Asset Quality in the discussion of financial condition. The increase
in the provision for the second quarter and first half of 2006, compared to
2005, was primarily due to organic loan growth.
Non-Interest
Income. Second
quarter non-interest income was unchanged and first half non-interest income
increased by $1.3 million (20%) in 2006, compared to 2005. Service fee income
growth continues to be a significant element of the Company’s growth strategy.
The annualized ratio of fee income to average assets was 0.58% in the first
half
of 2006, compared to 0.50% in the first half of 2005. Securities gains in all
periods were generally recorded on the sale of equity securities. Securities
gains were higher in 2005 because more securities were sold during those
periods. Miscellaneous other non-interest income in the first half of 2006
included $337 thousand in death benefits under bank owned life insurance
policies.
Non-Interest
Expense. Non-interest
expense decreased by $6.4 million (36%) in the second quarter and by $2.7
million (11%) in the first half of 2006 compared to 2005. The ratio of
non-interest expense to average assets was 2.21% in the first half of 2006,
compared to 3.56% in 2005. Non-interest expense in 2005 included charges for
the
termination of the ESOP and non-recurring merger and systems conversion costs.
Non-interest expense included $470 thousand in charges related to new branches
in the most recent quarter and a total of $700 thousand in such expenses for
the
first six months of this year. While the Company has significantly expanded
its
loan origination activities, much of the impact on expenses has been offset
by
higher deferrals of loan origination related expenses; these deferrals increased
by $1.7 million in the first half of 2006, compared to the same period in 2005.
The Company’s strategy continues to emphasize the realization of efficiencies
from expanded operations, targeted programs developed in the Company’s Six Sigma
process improvement discipline, and ongoing expense controls.
Income
from Discontinued Operations and Income Tax Expense.
Results
for the second quarter of 2006 included $359 thousand of pretax income from
discontinued operations from the sale of the Company’s data processing
subsidiary in June, 2004. This amount represented the balance of certain
contingent sale proceeds held in escrow relating to liabilities which were
assumed by the purchaser. The Company was able to retain the majority of these
funds and record them as income after the two year waiting period. At mid-year,
the Company continued to have other contingent revenues held in escrow relating
to customer retention which are scheduled for final analysis and settlement
in
the third quarter of 2006.
The
effective income tax rate was 31.2% and 32.1% in the second quarter and first
half of 2006. The tax rate was 34.2% and 32.9% for the comparable periods in
2005, excluding the impact of the ESOP termination. The lower tax rate in 2006
included the benefit of tax credits which were recorded beginning in the second
quarter on a community development investment in which the Bank is
participating. Additionally, the tax rate in 2006 included the benefit of life
insurance death benefits, which are not taxed as income.
Comprehensive
Income.
Comprehensive income is a component of total stockholders’ equity on the balance
sheet. Comprehensive income includes changes in accumulated other comprehensive
income, which consist of changes (after-tax) in the unrealized market gains
and
losses of investment securities available for sale and the net gain/(loss)
on
derivative instruments used as cash flow hedges. The Company recorded $5.1
million in comprehensive income in the first half of 2006, compared to a
comprehensive loss of $3.5 million in the first half of 2005. Net unrealized
securities losses were recorded in both periods primarily due to changes in
bond
prices as a result of interest rate changes.
Liquidity
and Cash Flows
The
Company’s primary source of funds was deposit growth in the first half of 2006.
The primary use of funds was loan growth. Reductions in investment securities
and additional borrowings were additional sources supplementing deposit growth.
Net deposit and loan growth are expected to continue to be significant sources
and uses of funds. The Company’s total commitments to originate new real estate
secured commercial loans increased by $49 million to $204 million during the
first half of the year, primarily due to growth in unfunded construction loan
commitments. Total commitments for all lending activities were $476 million
at
mid-year, compared to $419 million at year-end 2005. 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. Berkshire Hills
Bancorp’s primary routine source of funds is dividends from Berkshire Bank,
which paid a $5 million dividend to its parent in the first half of 2006. The
holding company also receives cash from the exercise of stock options and uses
cash for dividends, treasury stock purchases, and debt service for its junior
subordinated debentures. Additional discussion about the Company’s liquidity and
cash flows is contained in the Company’s 2005 Form 10-K in Item 7.
Capital
Resources
Please
see the “Equity” section of the Comparison of Financial Condition for a
discussion of stockholders’ equity. At June 30, 2006, Berkshire Bank’s
regulatory capital ratios placed the Bank in the “well capitalized” category
according to regulatory standards. Additional information about regulatory
capital is contained in Note 6 to
the
consolidated financial statements and in the 2005 Form 10-K.
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 instruments. 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 2005 Form 10-K. For the six months ended June 30, 2006, the Company
did not engage in any off-balance sheet transactions reasonably likely to have
a
material effect on the Company’s financial condition, results of operations or
cash flows.
Information
relating to payments due under contractual obligations is presented in the
2005
Form 10-K. There were no material changes in the Company’s payments due under
contractual obligations during the first half of 2006.
Please
see the discussion and analysis of quantitative and qualitative disclosures
about market risk provided in the Company’s 2005 Form 10-K for a general
discussion of the qualitative aspects of market risk and discussion of the
simulation model used by the Company to measure its interest rate risk.
In
addition to the instantaneous interest rate shock simulation model previously
disclosed, the Company has regularly utilized other types of analyses in
assessing its interest rate sensitivities. While primary emphasis was given
to
the rate shock model, the Company has also periodically utilized a rate change
ramp simulation model, which modeled the impact of interest rate changes which
were ramped evenly over a twelve month period, rather than as an instantaneous
shock. Emphasis was placed on the shock model in part due to the generational
low levels of interest rates and the anticipation of a future rebound. In recent
periods, the Federal Reserve Bank has raised interest rates on a ramped basis
and the Company now views the ramp model as more relevant for assessing the
risk
of the current and anticipated interest rate environments. Accordingly, the
simulation results presented below are for a twelve month ramped interest rate
change, and the year-end 2005 results have also been changed to reflect this
assumption. Additionally, the model has been extended to include a second
simulated year in order to fully assess the impact of changes which were ramped
in the first year. No other changes have been made to the assumptions or
methodologies used in the model.
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
|
|
Interest
Rates-Basis
|
|
1
-
12 Months
|
|
13
- 24 Months
|
|
Points
(Rate Ramp)
|
|
$
Change
|
|
%
Change
|
|
$
Change
|
|
%
Change
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+
200
|
|
$
|
(1,126
|
)
|
|
(1.81
|
)
%
|
$
|
(2,484
|
)
|
|
(3.79
|
)
%
|
+
100
|
|
|
(463
|
)
|
|
(0.74
|
)
|
|
(1,258
|
)
|
|
(1.92
|
)
|
-
100
|
|
|
831
|
|
|
1.33
|
|
|
2,191
|
|
|
3.34
|
|
-
200
|
|
|
1,193
|
|
|
1.91
|
|
|
2,038
|
|
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+
200
|
|
$
|
(210
|
)
|
|
(0.34
|
)
%
|
$
|
830
|
|
|
1.29
|
%
|
+
100
|
|
|
(327
|
)
|
|
(0.53
|
)
|
|
291
|
|
|
0.45
|
|
-
100
|
|
|
1,140
|
|
|
1.86
|
|
|
1,480
|
|
|
2.30
|
|
-
200
|
|
|
915
|
|
|
1.49
|
|
|
(1,189
|
)
|
|
(1.85
|
)
|
When
comparing the year-end 2005 rate shock sensitivity as reported in the 2005
Form
10-K to the ramp rate change scenario shown above, there is no material change
in the qualitative assessment of overall interest rate sensitivity of the Bank.
Please see the 2005 Form 10-K for further discussion of the interest rate
sensitivity at that date.
During
the first half of the year, the Company’s liability sensitivity increased
modestly due to shifts in the deposit mix to money market deposits and to
shorter duration time accounts and due to the growth of loans with intermediate
term pricing durations. The Company’s liability sensitivity also increased due
to lower prepayments of loans and investments as a result of higher prevailing
interest rates. Due to the Company’s growth plans, these factors are anticipated
to continue to influence potential changes in the Company’s interest rate risk
in future periods. The Company evaluates using longer-term borrowings or other
financial instruments to partially offset further liability sensitivity related
to loan and deposit changes. During the first six months of 2006, the Company
booked $25 million in two-three year FHLBB borrowings as a result of such
evaluations. Currently, the Company anticipates that short term rates may be
nearing a peak and it is willing to accept some moderate liability sensitivity
in support of its overall strategic objectives, and giving consideration to
possible pauses and possible future decreases in short term rates.
For
the
Bank, market risk also includes price risk, primarily security price risk.
The
net unrealized loss on securities available for sale increased to $9.7 million
(2.7 % of cost) at mid-year, compared to $3.6 million (0.9% of cost) as of
the
prior year end. This change was primarily due to the impact of higher interest
rates on the market value of debt securities. The increased amount of unrealized
losses was spread throughout the portfolio, and no securities were deemed to
be
impaired on an other-than-temporary basis.
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including its Chief Executive Officer and its Chief Financial Officer, of the
design and operation of the Company’s disclosure controls and procedures. Based
on this evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective for gathering, analyzing, and disclosing the information the Company
is required to disclose in the reports it files under the Securities Exchange
Act of 1934, within the time periods specified in the SEC’s rules and forms.
There was no change in the Company’s internal control over financial reporting
that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
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.
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2005, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks that we face.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
|
(a)
|
No
Company unregistered securities were sold by the Company during the
quarter ended June 30, 2006
|
|
(c)
|
The
following table provides certain information with regard to shares
repurchased by the Company in the second quarter of
2006.
|
Period
|
(a)
Total
Number
of
Shares
Purchased
|
(b)
Average
Price
Paid
per
Share
|
(
c
)
Total
Number of
Shares
Purchased
as Part
of
Publicly
Announced
Plans
or
Programs
|
(d)
Maximum
Number
of
Shares
that
May Yet Be
Purchased
under the
Plans
or Programs
|
April
1-
April
30, 2006
|
4,066
|
$
34.00
|
-
|
300,000
|
May
1-
May
31, 2006
|
-
|
$
-
|
-
|
300,000
|
June
1-
June
30, 2006
|
-
|
$
-
|
-
|
300,000
|
Total
|
4,066
|
$
34.00
|
-
|
300,000
|
______________________________________________________
Reflects
shares delivered to the Company to pay for the exercise price in connection
with
the exercise of a stock option.
On
February 23, 2006, the Company authorized a new plan to purchase up to 300,000
shares from time to time, subject to market conditions. This repurchase plan
will continue until it is completed or terminated by the Board of Directors.
As
of June 30, 2006, there had been no purchases made pursuant to this plan. There
were no other stock purchase plans in effect at June 30, 2006, and 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.
None.
|
The
annual meeting of the stockholders of the company was held on May
4,
2006.
|
|
|
|
|
|
|
|
|
|
|
1.
|
The
following individuals were elected as directors, each for a three-year
term by the following vote:
|
|
|
|
|
FOR
|
|
WITHHELD
|
|
|
|
Wallace
W. Altes
|
|
7,638,602
|
|
54,443
|
|
|
|
Lawrence
A. Bossidy
|
|
7,658,599
|
|
34,446
|
|
|
|
D.
Jeffrey Templeton
|
|
7,664,898
|
|
28,147
|
|
|
|
Corydon
L. Thurston
|
|
7,427,287
|
|
265,758
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
The
appointment of Wolf and Company, P.C. as independent auditors of
Berkshire
Hills Bancorp, Inc. for
the fiscal year ending December 31, 2006 was ratified by the stockholders
by the following vote:
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTENTIONS
|
|
|
|
|
7,565,375
|
|
103,683
|
|
25,987
|
None.
|
3.1
|
Certificate
of Incorporation of Berkshire Hills Bancorp, Inc.(1)
|
|
3.2
|
Amended
and Restated Bylaws of Berkshire Hills Bancorp, Inc.(2)
|
|
4.0
|
Specimen
Stock Certificate of Berkshire Hills Bancorp, Inc.(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________________________________ |
|
(1)
|
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.
|
|
(2)
|
Incorporated
herein by reference from the Exhibits to the Form 10-K as filed on
March
16, 2006.
|
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:
August 4, 2006
|
By:
|
/s/
Michael P. Daly
|
|
|
|
Michael
P. Daly
|
|
|
|
President,
Chief Executive Officer
|
|
|
|
and
Director
|
|
|
|
|
|
|
|
|
|
Dated:
August 4, 2006
|
By:
|
/s/
Wayne F. Patenaude
|
|
|
|
Wayne
F. Patenaude
|
|
|
|
Senior
Vice President,
|
|
|
|
Chief
Financial Officer and Treasurer
|
|
27