Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended September 30, 2006
OR
o
|
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 ý
No
o
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 o
Accelerated filer ý
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes
o
No
ý
The
Registrant had 8,693,945 shares of
common
stock, par value $0.01 per share, outstanding as of November 2, 2006.
BERKSHIRE
HILLS BANCORP, INC.
FORM
10-Q
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
|
|
7
|
|
|
|
|
|
16
|
|
|
|
|
|
18
|
|
|
|
|
|
19
|
|
|
|
|
|
27
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
29
|
|
|
|
|
|
33
|
|
|
|
|
|
34
|
|
|
|
|
|
34
|
|
|
|
|
|
34
|
|
|
|
|
|
34
|
|
|
|
|
|
35
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
(In
thousands, except share data)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
25,371
|
|
$
|
30,977
|
|
Short-term
investments
|
|
|
199
|
|
|
110
|
|
Total
cash and cash equivalents
|
|
|
25,570
|
|
|
31,087
|
|
|
|
|
|
|
|
|
|
Due
from broker
|
|
|
95,022
|
|
|
1,425
|
|
|
|
|
|
|
|
|
|
Securities
available for sale, at fair value
|
|
|
251,859
|
|
|
390,876
|
|
Securities
held to maturity, at amortized cost
|
|
|
39,957
|
|
|
29,908
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
1,629,083
|
|
|
1,416,449
|
|
Less:
Allowance for loan losses
|
|
|
(19,153
|
)
|
|
(13,001
|
)
|
Net
loans
|
|
|
1,609,930
|
|
|
1,403,448
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
27,944
|
|
|
26,236
|
|
Accrued
interest receivable
|
|
|
9,395
|
|
|
8,508
|
|
Goodwill
|
|
|
88,594
|
|
|
88,092
|
|
Other
intangible assets
|
|
|
10,071
|
|
|
11,524
|
|
Bank-owned
life insurance
|
|
|
19,602
|
|
|
19,002
|
|
Cash
surrender value - other life insurance
|
|
|
10,445
|
|
|
11,503
|
|
Other
assets
|
|
|
16,708
|
|
|
13,944
|
|
Total
assets
|
|
$
|
2,205,097
|
|
$
|
2,035,553
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,488,101
|
|
$
|
1,371,218
|
|
Borrowings
|
|
|
441,216
|
|
|
397,453
|
|
Junior
subordinated debentures
|
|
|
15,464
|
|
|
15,464
|
|
Other
liabilities
|
|
|
5,615
|
|
|
5,352
|
|
Total
liabilities
|
|
|
1,950,396
|
|
|
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
|
|
|
200,160
|
|
|
198,667
|
|
Unearned
compensation
|
|
|
(2,109
|
)
|
|
(1,435
|
)
|
Retained
earnings
|
|
|
102,783
|
|
|
99,429
|
|
Accumulated
other comprehensive income (loss)
|
|
|
782
|
|
|
(2,239
|
)
|
Treasury
stock, at cost (1,911,131 shares in 2006
|
|
|
|
|
|
|
|
and
2,060,604 in 2005)
|
|
|
(47,021
|
)
|
|
(48,462
|
)
|
Total
stockholders' equity
|
|
|
254,701
|
|
|
246,066
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,205,097
|
|
$
|
2,035,553
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
26,388
|
|
$
|
21,149
|
|
$
|
72,761
|
|
$
|
48,282
|
|
Securities
|
|
|
4,985
|
|
|
4,628
|
|
|
13,862
|
|
|
12,839
|
|
Short-term
investments
|
|
|
15
|
|
|
62
|
|
|
47
|
|
|
98
|
|
Total
interest and dividend income
|
|
|
31,388
|
|
|
25,839
|
|
|
86,670
|
|
|
61,219
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,766
|
|
|
5,979
|
|
|
29,365
|
|
|
13,689
|
|
Borrowings
|
|
|
5,019
|
|
|
4,806
|
|
|
12,636
|
|
|
10,951
|
|
Total
interest expense
|
|
|
15,785
|
|
|
10,785
|
|
|
42,001
|
|
|
24,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
15,603
|
|
|
15,054
|
|
|
44,669
|
|
|
36,579
|
|
Provision
for loan losses
|
|
|
6,185
|
|
|
204
|
|
|
7,075
|
|
|
998
|
|
Net
interest income, after provision for loan losses
|
|
|
9,418
|
|
|
14,850
|
|
|
37,594
|
|
|
35,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
fees
|
|
|
1,334
|
|
|
1,439
|
|
|
4,003
|
|
|
3,087
|
|
Wealth
management fees
|
|
|
882
|
|
|
680
|
|
|
2,410
|
|
|
2,013
|
|
Insurance
fees
|
|
|
623
|
|
|
472
|
|
|
2,112
|
|
|
679
|
|
Loan
fees
|
|
|
209
|
|
|
179
|
|
|
560
|
|
|
560
|
|
Increase
in cash surrender value of life insurance
|
|
|
227
|
|
|
245
|
|
|
767
|
|
|
648
|
|
(Loss)
gain recognized on securities, net
|
|
|
(5,080
|
)
|
|
832
|
|
|
(4,054
|
)
|
|
2,649
|
|
Gain
on sale of loans and securitized loans, net
|
|
|
-
|
|
|
22
|
|
|
-
|
|
|
773
|
|
Other
|
|
|
21
|
|
|
86
|
|
|
419
|
|
|
217
|
|
Total
non-interest income
|
|
|
(1,784
|
)
|
|
3,955
|
|
|
6,217
|
|
|
10,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
6,001
|
|
|
5,699
|
|
|
17,412
|
|
|
14,524
|
|
Occupancy
and equipment
|
|
|
1,885
|
|
|
1,655
|
|
|
5,638
|
|
|
4,006
|
|
Marketing
and advertising
|
|
|
403
|
|
|
372
|
|
|
996
|
|
|
732
|
|
Data
processing and telecommunications
|
|
|
853
|
|
|
736
|
|
|
2,550
|
|
|
1,718
|
|
Professional
services
|
|
|
376
|
|
|
590
|
|
|
1,311
|
|
|
1,376
|
|
Foreclosed
real estate and other loans, net
|
|
|
58
|
|
|
241
|
|
|
195
|
|
|
557
|
|
Amortization
of intangible assets
|
|
|
478
|
|
|
481
|
|
|
1,434
|
|
|
667
|
|
Other
recurring non-interest expense
|
|
|
1,299
|
|
|
998
|
|
|
4,295
|
|
|
3,159
|
|
Termination
of Employee Stock Ownership Plan
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,667
|
|
Other
non-recurring expense
|
|
|
-
|
|
|
828
|
|
|
385
|
|
|
1,791
|
|
Total
non-interest expense
|
|
|
11,353
|
|
|
11,600
|
|
|
34,216
|
|
|
37,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations before income taxes
|
|
|
(3,719
|
)
|
|
7,205
|
|
|
9,595
|
|
|
9,010
|
|
Income
tax (benefit) expense
|
|
|
(1,466
|
)
|
|
2,459
|
|
|
2,788
|
|
|
5,621
|
|
Net
(loss) income from continuing operations
|
|
|
(2,253
|
)
|
|
4,746
|
|
|
6,807
|
|
|
3,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
|
217
|
|
|
-
|
|
|
576
|
|
|
-
|
|
Income
tax expense
|
|
|
84
|
|
|
-
|
|
|
222
|
|
|
-
|
|
Net
income from discontinued operations
|
|
|
133
|
|
|
-
|
|
|
354
|
|
|
-
|
|
Net
(loss) income
|
|
$
|
(2,120
|
)
|
$
|
4,746
|
|
$
|
7,161
|
|
$
|
3,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.25
|
)
|
$
|
0.56
|
|
$
|
0.84
|
|
$
|
0.51
|
|
Diluted
|
|
$
|
(0.25
|
)
|
$
|
0.54
|
|
$
|
0.82
|
|
$
|
0.48
|
|
Average
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,557
|
|
|
8,456
|
|
|
8,516
|
|
|
6,683
|
|
Diluted
|
|
|
8,557
|
|
|
8,856
|
|
|
8,775
|
|
|
7,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at beginning of period
|
|
$
|
246,066
|
|
$
|
131,736
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
Net
income
|
|
|
7,161
|
|
|
3,389
|
|
Change
in net unrealized gain (loss) on securities
available-for-sale,
|
|
|
|
|
|
|
|
net
of reclassification adjustments and tax effects
|
|
|
3,042
|
|
|
(3,772
|
)
|
Net
loss on derivative instruments
|
|
|
(21
|
)
|
|
(42
|
)
|
Total
comprehensive income (loss)
|
|
|
10,182
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
Cash
dividends declared ( $0.42 per share in 2006 and
|
|
|
|
|
|
|
|
$0.38
per share in 2005)
|
|
|
(3,617
|
)
|
|
(2,508
|
)
|
Treasury
stock purchased/transferred
|
|
|
(2,356
|
)
|
|
(11,893
|
)
|
Exercise
of stock options
|
|
|
2,761
|
|
|
1,326
|
|
Reissuance
of treasury stock-other
|
|
|
1,608
|
|
|
905
|
|
Share-based
compensation
|
|
|
157
|
|
|
-
|
|
Tax
benefit from stock compensation
|
|
|
574
|
|
|
279
|
|
Change
in unearned compensation
|
|
|
(674
|
)
|
|
738
|
|
Acquisition
of Woronoco Bancorp, Inc.
|
|
|
-
|
|
|
111,915
|
|
Termination
of Employee Stock Ownership Plan
|
|
|
-
|
|
|
13,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at end of period
|
|
$
|
254,701
|
|
$
|
245,637
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
|
|
Nine
Months Ended September 30,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,161
|
|
$
|
3,389
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
continuing
operating activities :
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
7,075
|
|
|
998
|
|
Depreciation,
amortization, and deferrals, net
|
|
|
639
|
|
|
3,203
|
|
Share-based
compensation and ESOP expense
|
|
|
1,093
|
|
|
8,789
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
(574
|
)
|
|
(279
|
)
|
Increase
in cash surrender value of bank-owned life insurance
|
|
|
(767
|
)
|
|
(600
|
)
|
Net
losses (gains) on sales of securities and loans, net
|
|
|
4,054
|
|
|
(3,422
|
)
|
Deferred
income tax (benefit) provision, net
|
|
|
(1,653
|
)
|
|
1,129
|
|
Net
change in loans held for sale
|
|
|
2,093
|
|
|
(799
|
)
|
Net
change in all other assets
|
|
|
(4,539
|
)
|
|
4,570
|
|
Net
change in other liabilities
|
|
|
263
|
|
|
(5,241
|
)
|
Net
cash provided by continuing operating activities
|
|
|
14,845
|
|
|
11,737
|
|
Net
cash provided by discontinued operating activities
|
|
|
576
|
|
|
-
|
|
Total
net cash provided by operating activities
|
|
|
15,421
|
|
|
11,737
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Sales
of securities available for sale
|
|
|
20,671
|
|
|
126,653
|
|
Payments
on securities available for sale
|
|
|
41,422
|
|
|
61,259
|
|
Purchases
of securities available for sale
|
|
|
(14,351
|
)
|
|
(27,336
|
)
|
Payments
on securities held to maturity
|
|
|
12,886
|
|
|
20,771
|
|
Purchases
of securities held to maturity
|
|
|
(22,941
|
)
|
|
(17,801
|
)
|
Increase
in loans, net
|
|
|
(214,323
|
)
|
|
(58,308
|
)
|
Capital
expenditures
|
|
|
(4,288
|
)
|
|
(3,464
|
)
|
Proceeds
from sale of loans
|
|
|
-
|
|
|
3,635
|
|
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
|
|
|
(180,554
|
)
|
|
84,093
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
116,883
|
|
|
59,431
|
|
Proceeds
from Federal Home Loan Bank advances
|
|
|
257,014
|
|
|
504,285
|
|
Repayments
of Federal Home Loan Bank advances
|
|
|
(213,251
|
)
|
|
(654,406
|
)
|
Proceeds
from junior subordinated debentures
|
|
|
-
|
|
|
15,464
|
|
Treasury
stock purchased
|
|
|
(2,356
|
)
|
|
(6,996
|
)
|
Proceeds
from reissuance of treasury stock
|
|
|
4,369
|
|
|
2,231
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
574
|
|
|
279
|
|
Cash
dividends paid
|
|
|
(3,617
|
)
|
|
(2,508
|
)
|
Net
cash provided (used) by financing activities
|
|
|
159,616
|
|
|
(82,220
|
)
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(5,517
|
)
|
|
13,610
|
|
Cash
and cash equivalents at beginning of period
|
|
|
31,087
|
|
|
17,902
|
|
Cash
and cash equivalents at end of period
|
|
$
|
25,570
|
|
$
|
31,512
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
$
|
29,343
|
|
$
|
12,933
|
|
Interest
paid on borrowed funds
|
|
|
11,838
|
|
|
10,391
|
|
Income
taxes paid, net
|
|
|
1,627
|
|
|
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.
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 nine months ended September 30, 2006 are not necessarily
indicative of the results which may be expected for the year as a whole.
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, deferred tax assets and
liabilities, and the carrying value of goodwill and other intangible assets.
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, NOW, money market, savings,
and
time certificates of deposit accounts, and its primary lending products are
residential mortgage, commercial mortgage, commercial business, and consumer
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
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,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(2,120
|
)
|
$
|
4,746
|
|
$
|
7,161
|
|
$
|
3,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
8,657
|
|
|
8,588
|
|
|
8,616
|
|
|
7,091
|
|
Adjustment
for average unallocated SERP and ESOP shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(271
|
)
|
Less:
average number of unvested stock award shares
|
|
|
(100
|
)
|
|
(132
|
)
|
|
(100
|
)
|
|
(137
|
)
|
Average
number of basic shares outstanding
|
|
|
8,557
|
|
|
8,456
|
|
|
8,516
|
|
|
6,683
|
|
Plus:
average number of unvested stock award shares
|
|
|
-
|
|
|
132
|
|
|
100
|
|
|
137
|
|
Plus:
average number of dilutive shares based on stock options
|
|
|
-
|
|
|
268
|
|
|
159
|
|
|
241
|
|
Average
number of diluted shares outstanding
|
|
|
8,557
|
|
|
8,856
|
|
|
8,775
|
|
|
7,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
$
|
(0.25
|
)
|
$
|
0.56
|
|
$
|
0.84
|
|
$
|
0.51
|
|
Diluted
(loss) earnings per share
|
|
$
|
(0.25
|
)
|
$
|
0.54
|
|
$
|
0.82
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
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 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 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 a company’s
first fiscal year after September 15, 2006. Earlier adoption is permitted as
of
the beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including interim financial statements. 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
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, "Fair
Value Measurements" (SFAS
157). This statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 is effective for the Company on January
1, 2008 and is not expected to have a significant impact on the Company's
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 enterprises’ 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.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FIN
48 is
effective for fiscal years beginning after December 15, 2006. The Company is
currently analyzing the effects of FIN 48.
On
September 13, 2006, the Securities and Exchange Commission “SEC” issued
Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a potential current
year
misstatement. Prior to SAB 108, Companies might evaluate the materiality of
financial statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new misstatements
added in the current year, and the balance sheet approach focusing on the
cumulative amount of misstatement present in a company’s balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires
that companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach.
SAB 108 will be applicable to all financial statements issued by the
Company after November 15, 2006. The Company does not expect that SAB 108
will have a significant impact on the reported results of operations or
financial condition.
On
September 20, 2006, the FASB ratified EITF 06-4, “Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements”
(EITF
06-4). This issue addresses accounting for split-dollar life insurance
arrangements after the employer purchases a life insurance policy on the covered
employee. This EITF states that an obligation arises as a result of a
substantive agreement with an employee to provide future postretirement
benefits. Under EITF 06-4, the obligation is not settled upon entering into
an
insurance arrangement. Since the obligation is not settled, a liability should
be recognized in accordance with applicable authoritative guidance. EITF 06-4
is
effective for fiscal years beginning after December 15, 2007. The adoption
of
EITF 06-4 is not expected to have a material effect on the Company’s financial
statements.
Also
on
September 20, 2006, the FASB ratified EITF 06-5, “Accounting
for Purchases of Life Insurance—Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4,
Accounting
for Purchases of Life Insurance.”
This
issue addresses how an entity should determine the amount that could be realized
under the insurance contract at the balance sheet date in applying FTB 85-4
and
if the determination should be on an individual or group policy basis. EITF
06-5
is effective for fiscal years beginning after December 15, 2006. The adoption
of
EITF 06-5 is not expected to have a material effect on the Company’s financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of securities follows. The $1,849,000 loss on mortgage-backed securities held
for sale was recorded in the income statement in the quarter ended September
30,
2006.
|
|
|
|
|
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
(In
thousands)
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
-
|
|
$
|
-
|
|
Municipal
bonds and obligations
|
|
|
63,846
|
|
|
64,417
|
|
Mortgage-backed
securities, held for sale
|
|
|
73,862
|
|
|
72,012
|
|
Mortgage-backed
securities, other
|
|
|
64,716
|
|
|
63,836
|
|
Other
bonds and obligations
|
|
|
23,778
|
|
|
24,106
|
|
Total
debt securities
|
|
|
226,202
|
|
|
224,371
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
21,835
|
|
|
21,835
|
|
Other
equity securities
|
|
|
4,495
|
|
|
5,653
|
|
Total
equity securities
|
|
|
26,330
|
|
|
27,488
|
|
Total
securities available for sale
|
|
|
252,532
|
|
|
251,859
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
35,213
|
|
|
35,213
|
|
Mortgage-backed
securities
|
|
|
4,744
|
|
|
4,529
|
|
Total
securities held to maturity
|
|
|
39,957
|
|
|
39,742
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
$
|
292,489
|
|
$
|
291,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Loans
consisted of the following:
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Balance
|
|
of
total
|
|
Balance
|
|
of
total
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
-
4 family
|
|
$
|
553
|
|
|
34
|
%
|
$
|
514
|
|
|
37
|
%
|
Construction
|
|
|
32
|
|
|
2
|
|
|
35
|
|
|
2
|
|
Total
residential mortgages
|
|
|
585
|
|
|
36
|
|
|
549
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
116
|
|
|
7
|
|
|
59
|
|
|
4
|
|
Single
and multi-family
|
|
|
67
|
|
|
4
|
|
|
69
|
|
|
5
|
|
Other
commercial real estate
|
|
|
334
|
|
|
21
|
|
|
283
|
|
|
20
|
|
Total
commercial mortgages
|
|
|
517
|
|
|
32
|
|
|
411
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
194
|
|
|
12
|
|
|
159
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
181
|
|
|
11
|
|
|
148
|
|
|
10
|
|
Home
equity and other
|
|
|
152
|
|
|
9
|
|
|
149
|
|
|
11
|
|
Total
consumer loans
|
|
|
333
|
|
|
20
|
|
|
297
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$
|
1,629
|
|
|
100
|
%
|
$
|
1,416
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity
in the allowance for loan losses was as follows:
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
13,001
|
|
$
|
9,337
|
|
Provision
for loan losses
|
|
|
7,075
|
|
|
998
|
|
Allowance
attributed to acquired loans
|
|
|
-
|
|
|
3,321
|
|
Reclassification
of commitment reserve to other liabilities
|
|
|
(425
|
)
|
|
-
|
|
Loans
charged-off
|
|
|
(1,022
|
)
|
|
(1,003
|
)
|
Recoveries
|
|
|
524
|
|
|
470
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
19,153
|
|
$
|
13,123
|
|
|
|
|
|
|
|
|
|
In
prior
periods, the Company’s loan loss allowance included a reserve for credit losses
related to off-balance sheet credit commitments. During the third quarter of
2006, the Company transferred this reserve to other liabilities in the statement
of financial condition.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of deposit balances, by type, was as follows:
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Balance
|
|
of
deposits
|
|
Balance
|
|
of
deposits
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
178
|
|
|
12
|
%
|
$
|
180
|
|
|
13
|
%
|
NOW
|
|
|
139
|
|
|
9
|
|
|
149
|
|
|
11
|
|
Money
market
|
|
|
282
|
|
|
19
|
|
|
245
|
|
|
18
|
|
Savings
|
|
|
209
|
|
|
14
|
|
|
222
|
|
|
16
|
|
Total
non-maturity (core) deposits
|
|
|
808
|
|
|
54
|
|
|
796
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits less than 100 thousand
|
|
|
364
|
|
|
24
|
|
|
308
|
|
|
23
|
|
Time
deposits 100 thousand or more
|
|
|
269
|
|
|
18
|
|
|
210
|
|
|
15
|
|
Brokered
time deposits
|
|
|
47
|
|
|
4
|
|
|
57
|
|
|
4
|
|
Total
time deposits
|
|
|
680
|
|
|
46
|
|
|
575
|
|
|
42
|
|
Total
deposits
|
|
$
|
1,488
|
|
|
100
|
%
|
$
|
1,371
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Bank’s actual and required capital ratios were as follows:
|
|
|
|
|
|
FDIC
Minimums
|
|
|
|
September
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
|
|
|
9.3
|
|
|
10.2
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
7.5
|
|
|
7.8
|
|
|
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.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7. |
SHARE-BASED
COMPENSATION PLANS
|
The
Company has share-based compensation plans under which incentive and
nonqualified stock options may be granted periodically 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 date of the grant. 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. 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
consolidated financial statements in the 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 2005 Form 10-K and prior Forms
10-K.
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 unvested awards that were granted prior to
January 1, 2006, based on the fair value determined at the grant date under
SFAS
No. 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 nine
months ended September 30, 2006, the Company recognized additional
stock-based compensation expense related to stock options of $37 thousand,
or
$32 thousand net of tax, and $157 thousand, or $134 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 September 30, 2006 and a $0.02 decrease
in both basic and diluted earnings per share during the nine months ended
September 30, 2006. Cash flows from financing activities for the nine
months ended September 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 nine months ended September 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
|
|
|
-
|
|
|
-
|
|
|
(160,671
|
)
|
|
17.18
|
|
Shares
vested
|
|
|
-
|
|
|
(62,720
|
)
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
5,100
|
|
|
(1,600
|
)
|
|
(3,500
|
)
|
|
22.30
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
|
265,092
|
|
|
96,032
|
|
|
626,813
|
|
$
|
20.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
total
grant date fair value of unvested stock awards outstanding at December 31,
2005
was $2.73 million. For the nine months ended September 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 September 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 options outstanding at September 30, 2006 is as follows:
|
|
Stock
Options
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
Total
number of shares
|
|
|
626,813
|
|
|
577,306
|
|
Weighted
average exercise price
|
|
$
|
20.45
|
|
$
|
20.14
|
|
Aggregate
intrinsic value (in
thousands)
|
|
$
|
9,493
|
|
$
|
8,921
|
|
Weighted
average remaining contractual term
|
|
|
5.9
|
years |
|
5.8
|
years |
|
|
|
|
|
|
|
|
Stock-based
compensation expense totaled $337 thousand and $1.09 million during the three
and nine months ended September 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 $276 thousand at September 30, 2006. At such date, the
weighted-average period over which this unrecognized expense is expected to
be
recognized was 1.4 years. Unrecognized stock-based compensation expense related
to non-vested, non-option stock awards was $2.11 million at September 30,
2006. At such date, the weighted-average period over which this unrecognized
expense was expected to be recognized was 1.8 years.
The
following pro forma information presents net income and earnings per share
for
the three and nine months ended September 30, 2005 as if the fair value
method of SFAS 123R had been used to measure compensation cost for stock-based
compensation expense.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
(In
thousands, except per share data)
|
|
September
30, 2005
|
|
September
30, 2005
|
|
Net
income as reported
|
|
$
|
4,746
|
|
$
|
3,389
|
|
|
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense included
|
|
|
|
|
|
|
|
in
reported net income, net of related tax effects
|
|
|
216
|
|
|
677
|
|
|
|
|
|
|
|
|
|
Less:
Total stock-based employee compensation expense
|
|
|
|
|
|
|
|
determined
under fair value method for all awards, net of
|
|
|
|
|
|
|
|
related
tax effects
|
|
|
(324
|
)
|
|
(1,002
|
)
|
Pro
forma net income
|
|
$
|
4,638
|
|
$
|
3,064
|
|
|
|
|
|
|
|
|
|
Income
per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.56
|
|
$
|
0.51
|
|
Basic
- pro forma
|
|
|
0.55
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
|
0.54
|
|
|
0.48
|
|
Diluted
- pro forma
|
|
|
0.52
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
During
the nine months ended September 30, 2006 and 2005, proceeds from stock
option exercises totaled $2.76 million and $1.33 million, respectively. During
these periods, 160,671 shares and 97,443 shares, respectively, were issued
in
connection with stock option exercises. During the nine months ended September
30, 2006 and 2005, all shares issued in connection with stock option exercises
and non-vested, non-option stock awards were issued from available treasury
stock.
The
Bank
maintained 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
supplemental 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.
ITEM 2. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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 nine months ended September 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. 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. Although we believe that our
plans, intentions and expectations, as reflected in these forward-looking
statements are reasonable, we can give no assurance that these plans, intentions
or expectations will be achieved or realized. Our ability to predict results
or
the actual effects of our plans and strategies are 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 most recent annual report on Form 10-K, in Part II, Item
1A. - “Risk Factors” in this Form 10-Q, and in other reports filed with the
Securities and Exchange Commission. There are a number of factors, many of
which
are beyond our control, that could cause actual conditions, events, or results
to differ significantly from those described in the forward-looking statements.
These factors include, but are not limited to: general economic conditions,
either nationally or locally in some or all of the areas in which we conduct
our
business; conditions in the securities markets or the banking industry; changes
in interest rates and energy prices, which may affect our net income or future
cash flows; changes in deposit flows, and in demand for deposit, loan, and
investment products and other financial services in our local markets; changes
in real estate values, which could impact the quality of the assets securing
our
loans; changes in the quality or composition of the loan or investment
portfolios; changes in competitive pressures among financial institutions or
from non-financial institutions; the ability to successfully integrate any
assets, liabilities, customers, systems, and management personnel we may acquire
into our operations and our ability to realize related revenue synergies and
cost savings within expected time frames; our timely development of new and
competitive products or services in a changing environment, and the acceptance
of such products or services by our customers; the outcome of pending or
threatened litigation or of other matters before regulatory agencies, whether
currently existing or commencing in the future; changes in accounting
principles, policies, practices, or guidelines; changes in legislation and
regulation; operational issues and/or capital spending necessitated by the
potential need to adapt to industry changes in information technology systems
on
which we are highly dependent; changes in the monetary and fiscal policies
of
the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board; war or terrorist activities; and other economic, competitive,
governmental, regulatory, and geopolitical factors affecting the Company’s
operations, pricing, and services. Additionally, the timing and occurrence
or
non-occurrence of events may be subject to circumstances beyond our control.
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.
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 is 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
reflective of 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 and
other relevant information, 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 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. The Company increased its allowance from $13.5
million at June 30, 2006 to $19.2 million at September 30, 2006. For a further
discussion of this increase, see the section on the Loan Loss Allowance in
“Comparison of Financial Condition at September 30, 2006 and December 31, 2005”
in this Form 10-Q.
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 in an amount 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-competition 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.
|
|
At
or for the Three Months Ended
|
|
At
or for the Nine Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings - diluted
|
|
$
|
(0.25
|
)
|
$
|
0.54
|
|
$
|
0.82
|
|
$
|
0.48
|
|
Dividends
declared
|
|
|
0.14
|
|
|
0.14
|
|
|
0.42
|
|
|
0.38
|
|
Book
value
|
|
|
29.31
|
|
|
28.68
|
|
|
29.31
|
|
|
28.68
|
|
Common
stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
38.44
|
|
|
35.20
|
|
|
38.44
|
|
|
37.64
|
|
Low
|
|
|
33.46
|
|
|
31.90
|
|
|
32.37
|
|
|
30.97
|
|
Close
|
|
|
35.59
|
|
|
34.00
|
|
|
35.59
|
|
|
34.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
return on average assets
|
|
|
(0.37
|
)%
|
|
0.92
|
%
|
|
0.47
|
%
|
|
0.27
|
%
|
(Loss)
return on average equity
|
|
|
(3.15
|
)
|
|
7.90
|
|
|
3.83
|
|
|
2.47
|
|
Net
interest margin
|
|
|
3.22
|
|
|
3.31
|
|
|
3.22
|
|
|
3.31
|
|
Stockholders'
equity/total assets
|
|
|
11.55
|
|
|
12.08
|
|
|
11.55
|
|
|
12.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
20
|
%
|
|
(1
|
)%
|
|
20
|
%
|
|
94
|
%
|
Total
deposits
|
|
|
7
|
|
|
13
|
|
|
11
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
Period End: (In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,205
|
|
$
|
2,033
|
|
$
|
2,205
|
|
$
|
2,033
|
|
Total
loans
|
|
|
1,629
|
|
|
1,412
|
|
|
1,629
|
|
|
1,412
|
|
Other
earning assets
|
|
|
387
|
|
|
429
|
|
|
387
|
|
|
429
|
|
Total
intangible assets
|
|
|
99
|
|
|
100
|
|
|
99
|
|
|
100
|
|
Deposits
|
|
|
1,488
|
|
|
1,348
|
|
|
1,488
|
|
|
1,348
|
|
Borrowings
and debentures
|
|
|
457
|
|
|
436
|
|
|
457
|
|
|
436
|
|
Stockholders'
equity
|
|
|
255
|
|
|
246
|
|
|
255
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Period: (In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
15,603
|
|
$
|
15,054
|
|
$
|
44,669
|
|
$
|
36,579
|
|
Provision
for loan losses
|
|
|
6,185
|
|
|
204
|
|
|
7,075
|
|
|
998
|
|
Non-interest
income
|
|
|
(1,784
|
)
|
|
3,955
|
|
|
6,217
|
|
|
10,626
|
|
Non-interest
expense
|
|
|
11,353
|
|
|
11,600
|
|
|
34,216
|
|
|
37,197
|
|
Net
(loss) income
|
|
|
(2,120
|
)
|
|
4,746
|
|
|
7,161
|
|
|
3,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized)/average loans
|
|
|
0.04
|
%
|
|
0.04
|
%
|
|
0.04
|
%
|
|
0.06
|
%
|
Loan
loss allowance/total loans
|
|
|
1.18
|
|
|
0.93
|
|
|
1.18
|
|
|
0.93
|
|
Non-performing
assets/total assets
|
|
|
0.24
|
|
|
0.08
|
|
|
0.24
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
All operating ratios are annualized and based on average balance
sheet
amounts where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
576
|
|
|
5.24
|
%
|
$
|
561
|
|
|
5.06
|
%
|
$
|
564
|
|
|
5.17
|
%
|
$
|
385
|
|
|
5.06
|
%
|
Commercial
mortgages
|
|
|
496
|
|
|
7.37
|
|
|
396
|
|
|
6.68
|
|
|
458
|
|
|
7.31
|
|
|
328
|
|
|
6.39
|
|
Commercial
business loans
|
|
|
186
|
|
|
8.31
|
|
|
166
|
|
|
6.92
|
|
|
167
|
|
|
7.95
|
|
|
156
|
|
|
6.54
|
|
Consumer
loans
|
|
|
328
|
|
|
6.94
|
|
|
300
|
|
|
5.93
|
|
|
313
|
|
|
6.76
|
|
|
237
|
|
|
5.84
|
|
Total
loans
|
|
|
1,586
|
|
|
6.58
|
|
|
1,423
|
|
|
5.91
|
|
|
1,502
|
|
|
6.42
|
|
|
1,106
|
|
|
5.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
399
|
|
|
5.55
|
|
|
436
|
|
|
4.69
|
|
|
402
|
|
|
5.03
|
|
|
411
|
|
|
4.50
|
|
Short-term
investments
|
|
|
1
|
|
|
5.25
|
|
|
7
|
|
|
3.50
|
|
|
1
|
|
|
4.88
|
|
|
3
|
|
|
3.74
|
|
Total
earning assets
|
|
|
1,986
|
|
|
6.38
|
|
|
1,866
|
|
|
5.60
|
|
|
1,905
|
|
|
6.15
|
|
|
1,520
|
|
|
5.48
|
|
Intangible
assets
|
|
|
99
|
|
|
|
|
|
101
|
|
|
|
|
|
103
|
|
|
|
|
|
49
|
|
|
|
|
Other
assets
|
|
|
98
|
|
|
|
|
|
98
|
|
|
|
|
|
93
|
|
|
|
|
|
84
|
|
|
|
|
Total
assets
|
|
$
|
2,183
|
|
|
|
|
$
|
2,065
|
|
|
|
|
$
|
2,101
|
|
|
|
|
$
|
1,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
132
|
|
|
0.98
|
%
|
$
|
136
|
|
|
0.42
|
%
|
$
|
138
|
|
|
1.00
|
%
|
$
|
112
|
|
|
0.28
|
%
|
Money
Market
|
|
|
283
|
|
|
3.51
|
|
|
241
|
|
|
2.07
|
|
|
279
|
|
|
3.33
|
|
|
196
|
|
|
1.91
|
|
Savings
|
|
|
213
|
|
|
1.02
|
|
|
240
|
|
|
0.86
|
|
|
213
|
|
|
0.85
|
|
|
198
|
|
|
0.96
|
|
Time
|
|
|
664
|
|
|
4.41
|
|
|
515
|
|
|
3.12
|
|
|
640
|
|
|
4.17
|
|
|
407
|
|
|
2.62
|
|
Total
interest-bearing deposits
|
|
|
1,292
|
|
|
3.31
|
|
|
1,132
|
|
|
2.10
|
|
|
1,270
|
|
|
3.09
|
|
|
913
|
|
|
2.00
|
|
Borrowings
and debentures
|
|
|
445
|
|
|
4.47
|
|
|
500
|
|
|
3.81
|
|
|
402
|
|
|
4.19
|
|
|
407
|
|
|
3.60
|
|
Total
interest-bearing liabilities
|
|
|
1,737
|
|
|
3.60
|
|
|
1,632
|
|
|
2.62
|
|
|
1,672
|
|
|
3.35
|
|
|
1,320
|
|
|
2.50
|
|
Non-interest-bearing
demand deposits
|
|
|
179
|
|
|
|
|
|
185
|
|
|
|
|
|
173
|
|
|
|
|
|
144
|
|
|
|
|
Other
liabilities
|
|
|
8
|
|
|
|
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
Total
liabilities
|
|
|
1,924
|
|
|
|
|
|
1,823
|
|
|
|
|
|
1,851
|
|
|
|
|
|
1,470
|
|
|
|
|
Stockholders'
equity
|
|
|
259
|
|
|
|
|
|
242
|
|
|
|
|
|
250
|
|
|
|
|
|
183
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
2,183
|
|
|
|
|
$
|
2,065
|
|
|
|
|
$
|
2,101
|
|
|
|
|
$
|
1,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
2.78
|
%
|
|
|
|
|
2.98
|
%
|
|
|
|
|
2.80
|
%
|
|
|
|
|
2.98
|
%
|
Net
interest margin
|
|
|
|
|
|
3.22
|
%
|
|
|
|
|
3.31
|
%
|
|
|
|
|
3.22
|
%
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$
|
1,471
|
|
|
|
|
$ |
1,317
|
|
|
|
|
$ |
1,443
|
|
|
|
|
$ |
1,057
|
|
|
|
|
Fully
taxable equivalent income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
(in
thousands)
|
|
|
548
|
|
|
|
|
|
477
|
|
|
|
|
|
1,548
|
|
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
Summary
The
Company recorded a third quarter 2006 net loss of $2.1 million ($0.25 per
diluted share), compared to net income of $4.7 million ($0.54 per diluted share)
in the third quarter of 2005. Third quarter results in 2006 included a net
securities loss totaling $5.1 million related to a repositioning of the
securities portfolio and a loan loss provision totaling $6.2 million primarily
related to an adjustment of the loan loss allowance reflecting higher general
pool reserves. The loss on securities was already recorded in stockholders’
equity, so this transaction had no negative impact on stockholders’ equity.
Third quarter 2006 results also included $420 thousand in additional dividend
income from the Federal Home Loan Bank of Boston (FHLBB), as a result of its
change in the timing of the payment of dividends.
Nine
month 2006 net income was $7.2 million ($0.82 per diluted share), which was
111%
higher than the same period of 2005. Earnings included the benefit of the
acquisition of Woronoco Bancorp in June 2005, together with the benefit of
organic growth. Results in 2005 included an $8.7 million non-cash charge related
to the termination of the Employee Stock Ownership Plan. 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 $1.8 million. Earnings per share in both periods reflected the issuance
of shares for the Woronoco acquisition.
Additional
highlights for the most recent quarter included:
|
·
|
20
% annualized loan growth, including 32% annualized commercial loan
growth
|
|
·
|
7%
annualized deposit growth
|
|
·
|
4%
increase in net interest income, compared to the third quarter of
2005
(before provision for loan losses)
|
|
·
|
10%
increase in fee income, compared to the third quarter of
2005
|
|
·
|
2%
decrease in non-interest expense, compared to the third quarter of
2005
|
Comparison
of Financial Condition at September 30, 2006 and December 31,
2005
Assets.
Total
assets were $2.21 billion at September 30, 2006, increasing by $170 million
at
an 11% annualized rate since year-end 2005. Total loans grew at a 20% annualized
rate for the year-to-date. Due to the securities repositioning, securities
with
a value of $95 million were sold pending settlement at quarter-end. An
additional $72 million were designated as held for sale at that date, and were
subsequently sold in October 2006.
Investment
Securities.
At
quarter-end, the Company changed its intent to hold certain available-for-sale
securities with a fair value of approximately $167 million, based on a change
in
strategy related to certain recent events. Due to unusually large
migrations of deposit balances from transaction and savings accounts to money
market and time deposits, the Company has faced growing liability interest
rate
sensitivity, higher funding costs, and a narrower net interest margin. The
higher cost of interest-sensitive borrowings also resulted in a larger negative
spread on older securities with lower book yields. . Management determined
that a securities portfolio repositioning would address these issues.
As
a
result, management determined it appropriate to sell $95 million of
intermediate-term mortgage-backed securities and use the proceeds to repay
overnight borrowings costing 5.25% and totaling $84 million, along with other
borrowings coming due in the fourth quarter. These securities were traded
and pending settlement at September 30, 2006. Accordingly, the losses on sale
were recorded as realized in the income statement for the most recent quarter,
and the anticipated proceeds were recorded as amounts due from broker in the
statement of financial condition at quarter-end.
Management
also decided to sell an additional $72 million of intermediate-term
mortgage-backed securities and to reinvest most of these proceeds in similar
securities with higher yields. This action was taken to improve future income
and to improve management’s flexibility in managing the investment portfolio.
These securities were designated as held for sale at quarter-end and were
subsequently sold in October. Accordingly, the unrealized losses on these
securities at September 30, 2006 were recorded as realized in the income
statement for the third quarter.
The
average book yield on the $167 million of securities chosen for the
repositioning was approximately 4.1%. The repositioning of these securities
resulted in a net securities loss for the quarter of $5.1 million, net of $0.2
million in gains on equity securities sold during the quarter. The loss on
these
securities was already recorded in stockholders’ equity, so this transaction had
no negative impact on stockholders’ equity.
Due
primarily to the repositioning, total investment securities excluding those
held
for sale decreased to $220 million at September 30, 2006, compared to $396
million at the prior quarter-end. The total unrealized loss on securities
available for sale was $9.7 million at mid-year 2006. This loss had increased
from $3.6 million at year-end 2005 due to the impact of higher interest rates,
which caused debt securities prices to decline. In the third quarter,
medium-term interest rates declined, which led to improved securities prices.
After recording the net $5.1 million in losses primarily related to the
securities repositioning, the remaining available for sale securities had a
net
unrealized gain at quarter-end of approximately $1.2 million. In addition to
the
repositioning loss recorded in the third quarter, the Company recorded an
additional loss of approximately $0.3 million in October on the final sale
of
the $72 million in securities held for sale at quarter-end. This represented
the
decline in market value from quarter-end until the actual sale date in
October.
Securities
purchases for the year-to-date have consisted primarily of locally originated
industrial revenue bonds and other local municipal securities. The Bank
decreased its holdings of FHLBB stock by $15 million to $22 million due to
the
impact of changes in the capital policies of the FHLB system. In each quarter of
2006, the Bank has recorded securities gains related primarily to the sale
of
equity securities. The Company has been reducing the size of its portfolio
of
exchange traded equity securities to reduce price risk.
Excluding
securities held for sale, quarter-end available for sale securities totaled
$180
million and included intermediate-term mortgage-backed securities with a value
of $64 million. The net unrealized loss on these securities was $0.9 million
at
that date. The average book yield of these securities was approximately 5.0%.
The sale of these securities would not have offered the benefits contemplated
by
the Company when it decided to sell the $167 million of lower yielding
securities. As noted, the Company expects to replace approximately $60 - 70
million of the sold securities with similar securities having a higher yield.
The resulting portfolio of available for sale intermediate-term mortgage-backed
securities is expected to contribute to earnings, liquidity, and asset/liability
objectives. The Company has the ability and intent to hold these securities.
Loans.
Loans
totaled $1.63 billion at September 30, 2006, increasing by $213 million (20%
annualized) in the first nine months of 2006. Most categories of loans increased
at a double digit annualized rated except for residential construction, home
equity, and commercial multi-family loans, which reflected slowing conditions
in
residential markets. Total commercial loans increased by $141 million (33%
annualized), including strong growth in commercial construction, commercial
real
estate and commercial business loans. Commercial loans are the chief focus
of
the Bank’s lending strategy, and this is a market where the Bank feels it has a
strong 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 presidents assembled expanded teams of experienced
commercial lenders who are active in these markets. The New York region is
centered in Albany, with its comparatively large commercial market. Indirect
automobile loan originations and residential mortgage loan originations have
also benefited from regional expansion, including the opening of new branches
in
New York.
Loan
Loss Allowance.
Management increased its estimate of the loan loss allowance from $13.5 million
at June 30, 2006 to $19.2 million at September 30, 2006. The loan loss allowance
was increased based on management’s assessment of the loan losses inherent in
the portfolio at September 30, 2006. The ratio of the allowance to total loans
increased from 0.87% to 1.18% during this most recent quarter. The allowance
was
increased based on higher general pool reserves, reflecting management’s
analysis that loan losses may increase above the negligible levels of recent
years due to signs in the third quarter of an economic slowing. Of the total
$5.7 million increase in the allowance, management determined that $5.5 million
of this increase was related to the adjustment to increase general pool reserve
levels.
Management
has viewed both the Company’s and the industry’s recent loan loss experience as
unusually favorable due to a combination of economic factors including generally
low interest rates, fiscal stimulus, and a strong real estate market that had
increasingly been described as a bubble by various observers. In the absence
of
countervailing indicators, the loan loss allowance has reflected these
historically low loss rates.
During
the most recent quarter, management determined that there were specific events
in the quarter which indicated that economic conditions were becoming less
supportive, and that the credit risks in its environment had shifted from the
unusually benign conditions which have predominated in recent years.
The
most
prominent change was the pronounced slowdown in residential real estate markets
in the third quarter, as evidenced in part by the national Commerce Department
report on September 2006 home prices. This report showed that the year-to-year
decline in median home prices was the largest drop in thirty-five years. While
a
significant portion of the Company’s loan portfolio is secured by residential
real estate, management’s primary focus on residential real estate relates to
its function as perhaps the chief driver of economic growth in recent years.
Management reasoned that, like a plant closing which is expected to produce
loan
losses in the future, the sudden deceleration of this key economic indicator
has
resulted in higher probable loan losses in the Company’s loan portfolio. These
losses are viewed as chiefly inherent in the commercial loan portfolio, where
cash flows and collateral values are viewed as more sensitive to economic
fluctuations. An economic slowdown is expected to result in higher probable
loan
losses because business cash flows are generally the primary source of loan
repayments and management believes that business cash flows will probably
decline as a result of an overall softening of the economy.
Also
during the third quarter, the Federal Reserve Bank (the “Fed”) suspended
interest rate increases after seventeen consecutive hikes over the last two
years. This indicates that the Fed had determined that signs of economic slowing
were sufficient to warrant this suspension. Management’s review of historic
economic data led it to conclude that an economic slowing was highly likely
to
follow the suspension of a sustained period of tightening by the Fed, and that
such economic slowing increased losses inherent in the portfolio.
An
additional third quarter event was the combined impact of higher rates, higher
prices, and higher energy costs on loan repayment sources. The prime interest
rate climbed above 8% at the start of the quarter and management viewed this
as
a significant threshold, particularly following generally low interest rates
only two years ago. Higher prices and spiking energy costs in the third quarter
also contributed to a probable tightening of debt service ability by both retail
and commercial borrowers. Additionally, the Company noted that commercial
appraisals were beginning to reflect higher capitalization rates due to both
higher interest rates and higher equity spreads expected by investors. As a
result, management determined that it was probable that both cash flows and
real
estate values will provide less credit protection in the current environment
and
that higher loan losses are therefore probable.
Based
on
these events, the Company re-evaluated its loan loss methodology related to
pools of performing loans in order to reasonably estimate the range of probable
loan losses inherent in such pools. Management reviewed all of the major loan
pools on a pool by pool basis. Primary emphasis was given to commercial loans
because of historic experience that these loans are most sensitive to economic
and real estate market conditions and have the highest potential annual loss
rate, compared to residential mortgages, home equity loans, and high grade
consumer loans. Management considered relevant historic periods during the
last
two decades that were characterized by economic slowing, declining real estate
values, and higher interest rates, and assessed related loan loss data for
each
of the loan pools. Since the Company has grown and transformed itself into
a
multi-state regional institution in recent years, management considered both
the
Company’s historical loan loss data and FDIC historical loan loss data
pertaining to commercial banks with assets ranging from $1 billion to $10
billion to assess ranges of loan loss estimates. The Company also considered
other factors on a pool by pool basis which might be relevant to probable loan
losses, such as current trends in loan performance, risk ratings, regional
and
product mix, and the increasing size of individual loans being
originated.
For
each
major loan pool, the Company analyzed the expected average life of the loan
pool
and the probable rate of loan losses over that period based on the above
factors. The Company established a reserve amount for each of the loan pools
based on these analyses. The reserve on commercial real estate was set at 1.60%
of outstanding loans based on an estimate of annual losses approximating 0.46%
of average loans. The reserve on commercial construction and development loans
was set at 1.70% based on an annual loss estimate approximating 0.85% of average
loans. The reserve on commercial business loans was set at 2.45% based on an
annual loss estimate approximating 0.98% of average loans. The combined pool
reserves on all commercial loans equated to 1.84% of outstanding commercial
loans at September 30, 2006, compared to 1.35% at year-end 2005. The reserve
on
residential mortgage loans was set at 0.28% based on an annual loss estimate
approximating 0.07% of average loans. The reserve on total consumer loans was
set at 0.64% based on an annual loss estimate approximating 0.21% of average
loans. In addition to specific pool reserves, the Company maintains an
unallocated reserve which reflects
uncertainties
in the estimation process. The unallocated reserve was set at an amount equal
to
0.11% of total loans at September 30, 2006. The Company determined that
its reserves were reasonable in comparison to this data. In addition to the
general reserves, the loan loss allowance also included a reserve for impaired
loans which totaled $660 thousand at quarter-end.
Asset
Quality.
Annualized year-to-date charge-offs were 0.04% of average loans. Quarter-end
delinquencies (30-90 days) decreased to 0.29% of total loans at quarter-end.
Total non-accruing assets measured 0.24% of total assets, and there was no
other
real estate owned at quarter-end. Nonaccruing assets increased during the third
quarter due primarily to three commercial relationships which were progressing
towards resolution at quarter-end.
Other
Assets.
The net
book value of premises increased due primarily to the de-novo branching program
in the Company’s New York market. Goodwill increased due to fair value
adjustments recorded for assets and liabilities acquired as a result of the
Woronoco acquisition. Total other assets increased primarily due to a community
development tax credit investment which totaled $4.0 million at
quarter-end.
Deposits
and Borrowings.
Total
deposits increased at an 11% annualized rate for the year-to-date, reaching
$1.49 billion at September 30, 2006. The $117 million increase in deposits
for
the year-to-date included $61 million in New York deposits in new branches,
with
total New York deposits increasing from $41 million to $102 million over this
time. Annualized year-to-date deposit growth in the Massachusetts branches
was
7%, excluding $10 million in run-off of brokered time deposits acquired in
the
Woronoco acquisition. In addition to the six branches that the Bank is operating
in New York, the Bank has received regulatory approvals for four new branches
which are expected to open in the next two quarters. With these four new
branches, the Bank will have a total of 31 branches, including 11 in Berkshire
County, 10 in the Pioneer Valley and 10 in the New York region.
The
deposit balance mix has shifted during the year from low cost transaction and
savings accounts, with balances moving into money market and time deposit
accounts. 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. Migrations of balances from lower yielding accounts
were
a significant factor contributing to the higher funding costs. The Company
continues to promote transaction accounts, which have a lower cost and more
opportunities for fee income and other relationship cross-sales.
Total
borrowings increased to $441 million at quarter-end, growing by $44 million
for
the year-to-date as loan growth outpaced deposit growth. Overnight borrowings
totaled $84 million at quarter-end; these borrowings were paid down in October
from security sales proceeds. For the year-to-date, the Bank borrowed a total
of
$56 million in two four-year notes to help fund growth of loans with
intermediate-term pricing durations.
Equity.
For the
year-to-date, stockholders’ equity increased by $8.6 million due to the benefit
of retained earnings, improved securities prices, and stock option exercises.
Total stockholders’ equity increased in the third quarter primarily due to
improvement in accumulated comprehensive other income related to the decline
in
the unrealized loss as a result of improved securities prices during the third
quarter. Partially offsetting these benefits were the impact of dividends,
treasury stock repurchases, and stock awards. 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 September 30, 2006.
The
ratio
of stockholders’ equity to assets measured 11.6% at quarter-end, decreasing from
12.1% at the prior year-end due to the strong loan growth recorded during the
year. The Bank’s capital remained in excess of the regulatory requirements for a
“well-capitalized” status. Total book value per share was $29.31 at quarter-end,
compared to $28.81 at the prior year-end.
Comparison
of Operating Results for the Three and Nine Months Ended September 30, 2006
and
2005
Net
Income.
Third
quarter results for 2006 were a loss of $2.1 million due to charges for the
previously discussed loan loss allowance adjustment and the securities
repositioning. Net income was $5.0 million in the most recent quarter before
these charges. Net income in the most recent quarter included $0.4 million
in
after-tax benefit from additional dividend income from the FHLBB as a result
of
its change in the timing of the payment of dividends, together with income
from discontinued operations. After-tax costs related to new branches in New
York were $0.3 million in the
most
recent quarter, compared to $0.1 million in the same quarter of 2005. Net income
was $4.7 million in the third quarter of 2005.
Nine-month
2006 net income totaled $7.2 million, compared to net income of $3.4 million
for
the first nine months of 2005. Most major categories of income and expense
increased for the first nine months of 2006, compared to the first nine months
of 2005, primarily due to the acquisition of Woronoco Bancorp in June 2005,
together with the benefit of organic growth. Nine month results in 2005 included
$8.7 million in charges for the termination of the Employee Stock Ownership
Plan, as well as $1.8 million in merger and acquisition related charges.
Net
Interest Income. Net
interest income increased by $0.5 million (4%) and by $8.1 million (22%) in
the
third quarter and first nine months of 2006, respectively, compared to 2005.
Growth for the year-to-date reflected the benefits of the merger and organic
growth. Growth for the third quarter primarily reflected the benefit of
additional dividend income from the FHLBB, as a result of its change in the
timing of dividends. A 6% year-to-year increase in third quarter average earning
assets was generally offset by a tightening of the net interest margin to 3.22%
from 3.31% for these quarters. The margin tightening has reflected more
competitive deposit pricing and balance migrations to higher costing accounts,
along with the impact of the inverted yield curve on the spread between interest
bearing assets and liabilities.
The
year-to-year growth in third quarter average earning assets was produced by
higher average loans, which increased by 11%, including a 25% increase in
average commercial mortgages and a 12% increase in average commercial business
loans. Average investment securities declined by 8%, primarily reflecting
run-off. The $167 million repositioning of securities in the most recent quarter
was recorded at the end of the quarter and therefore did not have a significant
effect on the quarterly averages. Total average deposits increased by 12% for
these periods, and decreases in lower costing balances were offset by increases
of 17% for average money market accounts and 29% for average time deposits.
Average interest bearing liabilities increased at the same 6% rate as average
interest bearing assets. Total borrowings decreased by 11% as securities runoff
was used to reduce borrowings until the most recent quarter, when borrowings
increased due to loan growth. The securities repositioning and repayment of
borrowings was completed after the end of the most recent quarter, and therefore
was not reflected in the average balances.
Due
to
steady increases in short-term market interest rates through the second quarter
of 2006, asset yields and liability costs have generally been steadily
increasing over the last year. The largest benefit from higher interest rates
was related to commercial business loans, which are normally tied to the
prime lending rate. The most significant cost increase was related to money
market and time deposit accounts which have seen the most competition.
Additionally, there has been significant migration from lower cost transaction
and savings accounts into these higher cost account types. This migration has
exceeded expectations, resulting in higher funding costs and liability
sensitivity. As a result, the net interest spread and margin have declined
in
each of the last three quarters (adjusting for the delay in the FHLBB dividend
in the second quarter). Growth in average stockholders’ equity has helped to
limit the decline in the year-to-year third quarter net interest margin to
0.09%, despite the 0.20% decrease in the net interest spread over this time.
The
securities repositioning previously described is expected to benefit the net
interest margin in the future.
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 included in the
discussion of financial condition. The allowance was increased based on higher
general pool reserves, reflecting management’s belief that loan losses may
increase above the negligible levels of recent years due to signs in the third
quarter of an economic slowing. The provision for loan losses recorded in the
most recent quarter totaled $6.2 million. Of that amount, approximately $5.5
million was related to the increase in the pool reserves as a result of the
new
risk conditions, and the remaining $0.7 million was viewed as related to
quarterly activity, including primarily loan growth. For the first nine months
of the year, the loan loss provision totaled $7.1 million in 2006, compared
to
$1.0 million in 2005. Net loan charge-offs totaled $0.5 million in each of
those
periods.
Non-Interest
Income.
Third
quarter 2006 non-interest income was ($1.8) million due to $5.1 million in
net
securities losses. Securities losses included a $5.3 million loss due to the
investment repositioning, which was partially offset by $247 thousand of equity
gains recorded during the quarter. Third quarter 2005 non-interest income was
$4.0 million, including $0.8 million of net securities gains. Nine month 2006
non-interest income was
$6.2
million and was net of $4.1 million of securities losses. Nine month 2005
non-interest income was $10.6 million, and included $2.6 million of securities
gains and $0.8 million in gains on the sale of securitized loans. The Company
has recorded gains on the sales of equity securities in most periods as it
has
been reducing its equity security portfolio.
Year-to-year
third quarter total fee income increased by $0.3 million (10%) due to organic
growth. The year-to-year nine month gain was $2.7 million (43%), which reflected
the benefit of the merger and organic growth. Third quarter gains included
wealth management, insurance, and loan related fees. Third quarter deposit
related fees decreased by 7%, in part reflecting the impact of higher earnings
credits resulting from higher interest rates. Management repositioned some
deposit products after the end of the quarter in order to benefit deposit fee
income beginning in the fourth quarter. Fee income growth continues to be a
significant element of the Company’s growth strategy, and is expected to benefit
from the acquisition of five insurance agencies which was completed in October
2006. The annualized ratio of fee income to average assets was 0.58% in the
first nine months of 2006, compared to 0.51% in the same period of 2005.
Miscellaneous other non-interest income in the first nine months of 2006
included $337 thousand in death benefits under bank owned life insurance
policies.
Non-Interest
Expense. Non-interest
expense decreased by $0.2 million (2%) in the third quarter and by $3.0 million
(8%) in the first nine months of 2006, compared to 2005. These decreases were
primarily due to charges recorded in 2005 for the termination of the Employee
Stock Ownership Plan (“ESOP”) and non-recurring merger and systems conversion
costs. Excluding the ESOP plan and non-recurring charges, non-interest expense
increased by $0.6 million (5%) in the third quarter and by $7.1 million (27%)
in
the first nine months of 2006, compared to 2005. The latter increase was
primarily due to the increase in the size of the institution following the
Woronoco merger. For the third quarter, higher expenses were primarily related
to the costs of new branches in New York, which totaled $0.6 million in 2006,
compared to $0.2 million in 2005. 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 $2.4 million in the first nine months 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. The third quarter ratio of non-interest expense to average assets
decreased to 2.08% in 2006, compared to 2.25% in 2005.
Income
Tax Expense and Income from Discontinued Operations.
The
effective tax benefit rate recorded on the third quarter pretax loss was
approximately 39% due to the impact of the loan loss allowance adjustment in
the
Bank, which has a higher tax rate than the consolidated entities. The effective
tax rate in the third quarter of 2005 was 34%. For the first nine months of
the
year, the effective tax rate was 30% in 2006, compared to 62% in 2005. The
latter rate was due to the non-deductibility of most of the ESOP termination
charge. Results for the second and third quarters of 2006 also included income
from discontinued operations from the sale of the Company’s data processing
subsidiary in June 2004. The Company does not expect to record significant
additional income or expense from these discontinued operations.
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 $10.2
million in comprehensive income in the first nine months of 2006, compared
to a
comprehensive loss of $0.4 million in the first nine months of 2005.
Liquidity
and Cash Flows
The
Company’s primary source of funds was deposit growth in the first nine months of
2006, together with increased borrowings and run-off of investment securities.
The primary use of funds was loan growth. The securities repositioning, which
was in process at the end of the period, produced cash in October which was
used
to repay overnight borrowings. Net deposit and loan growth are expected to
continue to be significant sources and uses of funds. 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. The holding
company obtained a $15 million short term unsecured loan in October to provide
partial short term financing for the insurance agency acquisitions, and
additionally used existing cash balances to complete this transaction.
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 September 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 nine months ended September 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 nine months of 2006.
Subsequent
Events
On
October 24, 2006, the Company announced plans to acquire five Western
Massachusetts insurance agencies: Reynolds, Barnes & Hebb and McCormick,
Smith & Curry Insurance Agency, both of Pittsfield; Minkler Insurance
Agency, of Stockbridge; H.S. Andrews Insurance Agency, of Great Barrington;
and
MassOne Insurance Agency, of Greenfield.
The
Company completed these transactions in October, using available cash and short
term financing. The acquired agencies were combined with the Company’s existing
Berkshire Insurance Group. Berkshire Insurance Group offers complete lines
of
commercial and personal property and casualty insurance and group and individual
life, disability, and health insurance. The MassOne purchase was structured
as
an asset purchase, and the other acquisitions were structured as stock
purchases. Additionally, the Andrews agency was acquired by the Minkler agency
before the Company’s purchase. As part of this series of transactions, Berkshire
Insurance Group was transferred from a subsidiary of the Bank to a subsidiary
of
the parent holding company.
On
November 2, 2006, the Federal Deposit Insurance Corporation (the "FDIC")
adopted
final regulations to implement the Federal Deposit Insurance Reform Act of
2005
passed by Congress earlier this year to create a stronger and more stable
insurance system. The final regulations include the annual assessment rates
that
will take effect at the beginning of 2007. The new assessment rates for nearly
all banks will vary between five and seven cents for every $100 of domestic
deposits. As part of the Reform Act, Congress provided credits to institutions
that paid high premiums in the past to bolster the FDIC’s insurance reserves. As
a result, according to the FDIC, the majority of banks will have assessment
credits to initially offset all of their premiums in 2007. The preliminary
assessment credit for Berkshire Bank was calculated at $1.1 million. At this
time we believe the assessment credit will not be recognized up front, but
recognized on a go-forward basis only to the extent the credit is used to
reduce
future deposit premiums that would otherwise be due. Accordingly, we expect
the
reinstitution of deposit premiums by the FDIC will not have a material effect
on
our financial condition, results of operations or cash flows until after
2007.
On
November 3, 2006, a commercial customer of the Bank, with $6.1 million in loans
outstanding, filed for voluntary bankruptcy under Chapter 11. The customer
is a mechanical contractor in the Albany area. The
loan
was originated in June 2006 and was generally secured by assets, consisting
primarily of receivables and inventory. This loan was
performing at September 30, 2006 and was rated satisfactory according to the
Bank’s internal rating system. The Bank has reclassified the loan as
non-performing as of November 3, 2006. The Bank is currently
pursuing the remedies available under its loan documentation and
is assessing the credit risk related to this asset.
ITEM 3. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
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 generally
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
|
|
Interest
Rates-Basis
|
|
1
-
12 Months
|
|
13
- 24 Months
|
|
Points
(Rate Ramp)
|
|
$
Change
|
|
%
Change
|
|
$
Change
|
|
%
Change
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+
200
|
|
$
|
(41
|
)
|
|
(0.07
|
)%
|
$
|
(986
|
)
|
|
(1.53
|
)%
|
+
100
|
|
|
216
|
|
|
0.35
|
|
|
(103
|
)
|
|
(0.16
|
)
|
-
100
|
|
|
613
|
|
|
0.98
|
|
|
1,605
|
|
|
2.49
|
|
-
200
|
|
|
600
|
|
|
0.96
|
|
|
708
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the first nine months of the year, the Company’s liability sensitivity increased
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 nine months of 2006, the Company
recorded approximately $56 million in two-four year FHLBB borrowings as a result
of such evaluations.
During
the third quarter of 2006, the Company continued to experience increased
liability sensitivity. The Federal Reserve Bank suspended its interest rate
hikes, after 17 consecutive rate hikes over the past two years. Normally the
Company experiences immediate benefit from rate hikes because prime based assets
reset within 30 - 60 days, whereas deposit repricings typically are more lagged.
However, the Company’s net interest margin declined to the low end of the
expected range during the third quarter, and the Company decided to reposition
the investment securities portfolio and to use the proceeds to repay borrowings
in order to reduce liability sensitivity and to improve net interest income.
While the deleveraging was not completed until October, the September 30, 2006
analysis includes the benefit of the repositioning as it related to interest
rate sensitivity. The model showed that sensitivity was generally neutral in
most scenarios over the first year, with some continuing liability sensitivity
in the second model year. The Company felt that it was 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.
As a
result of improved market prices and the investment securities portfolio
repositioning, the securities portfolio had a small net unrealized gain at
September 30, 2006. As a result of the deleveraging and ongoing equity
securities sales, the Company’s overall exposure to market risk was viewed as
lower at quarter-end, compared to the prior twelve months.
ITEM 4. |
CONTROLS
AND PROCEDURES
|
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. During the third quarter of 2006, the Company
converted its investment securities accounting to a new accounting system.
This
was a planned improvement to the Company’s financial accounting systems, and was
not a response to an identified significant deficiency or material weakness.
There was no other 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.
ITEM 1. |
LEGAL
PROCEEDINGS
|
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.
An
investment in our common stock involves risk. You should
carefully consider the risks described below and all other information contained
in Form 10-Q before you decide to buy our common stock. It is possible
that risks and uncertainties not listed below may arise or become material
in
the future and affect our business.
Lending
Our
emphasis on commercial lending may expose us to increased lending risks,
which
could hurt our profits.
Our
commercial loan portfolio, which consists of commercial real estate loans,
construction and development loans and commercial and industrial loans has
increased from $570 million at December 31, 2005 to $711 million at
September 30, 2006. A significant portion of this growth has included
construction and development loans which may have higher risk, and loans
in new
markets, where the Company has less historic knowledge of the market. Also,
commercial
loans are
more
sensitive to economic downturns and the possible impact of higher interest
rates. Such sensitivity includes
potentially higher default rates and possible diminution of collateral values.
Some
of
the growth in commercial loans is also attributable to larger loan sizes
and
larger relationship exposures,
which
can have a greater impact on profits in the event of adverse loan performance.
Commercial
lending also involves more development financing, which
is
dependent on the future success of new operations. Additionally,
the Company has expanded its commercial lending team to accomplish this growth,
and this has the potential to increase risk relating to underwriting and
administrative controls as new lenders are integrated into the control
environment. These and other factors may result in errors in judging the
collectibility of commercial loans, which may lead to additional provisions
or
charge-offs.
Our
allowance for loan losses may prove to be insufficient to absorb losses in
our
loan portfolio.
Like
all
financial institutions, we maintain an allowance for loan losses to provide
for
loans in our portfolio that may not be repaid in their entirety. We believe
that
our allowance for loan losses is maintained at a level adequate to absorb
probable losses inherent in our loan portfolio as of the corresponding balance
sheet date. However, our allowance for loan losses may not be sufficient to
cover actual loan losses, and future provisions for loan losses could materially
adversely affect our operating results.
In
evaluating the adequacy of our allowance for loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth
of
our loan portfolio, changes in the composition of our loan portfolio and the
volume of delinquent and criticized loans. In addition, we use information
about
specific borrower situations, including their financial position and estimated
collateral values, to estimate the risk and amount of loss for those borrowers.
Finally, we also consider many qualitative factors, including general and
economic business conditions, the local residential real estate market, the
interest rate environment, fiscal and monetary policy of the United States
government, energy prices, commercial real estate conditions, the duration
of
the current business cycle, current general market collateral valuations, trends
apparent in any of the factors we take into account and other matters, which
are
by nature more subjective and fluid. Our estimates of the risk of loss and
amount of loss on any loan are complicated by the significant uncertainties
surrounding our borrowers’ abilities to successfully execute their business
models through changing economic environments, competitive challenges and other
factors. Because of the degree of uncertainty and susceptibility of these
factors to change, our actual losses may vary from our current
estimates.
Based
on
our review of the above-mentioned factors, we recorded a provision for loan
losses of $6.2 million in the quarter ended September 30, 2006 to bring our
allowance for loan losses on September 30, 2006 to $19.2 million, which was
1.18% of total loans. State and federal regulators, as an integral part of
their
examination process, periodically review our allowance for loan losses and
may
require us to increase our allowance for loan losses by recognizing additional
provisions for loan losses charged to expense, or to decrease our allowance
for
loan losses by recognizing loan charge-offs, net of recoveries. Any such
additional provisions for loan losses or charge-offs, as required by these
regulatory agencies, could have a material adverse effect on our financial
condition and results of operations.
A
downturn in the local economy or a decline in real estate
values could hurt our profits.
77%
of
our loans were secured by real estate as of September 30, 2006. In recent years,
there has been a significant
increase in real estate values in our market area. A decline in real estate
values could expose us to a greater
risk of loss. Because
the majority of our borrowers and depositors are individuals and businesses
located and doing business in our market areas, our success significantly
depends to a significant extent upon economic conditions in our market areas.
Adverse economic conditions in our market areas could reduce our growth rate,
affect the ability of our customers to repay their loans and generally affect
our financial condition and results of operations. Conditions such as inflation,
recession, unemployment, high interest rates, short money supply, scarce natural
resources, international disorders, terrorism and other factors beyond our
control may adversely affect our profitability. We are less able than a larger
institution to spread the risks of unfavorable local economic conditions across
a large number of diversified economies. Any sustained period of increased
payment delinquencies, foreclosures or losses caused by adverse market or
economic conditions in our market areas could adversely affect the value of
our
assets, revenues, results of operations and financial condition. Moreover,
we
cannot give any assurance we will benefit from any market growth or favorable
economic conditions in our primary market areas if they do occur.
Growth
Our
geographic expansion and growth, if not successful, could negatively impact
earnings.
We
plan
to achieve
significant growth both organically and through acquisitions. We have recently
expanded into new geographic markets and anticipate
that we will expand into additional new geographic markets as we transform
ourselves into a regional bank. The success of this
expansion will depend on our ability to continue to maintain and develop an
infrastructure appropriate to support such growth. Also, our success will depend
on the acceptance by customers of us and our services in these new markets
and,
in the case of expansion through acquisitions, the success of acquisitions
depends on many factors, including the long-term retention of key personnel
and
acquired customer relationships. The profitability of our expansion strategy
also will depend on whether the income we generate in the new markets
will offset
the increased expenses of operating a larger entity with increased personnel,
more branch locations and additional product
offerings. We expect that it may take a period of time before certain of our
new
branches can become profitable, especially
in areas in which we do not have an established physical presence. During this
period, operating these new
branches may negatively impact net income. Additionally, in connection with
our
expansion, we will need
to
increase our operational and financial procedures, systems and controls. If
we
have difficulty in doing so, it could
harm our
business, results of operations and financial condition.
Competition
from financial institutions and other financial service providers may adversely
affect our growth and profitability.
The
banking business is highly competitive and we experience competition in each
of
our markets from many other financial institutions. We compete with commercial
banks, credit unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market funds, and other mutual funds, as well as other super-regional,
national and international financial institutions that operate offices in our
primary market areas and elsewhere.
We
compete with these institutions both in attracting deposits and in making loans.
This competition has made it more difficult for us to make new loans and has
occasionally forced us to offer higher deposit rates. Price competition for
loans and deposits might result in our earning less on our loans and paying
more
on our deposits, which reduces net interest income. Many of our competitors
are
larger financial institutions. While we believe we can and do successfully
compete with these other financial institutions in our primary markets, we
may
face a competitive disadvantage as a result of our smaller size, smaller
resources and smaller lending limits, lack of geographic diversification and
inability to spread our marketing costs across a broader market.
Interest
Rate
Fluctuations
in interest rates could reduce our profitability and affect the value of our
assets.
Like
other financial institutions, we are subject to interest rate risk. Our primary
source of income is net interest income, which is the difference between
interest earned on loans and investments and the interest paid on deposits
and
borrowings. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the relationships
of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest
rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products (e.g.,
prime) may not change to the same degree over a given time period. In any event,
if market interest rates should move contrary to our position, our earnings
may
be negatively affected. In addition, loan volume and quality and deposit volume
and mix can be affected by market interest rates. Changes in levels of market
interest rates could materially adversely affect our net interest spread, asset
quality, origination volume and overall profitability.
Interest
rates have recently been at historically low levels. However, since
June 30, 2004, the U.S. Federal Reserve has increased its target for the
federal funds rate seventeen times, from 1.00% to 5.25%. While these short-term
market interest rates (which we use as a guide to price our deposits) have
increased, longer-term market interest rates (which we use as a guide to price
our longer-term loans) have not increased at this rate. This “flattening” of the
market yield curve has had a negative impact on our interest rate spread and
net
interest margin to date. If short-term interest rates continue to rise, and
if
rates on our deposits and borrowings continue to reprice upwards faster than
the
rates on our long-term loans and investments, we would experience further
compression of our interest rate spread and net interest margin, which would
have a negative effect on our net interest income and hence our profitability.
We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate environment,
we may not be able to manage this risk effectively. If we are unable to manage
interest rate risk effectively, our business, financial condition and results
of
operations could be materially harmed.
Changes
in the level of interest rates also may negatively affect our ability to
originate real estate loans, the value of our assets and our ability to realize
gains from the sale of our assets, all of which ultimately affect our
earnings.
Our
investment portfolio will include securities that are sensitive to interest
rates and variations in interest rates may adversely impact our profitability.
Our
consolidated securities portfolio will include mortgage-backed securities,
which
will be insured or guaranteed by U.S. government agencies or
government-sponsored enterprises and U.S. government securities. These
securities are sensitive to interest rate fluctuations. The unrealized gains
or
losses in our available-for-sale portfolio are reported as a separate component
of stockholders’ equity until realized upon sale. As a result, future interest
rate fluctuations may impact
stockholders’
equity, causing material fluctuations from quarter to quarter. Failure to hold
our securities until maturity or until market conditions are favorable for
a
sale could adversely affect our financial condition, profitability and
prospects.
Liquidity
Our
wholesale funding sources may prove insufficient to replace deposits at maturity
and support our future growth.
We
must
maintain sufficient funds to respond to the needs of depositors and borrowers.
As a part of our liquidity management, we use a number of funding sources in
addition to core deposit growth and repayments and maturities of loans and
investments. As we continue to grow, we are likely to become more dependent
on
these sources, which include Federal Home Loan Bank advances and proceeds from
the sale of loans. At September 30, 2006, we had approximately $441 million
of
FHLBB advances outstanding. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at acceptable interest
rates. Finally, if we are required to rely more heavily on more expensive
funding sources to support future growth, our revenues may not increase
proportionately to cover our costs. In this case, our operating margins and
profitability would be adversely affected.
Our
ability to service our debt, pay dividends and otherwise pay our obligations
as
they come due is substantially dependent on capital distributions from Berkshire
Bank, and these distributions are subject to regulatory limits and other
restrictions.
A
substantial source of our income from which we service our debt, pay our
obligations and from which we can pay dividends is the receipt of dividends
from
Berkshire Bank. The availability of dividends from Berkshire Bank is limited
by
various statutes and regulations. It is possible, depending upon the financial
condition of Berkshire Bank, and other factors, that the applicable regulatory
authorities could assert that payment of dividends or other payments is an
unsafe or unsound practice. If Berkshire Bank is unable to pay dividends to
us,
we may not be able to service our debt, pay our obligations or pay dividends
on
our common stock. The inability to receive dividends from Berkshire Bank would
adversely affect our business, financial condition, results of operations and
prospects.
Operations
We
operate in a highly regulated environment and may be adversely affected by
changes in laws and
regulations.
Berkshire
Hills Bancorp is subject to extensive regulation, supervision and examination
by
the Office of Thrift Supervision, its
chartering authority, and Berkshire Bank is subject to extensive supervision
and
examination by the Massachusetts Division of
Banks,
its chartering authority, and the Federal Deposit Insurance Corporation, as
insurer of Berkshire Bank’s deposits. Such regulations
and supervision govern the activities in which an institution and its holding
company may engage, and are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in their supervisory and enforcement
activities, including the imposition of restrictions on operations, the
classification of assets and determination of the level of allowance for loan
losses. Any change in such regulation and oversight, whether in the form of
regulatory
policy, regulations, legislation or supervisory action may have a material
impact on our operations. Berkshire Hills Bancorp primarily depends on Berkshire
Bank for dividends as a source of funds to service its indebtedness and to
pay
dividends to
shareholders. Such dividends may be restricted or prohibited by regulatory
authorities.
We
are subject to security and operational risks relating to our use of technology
that could damage our reputation and our business.
Security
breaches in our internet banking activities could expose us to possible
liability and damage our reputation. Any compromise of our security also could
deter customers from using our internet banking services that involve the
transmission of confidential information. We rely on standard internet security
systems to provide the security and
authentication
necessary to effect secure transmission of data. These precautions may not
protect our systems from compromises or breaches of our security measures that
could result in damage to our reputation and our business. Additionally, we
outsource some of our data processing to third parties. If our third party
providers encounter difficulties or if we have difficulty in communicating
with
such third parties, it will significantly affect our ability to adequately
process and account for customer transactions, which would significantly affect
our business operations.
Goodwill
Our
acquisitions have resulted in significant goodwill, which if it becomes impaired
would be required to be written down, which would negatively impact
earnings.
We
acquired Woronoco Bancorp, Inc. in 2005, and have purchased insurance and
financial planning businesses in the last
two
years, including the insurance agencies we acquired in October. We will
pursue additional opportunities for acquisitions in the future, including
acquisitions in adjacent states.
The success of acquisitions depends on many factors, including the long term
retention of key personnel and acquired customer relationships. We
recorded goodwill and other intangible assets in conjunction with the Woronoco
Acquisition and will record additional goodwill in connection with the insurance
agency acquisitions, and such assets may be
recorded in future acquisitions. If these assets were to become impaired, we
would be required to write them
down,
impacting earnings and capital.
|
(a)
|
No
Company unregistered securities were sold by the Company during the
quarter ended September 30, 2006.
|
|
(c)
|
The
following table provides certain information with regard to shares
repurchased by the Company in the third 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
|
July
1-
July
31, 2006
|
-
|
$
-
|
-
|
300,000
|
August
1-
August
31, 2006
|
2,172
|
$
35.15
|
-
|
300,000
|
September
1-
September
30, 2006
|
-
|
$
-
|
-
|
300,000
|
Total
|
2,172
|
$
35.15
|
-
|
300,000
|
The
shares purchased in the third quarter represent outstanding shares delivered
to
pay for the exercise price of stock options. 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 September 30, 2006,
there had been no purchases made pursuant to this plan. There were no other
stock purchase plans in effect at September 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.
ITEM 3. |
DEFAULTS
UPON SENIOR SECURITIES
|
ITEM 4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
ITEM 5. |
OTHER
INFORMATION
|
|
|
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)
|
|
31.1 |
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
31.2 |
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
32.1 |
Section
1350 Certification of Chief Executive
Officer
|
|
32.2 |
Section
1350 Certification of Chief Financial Officer
|
___________________________________________
|
(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:
November 8, 2006
|
By:
|
/s/
Michael P. Daly
|
|
|
|
Michael
P. Daly
|
|
|
|
President,
Chief Executive Officer
|
|
|
|
and
Director
|
|
|
|
|
|
|
|
|
|
Dated:
November 8, 2006
|
By:
|
/s/
Wayne F. Patenaude
|
|
|
|
Wayne
F. Patenaude
|
|
|
|
Senior
Vice President,
|
|
|
|
Chief
Financial Officer and Treasurer
|
|
35