BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Basis
of Presentation and Consolidation, and Use of
Estimates
The
consolidated financial statements include the accounts of Berkshire Hills
Bancorp, Inc. ("Berkshire" or the "Company") and its wholly-owned subsidiaries:
Berkshire Bank (the "Bank") and Berkshire Insurance Group, but exclude 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, 2007 are not necessarily
indicative of the results which may be expected for the year.
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, tax related 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, 2006.
On
September 21, 2007, the Company acquired all of the outstanding common stock
of
Factory Point Bancorp, Inc., including its principal wholly-owned subsidiary,
Factory Point National Bank of Manchester Center (see Note 2). Immediately
after
the completion of the acquisition, Factory Point National Bank of Manchester
Center was merged into the Bank.
Business
Through
its wholly-owned subsidiaries, the Company provides a variety of financial
services to individuals, municipalities and businesses through its offices
in
Western Massachusetts, Southern Vermont and Northeastern New York. Its primary
deposit products are checking, NOW, money market, savings, and time deposit
accounts. Its primary lending products are residential mortgage,
commercial mortgage, commercial business loans and consumer loans. The Company
offers electronic banking, cash management, and other transaction and reporting
services. The Company offers wealth management services including trust,
financial planning, and investment services. The Company is the agent for
complete lines of property and casualty, life, disability, and health
insurance.
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,
|
|
(In
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income (loss) applicable to common stock
|
|
$ |
944
|
|
|
$ |
(2,120 |
) |
|
$ |
10,462
|
|
|
$ |
7,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
9,023
|
|
|
|
8,657
|
|
|
|
8,869
|
|
|
|
8,616
|
|
Less:
average number of unvested stock award shares
|
|
|
(101 |
) |
|
|
(100 |
) |
|
|
(95 |
) |
|
|
(100 |
) |
Average
number of basic shares outstanding
|
|
|
8,922
|
|
|
|
8,557
|
|
|
|
8,774
|
|
|
|
8,516
|
|
Plus:
average number of unvested stock award shares
|
|
|
101
|
|
|
|
-
|
|
|
|
95
|
|
|
|
100
|
|
Plus:
average number of dilutive stock options
|
|
|
22
|
|
|
|
-
|
|
|
|
52
|
|
|
|
159
|
|
Average
number of diluted shares outstanding
|
|
|
9,045
|
|
|
|
8,557
|
|
|
|
8,921
|
|
|
|
8,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$ |
0.11
|
|
|
$ |
(0.25 |
) |
|
$ |
1.19
|
|
|
$ |
0.84
|
|
Diluted
earnings (loss) per share
|
|
$ |
0.10
|
|
|
$ |
(0.25 |
) |
|
$ |
1.17
|
|
|
$ |
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
Statements
of Financial Accounting Standards (“SFAS”)
SFAS
No. 157, “Fair Value Measurements.” SFAS 157 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.
SFAS
No. 159, “The Fair Value Option for FinancialAssets and
Financial Liabilities.” SFAS 159 permits all entities to choose to elect to
measure eligible financial instruments at fair value. A business entity shall
report unrealized gains and losses on items for which the fair value option
has
been elected in earnings. Eligible items include any recognized financial
assets
and liabilities with certain exceptions including but not limited to, deposit
liabilities, investments in subsidiaries, and certain deferred compensation
arrangements. The decision about whether to elect the fair value option is
generally applied on an instrument by instrument basis, is generally
irrevocable, and is applied only to an entire instrument and not to only
specified risks, specific cash flows, or portions of that instrument. This
Statement is effective as of the beginning of each reporting entity’s first
fiscal year that begins after November 15, 2007. Management is currently
analyzing the impact of making this election for any of the Company’s eligible
financial assets or liabilities.
Financial
Accounting Standards Board (“FASB”) Interpretation and Task Force
Issue
FASB
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109.” The Company adopted
the provisions of FIN 48 effective January 1, 2007. FIN 48 prescribes
a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will
be
sustained upon examination by the appropriate taxing authority that would
have
full knowledge of all relevant information.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
tax
position that meets the more-likely-than-not recognition threshold is measured
at the largest amount of benefit that is greater than fifty percent likely
of
being realized upon ultimate settlement. Tax positions that previously failed
to
meet the more-likely-than-not recognition threshold should be recognized
in the
first subsequent financial reporting period in which that threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. FIN 48 also provides
guidance on the accounting for and disclosure of unrecognized tax benefits,
interest and penalties. Adoption of FIN 48 did not have a significant impact
on
the Company's financial statements. The Company files income tax
returns in the U.S. federal jurisdiction. The Company is no longer
subject to U.S. federal income tax examinations by tax authorities for years
before 2004. The Company accounts for interest and
penalties related to uncertain tax positions as part of its provision for
federal and state income taxes.
EITF
No. 06-10, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.”
EITF 06-10 requires employers to recognize a liability for the
post-retirement benefit related to collateral assignment split-dollar life
insurance arrangements in accordance with SFAS No. 106 or APB Opinion
No. 12. EITF 06-10 also requires employers to recognize and measure an
asset based on the nature and substance of the collateral
assignment split-dollar life insurance arrangement. The provisions of EITF
06-10
are
effective for the Company on January 1, 2008, with earlier application
permitted, and are to be applied as a change in accounting principle either
through a cumulative-effect adjustment to retained earnings or other components
of equity or net assets in the statement of financial position as of the
beginning of the year of adoption; or as a change in accounting principle
through retrospective application to all prior periods. The Company is in
the
process of evaluating the potential impacts of adopting EITF 06-10 on its
financial statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER
WITH FACTORY POINT BANCORP, INC.
On
September 21, 2007, the Company completed its acquisition of Factory Point
Bancorp, Inc. and its subsidiary, Factory Point National Bank of Manchester
Center, (collectively “Factory Point”) for $79.4 million, including the
assumption of Factory Point stock options. Under the terms of the agreement,
the
Company issued 1,913,352 shares of the Company’s common stock and paid $16.0
million in cash in exchange for all outstanding Factory Point shares and
stock
options. Concurrent with the merger of Berkshire and Factory Point, the Bank
and
Factory Point National Bank merged with the Bank surviving. The
results of operations for Factory Point are included in our results subsequent
to the acquisition date.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed as the date of acquisition. We are in the process of
finalizing the purchase accounting for the acquisition; thus, the allocation
of
purchase price is subject to change.
(In
thousands)
|
|
September
21, 2007
|
|
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$ |
14,076
|
|
Investments
|
|
|
68,403
|
|
Loans,
net
|
|
|
231,846
|
|
Premises
and equipment, net
|
|
|
7,509
|
|
Cash
surrender value of life insurance policies
|
|
|
3,900
|
|
Goodwill
|
|
|
53,385
|
|
Intangible
assets
|
|
|
7,092
|
|
Other
assets
|
|
|
4,521
|
|
Total
assets acquired
|
|
$ |
390,732
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits
|
|
$ |
269,027
|
|
Borrowings
|
|
|
34,202
|
|
Other
liabilities
|
|
|
2,363
|
|
Total
liabilities assumed
|
|
$ |
305,592
|
|
|
|
|
|
|
Net
assets acquired
|
|
$ |
85,140
|
|
The
$7.1
million of acquired intangible assets was assigned to the core deposit premium
intangible, subject to amortization. The core deposit premiums are being
amortized over their estimated useful life of eight years using an accelerated
method. The goodwill recognized in the acquisition of approximately $53.4
million is not expected to be deductible for tax purposes.
The
Company’s cost to acquire Factory Point is as follows:
(In
thousands)
|
|
|
|
Cash
paid to Factory Point stockholders
|
|
$ |
16,015
|
|
Common
stock issued to Factory Point stockholders and stock options
assumed
|
|
|
63,423
|
|
Total
consideration
|
|
|
79,438
|
|
|
|
|
|
|
Professional
fees and other acquisition costs
|
|
|
5,702
|
|
Net
assets acquired
|
|
$ |
85,140
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pro
Forma
Financial Information
The
unaudited pro forma financial information assumes that the Factory Point
acquisition was consummated on January 1 of the periods presented. The pro
forma
adjustments are based on information available and certain assumptions that
we
believe are reasonable. Certain acquisition related adjustments are not included
in the pro forma information since they were recorded after completion of
the
acquisition. This pro forma information is presented for
informational purposes only and is not necessarily indicative of the results
of
future operations that would have been achieved had the acquisition taken
place
at the beginning of 2006. Pro forma information is as follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
$ |
37,558
|
|
|
$ |
36,648
|
|
|
$ |
111,533
|
|
|
$ |
101,557
|
|
Interest
expense
|
|
|
19,325
|
|
|
|
18,045
|
|
|
|
57,250
|
|
|
|
47,909
|
|
Net
interest income
|
|
|
18,233
|
|
|
|
18,603
|
|
|
|
54,283
|
|
|
|
53,648
|
|
Provision
for loan losses
|
|
|
930
|
|
|
|
6,185
|
|
|
|
1,780
|
|
|
|
7,465
|
|
Net
interest income after provision for loan losses
|
|
|
17,303
|
|
|
|
12,418
|
|
|
|
52,503
|
|
|
|
46,183
|
|
Non-interest
income
|
|
|
3,217
|
|
|
|
(823 |
) |
|
|
20,123
|
|
|
|
9,028
|
|
Non-interest
expense
|
|
|
20,780
|
|
|
|
13,833
|
|
|
|
56,528
|
|
|
|
41,553
|
|
(Loss)
income before income taxes
|
|
|
(260 |
) |
|
|
(2,238 |
) |
|
|
16,098
|
|
|
|
13,658
|
|
Income
tax (benefit) expense
|
|
|
(196 |
) |
|
|
(1,122 |
) |
|
|
4,786
|
|
|
|
3,752
|
|
Net
(loss) income
|
|
$ |
(64 |
) |
|
$ |
(1,116 |
) |
|
$ |
11,312
|
|
|
$ |
9,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.11 |
) |
|
$ |
1.06
|
|
|
$ |
0.95
|
|
Diluted
earnings (loss) per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
$ |
1.04
|
|
|
$ |
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES
A
summary
of securities follows:
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
September
30, 2007
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$ |
4,656
|
|
|
$ |
4,657
|
|
Municipal
bonds and obligations
|
|
|
66,522
|
|
|
|
66,586
|
|
Mortgage-backed
securities, other
|
|
|
85,915
|
|
|
|
86,070
|
|
Other
bonds and obligations
|
|
|
12,953
|
|
|
|
12,960
|
|
Total
debt securities
|
|
|
170,046
|
|
|
|
170,273
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
21,077
|
|
|
|
21,077
|
|
Other
equity securities
|
|
|
2,387
|
|
|
|
3,024
|
|
Total
equity securities
|
|
|
23,464
|
|
|
|
24,101
|
|
Total
securities available for sale
|
|
|
193,510
|
|
|
|
194,374
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
38,644
|
|
|
|
38,643
|
|
Mortgage-backed
securities
|
|
|
3,334
|
|
|
|
3,293
|
|
Total
securities held to maturity
|
|
|
41,978
|
|
|
|
41,936
|
|
Total
securities
|
|
$ |
235,488
|
|
|
$ |
236,310
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
63,788
|
|
|
$ |
64,503
|
|
Mortgage-backed
securities
|
|
|
85,102
|
|
|
|
84,334
|
|
Other
bonds and obligations
|
|
|
20,392
|
|
|
|
20,439
|
|
Total
debt securities
|
|
|
169,282
|
|
|
|
169,276
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
21,766
|
|
|
|
21,766
|
|
Other
equity securities
|
|
|
2,921
|
|
|
|
3,164
|
|
Total
equity securities
|
|
|
24,687
|
|
|
|
24,930
|
|
Total
securities available for sale
|
|
|
193,969
|
|
|
|
194,206
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
35,572
|
|
|
|
35,286
|
|
Mortgage-backed
securities
|
|
|
4,396
|
|
|
|
4,400
|
|
Total
securities held to maturity
|
|
|
39,968
|
|
|
|
39,686
|
|
Total
securities
|
|
$ |
233,937
|
|
|
$ |
233,892
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS
Loans
consisted of the
following:
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
(Dollars
in thousands)
|
|
Balance
|
|
|
Balance
|
|
Residential
mortgages:
|
|
|
|
|
|
|
1
-
4 Family
|
|
$ |
611,817
|
|
|
$ |
566,951
|
|
Construction
|
|
|
46,777
|
|
|
|
32,322
|
|
Total
residential mortgages
|
|
|
658,594
|
|
|
|
599,273
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
146,963
|
|
|
|
129,798
|
|
Single
and multi-family
|
|
|
61,126
|
|
|
|
64,619
|
|
Other
commercial mortgages
|
|
|
486,561
|
|
|
|
372,657
|
|
Total
commercial mortgages
|
|
|
694,650
|
|
|
|
567,074
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
203,594
|
|
|
|
189,758
|
|
Total
commercial loans
|
|
|
898,244
|
|
|
|
756,832
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
Auto
|
|
|
207,800
|
|
|
|
195,912
|
|
Home
equity and other
|
|
|
173,888
|
|
|
|
146,970
|
|
Total
consumer loans
|
|
|
381,688
|
|
|
|
342,882
|
|
Total
loans
|
|
$ |
1,938,526
|
|
|
$ |
1,698,987
|
|
|
|
|
|
|
|
|
|
|
5. LOAN
LOSS ALLOWANCE
Activity
in the allowance for loan
losses was as follows:
|
|
Nine
Months Ended September 30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of period
|
|
$ |
19,370
|
|
|
$ |
13,001
|
|
Provision
for loan losses
|
|
|
1,240
|
|
|
|
7,075
|
|
Allowance
attributed to acquired loans
|
|
|
4,453
|
|
|
|
-
|
|
Reclassification
of commitment reserve to other liabilites
|
|
|
-
|
|
|
|
(425 |
) |
Loans
charged-off
|
|
|
(3,259 |
) |
|
|
(1,022 |
) |
Recoveries
|
|
|
304
|
|
|
|
524
|
|
Balance
at end of period
|
|
$ |
22,108
|
|
|
$ |
19,153
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEPOSITS
A
summary
of period end time deposits is as follows:
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
(Dollars
in thousands)
|
|
Balance
|
|
|
Balance
|
|
Time
less than $100,000
|
|
$ |
423,589
|
|
|
$ |
369,325
|
|
Time
$100,000 or more
|
|
|
309,604
|
|
|
|
280,308
|
|
Brokered
time
|
|
|
26,578
|
|
|
|
41,741
|
|
Total
time deposits
|
|
$ |
759,771
|
|
|
$ |
691,374
|
|
7. REGULATORY
CAPITAL
The
Bank’s actual and required capital ratios were as follows:
|
|
|
|
|
|
|
|
|
FDIC
Minimum
|
|
September
30, 2007
|
|
December
31, 2006
|
|
to
be Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
|
10.5
|
%
|
|
|
10.3
|
%
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets
|
|
9.4
|
|
|
|
9.1
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
9.1
|
|
|
|
7.7
|
|
|
|
5.0
|
|
At
each
date shown, Berkshire Bank met the conditions required to be classified as
“well
capitalized” under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios
as set forth in the table above.
8. STOCK-BASED
COMPENSATION PLANS
A
combined summary of activity in the Company’s stock award and stock option plans
for the nine months ended September 30, 2007 is presented in the following
table:
|
|
Non-vested
Stock Awards
Outstanding
|
|
|
Stock
Options Outstanding
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Grant
Date
|
|
|
Number
of
|
|
|
Exercise
|
|
(Shares
in thousands)
|
|
Shares
|
|
|
Fair
Value
|
|
|
Shares
|
|
|
Price
|
|
Balance,
December 31, 2006
|
|
|
127
|
|
|
$ |
30.02
|
|
|
|
586
|
|
|
$ |
20.62
|
|
Granted
|
|
|
56
|
|
|
|
33.44
|
|
|
|
20
|
|
|
|
33.46
|
|
Acquired
from Factory Point
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
|
|
20.43
|
|
Stock
options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(100 |
) |
|
|
16.19
|
|
Stock
awards vested
|
|
|
(41 |
) |
|
|
30.80
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(41 |
) |
|
|
27.15
|
|
|
|
(2 |
) |
|
|
22.30
|
|
Balance,
September 30, 2007
|
|
|
101
|
|
|
$ |
32.75
|
|
|
|
676
|
|
|
$ |
21.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended September 30, 2007 and 2006, proceeds from stock option
exercises totaled $1.6 million and $2.8 million, respectively. During the
nine
months ended September 30, 2007, there were 156,000 shares issued in connection
with stock option exercises and non-vested stock awards. All of these
shares were issued from available treasury stock. There were 172,000
stock options assumed from Factory Point for a total value of $2.1
million. Stock-based compensation expense totaled $1.2 million and
$1.1 million during the nine months ended September 30, 2007 and 2006.
Stock-based compensation expense is recognized ratably over the requisite
service period for all awards.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9. OPERATING
SEGMENTS
The
Company has two reportable operating segments, Banking and Insurance, which
are
delineated by the consolidated subsidiaries of Berkshire Hills
Bancorp. Banking includes the activities of Berkshire Bank and its
subsidiaries, which provide commercial and consumer banking
services. Insurance includes the activities of Berkshire Insurance
Group, which provides commercial and consumer insurance services. The
only other consolidated financial activity of the Company is the Parent,
which
consists of the transactions of Berkshire Hills Bancorp. There are no
income statement eliminations. The total consolidated average assets
are net of eliminations of $288 million and $264 million for the three months
ended September 30, 2007 and 2006, respectively and $272 million and $284
million for the nine months ended September 30, 2007 and 2006,
respectively.
The
accounting policies of each reportable segment are the same as those of the
Company. The Insurance segment and the Parent reimburse the Bank for
administrative services provided to them. Income tax expense for the
individual segments is calculated based on the activity of the segments,
and the
Parent records the tax expense or benefit necessary to reconcile to the
consolidated total. The Parent does not allocate capital
costs. Average assets include securities available-for-sale based on
amortized cost.
A
summary
of the Company’s operating segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Consolidated
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
15,972
|
|
|
$ |
-
|
|
|
$ |
(493 |
) |
|
$ |
15,479
|
|
Provision
for loan losses
|
|
|
390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
390
|
|
Net
interest income after provision for loan losses
|
|
|
15,582
|
|
|
|
-
|
|
|
|
(493 |
) |
|
|
15,089
|
|
Non-interest
income
|
|
|
(263 |
) |
|
|
2,707
|
|
|
|
-
|
|
|
|
2,444
|
|
Non-interest
expense
|
|
|
13,773
|
|
|
|
2,600
|
|
|
|
216
|
|
|
|
16,589
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
1,546
|
|
|
|
107
|
|
|
|
(709 |
) |
|
|
944
|
|
Income
tax expense (benefit)
|
|
|
204
|
|
|
|
44
|
|
|
|
(248 |
) |
|
|
-
|
|
Net
income (loss)
|
|
$ |
1,342
|
|
|
$ |
63
|
|
|
$ |
(461 |
) |
|
$ |
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,171
|
|
|
$ |
32
|
|
|
$ |
298
|
|
|
$ |
2,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Consolidated
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
15,876
|
|
|
$ |
-
|
|
|
$ |
(273 |
) |
|
$ |
15,603
|
|
Provision
for loan losses
|
|
|
6,185
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,185
|
|
Net
interest income after provision for loan losses
|
|
|
9,691
|
|
|
|
-
|
|
|
|
(273 |
) |
|
|
9,418
|
|
Non-interest
income
|
|
|
(2,419 |
) |
|
|
635
|
|
|
|
-
|
|
|
|
(1,784 |
) |
Non-interest
expense
|
|
|
10,721
|
|
|
|
524
|
|
|
|
108
|
|
|
|
11,353
|
|
(Loss)
income from continuing operations before income taxes
|
|
|
(3,449 |
) |
|
|
111
|
|
|
|
(381 |
) |
|
|
(3,719 |
) |
Income
tax (benefit) expense
|
|
|
(1,379 |
) |
|
|
46
|
|
|
|
(133 |
) |
|
|
(1,466 |
) |
Net
(loss) income from continuing operations
|
|
|
(2,070 |
) |
|
|
65
|
|
|
|
(248 |
) |
|
|
(2,253 |
) |
Net
income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
133
|
|
|
|
133
|
|
Net
(loss) income
|
|
$ |
(2,070 |
) |
|
$ |
65
|
|
|
$ |
(115 |
) |
|
$ |
(2,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,177
|
|
|
$ |
5
|
|
|
$ |
265
|
|
|
$ |
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9. OPERATING
SEGMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Consolidated
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
47,197
|
|
|
$ |
-
|
|
|
$ |
(1,490 |
) |
|
$ |
45,707
|
|
Provision
for loan losses
|
|
|
1,240
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,240
|
|
Net
interest income after provision for loan losses
|
|
|
45,957
|
|
|
|
-
|
|
|
|
(1,490 |
) |
|
|
44,467
|
|
Non-interest
income
|
|
|
5,938
|
|
|
|
11,561
|
|
|
|
76
|
|
|
|
17,575
|
|
Non-interest
expense
|
|
|
38,836
|
|
|
|
7,681
|
|
|
|
585
|
|
|
|
47,102
|
|
Income
(loss) before income taxes
|
|
|
13,059
|
|
|
|
3,880
|
|
|
|
(1,999 |
) |
|
|
14,940
|
|
Income
tax expense (benefit)
|
|
|
3,587
|
|
|
|
1,591
|
|
|
|
(700 |
) |
|
|
4,478
|
|
Net
income (loss)
|
|
$ |
9,472
|
|
|
$ |
2,289
|
|
|
$ |
(1,299 |
) |
|
$ |
10,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,148
|
|
|
$ |
32
|
|
|
$ |
277
|
|
|
$ |
2,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Consolidated
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
45,443
|
|
|
$ |
-
|
|
|
$ |
(774 |
) |
|
$ |
44,669
|
|
Provision
for loan losses
|
|
|
7,075
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,075
|
|
Net
interest income after provision for loan losses
|
|
|
38,368
|
|
|
|
-
|
|
|
|
(774 |
) |
|
|
37,594
|
|
Non-interest
income
|
|
|
4,089
|
|
|
|
2,128
|
|
|
|
-
|
|
|
|
6,217
|
|
Non-interest
expense
|
|
|
32,237
|
|
|
|
1,497
|
|
|
|
482
|
|
|
|
34,216
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
10,220
|
|
|
|
631
|
|
|
|
(1,256 |
) |
|
|
9,595
|
|
Income
tax expense (benefit)
|
|
|
2,968
|
|
|
|
259
|
|
|
|
(439 |
) |
|
|
2,788
|
|
Net
income (loss) from continuing operations
|
|
|
7,252
|
|
|
|
372
|
|
|
|
(817 |
) |
|
|
6,807
|
|
Net
income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
354
|
|
|
|
354
|
|
Net
income (loss)
|
|
$ |
7,252
|
|
|
$ |
372
|
|
|
$ |
(463 |
) |
|
$ |
7,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,119
|
|
|
$ |
5
|
|
|
$ |
266
|
|
|
$ |
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
OVERVIEW
Management’s
discussion and analysis of financial condition and results of operations
is
intended to assist in understanding the financial condition and results of
operations of the Company. The following discussion and analysis should be
read
in conjunction with the Company’s consolidated financial statements and the
notes thereto appearing in Part I, Item 1 of this document and with Management’s
Discussion and Analysis included in the 2006 Annual Report on Form
10-K. In the following discussion, income statement comparisons are
against the same period of the previous year and balance sheet comparisons
are
against the previous fiscal year-end, unless otherwise
noted. Operating results discussed herein are not necessarily
indicative of the results for the year ending December 31, 2007 or any future
period. In management’s discussion and analysis of financial
condition and results of operations, certain reclassifications have been
made to
make prior periods comparable. Tax-equivalent adjustments are the result
of
increasing income from tax-advantaged securities by an amount equal to the
taxes
that would be paid if the income were fully taxable based on a 35% federal
income tax rate.
Berkshire
Hills Bancorp, Inc. is the holding company for Berkshire Bank - AMERICA'S
MOST
EXCITING BANKSM. 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, Southern Vermont and Northeastern
New York. The Company is a diversified regional financial services company,
delivering exceptional customer service and a broad array of competitively
priced deposit, loan, insurance, wealth management and trust services and
investment products.
On
September 21, 2007, the Company completed its acquisition of Factory Point
Bancorp, Inc., which was located in Southern Vermont, adding seven branches,
bringing total offices to 48 locations in three states.
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 subsidiaries. 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 annual report on Form 10-K for the year ended December 31,
2006 and 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.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND NEW ACCOUNTING
PRONOUNCEMENTS
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements in the 2006 Form 10-K. Please see those
policies in conjunction with this discussion. The accounting
and reporting policies followed by the Company conform, in all material
respects, to accounting principles generally accepted in the United States
and
to general practices within the financial services industry. The preparation
of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements and accompanying
notes.
While the Company bases estimates on historical experience, current information
and other factors deemed to be relevant, actual results could differ from
those
estimates.
The
Company considers accounting estimates to be critical to reported financial
results if (i) the accounting estimate requires management to make assumptions
about matters that are highly uncertain and (ii) different estimates that
management reasonably could have used for the accounting estimate in the
current
period, or changes in the accounting estimate that are reasonably likely
to
occur from period to period, could have a material impact on the Company’s
financial statements.
Accounting
policies related to the allowance for loan losses, income taxes, and goodwill
and identifiable intangible assets are considered to be critical, as these
policies involve considerable subjective judgment and estimation by
management. For additional information regarding critical
accounting policies, refer to Note 1 - Summary of Significant
Accounting Policies in the notes to consolidated financial statements and
the
sections captioned "Critical Accounting Policies" and "Loan Loss Allowance"
in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the 2006 Form 10-K. There have been no significant
changes in the Company’s application of critical accounting policies since
year-end 2006.
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. Data includes the impact of the acquisition of Factory Point on
September 21, 2007.
|
|
At
or for the Three Months Ended
|
|
|
At
or for the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average assets
|
|
|
0.18 |
% |
|
|
(0.37 |
)% |
|
|
0.64 |
% |
|
|
0.47 |
% |
Return
(loss) on average equity
|
|
|
1.44
|
|
|
|
(3.15 |
) |
|
|
5.18
|
|
|
|
3.83
|
|
Net
interest margin
|
|
|
3.20
|
|
|
|
3.22
|
|
|
|
3.20
|
|
|
|
3.22
|
|
Stockholders'
equity/total assets
|
|
|
13.38
|
|
|
|
11.55
|
|
|
|
13.38
|
|
|
|
11.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
Year-to-Date Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
4 |
% |
|
|
20 |
% |
|
|
19 |
% |
|
|
20 |
% |
Total
deposits
|
|
|
-
|
|
|
|
7
|
|
|
|
24
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Data: (In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,472
|
|
|
$ |
2,205
|
|
|
$ |
2,472
|
|
|
$ |
2,205
|
|
Total
loans
|
|
|
1,939
|
|
|
|
1,629
|
|
|
|
1,939
|
|
|
|
1,629
|
|
Other
earning assets
|
|
|
236
|
|
|
|
387
|
|
|
|
236
|
|
|
|
387
|
|
Total
intangible assets
|
|
|
183
|
|
|
|
99
|
|
|
|
183
|
|
|
|
99
|
|
Deposits
|
|
|
1,796
|
|
|
|
1,488
|
|
|
|
1,796
|
|
|
|
1,488
|
|
Borrowings
and debentures
|
|
|
332
|
|
|
|
457
|
|
|
|
332
|
|
|
|
457
|
|
Stockholders'
equity
|
|
|
331
|
|
|
|
255
|
|
|
|
331
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs YTD annualized/average loans
|
|
|
0.23 |
% |
|
|
0.04 |
% |
|
|
0.23 |
% |
|
|
0.04 |
% |
Loan
loss allowance/total loans
|
|
|
1.14
|
|
|
|
1.18
|
|
|
|
1.14
|
|
|
|
1.18
|
|
Nonperforming
assets/total assets
|
|
|
0.48
|
|
|
|
0.24
|
|
|
|
0.48
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) - diluted
|
|
$ |
0.10
|
|
|
$ |
(0.25 |
) |
|
$ |
1.17
|
|
|
$ |
0.82
|
|
Dividends
declared
|
|
|
0.15
|
|
|
|
0.14
|
|
|
|
0.43
|
|
|
|
0.42
|
|
Book
value
|
|
|
30.82
|
|
|
|
29.31
|
|
|
|
30.82
|
|
|
|
29.31
|
|
Common
stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
33.00
|
|
|
|
38.44
|
|
|
|
34.82
|
|
|
|
38.44
|
|
Low
|
|
|
25.21
|
|
|
|
33.46
|
|
|
|
25.21
|
|
|
|
32.37
|
|
Close
|
|
|
30.23
|
|
|
|
35.59
|
|
|
|
30.23
|
|
|
|
35.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Period: (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
15,479
|
|
|
$ |
15,603
|
|
|
$ |
45,707
|
|
|
$ |
44,669
|
|
Provision
for loan losses
|
|
|
390
|
|
|
|
6,185
|
|
|
|
1,240
|
|
|
|
7,075
|
|
Non-interest
income
|
|
|
2,444
|
|
|
|
(1,784 |
) |
|
|
17,575
|
|
|
|
6,217
|
|
Non-interest
expense
|
|
|
16,589
|
|
|
|
11,353
|
|
|
|
47,102
|
|
|
|
34,216
|
|
Net
income (loss)
|
|
|
944
|
|
|
|
(2,120 |
) |
|
|
10,462
|
|
|
|
7,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) All
performance ratios are annualized and based on average balance
sheet
amounts where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Balances and Average Yields/Rate
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
(Dollars
in millions)
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
635
|
|
|
|
5.35 |
% |
|
$ |
576
|
|
|
|
5.24 |
% |
|
$ |
617
|
|
|
|
5.35 |
% |
|
$ |
564
|
|
|
|
5.17 |
% |
Commercial
mortgages
|
|
|
609
|
|
|
|
7.49
|
|
|
|
496
|
|
|
|
7.37
|
|
|
|
593
|
|
|
|
7.52
|
|
|
|
458
|
|
|
|
7.31
|
|
Commercial
business loans
|
|
|
171
|
|
|
|
8.06
|
|
|
|
186
|
|
|
|
8.31
|
|
|
|
184
|
|
|
|
8.01
|
|
|
|
167
|
|
|
|
7.95
|
|
Consumer
loans
|
|
|
349
|
|
|
|
7.03
|
|
|
|
328
|
|
|
|
6.94
|
|
|
|
345
|
|
|
|
7.01
|
|
|
|
313
|
|
|
|
6.76
|
|
Total
loans
|
|
|
1,764
|
|
|
|
6.68
|
|
|
|
1,586
|
|
|
|
6.58
|
|
|
|
1,739
|
|
|
|
6.70
|
|
|
|
1,502
|
|
|
|
6.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and
other
|
|
|
229
|
|
|
|
6.15
|
|
|
|
400
|
|
|
|
5.55
|
|
|
|
232
|
|
|
|
6.04
|
|
|
|
403
|
|
|
|
5.03
|
|
Total
earning assets
|
|
|
1,993
|
|
|
|
6.70
|
|
|
|
1,986
|
|
|
|
6.38
|
|
|
|
1,971
|
|
|
|
6.60
|
|
|
|
1,905
|
|
|
|
6.15
|
|
Other
assets
|
|
|
220
|
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
Total
assets
|
|
$ |
2,213
|
|
|
|
|
|
|
$ |
2,183
|
|
|
|
|
|
|
$ |
2,186
|
|
|
|
|
|
|
$ |
2,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
deposits
|
|
$ |
142
|
|
|
|
1.40 |
% |
|
$ |
132
|
|
|
|
0.98 |
% |
|
$ |
141
|
|
|
|
1.49 |
% |
|
$ |
138
|
|
|
|
1.00 |
% |
Money
market deposits
|
|
|
330
|
|
|
|
3.67
|
|
|
|
283
|
|
|
|
3.51
|
|
|
|
311
|
|
|
|
3.69
|
|
|
|
279
|
|
|
|
3.33
|
|
Savings
deposits
|
|
|
198
|
|
|
|
1.17
|
|
|
|
213
|
|
|
|
1.02
|
|
|
|
198
|
|
|
|
1.11
|
|
|
|
213
|
|
|
|
0.85
|
|
Time
deposits
|
|
|
701
|
|
|
|
4.69
|
|
|
|
664
|
|
|
|
4.41
|
|
|
|
702
|
|
|
|
4.75
|
|
|
|
640
|
|
|
|
4.17
|
|
Total
interest-bearing deposits
|
|
|
1,371
|
|
|
|
3.64
|
|
|
|
1,292
|
|
|
|
3.31
|
|
|
|
1,352
|
|
|
|
3.63
|
|
|
|
1,270
|
|
|
|
3.09
|
|
Borrowings
and debentures
|
|
|
375
|
|
|
|
4.84
|
|
|
|
445
|
|
|
|
4.47
|
|
|
|
379
|
|
|
|
4.76
|
|
|
|
402
|
|
|
|
4.19
|
|
Total
interest-bearing liabilities
|
|
|
1,746
|
|
|
|
3.90
|
|
|
|
1,737
|
|
|
|
3.60
|
|
|
|
1,731
|
|
|
|
3.88
|
|
|
|
1,672
|
|
|
|
3.35
|
|
Non-interest-bearing
demand deposits
|
|
|
187
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
Other
liabilities
|
|
|
4
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Total
liabilities
|
|
|
1,937
|
|
|
|
|
|
|
|
1,924
|
|
|
|
|
|
|
|
1,917
|
|
|
|
|
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
276
|
|
|
|
|
|
|
|
259
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
2,213
|
|
|
|
|
|
|
$ |
2,183
|
|
|
|
|
|
|
$ |
2,186
|
|
|
|
|
|
|
$ |
2,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
2.80 |
% |
|
|
|
|
|
|
2.78 |
% |
|
|
|
|
|
|
2.72 |
% |
|
|
|
|
|
|
2.80 |
% |
Net
interest margin
|
|
|
|
|
|
|
3.20 |
% |
|
|
|
|
|
|
3.22 |
% |
|
|
|
|
|
|
3.20 |
% |
|
|
|
|
|
|
3.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits (in millions)
|
|
$ |
1,558
|
|
|
|
|
|
|
$ |
1,471
|
|
|
|
|
|
|
$ |
1,531
|
|
|
|
|
|
|
$ |
1,443
|
|
|
|
|
|
Fully
taxable equivalent income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
(in thousands)
|
|
|
533
|
|
|
|
|
|
|
|
548
|
|
|
|
|
|
|
|
1,626
|
|
|
|
|
|
|
|
1,548
|
|
|
|
|
|
(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
Berkshire’s
third quarter 2007 net income was $0.9 million ($0.10 per diluted share),
compared to a net loss of $2.1 million ($0.25 per diluted share) in
2006. Third quarter results in 2007 include $3.5 million ($0.38 per
diluted share) in charges net of tax, associated with pre-tax charges from
a
$3.8 million loss from a balance sheet deleveraging and $1.6 million in merger,
integration and restructuring expenses. Third quarter results in 2007 include
the benefit of the Factory Point acquisition, which contributed approximately
$0.02 per share to earnings for the quarter. 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. Third quarter 2006 results also included $0.4 million
in
additional dividend income from the Federal Home Loan Bank of Boston (FHLBB),
as
a result of a change in the timing of the payment of dividends.
Net
income for the nine months ended September 30, 2007 was $10.5 million ($1.17
per
diluted share), up 46% compared to $7.2 million ($0.82 per diluted share)
in net
income for the same period in 2006. The increase in net income was
driven mainly by increases in non-interest income of $11.4 million (primarily
from insurance revenue and deposit service fees) and net interest income
of $1.0
million (primarily from growth in earning assets) as well as a decrease in
the
provision for loan losses of $5.8 million (due to higher general pool reserves
in 2006 mentioned above) offset by increases in non-interest expense of $12.9
million (primarily from insurance agency acquisitions and the de novo branch
program) and income tax expense of $1.5 million.
Recent
highlights include the following (income comparisons are for the third quarter
compared to prior year, balance sheet comparisons are to prior
quarter):
|
·
|
Completed
acquisition of Factory Point Bancorp in Manchester Center, Vermont
on
September 21, adding seven branches and bringing total offices
to forty
eight locations in three states
|
|
·
|
$2.0
million increase in insurance commissions and fees, driven by insurance
agencies acquisition in fourth quarter of
2006
|
|
·
|
37%
growth in deposit service fees driven by 12% annualized growth
in
transaction account balances and new checking account convenience
services
introduced in the fourth quarter of
2006
|
|
·
|
5%
annualized organic loan growth
|
|
·
|
Net
interest margin increased to 3.20% from 3.15% in the linked
quarter
|
|
·
|
$82
million balance sheet deleveraging in the third quarter of 2007,
which is
expected to result in a stronger net interest margin, add $0.01
per share
to earnings on a quarterly basis (for the next twelve months) and
reduce
the Bank’s sensitivity to rising interest rates going
forward
|
|
·
|
Continued
de novo program by opening 4 new branches in New York in
2007
|
|
·
|
5%
annualized growth in non-maturity
deposits
|
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2007 AND DECEMBER 31,
2006
Factory
Point Acquisition. On September 21, 2007, the Company completed
the acquisition of Factory Point. This acquisition is described in
Note 2 to the financial statements, and this discussion should be read in
conjunction with that note. The Company recorded $391 million in assets and
$306
million in liabilities in conjunction with this acquisition, and most categories
of assets and liabilities increased primarily due to this event. The financial
statements include the operations of Factory Point beginning on September
22,
2007.
Balance
Sheet Summary. Total assets grew at a 20%
annualized rate to $2.47 billion from $2.15 billion during the first nine
months
of 2007. Asset growth resulted primarily from the Factory Point
acquisition which added $391 million in assets offset by the deleveraging
program which reduced assets by $82 million. Total deposits grew at a
24% annualized rate to $1.80 billion from $1.52 billion. Deposit growth resulted
primarily from the Factory Point acquisition, adding $269 million in deposits.
Stockholders’ equity grew at a 38% annualized rate to $331 million from $258
million primarily from the issuance of 1.9 million shares for the Factory
Point
acquisition.
Assets. Total
assets increased $322 million at September 30, 2007 compared to year-end
2006.
As mentioned above, the increase in total assets was driven primarily by
the
Factory Point acquisition, which added $391 million in assets offset by the
deleveraging program whereby the Company sold $82 million in assets. Assets
sold
consisted of $32 million of lower-yielding mortgage backed securities and
$50
million of longer-term fixed-rate residential mortgages.
Investment
Securities. Total investment securities increased $2.2
million at September 30, 2007 compared to year-end 2006. The Factory Point
acquisition increased investment securities by $68 million. This increase
was
offset primarily by the sale of securities in connection with the deleveraging
program, which totaled $32 million and the sale of $25 million of securities
from Factory Point sold shortly after the merger date. The sale of
$25 million of Factory Point securities was comprised mainly of municipal
securities and other debt securities. These securities were marked to market
as
of the acquisition date, and they were sold for an amount that approximated
this
value. The Company intends to reinvest these proceeds in agency mortgage-backed
securities and municipal bonds with average lives of 2-3 years. The remaining
securities from Factory Point were comprised mainly of conventional government
agency and mortgage backed securities, and municipal bonds. The loss from
the
securities sold in connection with the deleveraging program was $0.7 million.
These securities had an estimated average life of approximately 4 years and
a
book yield of 4.75%. As a result of the actions noted above, the Company’s
investment portfolio estimated average life was reduced by approximately
3/4 of
a year.
Loans.
Loans totaled $1.94 billion at September 30, 2007, increasing by $240 million
(19%
annualized) from year-end 2006. Loan
growth included $236 million related
to the Factory Point
acquisition. Loans added through the acquisition
were
primarily concentrated
in
commercial mortgage loans, residential
mortgages and home equity loans. Excludingthe
impact from
loans acquired through the Factory Point acquisition and the $50 million sale
of
longer-term residential mortgages in the third quarter related to the
deleveraging program, total
loans increased by $54 million for
the
year-to-date, growing at a 4% annualized rate. Loan
growth included $41 million in residential mortgages (9% annualized) and
$32
million in commercial mortgages (8% annualized). The Company expanded its
prime
residential mortgage lending and experienced growth in commercial mortgages
driven by its expansion in New York. Commercial business loans
decreased by $24 million. During the year, the Company reduced its
commercial business loans by $23 million due to the outplacement of certain
balances which had grown to require fully monitored asset based lending which
is
outside of the Company’s current risk management parameters. Furthermore, as
market conditions have softened, the Company has been more selective in
originating and retaining commercial credits. Indirect auto loans increased by
$7 million (5% annualized) year-to-date; originations of these loans have
been
slowed due to tighter lending margins. Home equity and other loans
were flat year-to-date, reflecting lower market demand for these types of
loans
following the prime rate increases that occurred in 2005 and
2006.
Berkshire’s
commitments for new credit originations at the end of the third quarter of
2007
totaled $114 million. This included residential mortgage commitments
totaling $49 million and commercial credit commitments totaling $65
million. These commitments include Factory Point commitments of $28
million at September 30, 2007. Berkshire had $190 million in
outstanding commercial construction commitments at September 30, 2007, including
$8 million from Factory Point. The Company had $147 million outstanding against
these commitments at September 30, 2007. Berkshire had $180 million in
outstanding home equity line commitments, including $24 million from Factory
Point at September 30, 2007.
Asset
Quality. Nonperforming assets measured 0.48% of total assets at
September 30, 2007, compared to 0.35% at year-end 2006. Nonperforming
loans were 0.59% of total loans at September 30, 2007, up from 0.45% at year-end
2006. The increase in nonperforming loans was primarily from a small
number of commercial mortgages totaling $4.7 million and a $0.6 million increase
in nonperforming residential mortgages, offset by a $1.7 million decrease
in
nonperforming commercial business loans. The decrease in nonperforming
commercial business loans was due to a $1.5 million write-down. The Company’s
mortgage and consumer portfolios continue to perform. Additionally, the
Company does not engage in subprime lending programs. FICO scores for both
mortgage and consumer loans continue to exceed an average of 729. Performing
delinquent loans were 0.71% of total loans at September 30, 2007, compared
to
0.26% at year-end 2006. This primarily related to an increase in 30
day delinquent commercial loans primarily from a $5.5 million commercial
mortgage. Third quarter 2007 net loan charge-offs totaled $1.9
million which increased from $0.1 million for the same period in
2006. This included a $1.5 million write-down on the Company’s
largest nonperforming loan, a commercial business loan, which was reduced
to
$4.7 million after the write-down. This charge reflected a decrease
in estimated collateral values for this credit, which is in
bankruptcy. The collateral values for this credit include account
receivables and claims of which the notional amounts substantially exceed
the
carrying balance of this credit at September 30, 2007. The Company
had previously established a $1.0 million reserve on this loan. The
annualized year-to-date rate of net loan charge-offs was 0.23%. The
ratio of the loan loss allowance to total loans remained unchanged at 1.14%
at
September 30, 2007 and year-end 2006. This ratio included the impact
from the completion of the Factory Point acquisition, and also benefited
from
the sale of $50 million of residential mortgages in the balance sheet
deleveraging. The Company had one foreclosed real estate property at September
30, 2007, for $0.3 million.
The
following tables set forth data related to asset quality for the periods
presented:
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
(Dollars
in thousands)
|
|
Balance
|
|
|
Balance
|
|
NON-PERFORMING
ASSETS
|
|
|
|
|
|
|
Nonaccruing
loans:
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
623
|
|
|
$ |
15
|
|
Commercial
mortgages
|
|
|
4,977
|
|
|
|
308
|
|
Commercial
business loans
|
|
|
5,553
|
|
|
|
7,203
|
|
Consumer
loans
|
|
|
274
|
|
|
|
66
|
|
Total
nonaccruing loans
|
|
|
11,427
|
|
|
|
7,592
|
|
Real
estate owned
|
|
|
348
|
|
|
|
-
|
|
Total
nonperforming assets
|
|
$ |
11,775
|
|
|
$ |
7,592
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses/nonperforming loans
|
|
|
193 |
% |
|
|
255 |
% |
Total
nonperforming loans/total loans
|
|
|
0.59 |
% |
|
|
0.45 |
% |
Total
nonperforming assets/total assets
|
|
|
0.48 |
% |
|
|
0.35 |
% |
Average
FICO scores of consumer automobile loans
|
|
|
729
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
DELINQUENT
LOANS / TOTAL LOANS
|
|
|
|
|
|
|
|
|
Performing
loans (30 days or more delinquent)
|
|
|
0.71 |
% |
|
|
0.26 |
% |
Nonperforming
loans
|
|
|
0.59 |
% |
|
|
0.45 |
% |
Total
delinquent loans
|
|
|
1.30 |
% |
|
|
0.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
NET
LOAN CHARGE-OFFS
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
(27 |
) |
Commercial
mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
business loans
|
|
|
(1,497 |
) |
|
|
(6 |
) |
|
|
(2,154 |
) |
|
|
2
|
|
Consumer
loans
|
|
|
(389 |
) |
|
|
(137 |
) |
|
|
(801 |
) |
|
|
(472 |
) |
Total
net
|
|
$ |
(1,886 |
) |
|
$ |
(143 |
) |
|
$ |
(2,955 |
) |
|
$ |
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (YTD annualized)/average loans
|
|
|
0.43 |
% |
|
|
0.04 |
% |
|
|
0.23 |
% |
|
|
0.04 |
% |
Goodwill
and Other Intangible Assets. Goodwill totaled $161
million at the end of the quarter, increasing by $57 million from year-end
2006.
This increase was due to the Factory Point acquisition which added $53 million
and $3 million related to contingent payables for insurance agencies acquired
in
2006. Other intangible assets totaled $22 million at the end of the quarter,
increasing $ 7 million from year-end 2006, from the core deposit premium
intangibles associated with Factory Point that are being amortized over eight
years on an accelerated basis.
Liabilities. Deposits
totaled $1.80 billion at the end of the third quarter, increasing by $269
million (24% annualized) from year-end 2006. Deposit growth included
$274 million related to the Factory Point acquisition. Exclusive of
the Factory Point acquisition, total deposits were flat as core deposit growth
was offset by a decrease in higher cost time deposits. Lower cost
non-maturity deposits increased $13 million during the year and higher cost
time
deposits decreased $13 million during the same period. For the quarter,
non-maturity deposits grew by $10 million (5% annualized) from organic growth,
led by transaction deposits, which grew at an 11% annualized organic growth
rate. This growth was driven by account growth in de novo branches, and the
Company’s strategy of promoting checking accounts and money market accounts, as
well as reduced promotions of higher-costing time deposits. Borrowings totaled
$316 million at the end of the third quarter, decreasing $29 million from
year-end 2006. Borrowings were impacted by several transactions during the
year.
As mentioned previously, the Company sold $82 million in assets and used
the
proceeds to pay down $48 million in callable and term borrowings (for a $1.2
million loss) with an average maturity of 2 years and an average cost of
approximately 5.7%. The remaining borrowings paid off from the deleveraging
were
overnight borrowings. Offsetting this decrease was $34 million in acquired
Factory Point borrowings and $15 million in borrowings at Berkshire to fund
the
cash consideration paid in the Factory Point acquisition.
Equity. Stockholders’
equity totaled $331 million at the end of the third quarter, increasing by
$72
million from year-end 2006. Consideration for the Factory Point
acquisition included the issuance of 1.91 million common shares valued at
$61
million, with an additional $2 million credit to equity for the value of
outstanding Factory Point stock options. Equity increased from the contribution
of earnings of $10 million offset by dividend payments of $4
million. The ratio of stockholders’ equity to total assets measured
13.4% at September 30, 2007, compared to 12.0% at the prior year-end, due to the
issuance of new common shares and the deleveraging program executed in
conjunction with the Factory Point acquisition. The ratio of tangible
equity to tangible assets measured 6.5% at
September 30, 2007, a decrease from 7.1% at
year-end 2006, reflecting the impact of the
higher goodwill and intangible assets resulting
from the acquisition. During the first quarter of 2007, the Bank
obtained approval to pay dividends to the Company in an aggregate amount
of $10
million in 2007 subject to various conditions, including that the Bank maintain
its “well capitalized” classification after factoring in the
payments. There were no dividends declared to the Company from the
Bank during the first nine months of the year.
COMPARISON
OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
AND
2006
Net
Income. Net income increased for both the three and
nine months ended September 30, 2007 compared to the same periods in
2006. Net income from continuing operations was $0.9 million for the
three months ended September 30, 2007 compared to a net loss of $2.3 million
for
the same period in 2006. The most recent quarter included after-tax
charges of $3.5 million related to the balance sheet deleveraging and
integration costs in association with the Factory Point acquisition, together
with expense restructure costs. For the three months ended September 30,
2006,
results included after-tax charges of $7.1 million, including $3.6 million
for
an adjustment of the loan loss allowance and $3.5 million related to a balance
sheet repositioning. Costs from the de novo branching program increased by
$0.3
million for the third quarter of 2007 in comparison to the same period in
2006. Net income from continuing operations was $10.5 million for the
nine months ended September 30, 2007, compared to net income of $6.8 million
for
the same period in 2006. Year-to-date results were impacted from the charges
noted above in the third quarters of 2007 and 2006. Net income increased
in the
insurance segment, which reported a $2.0 million increase in nine month income
in 2007 due to the insurance agency acquisitions in the fourth quarter of
2006. This more than offset the impact on bank earnings of the higher
costs related to the expansion of the de novo branch program. These
costs increased by $0.3 million and $1.5 million for the third quarter and
first
nine months of 2007 compared to the same periods in 2006. Earnings on
a year-to-date basis in 2007 also benefited from growth in the Bank’s net
interest income and non-interest income, along with the impact of a lower
loan
loss provision. Net interest income in the third quarter of 2007 was
down from the same period in 2006, primarily from additional dividend income
from the FHLBB totaling $0.4 million, which was received in the third quarter
of
2006.
Net
Interest Income. Net interest income decreased by $0.1
million and increased by $1.0 million in the third quarter and first nine
months
of 2007 respectively, compared to the same periods in 2006. The
decrease for the third quarter was due primarily to the $0.4 million impact
of
the delayed FHLB dividend for the second quarter of 2006 which was not paid
until the third quarter of 2006. The increase in net interest income
for the first nine months of 2007 reflected the benefit of growth in average
earning assets which was due to loan growth. Average earning assets
increased by $66 million (4%) in the first nine months of 2007, compared
to the
same period in 2006. Loans increased $237 million, primarily from
strong growth in commercial mortgages and solid gains in residential mortgages,
consumer loans and commercial business loans. Offsetting the increase in
loans
was a $171 million decrease in investment securities due to the securities
restructuring at the end of the third quarter of 2006.
The
net
interest margin for the third quarter was 3.20%, up 5 basis points (“bp”) from
the linked quarter and up 3 bp from the prior year when adjusting for the
$0.4
million FHLB dividend mentioned previously. The Bank is promoting
lower cost transaction accounts to help offset margin pressures and to provide
increased cross-selling opportunities. The margin benefited from the
securities restructuring at the beginning of that same quarter, which initially
generated a benefit of 0.20 – 0.25% towards the net interest
margin.
The
Company expects to see continued improvement in its net interest margin in
the
fourth quarter 2007 from the deleveraging in the third quarter 2007, continued
improvement in its deposit mix and the higher margin from Factory Point.
Offsetting these benefits will be the negative impact from the cost of
borrowings associated with the Factory Point acquisition. The Company is
somewhat liability sensitive and expects to benefit from any additional rate
cuts from the Federal Reserve in the fourth quarter of 2007.
Non-Interest
Income. Third quarter non-interest income was $2.4
million compared to a loss of $1.8 million for the same period in 2006. Third
quarter 2007 results reflect a $3.8 million loss in connection with the
deleveraging program mentioned previously. The Company sold $32 million in
investment securities for a $0.7 million loss, $50 million in residential
mortgages for a $2.0 million loss and paid down $48 million in callable and
term borrowings at a cost of $1.2 million. The remaining borrowings paid
off were overnight borrowings. Third quarter 2006 results reflect a
$5.1 million in net securities losses from a securities
repositioning.
Total
third quarter fee income increased by $2.8 million (92%) in 2007 compared
to
2006, and fee income for the first nine months of 2007 increased by $11.1
million (122%). These increases were primarily due to the insurance
agency acquisitions, which produced fee income growth of $2.0 million and
$9.3
million in the above periods, respectively. Insurance fee income is
seasonal, with approximately 60 – 65% of total insurance fees received in the
first half of the year. This seasonality includes contingent fee
income, which represents 25-30% of total annual insurance fee
income. For the first nine months of the year, deposit service fees
increased by $1.1 million or 28% due primarily to additional convenience
services which were introduced in the third quarter of 2006 and growth in
transaction accounts. Wealth management fees grew by 22%, reflecting
growth in total assets under management. Total wealth management assets
increased to $783 million at September 30, 2007, including $230 million in
assets previously managed by Factory Point. Assets under management increased
59% from year-end 2006.
Provision
for Loan Losses. The provision for loan
losses is a charge to earnings in an amount sufficient to maintain the allowance
for loan losses at a level deemed adequate by the Company. The level of the
allowance is a critical accounting estimate, which is subject to uncertainty.
The level of the allowance was included in the discussion of financial
condition. The third quarter provision for loan losses was $0.4 million in
2007 compared to $6.2 million in 2006. For the first nine months of
2007, the provision was $1.2 million compared to $7.1 million in 2006. Net
charge-offs totaled $1.9 million for the third quarter and exceeded the
provision for loan losses. This was due to several factors. The allowance
to
total loans increased from 1.11% in the linked quarter to 1.14% at September
30,
2007, and was driven by the $4.5 million added to the provision in connection
with the Factory Point acquisition and the sale of $50 million in residential
mortgages in connection with the deleveraging program. Additionally, of the
$1.9
million in net charge-offs, $1.5 million was related to the Company’s largest
nonperforming loan which had a previously established $1.0 million reserve
assigned to it. Lastly, management has determined, of the small number of
commercial mortgages classified as nonperforming at September 30, 2007, these
loans are adequately secured by collateral and do not warrant a specific
reserve
at this time. The $6.2 million provision for loan losses in the third
quarter of 2006 was driven primarily by management’s belief that loan losses
would likely increase above negligible levels of recent preceding years due
to
signs in the third quarter of 2006 of an economic slowing. As a result, a
$5.5
million charge was taken to increase the pool reserves as a result of the
new
risk conditions. Management believes market conditions that we have seen
in 2007
have borne out that judgment.
Non-Interest
Expense. Non-interest expense increased by $5.2 million
(46%) in the third quarter and by $12.9 million (38%) in the first nine months
of 2007 compared to 2006. For the first nine months of the year,
additional expense from the acquired insurance agencies totaled $6.2 million,
merger, integration and restructuring expenses increased $1.4 million, marketing
expenses increased $1.0 million and expenses related to the de novo branch
program increased by $1.5 million due to new branches. The remaining
$2.6 million increase (7%) in total non-interest expense was in all other
non-interest expense related to higher overhead for the Company’s transition
into a regional bank, together with initiatives to develop sales, products,
and
new branding. The total non-interest expense related to the de novo
branch program was $2.8 million in the first nine months of 2007, compared
to
$1.3 million in the first nine months of 2006. Berkshire views these
costs as an investment in franchise expansion in the attractive Albany and
Tech
Valley, New York area.
Income
from Discontinued Operations and Income Tax Expense. Results for
the third quarter and the first nine months of 2006 included $0.2 million
and
$0.6 million of pretax income from discontinued operations from the sale
of the
Company’s data processing subsidiary in June 2004. This amount
represented the balance of certain contingent sale proceeds held in escrow
relating to liabilities which were assumed by the purchaser. No income tax
was
recorded in the third quarter of 2007, as tax-exempt municipal bond and life
insurance income exceeded pre-tax income due to the deleveraging and merger
charges.
The
effective tax rate for the first nine months of 2007 was 30% compared to
29% in
the same period of 2006.
Results
of Segment Operations. The Company acquired five
affiliated insurance agencies in the fourth quarter of 2006. The
Company had not previously established operating segments for the purposes
of
financial statement disclosure. Due to the change in the composition
of the Company’s business as a result of the insurance agency acquisitions, the
Company has designated two operating segments for financial statement
disclosure: banking and insurance. Additional information about the
Company’s accounting for segment operations is contained in Note 9 to the
financial statements.
One
of
the Company's strategies is to emphasize non-depository products and increase
fee income to diversify revenues, enhance customer benefit, and reduce reliance
on net interest income where margins are under pressure. The
Company's acquisition of insurance agencies in the fourth quarter of 2006
was a
significant step in implementing this strategy. Net income of the
insurance segment for the first nine months of 2007 increased by $1.9 million
due to the impact of the acquired insurance agencies. Additionally,
the acquired agencies have a significant seasonality to revenues and earnings
due to the impact of annual contingency revenues which are received in the
first
half of the year. Net income for the banking segment for the first
nine months of 2007 increased $2.2 million due to increases in net interest
income (growth in earning assets) and non-interest income (increases in deposit
service and wealth management fees) as well as a decrease in the provision
for
loan losses offset by an increase in non-interest expense (driven by the
de novo
branches, marketing costs and the Factory Point merger costs). The net loss
from
continuing operations from the parent company for the first nine months of
2007
increased $0.5 million, primarily from higher interest expense associated
with
the debt to finance the insurance segment.
Comprehensive
Income. Accumulated other comprehensive income is a component of
total stockholders’ equity on the balance sheet. Comprehensive income
includes changes in accumulated other comprehensive income, which consists
principally of changes (after-tax) in the unrealized market gains and losses
of
investment securities available for sale. The change in accumulated
other comprehensive income was a gain $0.1 million in the nine months of
2007,
compared to a gain of $3.0 million in the first nine months of
2006. The net income for the first nine months of 2007 was $10.5
million compared to $7.2 million in the same period of 2006, which primarily
offset the difference in the gains previously mentioned. The Company
recorded total comprehensive income of $10.6 million in the first nine months
of
2007, compared to $10.2 million in the same period of 2006.
Liquidity
and Cash Flows. The Company’s primary
sources of funds were deposit growth and borrowings in the first nine months
of
2007. The primary use of funds was loan growth. 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. During the third quarter of 2007, the
Bank
improved its liquidity position from the deleveraging program from the sale
of
$82 million in assets which were used to pay down Federal Home Loan Bank
short
and long term borrowings. Berkshire Hills Bancorp’s primary routine
sources of funds are expected to be dividends from Berkshire Bank and Berkshire
Insurance Group. The holding company also receives cash from the
exercise of stock options and uses cash for dividends, stock repurchases
and
debt service. During the third quarter of 2007, the holding company
borrowed $20 million in three year bank notes and put in place $30 million
in
bank lines improving its liquidity position. Additional discussion
about the Company’s liquidity and cash flows is contained in the Company’s 2006
Annual Report on Form 10-K in Item 7. As noted previously, the Company completed
the acquisition of Factory Point for consideration comprised of 80% of stock
and
20% of cash. The cash component was $16
million. Additionally, direct costs of the merger are expected to
total about $4 million. The cash for these
expenditures
was provided primarily from borrowings, with dividends from subsidiaries
also
providing a liquidity source.
Capital
Resources. Please see the “Equity” section
of the Comparison of Financial Condition for a discussion of stockholders’
equity. At September 30, 2007, Berkshire Bank continued to be
classified as “well capitalized.” Additional information about
regulatory capital is contained in the notes to the consolidated financial
statements and in the 2006 Form 10-K. As noted above, the Company
issued 1.91 million shares of common stock in exchange for 80% of the shares
of
Factory Point Bancorp and 172,000 Factory Point stock options valued at $2.1
million according to the terms of the merger agreement.
Off-Balance
Sheet Arrangements and Contractual Obligations. In the
normal course of operations, the Company engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in the Company’s financial 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.
See the discussion under the caption of "Loans" in Item 2. of this Form 10-Q
for
the impact of Factory Point's loan commitments and lines of credit. A
further presentation of the Company’s off-balance sheet arrangements is
presented in the Company’s 2006 Form 10-K. For the nine months ended September
30, 2007, 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 2006 Form
10-K. Except for the definitive merger agreement with Factory Point
Bancorp, there were no material changes in the Company’s payments due under
contractual obligations during the first nine months of 2007. The
Company assumed $10 million in long-term debt from Factory Point. There were
no
other material contractual obligations assumed from Factory Point as of
September 21, 2007. The impact of the Factory Point acquisition is
discussed further in the Company’s SEC filings related to this
transaction.
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 2006 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.
During
the first half of 2007 the Company’s Interest Rate Risk did not change in any
material way to the risk that was reported in the year-end 2006 Form 10-K,
however during the third quarter of 2007 several events occurred that had
a
modest impact to the results that were previously reported. The net
effect of these events has left the Company modestly liability sensitive,
but
less so than the results previously released.
Change
in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rates-Basis
|
|
|
1
-
12 Months
|
|
13
- 24 Months
|
Points
(Rate Ramp)
|
|
|
$
Change
|
|
|
%
Change
|
|
$
Change
|
|
|
%
Change
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+
200
|
|
|
$ |
(1,882 |
) |
|
|
(2.62 |
)% |
|
$ |
(3,062 |
) |
|
|
(4.15 |
)% |
+
100
|
|
|
|
(704 |
) |
|
|
(0.98 |
) |
|
|
(1,142 |
) |
|
|
(1.55 |
) |
-
100
|
|
|
|
501
|
|
|
|
0.70
|
|
|
|
248
|
|
|
|
0.34
|
|
-
200
|
|
|
|
249
|
|
|
|
0.35
|
|
|
|
(2,333 |
) |
|
|
(3.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+
200
|
|
|
$ |
(1,402 |
) |
|
|
(2.26 |
)% |
|
$ |
(3,380 |
) |
|
|
(5.31 |
)% |
+
100
|
|
|
|
(415 |
) |
|
|
(0.67 |
) |
|
|
(1,255 |
) |
|
|
(1.97 |
) |
-
100
|
|
|
|
238
|
|
|
|
0.38
|
|
|
|
453
|
|
|
|
0.71
|
|
-
200
|
|
|
|
(3 |
) |
|
|
(0.01 |
) |
|
|
(1,188 |
) |
|
|
(1.87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
the
third quarter of 2007 there were two main events that had material impacts
to
the interest rate risk of Berkshire Hills Bancorp. The first event
was the acquisition of Factory Point National Bank of Manchester Center,
Vermont. The balance sheet composition of Factory Point was that of
liability sensitive. Even though Factory Point was a smaller
institution, the Bank realized that the sum of the two banks would leave
a more
liability sensitive bank than Berkshire would have been on its
own. In order to mitigate this effect, as well as several other
factors, Berkshire executed a balance sheet deleveraging of about $82 million
in
which it sold fixed rate whole loan residential mortgages and mortgage-backed
securities that had a combined average life of approximately 5 years and
paid
down borrowings from the Federal Home Loan Bank of Boston.
The
combined results of these actions led the Company to have what it considers
an
improved interest rate risk profile than the one that it reported at year
end
2006. Although the Bank is still modestly liability sensitive,
especially to rising rate scenarios, management feels that it is acceptable
risk
in the current interest rate environment and that should this view change
management will take necessary steps to further reduce the risk.
For
the
Bank, market risk also includes price risk, primarily security price
risk. The Bank does not hold any sub-prime securities. 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, 2007. 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.
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.
As
of
August 1, 2007, Kevin P. Riley joined Berkshire Hills Bancorp as Executive
Vice
President, Chief Financial Officer and Treasurer and assumed full responsibility
of these roles for the period covered by this report. Following the Company's
acquisition of Factory Point on September 21, 2007, the Company implemented
interim accounting processes related to Factory Point's operations until
a
planned conversion of the Factory Point core banking systems in November
2007.
The above change was made in accordance with the Company's ongoing review
of its
internal control over financial reporting and not in response to an identified
significant deficiency or material weakness.
The
Company is not involved in any
legal proceedings other than routine legal proceedings occurring in the normal
course of business. Such routine proceedings, in the aggregate, are
believed by management to be immaterial to the Company’s financial condition or
results of operations.
In
addition to the other information set forth in this report, you should carefully
consider: 1) the risk factors concerning the company’s acquisition of Factory
Point Bancorp contained in the Company’s Registration Statement on Form S-4/A,
dated July 17, 2007, and 2) the factors discussed in Part I, “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006,
which could materially affect our business, financial condition or future
results. The risks described in the Registration Statement on Form
S-4/A and in the Annual Report on Form 10-K are not the only risks that we
face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect
our
business, financial condition and/or operating results.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(a)
|
No
unregistered securities of the Company were sold by the Company
during the
quarter ended September 30, 2007.
|
(c)
|
The
following table provides certain information with regard to shares
repurchased by the Company in the third quarter of
2007.
|
|
|
|
|
|
|
|
|
Total
number of shares
|
|
|
Maximum
number of
|
|
|
|
Total
number
|
|
|
Average
|
|
|
purchased
as part of
|
|
|
shares
that may yet
|
|
|
|
of
shares
|
|
|
price
paid
|
|
|
publicly
announced
|
|
|
be
purchased under
|
|
Period
|
|
purchased
|
|
|
per
share
|
|
|
plans
or programs
|
|
|
the
plans or programs
|
|
July
1-31, 2007
|
|
|
39,156
|
|
|
$ |
27.35
|
|
|
|
2,473
|
|
|
|
271,122
|
|
August
1-31, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271,122
|
|
September
1-30, 2007
|
|
|
3,200
|
|
|
|
28.95
|
|
|
|
3,200
|
|
|
|
267,922
|
|
Total
|
|
|
42,356
|
|
|
$ |
27.47
|
|
|
|
5,673
|
|
|
|
|
|
On
February 23, 2006, the Company authorized a 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. There were no other stock purchase plans in effect at
September 30, 2007, 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. As of September 30, 2007, there have been 32,078 shares
purchased pursuant to the current plan.
ITEM
3.
|
DEFAULTS
UPON SENIOR
SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
A
special meeting of the stockholders of the Company was held on
August 28,
2007.
|
|
|
|
|
|
|
|
|
1.
|
The
Agreement and Plan of Merger by and between Berkshire Hills Bancorp,
Inc.
|
|
and
Factory Point Bancorp, Inc. was approved and adopted by the following
vote:
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTENTIONS
|
|
|
|
6,869,638
|
|
305,375
|
|
16,455
|
|
|
|
|
|
|
|
|
|
|
None.
|
2.1
|
Agreement
and Plan of Merger, dated May 14, 2007 by and between Berkshire
Hills
Bancorp, Inc. and Factory Point Bancorp, Inc.
(1)
|
|
3.1
|
Certificate
of Incorporation of Berkshire Hills Bancorp, Inc.(2)
|
|
3.2
|
Bylaws
of Berkshire Hills Bancorp, Inc.(3)
|
|
4.1
|
Draft
Stock Certificate of Berkshire Hills Bancorp, Inc.(2)
|
|
10.1
|
*
Factory Point Bancorp, Inc.1999 Non-Employee Directors Stock Option
Plan,
as amended and restated (4)
|
|
10.2
|
*
Factory Point Bancorp, Inc.1999 Stock Incentive Plan (4)
|
|
10.3
|
*
Factory Point Bancorp, Inc. 2004 Stock Incentive Plan, as amended
and
restated (4)
|
|
10.4
|
*
Change in Control Agreement by and between Berkshire Hills Bancorp,
Inc.
and Kevin P. Riley
|
|
10.5
|
*
Change in Control Agreement by and between Berkshire Bank and Kevin
P. Riley
|
|
|
Rule
13a-14(a) Certification of Chief Executive
Officer
|
|
|
Rule
13a-14(a) Certification of Chief Financial
Officer
|
|
|
Section
1350 Certification of Chief Executive
Officer
|
|
|
Section
1350 Certification of Chief Financial
Officer
|
___________________________________________
*
Management contract or compensatory plan, contract or arrangement.
|
(1)
|
Incorporated
herein by reference from Annex A of the Form S-4, Registration
Statement
and amendments thereto, initially filed on June 26, 2007, Registration
No.
333-144062.
|
|
(2)
|
Incorporated
herein by reference from the Exhibits to Form S-1, Registration
Statement
and amendments thereto, initially filed on March 10, 2000, Registration
No. 333-32146.
|
|
(3)
|
Incorporated
herein by reference from the Exhibits to the Form 8-K as filed
on October
29, 2007.
|
|
(4)
|
Incorporated
herein by reference from the exhibits to the Form S-8, Registration
Statement, filed on October 10, 2007, Registration No.
333-146604.
|
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, 2007
|
By:
|
/s/ Michael
P. Daly
|
|
|
Michael
P. Daly
|
|
|
President,
Chief Executive Officer
|
|
|
and
Director
|
|
|
|
|
|
|
Dated:
November 8, 2007
|
By:
|
/s/ Kevin
P. Riley
|
|
|
Kevin
P. Riley
|
|
|
Executive
Vice President, Chief Financial Officer
|
|
|
and
Treasurer
|
32