form10q-94847_berk.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2008
OR
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from __________________ to _________________
Commission
File Number 0-51584
BERKSHIRE
HILLS BANCORP, INC.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
04-3510455
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
24
North Street, Pittsfield, Massachusetts
|
01201
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(413)
443-5601
|
(Registrant’s
telephone number, including area code)
|
|
Not
Applicable
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one)
Large
Accelerated Filer ¨
|
Accelerated
Filer x
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company ¨
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes
[ ] No [X]
The
Registrant had 12,223,599 shares of common stock, par value $0.01 per
share, outstanding as of November 7, 2008.
BERKSHIRE
HILLS BANCORP, INC.
FORM
10-Q
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34
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34
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35
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ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
September
30,
|
|
|
December
31,
|
|
(In
thousands, except share data)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,445 |
|
|
$ |
33,259 |
|
Federal
funds sold and short-term investments
|
|
|
8,124 |
|
|
|
7,883 |
|
Total
cash and cash equivalents
|
|
|
34,569 |
|
|
|
41,142 |
|
Trading
securities, at fair value
|
|
|
15,267 |
|
|
|
- |
|
Securities
available for sale, at fair value
|
|
|
205,554 |
|
|
|
197,964 |
|
Securities
held to maturity
|
|
|
25,923 |
|
|
|
39,456 |
|
Federal
Home Loan Bank stock
|
|
|
21,077 |
|
|
|
21,077 |
|
Loans
held for sale
|
|
|
5,401 |
|
|
|
3,445 |
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
|
672,004 |
|
|
|
657,045 |
|
Commercial
mortgages
|
|
|
794,780 |
|
|
|
704,764 |
|
Commercial
business loans
|
|
|
181,224 |
|
|
|
203,564 |
|
Consumer
loans
|
|
|
344,359 |
|
|
|
378,643 |
|
Total
loans
|
|
|
1,992,367 |
|
|
|
1,944,016 |
|
Less: Allowance
for loan losses
|
|
|
(22,886 |
) |
|
|
(22,116 |
) |
Net
loans
|
|
|
1,969,481 |
|
|
|
1,921,900 |
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
37,902 |
|
|
|
38,806 |
|
Goodwill
|
|
|
161,178 |
|
|
|
161,632 |
|
Other
intangible assets
|
|
|
18,490 |
|
|
|
20,820 |
|
Cash
surrender value of life insurance policies
|
|
|
35,331 |
|
|
|
35,316 |
|
Other
assets
|
|
|
35,526 |
|
|
|
31,874 |
|
Total
assets
|
|
$ |
2,565,699 |
|
|
$ |
2,513,432 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
227,271 |
|
|
$ |
231,994 |
|
NOW
deposits
|
|
|
196,217 |
|
|
|
213,150 |
|
Money
market deposits
|
|
|
450,818 |
|
|
|
439,341 |
|
Savings
deposits
|
|
|
220,800 |
|
|
|
210,186 |
|
Total
non-maturity deposits
|
|
|
1,095,106 |
|
|
|
1,094,671 |
|
Brokered
time deposits
|
|
|
3,008 |
|
|
|
21,497 |
|
Other
time deposits
|
|
|
739,090 |
|
|
|
706,395 |
|
Total
time deposits
|
|
|
742,098 |
|
|
|
727,892 |
|
Total
deposits
|
|
|
1,837,204 |
|
|
|
1,822,563 |
|
Borrowings
|
|
|
366,092 |
|
|
|
334,474 |
|
Junior
subordinated debentures
|
|
|
15,464 |
|
|
|
15,464 |
|
Other
liabilities
|
|
|
14,257 |
|
|
|
14,094 |
|
Total
liabilities
|
|
|
2,233,017 |
|
|
|
2,186,595 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock ($.01 par value; 1,000,000 shares authorized; none
issued)
|
|
|
- |
|
|
|
- |
|
Common
stock ($.01 par value; 26,000,000 shares authorized; 12,513,825 shares
issued)
|
|
|
125 |
|
|
|
125 |
|
Additional
paid-in capital
|
|
|
265,897 |
|
|
|
266,134 |
|
Unearned
compensation
|
|
|
(2,205 |
) |
|
|
(2,009 |
) |
Retained
earnings
|
|
|
125,125 |
|
|
|
113,387 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(4,273 |
) |
|
|
1,217 |
|
Treasury
stock, at cost (2,020,671 shares at September 30, 2008
|
|
|
|
|
|
|
|
|
and
2,021,120 at December 31, 2007)
|
|
|
(51,987 |
) |
|
|
(52,017 |
) |
Total
stockholders' equity
|
|
|
332,682 |
|
|
|
326,837 |
|
Total
liabilities and stockholders' equity
|
|
$ |
2,565,699 |
|
|
$ |
2,513,432 |
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
30,078 |
|
|
$ |
29,719 |
|
|
$ |
91,224 |
|
|
$ |
87,393 |
|
Securities
and other
|
|
|
3,014 |
|
|
|
2,912 |
|
|
|
9,225 |
|
|
|
8,702 |
|
Total
interest and dividend income
|
|
|
33,092 |
|
|
|
32,631 |
|
|
|
100,449 |
|
|
|
96,095 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,676 |
|
|
|
12,581 |
|
|
|
32,485 |
|
|
|
36,849 |
|
Borrowings
and junior subordinated debentures
|
|
|
4,087 |
|
|
|
4,571 |
|
|
|
11,694 |
|
|
|
13,539 |
|
Total
interest expense
|
|
|
13,763 |
|
|
|
17,152 |
|
|
|
44,179 |
|
|
|
50,388 |
|
Net
interest income
|
|
|
19,329 |
|
|
|
15,479 |
|
|
|
56,270 |
|
|
|
45,707 |
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
commissions and fees
|
|
|
2,640 |
|
|
|
2,661 |
|
|
|
11,480 |
|
|
|
11,438 |
|
Deposit
service fees
|
|
|
2,518 |
|
|
|
1,825 |
|
|
|
7,159 |
|
|
|
5,127 |
|
Wealth
management fees
|
|
|
1,338 |
|
|
|
1,044 |
|
|
|
4,533 |
|
|
|
2,931 |
|
Loan
service and interest rate swap fees
|
|
|
561 |
|
|
|
324 |
|
|
|
1,026 |
|
|
|
681 |
|
Total
fee income
|
|
|
7,057 |
|
|
|
5,854 |
|
|
|
24,198 |
|
|
|
20,177 |
|
Other
|
|
|
174 |
|
|
|
433 |
|
|
|
1,042 |
|
|
|
1,160 |
|
Gain
(loss) on sale of securities, net
|
|
|
4 |
|
|
|
(672 |
) |
|
|
(22 |
) |
|
|
(591 |
) |
Loss
on prepayment of borrowings, net
|
|
|
- |
|
|
|
(1,180 |
) |
|
|
- |
|
|
|
(1,180 |
) |
Loss
on sale of loans, net
|
|
|
- |
|
|
|
(1,991 |
) |
|
|
- |
|
|
|
(1,991 |
) |
Total
non-interest income
|
|
|
7,235 |
|
|
|
2,444 |
|
|
|
25,218 |
|
|
|
17,575 |
|
Total
net revenue
|
|
|
26,564 |
|
|
|
17,923 |
|
|
|
81,488 |
|
|
|
63,282 |
|
Provision
for loan losses
|
|
|
1,250 |
|
|
|
390 |
|
|
|
3,180 |
|
|
|
1,240 |
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
9,796 |
|
|
|
7,891 |
|
|
|
29,294 |
|
|
|
24,632 |
|
Occupancy
and equipment
|
|
|
2,760 |
|
|
|
2,418 |
|
|
|
8,502 |
|
|
|
7,289 |
|
Marketing,
data processing, and professional services
|
|
|
2,121 |
|
|
|
2,260 |
|
|
|
6,423 |
|
|
|
6,323 |
|
Non-recurring
expense
|
|
|
- |
|
|
|
1,606 |
|
|
|
683 |
|
|
|
1,758 |
|
Amortization
of intangible assets
|
|
|
889 |
|
|
|
684 |
|
|
|
2,992 |
|
|
|
2,008 |
|
Other
|
|
|
2,171 |
|
|
|
1,730 |
|
|
|
6,549 |
|
|
|
5,092 |
|
Total
non-interest expense
|
|
|
17,737 |
|
|
|
16,589 |
|
|
|
54,443 |
|
|
|
47,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
7,577 |
|
|
|
944 |
|
|
|
23,865 |
|
|
|
14,940 |
|
Income
tax expense
|
|
|
2,301 |
|
|
|
- |
|
|
|
6,827 |
|
|
|
4,478 |
|
Net
income
|
|
$ |
5,276 |
|
|
$ |
944 |
|
|
$ |
17,038 |
|
|
$ |
10,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.11 |
|
|
$ |
1.65 |
|
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.10 |
|
|
$ |
1.64 |
|
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,303 |
|
|
|
8,922 |
|
|
|
10,330 |
|
|
|
8,774 |
|
Diluted
|
|
|
10,400 |
|
|
|
9,045 |
|
|
|
10,421 |
|
|
|
8,921 |
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
Nine
Months Ended September 30,
|
|
(In
thousands except per share data)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at beginning of period
|
|
$ |
326,837 |
|
|
$ |
258,161 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
17,038 |
|
|
|
10,462 |
|
Net
unrealized (loss) gain on securities available-for-sale,
|
|
|
|
|
|
|
|
|
net
of reclassification adjustments and tax effects
|
|
|
(4,531 |
) |
|
|
92 |
|
Net
(loss) gain on derivative instruments
|
|
|
(958 |
) |
|
|
71 |
|
Total
comprehensive income
|
|
|
11,549 |
|
|
|
10,625 |
|
Factory
Point Bancorp, Inc. acquisition
|
|
|
- |
|
|
|
63,423 |
|
Cash
dividends declared ($0.47 per share in 2008 and $0.43 per share in
2007)
|
|
|
(4,917 |
) |
|
|
(3,783 |
) |
Treasury
stock purchased
|
|
|
(4,883 |
) |
|
|
(554 |
) |
Forfeited
shares
|
|
|
- |
|
|
|
(995 |
) |
Exercise
of stock options
|
|
|
2,927 |
|
|
|
1,623 |
|
Reissuance
of treasury stock-other
|
|
|
1,435 |
|
|
|
1,722 |
|
Stock-based
compensation
|
|
|
1,208 |
|
|
|
1,184 |
|
Tax
benefit (loss) from stock compensation
|
|
|
(69 |
) |
|
|
615 |
|
Other
equity changes, net
|
|
|
(1,405 |
) |
|
|
(1,375 |
) |
Total
stockholders' equity at end of period
|
|
$ |
332,682 |
|
|
$ |
330,646 |
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Nine
Months Ended September 30,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
17,038 |
|
|
$ |
10,462 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
3,180 |
|
|
|
1,240 |
|
Depreciation,
amortization, and deferrals, net
|
|
|
5,872 |
|
|
|
4,754 |
|
Stock-based
compensation
|
|
|
1,208 |
|
|
|
1,184 |
|
Excess
tax effects from stock-based payment arrangements
|
|
|
69 |
|
|
|
(615 |
) |
Increase
in cash surrender value of bank-owned life insurance
policies
|
|
|
(1,125 |
) |
|
|
(789 |
) |
Net
loss on sales of securities, net
|
|
|
22 |
|
|
|
591 |
|
Net
change in loans held for sale
|
|
|
(1,956 |
) |
|
|
- |
|
Loss
on prepayment of borrowings
|
|
|
- |
|
|
|
1,180 |
|
Net
loss on sales of loans
|
|
|
- |
|
|
|
1,991 |
|
Loss
from sale of premises
|
|
|
35 |
|
|
|
- |
|
Writedowns
of other real estate owned
|
|
|
136 |
|
|
|
- |
|
Net
change in all other assets
|
|
|
(2,739 |
) |
|
|
175 |
|
Net
change in other liabilities
|
|
|
1,054 |
|
|
|
(1,015 |
) |
Net
cash provided by operating activities
|
|
|
22,794 |
|
|
|
19,158 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of Factory Point Bancorp, Inc.
|
|
|
- |
|
|
|
(7,641 |
) |
Sales
of securities available for sale
|
|
|
9,167 |
|
|
|
59,141 |
|
Proceeds
from maturities, calls and prepayments - securities available for
sale
|
|
|
21,256 |
|
|
|
25,227 |
|
Purchases
of securities available for sale
|
|
|
(44,953 |
) |
|
|
(16,778 |
) |
Proceeds
from maturities, calls and prepayments - securities held to
maturity
|
|
|
27,653 |
|
|
|
8,144 |
|
Purchases
of securities held to maturity
|
|
|
(14,391 |
) |
|
|
(10,159 |
) |
Purchase
of trading security
|
|
|
(15,000 |
) |
|
|
- |
|
Increase
in loans, net
|
|
|
(51,520 |
) |
|
|
(8,534 |
) |
Capital
expenditures
|
|
|
(2,090 |
) |
|
|
(4,449 |
) |
Proceeds
from surrender of life insurance
|
|
|
1,103 |
|
|
|
- |
|
Payment
for acquisition
|
|
|
(1,030 |
) |
|
|
- |
|
Proceeds
from sale of other real estate owned
|
|
|
547 |
|
|
|
- |
|
Proceeds
from sale of premises and equipment
|
|
|
74 |
|
|
|
- |
|
Total
net cash (used) provided by investing activities
|
|
|
(69,184 |
) |
|
|
44,951 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in deposits
|
|
|
14,642 |
|
|
|
5,179 |
|
Proceeds
from Federal Home Loan Bank ("FHLB") advances
|
|
|
194,835 |
|
|
|
93,293 |
|
Repayments
of Federal Home Loan Bank advances and other borrowings
|
|
|
(162,718 |
) |
|
|
(167,585 |
) |
Proceeds
from bank note
|
|
|
- |
|
|
|
25,000 |
|
Repayment
of bank note
|
|
|
- |
|
|
|
(15,000 |
) |
Treasury
stock purchased
|
|
|
(4,883 |
) |
|
|
(554 |
) |
Proceeds
from reissuance of treasury stock
|
|
|
2,927 |
|
|
|
1,623 |
|
Excess
tax effects from stock-based payment arrangements
|
|
|
(69 |
) |
|
|
615 |
|
Cash
dividends paid
|
|
|
(4,917 |
) |
|
|
(3,783 |
) |
Net
cash provided (used) by financing activities
|
|
|
39,817 |
|
|
|
(61,212 |
) |
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(6,573 |
) |
|
|
2,897 |
|
Cash
and cash equivalents at beginning of period
|
|
|
41,142 |
|
|
|
30,985 |
|
Cash
and cash equivalents at end of period
|
|
$ |
34,569 |
|
|
$ |
33,882 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
$ |
32,241 |
|
|
$ |
36,416 |
|
Interest
paid on borrowed funds
|
|
|
11,827 |
|
|
|
13,722 |
|
Income
taxes paid, net
|
|
|
5,265 |
|
|
|
5,492 |
|
See
accompanying notes to consolidated financial statements.
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, 2008 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, 2007.
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, 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
Acquisitions
In
January 2008, the Company acquired the Center for Financial
Planning (“CFP”) in Albany, New York. This acquisition provides a foundation for
the Bank’s New York region wealth management and investment services. The
acquisition was accounted for as a purchase transaction with all cash
consideration funded through internal sources. The operating results of CFP are
included with the Company's results of operations since the date of acquisition.
The purchase of CFP did not significantly impact the Company's consolidated
financial statements.
On
September 21, 2007, the Company completed its acquisition of Factory Point
Bancorp, Inc. and its subsidiary, Factory Point National Bank of Manchester
Center, Vermont (collectively “Factory Point”) for $79.4 million, including the
assumption of Factory Point stock options. Under the terms of the agreement, the
Company issued 1,913,353 shares of the Company’s common stock and paid $16.0
million in cash in exchange for all outstanding Factory Point shares and also
assumed all outstanding Factory Point stock options. Concurrent with the merger
of Berkshire Hills Bancorp and Factory Point Bancorp, the Bank and Factory Point
National Bank merged with the Bank as the surviving entity. The
operating results of Factory Point are included with the Company's results of
operations since the date of acquisition. See footnote 2 in Berkshire’s Annual
Report on Form 10-K for the year ended December 31, 2007 for additional
information for this acquisition.
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 Sept. 30,
|
|
|
Nine
Months Ended Sept. 30,
|
|
(In
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income applicable to common stock
|
|
$ |
5,276 |
|
|
$ |
944 |
|
|
$ |
17,038 |
|
|
$ |
10,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
10,425 |
|
|
|
9,023 |
|
|
|
10,452 |
|
|
|
8,869 |
|
Less:
average number of unvested stock award shares
|
|
|
(122 |
) |
|
|
(101 |
) |
|
|
(122 |
) |
|
|
(95 |
) |
Average
number of basic shares outstanding
|
|
|
10,303 |
|
|
|
8,922 |
|
|
|
10,330 |
|
|
|
8,774 |
|
Plus:
average number of dilutive unvested stock award shares
|
|
|
17 |
|
|
|
101 |
|
|
|
17 |
|
|
|
95 |
|
Plus:
average number of dilutive shares based on stock options
|
|
|
80 |
|
|
|
22 |
|
|
|
74 |
|
|
|
52 |
|
Average
number of diluted shares outstanding
|
|
|
10,400 |
|
|
|
9,045 |
|
|
|
10,421 |
|
|
|
8,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.11 |
|
|
$ |
1.65 |
|
|
$ |
1.19 |
|
Diluted
earnings per share
|
|
$ |
0.51 |
|
|
$ |
0.10 |
|
|
$ |
1.64 |
|
|
$ |
1.17 |
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Statements
of Financial Accounting Standards
SFAS No.
141, "Business Combinations (Revised 2007)." SFAS 141R replaces SFAS 141,
"Business Combinations," and applies to all transactions and other events in
which one entity obtains control over one or more other businesses. SFAS 141R
requires an acquirer, upon initially obtaining control of another entity, to
recognize the assets, liabilities and any non-controlling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value. SFAS 141R requires acquirers to
expense acquisition-related costs as incurred rather than allocating such costs
to the assets acquired and liabilities assumed, as was previously the case under
SFAS 141. Under SFAS 141R, the requirements of SFAS 146, “Accounting for Costs
Associated with Exit or Disposal Activities," would have to be met in order to
accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5,
"Accounting for Contingencies." The allowance for loan losses related to loans
acquired will not be included in the Company’s allowance for loan losses, but
will be reflected in the fair value of loans acquired. SFAS 141R is expected to
have a significant impact on the Company's accounting for business combinations
closing on or after January 1, 2009.
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 (see Note 10 - Fair Value
Measurements).
SFAS No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No. 115." SFAS 159 permits
entities to choose to measure eligible items at fair value at specified election
dates (see Note 2 – Securities and Note 10 - Fair Value
Measurements).
SFAS No.
160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment
of ARB Statement No. 51." SFAS 160 amends Accounting Research Bulletin (ARB) No.
51, "Consolidated Financial Statements," to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS 160 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. SFAS 160 is
effective for the
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Company
on January 1, 2009 and is not expected to have a significant impact on the
Company's financial statements.
SFAS No.
161, "Disclosures About Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133." SFAS 161 amends SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," to amend and expand the
disclosure requirements of SFAS 133 to provide greater transparency about (i)
how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedge items are accounted for under SFAS 133 and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity's financial position, results of operations and cash
flows. To meet those objectives, SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161
is effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company's financial statements.
On
October 10, 2008 the FASB issued FASB Staff Position (“FSP”) 157-3,
“Determining the Fair Value of a Financial Assets When the Market for that Asset
is Not Active”, which provides an example that illustrates key considerations in
determining the fair value of a financial asset when the market for that asset
is not active. The FSP does not change existing generally accepted accounting
principles. The FSP provides clarification for how to consider various inputs in
determining fair value under current market conditions consistent with the
principles of SFAS 157. This FSP is effective upon issuance, including prior
periods for which financial statement have not been issued. The impact of
adoption did not have a material impact on the Company’s consolidated financial
position or results of operations.
SEC
Staff Accounting Bulletins
Staff
Accounting Bulletin (SAB) No. 109, "Written Loan Commitments Recorded at Fair
Value Through Earnings." SAB No. 109 supersedes SAB 105, "Application of
Accounting Principles to Loan Commitments," and indicates that the expected net
future cash flows related to the associated servicing of the loan should be
included in the measurement of all written loan commitments that are accounted
for at fair value through earnings. The guidance in SAB 109 became effective on
January 1, 2008 and did not have a material impact on the Company's financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES
A summary
of securities follows:
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
September
30, 2008
|
|
|
|
|
|
|
Trading
- Municipal obligation
|
|
$ |
15,000 |
|
|
$ |
15,267 |
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
73,385 |
|
|
$ |
70,965 |
|
Mortgage-backed
securities, other
|
|
|
119,093 |
|
|
|
120,046 |
|
Other
bonds and obligations
|
|
|
15,587 |
|
|
|
12,050 |
|
Total
debt securities
|
|
|
208,065 |
|
|
|
203,061 |
|
Total
equity securities
|
|
|
2,384 |
|
|
|
2,493 |
|
Total
securities available for sale
|
|
|
210,449 |
|
|
|
205,554 |
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
25,039 |
|
|
|
25,488 |
|
Mortgage-backed
securities
|
|
|
884 |
|
|
|
881 |
|
Total
securities held to maturity
|
|
|
25,923 |
|
|
|
26,369 |
|
Total
securities
|
|
$ |
251,372 |
|
|
$ |
247,190 |
|
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
74,223 |
|
|
$ |
75,186 |
|
Mortgage-backed
securities
|
|
|
103,387 |
|
|
|
104,518 |
|
Other
bonds and obligations
|
|
|
15,601 |
|
|
|
15,265 |
|
Total
debt securities
|
|
|
193,211 |
|
|
|
194,969 |
|
Total
equity securities
|
|
|
2,836 |
|
|
|
2,995 |
|
Total
securities available for sale
|
|
|
196,047 |
|
|
|
197,964 |
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
36,981 |
|
|
|
37,233 |
|
Mortgage-backed
securities
|
|
|
2,475 |
|
|
|
2,456 |
|
Total
securities held to maturity
|
|
|
39,456 |
|
|
|
39,689 |
|
Total
securities
|
|
$ |
235,503 |
|
|
$ |
237,653 |
|
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115." SFAS 159 permits the Company to choose to
measure eligible items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value measurement option has been
elected are reported in earnings at each subsequent reporting date. The fair
value option (i) may be applied instrument by instrument, with certain
exceptions, thus the Company may record identical financial assets and
liabilities at fair value or by another measurement basis permitted under
generally accepted accounting principles, (ii) is irrevocable (unless a new
election date occurs) and (iii) is applied only to entire instruments and not
to
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
portions
of instruments. Adoption of SFAS 159 on January 1, 2008 did not have a
significant impact on the Company's financial statements.
The
Company elected to account for one security at fair value under SFAS No. 159
acquired during the second quarter of 2008. This security is classified as
trading on the consolidated balance sheet. The Company has the intent and
ability to hold this security to maturity and will report the purchase of this
security in the investing section on the consolidated statement of cash flows.
The investment security accounted for at fair value has an amortized cost of
$15.0 million and a fair value of $15.3 million at September 30, 2008. See note
9 – Derivative Financial Instruments for additional information related to this
investment security and the related interest rate swap.
The
unrealized losses on the other bonds and obligations available for sale
increased to $3.5 million at September 30, 2008. This portfolio
consists of investment grade corporate trust preferred securities and corporate
debt. The unrealized losses on the portfolio are due to an increase in credit
spreads and liquidity issues in the marketplace. The Company has concluded these
unrealized losses are temporary in nature since they are not related to the
underlying credit quality of the issuers, and the Company has the intent and
ability to hold these investments for a time necessary to recover its cost or
stated maturity (at which time, full payment is expected).
Loans consist of the
following:
(Dollars
in millions)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
Residential
mortgages:
|
|
|
|
|
|
|
1 -
4 Family
|
|
$ |
636 |
|
|
$ |
610 |
|
Construction
|
|
|
36 |
|
|
|
47 |
|
Total
residential mortgages
|
|
|
672 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
134 |
|
|
|
125 |
|
Single
and multi-family
|
|
|
70 |
|
|
|
69 |
|
Other
commercial mortgages
|
|
|
591 |
|
|
|
510 |
|
Total
commercial mortgages
|
|
|
795 |
|
|
|
704 |
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
181 |
|
|
|
204 |
|
Total
commercial loans
|
|
|
976 |
|
|
|
908 |
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
Auto
and other
|
|
|
157 |
|
|
|
211 |
|
Home
equity
|
|
|
187 |
|
|
|
168 |
|
Total
consumer loans
|
|
|
344 |
|
|
|
379 |
|
Total
loans
|
|
$ |
1,992 |
|
|
$ |
1,944 |
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan
losses is as follows:
|
|
Nine
Months Ended September 30,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$ |
22,116 |
|
|
$ |
19,370 |
|
Provision
for loan losses
|
|
|
3,180 |
|
|
|
1,240 |
|
Allowance
attributed to acquired loans
|
|
|
- |
|
|
|
4,453 |
|
Loans
charged-off
|
|
|
(2,968 |
) |
|
|
(3,259 |
) |
Recoveries
|
|
|
558 |
|
|
|
304 |
|
Balance
at end of period
|
|
$ |
22,886 |
|
|
$ |
22,108 |
|
A summary
of time deposits is as follows:
(Dollars
in millions)
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
Time
less than $100,000
|
|
$ |
394 |
|
|
$ |
409 |
|
Time
$100,000 or more
|
|
|
345 |
|
|
|
298 |
|
Brokered
time
|
|
|
3 |
|
|
|
21 |
|
Total
time deposits
|
|
$ |
742 |
|
|
$ |
728 |
|
The
Bank’s actual and required capital ratios are as follows:
|
|
|
|
|
FDIC
Minimum
|
|
September
30, 2008
|
December
31, 2007
|
to
be Well Capitalized
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
10.5
|
%
|
10.4
|
%
|
10.0
|
%
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets
|
9.4
|
|
9.3
|
|
6.0
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
7.9
|
|
8.0
|
|
5.0
|
|
At each
date shown, Berkshire Bank met the conditions to be classified as “well
capitalized” under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table above.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7.
|
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, 2008 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, 2007
|
|
|
105 |
|
|
$ |
31.88 |
|
|
|
644 |
|
|
$ |
21.90 |
|
Granted
|
|
|
64 |
|
|
|
22.38 |
|
|
|
- |
|
|
|
- |
|
Stock
options exercised
|
|
|
- |
|
|
|
- |
|
|
|
(153 |
) |
|
|
19.51 |
|
Stock
awards vested
|
|
|
(45 |
) |
|
|
29.97 |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(2 |
) |
|
|
27.67 |
|
|
|
(6 |
) |
|
|
33.46 |
|
Balance,
September 30, 2008
|
|
|
122 |
|
|
$ |
27.39 |
|
|
|
485 |
|
|
$ |
22.52 |
|
During
the nine months ended September 30, 2008 and 2007, proceeds from stock option
exercises totaled $2.9 million and $1.6 million, respectively. During the nine
months ended September 30, 2008, there were 217,000 shares issued in connection
with stock option exercises and non-vested stock awards. All of these
shares were issued from available treasury stock. Stock-based
compensation expense totaled $1.2 million during the nine months ended September
30, 2008 and 2007. Stock-based compensation expense is recognized ratably over
the requisite service period for all awards.
The
Company has two reportable operating segments, Banking and Insurance, which are
delineated by the consolidated subsidiaries of Berkshire Hills
Bancorp. 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. Management fees for
corporate services provided by the Bank to Berkshire Insurance Group and the
Parent are eliminated.
The
accounting policies of each reportable segment are the same as those of the
Company. The Insurance segment and the Parent reimburse the Bank for
administrative services provided to them. Income tax expense for the
individual segments is calculated based on the activity of the segments, and the
Parent records the tax expense or benefit necessary to reconcile to the
consolidated total. The Parent does not allocate capital
costs. Average assets include securities available-for-sale based on
amortized cost.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A summary
of the Company’s operating segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Eliminations
|
|
Consolidated
|
|
Three
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
19,736 |
|
|
$ |
- |
|
|
$ |
2,593 |
|
|
$ |
(3,000 |
) |
|
$ |
19,329 |
|
Provision
for loan losses
|
|
|
1,250 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,250 |
|
Net
interest income after provision for loan losses
|
|
|
18,486 |
|
|
|
- |
|
|
|
2,593 |
|
|
|
(3,000 |
) |
|
|
18,079 |
|
Non-interest
income
|
|
|
4,576 |
|
|
|
2,659 |
|
|
|
2,392 |
|
|
|
(2,392 |
) |
|
|
7,235 |
|
Non-interest
expense
|
|
|
15,179 |
|
|
|
2,742 |
|
|
|
(184 |
) |
|
|
- |
|
|
|
17,737 |
|
Income
(loss) before income taxes
|
|
|
7,883 |
|
|
|
(83 |
) |
|
|
5,169 |
|
|
|
(5,392 |
) |
|
|
7,577 |
|
Income
tax expense (benefit)
|
|
|
2,472 |
|
|
|
(64 |
) |
|
|
(107 |
) |
|
|
- |
|
|
|
2,301 |
|
Net
income (loss)
|
|
$ |
5,411 |
|
|
$ |
(19 |
) |
|
$ |
5,276 |
|
|
$ |
(5,392 |
) |
|
$ |
5,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in
millions)
|
|
$ |
2,520 |
|
|
$ |
31 |
|
|
$ |
361 |
|
|
$ |
(357 |
) |
|
$ |
2,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Eliminations
|
|
Consolidated
|
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (loss)
|
|
$ |
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 (loss)
|
|
|
(263 |
) |
|
|
2,707 |
|
|
|
1,405 |
|
|
|
(1,405 |
) |
|
|
2,444 |
|
Non-interest
expense
|
|
|
13,773 |
|
|
|
2,600 |
|
|
|
216 |
|
|
|
- |
|
|
|
16,589 |
|
Income
before income taxes
|
|
|
1,546 |
|
|
|
107 |
|
|
|
696 |
|
|
|
(1,405 |
) |
|
|
944 |
|
Income
tax expense (benefit)
|
|
|
204 |
|
|
|
44 |
|
|
|
(248 |
) |
|
|
- |
|
|
|
- |
|
Net
income
|
|
$ |
1,342 |
|
|
$ |
63 |
|
|
$ |
944 |
|
|
$ |
(1,405 |
) |
|
$ |
944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in
millions)
|
|
$ |
2,171 |
|
|
$ |
32 |
|
|
$ |
298 |
|
|
$ |
(288 |
) |
|
$ |
2,213 |
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
|
OPERATING
SEGMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Eliminations
|
|
Consolidated
|
|
Nine
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
57,645 |
|
|
$ |
- |
|
|
$ |
19,125 |
|
|
$ |
(20,500 |
) |
|
$ |
56,270 |
|
Provision
for loan losses
|
|
|
3,180 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,180 |
|
Net
interest income after provision for loan losses
|
|
|
54,465 |
|
|
|
- |
|
|
|
19,125 |
|
|
|
(20,500 |
) |
|
|
53,090 |
|
Non-interest
income
|
|
|
13,697 |
|
|
|
11,519 |
|
|
|
(2,411 |
) |
|
|
2,413 |
|
|
|
25,218 |
|
Non-interest
expense
|
|
|
46,260 |
|
|
|
7,691 |
|
|
|
492 |
|
|
|
- |
|
|
|
54,443 |
|
Income
before income taxes
|
|
|
21,902 |
|
|
|
3,828 |
|
|
|
16,222 |
|
|
|
(18,087 |
) |
|
|
23,865 |
|
Income
tax expense (benefit)
|
|
|
6,160 |
|
|
|
1,483 |
|
|
|
(816 |
) |
|
|
- |
|
|
|
6,827 |
|
Net
income
|
|
$ |
15,742 |
|
|
$ |
2,345 |
|
|
$ |
17,038 |
|
|
$ |
(18,087 |
) |
|
$ |
17,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in
millions)
|
|
$ |
2,487 |
|
|
$ |
32 |
|
|
$ |
350 |
|
|
$ |
(343 |
) |
|
$ |
2,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Eliminations
|
|
Consolidated
|
|
Nine
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
47,197 |
|
|
$ |
- |
|
|
$ |
2,010 |
|
|
$ |
(3,500 |
) |
|
$ |
45,707 |
|
Provision
for loan losses
|
|
|
1,240 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,240 |
|
Net
interest income after provision for loan losses
|
|
|
45,957 |
|
|
|
- |
|
|
|
2,010 |
|
|
|
(3,500 |
) |
|
|
44,467 |
|
Non-interest
income
|
|
|
5,938 |
|
|
|
11,561 |
|
|
|
8,337 |
|
|
|
(8,261 |
) |
|
|
17,575 |
|
Non-interest
expense
|
|
|
38,836 |
|
|
|
7,681 |
|
|
|
585 |
|
|
|
- |
|
|
|
47,102 |
|
Income
before income taxes
|
|
|
13,059 |
|
|
|
3,880 |
|
|
|
9,762 |
|
|
|
(11,761 |
) |
|
|
14,940 |
|
Income
tax expense (benefit)
|
|
|
3,587 |
|
|
|
1,591 |
|
|
|
(700 |
) |
|
|
- |
|
|
|
4,478 |
|
Net
income
|
|
$ |
9,472 |
|
|
$ |
2,289 |
|
|
$ |
10,462 |
|
|
$ |
(11,761 |
) |
|
$ |
10,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in
millions)
|
|
$ |
2,148 |
|
|
$ |
32 |
|
|
$ |
277 |
|
|
$ |
(272 |
) |
|
$ |
2,185 |
|
9.
|
DERIVATIVE
FINANCIAL INSTRUMENTS
|
The fair
value of derivative positions outstanding is included in other assets, accrued
interest payable and other liabilities in the accompanying consolidated balance
sheets. At September 30, 2008, the Company had outstanding interest rate swaps
with a total notional amount of $150.0 million that are designated as hedges of
FHLB advances and junior subordinated debentures. The swaps effectively convert
the debt from floating rate to fixed rate and qualify for cash flow hedge
accounting under SFAS No. 133 with the objective of protecting the overall
cash flows from the Company’s monthly interest payments for the $150.0 million
in floating rate FHLB advances and junior subordinated dentures.
During
the second quarter of 2008, the Company initiated a program to provide
derivative financial instruments to certain customers, acting as an intermediary
in the transaction. All of these customer derivatives, however, are
immediately hedged upon issuance by executing a mirror image derivative with a
dealer counterparty such that the Company has no net interest rate risk exposure
resulting from the transactions. Exposure with respect to these derivatives is
largely limited to nonperformance by either the customer or the other
counterparty. The notional amount of customer derivatives and the related
counterparty derivatives each totaled $28.9
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
million
at September 30, 2008. The customer derivatives and the related
counterparty derivatives are marked to market and any difference is reflected in
non-interest income.
The
Company executed an economic hedge in the second quarter and entered into a
transaction whereby the Company elected to account for a $15.0 million
fixed-rate municipal obligation at fair value under FAS 159 and entered into a
$15.0 million pay-fixed and receive-floating interest rate swap with a
counterparty and has accounted for the derivative at fair value under SFAS No.
133. The changes in the fair value of the investment security and interest rate
swap are expected to offset each other with any differences reflected in
non-interest income. The Company elected the fair value option for this
municipal obligation security due to several factors such as the large dollar
amount of the obligation in relation to other municipal obligation securities in
the Company’s held-to-maturity portfolio as well as the term of the obligation
which was 21.5 years at origination. The intent of the economic hedge was to
improve the Company’s asset sensitivity to changing interest rates.
Interest Rate
Derivatives. The notional amounts and estimated fair values of interest
rate derivative positions outstanding at September 30, 2008 are presented in the
following table (amounts in thousands). The Company utilizes independent third
party valuation models with observable market data inputs to estimate fair
values of interest rate swaps. The Company also obtains dealer quotations for
these derivatives for comparative purposes to assess the reasonableness of the
model valuations.
A
summary of interest rate derivatives at September 30, 2008,
follows:
|
|
Notional
A mount
|
|
|
Estimated
Fair Value - Asset (Liability)
|
|
Interest
rate swaps on variable-rate borrowings
|
|
$ |
150,000 |
|
|
$ |
(1,544 |
) |
Customer
related interest rate swaps
|
|
|
|
|
|
|
|
|
Receive
floating/pay fixed
|
|
|
28,948 |
|
|
|
(468 |
) |
Receive
fixed/pay floating
|
|
|
28,948 |
|
|
|
477 |
|
Receive
floating/pay fixed interest rate swap related to
|
|
|
|
|
|
|
|
|
to
the IRB security
|
|
|
15,000 |
|
|
|
(407 |
) |
|
|
|
|
|
|
|
|
|
The
weighted average rate paid and received for cash flow interest rate swaps
outsandings
|
|
|
|
|
|
as
of September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fixed
Interest Rate Paid
|
|
|
Floating
Interest Rate Received
|
|
Cash
flow hedge interest rate swaps on variable-rate borrowings
|
|
|
4.37 |
% |
|
|
2.96 |
% |
Interest
rate contracts involve the risk of dealing with institutional derivative
counterparties and their ability to meet contractual terms. Institutional
counterparties must have an investment grade credit rating and be approved by
the Company’s Risk Management Committee. The Company's credit exposure, net of
collateral pledged, relating to interest rate swaps with upstream financial
institution counterparties was not material at September 30, 2008. Collateral
levels for upstream financial institution counterparties are monitored and
adjusted on a regular basis for changes in interest rate swap
values.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
|
FAIR
VALUE MEASUREMENT
|
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157, "Fair Value
Measurements," for financial assets and financial liabilities. In accordance
with Financial Accounting Standards Board Staff Position (FSP) No. 157-2,
"Effective Date of FASB Statement No. 157," the Company will delay application
of SFAS 157 for non-financial assets and non-financial liabilities, until
January 1, 2009. 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
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants. A
fair value measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the
asset or liability. The price in the principal (or most advantageous) market
used to measure the fair value of the asset or liability shall not be adjusted
for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for
marketing activities that are usual and customary for transactions involving
such assets and liabilities; it is not a forced transaction. Market participants
are buyers and sellers in the principal market that are (i) independent, (ii)
knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS 157
requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market approach uses
prices and other relevant information generated by market transactions involving
identical or comparable assets and liabilities. The income approach uses
valuation techniques to convert future amounts, such as cash flows or earnings,
to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of
an asset (replacement cost). Valuation techniques should be consistently
applied. Inputs to valuation techniques refer to the assumptions that market
participants would use in pricing the asset or liability. Inputs may be
observable, meaning those that reflect the assumptions market participants would
use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the
reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances. In that regard, SFAS 157 establishes
a fair value hierarchy for valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
|
·
|
Level
1 Inputs - Unadjusted quoted prices in active markets for identical assets
or liabilities that the reporting entity has the ability to access at the
measurement date.
|
|
·
|
Level
2 Inputs - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly.
These might include quoted
prices
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
for
similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, prepayment speeds, credit
risks, etc.) or inputs that are derived principally from or corroborated
by market data by correlation or other
means.
|
|
·
|
Level
3 Inputs - Unobservable inputs for determining the fair values of assets
or liabilities that reflect an entity's own assumptions about the
assumptions that market participants would use in pricing the assets or
liabilities.
|
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation methodologies were
applied to all of the Company's financial assets and financial liabilities
carried at fair value effective January 1, 2008.
In
general, fair value is based upon quoted market prices, where available. If such
quoted market prices are not available, fair value is based upon internally
developed models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. These adjustments may include amounts to
reflect counterparty credit quality, the Company's creditworthiness, among other
things, as well as unobservable parameters. Any such valuation adjustments are
applied consistently over time. The Company's valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. While management believes the
Company's valuation methodologies are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
Securities
Available for Sale. Securities classified as
available for sale are reported at fair value utilizing Level 2 inputs. For
these securities, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the bond's terms and
conditions, among other things.
Trading Securities
at Fair Value.
Securities accounted for at fair value are reported utilizing Level 2 inputs
obtained from third parties.
Derivatives.
Currently, the Company uses swaps to manage its interest rate risk. The valuation of these
instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest
rate curves, foreign exchange rates, and implied volatilities.
To comply
with the provisions of SFAS No. 157, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the
respective
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
counterparty’s
nonperformance risk in the fair value measurements. In adjusting the
fair value of its derivative contracts for the effect of nonperformance risk,
the Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties. However, as of September
30, 2008, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of September 30, 2008, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ |
- |
|
|
$ |
205,554 |
|
|
$ |
- |
|
|
$ |
205,554 |
|
Trading
securities
|
|
|
- |
|
|
|
15,267 |
|
|
|
- |
|
|
|
15,267 |
|
Net
derivative liability
|
|
|
- |
|
|
|
1,942 |
|
|
|
- |
|
|
|
1,942 |
|
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). Financial
assets and financial liabilities measured at fair value on a non-recurring basis
were not significant at September 30, 2008.
Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test. Certain non-financial assets and liabilities
measured at fair value on a non-recurring basis include those measured at fair
value in the second step of a goodwill impairment test, as well as intangible
assets and other non-financial long-lived assets measured at fair value for
impairment assessment. As stated above, SFAS 157 will be applicable to these
fair value measurements beginning January 1, 2009.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
October 6, 2008, the Company announced that it planned to raise approximately
$30 million through the sale of shares of Berkshire Hills Bancorp common stock
in an underwritten public offering. The Company also announced that it granted
the underwriters an option to purchase additional shares of common stock
representing 15% of the gross offering proceeds to cover over-allotments, if
any.
On
October 8, 2008, the Company announced the pricing of the public offering of
Berkshire Hills Bancorp common stock at a price of $24.00 per share. The total
issuance, including the over-allotment was 1.725 million shares and the
proceeds, net of the underwriting discount and issuance costs, were $38.8
million. The offering closed on October 14, 2008. The Company intends
to utilize the net proceeds from the offering to strengthen its capital base and
to provide growth capital for its affiliates and for general corporate
purposes.
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 2007 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, 2008 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. 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, Northeastern New York and Southern
Vermont. The Bank is transitioning into a regional financial services company
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. Berkshire Hills Bancorp is
also the holding company for Berkshire Insurance Group, which sells all lines of
insurance (personal, commercial, employee benefits, and life insurance) in ten
locations in Massachusetts and in affiliation with the branch offices of
Berkshire Bank.
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,
2007 and in 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 2007 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 2007 Form 10-K. There have been no significant
changes in the Company’s application of critical accounting policies since
year-end 2007. 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 Company performs an annual impairment test of
goodwill in the fourth quarter of its fiscal year-end. As of September 30, 2008,
there have been no events requiring the Company to perform an interim impairment
test of goodwill.
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
0.82
|
% |
|
|
0.18
|
% |
|
|
0.90
|
% |
|
|
0.64
|
% |
Return
on average equity
|
|
|
6.26 |
|
|
|
1.44 |
|
|
|
6.84 |
|
|
|
5.18 |
|
Net
interest margin
|
|
|
3.48 |
|
|
|
3.20 |
|
|
|
3.45 |
|
|
|
3.20 |
|
Stockholders'
equity/total assets
|
|
|
12.97 |
|
|
|
13.38 |
|
|
|
12.97 |
|
|
|
13.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Data: (In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,566 |
|
|
$ |
2,472 |
|
|
$ |
2,566 |
|
|
$ |
2,472 |
|
Total
loans
|
|
|
1,992 |
|
|
|
1,939 |
|
|
|
1,992 |
|
|
|
1,939 |
|
Other
earning assets
|
|
|
273 |
|
|
|
236 |
|
|
|
273 |
|
|
|
236 |
|
Total
intangible assets
|
|
|
180 |
|
|
|
183 |
|
|
|
180 |
|
|
|
183 |
|
Deposits
|
|
|
1,837 |
|
|
|
1,796 |
|
|
|
1,837 |
|
|
|
1,796 |
|
Borrowings
and debentures
|
|
|
382 |
|
|
|
332 |
|
|
|
382 |
|
|
|
332 |
|
Stockholders'
equity
|
|
|
333 |
|
|
|
331 |
|
|
|
333 |
|
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs annualized/average loans
|
|
|
0.19
|
% |
|
|
0.23
|
% |
|
|
0.16
|
% |
|
|
0.23
|
% |
Loan
loss allowance/total loans
|
|
|
1.15 |
|
|
|
1.14 |
|
|
|
1.15 |
|
|
|
1.14 |
|
Nonperforming
assets/total assets
|
|
|
0.44 |
|
|
|
0.48 |
|
|
|
0.44 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
- diluted
|
|
$ |
0.51 |
|
|
$ |
0.10 |
|
|
$ |
1.64 |
|
|
$ |
1.17 |
|
Dividends
declared
|
|
|
0.16 |
|
|
|
0.15 |
|
|
|
0.47 |
|
|
|
0.43 |
|
Book
value
|
|
|
31.71 |
|
|
|
30.82 |
|
|
|
31.71 |
|
|
|
30.82 |
|
Common
stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
32.00 |
|
|
|
33.00 |
|
|
|
32.00 |
|
|
|
34.82 |
|
Low
|
|
|
20.68 |
|
|
|
25.21 |
|
|
|
20.61 |
|
|
|
25.21 |
|
Close
|
|
|
32.00 |
|
|
|
30.23 |
|
|
|
32.00 |
|
|
|
30.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period: (In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
19,329 |
|
|
$ |
15,479 |
|
|
$ |
56,270 |
|
|
$ |
45,707 |
|
Provision
for loan losses
|
|
|
1,250 |
|
|
|
390 |
|
|
|
3,180 |
|
|
|
1,240 |
|
Non-interest
income
|
|
|
7,235 |
|
|
|
2,444 |
|
|
|
25,218 |
|
|
|
17,575 |
|
Non-interest
expense
|
|
|
17,737 |
|
|
|
16,589 |
|
|
|
54,443 |
|
|
|
47,102 |
|
Net
income
|
|
|
5,276 |
|
|
|
944 |
|
|
|
17,038 |
|
|
|
10,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
(Dollars
in millions)
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
672 |
|
|
|
5.65
|
% |
|
$ |
635 |
|
|
|
5.35
|
% |
|
$ |
665 |
|
|
|
5.67
|
% |
|
$ |
617 |
|
|
|
5.35
|
% |
Commercial
mortgages
|
|
|
788 |
|
|
|
6.24 |
|
|
|
609 |
|
|
|
7.49 |
|
|
|
749 |
|
|
|
6.51 |
|
|
|
593 |
|
|
|
7.52 |
|
Commercial
business loans
|
|
|
192 |
|
|
|
6.41 |
|
|
|
171 |
|
|
|
8.06 |
|
|
|
197 |
|
|
|
6.80 |
|
|
|
184 |
|
|
|
8.01 |
|
Consumer
loans
|
|
|
346 |
|
|
|
5.86 |
|
|
|
349 |
|
|
|
7.03 |
|
|
|
357 |
|
|
|
6.16 |
|
|
|
345 |
|
|
|
7.01 |
|
Total
loans
|
|
|
1,998 |
|
|
|
5.99 |
|
|
|
1,764 |
|
|
|
6.68 |
|
|
|
1,968 |
|
|
|
6.19 |
|
|
|
1,739 |
|
|
|
6.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and
other
|
|
|
272 |
|
|
|
5.27 |
|
|
|
229 |
|
|
|
6.15 |
|
|
|
273 |
|
|
|
5.30 |
|
|
|
232 |
|
|
|
6.04 |
|
Total
earning assets
|
|
|
2,270 |
|
|
|
5.89 |
|
|
|
1,993 |
|
|
|
6.70 |
|
|
|
2,241 |
|
|
|
6.08 |
|
|
|
1,971 |
|
|
|
6.60 |
|
Other
assets
|
|
|
285 |
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
285 |
|
|
|
|
|
|
|
215 |
|
|
|
|
|
Total
assets
|
|
$ |
2,555 |
|
|
|
|
|
|
$ |
2,213 |
|
|
|
|
|
|
$ |
2,526 |
|
|
|
|
|
|
$ |
2,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
deposits
|
|
$ |
193 |
|
|
|
0.64
|
% |
|
$ |
142 |
|
|
|
1.40
|
% |
|
$ |
201 |
|
|
|
0.82
|
% |
|
$ |
141 |
|
|
|
1.49
|
% |
Money
market deposits
|
|
|
447 |
|
|
|
1.86 |
|
|
|
330 |
|
|
|
3.67 |
|
|
|
469 |
|
|
|
2.30 |
|
|
|
311 |
|
|
|
3.69 |
|
Savings
deposits
|
|
|
222 |
|
|
|
0.61 |
|
|
|
198 |
|
|
|
1.17 |
|
|
|
215 |
|
|
|
0.76 |
|
|
|
198 |
|
|
|
1.11 |
|
Time
deposits
|
|
|
734 |
|
|
|
3.76 |
|
|
|
701 |
|
|
|
4.69 |
|
|
|
718 |
|
|
|
4.08 |
|
|
|
702 |
|
|
|
4.75 |
|
Total
interest-bearing deposits
|
|
|
1,596 |
|
|
|
2.41 |
|
|
|
1,371 |
|
|
|
3.64 |
|
|
|
1,603 |
|
|
|
2.71 |
|
|
|
1,352 |
|
|
|
3.63 |
|
Borrowings
and debentures
|
|
|
380 |
|
|
|
4.27 |
|
|
|
375 |
|
|
|
4.84 |
|
|
|
358 |
|
|
|
4.37 |
|
|
|
379 |
|
|
|
4.76 |
|
Total
interest-bearing liabilities
|
|
|
1,976 |
|
|
|
2.77 |
|
|
|
1,746 |
|
|
|
3.90 |
|
|
|
1,961 |
|
|
|
3.01 |
|
|
|
1,731 |
|
|
|
3.88 |
|
Non-interest-bearing
demand deposits
|
|
|
233 |
|
|
|
|
|
|
|
187 |
|
|
|
|
|
|
|
224 |
|
|
|
|
|
|
|
179 |
|
|
|
|
|
Other
liabilities
|
|
|
11 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Total
liabilities
|
|
|
2,220 |
|
|
|
|
|
|
|
1,937 |
|
|
|
|
|
|
|
2,194 |
|
|
|
|
|
|
|
1,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
335 |
|
|
|
|
|
|
|
276 |
|
|
|
|
|
|
|
332 |
|
|
|
|
|
|
|
269 |
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
2,555 |
|
|
|
|
|
|
$ |
2,213 |
|
|
|
|
|
|
$ |
2,526 |
|
|
|
|
|
|
$ |
2,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
3.12
|
% |
|
|
|
|
|
|
2.80
|
% |
|
|
|
|
|
|
3.07
|
% |
|
|
|
|
|
|
2.72
|
% |
Net
interest margin
|
|
|
|
|
|
|
3.48
|
% |
|
|
|
|
|
|
3.20
|
% |
|
|
|
|
|
|
3.45
|
% |
|
|
|
|
|
|
3.20
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits (in
millions)
|
|
$ |
1,829 |
|
|
|
|
|
|
$ |
1,558 |
|
|
|
|
|
|
$ |
1,827 |
|
|
|
|
|
|
$ |
1,531 |
|
|
|
|
|
Fully
taxable equivalent income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
(in
thousands)
|
|
|
532 |
|
|
|
|
|
|
|
533 |
|
|
|
|
|
|
|
1,556 |
|
|
|
|
|
|
|
1,626 |
|
|
|
|
|
(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 2008 net income was $5.3 million ($0.51 per diluted share),
compared to $0.9 million ($0.10 per diluted share) in the third quarter
2007. For the first nine months of the year, Berkshire reported 2008
net income of $17.0 million ($1.64 per diluted share) compared to $10.5 million
($1.17 per diluted share) for the same period in 2007. 2007 results
include charges related to the acquisition of Factory Point Bancorp, Inc. and
balance sheet and expense restructurings.
Earnings
for 2008 included the benefit of Berkshire’s Vermont region, which was formed
with the acquisition of Factory Point Bancorp in September 2007. Most major
categories of revenue and expense increased due to this acquisition, and
earnings per share included the impact of additional shares issued in the
acquisition. First half earnings also included the seasonal benefit of insurance
contingency revenue.
Berkshire
produced a 48% increase in third quarter net revenues, which contributed to a
$4.3 million increase in net income and higher earnings per share, which totaled
$0.51 for the quarter. Net interest income increased $3.9 million or
25% in the third quarter mainly from an increase in earning assets from the
Factory Point Bancorp acquisition, modest organic loan growth (up 2% from
December 31, 2007) and a 28 basis point “bp” improvement in the net interest
margin. Non-interest income increased 196% in the third quarter from $3.8
million in balance sheet restructuring charges in 2007. Excluding the impact of
these balance sheet restructuring charges, non-interest income increased 15% or
$0.9 million from increases in deposit service fees, wealth management fees, and
loan services fees benefiting from the Factory Point acquisition and solid
growth in commercial products and demand deposit accounts. Noninterest expenses
increased $1.1 million in the third quarter of 2008 primarily from the Factory
Point acquisition.
Net
interest income increased $10.6 million or 23% for the first nine months of
2008, mainly from an increase in earning assets from the Factory Point Bancorp
acquisition and a 25 bp improvement in the net interest margin. Non-interest
income increased 43% for the first nine months of 2008 from $3.9 million in
balance sheet restructuring charges in 2007. Excluding the impact of these
balance sheet restructuring charges, non-interest income increased 18% or $3.8
million from increases in deposit service fees, wealth management fees, and loan
services fees benefiting from the Factory Point acquisition and growth in
commercial products and demand deposit accounts. Non-interest expenses increased
$7.3 million in 2008 primarily from the Factory Point acquisition.
The
Company’s loan performance remained well controlled in 2008. Berkshire does not
offer subprime lending programs and does not purchase investment securities
backed by subprime mortgages. The third quarter loan loss provision was $1.3
million compared to $0.4 million in 2007. The Company’s provision exceeded net
charge-offs by $0.3 million in the third quarter of 2008 mainly to provide for
loan growth during the quarter. Net charge-offs totaled $1.9 million for the
third quarter of 2007 which 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 in 2007 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 in 2007. Additionally, of the $1.9 million in
net
charge-offs
in 2007, $1.5 million was related to the Company’s largest nonperforming loan
which had a previously established $1.0 million reserve assigned to
it.
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
Balance Sheet
Summary. Total assets
grew at a 3% annualized rate to $2.57 billion from $2.51 billion during the
first nine months of 2008. Asset growth resulted primarily from loans
which grew at a 3% annualized rate to $1.99 billion from $1.94
billion. Total deposits increased by $15 million to $1.84 billion
from $1.82 billion primarily from increases in money market accounts and time
deposits. Stockholders’ equity grew at a 2% annualized rate to
$333 million from $327 million.
Assets. The $52 million increase
in assets was primarily due to a $48 million increase in
loans. Investment securities available for sale totaled $205.6
million at September 30, 2008 compared to 198.0 million at December 31, 2007.
There was a $4.9 million unrealized loss on investment securities available for
sale at September 30, 2008, compared to an unrealized gain of $1.9 million at
December 31, 2007. The unrealized loss was driven mainly by unrealized losses on
the other bonds and obligations available for sale which totaled
$3.5 million at September 30, 2008. This portfolio consists of
investment grade corporate trust preferred securities and corporate debt. The
unrealized losses on the portfolio are due to an increase in credit spreads and
liquidity issues in the marketplace. The Company has concluded these unrealized
losses are temporary in nature since they are not related to the underlying
credit quality of the issuers, and the Company has the intent and ability to
hold these investments for a time necessary to recover its cost or stated
maturity (at which time, full payment is expected). The Company does not hold
any preferred stock or equity investments of Fannie Mae or Freddie
Mac.
Total loans increased by $48 million in
the first nine months of 2008 due to commercial loan growth of
$68 million. Commercial loans grew at a
10% annualized
rate for the first nine
months of 2008 due to
commercial real estate loans in and around Berkshire’s markets,
representing increased market share as local business borrowers have relied more
on regional lenders and less on national lenders. Permanent residential
mortgages and home equity
loans increased by $45 million at an 8% annualized rate in 2008. Auto loans decreased by
$54 million due to a
planned reduction related to pricing and underwriting conditions in that market.
Residential
construction loans
decreased by $11 million
due to slower residential construction.
Loan
performance remained well-controlled in 2008. The Company does not
offer subprime lending programs or Alt A mortgage programs. The
annualized rate of net loan charge-offs was 0.16% during the
year. Total nonperforming assets decreased slightly during the year
to 0.44% of total assets from 0.46% at year-end 2007. Nonperforming
assets totaled $11.3 million at September 30, 2008, and included two commercial
relationships with balances over $1.0 million totaling $3.8 million at September
30, 2008. The decrease in nonperforming assets was due mainly to pay downs of a
few small commercial mortgages and charge-offs during the year. Total
accruing delinquent loans were 0.48% of total loans at the end of the third
quarter, compared to 0.43% at year-end 2007. The loan loss allowance
increased to 1.15% of total loans at the end of the third quarter of 2008 from
1.14% at December 31, 2007. Impaired loans totaled $14.6 million at
the end of the third quarter with a specific valuation allowance of $1.1
million. Based on management's assessment of national economic trends and trends
in the Company's commercial
loan risk
ratings, the Company recognizes that the level of problem assets and loan
charge-offs may be higher in future periods.
In
addition to the nonperforming assets discussed above, the Company has identified
approximately $52.8 million in potential problem loans at the end of the third
quarter 2008, as compared to $23.0 million at year-end 2007. Potential problem
loans are loans that are currently performing, but where known information about
possible credit problems of the related borrowers cause management to have
doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in disclosure of such loans as
nonperforming at some time in the future. Potential problem loans are typically
loans that are performing but are classified by the Company’s loan rating system
as “substandard.” At quarter-end 2008 and year-end 2007, potential problem loans
primarily consisted of commercial business loans and commercial mortgages. At
the end of the third quarter 2008, there were ten potential problem loans that
exceeded $1.0 million, totaling $44.8 million in aggregate, compared to six
potential problem loans exceeding $1.0 million, totaling $14.2 million at
year-end 2007. The increase in potential problem loans was due mainly to three
large commercial mortgage credit relationships totaling $27.8 million down
graded in the third quarter. In light of current economic events, Management has
increased its risk management resources and has been more focused on identifying
potential problem loans early to achieve resolutions before loans become
impaired or nonperforming. The three large credits are currently not delinquent
or impaired and Management is working with the borrowers to achieve favorable
resolutions. Management cannot predict the extent to which economic conditions
may worsen or other factors may impact borrowers and the potential problem
loans. Accordingly, there can be no assurance that other loans will not become
90 days or more past due, be placed on nonaccrual, become restructured, or
require increased allowance coverage and provision for loan losses.
Liabilities. For
the first nine months of 2008, non-maturity deposit balances remained relatively
unchanged as higher cost municipal accounts were replaced with retail accounts.
This was primarily due to money market account promotions and steady growth in
relationships, as reflected by growth in personal demand deposit balances and
savings accounts. Most of Berkshire’s retail deposit and loan promotions are
linked to companion checking accounts. Consumer deposit growth was offset by
lower commercial and municipal balances and the planned pay down of $18 million
in higher cost brokered time deposits. The number of commercial checking
accounts increased in 2008, and commercial deposits (including municipalities)
reflected targeted run-off of higher cost accounts. Excluding brokered deposits,
total deposits increased by $33 million during the first nine months of the
year.
Berkshire also entered into $150 million in interest rate swaps in 2008 to fix the rate on variable rate
borrowings, thereby reducing risk related to rising interest rates. Berkshire increased borrowings by
$32 million
during 2008 to fund loan growth and brokered time
deposit payoffs.
Equity. Stockholders’
equity increased by $6 million (2% annualized) to $333 million due primarily to
the benefit of retained earnings. Book value per share increased to
$31.71 at the end of the third quarter from $31.15 at year-end
2007. The ratio of total equity to assets decreased to 12.97% at
September 30, 2008 from 13.00% at December 31, 2007. The Company
repurchased 200,000 shares of common stock during the first half of 2008 at an
average cost of $24.41 per share under its announced repurchase
plan. The Company did not repurchase any shares
under
the plan in the third quarter of 2008.
The Company increased its quarterly dividend to $0.16 in the third quarter of
2008, an increase of 7% compared to the same period in 2007.
In the
fourth quarter of 2008, the Company issued 1.725 million shares of common
stock in a public offering and raised approximately $38.8 million, net of the
underwriting discount. The purpose of this additional equity was primarily to
strengthen the Company’s capital base, and to provide growth capital for its
affiliates and for general corporate purposes.
COMPARISON
OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007
Net
Income. Net income increased for both the three and nine
months ended September 30, 2008 compared to the same periods in
2007. Net income increased by $4.3 million (459%) and $6.6 million
(63%) for these periods, respectively. Net income increased from the
acquisition of Factory Point, stronger net interest margin, an increase in fee
income and merger and balance sheet restructuring charges in the third quarter
of 2007. Diluted earnings per share were $0.51 and $1.64 for the three and nine
months ended September 30, 2008 compared to $0.10 and $1.17 for the same periods
in 2007. The year-to-date return on assets was 0.90% and return on equity was
6.8% in 2008, compared to 0.64% and 5.2% in 2007.
Total Net
Revenue. Net revenue increased by $8.6 million (48%) and $18.2
million (29%) in the third quarter and first nine months of 2008 compared to the
same periods in 2007. These increases were primarily due to higher
net interest income, fee income and balance sheet restructuring charges in the
third quarter of 2007. Year-to-date net revenue per diluted share increased by
10% to $7.82 in 2008 from $7.09 in 2007, excluding the impact of the balance
sheet restructuring charges in 2007, net revenue per diluted share was $7.52 for
2007.
Net Interest
Income. Net interest income increased by $3.9 million (25%)
and $10.6 million (23%) in the third quarter and first nine months of 2008,
compared to the same periods in 2007. The increase reflected an
improvement in the net interest margin and the benefit of growth in average
earning assets which was due to the Factory Point acquisition and commercial
loan growth. Average earning assets increased by $277 million (14%)
and $270 million (14%) in the third quarter and first nine months of 2008,
compared to 2007.
The net
interest margin increased to 3.48% from 3.20% for the third quarter of 2008
compared to 2007, and increased to 3.45% from 3.20% for the first nine months of
2008 compared to 2007, due primarily to a balance sheet restructuring in the
third quarter of 2007, the Factory Point acquisition, favorable deposit pricing
strategies, rate reductions by the Federal Reserve in the first quarter of 2008
and an increase in non-interest bearing demand deposit accounts. The yield on
earning assets declined 81 bp from 6.70% for the third quarter of 2007 to 5.89%
in 2008. The rate paid on interest-bearing liabilities decreased 113 bp from
3.90% for the third quarter of 2007 to 2.77% in 2008. These declines were driven
by several interest rate reductions in the Federal Funds rate during the first
quarter of 2008 and initiatives to lower deposit costs by allowing high cost
large dollar amounts deposit accounts to run-off. The Company anticipates the
benefit from Federal Reserve interest rate reductions that resulted subsequent
to the third quarter of 2008 will be limited for interest-bearing deposits due
to the inability to further lower deposit rates at these low
levels.
Non-Interest
Income. Total third quarter fee income increased by $1.2
million (21%) in 2008 compared to 2007, and fee income for the first nine months
of 2008 increased by $4.0 million (20%) compared to 2007. These
increases were due mainly to an increase in deposit service fees, loan service
and interest rate swap fees and wealth management fees. For the first
nine months of the year, deposit fee income increased by $2.0 million due
primarily to the Factory Point acquisition and growth in transaction
accounts. For the first nine months of the year, wealth management
fees grew by $1.6 million, reflecting growth in total assets under management
from the Factory Point and Center for Financial Planning acquisitions and
organic growth. Loan service and interest rate swap fees increased
$0.3 million for the first nine months of 2008 mainly from the Company’s
back-to-back interest rate swap program offered to customers in 2008. The
decrease in other income of $0.3 million in the third quarter of 2008 compared
to the same period in 2007 was primarily due to a net $0.2 million fair value
loss on a hedged transaction accounted for under FAS 159. 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.
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 $1.3 million in
2008, compared to $0.4 million in 2007. For the first nine months,
the provision was $3.2 million in 2008, compared to $1.2 million in
2007. The increase in the provision for loan losses in 2008 reflects
commercial loan growth and several events which impacted the 2007 provision. The
2007 provision was impacted by the second quarter provision which was unusually
low due to the impact of the outplacement of certain large commercial loan
balances during that quarter. The third quarter 2007 provision was impacted by
the $4.5 million added to the allowance in connection with the Factory
Point acquisition, and the sale of $50 million in residential mortgages in
connection with the deleveraging program which increased the allowance to total
loans from 1.11% in the 2007 linked quarter to 1.14% at September 30, 2007.
Additionally, of the $1.9 million in net charge-offs for the third quarter of
2007, $1.5 million was related to the Company’s largest nonperforming loan at
that time which had a previously established $1.0 million reserve assigned to
it.
Non-Interest
Expense and Income Tax Expense. Non-interest expense increased
by $1.1 million (7%) in the third quarter and by $7.3 million (16%) for the
first nine months of 2008 compared to 2007. The increases in
non-interest expense resulted mainly from the additional expenses associated
with the Factory Point acquisition. Other expense increased $1.5 million for the
first nine months of 2008 compared to 2007, and includes $0.3 million in
additional expenses associated with loan collection and other real estate owned
costs and expenses associated with the Factory Point acquisition. Second quarter
2008 expense included $0.7 million in non-core charges related to a severance
charge and charge-offs of certain deferred loan costs and late fees receivable
while third quarter 2007 expenses included merger, integration and restructuring
expenses of $1.6 million mainly from the Factory Point acquisition.
The
effective tax rate in the third quarter and first nine months of 2008 was 30%
and 29%, compared to no expense for the third quarter of 2007 and 30% for the
first nine months of 2007. 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.
Results of
Segment Operations. The Company has designated two operating
segments for financial statement disclosure: banking and insurance. Additional
information about the Company’s accounting for segment operations is contained
in Note 8 to the financial statements.
One of
the Company's strategies is to emphasize fee income growth to diversify
revenues, 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. The third quarter results for the insurance segment was a
slight loss compared to $0.1 million in net income for the third quarter of 2007
and $2.3 million in net income for the first nine months of 2008 and
2007. 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. The first quarter income of
the insurance segment is expected to be the highest quarterly income of this
segment due to this seasonality. Net profit from the banking segment
totaled $5.4 million and $15.8 million for the third quarter and first nine
months of 2008, compared to $1.3 million and $9.5 million in 2007. The increase
in net profit from the banking segment is primarily from the acquisition of
Factory Point, the improvement in net interest margin and increased fee
income.
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 (loss), which
consists principally of changes (after-tax) in the unrealized market gains and
losses of investment securities available for sale and the change in fair value
of cash flow hedges. The change in accumulated other comprehensive
income (loss) was a loss of $5.5 million in the first nine months of 2008,
compared to a gain of $0.2 million in the first nine months of 2007, primarily
due to changes in bond prices and the value of interest rate swaps as a result
of interest rate changes. The Company recorded total comprehensive
income of $11.5 million in 2008, compared to $10.6 million in 2007.
Liquidity and
Cash Flows. The Company’s primary
sources of funds were deposit growth and borrowings in the first nine months of
2008. 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. 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. Additional discussion about the Company’s liquidity and
cash flows is contained in the Company’s 2007 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, 2008, 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 2007 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 2007
Form 10-K. For the nine months ended September 30, 2008, 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 2007 Form 10-K.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the
quarter ended September 30, 2008, the Bank showed a neutral to slightly asset
sensitive position to parallel interest rates changes over the course of the
next twelve months. These results are in contrast to the
results reported at fiscal year end 2007 in which the company exhibited a more
liability sensitive profile to changes in general market rates. The
primary reasons for this change are several strategic actions that the company
took in the first half of 2008 in order to better position itself for a
potential increase in market rates. As previously discussed, the
Company entered into cash flow derivative hedges in order to transition some of
its short term floating rate liability costs into long term fixed rate products
while we felt that these rates were at advantageous levels. Berkshire
has also tried to extend liabilities by offering our customers competitively
priced 2-5 year Certificates of Deposit. Finally, during the first
half of the year Berkshire began a back-to-back interest rate swap program with
selected, high credit quality commercial customers in which it was ultimately
able to grow the short term adjustable rate portion of its commercial portfolio.
The Company anticipates the benefit from Federal Reserve interest rate
reductions that resulted subsequent to the third quarter of 2008 will be limited
for interest-bearing deposits due to the inability to further lower deposit
rates at these low levels.
There
have been no material changes to the way that the Company measures market risk
during the first nine months of 2008. For further discussion about
the Company’s Quantitative and Qualitative Aspects of Market Risk, please review
Item 7A of the Report 10-K filed for the fiscal year ended December 31,
2007.
ITEM
4. CONTROLS
AND PROCEDURES
As of the
end of the period covered by this Quarterly Report on Form 10-Q, an evaluation
was carried out by the Company's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective as of the end of the period covered by
this report. No change in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) occurred during the last fiscal quarter that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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.
There
have been no material changes to the risk factors previously disclosed in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007. In addition to the other information set forth in this report,
you should carefully consider the factors discussed in Part I, “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007,
which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are
not the only risks that we face. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
|
No
Company unregistered securities were sold by the Company during the
quarter ended September 30, 2008.
|
(c)
|
The
following table provides certain information with regard to shares
repurchased by the Company in the third quarter of
2008.
|
|
|
|
|
|
|
|
|
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, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
97,993 |
|
August
1-31, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97,993 |
|
September
1-30, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97,993 |
|
Total
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
97,993 |
|
On
December 14, 2007, the Company authorized the purchase of up to 300,000
additional shares, from time to time, subject to market conditions. The
repurchase plan will continue until it is completed or terminated by the Board
of Directors. The Company has no plans that it has elected to
terminate prior to expiration or under which it does not intend to make further
purchases. During the quarter, 588 shares were repurchased by the Company to
fund tax withholdings for vested stock awards and cashless stock option
exercises during the period. These shares are not included in the total number
of shares purchased as part of publicly announced plans.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
|
None.
|
|
|
|
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
|
|
|
None.
|
|
|
|
|
|
ITEM
5.
|
|
|
|
|
None.
|
|
|
|
|
|
ITEM
6.
|
|
|
|
|
|
3.1
|
Certificate
of Incorporation of Berkshire Hills Bancorp, Inc.(1)
|
|
3.2
|
Amended
and restated Bylaws of Berkshire Hills Bancorp, Inc.(2)
|
|
4.1
|
Draft
Stock Certificate of Berkshire Hills Bancorp, Inc.(1)
|
|
|
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
_________________________________________________
|
|
(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 8-K as filed on
February 29, 2008.
|
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 7, 2008
|
By: /s/ Michael
P. Daly
|
|
Michael
P. Daly
|
|
President,
Chief Executive Officer
|
|
and
Director
|
|
|
|
|
Dated:
November 7, 2008
|
By: /s/ Kevin
P. Riley
|
|
Kevin
P. Riley
|
|
Executive
Vice President, Chief Financial
|
|
Officer
and Treasurer
|
35