Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2012

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 000-51584

 

 

BERKSHIRE HILLS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3510455

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

24 North Street, Pittsfield, Massachusetts

 

01201

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (413) 443-5601

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No x

 

The Registrant had 22,208,105 shares of common stock, par value $0.01 per share, outstanding as of August 3, 2012.

 

 

 



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

FORM 10-Q

 

INDEX

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

4

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2011

6

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011

7

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

8

 

 

 

 

Notes to Consolidated Financial Statements

9

 

Note 1

Basis of Presentation

9

 

Note 2

Recent Accounting Pronouncements

9

 

Note 3

Acquisitions

11

 

Note 4

Trading Account Security

15

 

Note 5

Securities Available for Sale and Held to Maturity

16

 

Note 6

Loans

20

 

Note 7

Deposits

36

 

Note 8

Stockholders’ Equity

37

 

Note 9

Earnings per Share

38

 

Note 10

Stock-Based Compensation Plans

38

 

Note 11

Operating Segments

39

 

Note 12

Derivative Financial Instruments and Hedging Activities

40

 

Note 13

Fair Value Measurements

44

 

Note 14

Net Interest Income after Provision for Loan Losses

50

 

Note 15

Subsequent Events

50

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

50

 

 

 

 

Selected Financial Data

55

 

 

 

 

Average Balances and Average Yields/Rates

57

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

65

 

 

 

Item 4.

Controls and Procedures

66

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

67

 

2



Table of Contents

 

Item 1A.

Risk Factors

67

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

 

Item 3.

Defaults Upon Senior Securities

68

 

 

 

Item 4.

Mine Safety Disclosures

68

 

 

 

Item 5.

Other Information

68

 

 

 

Item 6.

Exhibits

68

 

 

 

Signatures

 

70

 

3



Table of Contents

 

PART I

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

(In thousands, except share data)

 

2012

 

2011

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

44,696

 

$

46,713

 

Short-term investments

 

21,790

 

28,646

 

Total cash and cash equivalents

 

66,486

 

75,359

 

 

 

 

 

 

 

Trading security

 

17,365

 

17,395

 

Securities available for sale, at fair value

 

471,368

 

419,756

 

Securities held to maturity (fair values of $43,285 and $60,395)

 

41,822

 

58,912

 

Federal Home Loan Bank stock and other restricted securities

 

37,174

 

37,118

 

Total securities

 

567,729

 

533,181

 

 

 

 

 

 

 

Loans held for sale

 

59,280

 

1,455

 

 

 

 

 

 

 

Residential mortgages

 

1,193,447

 

1,020,435

 

Commercial mortgages

 

1,281,058

 

1,156,241

 

Commercial business loans

 

519,684

 

410,292

 

Consumer loans

 

371,430

 

369,602

 

Total loans

 

3,365,619

 

2,956,570

 

Less: Allowance for loan losses

 

(32,868

)

(32,444

)

Net loans

 

3,332,751

 

2,924,126

 

 

 

 

 

 

 

Premises and equipment, net

 

68,569

 

60,139

 

Other real estate owned

 

827

 

1,900

 

Goodwill

 

220,360

 

202,391

 

Other intangible assets

 

19,505

 

20,973

 

Cash surrender value of bank-owned life insurance policies

 

76,290

 

75,009

 

Other assets

 

95,926

 

91,309

 

Assets from discontinued operations

 

 

5,362

 

Total assets

 

$

4,507,723

 

$

3,991,204

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Demand deposits

 

$

535,472

 

$

447,414

 

NOW deposits

 

298,236

 

272,204

 

Money market deposits

 

1,158,562

 

1,055,306

 

Savings deposits

 

371,668

 

350,517

 

Time deposits

 

1,045,767

 

975,734

 

Total deposits

 

3,409,705

 

3,101,175

 

Short-term debt

 

239,030

 

10,000

 

Long-term Federal Home Loan Bank advances

 

213,497

 

211,938

 

Junior subordinated debentures

 

15,464

 

15,464

 

Total borrowings

 

467,991

 

237,402

 

Other liabilities

 

46,757

 

43,758

 

Liabilities from discontinued operations

 

 

55,504

 

Total liabilities

 

3,924,453

 

3,437,839

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock ($.01 par value; 50,000,000 shares authorized and 23,824,972 shares issued and 22,169,157 shares outstanding in 2012; 22,860,368 shares issued and 21,147,736 shares outstanding in 2011)

 

238

 

229

 

Additional paid-in capital

 

516,183

 

494,304

 

Unearned compensation

 

(3,200

)

(2,790

)

Retained earnings

 

115,871

 

109,477

 

Accumulated other comprehensive loss

 

(4,336

)

(4,885

)

Treasury stock, at cost (1,655,815 shares in 2012 and 1,712,632 shares in 2011)

 

(41,486

)

(42,970

)

Total stockholders’ equity

 

583,270

 

553,365

 

Total liabilities and stockholders’ equity

 

$

4,507,723

 

$

3,991,204

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands, except per share data)

 

2012

 

2011

 

2012

 

2011

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

Loans

 

$

38,787

 

$

28,607

 

$

73,838

 

$

53,213

 

Securities and other

 

3,869

 

3,446

 

7,490

 

6,753

 

Total interest and dividend income

 

42,656

 

32,053

 

81,328

 

59,966

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

5,482

 

5,768

 

10,984

 

11,483

 

Borrowings and junior subordinated debentures

 

2,121

 

2,084

 

4,146

 

4,136

 

Total interest expense

 

7,603

 

7,852

 

15,130

 

15,619

 

Net interest income

 

35,053

 

24,201

 

66,198

 

44,347

 

Non-interest income

 

 

 

 

 

 

 

 

 

Loan related fees

 

3,524

 

780

 

4,897

 

1,371

 

Deposit related fees

 

3,963

 

3,366

 

7,463

 

5,907

 

Insurance commissions and fees

 

2,768

 

2,782

 

5,514

 

6,512

 

Wealth management fees

 

1,757

 

1,389

 

3,657

 

2,581

 

Total fee income

 

12,012

 

8,317

 

21,531

 

16,371

 

Other

 

269

 

(277

)

510

 

(197

)

Gain on borrowings

 

 

124

 

42

 

124

 

Gain on sale of securities, net

 

7

 

6

 

7

 

6

 

Total non-interest income

 

12,288

 

8,170

 

22,090

 

16,304

 

Total net revenue

 

47,341

 

32,371

 

88,288

 

60,651

 

Provision for loan losses

 

2,250

 

1,500

 

4,250

 

3,100

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

15,638

 

12,027

 

29,227

 

23,178

 

Occupancy and equipment

 

4,490

 

3,546

 

8,885

 

6,981

 

Technology and communications

 

2,258

 

1,531

 

4,216

 

2,997

 

Marketing and promotion

 

778

 

341

 

1,129

 

622

 

Professional services

 

1,493

 

1,216

 

2,858

 

2,148

 

FDIC premiums and assessments

 

870

 

741

 

1,551

 

1,768

 

Other real estate owned and foreclosures

 

(6

)

700

 

173

 

1,309

 

Amortization of intangible assets

 

1,357

 

935

 

2,668

 

1,651

 

Merger, acquisition and conversion related expenses

 

4,085

 

5,451

 

8,308

 

7,159

 

Other

 

3,221

 

2,135

 

5,363

 

3,999

 

Total non-interest expense

 

34,184

 

28,623

 

64,378

 

51,812

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

10,907

 

2,248

 

19,660

 

5,739

 

Income tax expense

 

2,921

 

371

 

5,193

 

1,027

 

Net income from continuing operations

 

7,986

 

1,877

 

14,467

 

4,712

 

Loss from discontinued operations before income taxes (including gain on disposal of $63)

 

 

 

(261

)

 

Income tax expense

 

 

 

376

 

 

Net loss from discontinued operations

 

 

 

(637

)

 

Net income

 

$

7,986

 

$

1,877

 

$

13,830

 

$

4,712

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.37

 

$

0.11

 

$

0.68

 

$

0.31

 

Discontinued operations

 

 

 

(0.03

)

 

Total basic and diluted earnings per share

 

$

0.37

 

$

0.11

 

$

0.65

 

$

0.31

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

21,742

 

16,580

 

21,349

 

15,269

 

Diluted

 

21,806

 

16,601

 

21,434

 

15,299

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,986

 

$

1,877

 

$

13,830

 

$

4,712

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Changes in unrealized gainson securities available-for-sale

 

1,394

 

878

 

2,687

 

1,894

 

Changes in unrealized (losses) gains on derivative hedges

 

(2,488

)

(816

)

(2,204

)

436

 

Changes in unrealized gains on terminated swaps

 

235

 

235

 

471

 

471

 

Changes in unrealized losses on pension

 

(257

)

 

(257

)

 

Income taxes related to other comprehensive income

 

672

 

(103

)

(148

)

(1,085

)

Total other comprehensive (loss) income

 

(444

)

194

 

549

 

1,716

 

Total comprehensive income

 

$

7,542

 

$

2,071

 

$

14,379

 

$

6,428

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

other 

 

 

 

 

 

 

 

Common stock

 

paid-in

 

Unearned

 

Retained

 

comprehensive

 

Treasury

 

 

 

(In thousands)

 

Shares

 

Amount

 

capital

 

compensation

 

earnings

 

loss

 

stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

14,076

 

$

158

 

$

337,537

 

$

(1,776

)

$

103,972

 

$

(6,410

)

$

(44,834

)

$

388,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

4,712

 

 

 

4,712

 

Other comprehensive income

 

 

 

 

 

 

1,716

 

 

1,716

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,428

 

Acquisition of Rome Bancorp, Inc.

 

2,661

 

27

 

55,463

 

 

 

 

 

55,490

 

Rome ESOP loan repayment

 

(44

)

 

 

 

 

 

(943

)

(943

)

Cash dividends declared ($0.32 per share)

 

 

 

 

 

(4,930

)

 

 

(4,930

)

Forfeited shares

 

(21

)

 

33

 

426

 

 

 

(459

)

 

Exercise of stock options

 

13

 

 

 

 

(112

)

 

326

 

214

 

Restricted stock grants

 

59

 

 

(242

)

(1,261

)

 

 

1,503

 

 

Stock-based compensation

 

 

 

2

 

471

 

 

 

 

473

 

Net tax expense related to stock-based compensation

 

 

 

66

 

 

 

 

 

66

 

Other, net

 

(23

)

 

 

 

 

 

(475

)

(475

)

Balance at June 30, 2011

 

16,721

 

$

185

 

$

392,859

 

$

(2,140

)

$

103,642

 

$

(4,694

)

$

(44,882

)

$

444,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

21,148

 

$

229

 

$

494,304

 

$

(2,790

)

$

109,477

 

$

(4,885

)

$

(42,970

)

$

553,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

13,830

 

 

 

13,830

 

Other comprehensive income

 

 

 

 

 

 

549

 

 

549

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,379

 

Acquisition of The Connecticut Bank and Trust Company

 

965

 

9

 

21,981

 

 

 

 

 

21,990

 

Cash dividends declared ($0.34 per share)

 

 

 

 

 

(7,372

)

 

 

(7,372

)

Forfeited shares

 

(8

)

 

11

 

169

 

 

 

(180

)

 

Exercise of stock options

 

13

 

 

 

 

(64

)

 

335

 

271

 

Restricted stock grants

 

64

 

 

(148

)

(1,476

)

 

 

1,624

 

 

Stock-based compensation

 

 

 

 

897

 

 

 

 

897

 

Net tax benefit related to stock-based compensation

 

 

 

35

 

 

 

 

 

35

 

Other, net

 

(13

)

 

 

 

 

 

(295

)

(295

)

Balance at June 30, 2012

 

22,169

 

$

238

 

$

516,183

 

$

(3,200

)

$

115,871

 

$

(4,336

)

$

(41,486

)

$

583,270

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

13,830

 

$

4,712

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

4,250

 

3,100

 

Net amortization of securities

 

986

 

595

 

Change in unamortized net loan costs and premiums

 

(461

)

475

 

Premises depreciation and amortization expense

 

2,921

 

2,159

 

Write down of other real estate owned

 

 

1,200

 

Stock-based compensation expense

 

895

 

473

 

(Accretion)/Amortization of purchase accounting entries

 

(3,541

)

(468

)

Amortization of other intangibles

 

2,668

 

1,651

 

Excess tax loss from stock-based payment arrangements

 

(35

)

 

Income from cash surrender value of bank-owned life insurance policies

 

(1,281

)

(872

)

Gain on sales of securities, net

 

(48

)

(253

)

Net (increase) decrease in loans held for sale

 

(9,561

)

1,043

 

Loss on disposition of assets

 

1,527

 

 

Loss on sale of other real estate

 

28

 

104

 

Net change in other

 

3,925

 

2,792

 

Net cash provided by operating activities

 

16,103

 

16,711

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net decrease in trading security

 

240

 

130

 

Proceeds from sales of securities available for sale

 

32,440

 

3,525

 

Proceeds from maturities, calls and prepayments of securities available for sale

 

47,006

 

70,196

 

Purchases of securities available for sale

 

(89,843

)

(68,360

)

Proceeds from maturities, calls and prepayments of securities held to maturity

 

25,775

 

6,058

 

Purchases of securities held to maturity

 

(8,685

)

(4,683

)

Net change in loans

 

(200,668

)

(55,391

)

Net cash used for Divestiture

 

(48,890

)

 

Proceeds from sale of Federal Home Loan Bank stock

 

1,861

 

3,571

 

Proceeds from sale of other real estate

 

1,872

 

382

 

Acquisitions, net of cash paid

 

(58,150

)

10,849

 

Purchase of premises and equipment, net

 

(11,604

)

(2,907

)

Net cash (used) by investing activities

 

(308,646

)

(36,630

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

98,609

 

51,984

 

Proceeds from Federal Home Loan Bank advances and other borrowings

 

231,595

 

105,480

 

Repayments of Federal Home Loan Bank advances and other borrowings

 

(39,891

)

(135,118

)

Net proceeds from reissuance of treasury stock

 

271

 

214

 

Excess tax loss from stock based payment arrangements

 

35

 

66

 

Common stock cash dividends paid

 

(7,372

)

(4,930

)

Net cash provided by financing activities

 

283,247

 

17,696

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(9,296

)

(2,223

)

Cash and cash equivalents at beginning of period

 

75,782

 

44,140

 

Cash and cash equivalents at end of period

 

$

66,486

 

$

41,917

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid on deposits

 

10,984

 

11,536

 

Interest paid on borrowed funds

 

4,146

 

4,045

 

Income taxes (refunded) paid, net

 

(965

)

55

 

Acquisition of non-cash assets and liabilities:

 

 

 

 

 

Assets acquired

 

342,786

 

322,305

 

Liabilities assumed

 

(253,155

)

(259,524

)

Rome stock owned by the Company

 

 

668

 

Other non-cash changes:

 

 

 

 

 

Other net comprehensive income

 

549

 

1,716

 

Real estate owned acquired in settlement of loans

 

(320

)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

Note: The Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and the cash and cash equivalents at beginning of period includes the cash flows from activities associated with discontinued operations.

 

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Table of Contents

 

NOTE 1.                BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and contain all adjustments, consisting solely of normal, recurring adjustments, necessary for a fair statement of results for such periods.

 

In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to U.S. GAAP have been omitted.

 

The results for any interim period are not necessarily indicative of results for the full year.  These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for Berkshire Hills Bancorp, Inc. (the “Company”) previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Election of the use of the Fair Value Option

 

In connection with the Company’s purchase of Greenpark Mortgage Corporation (“Greenpark”) as described in Note 3, the Company elected the applicable accounting guidance for the fair value option as it relates to loans held for sale (“HFS”).  This election allows for a more effective matching of the fair value changes that flow through earnings from the interest rate lock commitment (“IRLC”) stage to the funded HFS loan stage, and forward commitments used to economically hedge the changes in fair value of the IRLC and HFS loans.  The election was applied on a prospective basis starting with all HFS loans originated after April 30, 2012.  See Note 13 for the HFS loans fair value recorded in the Company’s Consolidated Balance Sheet and unrealized gain recorded in the Company’s Consolidated Statement of Income as of and for the period ended June 30, 2012.

 

Out of Period Adjustments

 

For the three months and six months ended June 30, 2012, the Company recorded a correction of an immaterial error relating to prior years that increased net income by $0.5 million and $0.7 million, respectively. The correction represents a prior period tax related over-accrual.  While these adjustments were noteworthy for the quarter, after evaluating the quantitative and qualitative aspects of these adjustments, the Company concluded that its prior period financial statements were not materially misstated and, therefore, no restatement was required.

 

NOTE 2.                RECENT ACCOUNTING PRONOUNCEMENTS

 

ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  In May 2011, the FASB issued ASU 2011-04 to provide a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets; (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) The fair value measurement of instruments classified within an entity’s shareholders’ equity is aligned with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The Company adopted the provisions of ASU No. 2011-04 effective January 1, 2012.

 

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Table of Contents

 

The fair value measurement provisions of ASU No. 2011-04 had no impact on the Company’s financial statements.  The required disclosures are incorporated in Note 14 to the Company’s financial statements.

 

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” as further discussed below.  The Company adopted the new guidance by reporting the components of comprehensive income in two separate but consecutive statements.

 

ASU No. 2011-08, “Testing Goodwill for Impairment”. In September 2011, the FASB issued ASU 2011-08 which will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount . The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  In July 2012, the FASB issued ASU 2012-02 that amends ASU 2011-08 to simplify how entities test indefinite-lived intangible assets other than goodwill for impairment.  After an assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test.  Otherwise, the quantitative test is optional.  ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.  The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 

ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is limited to matters of presentation with no impact expected on the Company’s financial statements.

 

ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 is effective for annual and interim periods beginning after December 15, 2011. The required disclosures required are incorporated in Note 8 and do not have a significant impact on the Company’s financial statements.

 

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NOTE 3.                ACQUISITIONS

 

The Connecticut Bank and Trust Company

 

On April 20, 2012, the Company acquired all of the outstanding common shares of The Connecticut Bank and Trust Company (“CBT”). CBT operated eight banking offices serving the Greater Hartford area and was merged with and into Berkshire Bank, a wholly owned subsidiary of the Company.  This business combination is an extension of the Berkshire franchise and the goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to CBT’s operations.    The combination was negotiated between the companies and was approved unanimously by their boards of directors.

 

CBT shareholders received 965 thousand shares of the Company common stock and $9.0 million in cash.  On the acquisition date, CBT had 3.617 million outstanding common shares.  Through a cash/share election procedure, the Company paid $8.25 per share for 30% of the outstanding common shares.  For 70% of the outstanding shares, the Company exchanged its stock in a ratio of 0.381 shares of the Company’s common stock for each share of CBT stock.  The 965 thousand shares of Company common stock issued in this exchange were valued at $22.80 per share based on its closing price on April 19, 2012.  Berkshire paid $0.2 million in cash consideration to settle all outstanding CBT options.  The Company issued no new Berkshire options in connection with the merger.

 

As of April 20, 2012, CBT had assets with a carrying value of approximately $268.8 million, including loans outstanding with a carrying value of approximately $215.8 million, as well as deposits with a carrying value of approximately $209.7 million. The results of CBT’s operations are included in the Consolidated Statement of Income from the date of acquisition. As part of the acquisition, the Company repurchased and retired from the United States Department of Treasury (“Treasury”) each share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, of CBT stock issued and outstanding for $5.4 million and the outstanding warrant issued to the Treasury to purchase CBT common stock for $0.8 million.

 

The assets and liabilities in the CBT acquisition were recorded at their fair value based on management’s best estimate using information available at the date of acquisition.  Consideration paid, and fair values of CBT’s assets acquired and liabilities assumed as of April 20, 2012 are summarized in the following table:

 

Consideration Paid:

 

 

 

Berkshire Hills Bancorp common stock issued to CBT common stockholders

 

$

21,992

 

Cash consideration paid to CBT common shareholders

 

8,952

 

Repurchase of CBT’s preferred stock and warrant

 

6,290

 

Cash consideration paid for CBT employee stock options

 

150

 

Total consideration paid

 

$

37,384

 

 

Recognized Amounts of Identifiable Assets Aquired and
(Liabilities Assumed), At Fair Value:

 

As Acquired

 

Fair Value
Adjustments

 

As Recorded at
Acquisition

 

Cash and short term investments

 

$

10,568

 

$

 

$

10,567

 

Investment securities

 

41,428

 

(46

)(a)

41,382

 

Loans

 

215,773

 

(6,181

)(b)

209,592

 

Premises and equipment

 

1,393

 

 

1,393

 

Core deposit intangibles

 

 

 

1,200

(c)

1,200

 

Other intangibles

 

 

(238

)(d)

(238

)

Other assets

 

3,081

 

7,795

(e)

10,877

 

Deposits

 

(209,707

)

(428

)(f)

(210,135

)

Borrowings

 

(35,865

)

(3,020

)(g)

(38,885

)

Other liabilities

 

(1,978

)

(209

)(h)

(2,187

)

Total identifiable net assets

 

$

24,693

 

$

(1,127

)

$

23,566

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

$

13,818

 

 

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Table of Contents

 


Explanation of Certain Fair Value Adjustments

(a)          The adjustment represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition.

(b)         The adjustment represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio.  Loans that met the criteria and are being accounted for in accordance with ASC 310-30 had a carrying amount of $15.3 million.  Non-impaired loans not accounted for under 310-30 had a carrying value of $194.2 million.

(c)          The adjustment represents the value of the core deposit base assumed in the acquisition.  The core deposit asset was recorded as an identifiable intangible asset and will be amortized over the average life of the deposit base.

(d)         The adjustment represents an intangible liability related to assumed leases, which was recorded as an identifiable intangible and will be amortized over the remaining life of the leases.

(e)          This amount primarily consists of adjustments in the net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other deferred tax items including recognition of a $4.8 million deferred tax asset related to operating losses, which CBT had a full valuation allowance against.

(f)            The adjustment is necessary because the weighted average interest rate of deposits exceeded the cost of similar funding at the time of acquisition.

(g)         The adjustment represents a write up of the book value of borrowings to their estimated fair value calculated based on interest rates of similar borrowings available on the date of acquisition.

(h)         The adjustment represents a write up of the book value of other liabilities to their estimated fair value at the acquisition date.

 

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from CBT were estimated using cash flow projections based on the remaining maturity and repricing terms.  Cash flows were adjusted by estimating future credit losses and the rate of prepayments.  Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.  To estimate the fair value of collateral dependent loans with deteriorated credit quality, we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral.  We discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.  There was no carryover of CBT’s allowance for credit losses associated with the loans that were acquired as the loans were initially recorded at fair value.

 

Information about the acquired loan portfolio subject to ASC 310-30 as of April 20, 2012 is as follows (in thousands):

 

 

 

ASC 310-30 Loans

 

Contractually required principal and interest at acquisition

 

$

23,726

 

Contractual cash flows not expected to be collected (nonaccretable discount)

 

(5,563

)

Expected cash flows at acquisition

 

18,163

 

Interest component of expected cash flows (accretable discount)

 

(2,816

)

Fair value of acquired loans

 

$

15,347

 

 

The core deposit intangible asset recognized as part of the CBT merger is being amortized over its estimated useful life of approximately eight years utilizing an accelerated method.  Other intangibles consist of leasehold intangible liabilities, which are amortized over the life of each respective lease using a straight-line method.

 

The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is not deductible for tax purposes.

 

The fair value of savings and transaction deposit accounts acquired from CBT was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.  The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.

 

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Table of Contents

 

Direct merger and acquisition integration-related costs related to the CBT acquisition were expensed as incurred and totaled $2.7 million for the first six months of 2012, and none in 2011.

 

Greenpark Mortgage Corporation

 

On April 30, 2012, Berkshire Bank acquired the operations, and purchased certain assets and assumed certain limited liabilities of Greenpark Mortgage Corporation (“Greenpark”), as contemplated by the Asset Purchase Agreement dated February 2, 2012, by and between Berkshire Bank and Greenpark.  The purchase of Greenpark’s operations increases the Company’s consumer lending capabilities, and expands the Company’s geographical footprint into eastern Massachusetts along with broadening its sources of fee-based income.

 

The purchase price for Greenpark’s operations was $4.0 million, but additional consideration of $0.1 million was paid for certain prepaid assets.  $46.5 million was paid to retire outstanding bank loans, recently originated loans, along with $2.8 million in premiums on those loans representing the sellers’ income on those loans had they been sold prior to April 30, 2012.  Additionally, a $1.1 million liability was recorded for contingent consideration representing the fair value of earn-out payments to the sellers of Greenpark over a five year period of time after the purchase date.  While the earn-out payments are based on production of loan originations, which can vary from year to year, management calculated an expected range of $0.2 million to $0.3 million in annual payments using the Black Scholes model to estimate the fair value of the contingent liability.  Direct acquisition and integration costs of Greenpark’s operations were expensed as incurred, and totaled $0.3 million during the first six months of 2012.  The results of Greenpark’s operations are included in the Consolidated Statements of Income from the date of acquisition.

 

The assets and liabilities in the Greenpark transaction were recorded at their fair value based on management’s best estimate using information available at the date of purchase.  The Greenpark transaction is an asset purchase for legal purposes, which limits the Company’s exposure to the assumption of liabilities as defined in the purchase agreement, and to any potential unknown liabilities that result from operations that occur subsequent to the purchase date.  The transaction is also considered an asset purchase for tax purposes, which results in a step-up in tax basis of assets acquired and liabilities assumed along with tax deductible goodwill.  For book purposes, the Company will account for the transaction as a business combination in accordance with applicable accounting guidance, as it represents an acquisition of a business with a distinct set of inputs and processes to produce outputs.  The goodwill, representing the excess of consideration paid over the net fair value of assets and liabilities acquired, is not amortized for book purposes, and is assigned to our banking segment.

 

The assets and liabilities in the Greenpark transaction were recorded at their fair value based on management’s best estimate using information available at the date of acquisition.  Consideration paid, and fair values of Greenpark’s assets acquired and liabilities assumed, are summarized in the following table:

 

Consideration Paid:

 

 

 

Cash purchase price

 

$

4,000

 

Cash paid for certain prepaid assets

 

58

 

Payoff of Greenpark’s lines of credit

 

46,496

 

Premiums paid for loans, and loan commitments

 

2,770

 

Contingent purchase price

 

1,087

 

Total consideration paid

 

54,411

 

 

 

 

 

Recognized Amounts of Identifiable Assets Aquired and (Liabilities Assumed), At Fair Value:

 

 

 

Loans held for sale

 

48,408

(a)

Other assets

 

2,621

(b)

Premises and equipment

 

98

(c)

Other liabilities

 

(862

)(d)

Total identifiable net assets

 

50,265

 

 

 

 

 

Goodwill

 

$

4,146

 

 

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Table of Contents

 


Explanation of Certain Fair Values

(a)          Includes a portion of the cash consideration paid for premiums as described above, which adjusts the loans to fair value.

(b)         Represents the fair value of the acquired derivative associated with commitments to originate loans at a specified locked-rate (“interest rate lock commitments”).

(c)          Represents the fair value of certain acquired office equipment.

(d)         Consists of forward contracts acquired at fair value, which serves to hedge the movements in fair value of the interest rate lock commitments.

 

The adjustment of loans from Greenpark’s carrying value of $46.5 million to fair value of $48.4 million represents a portion of the cash consideration paid for premiums as described above.

 

The following table presents selected unaudited pro forma financial information reflecting the CBT and Greenpark transactions assuming they were completed as of January 1, 2011.   The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had these acquisitions actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.   Pro forma basic and diluted earnings per common share were calculated using Berkshire’s actual weighted-average shares outstanding for the periods presented, plus the incremental shares issued, assuming the CBT and Greenpark transactions occurred at the beginning of the periods presented.    The unaudited pro forma information is based on the actual financial statements of Berkshire for the periods shown, and on the actual financial statements of CBT and Greenpark for the 2011 period shown and in 2012 until the date of acquisition, at which time their operations became included in Berkshire’s financial statements.

 

The unaudited pro forma information, for the six months ended June 30, 2012 and 2011, set forth below reflects adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest income and expense due to investment sales and additional borrowings as a result of the CBT and Greenpark transactions.  Direct merger and acquisition integration-related costs incurred by the Company during 2012 are reversed, as those expenses are assumed to have occurred prior to 2011.  Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities or anticipated cost savings.

 

Information in the following table is shown in thousands, except earnings per share:

 

 

 

Pro Forma

 

 

 

Six months ended June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net interest income

 

$

69,958

 

$

50,753

 

Non-interest income

 

30,892

 

25,421

 

Net income

 

13,984

 

6,451

 

 

 

 

 

 

 

Pro forma earnings per share from continuing operations:

 

 

 

 

 

Basic

 

$

0.68

 

$

0.40

 

Diluted

 

$

0.68

 

$

0.40

 

 

On May 31, 2012, the Company entered into a merger agreement with Beacon Federal Bancorp, Inc. (“Beacon Federal”), the parent company of Beacon Federal (“Beacon Bank”), pursuant to which Beacon Federal will merge with and into the Company in a transaction to be accounted for as a business combination. It is expected that Beacon Bank will also merge with and into Berkshire Bank.  Located in East Syracuse, New York, Beacon Federal had $1 billion in total assets at March 31, 2012 (unaudited) and, through Beacon Bank, operates 7 banking offices providing a range of banking services in New York, Massachusetts, and Tennessee.

 

Under the terms of this merger agreement, 50% of the outstanding shares of Beacon Federal common stock will be converted into the right to receive 0.9200 of a share of Company common stock and the remaining 50% of outstanding shares of Beacon Federal common stock will be exchanged for $20.50 in cash.

 

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Table of Contents

 

The transaction is subject to closing conditions, including the receipt of regulatory approvals and approval by the shareholders of Beacon Federal. The merger is currently expected to be completed in the fourth quarter of 2012.  If the merger is not consummated under specified circumstances, Beacon Federal has agreed to pay the Company a termination fee of $5.28 million.

 

The Company incurred $0.4 million of merger and acquisition expenses related to the Beacon Federal merger for the six months ended June 30, 2012.

 

NOTE 4.                TRADING ACCOUNT SECURITY

 

The Company holds a tax advantaged economic development bond that is being accounted for at fair value. The security had an amortized cost of $13.9 million and $14.1 million, and a fair value of $17.4 million and $17.4 million, at June 30, 2012 and December 31, 2011, respectively. As discussed further in Note 13 - Derivative Financial Instruments and Hedging Activities, the Company has entered into a swap contract to swap-out the fixed rate of the security in exchange for a variable rate. The Company does not purchase securities with the intent of selling them in the near term, and there are no other securities in the trading portfolio at June 30, 2012.

 

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Table of Contents

 

NOTE 5. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

 

The following is a summary of securities available for sale and held to maturity:

 

(In thousands)

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

June 30, 2012

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

73,801

 

$

5,136

 

$

(29

)

$

78,908

 

Government guaranteed residential mortgage-backed securities

 

43,225

 

826

 

 

44,051

 

Government-sponsored residential mortgage-backed securities

 

287,191

 

2,773

 

(329

)

289,635

 

Corporate bonds

 

9,997

 

 

(431

)

9,566

 

Trust preferred securities

 

20,008

 

701

 

(2,239

)

18,470

 

Other bonds and obligations

 

738

 

1

 

 

739

 

Total debt securities

 

434,960

 

9,437

 

(3,028

)

441,369

 

Equity securities:

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

27,422

 

2,954

 

(377

)

29,999

 

Total securities available for sale

 

462,382

 

12,391

 

(3,405

)

471,368

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

7,400

 

 

 

7,400

 

Government-sponsored residential mortgage-backed securities

 

77

 

7

 

 

84

 

Tax advantaged economic development bonds

 

33,732

 

1,456

 

 

35,188

 

Other bonds and obligations

 

613

 

 

 

613

 

Total securities held to maturity

 

41,822

 

1,463

 

 

43,285

 

 

 

 

 

 

 

 

 

 

 

Total Securities

 

$

504,204

 

$

13,854

 

$

(3,405

)

$

514,653

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

73,436

 

$

4,418

 

$

 

$

77,854

 

Government guaranteed residential mortgage-backed securities

 

44,051

 

1,045

 

 

45,096

 

Government-sponsored residential mortgage-backed securities

 

245,033

 

2,990

 

(412

)

247,611

 

Corporate bonds

 

9,996

 

 

(269

)

9,727

 

Trust preferred securities

 

20,064

 

343

 

(2,592

)

17,815

 

Other bonds and obligations

 

642

 

2

 

 

644

 

Total debt securities

 

393,222

 

8,798

 

(3,273

)

398,747

 

Equity securities:

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

20,236

 

1,555

 

(782

)

21,009

 

Total securities available for sale

 

413,458

 

10,353

 

(4,055

)

419,756

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

10,349

 

 

 

10,349

 

Government-sponsored residential mortgage-backed securities

 

79

 

4

 

 

83

 

Tax advantaged economic development bonds

 

47,869

 

1,479

 

 

49,348

 

Other bonds and obligations

 

615

 

 

 

615

 

Total securities held to maturity

 

58,912

 

1,483

 

 

60,395

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

472,370

 

$

11,836

 

$

(4,055

)

$

480,151

 

 

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Table of Contents

 

The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities, segregated by contractual maturity at June 30, 2012 are presented below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Mortgage-backed securities are shown in total, as their maturities are highly variable.  Equity securities have no maturity and are also shown in total.

 

 

 

Available for sale

 

Held to maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

$

 

$

 

$

3,677

 

$

3,677

 

Over 1 year to 5 years

 

9,949

 

9,733

 

3,725

 

3,790

 

Over 5 years to 10 years

 

15,518

 

16,087

 

16,033

 

17,103

 

Over 10 years

 

79,077

 

81,863

 

18,310

 

18,631

 

Total bonds and obligations

 

104,544

 

107,683

 

41,745

 

43,201

 

Marketable equity securities

 

27,422

 

29,999

 

 

 

Residential mortgage-backed securities

 

330,416

 

333,686

 

77

 

84

 

Total

 

$

462,382

 

$

471,368

 

$

41,822

 

$

43,285

 

 

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Table of Contents

 

Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:

 

 

 

Less Than Twelve Months

 

Over Twelve Months

 

Total

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

(In thousands)

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

29

 

$

2,325

 

$

 

$

 

$

29

 

$

2,325

 

Government-guaranteed residential mortgage-backed securities

 

24

 

10,165

 

 

 

24

 

10,165

 

Government-sponsored residential mortgage-backed securities

 

274

 

88,650

 

31

 

5,866

 

305

 

94,516

 

Corporate bonds

 

 

 

431

 

9,566

 

431

 

9,566

 

Trust preferred securities

 

 

 

2,239

 

3,395

 

2,239

 

3,395

 

Total debt securities

 

327

 

101,140

 

2,701

 

18,827

 

3,028

 

119,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

143

 

7,484

 

234

 

1,765

 

377

 

9,249

 

Total securities available for sale

 

470

 

108,624

 

2,935

 

20,592

 

3,405

 

129,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax advantaged economic development bonds

 

 

 

 

 

 

 

Total securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

470

 

$

108,624

 

$

2,935

 

$

20,592

 

$

3,405

 

$

129,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Government guaranteed residential mortgage-backed securities

 

$

1

 

$

48

 

$

 

$

 

$

1

 

$

48

 

Government-sponsored residential mortgage-backed securities

 

375

 

76,278

 

36

 

5,766

 

411

 

82,044

 

Corporate bonds

 

224

 

6,776

 

45

 

2,951

 

269

 

9,727

 

Trust preferred securities

 

20

 

2,541

 

2,572

 

3,065

 

2,592

 

5,606

 

Total debt securities

 

620

 

85,643

 

2,653

 

11,782

 

3,273

 

97,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

782

 

6,229

 

 

 

782

 

6,229

 

Total securities available for sale

 

$

1,402

 

$

91,872

 

$

2,653

 

$

11,782

 

$

4,055

 

$

103,654

 

 

Debt Securities

 

The Company expects to recover its amortized cost basis on all debt securities in its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of June 30, 2012, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover. The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS and HTM portfolios were not other-than-temporarily impaired at June 30, 2012:

 

AFS municipal bonds and obligations

 

At June 30, 2012, 3 out of a total of 128 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. The aggregate unrealized losses represented 1% of the amortized cost of the securities in unrealized loss positions. The Company has the intent to hold these securities until recovery. There were no material underlying credit downgrades during the past quarter. All securities are considered performing.

 

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Table of Contents

 

AFS residential mortgage-backed securities

 

At June 30, 2012, 18 out of a total of 167 securities in the Company’s portfolios of AFS residential mortgage-backed were in unrealized loss positions. Aggregate unrealized losses represented less than 1% of the amortized cost of securities in unrealized loss positions within the AFS portfolio. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association (“GNMA”) guarantee the contractual cash flows of all of the Company’s residential mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the past quarter. All securities are considered performing.

 

AFS corporate bonds

 

At June 30, 2012, all securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represented 4% of the amortized cost of the securities. 2 of the securities were downgraded by Moody’s in the past quarter, but all 3 remain investment grade rated and the market value of the securities supports the Company’s amortized value. The securities are considered performing.

 

AFS trust preferred securities

 

At June 30, 2012, 3 out of a total of 6 securities in the Company’s portfolio of AFS trust preferred securities were in unrealized loss positions. Aggregate unrealized losses represented 40% of the amortized cost of securities in unrealized loss positions. The Company’s evaluation of the present value of expected cash flows on these securities supports its conclusions about the recoverability of the securities’ amortized cost bases.  3 of the securities in the AFS trust preferred portfolio were downgraded by Moody’s during the past quarter and 4 of the 6 securities contain at least one below investment grade ratings.  Berkshire reviews the financial strength of all of the single issue trust issuers and has concluded that the amortized cost remains supported by the market value of these securities and they are considered performing.

 

At June 30, 2012, $2.0 million of the total unrealized losses was attributable to a $2.6 million investment in a Mezzanine Class B tranche of a $360 million pooled trust preferred security issued by banking and insurance entities. The Company evaluated the security, with a Level 3 fair value of $0.6 million, for potential other-than-temporary-impairment (“OTTI”) at June 30, 2012 and determined that OTTI was not evident based on both the Company’s ability and intent to hold the security until the recovery of its remaining amortized cost and the protection from credit loss afforded by $33 million in excess subordination above current and projected losses. The security is considered performing.

 

Marketable Equity Securities

 

In evaluating its marketable equity securities portfolio for OTTI, the Company considers its ability and intent to hold an equity security to recovery of its cost basis.  In addition, various other factors are considered, including the length of time and the extent to which the fair value has been less than cost, and the financial condition and near term prospects of the issuer. Any OTTI is recognized immediately through earnings.

 

At June 30, 2012, 6 out of a total of 22 securities in the Company’s portfolio of marketable equity securities were in an unrealized loss position. The unrealized loss represented 4% of the amortized cost of the securities. The Company has the ability and intent to hold the securities until a recovery of their cost bases and does not consider the securities other-than-temporarily impaired at June 30, 2012. As new information becomes available in future periods, changes to the Company’s assumptions may be warranted and could lead to a different conclusion regarding the OTTI of these securities.

 

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NOTE 6. LOANS

 

Total loans include loans from business activities and loans acquired from business combinations. Loans from business combinations are those loans acquired from the acquisitions of The Connecticut Bank and Trust Company, Legacy Bancorp, Inc., and Rome Bancorp, Inc. The following is a summary of total loans:

 

 

 

June 30, 2012

 

(In thousands)

 

Loans from Business
Activities

 

Loans Acquired from
Business Combinations

 

Total

 

 

 

 

 

 

 

 

 

Residential mortgages

 

 

 

 

 

 

 

1-4 family

 

$

850,734

 

$

306,554

 

$

1,157,288

 

Construction

 

28,059

 

8,100

 

36,159

 

Total residential mortgages

 

878,793

 

314,654

 

1,193,447

 

 

 

 

 

 

 

 

 

Commercial mortgages:

 

 

 

 

 

 

 

Construction

 

146,649

 

14,155

 

160,804

 

Single and multi-family

 

71,861

 

32,475

 

104,336

 

Commercial real estate

 

747,877

 

268,041

 

1,015,918

 

Total commercial mortgages

 

966,387

 

314,671

 

1,281,058