Unassociated Document
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, 2011
 
¨
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 ¨
 
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 ¨
 
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 ¨        Accelerated Filer x       Non-Accelerated Filer ¨     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 21,128,868 shares of common stock, par value $0.01 per share, outstanding as of August 2, 2011.

 
 

 

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, 2011 and December 31, 2010
3
     
 
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010
4
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010
5
     
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010
6
     
 
Notes to Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
     
 
Selected Financial Data
44
     
 
Average Balances and Average Yields/Rates
45
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53
     
Item 4.
Controls and Procedures
53
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
54
     
Item 1A.
Risk Factors
55
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
55
     
Item 3.
Defaults Upon Senior Securities
55
     
Item 4.
Removed and Reserved
56
     
Item 5.
Other Information
56
     
Item 6.
Exhibits
56
     
Signatures
 
58

 
2

 

PART I
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS

   
June 30,
   
December 31,
 
(In thousands, except share data)
 
2011
   
2010
 
Assets
           
Cash and due from banks
  $ 30,912     $ 24,643  
Short-term investments
    11,005       19,497  
Total cash and cash equivalents
    41,917       44,140  
                 
Trading security
    16,025       16,155  
Securities available for sale, at fair value
    306,073       310,242  
Securities held to maturity (fair values of $56,414 and $57,594)
    55,061       56,436  
Federal Home Loan Bank stock and other restricted securities
    23,120       23,120  
Total securities
    400,279       405,953  
                 
Loans held for sale
    -       1,043  
                 
Residential mortgages
    808,225       644,973  
Commercial mortgages
    988,342       925,573  
Commercial business loans
    345,364       286,087  
Consumer loans
    309,758       285,529  
Total loans
    2,451,689       2,142,162  
Less:  Allowance for loan losses
    (31,919 )     (31,898 )
Net loans
    2,419,770       2,110,264  
                 
Premises and equipment, net
    44,026       38,546  
Other real estate owned
    1,700       3,386  
Goodwill
    178,068       161,725  
Other intangible assets
    14,523       11,354  
Cash surrender value of bank-owned life insurance policies
    56,865       46,085  
Other assets
    68,406       58,907  
Total assets
  $ 3,225,554     $ 2,881,403  
                 
Liabilities
               
Demand deposits
  $ 351,249     $ 297,502  
NOW deposits
    216,256       212,143  
Money market deposits
    792,160       716,078  
Savings deposits
    315,161       237,594  
Time deposits
    810,989       741,124  
Total deposits
    2,485,815       2,204,441  
                 
Short-term debt
    7,770       47,030  
Long-term Federal Home Loan Bank advances
    237,429       197,807  
Junior subordinated debentures
    15,464       15,464  
Total borrowings
    260,663       260,301  
Other liabilities
    34,106       28,014  
Total liabilities
    2,780,584       2,492,756  
                 
Stockholders’ equity
               
Common stock ($.01 par value; 26,000,000 shares authorized; 18,509,376 shares issued and 16,721,075 shares outstanding in 2011; 15,848,825 shares issued and 13,916,094 shares outstanding in 2010)
    185       158  
Additional paid-in capital
    392,864       337,537  
Unearned compensation
    (2,145 )     (1,776 )
Retained earnings
    103,642       103,972  
Accumulated other comprehensive loss
    (4,694 )     (6,410 )
Treasury stock, at cost (1,788,301 shares in 2011 and 1,772,677 shares in 2010)
    (44,882 )     (44,834 )
Total stockholders' equity
    444,970       388,647  
Total liabilities and stockholders' equity
  $ 3,225,554     $ 2,881,403  

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

 
3

 

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In thousands, except per share data)
 
2011
   
2010
   
2011
   
2010
 
Interest and dividend income
                       
Loans
  $ 28,607     $ 24,490     $ 53,213     $ 48,437  
Securities and other
    3,446       3,473       6,753       7,008  
Total interest and dividend income
    32,053       27,963       59,966       55,445  
Interest expense
                               
Deposits
    5,768       6,787       11,483       13,683  
Borrowings and junior subordinated debentures
    2,084       2,305       4,136       4,594  
Total interest expense
    7,852       9,092       15,619       18,277  
Net interest income
    24,201       18,871       44,347       37,168  
Non-interest income
                               
Loan related fees
    780       756       1,371       1,712  
Deposit related fees
    3,366       2,819       5,907       5,279  
Insurance commissions and fees
    2,782       3,197       6,512       6,670  
Wealth management fees
    1,389       1,140       2,581       2,316  
Total fee income
    8,317       7,912       16,371       15,977  
Gain on sale of securities, net
    6       -       6       -  
Non-recurring gain
    124       -       124       -  
Other
    (277 )     (301 )     (197 )     (220 )
Total non-interest income
    8,170       7,611       16,304       15,757  
Total net revenue
    32,371       26,482       60,651       52,925  
Provision for loan losses
    1,500       2,200       3,100       4,526  
Non-interest expense
                               
Compensation and benefits
    12,027       10,960       23,178       21,957  
Occupancy and equipment
    3,546       2,963       6,981       5,998  
Technology and communications
    1,531       1,373       2,997       2,756  
Marketing and professional services
    1,557       1,116       2,770       2,413  
Supplies, postage and delivery
    507       542       961       1,115  
FDIC premiums and assessments
    741       874       1,768       1,647  
Other real estate owned
    700       -       1,309       27  
Amortization of intangible assets
    935       768       1,651       1,536  
Merger related expenses
    5,451       -       7,159       21  
Other
    1,628       1,432       3,038       2,750  
Total non-interest expense
    28,623       20,028       51,812       40,220  
                                 
Income before income taxes
    2,248       4,254       5,739       8,179  
Income tax expense
    371       816       1,027       1,375  
Net income
  $ 1,877     $ 3,438     $ 4,712     $ 6,804  
                                 
Basic earnings per share
  $ 0.11     $ 0.25     $ 0.31     $ 0.49  
                                 
Diluted earnings per share
  $ 0.11     $ 0.25     $ 0.31     $ 0.49  
                                 
Weighted average shares outstanding:
                               
Basic
    16,580       13,856       15,269       13,845  
Diluted
    16,601       13,894       15,299       13,875  

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

 
4

 

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
  
                                        
Accumulated
             
                     
Additional
   
Unearned
         
other comp-
             
   
Common stock
   
Preferred
   
paid-in
   
compen-
   
Retained
   
rehensive
   
Treasury
       
(In thousands)
 
Shares
   
Amount
   
stock
   
capital
   
sation
   
earnings
   
income (loss)
   
stock
   
Total
 
             
Balance at December 31, 2009
    13,916     $ 158     $ -     $ 338,822     $ (1,318 )   $ 99,597     $ (2,968 )   $ (49,146 )   $ 385,145  
                                                                         
Comprehensive income:
                                                                       
Net income
    -       -       -       -       -       6,804       -       -       6,804  
Other net comprehensive loss
    -       -       -       -       -       -       (3,011 )     -       (3,011 )
Total comprehensive income
                                                                    3,794  
Cash dividends declared ($0.16 per share)
    -       -       -       -       -       (4,492 )     -       -       (4,492 )
Forfeited shares
    (10 )     -       -       14       190       -       -       (204 )     -  
Exercise of stock options
    13       -       -       -       -       (108 )     -       318       210  
Restricted stock grants
    130       -       -       (1,149 )     (2,166 )     -       -       3,315       -  
Stock-based compensation
    -       -       -       3       781       -       -       -       784  
Other, net
    (12 )     -       -       -       -       16       -       (205 )     (189 )
                                                                         
Balance at June 30, 2010
    14,037       158       -       337,690       2,513       101,818       (5,979 )     (46,213 )     385,252  
                                                                         
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 net 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 ($0.16 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  

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

 
5

 

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended June 30,
 
(In thousands)
 
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 4,712     $ 6,804  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    3,100       4,526  
Net amortization of securities
    595       1,347  
Change in unamortized net loan costs and premiums
    475       388  
Premises and equipment depreciation and amortization expense
    2,159       1,848  
Write down of other real estate owned
    1,200       -  
Stock-based compensation amortization expense
    473       784  
Amortization of intangible assets
    1,651       1,536  
Income from cash surrender value of bank-owned life insurance policies
    (872 )     (583 )
Gain on sale of securities
    (253 )     -  
Loss on sale of real estate
    104       -  
Net decrease in loans held for sale
    1,043       990  
Net change in other
    2,324       3,371  
Net cash provided by operating activities
    16,711       21,011  
                 
Cash flows from investing activities:
               
Trading account security:
               
Proceeds from maturities, calls and prepayments
    130       218  
Securities available for sale:
               
Sales
    3,525       3,159  
Proceeds from maturities, calls and prepayments
    70,196       49,947  
Purchases
    (68,360 )     (24,756 )
Securities held to maturity:
               
Proceeds from maturities, calls and prepayments
    6,058       11,897  
Purchases
    (4,683 )     (12,894 )
                 
Loan originations, net
    (55,391 )     (66,479 )
Proceeds from sale of other real estate
    382       -  
Proceeds from sale of Federal Home Loan Bank stock
    3,571       -  
Acquisition of Rome Bancorp, Inc., net of cash paid
    10,849       -  
Additions to life insurance
    -       2,217  
Purchases of premises and equipment
    (2,907 )     (2,420 )
Net cash used by investing activities
    (36,630 )     (39,111 )
                 
Cash flows from financing activities:
               
Net increase in deposits
    51,984       53,409  
Proceeds from Federal Home Loan Bank advances and other borrowings
    105,480       116,380  
Repayments of Federal Home Loan Bank advances and other borrowings
    (135,118 )     (137,767 )
Net proceeds from reissuance of treasury stock
    214       210  
Excess tax benefit from stock based payment arrangements
    66       -  
Common stock cash dividends paid
    (4,930 )     (4,492 )
Net cash provided by financing activities
    17,696       27,740  
                 
Net change in cash and cash equivalents
    (2,223 )     9,640  
Cash and cash equivalents at beginning of period
    44,140       32,608  
Cash and cash equivalents at end of period
  $ 41,917     $ 42,248  
                 
Supplemental cash flow information:
               
Interest paid on deposits
    11,536       13,708  
Interest paid on borrowed funds
    4,045       4,616  
Income taxes paid, net
    55       (619 )
Transfers into other real estate owned
    -       1,000  
                 
Acquisition of non-cash assets and liabilities:
               
Assets acquired
    322,305       -  
Liabilities assumed
    (259,524 )     -  
Rome stock owned by the Company
    668       -  
Other non-cash changes:
               
Other net comprehensive loss
    1,716       -  

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

 
6

 

1.
GENERAL

Basis of presentation and consolidation
 
The consolidated financial statements (the “financial statements”) of Berkshire Hills Bancorp, Inc. (the “Company” or “Berkshire”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements, including year-end consolidated balance sheet data presented, do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation are reflected in the interim financial statements and consist of normal recurring entries. These financial statements include the accounts of the Company and its wholly-owned subsidiaries, Berkshire Insurance Group, Inc. (“BIG”) and Berkshire Bank (the “Bank”), together with the Bank’s consolidated subsidiaries. One of the Bank’s consolidated subsidiaries is Berkshire Bank Municipal Bank, a New York chartered limited-purpose commercial bank. All significant inter-company transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results which may be expected for the year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Business
 
Through its wholly-owned subsidiaries, the Company provides a variety of financial services to individuals, businesses, not-for-profit organizations, and municipalities through its offices in western Massachusetts, southern Vermont and northeastern and central New York. The Company also provides asset-based middle-market commercial lending throughout New England and its New York markets.  Its primary deposit products are checking, NOW, money market, savings, and time deposit accounts.  Its primary lending products are residential mortgages, commercial mortgages, commercial business loans and consumer loans. The Company offers electronic banking, cash management, other transaction and reporting services and interest rate swap contracts to commercial customers. The Company offers wealth management services including trust, financial planning, and investment services. The Company is also an agent for complete lines of property and casualty, life, disability, and health insurance.
 
Business segments
 
An operating segment is a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company has two reportable operating segments, Banking and Insurance, which are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp, Inc.  Banking includes the activities of the Bank and its subsidiaries, which provide commercial and consumer banking services.  Insurance includes the activities of BIG and its subsidiaries, which provides commercial and consumer insurance services.  The only other consolidated financial activity of the Company consists of the transactions of its parent, Berkshire Hills Bancorp, Inc.

Use of estimates
 
In preparing the financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses; the valuation of deferred tax assets; the estimates related to the initial measurement of goodwill and intangible assets and subsequent impairment analyses; the determination of other-than-temporary impairment of securities; and the determination of fair value of financial instruments and subsequent impairment analysis.

 
7

 

Significant accounting policies
 
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in the 2010 Form 10-K.  The following policies have since been refined or added and are described below:

Allowance for Loan Losses
 
The allowance for loan losses is established based upon the level of estimated probable losses in the current loan portfolio. Loan losses are charged against the allowance when management believes the collectability of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment. The formula-based approach emphasizes loss factors derived from actual historical and industry portfolio loss rates, which are combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan categories. Allowance amounts are determined based on an estimate of historical average annual percentage rate of loan loss for each loan segment, a temporal estimate of the incurred loss emergence and confirmation period for each loan category, and certain qualitative risk factors considered in the computation of the allowance for loan losses.

Qualitative risk factors impacting the inherent risk of loss within the portfolio include the following:

 
• 
National and local economic and business conditions

 
• 
Level and trend of delinquencies

 
• 
Level and trend of charge-offs and recoveries

 
• 
Trends in volume and terms of loans

 
• 
Risk selection, lending policy and underwriting standards

 
• 
Experience and depth of management

 
• 
Banking industry conditions and other external factors

 
• 
Concentration risk

Actual historical loss rates for commercial mortgage and commercial business loans are assessed by internal risk rating. Historical loss rates for residential mortgages, home equity and other consumer loans are not risk graded but are assessed based on the total of each loan segment. This approach incorporates qualitative adjustments based upon management’s assessment of various market and portfolio specific risk factors into its formula-based estimate. Due to the imprecise nature of the loan loss estimation process and ever changing conditions, the qualitative risk attributes may not adequately capture amounts of incurred loss in the formula-based loan loss components used to determine allocations in the Company’s analysis of the adequacy of the allowance for loan losses.

 
8

 

The Company evaluates certain loans individually for specific impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification, or non-accrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of the probable loss is able to be estimated. Estimates of loss may be determined by the present value of anticipated future cash flows or the loan’s observable fair market value, or the fair value of the collateral, if the loan is collateral dependent. However, for collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible.

Large groups of small-balance homogeneous loans such as the residential mortgage, home equity and other consumer portfolios are collectively evaluated for impairment. As such, the Company does not typically identify individual loans within these groupings as impaired loans or for impairment evaluation and disclosure. The Company evaluates all TDRs for impairment on an individual loan basis regardless of loan type.

In the first quarter of 2011, management made refinements to its allowance for loan loss methodology to better incorporate the Company’s internal risk ratings into its formula-based approach. This refinement did not have a significant effect on the first and second quarter’s loan loss provision or the total allowance for loan loss.

Acquired Loans

Loans that we acquire in acquisitions subsequent to January 1, 2009 are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.

For loans that meet the criteria stipulated in ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company shall recognize the accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. This accretable yield shall not be recorded on the balance sheet. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference.  The nonaccretable difference shall not be recognized as an adjustment of yield, a loss accrual, or a valuation allowance.  Going forward, the Company shall continue to evaluate whether the timing and the amount of cash to be collected are reasonably expected.  Subsequent significant increases in cash flows we expect to collect will first reduce previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield.  Subsequent decreases in expected cash flows may result in the loan being considered impaired.  Interest income shall not be recognized to the extent that the net investment in the loan would increase to an amount greater than the payoff amount.

For loans that do not meet the ASC 310-30 criteria, the Company shall accrete interest income on a level yield basis using the contractually required cash flows.

The expected prepayments used to determine the accretable yield shall be consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference.  Differences in the actual and expected prepayments impact the accretable yield but not the nonaccretable difference.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield. We have determined that we can reasonably estimate future cash flows on our current portfolio of acquired loans that are past due 90 days or more and on which we are accruing interest and we expect to fully collect the carrying value of the loans.

 
9

 

Earnings Per Share
 
Earnings per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In thousands, except per share data)
 
2011
   
2010
   
2011
   
2010
 
Net income
  $ 1,877     $ 3,438     $ 4,712     $ 6,804  
                                 
Average number of shares outstanding
    16,730       14,033       15,425       14,012  
Less: average number of unvested stock award shares
    (150 )     (177 )     (156 )     (167 )
Average number of basic shares outstanding
    16,580       13,856       15,269       13,845  
                                 
Plus: average number of dilutive unvested stock award shares
    21       25       (126 )     17  
Plus: average number of dilutive stock options
    -       13       156       13  
Average number of diluted shares outstanding
    16,601       13,894       15,299       13,875  
                                 
Basic earnings per share
  $ 0.11     $ 0.25     $ 0.31     $ 0.49  
Diluted earnings per share
  $ 0.11     $ 0.25     $ 0.31     $ 0.49  

For the quarter ended June 30, 2011, 129 thousand shares of restricted stock and 127 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. For the quarter ended June 30, 2010, 158 thousand shares of restricted stock and 257 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.

Recent accounting pronouncements
 
FASB ASU No. 2010-20, “Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. In July 2010, the FASB issued ASU 2010-20 which requires an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s loan portfolio (2) how that risk is analyzed and assessed in arriving at the allowance for loan and lease losses and (3) the changes and reasons for those changes in the allowance for loan and lease losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this guidance resulted in significant additional loan disclosures included in Note 6.
 
FASB ASU No. 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations”. In December 2010, the FASB issued ASU 2010-29 which clarifies the presentation of pro forma information required for business combinations when a public company presents comparative financial information. The amendments in this guidance are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  The adoption of this guidance required addition disclosures included in Note 3.
 
FASB ASU No. 2011-02,A Creditor’s Determination of Whether Restructuring Is a Troubled Debt Restructuring”.  In April 2011, the FASB issued ASU 2011-02 which clarifies when a loan modification or restructuring is considered a troubled debt restructuring.  The guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and is to be applied retrospectively to modifications occurring on or after the beginning of the annual period of adoption.  The adoption of this guidance could result in additional loans being classified as troubled debt restructurings and will require additional loan disclosures which the Company is in the process of assessing.
 
FASB ASU No. 2011-05, “Presentation of Comprehensive Income”.  In June 2011, the FASB issued ASU 2011-05 which requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and is to be applied retrospectively.  The adoption of this guidance will require addition disclosures.

 
10

 
 
2. 
CORRECTION OF IMMATERIAL  ERROR
 
During the second quarter of 2011, the Company corrected an immaterial error in its prior period accounting treatment for certain tax credit investment limited partnership interests.  These interests primarily relate to low income housing, community development, and solar energy related investments.  As a result of this error, the Company’s non-interest income and income tax expense were overstated in 2010 and in the first quarter of 2011.  On the corresponding balance sheets, the Company’s tax credit investment limited partnership interests were overstated in 2010 and in the first quarter of 2011.  The overstatement of the tax credit investment balance in each period was more than offset by an understatement of the Company’s deferred tax asset balance.  These balances are included as components of other assets in the accompanying consolidated balance sheets.

The Company assessed the materiality of this error for each previously issued quarterly and annual period that were effected in accordance with generally accepted accounting principles, and determined that the error was immaterial.  The Company determined that the cumulative error is immaterial to our estimated income for the full fiscal year ending December 31, 2011 but was material to our trend in earnings.   Accordingly, the Company has revised its consolidated balance sheet as of December 31, 2010 and the consolidated statement of operations for the three-month and six-month periods ended June 30, 2010.  The Company intends to revise its consolidated financial statements for certain quarterly and annual periods through subsequent periodic filings.  The effect of correcting this immaterial error in the consolidated statement of operations for the year ended December 31, 2010, the consolidated balance sheet as of December 31, 2010, and for the fiscal 2010 and 2011 quarterly periods to be reported in subsequent periodic filings is as follows:

    
For the Quarter Ended
   
For the Six Months Ended
 
   
June 30, 2010
   
June 30, 2010
 
(in thousands, except per share data)
 
As Reported
   
As Revised
   
As Reported
   
As Revised
 
                         
Consolidated statement of operations information:
                       
Non-interest income
  $ 7,963     $ 7,611     $ 16,461     $ 15,757  
Income tax expense
    1,198       816       2,139       1,375  
Net income
    3,408       3,438       6,744       6,804  
Basic earnings per share
    0.25       0.25       0.49       0.49  
Diluted earnings per share
    0.25       0.25       0.49       0.49  
                                 
Consolidated balance sheet information:
                               
Other assets
    68,484       69,111       68,484       69,111  
Retained earnings
    101,193       101,820       101,193       101,820  

   
For the Quarter Ended
   
For the Quarter Ended
   
For the Year Ended
   
For the Quarter Ended
 
   
September 30, 2010
   
December 31, 2010
   
December 31, 2010
   
March 31, 2011
 
(in thousands, except per share data)
 
As Reported
   
As Revised
   
As Reported
   
As Revised
   
As Reported
   
As Revised
   
As Reported
   
As Revised
 
                                                 
Consolidated statement of operations information:
                                               
Non-interest income
  $ 6,915     $ 6,563     $ 7,783     $ 7,431     $ 31,159     $ 29,751     $ 8,502     $ 8,134  
Income tax expense
    1,081       699       893       511       4,113       2,585       1,061       656  
Net income
    3,424       3,454       3,570       3,600       13,378       13,858       2,798       2,835  
Basic earnings per share
    0.25       0.25       0.26       0.26       0.99       1.00       0.20       0.20  
Diluted earnings per share
    0.25       0.25       0.26       0.26       0.99       1.00       0.20       0.20  
                                                                 
Consolidated balance sheet information:
                                                               
Other assets
    68,408       69,065       58,220       58,907       58,220       58,907       59,122       59,846  
Retained earnings
    102,270       102,927       103,285       103,972       103,285       103,972       103,720       104,444  

 
11

 

3. 
ACQUISITION
 
Rome Bancorp, Inc.

On April 1, 2011, the Company acquired all of the outstanding common shares of Rome Bancorp, Inc. ("Rome"), the parent company of The Rome Savings Bank. Concurrently, Rome Bancorp merged into Berkshire Hills Bancorp and The Rome Savings Bank merged into Berkshire Bank. Rome had five banking offices serving Rome, Lee, and New Hartford, New York.  This business combination is an extension of the Berkshire Hills franchise and the goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to the Rome operations.  The combination was negotiated between the companies and was approved unanimously by their boards of directors.

Rome shareholders received 2.7 million shares of the Company’s common stock and $22.7 million in cash.  On the acquisition date, Rome had 6.7 million outstanding common shares.  Through a cash/stock election procedure, the Company paid $11.25 per share for 30% of the outstanding Rome common shares and exchanged its stock in a ratio of 0.5658 shares of the Company’s common stock for each share of the remaining 70% outstanding Rome shares.  The 2.7 million shares of Company common stock issued in this exchange were valued at $20.83 per share based on the closing price of Berkshire Hills posted on March 31, 2011.  In addition to the above consideration, the Company owned 59 thousand shares of Rome stock which had been previously acquired at an average cost of $9.22 per share.  Berkshire Hills recorded a $123 thousand gain on these shares which was recorded in non-interest income on the date of acquisition.  Berkshire Hills paid $0.4 million in cash to retire outstanding Rome stock options.

The results of Rome’s operations are included in the Consolidated Statements of Income from the date of acquisition. In connection with the merger, the consideration paid, the assets acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as summarized in the following tables, in thousands, as of April 1, 2011:
 
Consideration Paid:
     
Berkshire Hills Bancorp common stock issued to Rome common stockholders
  $ 55,419  
Cash consideration paid to Rome common shareholders
    22,683  
Value of Rome stock previously purchased by Berkshire Hills
    668  
Cash consideration paid for Rome employee stock options
    354  
Total consideration paid
    79,124  
         
Recognized Amounts of Identifiable Assets Aquired and (Liabilities Assumed), At Fair Value:
       
Cash and short term investments
    33,533  
Investment securities
    418  
Loans
    257,604  
Federal Home Loan Bank common stock
    3,571  
Bank owned life insurance
    9,908  
Premises and equipment
    4,732  
Core deposit intangibles
    4,820  
Other assets
    7,719  
Deposits
    (229,390 )
Borrowings
    (30,000 )
Other liabilities
    (134 )
Total identifiable net assets
    62,781  
         
Goodwill
  $ 16,343  

 
12

 

Goodwill

The fair values for most loans acquired from Rome 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 problem loans, 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 Rome’s allowance for credit losses associated with the loans we acquired as the loans were initially recorded at fair value.

Information about the acquired loan portfolio as of April 1, 2011 is as follows (in thousands):

Contractually required principal and interest at acquisition
  $ 262,718  
 Contractual cash flows not expected to be collected (nonaccretable discount)
    (4,880 )
 Expected cash flows at acquisition
    257,838  
 Interest component of expected cash flows (accretable discount)
    (234 )
 Fair value of aquired loans
  $ 257,604  

The core deposit intangible asset recognized as part of the Rome merger is being amortized over its estimated useful life of approximately ten years utilizing an accelerated 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 Rome was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  Certificates of deposit were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates.  The projected cash was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity.

The fair value of borrowings assumed was equal to carrying value, since these were overnight borrowings at the time of the merger.

Rome had no insurance related operations, so no goodwill was recognized in connection with the insurance segment of Berkshire Hills.

Financial Information

The following table presents selected pro forma financial information reflecting the Rome acquisition assuming it was completed as of the beginning of the respective periods.   The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the Rome acquisition 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 Hills’ actual weighted-average shares outstanding for the periods presented, plus the incremental shares issued, assuming the Rome acquisition occurred at the beginning of the periods presented.    The pro forma information is based on the actual financial statements of Berkshire Hills and Rome for the periods shown.  This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. Merger related costs recorded by Berkshire Hills are included in the Company’s consolidated financial statements, and these costs are also included on a pro forma basis in the 2010 pro forma financial information below.  Planned cost savings are not reflected in the unaudited pro forma amounts for the periods shown.  Pro forma results in 2011 include certain non-routine charges recorded by Rome in 2011 prior to the time of the merger.  The Company has determined that it is impracticable to report the amounts of revenue and earnings of Rome since the acquisition date included in the consolidated income statement due to the integration of Rome operations with those of the Company subsequent to its acquisition.  Pro forma net income for the first six months of 2010 is adjusted by non-recurring items consisting of a $465 thousand credit representing the reversal of the Rome loan loss provision and a $5.498 million charge representing merger related expenses recorded by Berkshire in 2010 and 2011.

 
13

 

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

   
Pro Forma
 
   
Six months ended June 30,
 
   
2011
   
2010
 
             
Net interest income
  $ 47,560     $ 44,158  
Non-interest income
    17,343       17,520  
Net income
    2,499       4,576  
                 
Pro forma earnings per share:
               
Basic
  $ 0.15     $ 0.28  
Diluted
  $ 0.15     $ 0.28  
 
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 $14.3 million and $14.6 million, and a fair value of $16.0 million and $16.2 million, at June 30, 2011 and December 31, 2010, respectively. As discussed further in Note 11 - 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, 2011.
 
 
14

 

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, 2011
                       
Securities available for sale
                       
Debt securities:
                       
Municipal bonds and obligations
  $ 73,788     $ 1,860     $ (123 )   $ 75,525  
Government guaranteed residential mortgage-backed securities
    17,901       363       -       18,264  
Government-sponsored residential mortgage-backed securities
    164,113       2,905       (116 )     166,902  
Corporate bonds
    4,995       34       (36 )     4,993  
Trust preferred securities
    20,120       460       (2,049 )     18,531  
Other bonds and obligations
    681       2       -       683  
Total debt securities
    281,598       5,624       (2,324 )     284,898  
Equity securities:
                               
Marketable equity securities
    18,612       2,826       (263 )     21,175  
Total securities available for sale
    300,210       8,450       (2,587 )     306,073  
                                 
Securities held to maturity
                               
Municipal bonds and obligations
    6,069       -       -       6,069  
Government-sponsored residential mortgage-backed securities
    81       4       -       85  
Tax advantaged economic development bonds
    48,384       1,349       -       49,733  
Other bonds and obligations
    527       -       -       527  
Total securities held to maturity
    55,061       1,353       -       56,414  
                                 
Total
  $ 355,271     $ 9,803     $ (2,587 )   $ 362,487  
                                 
December 31, 2010
                               
Securities available for sale
                               
Debt securities:
                               
Municipal bonds and obligations
  $ 79,292     $ 1,008     $ (394 )   $ 79,906  
Government guaranteed residential mortgage-backed securities
    25,801       370       (7 )     26,164  
Government-sponsored residential mortgage-backed securities
    144,493       2,806       (580 )     146,719  
Corporate bonds
    18,307       73       (90 )     18,290  
Trust preferred  securities
    22,222       316       (2,683 )     19,855  
Other bonds and obligations
    402       2       (1 )     403  
Total debt securities
    290,517       4,575       (3,755 )     291,337  
Equity securities:
                               
Marketable equity securities
    15,756       3,217       (68 )     18,905  
Total securities available for sale
    306,273       7,792       (3,823 )     310,242  
                                 
Securities held to maturity
                               
Municipal bonds and obligations
    7,069       -       -       7,069  
Government-sponsored residential mortgage-backed securities
    83       3       -       86  
Tax advantaged economic development bonds
    48,861       1,155       -       50,016  
Other bonds and obligations
    423       -       -       423  
Total securities held to maturity
    56,436       1,158       -       57,594  
                                 
Total
  $ 362,709     $ 8,950     $ (3,823 )   $ 367,836  
 
 
15

 
 
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, 2011 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
  $ 310     $ 311     $ 2,434     $ 2,434  
Over 1 year to 5 years
    2,996       2,959       1,792       1,792  
Over 5 years to 10 years
    18,167       18,569       31,488       32,216  
Over 10 years
    78,111       77,893       19,266       19,887  
Total bonds and obligations
    99,584       99,732       54,980       56,329  
                                 
Marketable equity securities
    18,612       21,175       -       -  
Residential mortgage-backed securities
    182,014       185,166       81       85  
                                 
Total
  $ 300,210     $ 306,073     $ 55,061     $ 56,414  
 
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, 2011
                 
                                     
Securities available for sale
                                   
Debt securities:
                                   
Municipal bonds and obligations
  $ 123     $ 7,453     $ -     $ -     $ 123     $ 7,453  
Government-sponsored residential  mortgage-backed securities
    101       26,208       15       11,841       116       38,049  
Corporate bonds
    -       -       36       2,959       36       2,959  
Trust preferred securities
    -       -       2,049       3,591       2,049       3,591  
Total debt securities
    224       33,661       2,100       18,391       2,324       52,052  
                                                 
Marketable equity securities
    263       4,236       -       -       263       4,236  
Total securities available for sale
  $ 487     $ 37,897     $ 2,100     $ 18,391     $ 2,587     $ 56,288  
                                                 
December 31, 2010
                     
                                                 
Securities available for sale
                                               
Debt securities:
                                               
Municipal bonds and obligations
  $ 335     $ 15,630     $ 59     $ 1,195     $ 394