berkshire_hills10q-87411.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 (Mark One)
 berkshire hills bancorp
 
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

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

For the transition period from __________________ to _________________

Commission File Number 0-51584

BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware
04-3510455
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
24 North Street, Pittsfield, Massachusetts
01201
(Address of principal executive offices)
(Zip Code)

(413) 443-5601
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

Large accelerated filer ¨   Accelerated filer ý   Non-accelerated filer ¨

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

The Registrant had 10,693,048 shares of common stock, par value $0.01 per share, outstanding as of November 8, 2007.

1



BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q

INDEX

   
Page
 
     
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
17
     
 
19
     
 
20
     
28
     
29
     
     
 
     
30
     
30
     
30
     
30
     
31
     
31
     
31
     
 
32



2


PART I

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
(In thousands, except share data)
 
2007
   
2006
 
Assets
           
Total cash and cash equivalents
  $
33,882
    $
30,985
 
Securities available for sale, at fair value
   
194,374
     
194,206
 
Securities held to maturity, at amortized cost
   
41,978
     
39,968
 
                 
Residential mortgages
   
658,594
     
599,273
 
Commercial mortgages
   
694,650
     
567,074
 
Commercial business loans
   
203,594
     
189,758
 
Consumer loans
   
381,688
     
342,882
 
Total loans
   
1,938,526
     
1,698,987
 
Less:  Allowance for loan losses
    (22,108 )     (19,370 )
Net loans
   
1,916,418
     
1,679,617
 
                 
Premises and equipment, net
   
38,578
     
29,130
 
Goodwill
   
161,296
     
104,531
 
Other intangible assets
   
21,876
     
16,810
 
Cash surrender value of life insurance policies
   
35,027
     
30,338
 
Other assets
   
28,633
     
24,057
 
Total assets
  $
2,472,062
    $
2,149,642
 
                 
Liabilities and Stockholders' Equity
               
Liabilities
               
Demand deposits
  $
228,731
    $
178,109
 
NOW deposits
   
207,326
     
153,087
 
Money market deposits
   
388,251
     
297,155
 
Savings deposits
   
212,065
     
202,213
 
Total non-maturity deposits
   
1,036,373
     
830,564
 
Brokered time deposits
   
26,578
     
41,741
 
Other time deposits
   
733,193
     
649,633
 
Total time deposits
   
759,771
     
691,374
 
Total deposits
   
1,796,144
     
1,521,938
 
Borrowings
   
316,095
     
345,005
 
Junior subordinated debentures
   
15,464
     
15,464
 
Other liabilities
   
13,713
     
9,074
 
Total liabilities
   
2,141,416
     
1,891,481
 
                 
Stockholders' equity
               
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)
   
-
     
-
 
Common stock ($.01 par value; 26,000,000 shares authorized; 12,513,824 shares
               
issued at September 30, 2007 and 10,600,472 shares issued at December 31, 2006)
   
125
     
106
 
Additional paid-in capital
   
265,923
     
200,975
 
Unearned compensation
    (2,282 )     (1,896 )
Retained earnings
   
112,252
     
105,731
 
Accumulated other comprehensive income
   
255
     
92
 
Treasury stock, at cost (1,785,047 shares at September 30, 2007 and
               
1,887,068 at December 31, 2006)
    (45,627 )     (46,847 )
Total stockholders' equity
   
330,646
     
258,161
 
Total liabilities and stockholders' equity
  $
2,472,062
    $
2,149,642
 
                 
See accompanying notes to consolidated financial statements.

3



BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands, except per share data)
 
2007
   
2006
   
2007
   
2006
 
Interest and dividend income
                       
Loans
  $
29,719
    $
26,388
    $
87,393
    $
72,761
 
Securities and other
   
2,912
     
5,000
     
8,702
     
13,909
 
Total interest and dividend income
   
32,631
     
31,388
     
96,095
     
86,670
 
Interest expense
                               
Deposits
   
12,581
     
10,766
     
36,849
     
29,365
 
Borrowings and junior subordinated debentures
   
4,571
     
5,019
     
13,539
     
12,636
 
Total interest expense
   
17,152
     
15,785
     
50,388
     
42,001
 
Net interest income
   
15,479
     
15,603
     
45,707
     
44,669
 
Non-interest income
                               
Insurance commissions and fees
   
2,661
     
623
     
11,438
     
2,112
 
Deposit service fees
   
1,825
     
1,334
     
5,127
     
4,003
 
Wealth management fees
   
1,044
     
882
     
2,931
     
2,410
 
Loan service fees
   
324
     
209
     
681
     
560
 
Total fee income
   
5,854
     
3,048
     
20,177
     
9,085
 
Other
   
433
     
248
     
1,160
     
1,186
 
Loss on sale of securities, net
    (672 )     (5,080 )     (591 )     (4,054 )
Loss on prepayment of borrowings, net
    (1,180 )    
-
      (1,180 )    
-
 
Loss on sale of loans, net
    (1,991 )    
-
      (1,991 )    
-
 
Total non-interest income
   
2,444
      (1,784 )    
17,575
     
6,217
 
Total net revenue
   
17,923
     
13,819
     
63,282
     
50,886
 
Provision for loan losses
   
390
     
6,185
     
1,240
     
7,075
 
Non-interest expense
                               
Salaries and employee benefits
   
7,891
     
6,001
     
24,632
     
17,412
 
Occupancy and equipment
   
2,418
     
1,885
     
7,289
     
5,638
 
Marketing, data processing, and professional services
   
2,260
     
1,632
     
6,323
     
4,857
 
Non-recurring expenses
   
1,606
     
-
     
1,758
     
385
 
Amortization of intangible assets
   
684
     
478
     
2,008
     
1,434
 
Other
   
1,730
     
1,357
     
5,092
     
4,490
 
Total non-interest expense
   
16,589
     
11,353
     
47,102
     
34,216
 
                                 
Income (loss) from continuing operations before income taxes
   
944
      (3,719 )    
14,940
     
9,595
 
Income tax expense (benefit)
   
-
      (1,466 )    
4,478
     
2,788
 
Net income (loss) from continuing operations
   
944
      (2,253 )    
10,462
     
6,807
 
                                 
Income from discontinued operations before income taxes
   
-
     
217
     
-
     
576
 
Income tax expense
   
-
     
84
     
-
     
222
 
Net income from discontinued operations
   
-
     
133
     
-
     
354
 
Net income (loss)
  $
944
    $ (2,120 )   $
10,462
    $
7,161
 
                                 
Basic earnings (loss) per share
                               
Continuing operations
  $
0.11
    $ (0.26 )   $
1.19
    $
0.80
 
Discontinued operations
   
-
     
0.01
     
-
     
0.04
 
Total
  $
0.11
    $ (0.25 )   $
1.19
    $
0.84
 
                                 
Diluted earnings (loss) per share
                               
Continuing operations
  $
0.10
    $ (0.26 )   $
1.17
    $
0.78
 
Discontinued operations
   
-
     
0.01
     
-
     
0.04
 
Total
  $
0.10
    $ (0.25 )   $
1.17
    $
0.82
 
Weighted average shares outstanding
                               
Basic
   
8,922
     
8,557
     
8,774
     
8,516
 
Diluted
   
9,045
     
8,557
     
8,921
     
8,775
 
                                 
See accompanying notes to consolidated financial statements.

4


BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

   
Nine Months Ended September 30,
 
(In thousands)
 
2007
   
2006
 
             
Total stockholders' equity at beginning of period
  $
258,161
    $
246,066
 
Comprehensive income:
               
Net income
   
10,462
     
7,161
 
Change in net unrealized gain on securities available-for-sale,
               
net of reclassification adjustments and tax effects
   
92
     
3,042
 
Net gain (loss) on derivative instruments
   
71
      (21 )
Total comprehensive income
   
10,625
     
10,182
 
Factory Point Bancorp, Inc.
   
63,423
     
-
 
Cash dividends declared ($0.43 per share in 2007 and $0.42 per share in 2006)
    (3,783 )     (3,617 )
Treasury stock purchased
    (554 )     (2,356 )
Forfeited restricted shares
    (995 )    
-
 
Exercise of stock options
   
1,623
     
2,761
 
Reissuance of treasury stock-other
   
1,722
     
1,608
 
Stock-based compensation from stock options
   
195
     
157
 
Tax benefit from stock compensation
   
615
     
574
 
Change in unearned compensation
    (386 )     (674 )
Total stockholders' equity at end of period
  $
330,646
    $
254,701
 
                 

See accompanying notes to consolidated financial statements.


5


BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Nine Months Ended September 30,
 
(In thousands)
 
2007
   
2006
 
Cash flows from operating activities:
           
Net income
  $
10,462
    $
7,161
 
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
   
1,240
     
7,075
 
Depreciation, amortization, and deferrals, net
   
4,754
     
639
 
Stock-based compensation
   
1,184
     
1,093
 
Excess tax benefits from stock-based payment arrangements       (615      (574
Increase in cash surrender value of bank-owned life insurance policies
    (789 )     (767 )
Net losses on sales of securities
   
591
     
4,054
 
Loss on prepayment of borrowings
   
1,180
     
-
 
Net losses on sales of loans
   
1,991
     
-
 
Net change in loans held for sale
   
-
     
2,093
 
Net change in other assets
   
175
      (6,192 )
Net change in other liabilities
    (1,015 )    
263
 
Net cash provided by continuing operating activities
   
19,158
     
14,845
 
Net cash provided by discontinued operating activities
   
-
     
576
 
Net cash provided by operating activities
   
19,158
     
15,421
 
                 
Cash flows from investing activities:
               
Acquisition of Factory Point Bancorp, Inc.
    (7,641 )    
-
 
Sales of securities available for sale
   
59,141
     
20,671
 
Proceeds from maturities, calls, and prepayments - securities available for sale
   
25,227
     
41,422
 
Purchases of securities available for sale
    (16,778 )     (14,351 )
Proceeds from maturities, calls, and prepayments - securities held to maturity
   
8,144
     
12,886
 
Purchases of securities held to maturity
    (10,159 )     (22,941 )
Increase in loans, net
    (8,534 )     (214,323 )
Capital expenditures
    (4,449 )     (4,288 )
Proceeds from sale of fixed assets
   
-
     
370
 
Total net cash provided (used) by investing activities
   
44,951
      (180,554 )
                 
Cash flows from financing activities:
               
Net increase in deposits
   
5,179
     
116,883
 
Proceeds from Federal Home Loan Bank ("FHLB") advances
   
93,293
     
257,014
 
Repayments of FHLB advances
    (167,585 )     (213,251 )
Proceeds from bank note
   
25,000
     
-
 
Repayment of bank note
    (15,000 )    
-
 
Treasury stock purchased
    (554 )     (2,356 )
Proceeds from reissuance of treasury stock
   
1,623
     
4,369
 
Excess tax benefits from stock-based payment arrangements
   
615
     
574
 
Cash dividends paid
    (3,783 )     (3,617 )
Net cash (used) provided by financing activities
    (61,212 )    
159,616
 
                 
Net change in cash and cash equivalents
   
2,897
      (5,517 )
Cash and cash equivalents at beginning of period
   
30,985
     
31,087
 
Cash and cash equivalents at end of period
  $
33,882
    $
25,570
 
                 
Supplemental cash flow information:
               
Interest paid on deposits
  $
36,416
    $
29,343
 
Interest paid on borrowed funds
   
13,722
     
11,838
 
Income taxes paid, net
   
5,492
     
1,627
 
                 
See accompanying notes to consolidated financial statements.

6



BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.           GENERAL

Basis of Presentation and Consolidation, and Use of Estimates
 
The consolidated financial statements include the accounts of Berkshire Hills Bancorp, Inc. ("Berkshire" or the "Company") and its wholly-owned subsidiaries: Berkshire Bank (the "Bank") and Berkshire Insurance Group, but exclude its wholly-owned subsidiary Berkshire Hills Capital Trust I, which is accounted for using the equity method.  The consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of the results which may be expected for the year.
 
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are susceptible to near-term changes include the determination of the allowance for loan losses, tax related assets and liabilities, and the carrying value of goodwill and other intangible assets.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2006.
 
On September 21, 2007, the Company acquired all of the outstanding common stock of Factory Point Bancorp, Inc., including its principal wholly-owned subsidiary, Factory Point National Bank of Manchester Center (see Note 2). Immediately after the completion of the acquisition, Factory Point National Bank of Manchester Center was merged into the Bank.
 
Business
 
Through its wholly-owned subsidiaries, the Company provides a variety of financial services to individuals, municipalities and businesses through its offices in Western Massachusetts, Southern Vermont and Northeastern New York. Its primary deposit products are checking, NOW, money market, savings, and time deposit accounts.  Its primary lending products are residential mortgage, commercial mortgage, commercial business loans and consumer loans. The Company offers electronic banking, cash management, and other transaction and reporting services. The Company offers wealth management services including trust, financial planning, and investment services. The Company is the agent for complete lines of property and casualty, life, disability, and health insurance.

 
7




BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Earnings Per Common Share
 
Earnings per common share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(In thousands, except per share data)
 
2007
   
2006
   
2007
   
2006
 
Net income (loss) applicable to common stock
  $
944
    $ (2,120 )   $
10,462
    $
7,161
 
                                 
Average number of common shares outstanding
   
9,023
     
8,657
     
8,869
     
8,616
 
Less: average number of unvested stock award shares
    (101 )     (100 )     (95 )     (100 )
Average number of basic shares outstanding
   
8,922
     
8,557
     
8,774
     
8,516
 
Plus: average number of unvested stock award shares
   
101
     
-
     
95
     
100
 
Plus: average number of dilutive stock options
   
22
     
-
     
52
     
159
 
Average number of diluted shares outstanding
   
9,045
     
8,557
     
8,921
     
8,775
 
                                 
Basic earnings (loss) per share
  $
0.11
    $ (0.25 )   $
1.19
    $
0.84
 
Diluted earnings (loss) per share
  $
0.10
    $ (0.25 )   $
1.17
    $
0.82
 
                                 
Recent Accounting Pronouncements
 
Statements of Financial Accounting Standards (“SFAS”)
 
SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company’s financial statements.
 
SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities.” SFAS 159 permits all entities to choose to elect to measure eligible financial instruments at fair value. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings. Eligible items include any recognized financial assets and liabilities with certain exceptions including but not limited to, deposit liabilities, investments in subsidiaries, and certain deferred compensation arrangements. The decision about whether to elect the fair value option is generally applied on an instrument by instrument basis, is generally irrevocable, and is applied only to an entire instrument and not to only specified risks, specific cash flows, or portions of that instrument. This Statement is effective as of the beginning of each reporting entity’s first fiscal year that begins after November 15, 2007. Management is currently analyzing the impact of making this election for any of the Company’s eligible financial assets or liabilities.
 
Financial Accounting Standards Board (“FASB”) Interpretation and Task Force Issue
 
FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109.”   The Company adopted the provisions of FIN 48 effective January 1, 2007.  FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.
 

8

 

BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. FIN 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Adoption of FIN 48 did not have a significant impact on the Company's financial statements.  The Company files income tax returns in the U.S. federal jurisdiction.  The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2004.  The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.
 
EITF No. 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-10 requires employers to recognize a liability for the post-retirement benefit related to collateral assignment split-dollar life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No. 12. EITF 06-10 also requires employers to recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The provisions of EITF 06-10 are effective for the Company on January 1, 2008, with earlier application permitted, and are to be applied as a change in accounting principle either through a cumulative-effect adjustment to retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption; or as a change in accounting principle through retrospective application to all prior periods. The Company is in the process of evaluating the potential impacts of adopting EITF 06-10 on its financial statements.
 

 

 

9


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
2.           MERGER WITH FACTORY POINT BANCORP, INC.

On September 21, 2007, the Company completed its acquisition of Factory Point Bancorp, Inc. and its subsidiary, Factory Point National Bank of Manchester Center, (collectively “Factory Point”) for $79.4 million, including the assumption of Factory Point stock options. Under the terms of the agreement, the Company issued 1,913,352 shares of the Company’s common stock and paid $16.0 million in cash in exchange for all outstanding Factory Point shares and stock options. Concurrent with the merger of Berkshire and Factory Point, the Bank and Factory Point National Bank merged with the Bank surviving.  The results of operations for Factory Point are included in our results subsequent to the acquisition date.
 
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as the date of acquisition. We are in the process of finalizing the purchase accounting for the acquisition; thus, the allocation of purchase price is subject to change.
 
(In thousands)
 
September 21, 2007
 
Assets
     
Cash and cash equivalents
  $
14,076
 
Investments
   
68,403
 
Loans, net
   
231,846
 
Premises and equipment, net
   
7,509
 
Cash surrender value of life insurance policies
   
3,900
 
Goodwill
   
53,385
 
Intangible assets
   
7,092
 
Other assets
   
4,521
 
Total assets acquired
  $
390,732
 
         
Liabilities
       
Deposits
  $
269,027
 
Borrowings
   
34,202
 
Other liabilities
   
2,363
 
Total liabilities assumed
  $
305,592
 
         
Net assets acquired
  $
85,140
 

The $7.1 million of acquired intangible assets was assigned to the core deposit premium intangible, subject to amortization. The core deposit premiums are being amortized over their estimated useful life of eight years using an accelerated method. The goodwill recognized in the acquisition of approximately $53.4 million is not expected to be deductible for tax purposes.
 
The Company’s cost to acquire Factory Point is as follows:
 
(In thousands)
     
Cash paid to Factory Point stockholders
  $
16,015
 
Common stock issued to Factory Point stockholders and stock options assumed
   
63,423
 
Total consideration
   
79,438
 
         
Professional fees and other acquisition costs
   
5,702
 
Net assets acquired
  $
85,140
 



10



BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pro Forma Financial Information

The unaudited pro forma financial information assumes that the Factory Point acquisition was consummated on January 1 of the periods presented. The pro forma adjustments are based on information available and certain assumptions that we believe are reasonable. Certain acquisition related adjustments are not included in the pro forma information since they were recorded after completion of the acquisition.  This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of future operations that would have been achieved had the acquisition taken place at the beginning of 2006. Pro forma information is as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands, except per share data)
 
2007
   
2006
   
2007
   
2006
 
Interest income
  $
37,558
    $
36,648
    $
111,533
    $
101,557
 
Interest expense
   
19,325
     
18,045
     
57,250
     
47,909
 
Net interest income
   
18,233
     
18,603
     
54,283
     
53,648
 
Provision for loan losses
   
930
     
6,185
     
1,780
     
7,465
 
Net interest income after provision for loan losses
   
17,303
     
12,418
     
52,503
     
46,183
 
Non-interest income
   
3,217
      (823 )    
20,123
     
9,028
 
Non-interest expense
   
20,780
     
13,833
     
56,528
     
41,553
 
(Loss) income before income taxes
    (260 )     (2,238 )    
16,098
     
13,658
 
Income tax (benefit) expense
    (196 )     (1,122 )    
4,786
     
3,752
 
Net (loss) income
  $ (64 )   $ (1,116 )   $
11,312
    $
9,906
 
                                 
Basic earnings (loss) per share
  $ (0.01 )   $ (0.11 )   $
1.06
    $
0.95
 
Diluted earnings (loss) per share
  $ (0.01 )   $ (0.10 )   $
1.04
    $
0.92
 
                                 

 


11


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.           SECURITIES

A summary of securities follows:
 
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
 
September 30, 2007
           
Securities Available for Sale
           
Debt securities:
           
U.S. Government agencies
  $
4,656
    $
4,657
 
Municipal bonds and obligations
   
66,522
     
66,586
 
Mortgage-backed securities, other
   
85,915
     
86,070
 
Other bonds and obligations
   
12,953
     
12,960
 
Total debt securities
   
170,046
     
170,273
 
Equity securities:
               
Federal Home Loan Bank stock
   
21,077
     
21,077
 
Other equity securities
   
2,387
     
3,024
 
Total equity securities
   
23,464
     
24,101
 
Total securities available for sale
   
193,510
     
194,374
 
                 
Securities Held to Maturity
               
Municipal bonds and obligations
   
38,644
     
38,643
 
Mortgage-backed securities
   
3,334
     
3,293
 
Total securities held to maturity
   
41,978
     
41,936
 
Total securities
  $
235,488
    $
236,310
 

                 
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
 
December 31, 2006
               
Securities Available for Sale
               
Debt securities:
               
Municipal bonds and obligations
  $
63,788
    $
64,503
 
Mortgage-backed securities
   
85,102
     
84,334
 
Other bonds and obligations
   
20,392
     
20,439
 
Total debt securities
   
169,282
     
169,276
 
Equity securities:
               
Federal Home Loan Bank stock
   
21,766
     
21,766
 
Other equity securities
   
2,921
     
3,164
 
Total equity securities
   
24,687
     
24,930
 
Total securities available for sale
   
193,969
     
194,206
 
                 
Securities Held to Maturity
               
Municipal bonds and obligations
   
35,572
     
35,286
 
Mortgage-backed securities
   
4,396
     
4,400
 
Total securities held to maturity
   
39,968
     
39,686
 
Total securities
  $
233,937
    $
233,892
 
 

12



BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.           LOANS

Loans consisted of the following:
 
   
September 30, 2007
   
December 31, 2006
 
(Dollars in thousands)
 
Balance
   
Balance
 
Residential mortgages:
           
1 - 4 Family
  $
611,817
    $
566,951
 
Construction
   
46,777
     
32,322
 
Total residential mortgages
   
658,594
     
599,273
 
                 
Commercial mortgages:
               
Construction
   
146,963
     
129,798
 
Single and multi-family
   
61,126
     
64,619
 
Other commercial mortgages
   
486,561
     
372,657
 
Total commercial mortgages
   
694,650
     
567,074
 
                 
Commercial business loans
   
203,594
     
189,758
 
Total commercial loans
   
898,244
     
756,832
 
                 
Consumer loans:
               
Auto
   
207,800
     
195,912
 
Home equity and other
   
173,888
     
146,970
 
Total consumer loans
   
381,688
     
342,882
 
Total loans
  $
1,938,526
    $
1,698,987
 
                 

 
5.           LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses was as follows:
 
   
Nine Months Ended September 30,
 
(In thousands)
 
2007
   
2006
 
Balance at beginning of period
  $
19,370
    $
13,001
 
Provision for loan losses
   
1,240
     
7,075
 
Allowance attributed to acquired loans
   
4,453
     
-
 
Reclassification of commitment reserve to other liabilites
   
-
      (425 )
Loans charged-off
    (3,259 )     (1,022 )
Recoveries
   
304
     
524
 
Balance at end of period
  $
22,108
    $
19,153
 
                 


13



BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.           DEPOSITS

A summary of period end time deposits is as follows:
             
   
September 30, 2007
   
December 31, 2006
 
(Dollars in thousands)
 
Balance
   
Balance
 
Time less than $100,000
  $
423,589
    $
369,325
 
Time $100,000 or more
   
309,604
     
280,308
 
Brokered time
   
26,578
     
41,741
 
Total time deposits
  $
759,771
    $
691,374
 


7.           REGULATORY CAPITAL

The Bank’s actual and required capital ratios were as follows:
                 
FDIC Minimum 
 
September 30, 2007
 
December 31, 2006
 
to be Well Capitalized
                       
Total capital to risk weighted assets
 
       10.5
%
   
        10.3
%
   
        10.0
 %
                       
Tier 1 capital to risk weighted assets
 
         9.4
     
          9.1
     
          6.0
 
                       
Tier 1 capital to average assets
 
         9.1
     
          7.7
     
          5.0
 

At each date shown, Berkshire Bank met the conditions required to be classified as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.


8.           STOCK-BASED COMPENSATION PLANS

A combined summary of activity in the Company’s stock award and stock option plans for the nine months ended September 30, 2007 is presented in the following table:
 
   
Non-vested Stock Awards
Outstanding
   
Stock Options Outstanding
 
         
Weighted-
         
Weighted-
 
         
Average
         
Average
 
   
Number of
   
Grant Date
   
Number of
   
Exercise
 
(Shares in thousands)
 
Shares
   
Fair Value
   
Shares
   
Price
 
Balance, December 31, 2006
   
127
    $
30.02
     
586
    $
20.62
 
Granted
   
56
     
33.44
     
20
     
33.46
 
Acquired from Factory Point
   
-
     
-
     
172
     
20.43
 
Stock options exercised
   
-
     
-
      (100 )    
16.19
 
Stock awards vested
    (41 )    
30.80
     
-
     
-
 
Forfeited
    (41 )    
27.15
      (2 )    
22.30
 
Balance, September 30, 2007
   
101
    $
32.75
     
676
    $
21.60
 
                                 
During the nine months ended September 30, 2007 and 2006, proceeds from stock option exercises totaled $1.6 million and $2.8 million, respectively. During the nine months ended September 30, 2007, there were 156,000 shares issued in connection with stock option exercises and non-vested stock awards.  All of these shares were issued from available treasury stock.  There were 172,000 stock options assumed from Factory Point for a total value of $2.1 million.  Stock-based compensation expense totaled $1.2 million and $1.1 million during the nine months ended September 30, 2007 and 2006. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.
 

14



 
BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.           OPERATING SEGMENTS

The Company has two reportable operating segments, Banking and Insurance, which are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp.  Banking includes the activities of Berkshire Bank and its subsidiaries, which provide commercial and consumer banking services.  Insurance includes the activities of Berkshire Insurance Group, which provides commercial and consumer insurance services.  The only other consolidated financial activity of the Company is the Parent, which consists of the transactions of Berkshire Hills Bancorp.  There are no income statement eliminations.  The total consolidated average assets are net of eliminations of $288 million and $264 million for the three months ended September 30, 2007 and 2006, respectively and $272 million and $284 million for the nine months ended September 30, 2007 and 2006, respectively.

The accounting policies of each reportable segment are the same as those of the Company.  The Insurance segment and the Parent reimburse the Bank for administrative services provided to them.  Income tax expense for the individual segments is calculated based on the activity of the segments, and the Parent records the tax expense or benefit necessary to reconcile to the consolidated total.  The Parent does not allocate capital costs.  Average assets include securities available-for-sale based on amortized cost.

A summary of the Company’s operating segments was as follows:
                         
                     
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Consolidated
 
 Three Months Ended September 30, 2007
                       
 Net interest income
  $
15,972
    $
-
    $ (493 )   $
15,479
 
 Provision for loan losses
   
390
     
-
     
-
     
390
 
 Net interest income after provision for loan losses
   
15,582
     
-
      (493 )    
15,089
 
 Non-interest income
    (263 )    
2,707
     
-
     
2,444
 
 Non-interest expense
   
13,773
     
2,600
     
216
     
16,589
 
 Income (loss) from continuing operations before income taxes
   
1,546
     
107
      (709 )    
944
 
 Income tax expense (benefit)
   
204
     
44
      (248 )    
-
 
 Net income (loss)
  $
1,342
    $
63
    $ (461 )   $
944
 
                                 
 Average assets (in millions)
  $
2,171
    $
32
    $
298
    $
2,213
 

                           
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Consolidated
 
 Three Months Ended September 30, 2006
                               
 Net interest income
  $
15,876
    $
-
    $ (273 )   $
15,603
 
 Provision for loan losses
   
6,185
     
-
     
-
     
6,185
 
 Net interest income after provision for loan losses
   
9,691
     
-
      (273 )    
9,418
 
 Non-interest income
    (2,419 )    
635
     
-
      (1,784 )
 Non-interest expense
   
10,721
     
524
     
108
     
11,353
 
 (Loss) income from continuing operations before income taxes
    (3,449 )    
111
      (381 )     (3,719 )
 Income tax (benefit) expense
    (1,379 )    
46
      (133 )     (1,466 )
 Net (loss) income from continuing operations
    (2,070 )    
65
      (248 )     (2,253 )
 Net income from discontinued operations
   
-
     
-
     
133
     
133
 
 Net (loss) income
  $ (2,070 )   $
65
    $ (115 )   $ (2,120 )
                                 
 Average assets (in millions)
  $
2,177
    $
5
    $
265
    $
2,183
 
                                 


15




BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.           OPERATING SEGMENTS (continued)

                         
                     
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Consolidated
 
 Nine Months Ended September 30, 2007
                       
 Net interest income
  $
47,197
    $
-
    $ (1,490 )   $
45,707
 
 Provision for loan losses
   
1,240
     
-
     
-
     
1,240
 
 Net interest income after provision for loan losses
   
45,957
     
-
      (1,490 )    
44,467
 
 Non-interest income
   
5,938
     
11,561
     
76
     
17,575
 
 Non-interest expense
   
38,836
     
7,681
     
585
     
47,102
 
 Income (loss) before income taxes
   
13,059
     
3,880
      (1,999 )    
14,940
 
 Income tax expense (benefit)
   
3,587
     
1,591
      (700 )    
4,478
 
 Net income (loss)
  $
9,472
    $
2,289
    $ (1,299 )   $
10,462
 
                                 
 Average assets (in millions)
  $
2,148
    $
32
    $
277
    $
2,185
 

                                 
                           
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Consolidated
 
 Nine Months Ended September 30, 2006
                               
 Net interest income
  $
45,443
    $
-
    $ (774 )   $
44,669
 
 Provision for loan losses
   
7,075
     
-
     
-
     
7,075
 
 Net interest income after provision for loan losses
   
38,368
     
-
      (774 )    
37,594
 
 Non-interest income
   
4,089
     
2,128
     
-
     
6,217
 
 Non-interest expense
   
32,237
     
1,497
     
482
     
34,216
 
 Income (loss) from continuing operations before income taxes
   
10,220
     
631
      (1,256