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BHLB > SEC Filings for BHLB > Form 10-Q on 9-Nov-2012All Recent SEC Filings




Quarterly Report



Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company's consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2011 Annual Report on Form 10-K. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the year 2012 or any future period. In management's discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. Tax-equivalent adjustments are the result of increasing income from tax-advantaged securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 40.2% marginal effective income tax rate. In the discussion, references to earnings per share refer to diluted earnings per share unless otherwise specified.

Berkshire Hills Bancorp (the "Company" or "Berkshire") is headquartered in Pittsfield, Massachusetts. It had $4.6 billion in assets at September 30, 2012 and is the parent of Berkshire Bank - America's Most Exciting BankSM (the "Bank"). On April 20, 2012, Berkshire completed the acquisition of CBT - The Connecticut Bank and Trust Company, headquartered in Hartford, Connecticut. On April 30, 2012, Berkshire acquired the net assets and operations of Greenpark Mortgage, headquartered in Needham, Massachusetts. Berkshire's operations and financial condition in this report include the impacts of these acquisitions. On October 19, 2012, Berkshire completed the acquisition of Beacon Federal Bancorp, headquartered in East Syracuse, New York. The Beacon impact will be recorded in the fourth quarter and is not included in the operations and financial condition in this report. Including Beacon, Berkshire has about $5.5 billion in assets. It provides personal and business banking, insurance, and wealth management services through 73 full service branch offices in Western Massachusetts, Central and Eastern New York, North Central Connecticut, and Southern Vermont. Berkshire also operates 10 lending offices for commercial and residential mortgage originations in central and eastern Massachusetts. The Company also has two former Beacon branch offices held for sale in Tennessee. Berkshire Bank provides 100% deposit insurance protection on all deposit accounts, regardless of amount, based on a combination of FDIC insurance and membership in the Depositors Insurance Fund (DIF). For more information, visit or call 800-773-5601.

Berkshire is a regional financial services company that seeks to distinguish itself based on the following attributes:

          Strong growth from organic, de novo, product and acquisition

          Positive operating leverage elevating long term profitability

          Solid capital, core funding and risk management culture

          Experienced executive team focused on earnings and stockholder value

          Distinctive brand and culture as America's Most Exciting BankSM

          Diversified integrated financial service revenues

          Positioned to be regional consolidator in attractive markets

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Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. One can identify these statements from the use of the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions.

Factors that could cause the results to differ materially from those described in the forward looking statements include, but are not limited to, statements that can be found in the filings made by Berkshire with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2011, the proxy statement/prospectus filed pursuant to Rule 424(b)(3) on August 6, 2012, and the Risk Factors in Item 1A of this report. Because of these and other uncertainties, Berkshire's actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, Berkshire's past results of operations do not necessarily indicate Berkshire's combined future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. Berkshire is not undertaking an obligation to update these forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Berkshire qualifies all of its forward-looking statements by these cautionary statements.


This discussion is intended to assist in understanding the financial condition and results of operations of the Company. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report.


The Company's significant accounting policies are described in Note 1 to the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Please see those policies in conjunction with this discussion. Management believes that the following policies would be considered critical under the SEC's definition:

Allowance for Loan Losses. The allowance for loan losses is the Company's estimate of probable credit losses in the loan portfolio at the financial statement date. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although management believes that it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. Conditions in the local economy and real estate values could require the Company to increase provisions for loan losses, which would negatively impact earnings.

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Acquired Loans. Due to recent bank acquisitions, the Company added a significant accounting policy related to acquired loans. Loans that the Company acquired 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 initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Company estimates the fair value of the underlying collateral of the loans. These values are discounted 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.

Income Taxes. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years' taxable income, to which "carry back" refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. In determining the valuation allowance, the Company uses historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carry-forward periods, tax planning opportunities and other relevant considerations. These underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination is made.

Goodwill and Identifiable Intangible Assets. Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and market multiples analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

Determination of Other-Than-Temporary Impairment of Securities. The Company evaluates debt and equity securities within the Company's available for sale and held to maturity portfolios for other-than-temporary impairment ("OTTI"), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is "more likely than not" that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, 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 on marketable equity securities is recognized immediately through earnings. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

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Fair Value of Financial Instruments. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.

For additional information regarding critical accounting policies, refer to Note
1 - Summary of Significant Accounting Policies in the notes to consolidated financial statements and the sections captioned "Critical Accounting Policies" and "Loan Loss Allowance" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2011 Form 10-K. There have been no significant changes in the Company's application of critical accounting policies since year-end 2011. Please refer to the note on Recent Accounting Pronouncements in Note 2 to the consolidated financial statements of this report for a detailed discussion of new accounting pronouncements. Please also see Note 1 in the consolidated financial statements for Election of the Use of the Fair Value Option.


The following summary data is based in part on the consolidated financial statements and accompanying notes, and other information appearing elsewhere in this Form 10-Q.

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                                           At or for the Three Months Ended          At or for the Nine Months Ended
                                                     September 30,                            September 30,
                                              2012                  2011                 2012                2011

Net earnings, diluted                   $            0.46     $            0.22    $            1.10    $          0.54
Total common book value                             26.60                 25.87                26.60              25.87
Dividends                                            0.17                  0.16                 0.51               0.48
Common stock price:
High                                                23.66                 24.14                24.49              24.14
Low                                                 21.19                 17.11                20.15              17.11
Close                                               22.88                 18.47                22.88              18.47

Return on average assets                             0.88 %                0.45 %               0.73 %             0.36 %
Return on average common equity                      6.89                  3.31                 5.57               2.62
Net interest margin, fully taxable
equivalent                                           3.50                  3.74                 3.62               3.52
Fee income/Net interest and fee
income                                              28.35                 22.20                25.91              25.07

Net charge-offs (current period
annualized)/average loans                            0.27 %                0.27 %               0.25 %             0.27 %
Allowance for loan losses/total
loans                                                0.97                  1.07                 0.97               1.07

Stockholders' equity to total assets                12.75 %               13.38 %              12.75 %            13.38 %

FINANCIAL DATA: (In millions)
Total assets                            $           4,634     $           4,087    $           4,634    $         4,087
Total loans                                         3,418                 2,955                3,418              2,955
Allowance for loan losses                              33                    32                   33                 32
Other earning assets                                  722                   603                  722                603
Total intangible assets                               239                   233                  239                233
Total deposits                                      3,450                 3,038                3,450              3,038
Total borrowings and debentures                       537                   237                  537                237
Total common stockholders' equity                     591                   547                  591                547

FOR THE PERIOD: (In thousands)
Net interest income                     $          35,225     $          31,038    $         101,423    $        75,385
Non-interest income                                14,313                10,674               36,403             26,978
Provision for loan losses                           2,500                 2,200                6,750              5,300
Non-interest expense                               32,162                34,710               96,540             86,522
Net income                                         10,029                 4,392               23,859              9,104

(1) All performance ratios are annualized and are based on average balance sheet amounts, where applicable.

(2) Ratio calculations related to loans and deposits of discontinued operations have not been reclassified on the above schedule.

(3) Generally accepted accounting principles require that loans acquired in a business combination be recorded at fair value, whereas loans from business activities are recorded at cost. The fair value of loans acquired in a business combination includes expected loan losses, and there is no loan loss allowance recorded for these loans at the time of acquisition. Accordingly, the ratio of the loan loss allowance to total loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally reduced for loans acquired in a business combination since these loans are recorded net of expected loan losses. Therefore, the ratio of net loan charge-offs to average loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Other institutions may have loans acquired in a business combination, and therefore there may be no direct comparability of these ratios between and among other institutions.

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The following table presents average balances and an analysis of average rates
and yields on an annualized fully taxable equivalent basis for the periods

                                  Three Months Ended September 30,                        Nine Months Ended September 30,
                                  2012                        2011                        2012                        2011
                         Average     Yield/Rate      Average     Yield/Rate      Average     Yield/Rate      Average     Yield/Rate
($ In millions)          Balance     (FTE basis)     Balance     (FTE basis)     Balance     (FTE basis)     Balance     (FTE basis)
mortgages               $   1,208           4.28 %  $   1,005           4.82 %  $   1,154           4.47 %  $     819           4.95 %
Commercial loans            1,823           4.85        1,524           5.27        1,711           4.95        1,348           4.90
Consumer loans                368           3.97          377           4.17          370           3.98          323           3.92
Total loans                 3,399           4.62        2,906           4.97        3,235           4.66        2,490           4.79
Securities                    559           3.02          474           3.53          544           3.21          428           3.87
investments and
loans held for sale           116           2.15           34           0.03           51           2.15           17           0.11
Total earning assets        4,074           4.27        3,414           4.72        3,830           4.38        2,935           4.63
Other assets                  498                         456                         472                         385
Total assets            $   4,572                   $   3,870                   $   4,302                   $   3,320

Liabilities and
stockholders' equity
NOW                     $     291           0.28 %  $     257           0.49 %  $     287           0.28 %  $     234           0.38 %
Money market                1,171           0.47          853           0.66        1,131           0.50          792           0.70
Savings                       376           0.18          476           0.18          369           0.19          343           0.25
Time                        1,039           1.48        1,030           1.67        1,020           1.48          859           1.95
deposits                    2,877           0.78        2,616           0.95        2,807           0.79        2,228           1.08
Borrowings and
debentures                    531           1.70          253           3.34          397           2.17          251           3.35
liabilities                 3,408           0.92        2,869           1.16        3,204           0.96        2,479           1.31
demand deposits               538                         432                         493                         353
Other liabilities              43                          38                          36                          30
Total liabilities           3,989                       3,339                       3,733                       2,862

Total stockholders'
equity                        583                         531                         569                         458
Total liabilities
and stockholders'
equity                  $   4,572                   $   3,870                   $   4,302                   $   3,320

Net interest spread                         3.35 %                      3.56 %                      3.42 %                      3.32 %
Net interest margin                         3.50                        3.74                        3.62                        3.52
Cost of funds                               0.80                        1.01                        0.84                        1.15
Cost of deposits                            0.66                        0.82                        0.68                        0.93

Supplementary data
Total deposits (In
millions)               $   3,416                   $   3,048                   $   3,300                   $   2,582
Fully taxable
equivalent income
adj. (In thousands)     $     623                   $     673                   $   1,930                   $   2,027

(1) The average balances of loans include nonaccrual loans and deferred fees and costs.

(2) The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.

(3) The above schedule includes yields associated with discontinued operations, although the related income is excluded from income from continuing operations on the income statement. The above schedule includes balances associated with discontinued operations in loans and deposits.

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During the third quarter and first nine months of 2012, Berkshire recorded significant growth in loans, deposits, revenues, and earnings as a result of its initiatives to build its franchise. There was general improvement of profitability, and measures of capital, asset quality, and liquidity remained favorable. Improvement has been realized in areas where Berkshire has been investing for growth, including commercial banking and regional expansion in Central/Eastern New York, Northern Connecticut, and Central/Eastern Massachusetts. Major third quarter business achievements included:

Ongoing organic growth of loans and deposits, including 38% annualized growth in commercial business loans and 19% annualized growth in demand deposit balances.

. . .

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