LEGC Legacy Bancorp, Inc. (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		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

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

COMMISSION FILE NUMBER : 000-51525

LEGACY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-3135053
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

99 NORTH STREET
PITTSFIELD, MASSACHUSETTS 01201
(Address of principal executive offices) (Zip Code)

(413) 443-4421
(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act: Common Stock ($0.01 par value per share)
Securities registered pursuant to section 12(g) of the Act: None

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 þ       No o

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 12(b)-2 of the Exchange Act.

Large accelerated filer o       Accelerated Filer þ       Non-accelerated filer o

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

The number of shares of Common Stock outstanding as of November 2, 2007 was 9,457,926 .

 

 

LEGACY BANCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page No.
Part I — Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006			2
Consolidated Statements of Income for the three months ended September 30, 2007 and 2006 and the nine months ended September 30, 2007 and 2006			3
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2007 and 2006			4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006			5
Notes to Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			8
Item 3 Quantitative and Qualitative Disclosures about Market Risks			20
Item 4 Controls and Procedures			21
Part II — Other Information
Item 1 Legal Proceedings			21
Item 1A Risk Factors			21
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3 Defaults Upon Senior Securities			22
Item 4 Submission of Matters to a Vote of Security Holders			22
Item 5 Other Information			22
Item 6 Exhibits			23
EX-31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) of J. Williar Dunlaevy
EX-31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a) of Stephen M. Conley
EX-32 Certification pursuant to 18 U.S.C. Section 1350 CEO & CFO

PART I — FINANCIAL INFORMATION

See accompanying notes to unaudited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

(continued)

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

LEGACY BANCORP AND SUBSIDIARIES

In February 2007, the FASB issued Statement of financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”  (“SFAS 159”).  This Statement provides companies with an option to report selected financial assets and liabilities at fair value.  The Standard’s objective is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.  This Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  Early adoption is permitted if the Company makes the choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157.  The Company did not elect early adoption of SFAS 159 nor does it expect SFAS 159 to have a material impact on the Company’s consolidated financial statements.

3. Earnings Per Share

Basic earnings per share is determined by dividing net income by the weighted-average number of net outstanding common shares for the period. The net outstanding common shares equals the gross number of common shares issued less unallocated shares of the Legacy Banks Employee Stock Ownership Plan (“ESOP”), the average number of treasury shares and the number of unvested shares related to restricted stock awards. Diluted earnings per share is determined by dividing net income by the average number of net outstanding common shares computed as if all potential common shares have been issued by the Company. Potential common shares to be issued would include those related to outstanding options and unvested stock awards. Earnings per common share have been computed as follows:

4. Dividends

On September 5, 2007, the Company declared a cash dividend of $0.04 per common share which was paid on October 1, 2007 to shareholders of record as of the close of business on September 20, 2007.

5. Loan Commitments and other Contingencies

Outstanding loan commitments and other contingencies totaled $146.8 million at September 30, 2007, compared to $129.0 million as of December 31, 2006. Loan commitments and other contingencies primarily consist of commitments to originate new loans as well as the outstanding unused portions of home equity and other lines of credit.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis discusses the changes in financial position and results of operations of Legacy Bancorp, Inc. and subsidiaries, and should be read in conjunction with both the unaudited consolidated interim financial statements and the notes thereto, appearing in Part I, Item 1 of this report, as well as the “Management’s Discussion and Analysis” section included in the Company’s most recent Securities and Exchange Commission Form 10-K filed by the Company for the year ended December 31, 2006.

Forward-Looking Statements

Certain statements herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe”, “expect”, “anticipate”, “estimate”, and “intend” or future or conditional verbs such as “will”, “would”, “should”, “could”, or “may”. Certain factors that could cause actual results to differ materially from expected results include changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the businesses in which the Company is engaged and changes in the securities market. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. We consider the following to be critical accounting policies:

Allowance for Loan Losses. The determination of the allowance for loan losses is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance is evaluated on a regular basis by management and is based on a periodic review of the collectibility of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated value of any underlying collateral and prevailing economic conditions.

Income Taxes. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance related to deferred tax assets is established when, in management’s judgment, it is more likely than not that all or a portion of such deferred tax assets will not be realized.

This discussion has highlighted those accounting policies that management considers to be critical; however all accounting policies are important, and therefore you are encouraged to review each of the policies included in Note 1 to the consolidated financial statements in the most recent Securities and Exchange Commission Form 10-K of Legacy Bancorp, Inc., to gain a better understanding of how our financial performance is measured and reported.

Comparison of Financial Condition at September 30, 2007 and December 31, 2006

Overview: Total assets increased by $50.1 million, or 6.2%, from $808.3 million at December 31, 2006 to $858.4 million at September 30, 2007. This increase was due primarily to growth in the net loan portfolio, excluding loans held for sale, of $51.6 million, or 8.9% to $630.4 million at September 30, 2007. Additionally the Bank’s investment in bank-owned life insurance increased to $14.6 million as of September 30, 2007 from $4.4 million at December 31, 2006. Offsetting these increases was a decrease in securities and other investments of $16.7 million, or 9.5%, as discussed further below. 

Investment Activities : Cash and short term investments increased by $2.5 million, or 11.4%, from $21.6 million at December 31, 2006 to $24.1 million at September 30, 2007. Securities and other investments decreased $16.7 million, or 9.5%, from $176.1 million at December 31, 2006 to $159.4 million at September 30, 2007 as cash flow was utilized to partially fund loan growth, the $9.8 million purchase of bank-owned life insurance, and the repurchase of the Company’s common shares as outlined in Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds . The decreases in securities occurred primarily in government-sponsored enterprises and mortgage-backed securities. At September 30, 2007, the Company’s available-for-sale portfolio amounted to $144.3 million, or 16.8% of total assets. The following table sets forth at the dates indicated information regarding the amortized cost and fair values of the Company’s investment securities.

Lending Activities: Total net loans, excluding loans held for sale, at September 30, 2007 were $630.4 million, an increase of $51.6 million or 8.9%, from $578.8 million at December 31, 2006. The following table sets forth the composition of the Bank’s loan portfolio (not including loans held for sale) in dollar amounts and as a percentage of the respective portfolio at the dates indicated.

Residential mortgages increased $22.0 million, or 6.8% from $325.4 million at December 31, 2006 to $347.4 million at September 30, 2007, while commercial real estate and commercial other loans increased $25.5 million, or 13.1% from $193.9 million at December 31, 2006 to $219.4 million at September 30, 2007. The Company has been very encouraged by the activity in its loan production office which opened in September 2006 in the Albany-Troy-Schenectady, New York market and contributed to the growth in the first nine months of 2007.

Non-performing Assets: The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. No interest income from these loans was recorded in net income for the three and nine month periods ended September 30, 2007 while they were on non-accrual status. If the non-accrual loans had been current, the gross interest income that would have been recorded is equal to approximately $21,000 and $62,000 for the three and nine month period ended September 30, 2007. The Bank had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven or the loans have been modified at an interest rate less than current market rates) at September 30, 2007 and five troubled debt restructurings, all to one borrower, totaling approximately $943,000 December 31, 2006. The interest income recorded from these loans amounted to approximately $16,000 and $60,000 for the three and nine month periods ended September 30, 2007, respectively.

Allowance for Loan Losses : In originating loans, the Bank recognizes that losses will be experienced on loans and that the risk of loss will vary with many factors, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan over the term of the loan. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio, and as such, this allowance represents management’s best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, portfolio volume and mix, geographic and large borrower concentrations, estimated credit losses based on internal and independent external portfolio reviews, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated, general and unallocated components. The allocated component relates to loans that are classified as either doubtful, substandard or special mention and are also classified as impaired. For such loans, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of the loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the original 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. Impaired loans are generally maintained on a non-accrual basis. Impairment is measured on a loan-by-loan basis for commercial loans and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank generally does not separately identify individual consumer and residential loans for impairment disclosures. At September 30, 2007, impaired loans totaled $2.6 million with a corresponding specific reserve allowance of $357,000.

While the Bank believes that it has established adequate allocated and general allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Bank’s regulators periodically review the allowance for loan losses. These regulatory agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination, thereby negatively affecting the Bank’s financial condition and earnings. The following table sets forth activity in the Bank’s allowance for loan losses for the periods indicated:

Deposits : The following table sets forth the Bank’s deposit accounts (excluding escrow deposits) for the periods indicated:

Deposits increased $22.6 million or 4.4% from $518.2 million at December 31, 2006 to $540.9 million at September 30, 2007 driven by certificate of deposit (CDs) specials and new customer relationships related to the new branch openings in Great Barrington and North Adams, Massachusetts. As a result, total CDs increased $15.6 million, or 6.8% from $227.9 million at December 31, 2006 to $243.4 million at September 20, 2007. Other increases in Relationship Savings and certain money market accounts were offset somewhat by a decrease in regular savings and NOW accounts.

Borrowings include borrowings from the Federal Home Loan Bank of Boston (FHLBB) as well as securities sold under agreements to repurchase, and have increased $38.8 million, or 29.2%, to $171.8 million at September 30, 2007. This increase has been due to the Bank taking advantage of some lower cost FHLBB specials, as well as the borrowing of very short term funds to partially fund loan growth. These shorter term borrowings have a maturity schedule established in anticipation of the inflow of deposits as a result of the pending acquisition of five branches in New York State from First Niagara Bank, expected to close on December 7, 2007.

Stockholders’ Equity decreased by $12.7 million, or 8.5% during the first three quarters of 2007 primarily due to the repurchase of stock. During the first quarter of 2007, the Company purchased 412,344 shares of Company stock at an average price of $16.15 per share in order to fund the restricted stock portion of the 2006 Equity Incentive Plan. Additionally the Company purchased 515,430 shares at an average price of $14.62 during the second and third quarters of 2007 as part of a stock repurchase program announced in April and completed in August 2007. More recently the Company purchased 144,500 shares at an average price of $14.03 during the third quarter of 2007 as part of a stock repurchase program announced in August 2007. Total equity was positively impacted by a contribution of $1.7 million from net income and the amortization of unearned compensation. These increases to equity were offset somewhat by the declaration of a dividend of $0.04 per share during each of the first three quarters of 2007, which had the effect of decreasing stockholders’ equity by $1.1 million.

Comparison of Operating Results for the Three Months Ended September 30, 2007 and 2006

Net income for the three months ended September 30, 2007 was $520,000, a decrease of $783,000, or 60.1% from $1.3 million for the same period in 2006. This decrease was primarily due to an increase in non interest expenses of $1.5 million as compared to the three months ended September 30, 2006 as well as an increase in the loan loss provision of $255,000, offset somewhat by an increase in non-interest income of $369,000 as well as a decrease in tax provision of $489,000. All of these changes are discussed below.

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. The Bank does not accrue interest on loans on non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields.