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01.29.2009

Legacy Bancorp, Inc. Reports Results for Quarter

and Year Ended December 31, 2008

PITTSFIELD, MASSACHUSETTS (January 29, 2009): Legacy Bancorp, Inc. (the “Company” or “Legacy”) (NASDAQ: LEGC), the holding company for Legacy Banks (the “Bank”), today reported a net loss of $451,000, or $0.06 per diluted share for the quarter ended December 31, 2008, which represents an improvement of $43,000 from a net loss of $494,000 in the fourth quarter of 2007. Year to date, the Company has generated net income of $1.4 million, or $0.18 per diluted share, an increase of $199,000 from 2007. The loss in the quarter was primarily the result of an other-than-temporary impairment (OTTI) charge of $2.3 million related to the writedown of certain investment securities owned by the Bank, as well as a provision for loan losses in the amount of $890,000. The book value per share and tangible book value per share were $14.14 and $12.74, respectively, at December 31, 2008.

 

J. Williar Dunlaevy, Chief Executive Officer, commented “Although we are reporting a loss for the fourth quarter of 2008, we are also pleased to be able to report a small increase in earnings for all of 2008 in comparison with 2007. These are solid results, particularly in the midst of the worst economic crisis in the last 70 years. 2008 earnings are up 16% compared with 2007 and earnings per share for 2008 are up 29% compared with 2007. The comparison for underlying core earnings is even more impressive with a near 100% increase for 2008 in comparison with 2007. The driving factors behind our improved financial performance are that we have been successful in increasing the net interest margin throughout the year and also have controlled the increase of operating expenses.

“In spite of the difficult economic environment resulting from the mortgage and investment banking crisis and the global economic recession, our earnings, asset quality, and capital position are strengths that distinguish Legacy. Our capital level, $124 million and 13.1% of assets, is well beyond the regulatory definition of ‘well capitalized’. This financial strength will continue to be the foundation of our operations and our continued expansion. While we are sensitive to the economic challenges of the day, we continue to make loans to individuals and businesses in our communities, just as the bank has for over 170 years. It also is for these reasons that last week we announced that we would decline to participate in the U.S. Treasury Capital Purchase Program (TARP) for which the Company had received preliminary approval earlier this month.

 

“Earlier this month we opened our 18^th office at 545 Troy Schenectady Road, Latham, New York. In July we also opened an office at North Pearl Street in Albany, New York. We are very pleased with our deposit growth at these offices in the short time that they have been open. Previously we announced that we will be purchasing an office in Haydenville, Massachusetts, and we expect that transaction to be completed in March 2009. For all intents and purposes a year ago we had 11 offices, not including the 5 offices we had just purchased in upstate New York in December of 2007. Even with the significant increases in our offices, our operating expenses for 2008 were down 2.2%. Our associates at Legacy Banks have and continue to embrace our Delta Project, which is a key element in our Strategic Plan to continue to embrace the changes that will improve our quality and efficiency and will be the foundation for our continued growth and expansion.

“The major adjustment between our core earnings and our net income for the year was other than temporarily impaired (OTTI) charges related to market value declines for several of our common stock and bond investments. These charges were made in what we consider to be a rigorous application of generally accepted accounting principles. We continue to hold some of these securities and we believe these investment positions will regain value.”

The Company’s total assets increased by $20.1 million, or 2.2%, from $924.5 million at December 31, 2007 to $944.7 million at December 31, 2008. Within the overall balance sheet, the gross loan portfolio, excluding loans held for sale, increased by $42.6 million, or 6.5% during 2008. Commercial real estate and other commercial loans increased $40.8 million, or 17.0%, to $280.6 million. Residential mortgage loans decreased by $5.5 million, or 1.6%, during 2008 as growth through origination was offset by the sale of $12.7 million in residential mortgages during the fourth quarter of the year. This decrease in residential mortgages was offset by increases in home equity loans of $6.4 million, or 11.3%, and consumer and other loans of $1.0 million, or 8.4%. The investment portfolio has increased by $585,000 or 0.4%, while cash and cash equivalents decreased $28.6 million, or 46.0%, at December 31, 2008 as compared to the prior year end as excess short-term cash from the prior year end was reinvested into loans during 2008.

 

Deposits decreased by $2.4 million, or 0.4%, to $608.1million. This overall decline was caused by a decrease of $3.5 million, or 1.3%, in certificates of deposit (CDs). Other decreases in certain money market and savings accounts were offset by an increase in Smart Banking/relationship savings accounts and demand accounts. For much of 2008, the Bank aligned its CD pricing with the yield curve and allowed the runoff of higher rate, single-service CDs. To offset that outflow and fund loan growth, the Bank increased its level of advances from the Federal Home Loan Bank of Boston by $30.5 million, or 18.2%, at December 31, 2008 as compared to the end of 2007. This shift of funding sources has allowed the Bank to take advantage of lower cost borrowing alternatives while also lengthening certain liabilities, which in turn has improved its asset and liability management position.

Stock repurchases were a primary contributor to an overall decrease in stockholders’ equity of $9.0 million, or 6.7%, as of December 31, 2008. Legacy purchased 462,048 shares of stock at an average price of $13.24 per share during 2008 as part of the Stock Repurchase Program announced in December 2007. Equity has also decreased as current market conditions have resulted in an increase in the unrealized loss on available-for-sale investment securities. Total equity was positively affected by a contribution of $1.4 million from net income and the amortization of unearned compensation, offset somewhat by the declaration of a dividend of $0.05 per share during each quarter of 2008.

Asset quality remains strong at the close of the fourth quarter. As mentioned in the Company’s first quarter 2008 earnings call, overall nonperforming loans had increased to $7.7 million as of March 31, 2008 due primarily to a $5.5 million commercial construction loan which the Bank placed on non-accrual status at that time. As of December 31, 2008 total nonperforming loans were $7.5 million, including the $5.5 million commercial construction loan. The additions to nonperforming loans during the year have resulted in an increase in their ratio to total assets to 0.80% at December 31, 2008 from 0.17% at December 31, 2007. Legacy is, and always has been, diligent in evaluating its loan portfolio, especially given the current economic environment.

 

The provision for loan losses increased by $437,000, or 96.5%, in the fourth quarter and by $414,000 or 39.4% for the full year as compared to the same periods in 2007. This increase in both periods was a reflection of both the difference in the amount of and mix of loan growth for the respective periods, higher net charge-offs in 2008 and a continuous review and analysis of current market and economic conditions by management. The allowance for loan losses to total loans stood at 0.95% at December 31, 2008, as compared to 0.85% at December 31, 2007.

 

The Company’s net interest income increased by $1.3 million, or 22.4%, in the fourth quarter, and by $4.0 million, or 16.8% year to date as compared to the same periods in 2007. The net interest margin (NIM) was 3.39% for the three months ended December 31, 2008, an increase of 50 basis points from the fourth quarter of 2007, as changes in the yield curve have enabled the Bank to reprice its liabilities downward at a faster rate than its assets. Year to date the NIM was 3.27%, which represents an increase of 26 basis points from the same period of 2007.

 

Non-interest income for the quarter was a net charge of $705,000, a decrease of $2.1 million, or 149.1%, compared to the fourth quarter of 2007. Year to date, non-interest income has decreased by $3.5 million, or 59.1%, as compared to 2007. The decrease in both periods is primarily due to the change from year to year in the net gain or loss on the sale of securities and accounting charges for securities which are deemed to be other-than-temporarily impaired (OTTI). For these items the Bank recorded a net loss of $2.2 million for the fourth quarter of 2008, and a net loss of $3.2 million year to date as compared to a net loss of $49,000 and a net gain of $510,000 in the same periods in 2007. The primary cause of this decrease in the fourth quarter was a $2.3 million OTTI charge related to the writedown of the value in the Bank’s investment in certain equity securities and trust preferred backed bonds. Year to date OTTI charges total $3.6 million, which includes $972,000 related to the Bank’s investment in Freddie Mac and Fannie Mae preferred stock. The year to date decrease in non-interest income was partially offset by an increase of $214,000, or 42.8%, in income from bank-owned life insurance (BOLI) as a result of the Bank’s 2007 investment in $9.8 million of BOLI.

 

Operating expenses decreased by $1.8 million, or 22.3%, for the fourth quarter of 2008 as compared to the same period of 2007, and by $603,000, or 2.2% year to date. The December 2007 acquisition of five full service branch offices in eastern New York has contributed to increases in occupancy and equipment, data processing, advertising and other general and administrative (G&A) expenses in both the quarter and year to date totals. Salary and benefit increases related to these offices were offset by decreases achieved from the reduction in workforce which occurred in the fourth quarter of 2007, resulting in a $1.5 million severance charge during that period. Salary and benefit expenses also benefited from a $1.4 million decrease in amortization expense related to the 2006 Equity Incentive Plan due primarily to the accelerated nature of the amortization. Conversely, other G&A expenses increased as a result of amortization expense of $653,000 related to the $3.2 million core deposit intangible acquired as part of the branch acquisition.

 

The income tax benefit decreased $529,000 to a net benefit of $204,000 in the fourth quarter of 2008 from a net benefit of $733,000 in the prior year’s fourth quarter as a result of a smaller pre-tax loss. Year to date, taxes have increased $527,000 as compared to 2007 due to the higher levels of pre-tax income. The Company’s 2008 combined federal and state effective tax rate of 35.0% was impacted by a third quarter state expense of $115,000 to adjust deferred income taxes as a result of a legislative change in the Massachusetts income tax rate scheduled to go into effect in the years 2010 through 2012, and a fourth quarter expense of $125,000 to adjust the tax valuation reserve related to the federal charitable contribution carryforward. The improvement to net interest income and lower operating expenses helped the Company’s core efficiency ratio (reported efficiency ratio net of the effect of non-core adjustments) for the quarter improve to 70.1% from 86.9% in the year earlier period. Year to date, the core efficiency ratio has improved to 77.5% in 2008 from 87.2% in 2007.

 

CONFERENCE CALL

J. Williar Dunlaevy, Chairman and Chief Executive Officer, and Paul H. Bruce, Chief Financial Officer, will host a conference call at 3:00 p.m. (Eastern Time) on Friday January 30, 2009. Persons wishing to access the conference call may do so by dialing 877-407-9205. Replays of the conference call will be available beginning January 30, 2009 at 6:00 p.m. (Eastern Time) through February 7, 2009 at 11:59 p.m. (Eastern Time) by dialing 877-660-6853 and using Account #286 and Conference ID #309715 (both numbers are needed to access the replay).