UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
|
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2006
|
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: 0-58514
BERKSHIRE
HILLS BANCORP, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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04-3510455
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|
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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|
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24
North Street, Pittsfield, Massachusetts
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01201
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|
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (413) 443-5601
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, par value $0.01 per share
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|
(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer and accelerated filer” in rule 12b-2 of the Exchange Act.
(Check one):
Large
Accelerated filer o
Accelerated filer
x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $255 million, based upon the closing price of $35.48 as
quoted on the NASDAQ Global Select Market as of the last business day of the
registrant’s most recently completed second fiscal quarter.
The
number of shares outstanding of the registrant’s common stock as of March 7,
2007 was 8,760,526.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2007 Annual Meeting of Shareholders are
incorporated by
reference in Part III of this Form 10-K.
-1-
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INDEX
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||
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3
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||
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3
|
||
|
20
|
||
|
25
|
||
|
26
|
||
|
26
|
||
|
26
|
||
|
27
|
||
|
27
|
||
|
30
|
||
|
31
|
||
|
|
||
|
43
|
||
|
46
|
||
|
85
|
||
|
85
|
||
|
85
|
||
|
86
|
||
|
86
|
||
|
87
|
||
|
88
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||
|
88
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||
|
88
|
||
|
89
|
||
|
89
|
||
|
91
|
PART
I
ITEM
1. BUSINESS
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements that are based on assumptions and
may
describe future plans, strategies and expectations of Berkshire Hills Bancorp,
Inc. and Berkshire Bank. This document may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E
of the Securities Exchange Act of 1934. These forward-looking statements, which
are based on certain assumptions and describe future plans, strategies, and
expectations of the Company, are generally identified by use of the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,”
“seek,” “strive,” “try,” or future or conditional verbs such as “will,” “would,”
“should,” “could,” “may,” or similar expressions. Although we believe that our
plans, intentions and expectations, as reflected in these forward-looking
statements are reasonable, we can give no assurance that these plans, intentions
or expectations will be achieved or realized. Our ability to predict results
or
the actual effects of our plans and strategies are inherently uncertain. Actual
results, performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking statements contained
in this Form 10-K. Important factors that could cause actual results to differ
materially from our forward-looking statements are set forth under Item 1A.
-
“Risk Factors” in this Form 10-K, and in other reports filed with the Securities
and Exchange Commission. There are a number of factors, many of which are beyond
our control, that could cause actual conditions, events, or results to differ
significantly from those described in the forward-looking statements. These
factors include, but are not limited to: general economic conditions, either
nationally or locally in some or all of the areas in which we conduct our
business; conditions in the securities markets or the banking industry; changes
in interest rates and energy prices, which may affect our net income or future
cash flows; changes in deposit flows, and in demand for deposit, loan, and
investment products and other financial services in our local markets; changes
in real estate values, which could impact the quality of the assets securing
our
loans; changes in the quality or composition of the loan or investment
portfolios; changes in competitive pressures among financial institutions or
from non-financial institutions; the ability to successfully integrate any
assets, liabilities, customers, systems, and management personnel we may acquire
into our operations and our ability to realize related revenue synergies and
cost savings within expected time frames; our timely development of new and
competitive products or services in a changing environment, and the acceptance
of such products or services by our customers; the outcome of pending or
threatened litigation or of other matters before regulatory agencies, whether
currently existing or commencing in the future; changes in accounting
principles, policies, practices, or guidelines; changes in legislation and
regulation; operational issues and/or capital spending necessitated by the
potential need to adapt to industry changes in information technology systems
on
which we are highly dependent; changes in the monetary and fiscal policies
of
the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board; war or terrorist activities; and other economic, competitive,
governmental, regulatory, and geopolitical factors affecting the Company’s
operations, pricing, and services. Additionally, the timing and occurrence
or
non-occurrence of events may be subject to circumstances beyond our control.
You
should not place undue reliance on these forward-looking statements, which
reflect our expectations only as of the date of this report. We do not assume
any obligation to revise forward-looking statements except as may be required
by
law.
GENERAL
Berkshire
Hills Bancorp, Inc. is a Delaware corporation and the holding company for
Berkshire Bank. Established in 1846, Berkshire Bank is one of Massachusetts'
oldest and largest independent banks and is the largest banking institution
based in Western Massachusetts. The Bank is headquartered in Pittsfield,
Massachusetts and operates 27 full-service banking offices serving communities
throughout Western Massachusetts and in Northeastern New York. The Bank operates
in three regions:
|
·
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The
Berkshire County Region, with eleven offices in Berkshire
County.
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|
·
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The
Pioneer Valley Region with ten offices along the Connecticut River
valley
north and west of Springfield in Massachusetts. The Company entered
this
region through the acquisition of Woronoco Bancorp Inc. in June
2005.
|
|
·
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The
New York Region serving Albany and the surrounding area in Northeastern
New York. This region represents a de novo expansion by the Bank. At
year end 2006, it had six offices, with another four offices
scheduled to open in the first half of
2007.
|
These
three regions are viewed as having favorable demographics and provide an
attractive regional niche for the Bank to distinguish itself as the preferred
choice compared to larger super-regional banks and smaller community banks.
The
Company is pursuing growth through acquisitions, de novo branching, product
development, and organic growth. The Company is considering possible expansion
into Southern Vermont and Northern Connecticut. The Bank entered the Pioneer
Valley area of Massachusetts in 2005 with the acquisition of Woronoco Bancorp,
Inc. The Company made acquisitions of insurance and financial planning providers
in 2004 and 2005, followed by the acquisition of five affiliated insurance
agencies in the fourth quarter of 2006. These insurance acquisitions were merged
and integrated into the Berkshire Insurance Group, which was made a subsidiary
of the Company. The Company aspires to be “America’s Most Exciting Bank”. It has
set out to change the financial service experience, and its vision is to
establish itself as a world-class financial services company through an engaging
and exciting environment where customers want to do business and employees
want
to work.
The
Bank
is a full-scale provider of deposit, lending, investment, and insurance products
by a team of employees with extensive experience in banking, insurance, and
investment management. The Company stresses quality control, including using
Six
Sigma tools to improve operational effectiveness and efficiency. It is enhancing
its credit and risk management functions to maintain strong asset quality and
careful interest rate management. It stresses a culture of teamwork and
performance excellence to produce customer satisfaction to support its strategic
growth and profitability.
COMPANY
WEBSITE AND AVAILABILITY OF SECURITIES AND EXCHANGE COMMISSION
FILINGS
The
Company’s Internet website is www.berkshirebank.com.
The
Company makes available free of charge on or through its website, its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and any amendments to those reports filed pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after the Company electronically files such material with the Securities and
Exchange Commission. Information on the website is not incorporated by reference
and is not a part of this annual report on Form 10-K.
COMPETITION
The
Company is subject to strong competition from banks and other financial
institutions and financial service providers. Its competition includes national
and super-regional banks such as Bank of America, TD Banknorth, and Citizens
Bank, which have substantially greater resources and lending limits. Non-bank
competitors include credit unions, brokerage firms, insurance providers,
financial planners, and the mutual fund industry. New technology is reshaping
customer interaction with financial service providers and the increase of
Internet-accessible financial institutions increases competition for the
Company’s customers. The Company generally competes on the basis of customer
service, relationship management, and the pricing of loan and deposit products
and wealth management services.
The location and convenience of branch offices is also a significant competitive
factor, particularly regarding new offices. The Bank has recently designated
regional headquarters led by regional presidents as an important component
of
its market management. The Company has recently revised its vision - to
establish itself as a world-class financial services company through an engaging
and exciting environment where customers want to do business and employees
want
to work. This brand and culture statement is expected to drive customer
emotional engagement, loyalty, market share and profitability.
LENDING
ACTIVITIES
General.
The
Bank
originates loans in the four basic portfolio categories discussed below. Lending
activities are limited by federal and state laws and regulations. Loan interest
rates and other key loan terms are affected principally by the Bank’s
asset/liability strategy, loan demand, competition, and the supply of money
available for lending purposes. These factors, in turn, are affected by general
and economic conditions, monetary policies of the federal government, including
the Federal Reserve Board, legislative tax policies and governmental budgetary
matters. The majority of the Bank’s loans are made in its market areas and are
secured by real estate in its primary markets. Lending activities are therefore
affected by activity in these real estate markets. The Bank does not engage
in
subprime lending activities targeted towards borrowers in high risk categories.
The Bank monitors and limits the amount of long-term fixed-rate lending volume.
Adjustable-rate loan products generally reduce interest rate risk but may
produce higher loan losses in
the
event
of sustained rate increases. Despite the 4.25% increase in the prime interest
rate over the two years ending in June 2006, such higher losses have not
yet
been recorded but were determined to be inherent in the portfolio, which
resulted in an increase in the loan loss allowance in 2006.
Loan
Portfolio Analysis. The
following table sets forth the year-end composition of the Bank’s loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates
indicated.
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
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||||||||||||||||||||||
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|
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Percent
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Percent
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Percent
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|
|
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Percent
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Percent
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||||||||||
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of
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of
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of
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of
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of
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||||||||||
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(Dollars
in millions)
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
Amount
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|
Total
|
|
Amount
|
|
Total
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|||||||||||
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Residential
mortgages
|
$
|
599.2
|
36
|
% | $ |
549.8
|
39
|
% | $ |
235.2
|
28
|
% | $ |
265.5
|
34
|
% | $ |
241.6
|
33
|
%
|
|||||||||||
|
Commercial
mortgages
|
567.1
|
33
|
410.7
|
29
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260.5
|
32
|
206.4
|
26
|
157.1
|
22
|
|||||||||||||||||||||
|
Commercial
business
|
189.8
|
11
|
158.7
|
11
|
150.9
|
18
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166.3
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21
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165.3
|
23
|
|||||||||||||||||||||
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Total
commercial loans
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756.9
|
44
|
569.4
|
40
|
411.4
|
50
|
372.7
|
47
|
322.4
|
45
|
|||||||||||||||||||||
|
Consumer
|
342.9
|
20
|
301.0
|
21
|
181.5
|
22
|
154.0
|
19
|
159.0
|
22
|
|||||||||||||||||||||
|
Total
loans
|
1,699.0
|
100
|
% |
1,420.2
|
100
|
% |
828.1
|
100
|
% |
792.2
|
100
|
% |
723.0
|
100
|
%
|
||||||||||||||||
|
Allowance
for loan losses
|
(19.4
|
)
|
(13.0
|
)
|
(9.3
|
)
|
(9.0
|
)
|
(10.3
|
)
|
|||||||||||||||||||||
| Net loans | $ | 1,679.6 | $ | 1,407.2 | $ | 818.8 | $ | 783.2 | $ | 712.7 | |||||||||||||||||||||
Residential
mortgages. The
Bank
originates first mortgage loans to individuals, secured by one-to-four family
residences in its markets. The Bank originates both fixed-rate and
adjustable-rate mortgages to finance primary and secondary residences, as well
as non-owner occupied properties. The Bank also provides construction and land
development first
mortgage loans to individuals. The Bank also offers jumbo loan products and
FHA/VA related products. Berkshire Bank generally underwrites, processes, and
closes its residential mortgages following conforming secondary market
guidelines.
The
Bank
originates loans to individuals for the construction and acquisition of personal
residences. These loans generally provide fifteen-month construction periods
followed by a permanent mortgage
loan, and follow the Bank’s normal mortgage underwriting guidelines. Residential
construction loans totaled $32 million at year-end 2006.
The
Bank
normally holds most adjustable-rate mortgages for its own portfolio. It
generally sells most 15 and 30 year fixed-rate mortgages on a servicing released
flow basis, although some are retained in portfolio. Forward sale commitments
are made when customers rate-lock their applications. Sometimes the Bank also
sells or securitizes some existing residential mortgages
to adjust interest rate risk or to provide liquidity. Residential mortgages
are
viewed as having the least credit risk and the narrowest lending margins among
the Bank’s lending products.
Commercial
Mortgages. The
Bank
originates commercial mortgages on properties used for business purposes such
as
small office buildings, industrial, healthcare, lodging, recreation, or retail
facilities. This portfolio also includes commercial 1-4 family and multifamily
properties. Loans may generally be made with terms of up to 25 years and with
interest rates that adjust periodically (primarily from floating to five
years).
Berkshire
Bank generally requires that borrowers have debt service coverage ratios (the
ratio of available cash flows before debt service to debt service) of at least
1.25 times. Loans may be made up to 80% of appraised value. Generally,
commercial mortgages require personal guarantees by the principals. Credit
enhancements in the form of additional collateral or guarantees are normally
considered for start-up businesses without a qualifying cash flow history.
The
Bank
also originates commercial construction loans for residential and commercial
properties. These loans generally have an interest-only phase during
construction and then convert to permanent financing. Berkshire Bank also
originates land loans for the purpose of holding or developing the land for
sale. Land loans are normally three year notes with principal due at maturity.
Commercial construction loans totaled $130 million at year-end
2006.
Commercial
mortgages generally involve larger principal amounts and a greater degree of
risk than residential mortgages. They also often provide higher lending spreads.
Because repayment is often dependent on the successful
operation
or management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. Additionally,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project rather
than
on established cash flows. If the Bank is forced to foreclose on a construction
project before or at completion, there is a higher risk of credit loss.
Berkshire Bank seeks to minimize these risks through strict adherence to its
underwriting standards and portfolio management processes.
Commercial
Business Loans. The
Bank
offers secured commercial term loans with repayment terms which are normally
limited to the lesser of the expected useful life of the asset being financed,
generally not exceeding seven years. Berkshire Bank also offers revolving loans,
lines of credit, letters of credit, time notes and Small Business Administration
guaranteed loans. Business lines of credit have adjustable rates of interest
and
are payable on demand, subject to annual review and renewal.
Commercial
lending policies regarding debt-service coverage ability and
guarantees are
similar to those which govern commercial real estate lending. Commercial
business loans are generally secured by a variety of collateral such as accounts
receivable, inventory and equipment, and are generally supported by personal
guarantees. Loan to value ratios depend on the collateral type and generally
do
not exceed 95% of the liquidation value of the collateral. Some commercial
loans
may also be secured by liens on real estate. Berkshire Bank generally does
not
make unsecured commercial loans.
Commercial
loans are of higher risk and are made primarily on the basis of the borrower’s
ability to make repayment from the cash flows of its business. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value. The Bank gives additional consideration
to
the borrower’s credit history and capacity to help mitigate these risks.
Commercial loans are often a central component of a total commercial banking
relationship, and are therefore an important component of the Bank’s lending
activities.
Consumer
Loans. Berkshire
Bank’s consumer lending strategy is focused on indirect automobile loans and
home equity loans. The Bank offers fixed-rate automobile loans with terms of
up
to 72 months for new and recent model used cars and up to 66 months for older
model used cars. The Bank generally makes such loans up to 100% of the retail
value shown in the NADA
Used Car Guide.
This
program is targeted towards prime grade credits. The Bank does not offer
subprime lending programs. The automobile loans have produced a higher loan
charge-off rate than the Bank’s residential mortgage and home equity loans.
Collections are more sensitive to changes in borrower financial circumstances,
and the collateral can be depreciated or damaged prior to repossession.
Additionally, collections are more subject to the limitations of federal and
state laws. Automobile loans outstanding totaled $196 million at year-end 2006.
The Bank originates indirect loans through a network of automobile dealers
in
its market, as well as through a conduit sales finance company sourced from
franchised automobile dealerships.
The
Bank’s home equity lines of credit are typically secured by second mortgages on
borrowers’ residences. Home equity lines have an initial revolving period up to
ten years, followed by an amortizing term up to fifteen years. These loans
are
normally indexed to the prime rate. Home equity loans also include amortizing
fixed-rate second mortgages with terms up to fifteen years. Lending policies
for
combined debt service and collateral coverage are similar to those used for
residential first mortgages, although underwriting verifications are
more
streamlined. Home equity line credit risks are similar to those of
adjustable-rate
first mortgages, although these loans may be more sensitive to losses when
interest rates are rising due to more sensitivity to rate changes and more
possible compression of collateral coverage on second liens. The Bank also
includes all other consumer loans in this portfolio total, including personal
secured and unsecured loans and overdraft protection facilities. Home equity
and
other loans outstanding at year-end 2006 totaled $147 million.
Maturity
and Sensitivity of Loan Portfolio. The
following table shows contractual final maturities of selected loan categories
at year-end 2006. The contractual maturities do not reflect premiums, discounts,
and deferred costs, and do not reflect prepayments.
|
Contractual
Maturity
|
One
Year
|
More
than One
|
More
Than
|
|
|||||||||
|
(In
thousands)
|
or
Less
|
to
Five Years
|
Five
Years
|
Total
|
|||||||||
|
Construction
mortgage loans:
|
|||||||||||||
|
Residential
|
$
|
1,669
|
$
|
30,653
|
$
|
-
|
$
|
32,322
|
|||||
|
Commercial
|
23,293
|
106,505
|
-
|
129,798
|
|||||||||
|
Commercial
business loans
|
92,771
|
46,053
|
50,934
|
189,758
|
|||||||||
|
Total
|
$
|
117,733
|
$
|
183,211
|
$
|
50,934
|
$
|
351,878
|
|||||
For
the
$234 million total of loans above which mature in more than one year, $40
million of these loans are fixed-rate and $194 million are adjustable
rate.
Loan
Administration.
Lending
activities are governed by a loan policy approved by the Board of Directors.
Internal staff perform post-closing loan documentation review, quality control
and ongoing loan review. The Bank assigns a risk rating to all commercial loans,
and loan review staff perform an ongoing program of loan and risk rating
reviews. Management also employs an independent third party for loan reviews,
as
discussed in “Allowance for Loan Losses.”
The
Bank’s lending activities follow written, non-discriminatory underwriting
standards and loan origination procedures established by Berkshire Bank’s Board
of Directors and management. The Board of Directors has approved individual
and
combined lending approval authorities up to specified limits. Above those
limits, the Board of Directors established Regional Loan Committees with
commercial approval authority generally up to $5 million. Management’s Executive
Loan Committee is responsible for commercial loan approval above $5 million
and
residential mortgage approval above $2 million. The Bank’s lending activities
are conducted by its salaried and commissioned loan personnel and through its
relationships with automobile dealers. From time to time, the Bank will purchase
whole loans or participations in loans. These loans are underwritten according
to Berkshire Bank’s underwriting criteria and procedures and are generally
serviced by the originating lender under terms of the applicable participation
agreement. The Bank from time to time will sell or securitize residential
mortgages in the secondary market based on prevailing market interest rate
conditions and an analysis of the composition and risk of the loan portfolio,
the Bank’s interest rate risk profile and liquidity needs. The Bank sells a
limited number of commercial loan participations on a non-recourse basis. The
Bank issues loan commitments to its prospective borrowers conditioned on the
occurrence of certain events. Loan origination commitments are made in writing
on specified terms and conditions and are generally honored for up
to ninety
days from approval; some commercial commitments are made for longer terms.
Total
lending commitments, including lines and letters of credit, were $456 million
at
year-end 2006.
The
loan
policy sets certain limits on concentrations of credit and requires periodic
reporting of concentrations to the Bank’s Board. Loans outstanding to the ten
largest relationships totaled $155 million at year-end 2006. All of these
relationships were rated in the three lowest risk commercial risk rating
categories used by the Bank. Total year-end commercial construction loans
outstanding were 74% of the Bank’s risk based capital at year-end, and total
commercial mortgage outstandings (excluding certain owner-occupied loans) were
estimated at 265% of risk based capital. The FDIC has recently established
monitoring guidelines of 100% and 300% for these ratios, respectively. Above
these guidelines, additional monitoring and risk management controls are
required. Based on commitments outstanding at year-end 2006, the Bank may exceed
these monitoring guidelines for one or both of these ratios in 2007, and the
Bank is proactively establishing additional monitoring and risk management
controls as set forth by the FDIC. The commercial construction and development
loans primarily involve lodging, leisure, and retail properties. For the
majority of these loans, the Bank provides permanent or semi-permanent financing
after the construction period. The Bank also finances residential and
condominium construction and development projects. The total number of units
without committed end sales does not exceed sixty units.
Problem
Assets. While
Berkshire Bank generally prefers to work with borrowers to resolve problems,
Berkshire Bank generally will initiate foreclosure or other proceedings no
later
than the 90th
day of a
delinquency, as necessary, to
minimize
any potential loss. Management reports to the Board of Directors monthly
delinquent loans and nonperforming assets. Loans are generally removed from
accruing status when they reach 90 days delinquent, except for certain loans
which are well secured and in the process of collection. Delinquent auto loans
are maintained on accrual until they reach 120 days delinquent, and then they
are generally charged-off.
Real
estate acquired by Berkshire Bank as a result of loan collections is classified
as real estate owned until sold. When property is acquired it is recorded at
fair market value less estimated selling costs at the date of foreclosure,
establishing a new cost basis. Holding costs and decreases in fair value after
acquisition are expensed. At year-end 2006, Berkshire Bank had no foreclosed
real estate.
The
following table sets forth additional
information on year-end problem assets.
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|
2003
|
|
2002
|
|||||||||
|
Nonaccruing
loans:
|
||||||||||||||||
|
Residential
mortgages
|
$
|
15
|
$
|
261
|
$
|
327
|
$
|
348
|
$
|
230
|
||||||
|
Commercial
mortgages
|
308
|
271
|
147
|
496
|
-
|
|||||||||||
|
Commercial
business
|
7,203
|
553
|
523
|
1,887
|
2,850
|
|||||||||||
|
Consumer
|
66
|
101
|
155
|
468
|
661
|
|||||||||||
|
Total
nonperforming loans
|
7,592
|
1,186
|
1,152
|
3,199
|
3,741
|
|||||||||||
|
Real
estate owned
|
-
|
-
|
-
|
-
|
1,500
|
|||||||||||
|
Total
nonperforming assets
|
$
|
7,592
|
$
|
1,186
|
$
|
1,152
|
$
|
3,199
|
$
|
5,241
|
||||||
|
Troubled
debt restructurings
|
$
|
5,268
|
$
|
1,234
|
$
|
510
|
$
|
214
|
$
|
-
|
||||||
|
Accruing
loans 90+ days past due
|
281
|
110
|
65
|
306
|
590
|
|||||||||||
|
Total
nonperforming loans/total loans
|
0.45
|
%
|
0.08
|
%
|
0.14
|
%
|
0.40
|
%
|
0.52
|
%
|
||||||
|
Total
nonperforming assets/total assets
|
0.35
|
%
|
0.06
|
%
|
0.09
|
%
|
0.26
|
%
|
0.36
|
%
|
||||||
Asset
Classification and Delinquencies. The
Bank
performs an internal analysis of its loan portfolio and assets to classify
such
loans and assets similar to the manner in which such loans and assets are
classified by the federal banking regulators. There are four classifications
for
problem assets: loss, doubtful, substandard and special mention. An asset
classified as “Loss” is normally fully charged-off. “Substandard” assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are
not
corrected. Nonaccruing loans are normally classified as substandard. “Doubtful”
assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the
basis of currently existing facts, conditions and values questionable, and
there
is a high possibility of loss. Assets that do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated “Special
Mention.”
At
year-end 2006, there were no loan balances classified as
loss.
The balance of loans classified as doubtful was $228 thousand. Loans classified
as substandard totaled $23.7 million. The largest three substandard commercial
relationships totaled $10.6 million and were in the process of collection.
The
largest substandard loan totaled $6.0 million and was in collection through
bankruptcy proceedings. This loan is secured by business assets and had a $0.5
million impaired loan reserve at year-end. Loans classified as substandard
are
collectively regarded as having the potential to be nonperforming in the future.
Loans rated special mention totaled $34.4 million at year end 2006. Loans
delinquent 30 - 90 days totaled $4.1 million at year-end 2006. Troubled debt
restructurings totaled $5.3 million at year-end 2006, which was increased from
$1.2 million at the prior year-end due primarily to restructurings related
to
certain substandard loans.
Allowance
for Loan Losses. Berkshire
Bank maintains an allowance for loan losses to absorb losses inherent in the
loan portfolio. The allowance represents management’s estimate of inherent
losses that are probable and estimable as of the date of the financial
statements. The allowance includes a specific component for impaired loans
and
an unallocated component for estimated model imprecision.
The
loan
portfolio and other credit exposures are regularly reviewed by management to
evaluate the adequacy of the allowance for loan losses. The methodology for
assessing the appropriateness of the allowance includes comparison to actual
losses, peer group comparisons, industry data and economic conditions. In
addition, management employs an independent third party to perform an annual
review of all of Berkshire Bank’s commercial loan relationships exceeding
$1 million, all material credits on Berkshire Bank’s watch list or
classified as substandard, and a random sampling of new loans. The regulatory
agencies, as an integral part of their examination process, also periodically
review Berkshire Bank’s allowance for loan losses. Such agencies may require
Berkshire Bank to make additional provisions for estimated losses based upon
judgments different from those of management.
In
assessing the allowance for loan losses, loss factors are applied to various
pools of outstanding loans. Loss factors are based on management’s judgment of
losses inherent in the portfolio, including past loan loss experience, known
and
inherent risks in the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values and economic
conditions. The loss factors may be adjusted for significant factors that,
in
management’s judgment, affect the losses inherent in the portfolio as of the
evaluation date. Generally, nonaccruing commercial loans are deemed impaired
and
evaluated for specific valuation allowances. Berkshire Bank primarily segregates
the loan portfolio according to the primary loan types: residential mortgages,
commercial mortgages, commercial business loans and consumer loans, and also
evaluates commercial construction loans as a pool. Reserves are assigned to
impaired loans, and this is normally based on the fair value of collateral
since
most impaired loans are deemed to be collateral dependent. In 2006, the Company
adjusted its loan loss allowance based on new loss factors which emerged during
the year, as is further described in Item 7 of this Form 10-K.
In
addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management’s subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of
the
loan portfolio. The allowance methodology reflects management’s objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
Although
management believes that it uses the best information available to establish
the
allowance for loan losses, future adjustments to the allowance for loan losses
may be necessary and results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making its
determinations. Because the estimation of inherent losses cannot be made with
certainty, there can be no assurance that the existing allowance for loan losses
is adequate or that increases will not be necessary should the quality of any
loan deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect Berkshire Bank’s
financial condition and results of operations. In 2006, the allowance was
reduced by $425 thousand representing the transfer to liabilities of reserves
for losses on unfunded credit commitments.
The
following table presents an analysis of the allowance for loan losses for the
years indicated.
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Balance
at beginning of year
|
$
|
13,001
|
$
|
9,337
|
$
|
8,969
|
$
|
10,308
|
$
|
11,034
|
||||||
|
Charged-off
loans:
|
||||||||||||||||
|
Residential
mortgages
|
27
|
-
|
-
|
-
|
-
|
|||||||||||
|
Commercial
mortgages
|
-
|
-
|
138
|
-
|
510
|
|||||||||||
|
Commercial
business
|
461
|
432
|
218
|
157
|
444
|
|||||||||||
|
Consumer
|
1,288
|
1,110
|
1,846
|
4,207
|
9,074
|
|||||||||||
|
Total
charged-off loans
|
1,776
|
1,542
|
2,202
|
4,364
|
10,028
|
|||||||||||
|
Recoveries
on charged-off loans:
|
||||||||||||||||
|
Commercial
business
|
43
|
55
|
296
|
440
|
178
|
|||||||||||
|
Consumer
|
667
|
517
|
709
|
1,125
|
2,944
|
|||||||||||
|
Total
recoveries
|
710
|
572
|
1,005
|
1,565
|
3,122
|
|||||||||||
|
Net
loans charged-off
|
1,066
|
970
|
1,197
|
2,799
|
6,906
|
|||||||||||
|
Allowance
attributed to loans acquired by merger
|
-
|
3,321
|
-
|
-
|
-
|
|||||||||||
|
Provision
for loan losses
|
7,860
|
1,313
|
1,565
|
1,460
|
6,180
|
|||||||||||
|
Transfer
of commitment reserve
|
(425
|
)
|
-
|
-
|
-
|
-
|
||||||||||
|
Allowance
for loan losses, balance at end of year
|
$
|
19,370
|
$
|
13,001
|
$
|
9,337
|
$
|
8,969
|
$
|
10,308
|
||||||
|
Ratios:
|
||||||||||||||||
|
|
||||||||||||||||
|
Net
loans charged-off/average total loans
|
0.07
|
%
|
0.08
|
%
|
0.15
|
%
|
0.35
|
%
|
0.87
|
%
|
||||||
|
Recoveries/charged-off
loans
|
39.98
|
37.09
|
45.64
|
35.86
|
31.13
|
|||||||||||
|
Net
loans charged-off/allowance for loan losses
|
5.50
|
7.46
|
12.82
|
31.21
|
67.00
|
|||||||||||
|
Allowance
for loan losses/total loans
|
1.14
|
0.92
|
1.13
|
1.13
|
1.43
|
|||||||||||
|
Allowance
for loan losses/nonperforming loans
|
2.55
|
x
|
10.96
|
x
|
8.11
|
x
|
2.80
|
x
|
2.76
|
x
|
||||||
The
following table presents year-end data for the approximate allocation of the
allowance for loan losses by loan categories at the dates indicated and the
percentage of loans in each category. Management believes that the allowance
can
be allocated by category only on an approximate basis. The allocation of the
allowance to each category is not indicative of future losses and does not
restrict the use of any of the allowance to absorb losses in any
category.
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||||||||||||
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
|||||||||||||||||||||||||||
|
Loans
|
Loans
|
Loans
|
Loans
|
Loans
|
|||||||||||||||||||||||||||
|
in
Each
|
in
Each
|
in
Each
|
in
Each
|
in
Each
|
|||||||||||||||||||||||||||
|
Amount
|
Category
to
|
Amount
|
Category
to
|
Amount
|
Category
to
|
Amount
|
Category
to
|
Amount
|
Category
to
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Allocated
|
Total
Loans
|
Allocated
|
Total
Loans
|
Allocated
|
Total
Loans
|
Allocated
|
Total
Loans
|
Allocated
|
Total
Loans
|
|||||||||||||||||||||
|
Residential
mortgages
|
$
|
1,845
|
36
|
%
|
$
|
1,649
|
39
|
%
|
$
|
435
|
28
|
%
|
$
|
491
|
34
|
%
|
$
|
446
|
33
|
%
|
|||||||||||
|
Commercial
mortgages
|
9,939
|
33
|
5,933
|
29
|
3,828
|
32
|
2,945
|
26
|
1,843
|
22
|
|||||||||||||||||||||
|
Commercial
business
|
5,199
|
11
|
3,517
|
11
|
3,344
|
18
|
3,362
|
21
|
3,369
|
23
|
|||||||||||||||||||||
|
Consumer
|
2,387
|
20
|
1,902
|
21
|
1,730
|
22
|
2,171
|
19
|
4,650
|
22
|
|||||||||||||||||||||
|
Total
|
$
|
19,370
|
100
|
%
|
$
|
13,001
|
100
|
%
|
$
|
9,337
|
100
|
%
|
$
|
8,969
|
100
|
%
|
$
|
10,308
|
100
|
%
|
|||||||||||
INVESTMENT
SECURITIES ACTIVITIES
The
investment securities portfolio is primarily used to provide for Berkshire
Bank’s cash flow needs, to provide adequate liquidity to protect the safety of
customer deposits, to manage interest rate risk, and to earn a reasonable return
on investment. The average maturity or repricing and the types of securities
maintained are based upon the composition, maturity, and quality of the loan
portfolio, interest rate risk and Berkshire Bank’s liquidity position and
deposit structure.
The
Risk
Management Committee of the Board of Directors is responsible for developing
and
reviewing Berkshire Bank’s investment policy. Investment decisions
are made in accordance with the Bank’s investment policy and are based upon the
quality of a particular investment, its inherent risks, the Bank’s liquidity
needs, prospects for yield and/or appreciation and the potential tax
consequences. General investment strategies are developed and authorized by
the
Risk Management Committee. The execution of specific investment actions and
the
day-to-day oversight of the Bank’s investment portfolio rests with the President
and the Treasurer. The Board of Directors receives a monthly report of all
securities transactions made during the previous month.
The
majority of the Bank’s investments have been in mortgage-backed securities
issued or guaranteed by U.S. Government sponsored enterprises. The Bank has
focused on adjustable-rate pass-through mortgage-backed securities that have
limited extension risk,
such as five and seven-year hybrid securities and 10-year fixed-rate
mortgage-backed securities. These securities typically have an average duration
of 3-5 years. Securities acquired as a result of the Woronoco acquisition also
were primarily U.S. Government sponsored enterprise pass-through
mortgage-backed securities,
although these securities were mostly backed by fixed rate loans. Nearly all
the
mortgage-backed securities owned by the Bank are issued by Fannie Mae or Freddie
Mac. No other issuer concentrations exceeding 10% of stockholders’ equity
existed at year-end 2006. The Bank also purchases municipal bonds and
obligations, and purchases and originates industrial
revenue bonds. Some of these securities support local municipal relationships
and these securities provide a tax-advantaged yield. Subsequent to the
deleveraging in 2006, municipal bonds and obligations became the largest
category of investments. Other corporate bonds are primarily investment grade
trust preferred securities issued by financial institutions. The equity
securities portfolio consists primarily of investments in the common stock
of
the Federal Home Loan Bank of Boston. The Bank has substantially liquidated
its
actively managed portfolio of exchange traded equity securities of bank, utility
and industrial stocks.
In
2005
and 2006, the Bank executed deleveraging programs to reduce leverage, improve
yield, and improve interest rate sensitivity. The 2005 deleveraging was in
conjunction with the Woronoco acquisition. Berkshire Bank’s investment policy
allows the use of certain hedging strategies, including the purchase of options
in an effort to increase the return and decrease the risk on the
securities portfolio.
The
following table presents the year-end amortized cost and fair value of Berkshire
Bank’s securities, by type of security, for the years indicated:
|
2006
|
|
2005
|
|
2004
|
|
||||||||||||||
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
||||||
|
(In
thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|||||||
|
Available
for sale securities
|
|||||||||||||||||||
|
U.S.
Government agencies
|
$
|
-
|
$
|
-
|
$
|
69
|
$
|
63
|
$
|
1,106
|
$
|
1,113
|
|||||||
|
Municipal
bonds and obligations
|
63,788
|
64,503
|
63,701
|
63,673
|
19,169
|
19,172
|
|||||||||||||
|
Mortgage-backed
securities
|
85,102
|
84,334
|
264,705
|
258,504
|
323,956
|
322,585
|
|||||||||||||
|
Other
bonds and obligations
|
20,392
|
20,439
|
24,356
|
24,703
|
9,418
|
9,429
|
|||||||||||||
|
Equity
securities
|
24,687
|
24,930
|
41,667
|
43,933
|
24,210
|
32,122
|
|||||||||||||
|
Total
available for sale securities
|
$
|
193,969
|
$
|
194,206
|
$
|
394,498
|
$
|
390,876
|
$
|
377,859
|
$
|
384,421
|
|||||||
|
Held
to maturity securities
|
|||||||||||||||||||
|
Municipal
bonds and obligations
|
$
|
35,572
|
$
|
35,286
|
$
|
23,851
|
$
|
23,851
|
$
|
25,227
|
$
|
25,227
|
|||||||
|
Mortgage-backed
securities
|
4,396
|
4,400
|
6,057
|
5,912
|
4,715
|
4,672
|
|||||||||||||
|
Total
held to maturity securities
|
$
|
39,968
|
$
|
39,686
|
$
|
29,908
|
$
|
29,763
|
$
|
29,942
|
$
|
29,899
|
|||||||
The
following table summarizes year-end 2006 amortized cost, weighted average yields
and contractual maturities of debt securities. Yields are stated on a book
basis
(not fully taxable equivalent).
|
|
|
|
|
More
than One
|
|
More
than Five Years
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
One
Year or Less
|
|
Year
to Five Years
|
|
to
Ten Years
|
|
More
than Ten Years
|
|
Total
|
|
||||||||||||||||||||
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
||||||||||
|
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
||||||||||
|
(Dollars
in millions)
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|||||||||||
|
Municipal
bonds and obligations
|
$ |
9.2
|
4.20
|
% | $ |
1.4
|
3.62
|
% | $ |
5.3
|
3.78
|
% | $ |
83.5
|
4.36
|
% | $ |
99.4
|
4.30
|
% | |||||||||||
|
Mortgage-backed
securities
|
-
|
-
|
4.3
|
4.18
|
12.6
|
5.16
|
72.6
|
5.09
|
89.5
|
5.06
|
|||||||||||||||||||||
|
Other
bonds and obligations
|
-
|
-
|
-
|
-
|
3.0
|
5.18
|
17.4
|
5.99
|
20.4
|
5.88
|
|||||||||||||||||||||
|
Total
|
$
|
9.2
|
4.20
|
%
|
$
|
5.7
|
4.04
|
%
|
$
|
20.9
|
4.81
|
%
|
$
|
173.5
|
4.83
|
%
|
$
|
209.3
|
4.78
|
%
|
|||||||||||
DEPOSIT
ACTIVITIES AND OTHER SOURCES OF FUNDS
Deposits
are the major source of funds for Berkshire Bank’s lending and investment
activities. Deposit accounts are the primary product and service interaction
with the Bank’s customers. The Bank also uses borrowings from the Federal Home
Loan Bank of Boston (FHLBB) as an additional source of funding, particularly
for
daily cash management and for funding longer duration assets. FHLBB advances
also provide more pricing and option alternatives for particular asset/liability
needs. In 2005, the Company created a trust subsidiary to issue $15.0 million
in
trust preferred securities,
which provided funds which were invested in the Bank as additional paid in
capital, thereby increasing its regulatory capital.
Most
of
the Bank’s deposits are generated from the areas surrounding its branch offices.
The Bank offers a wide variety of deposit accounts with a range of interest
rates and terms. The Bank also periodically offers promotional interest rates
and terms for limited periods of time. Berkshire Bank’s deposit accounts consist
of interest-bearing checking, noninterest-bearing checking, regular savings,
money market savings and time certificates of deposit. The Bank emphasizes
its
transaction deposits - checking and NOW accounts for personal accounts
and checking accounts
promoted to businesses. These accounts have the lowest marginal cost to the
Bank
and are also often a core account for a customer relationship. The Bank offers
a
courtesy overdraft program to improve customer service, and also provides debit
cards and other electronic fee producing payment services to transaction account
customers. Money market accounts have increased in popularity due to their
interest rate structure. Savings accounts include traditional
passbook
and
statement accounts. The Bank’s time accounts provide maturities from three
months to five years. Additionally, the Bank offers a variety of retirement
deposit accounts to personal and business customers. The Bank added brokered
time deposit accounts with the acquisition of Woronoco Bancorp. These brokered
deposits are being allowed to runoff.
The
following table presents information concerning average balances and weighted
average interest rates on Berkshire Bank’s deposit accounts for the years
indicated.
|
2006
|
|
2005
|
|
2004
|
|
|||||||||||||||||||||||
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|||||||||
|
|
|
|
|
of
Total
|
|
Weighted
|
|
|
|
of
Total
|
|
Weighted
|
|
|
|
of
Total
|
|
Weighted
|
|
|||||||||
|
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
|||||||||
|
(Dollars
in millions)
|
|
Balance
|
|
Deposits
|
|
Rate
|
|
Balance
|
|
Deposits
|
|
Rate
|
|
Balance
|
|
Deposits
|
|
Rate
|
||||||||||
|
Demand
|
$
|
174.5
|
12
|
%
|
-
|
%
|
$
|
149.6
|
13
|
%
|
-
|
%
|
$
|
103.7
|
12
|
%
|
-
|
%
|
||||||||||
|
NOW
|
137.8
|
9
|
1.09
|
121.7
|
11
|
0.39
|
97.9
|
11
|
0.09
|
|||||||||||||||||||
|
Money
market
|
284.4
|
19
|
3.41
|
209.0
|
18
|
2.13
|
160.3
|
19
|
1.29
|
|||||||||||||||||||
|
Savings
|
210.6
|
14
|
0.90
|
205.8
|
18
|
0.90
|
168.5
|
20
|
0.77
|
|||||||||||||||||||
|
Time
|
651.7
|
46
|
4.28
|
445.2
|
40
|
3.20
|
321.0
|
38
|
2.78
|
|||||||||||||||||||
|
Total
|
$
|
1,459.0
|
100
|
%
|
2.81
|
%
|
$
|
1,131.3
|
100
|
%
|
1.86
|
%
|
$
|
851.4
|
100
|
%
|
1.46
|
%
|
||||||||||
At
year-end 2006, Berkshire Bank had time deposit accounts in amounts of $100
thousand or more maturing as follows:
|
|
|
Weighted
|
|
||||
|
|
|
|
|
Average
|
|
||
|
Maturity
Period
|
|
Amount
|
|
Rate
|
|||
|
(Dollars
in thousands)
|
|||||||
|
Three
months or less
|
$
|
58,527
|
4.49
|
%
|
|||
|
Over
3 months through 6 months
|
85,460
|
4.94
|
|||||
|
Over
6 months through 12 months
|
85,703
|
4.96
|
|||||
|
Over
12 months
|
92,094
|
4.80
|
|||||
|
Total
|
$
|
321,784
|
4.82
|
%
|
|||
The
FHLBB
functions as a central reserve bank
providing credit for member institutions. As an FHLBB member, Berkshire Bank
is
required to own capital stock of the FHLBB. FHLBB borrowings are generally
secured by most of the member’s mortgage loans and mortgage-related securities,
as well as certain other assets. Advances are made under several different
credit programs with different lending standards, interest rates, and range
of
maturities. The Company has also utilized notes payable and junior subordinated
debentures as additional funds sources.
WEALTH
MANAGEMENT SERVICES
The
Bank’s Asset Management/Trust Group provides consultative trust relationship
management to individuals, businesses, and institutions, with an emphasis on
personal investment management to individuals. The group has built a track
record over more than a decade with its dedicated in-house investment management
team. At year-end 2006, assets under management totaled $494 million. The group
also provides brokerage and investment management services in association with
Commonwealth Financial Network.
INSURANCE
Expanding
on its existing insurance operations, and those acquired as part of the Woronoco
Bancorp acquisition in 2005, Berkshire Insurance Group, Inc. acquired five
agencies with eight locations at the end of October 2006. The resulting agency
has 94 full-time equivalent employees in ten locations in Berkshire, Franklin
and Hampden Counties of Massachusetts. Berkshire Insurance Group is one of
the
largest insurance agencies in Western Massachusetts. One of the acquired
agencies was a Best Practices and Five Star designee which bolstered the
administrative and efficiency expertise, and one of the agencies had a strong
sales selection, training and oversight process in place. The newly appointed
executive team draws on over 175 years of independent agency management and
sales experience and manages a combined sales force of fifteen agents. Berkshire
Insurance Group sells all lines of insurance (personal,
commercial,
employee benefits, and life insurance) in western Massachusetts, southern
Vermont, and northwestern Connecticut. The group is preparing to enter the
New
York market for commercial insurance in the second quarter of 2007, and is
also
licensed in New Hampshire, Maine, Pennsylvania, Florida, New Jersey, Colorado,
and North Carolina. Berkshire Insurance Group is instituting an aggressive
cross
sell program of insurance and banking products through all offices and branches.
GOVERNMENT
BANKING
Berkshire
Bank offers full-service government banking for cities, towns and municipal
school districts in its primary markets and southern Vermont. The Bank offers
municipalities all aspects of financial advisory services for the sale of notes
and bonds, actively working with bond counsel, rating agencies, consulting
agencies and bond buyers. Additionally, the Bank offers a wide range of
municipal deposit products and checking accounts. In October 2005, Berkshire
Bank opened Berkshire Municipal Bank, an FDIC-insured, New York-chartered
limited purpose commercial bank, organized principally to accept deposits from
New York municipalities and other governmental entities.
PERSONNEL
At
year-end 2006, the Company had 522 full-time equivalent employees, representing
an increase of 123 (31%) from 399 at year-end 2005. This growth was primarily
due to the insurance company acquisitions in the fourth quarter. Year-end
personnel included 94 full-time equivalent employees in Berkshire Insurance
Group and 428 in the Bank. The employees are not represented by a collective
bargaining unit and the Bank will strive to continue its strong relationship
with its employees.
SUBSIDIARY
ACTIVITIES
Berkshire
Hills Bancorp, Inc. wholly owns three active subsidiaries: Berkshire Bank,
Berkshire Insurance Group, and Berkshire Hills Capital Trust I. The capital
trust subsidiary was created under Delaware law in 2005 to facilitate the
issuance of trust preferred securities. The Berkshire Insurance Group is
incorporated in Massachusetts. It was contributed to the Company by the Bank
in
October, 2006 in conjunction with the insurance agency purchases, and was
previously discussed under “Insurance”. The Company also owns one dormant
Massachusetts subsidiary, Berkshire Hills Technology, Inc., which discontinued
operations in 2004.
Berkshire
Bank is a Massachusetts chartered savings bank which wholly owns five
subsidiaries. The Bank owns three subsidiaries which are qualified as
“securities corporations” for Massachusetts income tax purposes: North Street
Securities Corporation, Woodland Securities, Inc., and Gold Leaf Securities
Corporation. Berkshire Bank also owns Berkshire Municipal Bank, which was
previously discussed under “Government Banking”. Additionally, the Bank owns the
inactive subsidiary, Berkshire Financial Planning, Inc., which ceased
offering brokerage services
in 2004. Except for Berkshire Municipal Bank, all subsidiaries of Berkshire
Bank
are incorporated in Massachusetts.
During
2005, the Company acquired Woronoco Bancorp. Between the acquisition date and
the end of the year, all of the Woronoco subsidiaries were merged into existing
Berkshire entities, except for Woronoco Insurance Group, Inc., which was
acquired by Berkshire Bank and renamed Berkshire Insurance Group, Inc.
SEGMENT
REPORTING
Management
monitors the revenue streams of the various products and services in evaluating
the Company’s operations and financial performance. All of the Company’s
operations are considered by management to be aggregated in one reportable
operating segment. Prior to its discontinuation, the operations of Berkshire
Hills Technology, Inc., were evaluated on a stand-alone basis.
REGULATION
AND SUPERVISION
The
following discussion describes elements of an extensive regulatory framework
applicable to savings and loan holding companies and banks and specific
information about the Company and its subsidiaries. Federal and state regulation
of savings banks and their holding companies is intended primarily for the
protection of depositors and the Deposit Insurance Fund rather than for the
protection of stockholders and creditors.
GENERAL
As
a
savings and loan holding company, Berkshire Hills is required by federal law
to
file reports with, and otherwise comply with the rules and regulations of,
the
Office of Thrift Supervision (“OTS”). As a savings bank chartered by the
Commonwealth of Massachusetts, Berkshire Bank is subject to extensive
regulation, examination and supervision by the Massachusetts Commissioner of
Banks (the “Commissioner”), as its primary regulator, and the Federal Deposit
Insurance Corporation (“FDIC”), as the deposit insurer. Berkshire Bank is a
member of the Federal Home Loan Bank system and, with respect to deposit
insurance, of the Bank Insurance Fund managed by the FDIC. Berkshire Bank must
file reports with the Commissioner and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The Commissioner and/or the FDIC conduct periodic
examinations to test Berkshire Bank’s safety and soundness and compliance with
various regulatory requirements. The regulatory structure gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulatory requirements
and
policies, whether by the Commissioner, the FDIC or Congress, could have a
material adverse impact on the Company, the Bank and their operations. Certain
regulatory requirements applicable to Berkshire Bank and to the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this Form 10-K does not purport to be a complete description
of such statutes and regulations and their effects on
Berkshire Bank and Berkshire Hills and is qualified in its entirety by reference
to the actual laws and regulations.
MASSACHUSETTS
BANKING LAWS AND SUPERVISION
Massachusetts
savings banks are regulated and supervised by the Massachusetts Commissioner
of
Banks (the “Commissioner”), who oversees regular bank examinations. The
Commissioner’s approval is required to establish or close branches, to merge
with another bank, to form a holding company, to issue stock or to undertake
many other activities. Any Massachusetts bank
that
does not operate in accordance with the Commissioner’s regulations, policies and
directives may be sanctioned. The Commissioner may suspend or remove directors
or officers of a bank who have violated the law, conducted a bank’s business in
a manner that is unsafe, unsound or contrary to the depositors’ interests, or
been negligent in the performance of their duties. In addition, the Commissioner
has the authority to appoint a receiver or conservator if it is determined
that
the bank is conducting its business in an unsafe or unauthorized manner, and
under certain other circumstances.
All
Massachusetts-chartered
savings
banks
are required to be members of the Depositors Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. Member banks are required to pay fund assessments. In
addition, the Mutual Savings Central Fund acts as a source of liquidity to
its
members in supplying them with low-cost funds, and purchasing qualifying
obligations from them.
Berkshire
Bank must adhere to the Massachusetts banking laws, which govern activities
such
as authorized investments, lending activities and dividend payments. In
particular, a Massachusetts savings bank may only pay dividends on its capital
stock if such payment would not impair the bank’s capital stock. No dividends
may be paid to stockholders of a bank if such dividends would reduce
stockholders’ equity of the bank below the amount of the liquidation account
required by the Massachusetts conversion regulations. Additionally, the
Commissioner may restrict the payment of dividends by a bank if it is determined
that such payment would result in safety and soundness concerns.
FEDERAL
REGULATIONS
CAPITAL
REQUIREMENTS
Under
FDIC regulations, federally insured state-chartered banks that are not members
of the Federal Reserve System (“state non-member banks”), such as Berkshire
Bank, are required to comply with minimum leverage capital requirements. For
an
institution determined by the FDIC to not be anticipating or experiencing
significant growth and to be in general a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Rating System established
by the Federal Financial Institutions Examination Council, the minimum capital
leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For
all
other institutions, the minimum leverage capital ratio
is
not
less than 4%. Tier 1 capital is the sum of common stockholders’ equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority investments in certain subsidiaries, less intangible assets (except
for
certain servicing rights and credit card relationships) and a percentage of
certain nonfinancial equity investments.
Berkshire
Bank must also comply with the FDIC risk-based capital guidelines. The FDIC
guidelines require state non-member banks to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. Risk-based
capital ratios are determined by allocating assets and specified off-balance
sheet items to four risk-weighted categories ranging from 0% to 100%, with
higher levels of capital being required for the categories perceived as
representing greater risk.
State
non-member banks must maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%, of which at least one-half must be Tier 1 capital. Total
capital consists of Tier 1 capital plus Tier 2 or supplementary capital items,
which include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock, a portion of the net
unrealized gain on equity securities and other capital instruments. The
includable amount of Tier 2 capital cannot exceed the amount of the
institution’s Tier 1 capital.
As
a
savings and loan holding company regulated by the OTS, Berkshire Hills is not
subject to any separate regulatory capital requirements. Berkshire Bank’s
regulatory capital is included in the Stockholders’ Equity note of the Company’s
financial statements in Item 8 of this report. For the dates shown, Berkshire
Bank met each of its capital requirements.
INTERSTATE
BANKING AND BRANCHING
Federal
law permits a bank, such as Berkshire Bank,
to
acquire an institution by merger in a state other than Massachusetts unless
the
other state has opted out. Federal law also authorizes de novo branching into
another state if the host state enacts a law expressly permitting out of state
banks to establish such branches within its borders. At its New York branches,
Berkshire Bank may conduct any activity that is authorized
under Massachusetts law that is permissible either for a New York savings bank
(subject to applicable federal restrictions) or a New York branch of an
out-of-state national bank. The New York State Superintendent of Banks may
exercise certain regulatory authority over the Bank’s New York
branches.
PROMPT
CORRECTIVE REGULATORY ACTION
Federal
law requires, among other things, that federal bank regulatory authorities
take
“prompt corrective action” with respect to banks that do not meet minimum
capital requirements. For these purposes, the law establishes three categories
of capital deficient institutions: undercapitalized, significantly
undercapitalized and critically undercapitalized.
The
FDIC
has adopted regulations to implement the prompt corrective action legislation.
An institution is deemed to be “well capitalized” if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater. An institution is “adequately
capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier
1 risk-based capital ratio of 4% or greater and generally a leverage ratio
of 4%
or greater. An institution is “undercapitalized” if it has a total risk-based
capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than
4%, or generally a leverage ratio of less than 4% (3% or less for institutions
with the highest examination rating). An institution is deemed to be
“significantly undercapitalized” if it has a total risk-based capital ratio of
less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is considered to be “critically
undercapitalized” if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%. As of December
31, 2006, Berkshire Bank met the conditions to be classified as a “well
capitalized” institution.
“Undercapitalized”
banks must adhere to growth, capital distribution (including dividend) and
other
limitations and are required to submit a capital restoration plan. No
institution may make a capital distribution, including payment as a dividend,
if
it would be “undercapitalized” after the payment. A bank’s compliance with such
plans is required to be guaranteed by its parent holding company in an amount
equal to the lesser of 5% of the institution’s total assets when deemed
undercapitalized or the amount needed to comply with regulatory capital
requirements. If an “undercapitalized” bank fails to submit an acceptable plan,
it is treated as if it is “significantly undercapitalized.” “Significantly
undercapitalized” banks must comply with one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
assets
and
cease
receipt of deposits from correspondent banks or dismiss directors or officers,
and restrictions on interest rates paid on deposits, compensation of executive
officers and capital distributions by the parent holding company. “Critically
undercapitalized” institutions must comply with additional sanctions including,
subject to a narrow exception, the appointment of a receiver or conservator
within 270 days after it obtains such status.
TRANSACTIONS
WITH AFFILIATES
Under
current federal law, transactions between depository institutions and their
affiliates are governed by Sections 23A and 23B of the Federal Reserve Act.
In a
holding company context, at a minimum, the parent holding company of a savings
bank and any companies which are controlled by such parent holding company
are
affiliates of the savings bank. Generally, Section 23A limits the extent to
which the savings bank or its subsidiaries may engage in “covered transactions,”
such as loans,
with any
one affiliate to 10% of such savings bank’s capital stock and surplus, and
contains an aggregate limit on all such transactions with all affiliates to
20%
of capital stock and surplus. Loans to affiliates and certain other specified
transactions must comply with specified collateralization requirements.
Section 23B requires that transactions with affiliates be on terms that are
no
less favorable to the savings bank or its subsidiary as similar transactions
with non-affiliates.
Further,
federal law restricts an institution with respect to loans to directors,
executive officers, and principal stockholders (“insiders”). Loans to insiders
and their related interests may not exceed, together with all other outstanding
loans to such persons and affiliated entities, the institution’s total capital
and surplus. Loans to insiders above specified amounts must receive the prior
approval of the board of directors. Further, loans to insiders must be made
on
terms substantially the same as offered in comparable transactions to other
persons, except that such insiders may receive preferential loans made under
a
benefit or compensation program that is widely available to Berkshire Bank’s
employees and does not give preference to the insider over the employees.
Federal law places additional limitations on loans to executive
officers.
ENFORCEMENT
The
FDIC
has extensive enforcement authority
over insured savings banks, including Berkshire Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties,
to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws
and
regulations and unsafe or unsound practices. The FDIC has authority under
federal law to appoint a conservator or receiver for an insured bank under
limited circumstances.
INSURANCE
OF DEPOSIT ACCOUNTS
The
Bank’s deposits are insured up to applicable limits by the Deposit Insurance
Fund of the Federal Deposit Insurance Corporation. The Deposit Insurance Fund
is
the successor to the Bank Insurance Fund and the Savings Association Insurance
Fund, which were merged in 2006. The Federal Deposit Insurance Corporation
recently amended its risk-based assessment system for 2007 to implement
authority granted by the Federal Deposit Insurance Reform Act of 2005 (“Reform
Act”). Under the revised system, insured institutions are assigned to one of
four risk categories based on supervisory evaluations, regulatory capital levels
and certain other factors. An institution’s assessment rate depends upon the
category to which it is assigned. Risk category I, which contains the least
risky depository institutions, is expected to include more than 90% of all
institutions. Unlike the other categories, Risk Category I contains further
risk
differentiation based on the Federal Deposit Insurance Corporation’s analysis of
financial ratios, examination component ratings and other information.
Assessment rates are determined by the Federal Deposit Insurance Corporation
and
currently range from five to seven basis points for the healthiest institutions
(Risk Category I) to 43 basis points of assessable deposits for the riskiest
(Risk Category IV). The Federal Deposit Insurance Corporation may adjust rates
uniformly from one quarter to the next, except that no single adjustment can
exceed three basis points. No institution may pay a dividend if in default
of
the FDIC assessment.
The
Reform Act also provided for a one-time credit for eligible institutions based
on their assessment base as of December 31, 1996. Subject to certain limitations
with respect to institutions that are exhibiting weaknesses, credits can be
used
to offset assessments until exhausted. The Bank’s one-time credit is expected to
approximate $1.1 million The Reform Act also provided for the possibility that
the Federal Deposit Insurance Corporation may pay dividends to insured
institutions once the Deposit Insurance fund reserve ratio equals or exceeds
1.35% of estimated insured deposits.
In
addition to the assessment for deposit insurance, institutions are required
to
make payments on bonds issued in the late 1980s by the Financing Corporation
to
recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and during the calendar year ending December 31, 2006 averaged 1.28
basis points of assessable deposits.
The
Reform Act provided the Federal Deposit Insurance Corporation with authority
to
adjust the Deposit Insurance Fund ratio to insured deposits within a range
of
1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%.
The
ratio, which is viewed by the Federal Deposit Insurance Corporation as the
level
that the fund should achieve, was established by the agency at 1.25% for 2007.
The
Federal Deposit Insurance Corporation has authority to increase insurance
assessments. A significant increase in insurance premiums would likely have
an
adverse effect on the operating expenses and results of operations of the Bank.
Management cannot predict what insurance assessment rates will be in the
future.
Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation
upon
a finding that the institution has engaged in unsafe or unsound practices,
is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the Federal
Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
FEDERAL
HOME LOAN BANK SYSTEM
The
Bank
is a member of the Federal Home Loan Bank system, which consists of 12 regional
Federal Home Loan Banks that provide a central credit facility primarily for
member institutions. Berkshire Bank, as a member, is required to acquire and
hold shares of capital stock in the Federal Home Loan Bank of Boston. Berkshire
Bank was in compliance with this requirement with an investment in Federal
Home
Loan Bank of Boston stock at year-end 2006 of $21.8 million.
The
Federal Home Loan Banks are required to provide funds for certain purposes
including contributing funds for affordable housing programs. These requirements
could reduce the amount of dividends that the Federal Home Loan Banks pay to
their members and result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members. For the years 2006, 2005, 2004, 2003,
and 2002, cash dividends from the Federal Home Loan Bank of Boston to Berkshire
Bank amounted to approximately $1.6 million, $1.3 million$0.5 million, $0.2
million and $0.3 million, respectively.
HOLDING
COMPANY REGULATION
Federal
law allows a state savings bank that qualifies as a “Qualified Thrift Lender,”
discussed below, to elect to be treated as a savings association for purposes
of
the savings and loan holding company provisions of federal law. Such election
allows its holding company to be regulated as a savings and loan holding company
by the OTS rather than as a bank holding company by the Federal Reserve Board.
Berkshire Bank made such election and the Company is a non-diversified unitary
savings and loan holding company within the meaning of federal law. As such,
the
Company is registered with the OTS and must adhere to the OTS’s regulations and
reporting requirements. In addition, the OTS may examine, supervise and take
enforcement action against the Company and has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. Additionally,
Berkshire Bank is required to notify the OTS at least 30 days before declaring
any dividend to the Company. By regulation, the OTS may restrict or prohibit
the
Bank from paying dividends.
As
a
unitary savings and loan holding company, the Company is generally unrestricted
under existing laws as to the types of business activities in which it may
engage. The Gramm-Leach-Bliley Act of 1999 provided that unitary savings and
loan holding companies may only engage in activities permitted to a financial
holding company under that legislation and those permitted for a multiple
savings and loan holding company. Unitary savings and loan companies existing
prior to May 4, 1999, such as the Company, were grandfathered as to the
unrestricted activities. The Company would become subject to activities
restrictions upon the acquisition of another savings institution that is held
as
a separate subsidiary.
Federal
law prohibits a savings and loan holding company from, directly or indirectly,
acquiring more than 5% of the voting stock of another savings association or
savings and loan holding company or from acquiring such an institution or
company by merger, consolidation or purchase of its assets, without prior
written approval of the OTS. In evaluating applications by holding companies
to
acquire savings associations, the OTS considers the financial and managerial
resources and future prospects of the Company and the institution involved,
the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
To
be
regulated as a savings and loan holding company by the OTS (rather than as
a
bank holding company by the Federal Reserve Board), the Bank must qualify as
a
Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, the Bank
must
maintain compliance with the test for a “domestic building and loan
association,” as defined in the Internal Revenue Code, or with a Qualified
Thrift Test. Under the Qualified Thrift Lender Test, a savings institution
is
required to maintain at least 65% of its “portfolio assets” (total assets less:
(1) specified liquid assets up to 20% of total assets; (2) intangibles,
including goodwill; and (3) the value of property used to conduct business)
in
certain “qualified thrift investments” (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12-month period. At year-end 2006, Berkshire
Bank maintained 77% of its portfolio assets in qualified thrift investments.
Berkshire Bank also met the QTL test in each of the prior twelve months and,
therefore, met the QTL Test.
Acquisition
of the Company.
Under
the Federal Change in Bank Control Act, a notice must be submitted to the OTS
if
any person (including a company), or group acting in concert, seeks to acquire
“control” of a savings and loan holding company. Under certain circumstances, a
change in control may occur, and prior notice is required, upon the acquisition
of 10% or more of the Company’s outstanding voting stock, unless the OTS has
found that the acquisition will not result in a change of control of the
Company.
Massachusetts
Holding Company Regulation.
In
addition to the federal holding
company regulations,
a bank holding company organized or doing business in Massachusetts must comply
with regulations under Massachusetts law. Approval of the Massachusetts
regulatory authorities would be required for the Company to acquire 25% or
more
of the voting stock of another depository institution. Similarly, prior
regulatory approval would be necessary for any person or company to acquire
25%
or more of the voting stock of the Company. The term “bank holding company,” for
the purpose of Massachusetts law, is defined generally to include any company
which, directly or indirectly, owns, controls or holds with power to vote more
than 25% of the voting stock of each of two or more banking institutions,
including commercial banks and state co-operative banks, savings banks and
savings and loan association and national banks, federal savings banks and
federal savings and loan associations. In general, a holding company
controlling, directly or indirectly, only one banking institution will not
be
deemed to be a bank holding company for the purposes of Massachusetts law.
Under
Massachusetts law, the prior approval of the Board of Bank Incorporation is
required before the following: any company may become a bank holding company;
any bank holding company acquires direct or indirect ownership or control of
more than 5% of the voting stock of, or all or substantially all of the assets
of, a banking institution; or any bank holding company mergers with another
bank
holding company. The Company is a bank holding company for purposes of
Massachusetts law. The Company has no current plan or arrangement to acquire
ownership or control, directly or indirectly, of 25% or more of the voting
stock
of another banking institution.
BERKSHIRE
MUNICIPAL BANK
In
2005,
Berkshire Bank established a new subsidiary, Berkshire Municipal Bank, as a
state chartered limited
purpose commercial bank in New York, to accept deposits of municipalities and
other governmental entities in the State of New York. Berkshire Municipal Bank
is subject to extensive regulation, examination and supervision by the New
York
State Superintendent of Banks, as its primary regulator and the FDIC, as the
deposit insurer. It is also subject to regulation as to certain matters by
the
Federal Reserve.
FEDERAL AND
MASSACHUSETTS INCOME TAXATION
The
Company and the Bank report their income on a calendar year basis using the
accrual method of accounting. The federal income tax laws apply to the Company
and Berkshire Bank in the same manner as to other corporations with some
exceptions, including particularly Berkshire Bank’s reserve for bad debts
discussed below. This discussion of tax matters is only a summary and is not
a
comprehensive description of the tax rules applicable to the Company and its
subsidiaries.
Prior
to
1995, the Bank was permitted to use certain favorable provisions to calculate
deductions from taxable income for annual additions to its bad debt reserve.
Federal legislation in 1996 repealed this reserve method and required savings
institutions to recapture or take into income certain portions of their
accumulated bad debt reserves. Approximately $844 thousand of the Bank’s
accumulated bad debt reserves will not be recaptured into taxable income unless
the Bank makes a “nondividend distribution” to the Company, including
distributions in excess of the Bank’s current and accumulated earnings
and profits. In the event of a nondividend distribution, approximately 150%
of
the amount of the distribution up to $844 thousand would be includable in income
for federal income tax purposes, resulting in an increase in tax of $346
thousand assuming a marginal federal and state tax rate of 41%. The Bank does
not intend to pay dividends that would result in a recapture of any portion
of
its bad debt reserves.
The
Massachusetts excise tax rate for savings banks is currently 10.5% of federal
taxable income, adjusted for certain items. Taxable income includes gross income
as defined under the Internal Revenue Code, plus interest from municipal
obligations of any state, less deductions, but not the credits, allowable under
the provisions of the Internal Revenue Code, except no deduction is allowed
for
bonus depreciation or state income taxes. Carryforwards and carrybacks of net
operating losses are not allowed. A qualifying limited purpose corporation
is
generally entitled to special tax treatment as a “securities corporation.” The
Bank’s three securities corporations all qualify for this treatment, and are
taxed at a 1.3% rate on their gross income.
ITEM
1A. RISK FACTORS
An
investment in our common stock involves risk. You should carefully consider
the
risks described below and all other information contained in this annual report
on Form 10-K before you decide to buy our common stock. It is possible that
risks and uncertainties not listed below may arise or become material in the
future and affect our business.
Lending
Our
emphasis on commercial lending may expose us to increased lending risks, which
could hurt our profits.
Our
commercial loan portfolio, which consists of commercial real estate loans,
construction and development loans and commercial business loans has increased
from $569 million at year-end 2005 to $757 million at year-end 2006. A
significant portion of this growth has included construction and development
loans that may have higher risk, and loans in new markets, where the Company
has
less historic knowledge of the market. Also, commercial
loans are
more
sensitive to economic downturns and the possible impact of higher interest
rates. Such sensitivity includes
potentially higher default rates and possible diminution of collateral values.
Some
of
the growth in commercial loans is also attributable to larger loan sizes
and
larger relationship exposures,
which
can have a greater impact on profits in the event of adverse loan performance.
Commercial
lending also involves more development financing, which
is
dependent on the future success of new operations. Additionally,
the Company has expanded its commercial lending team to accomplish this growth,
and this has the potential to increase risk relating to underwriting and
administrative controls as new lenders are integrated into the control
environment. These and other factors may result in errors in judging the
collectibility of commercial loans, which may lead to additional provisions
or
charge-offs. Construction lending depends largely upon the accuracy of the
initial estimate of the property’s value at completion of construction and the
estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of construction costs proves to be inaccurate, the Company may be
required to advance funds beyond the amount originally committed to permit
completion of the building. If the estimate of value proves to be inaccurate,
the Company may be confronted, at or before the maturity of the loan, with
a
building having a value which is insufficient to assure full repayment. If
the
Company is forced to foreclose on a building before or at completion due to
a
default, there can be no assurance that it will be able to recover all of the
unpaid balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs.
Our
allowance for loan losses may prove to be insufficient to absorb losses in
our
loan portfolio.
Like
all
financial institutions, we maintain an allowance for loan losses to provide
for
loans in our portfolio that may not be repaid in their entirety. We believe
that
our allowance for loan losses is maintained at a level adequate to absorb
probable losses inherent in our loan portfolio as of the corresponding balance
sheet date. However, our allowance for loan losses may not be sufficient to
cover actual loan losses, and future provisions for loan losses could materially
adversely affect our operating results.
In
evaluating the adequacy of our allowance for loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth
of
our loan portfolio, changes in the composition of our loan portfolio and the
volume of delinquent and criticized loans. In addition, we use information
about
specific borrower situations, including their financial position and estimated
collateral values, to estimate the risk and amount of loss for those borrowers.
Finally, we also consider many qualitative factors, including general and
economic business conditions, the local residential real estate market, the
interest rate environment, fiscal and monetary policy of the United States
government, energy prices, commercial real estate conditions, the duration
of
the current business cycle, current general market collateral valuations, trends
apparent in any of the factors we take into account and other matters, which
are
by nature more subjective and fluid. Our estimates of the risk of loss and
amount of loss on any loan are complicated by the significant uncertainties
surrounding our borrowers’ abilities to successfully execute their business
models through changing economic environments, competitive challenges and other
factors. Because of the degree of uncertainty and susceptibility of these
factors to change, our actual losses may vary from our current
estimates.
Based
on
our review of the above-mentioned factors, we recorded a provision for loan
losses of $7.9 million for the year ended December 31, 2006 to bring our
allowance for loan losses at year-end 2006 to $19.4 million, which was 1.14%
of
total loans. State and federal regulators, as an integral part of their
examination process, periodically review our allowance for loan losses and
may
require us to increase our allowance for loan losses by recognizing additional
provisions for loan losses charged to expense, or to decrease our allowance
for
loan losses by recognizing loan charge-offs, net of recoveries. Any such
additional provisions for loan losses or charge-offs, as required by these
regulatory agencies, could have a material adverse effect on our financial
condition and results of operations.
A
downturn in the local economy or a decline in real
estate
values could hurt our profits.
Approximately
77% of our loans were secured by real estate as of year-end 2006. In recent
years, there has been a significant
increase in real estate values in our market area. A decline in real estate
values could expose us to a greater
risk of loss. Because
the majority of our borrowers and depositors are individuals and businesses
located and doing business in our market areas, our success depends to a
significant extent upon economic conditions in our market areas. Adverse
economic conditions in our market areas could reduce our growth rate, affect
the
ability of our customers to repay their loans and generally effect our financial
condition and results of operations. Conditions such as inflation, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders, terrorism and other factors beyond our control may
adversely affect our profitability. We are less able than a larger institution
to spread the risks of unfavorable local economic conditions across a large
number of diversified economies. Any sustained period of increased payment
delinquencies, foreclosures or losses caused by adverse market or economic
conditions in our market areas could adversely affect the value of our assets,
revenues, results of operations and financial condition. Moreover, we cannot
give any assurance we will benefit from any market growth or favorable economic
conditions in our primary market areas if they do occur.
Growth
Our
geographic expansion and growth, if not successful, could negatively impact
earnings.
We
plan
to achieve
significant growth both organically and through acquisitions. We have recently
expanded into new geographic markets and anticipate
that we will expand into additional new geographic markets as we transform
ourselves into a regional bank. The success of this
expansion will depend on our ability to continue to maintain and develop an
infrastructure appropriate to support such growth. Also, our success will depend
on the acceptance by customers of us and our services in these new markets
and,
in the case of expansion through acquisitions, the success of acquisitions
depends on many factors, including the long-term retention of key personnel
and
acquired customer relationships. The profitability of our expansion strategy
also will depend on whether the income we generate in the new markets
will offset
the increased expenses of operating a larger entity with increased personnel,
more branch locations and additional product
offerings. We expect that it may take a period of time before certain of our
new
branches can become profitable, especially
in areas in which we do not have an established physical presence. During this
period, operating these new
branches may negatively impact net income. Additionally, in connection with
our
expansion, we will need
to
increase our operational and financial procedures, systems and controls. If
we
have difficulty in doing so, it could
harm our
business, results of operations and financial condition.
Competition
from financial institutions and other financial service providers may adversely
affect our growth and profitability.
The
banking business is highly competitive and we experience competition in each
of
our markets from many other financial institutions. We compete with commercial
banks, credit unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market funds, and other mutual funds, as well as other super-regional,
national and international financial institutions that operate offices in our
primary market areas and elsewhere.
We
compete with these institutions both in attracting deposits and in making loans.
This competition has made it more difficult for us to make new loans and has
occasionally forced us to offer higher deposit rates. Price competition for
loans and deposits might result in our earning less on our loans and paying
more
on our deposits, which reduces net interest income. Many of our competitors
are
larger financial institutions. While we believe we can and do successfully
compete with these other financial institutions in our primary markets, we
may
face a competitive disadvantage as a result of our smaller size, smaller
resources and smaller lending limits, lack of geographic diversification and
inability to spread our marketing costs across a broader market.
Our
continued pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is
needed.
We
are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. We may at some point need to raise
additional capital to support our continued growth. Our ability to raise
capital, if needed, will depend on conditions in the capital markets at that
time, which are outside of our control, and on our financial performance.
Accordingly, if needed, we cannot assure you of our ability to raise additional
capital on terms acceptable to us. If we cannot raise additional capital when
needed, our ability to execute our strategic plan, which includes further
expanding our operations through internal growth and acquisitions could be
materially impaired.
Interest
Rates
Fluctuations
in interest rates could reduce our profitability and affect the value of our
assets.
Like
other financial institutions, we are subject to interest rate risk. Our primary
source of income is net interest income, which is the difference between
interest earned on loans and investments and the interest paid on deposits
and
borrowings. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the relationships
of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest
rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products
(e.g.,
prime)
may not change to the same degree over a given time period. In any event, if
market interest rates should move contrary to our position, our earnings may
be
negatively affected. In addition, loan volume and quality and deposit volume
and
mix can be affected by market interest rates. Changes in levels of market
interest rates could materially adversely affect our net interest spread, asset
quality, origination volume and overall profitability.
Interest
rates have recently been at historically low levels. However, since
June 30, 2004, the U.S. Federal Reserve has increased its target for the
federal funds rate seventeen times, from 1.00% to 5.25%. While these short-term
market interest rates (which we use as a guide to price our deposits) have
increased, longer-term market interest rates (which we use as a guide to price
our longer-term loans) have not. This “flattening” of the market yield curve has
had a negative impact on our interest rate spread and net interest margin to
date. If short-term interest rates continue to rise, and if rates on our
deposits and borrowings continue to reprice upwards faster than the rates on
our
long-term loans and investments, we would experience further compression of
our
interest rate spread and net interest margin, which would have a negative effect
on our net interest income and hence our profitability.
We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate environment,
we may not be able to manage this risk effectively. If we are unable to manage
interest rate risk effectively, our business, financial condition and results
of
operations could be materially harmed.
Changes
in the level of interest rates also may negatively affect our ability to
originate real estate loans, the value of our assets and our ability to realize
gains from the sale of our assets, all of which ultimately affect our
earnings.
Our
investment portfolio includes securities that are sensitive to interest rates
and variations in interest rates may adversely impact our
profitability.
Our
securities portfolio is comprised of mortgage-backed securities, which are
insured or guaranteed by U.S. government agencies or government-sponsored
enterprises, and U.S. government securities, as well as municipal bonds and
obligations and other bonds. These securities are sensitive to interest rate
fluctuations. The unrealized gains or losses in our available-for-sale portfolio
are reported as a separate component of stockholders’ equity until realized upon
sale. As a result, future interest rate fluctuations may impact stockholders’
equity, causing material fluctuations from quarter to quarter. Failure to hold
our securities until maturity or until market conditions are favorable for
a
sale could adversely affect our financial condition, profitability and
prospects.
Liquidity
Our
wholesale funding sources may prove insufficient to replace deposits at maturity
and support our future growth.
We
must
maintain sufficient funds to respond to the needs of depositors and borrowers.
As a part of our liquidity management, we use a number of funding sources in
addition to core deposit growth and repayments and maturities of loans and
investments. As we continue to grow, we are likely to become more dependent
on
these sources, which include Federal Home Loan Bank advances and proceeds from
the sale of loans. At December 31, 2006, we had approximately $330 million
of
FHLBB advances outstanding. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at acceptable interest
rates. Finally, if we are required to rely more heavily on more expensive
funding sources to support future growth, our revenues may not increase
proportionately to cover our costs. In this case, our operating margins and
profitability would be adversely affected.
Our
ability to service our debt, pay dividends and otherwise pay our obligations
as
they come due is substantially dependent on capital distributions from Berkshire
Bank, and these distributions are subject to regulatory limits and other
restrictions.
A
substantial source of our income from which we service our debt, pay our
obligations and from which we can pay dividends is the receipt of dividends
from
Berkshire Bank. The availability of dividends from Berkshire Bank is limited
by
various statutes and regulations. It is possible, depending upon the financial
condition of Berkshire Bank, and other factors, that the applicable regulatory
authorities could assert that payment of dividends or other payments is an
unsafe or unsound practice. If Berkshire Bank is unable to pay dividends to
us,
we may not be able to service our debt, pay our obligations or pay dividends
on
our common stock. The inability to receive dividends from Berkshire Bank would
adversely affect our business, financial condition, results of operations and
prospects.
Operational
We
operate in a highly regulated environment and may be adversely affected by
changes in laws and
regulations.
Berkshire
Hills Bancorp is subject to extensive regulation, supervision and examination
by
the Office of Thrift Supervision, its
chartering authority, and Berkshire Bank is subject to extensive supervision
and
examination by the Massachusetts Division of
Banks,
its chartering authority, and the Federal Deposit Insurance Corporation, as
insurer of Berkshire Bank’s deposits. Such regulations
and supervision govern the activities in which an institution and its holding
company may engage, and are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in their supervisory and enforcement
activities, including the imposition of restrictions on operations, the
classification of assets and determination of the level of allowance for loan
losses. Any change in such regulation and oversight, whether in the form of
regulatory
policy, regulations, legislation or supervisory action may have a material
impact on our operations. Berkshire Hills Bancorp primarily depends on Berkshire
Bank for dividends as a source of funds to service its indebtedness and to
pay
dividends to
stockholders. Such dividends may be restricted or prohibited by regulatory
authorities.
We
are subject to security and operational risks relating to our use of technology
that could damage our reputation and our business.
Security
breaches in our internet banking activities could expose us to possible
liability and damage our reputation. Any compromise of our security also could
deter customers from using our internet banking services that involve the
transmission of confidential information. We rely on standard internet security
systems to provide the security and authentication necessary to effect secure
transmission of data. These precautions may not protect our systems from
compromises or breaches of our security measures that could result in damage
to
our reputation and our business. Additionally, our data processing and
telecommunications utilize third party software, hardware, and support. If
our
third party providers encounter difficulties or if we have difficulty in
communicating with third parties, it will significantly affect our ability
to
adequately process and account for customer transactions, which would
significantly affect our business operations.
Provisions
of our certificate of incorporation, bylaws and Delaware law, as well as state
and federal banking regulations, could delay or prevent a takeover of us by
a
third party.
Provisions
in our certificate of incorporation and bylaws, the corporate law of the State
of Delaware, and state and federal regulations could delay, defer or prevent
a
third party from acquiring us, despite the possible benefit to our stockholders,
or otherwise adversely affect the price of our common stock. These provisions
include: limitations on voting rights of beneficial owners of more than 10%
of
our common stock, supermajority voting requirements for certain business
combinations; the election of directors to staggered terms of three years;
and
advance notice requirements for nominations for election to our board of
directors and for proposing matters that stockholders may act on at stockholder
meetings. In addition, we are subject to Delaware laws, including one that
prohibits us from engaging in a business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder unless certain conditions are met. These provisions
may
discourage potential takeover attempts, discourage bids for our common stock
at
a premium over market price or adversely affect the market price of, and the
voting and other rights of the holders of, our common stock. These provisions
could also discourage proxy contests and make it more difficult for you and
other stockholders to elect directors other than the candidates nominated by
our
Board.
Goodwill
Our
acquisitions have resulted in significant goodwill, which if it becomes impaired
would be required to be written down, which would negatively impact
earnings.
We
acquired Woronoco Bancorp, Inc. in 2005, and have purchased insurance and
financial planning businesses in the last
two
years, including the five insurance agencies we acquired on October 31, 2006.
We
will pursue additional opportunities for acquisitions in the future, including
acquisitions in adjacent states.
The success of acquisitions depends on many factors, including the long term
retention of key personnel and acquired customer relationships. We
recorded goodwill and other intangible assets in conjunction with the Woronoco
Bancorp acquisition and in connection with the insurance agency acquisitions,
and such assets may be
recorded in future acquisitions. If these assets were to become impaired, we
would be required to write them
down.
Trading
The
trading history of our common stock is characterized by low trading volume.
The
value of your investment may be subject to sudden decreases due to the
volatility of the price of our common stock.
Our
common stock trades on The NASDAQ Global Select Market. The average daily
trading volume of our common stock was approximately 29,400 shares. We cannot
predict the extent to which investor interest in us will lead to a more active
trading market in our common stock or how liquid that market might become.
A
public trading market having the desired characteristics of depth, liquidity
and
orderliness depends upon the presence in the marketplace of willing buyers
and
sellers of our common stock at any given time, which presence is dependent
upon
the individual decisions of investors, over which we have no control.
The
market price of our common stock may be highly volatile and subject to wide
fluctuations in response to numerous factors, including, but not limited to,
the
factors discussed in other risk factors and the following:
|
·
|
actual
or anticipated fluctuations in our operating
results;
|
|
·
|
changes
in interest rates;
|
|
·
|
changes
in the legal or regulatory environment in which we
operate;
|
|
·
|
press
releases, announcements or publicity relating to us or our competitors
or
relating to trends in our industry;
|
|
·
|
changes
in expectations as to our future financial performance, including
financial estimates or recommendations by securities analysts and
investors;
|
|
·
|
future
sales of our common stock;
|
|
·
|
changes
in economic conditions in our marketplace, general conditions in
the U.S.
economy, financial markets or the banking industry,
and
|
|
·
|
other
developments affecting our competitors or us.
|
These
factors may adversely affect the trading price of our common stock, regardless
of our actual operating performance, and could prevent you from selling your
common stock at the price you desire. In addition, the stock markets, from
time
to time, experience extreme price and volume fluctuations that may be unrelated
or disproportionate to the operating performance of companies. These broad
fluctuations may adversely affect the market price of our common stock,
regardless of our trading performance. In the past, stockholders often have
brought securities class action litigation against a company following periods
of volatility in the market price of their securities. We may be the target
of
similar litigation in the future, which could result in substantial costs and
divert management’s attention and resources.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Company’s headquarters is located in an owned facility located in Pittsfield,
Massachusetts. At year-end 2006, the Company entered into a long term lease
for
new corporate headquarters to be occupied in 2007 in Pittsfield. The current
headquarters will be used for the expansion of operations. At year-end 2006,
the
Company occupied a total of 47 facilities, of which 17 were owned by the Company
and 30 were leased, within its primary market areas of Berkshire County,
Massachusetts; Pioneer Valley, Massachusetts; and Capital Region, Northeastern
New York. In 2006, the Company opened 3 new branches in New York, bringing
the
total full service branch count to 27, of which 14 operate in premises owned
by
the Company. The Company also announced 4 new branch locations for 2007, all
of
which will operate in facilities leased by the Company. Additionally, with
the
acquisition of the five insurance agencies in October of 2006, the Company
now
leases 10 buildings throughout the Pioneer Valley and Berkshire County in
relation to these insurance agencies. Also at year-end 2006, the Company
occupied 6 additional office properties, of which 3 were leased and 3 were
owned. The Company is increasing its workspace capacity in proportion with
its
current expansion and growth plans to adequately fill its needs.
ITEM
3. LEGAL PROCEEDINGS
At
December 31, 2006, neither the Company nor the Bank were involved in any pending
legal proceedings believed by management to be material to the Company’s
financial condition or results of operations. Periodically, there have been
various claims and lawsuits involving the Bank, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans
and
other issues incident to the Bank’s business. However, neither the Company nor
the Bank is a party to any pending legal proceedings that it believes, in the
aggregate, would have a material adverse effect on the financial condition
or
operations of the Company.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of 2006.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
The
common shares of Berkshire Hills trade on the NASDAQ Global Select Market under
the symbol “BHLB”. Since its initial public offering, the Company’s shares had
traded on the American Stock Exchange under the symbol “BHL”. The Company’s
shares began trading on the NASDAQ Global Select Market on October 25,
2005.
The
following table sets forth the quarterly high and low sales price information
and dividends declared per share of common stock in 2006 and 2005. On March
7,
2007, the closing market price of Berkshire Hills common stock was $33.52.
Berkshire Hills increased its quarterly dividend to $0.14 per share in the
third
quarter of 2005.
|
|
|
Dividends
|
||||||||
|
2006
|
High
|
Low
|
Declared
|
|||||||
|
First
quarter
|
$
|
36.08
|
$
|
32.37
|
$
|
0.14
|
||||
|
Second
quarter
|
36.39
|
32.77
|
0.14
|
|||||||
|
Third
quarter
|
38.44
|
33.46
|
0.14
|
|||||||
|
Fourth
quarter
|
39.67
|
33.08
|
0.14
|
|||||||
|
2005
|
||||||||||
|
First
quarter
|
$
|
37.64
|
$
|
33.40
|
$
|
0.12
|
||||
|
Second
quarter
|
34.90
|
30.97
|
0.12
|
|||||||
|
Third
quarter
|
35.20
|
31.90
|
0.14
|
|||||||
|
Fourth
quarter
|
35.57
|
31.75
|
0.14
|
|||||||
Holders
The
Company had approximately 2,029 holders of record of common stock at March
8,
2007.
Dividends
The
principal source of the Company’s cash reserves is dividends received from the
Bank and, in the future from Berkshire Insurance Group, together with proceeds
from stock option exercises. In addition, the Company has issued subordinated
debt to its wholly owned subsidiary grantor trust. The banking regulators may
prohibit banks and holding companies from paying dividends that would constitute
an unsafe or unsound banking practice, or which would reduce the amount of
its
capital below that necessary to minimum applicable regulatory capital
requirements. The Company is subject to the requirements of Delaware law, which
generally limits dividends to an amount equal to the excess of the net assets
of
the Company (the amount by which total assets exceed total liabilities) over
its
statutory capital or, if there is no excess, to its net profits for the current
and/or immediately preceding fiscal year. See also the Stockholders’ Equity note
in the financial statements in Item8 of this Form 10-K.
Securities
Authorized for Issuance under Equity Compensation Plans
Information
regarding securities authorized for issuance under equity compensation plans
appears in Part III, Item 12 of this report.
Recent
Sales of Unregistered Securities; Use of Proceeds From Registered
Securities
No
unregistered securities were sold by the Company within the last three years.
Registered securities were exchanged as part of the consideration for the
acquisition of Woronoco Bancorp.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchases
The
following table provides information with respect to any purchase made by or
on
behalf of the Company or any “affiliated purchaser”, as defined by Section
240.10b-18(a)(3) of the Securities and Exchange Act of 1934, of shares of the
Company’s common stock during the fourth quarter of 2006.
|
Period
|
Total
number of
shares
purchased
|
Average
price
paid
per share
|
Total
number of shares
purchased
as part of
publicly
announced
plans
or programs
|
Maximum
number of
shares
that may yet be
purchased
under the
plans
or programs
|
|||||||||
|
October
1-31, 2006
|
-
|
$
|
-
|
-
|
300,000
|
||||||||
|
November
1-30, 2006
|
-
|
-
|
-
|
300,000
|
|||||||||
|
December
1-31, 2006
|
15,000
|
34.66
|
15,000
|
285,000
|
|||||||||
|
Total
|
15,000
|
$
|
34.66
|
15,000
|
285,000
|
||||||||
On
February 23, 2006, the Company authorized the purchase of up to 300,000 shares,
from time to time, subject to market conditions. The repurchase plan will
continue until it is completed or terminated by the Board of Directors. As
of
December 31, 2006, there were 15,000 shares repurchased under this plan and
285,000 shares remained available to be repurchased. The Company has no plans
that it has elected to terminate prior to expiration or under which it does
not
intend to make further purchases.
Performance
Graph
The
performance graph compares the Company’s cumulative stockholder return on its
common stock over the last five years to the cumulative return of the NASDAQ
Composite Index, the SNL $1 Billion - $5 Billion Thrift Index, and the SNL
All
Bank and Thrift Index. Total stockholder return is measured by dividing total
dividends (assuming dividend reinvestment) for the measurement period plus
share
price change for a period by the share price at the beginning of the measurement
period. The Company’s cumulative stockholder return over a five-year period is
based on an initial investment of $100 on December 31, 2001.
The
Company has previously used the SNL $1 Billion - $5 Billion Thrift Index to
compare its stock performance to a peer index. Due to the Company’s growth and
transformation into a more diversified regional financial institution with
a
more bank-like balance sheet, the Company has determined that a more appropriate
index to compare to its stock performance is the SNL Bank and Thrift Index.
Both
of these indices are shown in the performance graph, and in the future the
SNL
Bank and Thrift Index will be shown as the banking industry comparative
index.
Comparison
of Five Year Cumulative Total Return Among Berkshire Hills Bancorp, NASDAQ
Composite Index, SNL $1B - $5B Thrift Index, and SNL Bank and Thrift
Index
|
|
Period
Ending
|
|||||
|
Index
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
|
Berkshire
Hills Bancorp, Inc.
|
100.00
|
118.72
|
185.60
|
193.04
|
176.77
|
179.44
|
|
NASDAQ
Composite
|
100.00
|
68.76
|
103.67
|
113.16
|
115.57
|
127.58
|
|
SNL
$1B-$5B Thrift Index
|
100.00
|
128.06
|
192.07
|
217.67
|
215.77
|
248.17
|
|
SNL
Bank and Thrift Index
|
100.00
|
93.96
|
127.39
|
142.66
|
144.89
|
169.30
|
ITEM
6. SELECTED FINANCIAL DATA
The
following summary data is based in part on the consolidated financial statements
and accompanying notes, and other schedules appearing elsewhere in this Form
10-K. Historical data is also based in part on, and should be read in
conjunction with, prior filings with the SEC. Financial data includes the impact
of the acquisition of Woronoco Bancorp, Inc. in 2005 and five affiliated
insurance agencies in 2006.
|
At
or For the Years Ended December 31,
|
||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|||||||
|
Selected
Financial Data:
|
||||||||||||||||
|
Total
assets
|
$
|
2,149,642
|
$
|
2,035,553
|
$
|
1,310,115
|
$
|
1,218,548
|
$
|
1,045,947
|
||||||
|
Securities
|
234,174
|
420,320
|
414,363
|
359,294
|
226,919
|
|||||||||||
|
Loans,
net
|
1,679,617
|
1,407,229
|
818,842
|
783,258
|
712,714
|
|||||||||||
|
Goodwill
and intangibles
|
121,341
|
99,616
|
7,254
|
10,233
|
10,436
|
|||||||||||
|
Deposits
|
1,521,938
|
1,371,218
|
845,789
|
830,244
|
782,360
|
|||||||||||
|
Borrowings
and subordinated debentures
|
360,469
|
412,917
|
327,926
|
251,465
|
133,702
|
|||||||||||
|
Total
stockholders’ equity
|
258,161
|
246,066
|
131,736
|
123,175
|
120,569
|
|||||||||||
|
Selected
Operating Data:
|
||||||||||||||||
|
Total
interest and dividend income
|
$
|
118,051
|
$
|
87,732
|
$
|
61,081
|
$
|
56,308
|
$
|
64,128
|
||||||
|
Total
interest expense
|
57,811
|
36,115
|
20,724
|
18,742
|
23,428
|
|||||||||||
|
Net
interest income
|
60,240
|
51,617
|
40,357
|
37,566
|
40,700
|
|||||||||||
|
Provision
for loan losses
|
7,860
|
1,313
|
1,565
|
1,460
|
6,180
|
|||||||||||
|
Service
charge and fee income
|
13,539
|
9,373
|
5,493
|
5,023
|
4,659
|
|||||||||||
|
All
other non-interest income
|
(1,491
|
)
|
5,550
|
2,271
|
1,425
|
1,768
|
||||||||||
|
Total
non-interest expense
|
48,868
|
48,998
|
28,977
|
28,243
|
37,279
|
|||||||||||
|
Provision
for income taxes
|
4,668
|
8,003
|
5,639
|
5,161
|
885
|
|||||||||||
|
Net
income (loss) from discontinued operations
|
371
|
-
|
(431
|
)
|
(185
|
)
|
(686
|
)
|
||||||||
|
Net
income
|
$
|
11,263
|
$
|
8,226
|
$
|
11,509
|
$
|
8,965
|
$
|
2,097
|
||||||
|
Dividends
per share
|
$
|
0.56
|
$
|
0.52
|
$
|
0.48
|
$
|
0.48
|
$
|
0.48
|
||||||
|
Basic
earnings per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
1.28
|
$
|
1.16
|
$
|
2.26
|
$
|
1.74
|
$
|
0.52
|
||||||
|
Discontinued
operations
|
0.04
|
-
|
(0.08
|
)
|
(0.04
|
)
|
(0.13
|
)
|
||||||||
|
Total
|
$
|
1.32
|
$
|
1.16
|
$
|
2.18
|
$
|
1.70
|
$
|
0.39
|
||||||
|
Diluted
earnings per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
1.25
|
$
|
1.10
|
$
|
2.08
|
$
|
1.60
|
$
|
0.47
|
||||||
|
Discontinued
operations
|
0.04
|
-
|
(0.07
|
)
|
(0.03
|
)
|
(0.11
|
)
|
||||||||
|
Total
|
$
|
1.29
|
$
|
1.10
|
$
|
2.01
|
$
|
1.57
|
$
|
0.36
|
||||||
|
Average
shares outstanding:
|
||||||||||||||||
|
Basic
|
8,538
|
7,122
|
5,284
|
5,266
|
5,435
|
|||||||||||
|
Diluted
|
8,730
|
7,503
|
5,731
|
5,703
|
5,867
|
|||||||||||
|
|
At
or For the Years Ended December 31,
|
|||||||||||||||
|
(Dollars
in thousands, except per share data)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Selected
Operating Ratios and Other Data:
|
||||||||||||||||
|
Performance
Ratios:
|
||||||||||||||||
|
Return
on average assets
|
0.53
|
%
|
0.47
|
%
|
0.89
|
%
|
0.80
|
%
|
0.20
|
%
|
||||||
|
Return
on average equity
|
4.40
|
4.19
|
9.06
|
7.28
|
1.54
|
|||||||||||
|
Interest
rate spread
|
2.81
|
3.00
|
3.10
|
3.29
|
3.70
|
|||||||||||
|
Net
interest margin
|
3.24
|
3.33
|
3.37
|
3.61
|
4.18
|
|||||||||||
|
Non-interest
income/total net revenue
|
16.67
|
22.43
|
16.13
|
14.65
|
13.64
|
|||||||||||
|
Non-interest
expense/average assets
|
2.31
|
2.81
|
2.25
|
2.53
|
3.54
|
|||||||||||
|
Dividend
payout ratio
|
42.92
|
45.06
|
22.02
|
28.24
|
123.08
|
|||||||||||
|
Bank
Capital Ratios:
|
||||||||||||||||
|
Tier
1 capital to average assets
|
7.69
|
7.79
|
8.08
|
7.87
|
8.60
|
|||||||||||
|
Total
capital to risk-weighted assets
|
10.27
|
11.12
|
12.69
|
12.55
|
13.48
|
|||||||||||
|
Shareholders’
equity/total assets
|
12.01
|
12.09
|
10.06
|
10.11
|
11.53
|
|||||||||||
|
Asset
Quality Ratios:
|
||||||||||||||||
|
Nonperforming
loans/total loans
|
0.45
|
0.08
|
0.14
|
0.40
|
0.52
|
|||||||||||
|
Nonperforming
assets/total assets
|
0.35
|
0.06
|
0.09
|
0.26
|
0.36
|
|||||||||||
|
Net
loans charged-off/average total loans
|
0.07
|
0.08
|
0.15
|
0.35
|
0.87
|
|||||||||||
|
Allowance
for loan losses/total loans
|
1.14
|
0.92
|
1.13
|
1.13
|
1.43
|
|||||||||||
|
Allowance
for loan losses/nonperforming loans
|
2.55
|
x
|
10.96
|
x
|
8.11
|
x
|
2.80
|
x
|
2.76
|
x
|
||||||
|
|
||||||||||||||||
|
Share
Data:
|
||||||||||||||||
|
Book
value per share
|
$
|
29.63
|
$
|
28.81
|
$
|
22.43
|
$
|
20.87
|
$
|
19.71
|
||||||
|
Market
price at year end
|
$
|
33.46
|
$
|
33.50
|
$
|
37.15
|
$
|
36.20
|
$
|
23.55
|
||||||
|
|
||||||||||||||||
|
Note:
|
All
performance ratios are based on average balance sheet amounts where
applicable.
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
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.
CRITICAL
ACCOUNTING POLICIES
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements. Please see those policies in conjunction
with
this discussion.
Critical
accounting policies are those that are reflective of significant judgments
and
uncertainties, and could potentially result in materially different results
under different assumptions and conditions. Management believes that our most
critical accounting policies, which involve the most complex or subjective
decisions or assessments, are as follows:
Allowance
for Loan Losses.
Arriving at an appropriate level of allowance for loan losses involves a high
degree of judgment. The allowance for loan losses provides for probable
estimable losses based upon evaluations of known and inherent risks in the
loan
portfolio. 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 we believe that we use
the
appropriate information available 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. For
example,
a downturn in the local economy could cause an increase in non-performing loans.
Additionally, a decline in real estate values could cause some of our loans
to
become inadequately collateralized. In either case, this may require us to
increase our provisions for loan losses, which would negatively impact earnings.
The allowance for loan losses discussion in Item 1 provides additional
information about the allowance.
Income
Taxes.
Management considers accounting for income taxes as a critical accounting policy
due to the subjective nature of certain estimates that are involved in the
calculation and evaluation of the timing and recognition of resulting tax
liabilities and assets. Management uses the asset 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. Management must assess the
realizability of the deferred tax asset, including the carry forward of a
portion of the charitable contribution, and to the extent that management
believes that recovery is not likely, a valuation allowance is established.
Adjustments to increase or decrease the valuation allowance are generally
charged or credited, respectively, to income tax expense.
Goodwill
and Identifiable Intangible Assets.
In
conjunction with the acquisition of Woronoco Bancorp in 2005, goodwill was
recorded as an intangible asset equal to the excess of the purchase price over
the estimated fair value of the net assets acquired. Other intangible assets
were recorded for the fair value of core deposits and non-compete agreements.
Goodwill and intangible assets were recorded for the purchase of insurance
agencies in 2006. The valuation techniques used by management to determine
the
carrying value of assets acquired in the acquisition and the estimated lives
of
identifiable intangible assets involve estimates for discount rates, projected
future cash flows and time period calculations, all of which are susceptible
to
change based on changes in economic conditions and other factors. Future events
or changes in the estimates which were used to determine the carrying value
of
goodwill and identifiable intangible assets or which otherwise adversely affects
their value or estimated lives could have a material adverse impact on future
results of operations.
SUMMARY
- 2006
Net
income increased by 37% to $11.3 million in 2006, compared to $8.2 million
in
the prior year. Net income per diluted share increased by 17% to $1.29 in 2006
from $1.10 in 2005. Earnings growth included the benefit of organic growth
and
expansion, along with the acquisition of Woronoco Bancorp in June 2005. All
earnings per share references are to diluted shares, and also reflect the
additional shares issued for the Woronoco acquisition.
Financial
highlights in 2006 included:
|
·
|
44%
growth in fee income
|
|
·
|
20%
growth in total loans
|
|
·
|
33%
growth in total commercial loans
|
|
·
|
11%
growth in total deposits
|
Other
highlights in 2006 included:
|
·
|
The
acquisition of five insurance agencies in October 2006 with combined
annual revenues in excess of $9
million.
|
|
·
|
The
opening of three new branches in New York, increasing the total
branch
count by 12% to a total of 27. The Company also announced an additional
four new branches in New York to be opened in 2007, representing
a further
15% increase in the total branch count planned for
2007.
|
|
·
|
Executive
team expanded with new leadership experienced in regional bank
management.
|
|
·
|
New
board members added, broadening regional
representation.
|
|
·
|
Growth
recorded in all three regions - Berkshire, Pioneer Valley, and
New
York.
|
|
·
|
Net
loan charge-offs remained modest at 0.07% of average
loans.
|
Results
in 2006 included a third quarter loss of $2.1 million ($0.25 per share) due
to a
$5.3 million securities loss related to a securities portfolio restructuring
and
deleveraging. Third quarter results also included a $6.2 million loan loss
provision due to an adjustment in the loan loss allowance. These charges
strengthened the balance sheet and were not viewed by management as indicative
of normal quarterly activity. Net diluted earnings per share for the other
three
quarters of 2006 averaged $0.51 per share.
Average
Balances, Interest and Average Yields/Cost
The
following table presents an analysis of average rates and yields on a fully
taxable equivalent basis for the years included.
|
|
|
2006
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|||||||||
|
|
|
Average
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|||||||||
|
(Dollars
in millions)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
||||||||||
|
Interest-earning
assets:
|
|||||||||||||||||||||||||||||
|
Loans
(1)
|
$
|
1,547.3
|
$
|
100.8
|
6.51
|
%
|
$
|
1,182.3
|
$
|
70.1
|
5.93
|
%
|
$
|
795.5
|
$
|
43.8
|
5.51
|
%
|
|||||||||||
|
Investment
securities (2)
|
370.8
|
19.1
|
5.15
|
413.0
|
19.2
|
4.64
|
424.0
|
18.1
|
4.28
|
||||||||||||||||||||
|
Short-term
investments
|
4.9
|
0.3
|
6.12
|
2.8
|
0.1
|
3.30
|
3.0
|
0.1
|
1.28
|
||||||||||||||||||||
|
Total
interest-earning assets
|
1,923.0
|
120.2
|
6.25
|
1,598.1
|
89.4
|
5.59
|
1,222.5
|
62.0
|
5.07
|
||||||||||||||||||||
|
Intangible
assets
|
103.2
|
62.0
|
|||||||||||||||||||||||||||
|
Other
non-interest earning assets
|
90.1
|
85.1
|
67.0
|
||||||||||||||||||||||||||
|
Total
assets
|
$
|
2,116.3
|
$
|
1,745.2
|
$
|
1,289.5
|
|||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
|||||||||||||||||||||||||||||
|
Deposits:
|
|||||||||||||||||||||||||||||
|
NOW
accounts
|
137.8
|
1.5
|
1.09
|
%
|
121.7
|
0.5
|
0.39
|
%
|
97.9
|
0.1
|
0.09
|
%
|
|||||||||||||||||
|
Money
market accounts
|
284.4
|
9.7
|
3.41
|
209.0
|
4.4
|
2.13
|
160.3
|
2.1
|
1.29
|
||||||||||||||||||||
|
Savings
accounts
|
210.6
|
1.9
|
0.90
|
205.8
|
1.8
|
0.90
|
168.5
|
1.3
|
0.77
|
||||||||||||||||||||
|
Certificates
of deposit
|
651.7
|
27.9
|
4.28
|
445.2
|
14.3
|
3.20
|
321.0
|
8.9
|
2.78
|
||||||||||||||||||||
|
Total
interest-bearing deposits
|
1,284.5
|
41.0
|
3.19
|
981.7
|
21.0
|
2.14
|
747.7
|
12.4
|
1.66
|
||||||||||||||||||||
|
Borrowings
|
394.4
|
16.8
|
4.26
|
410.8
|
15.1
|
3.67
|
305.6
|
8.3
|
2.73
|
||||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,678.9
|
57.8
|
3.44
|
1,392.5
|
36.1
|
2.59
|
1,053.3
|
20.7
|
1.97
|
||||||||||||||||||||
|
Non-interest-bearing
demand
|
|||||||||||||||||||||||||||||
|
deposits
|
174.5
|
149.6
|
103.7
|
||||||||||||||||||||||||||
|
Other
non-interest-bearing
|
|||||||||||||||||||||||||||||
|
liabilities
|
7.2
|
6.6
|
5.4
|
||||||||||||||||||||||||||
|
Total
liabilities
|
1,860.6
|
1,548.7
|
1162.4
|
||||||||||||||||||||||||||
|
Equity
|
255.7
|
196.5
|
127.1
|
||||||||||||||||||||||||||
|
Total
liabilities and equity
|
$
|
2,116.3
|
$
|
1,745.2
|
$
|
1,289.5
|
|||||||||||||||||||||||
|
Net
interest-earning assets
|
$
|
244.1
|
$
|
205.6
|
$
|
169.2
|
|||||||||||||||||||||||
|
Net
interest income
|
$
|
62.4
|
$
|
53.3
|
$
|
41.3
|
|||||||||||||||||||||||
|
Interest
rate spread
|
2.81
|
%
|
3.00
|
%
|
3.10
|
%
|
|||||||||||||||||||||||
|
Net
interest margin
|
3.24
|
%
|
3.33
|
%
|
3.37
|
%
|
|||||||||||||||||||||||
|
Interest-earning
assets/interest-bearing liabilities
|
114.54
|
%
|
114.76
|
%
|
116.06
|
%
|
|||||||||||||||||||||||
|
Fully
taxable equivalent adjustment
|
$
|
2.1
|
$
|
1.6
|
$
|
0.9
|
|||||||||||||||||||||||
|
(1)
The average balances of loans includes nonaccrual loans, loans
held for
sale, and deferred fees and costs.
|
|||||||||||
|
(2)
The average balance of investment securities is based on amortized
cost.
|
RATE/VOLUME
ANALYSIS
The
following table presents the effects of changing rates and volumes on the fully
taxable equivalent net interest income. Changes attributable to changes in
both
rate and volume have been allocated proportionately based on the absolute value
of the change due to rate and the change due to volume.
|
2006
Compared with 2005
|
2005
Compared with 2004
|
||||||||||||||||||
|
Increase
(Decrease) Due to
|
Increase
(Decrease) Due to
|
||||||||||||||||||
|
(In
thousands)
|
Rate
|
|
Volume
|
|
Net
|
|
Rate
|
|
Volume
|
|
Net
|
||||||||
|
Interest
income:
|
|||||||||||||||||||
|
Loans
|
$
|
7,355
|
$
|
23,378
|
$
|
30,733
|
$
|
3,555
|
$
|
22,782
|
$
|
26,337
|
|||||||
|
Investment
securities
|
1,970
|
(2,062
|
)
|
(92
|
)
|
1,474
|
(477
|
)
|
997
|
||||||||||
|
Short-term
investments
|
40
|
106
|
146
|
76
|
(3
|
)
|
73
|
||||||||||||
|
Total
interest income
|
9,365
|
21,422
|
30,787
|
5,105
|
22,302
|
27,407
|
|||||||||||||
|
Interest
expense:
|
|||||||||||||||||||
|
NOW
accounts
|
924
|
70
|
994
|
355
|
26
|
381
|
|||||||||||||
|
Money
market accounts
|
3,272
|
1,970
|
5,242
|
1,624
|
759
|
2,383
|
|||||||||||||
|
Savings
accounts
|
(29
|
)
|
42
|
13
|
259
|
315
|
574
|
||||||||||||
|
Certificates
of deposit
|
5,813
|
7,934
|
13,747
|
1,483
|
3,834
|
5,317
|
|||||||||||||
|
Total
deposits
|
9,980
|
10,016
|
19,996
|
3,721
|
4,934
|
8,655
|
|||||||||||||
|
Borrowings
|
2,319
|
(619
|
)
|
1,700
|
3,375
|
3,361
|
6,736
|
||||||||||||
|
Total
interest expense
|
12,299
|
9,397
|
21,696
|
7,096
|
8,295
|
15,391
|
|||||||||||||
|
Change
in net interest income
|
$
|
(2,934
|
)
|
$
|
12,025
|
$
|
9,091
|
$
|
(1,991
|
)
|
$
|
14,007
|
$
|
12,016
|
|||||
COMPARISON
OF FINANCIAL CONDITION AT YEAR-END DECEMBER 31, 2006 AND 2005
Balance
Sheet Summary.
Total
assets were $2.15 billion at December 31, 2006, increasing by 6% for the year.
Total loans increased by 20% for the year to $1.70 billion, reflecting strong
originations in most major categories. Securities available for sale decreased
by 50% to $194 million due to the deleveraging and restructuring initiated
at
the end of the third quarter. Total goodwill and other intangible assets
increased by $22 million (22%) in 2006 due to the acquisition of the insurance
agencies in the fourth quarter. Total deposits increased by 11% to $1.52 billion
in 2006, reflecting the benefit of de novo branch expansion and organic growth.
Securities sales proceeds were used to pay down borrowings, which decreased
by
13% to $345 million. The 5% increase in stockholders’ equity to $258 million
primarily reflected retained earnings and proceeds from stock option exercises.
Investment
Securities. Total
investment securities decreased by $186 million (44%) in 2006. At the end of
the
third quarter, the
Company changed its intent to hold certain available-for-sale securities with
a
fair value of approximately $167 million. Due to unusually large migrations
of
deposit balances from transaction and savings accounts to money market and
time
deposits, the Company faced growing liability interest rate sensitivity, higher
funding costs, and a narrower net interest margin. The higher cost of
interest-sensitive borrowings also resulted in a larger negative spread on
older
securities with lower book yields. Management determined that a securities
portfolio repositioning would help mitigate these issues. The $167 million
of
securities sold were mostly intermediate-term mortgage-backed securities.
Proceeds were used primarily to pay down borrowings, and secondarily to fund
additional loan growth in the fourth quarter. This action was taken to improve
future income and to improve management’s flexibility in managing the investment
portfolio. The average book yield on the $167 million of securities chosen
for
the repositioning was approximately 4.1%. The remaining portfolio of available
for sale intermediate-term mortgage-backed securities is expected to contribute
to earnings, liquidity, and asset/liability objectives. The Company has the
ability and intent to hold these securities.
The
repositioning of these securities resulted in a net securities loss of $5.3
million. The loss on these securities was already recorded in stockholders’
equity, so this transaction had no negative impact on stockholders’ equity. The
total unrealized loss on securities available for sale was $9.7 million at
mid-year 2006. This loss had increased from $3.6 million at year-end 2005 due
to
the impact of higher interest rates, which caused debt securities prices to
decline. In the third quarter, medium-term interest rates declined, which led
to
improved securities prices. After recording the $5.3
million
loss related to the securities repositioning, the remaining available for sale
securities had a net unrealized gain of $237 thousand at year-end.
Securities
purchases for the year 2006 consisted primarily of locally originated industrial
revenue bonds and other local municipal securities. The Bank decreased its
holdings of FHLBB stock by $15 million to $22 million due to the impact of
changes in the capital policies of the FHLB system. In each quarter of 2006,
the
Bank recorded securities gains related primarily to the sale of equity
securities. The Company had liquidated substantially all of its portfolio of
exchange traded equity securities at the end of the year 2006.
At
year-end 2006, the total investment securities portfolio of $234 million
included $100 million of municipal bonds and obligations, $89 million of
mortgage backed securities, Federal Home Loan Bank stock of $22 million, and
$23
million of other securities which consisted primarily of trust preferred
securities. Securities with repricings over five years totaled $160 million
at
year-end 2006, which was down from $249 million at the prior year-end due to
the
portfolio restructuring. The fully taxable equivalent yield on investment
securities increased to 5.6% in the fourth quarter of 2006 from 4.9% in the
same
quarter of 2005. This reflected part of the benefit of the securities
restructuring in the fourth quarter, along with the benefit of longer term
municipal securities added during the year.
Loans.
Total
loans increased by $279 million (20%) in 2006. Most major categories of loans
increased during the year. Total commercial loans increased by $187 million
(33%) for the year due to strong originations in all regions. Commercial loans
equaled 45% of total loans at year-end 2006. Commercial loans are the chief
focus of the Bank’s lending strategy, and the Bank feels it has a strong
competitive advantage in this market as a locally headquartered regional bank.
The majority of commercial loan volume was originated in the New York region
which is centered in Albany and is the largest commercial market in which the
Bank operates. Commercial loans also grew at a strong 18% pace in the Bank’s
Massachusetts markets. Loan growth benefited from the new leadership and lending
teams that the Bank has assembled in its new regions in the Pioneer Valley
and
New York. Commercial loan growth was concentrated in a $71 million increase
in
commercial construction loans and an $85 million increase in other commercial
mortgages. The annualized pace of commercial loan growth slowed to 26% in the
fourth quarter and the Company anticipates slower growth in 2007 due to the
impact of interest rates on loan demand and margins. The Company is focusing
on
its process of customer and product selection, and is emphasizing shorter term
credits where it has a competitive advantage compared to larger financial
institutions. The Company also expects to utilize loan participations and
secondary market conduits to broaden and diversify its credit
offerings.
The
Company also recorded increases of $53 million (10%) in residential permanent
mortgages and $43 million (32%) in indirect auto loans, and these areas also
benefited from the Company’s larger regional footprint and a new auto loan
conduit. The Bank does not offer subprime loan programs. The Company had small
declines in residential construction, commercial single and multi-family, and
home equity loans. This related primarily to less demand due to slowing housing
markets and to the impact of higher interest rates, particularly since most
of
the Company’s consumer real estate lending products are adjustable-rate. The
Company generally sells its originations of fixed-rate residential mortgages
to
secondary market investors on a flow basis. The Company is developing new
consumer credit initiatives for 2007, including enhancement of residential
lending programs and faster turnarounds of other consumer loan
products.
Loans
with repricings over five years totaled $501 million at year-end 2006, which
was
an increase of $140 million over the $361 million total at year-end 2005. This
increase reflected demand for longer-term fixed rates following two years of
rising short-term rates. The $140 million increase in loans repricing over
five
years was offset by a $75 million decrease in loans repricing in 3-5 years,
as
well as the $89 million decrease in securities repricing over five years. The
average yield on loans increased to 6.7% in the fourth quarter of 2006 from
6.2%
in the fourth quarter of 2005. This reflected the 1% increase in the prime
rate
during the year and higher rates on loan originations following two years of
rate increases. Residential mortgage yields showed the least increase, rising
to
5.3% from 5.2%. Commercial business loans had the highest yield of 8.0% and
the
largest increase of 0.9% since most of these loans are tied to
prime.
Asset
Quality.
Most
measures of asset quality were favorable at the end of 2006. Net loan
charge-offs were 0.07% of total average loans for the year 2006. Year-end
delinquencies (30-90 days) measured 0.24% of total loans at year-end 2006,
compared to 0.30% at the prior year-end. Total year-end 2006 non-performing
assets measured 0.35% of total assets, and there was no other real estate owned.
These non-performing assets included a secured commercial loan totaling $6.0
million (0.28% of assets) which became non-accruing during the fourth quarter.
A
specific reserve of $0.5
million
was assigned to this relationship at year-end, and management was actively
pursuing collection. All other year-end 2006 non-performing assets measured
0.07% of total assets. Non-performing assets at the prior year-end were 0.06%
of
total assets.
Loan
Loss Allowance. Management
increased the loan loss allowance from $13.0 million at year-end 2005 to $19.4
million at December 31, 2006. The loan loss allowance was increased primarily
based on management’s assessment of higher loan losses inherent in the portfolio
at September 30, 2006. The allowance also increased due to higher pool reserves
related to higher loan outstandings and to higher reserves on impaired loans.
The ratio of the allowance to total loans increased from 0.92% to 1.14% during
2006. The allowance was increased in the third quarter to 1.18% of total loans
based on higher general pool reserves, reflecting management’s analysis that
loan losses would increase above the negligible levels of recent years due
to
signs in the third quarter of an economic slowing. Of the total $6.4 million
increase in the allowance in 2006, $5.5 million of this increase was related
to
the third quarter adjustment to increase general pool reserve levels due to
a
higher percentage of inherent losses in the portfolio.
Management
has viewed both the Company’s and the industry’s recent loan loss experience as
unusually favorable due to a combination of economic factors including generally
low interest rates, fiscal stimulus, and a strong real estate market that had
increasingly been described as a bubble by various observers. In the absence
of
countervailing indicators, the loan loss allowance has reflected these
historically low loss rates. During the third quarter, management determined
that there were specific events in the quarter which indicated that economic
conditions were becoming less supportive, and that the credit risks in its
environment had shifted from the unusually benign conditions which have
predominated in recent years.
The
most
prominent change was the pronounced slowdown in residential real estate markets
in the third quarter, as evidenced in part by the Commerce Department report
on
September 2006 home prices. This report showed that the year-to-year decline
in
median home prices was the largest drop in thirty-five years. While a
significant portion of the Company’s loan portfolio is secured by residential
real estate, management’s primary focus on residential real estate relates to
its function as perhaps the chief driver of economic growth in recent years.
Management reasoned that, like a plant closing which is expected to produce
loan
losses in the future, the sudden deceleration of this key economic indicator
has
resulted in higher probable loan losses in the Company’s loan portfolio. These
losses are viewed as chiefly inherent in the commercial loan portfolio, where
cash flows and collateral values are viewed as more sensitive to economic
fluctuations. An economic slowdown is expected to result in higher probable
loan
losses because business cash flows are generally the primary source of loan
repayments and management believes that some business cash flows decline as
a
result of an overall softening of the economy.
Also
during the third quarter, the Federal Reserve Bank (the “Fed”) suspended
interest rate increases after seventeen consecutive hikes over the last two
years, a further sign of economic slowing. Management’s review of historic
economic data led it to conclude that an economic slowing was highly likely
to
follow the suspension of a sustained period of tightening by the Fed, and that
such economic slowing increased losses inherent in the portfolio.
An
additional third quarter event was the combined impact of higher rates, higher
prices, and higher energy costs on loan repayment sources. The prime interest
rate climbed above 8% at the start of the quarter and management viewed this
as
a significant threshold, particularly following generally low interest rates
only two years ago. Higher prices and spiking energy costs in the third quarter
also contributed to a probable tightening of debt service ability by both retail
and commercial borrowers. Additionally, the Company noted that commercial
appraisals were beginning to reflect higher capitalization rates due to both
higher interest rates and higher equity spreads expected by investors. As a
result, management determined that it was probable that both cash flows and
real
estate values will provide less credit protection in the current environment
and
that higher loan losses are therefore probable.
Based
on
these events, the Company re-evaluated its loan loss methodology related to
pools of performing loans in order to reasonably estimate the range of probable
loan losses inherent in such pools. Management reviewed all of the major loan
pools on a pool by pool basis. Primary emphasis was given to commercial loans
because of historic experience that these loans are most sensitive to economic
and real estate market conditions and have the highest potential annual loss
rate. Management considered relevant historic periods during the last two
decades that were characterized by economic slowing, declining real estate
values, and higher interest rates, and assessed related loan loss data for
each
of the loan pools. Management considered both the Company’s historical loan loss
data and FDIC
historical
loan loss data pertaining to commercial banks with assets ranging from $1
billion to $10 billion to assess ranges of loan loss estimates. The Company
also
considered other factors on a pool by pool basis which might be relevant to
probable loan losses, such as current trends in loan performance, risk ratings,
regional conditions, product mix, and the increasing size of individual loans
being originated.
For
each
major loan pool, the Company analyzed the average life of the loan pool and
the
probable rate of loan losses over that period based on the above factors. The
Company established a reserve amount for each of the loan pools based on these
analyses, with each pool reserve amount being based on the product of the
average pool life and the probable rate of losses. The average pool lives of
the
various pools ranged between two and four years and were viewed as consistent
with the expected loss emergence patterns based on management’s estimates of
losses inherent in the pools on the balance sheet dates. The reserve on
commercial real estate was set at 1.60% of outstanding loans based on an
estimate of annual losses approximating 0.46% of average loans. The reserve
on
commercial construction and development loans was set at 1.70% based on an
annual loss estimate approximating 0.85% of average loans. The reserve on
commercial business loans was set at 2.45% based on an annual loss estimate
approximating 0.98% of average loans. The combined pool reserves on all
commercial loans equated to 1.84% of outstanding commercial loans at September
30, 2006, compared to 1.35% at year-end 2005. The reserve on residential
mortgage loans was set at 0.28% based on an annual loss estimate approximating
0.07% of average loans.
The
reserve on total consumer loans was set at 0.64% based on an annual loss
estimate approximating 0.21% of average loans. In addition to specific pool
reserves, the Company maintains an unallocated reserve which reflects
uncertainties in the estimation process. Pool reserves were adjusted slightly
in
the fourth quarter based on current loan originations and on loss emergence
trends in the quarter. The unallocated reserve was set at an amount equal to
11%
of total loans at year-end 2006. In addition to the general reserves, the loan
loss allowance also included a reserve for impaired loans which totaled $812
thousand at year-end.
Other
Assets. The
net
book value of premises increased due primarily to the de-novo branching program
in the Company’s New York market. Goodwill and other intangible assets increased
due to the acquisition of five insurance agencies. All other assets increased
primarily due to equity investments in community and historic development
entities which provide transferable tax credits utilized by the
Company.
Deposits.
Total
deposits increased by $151 million (11%) in 2006. Excluding planned runoff
of
brokered time deposits, total deposits increased by $166 million (13%). The
de
novo branch program in New York generated $67 million in deposit growth, with
total New York deposits increasing to $108 million at year-end 2006. Deposit
growth in the Massachusetts branches measured 8%, including 15% growth in the
recently acquired Pioneer Valley deposits and 5% growth in Berkshire County
deposits. Deposit growth was centered in higher yielding money market accounts
and time deposits. Balances declined in the other deposit categories as
customers shifted funds into the higher yielding accounts in reaction to the
rising interest rates in 2006 and 2005. Time deposits with maturities over
three
years declined to $51 million at year-end 2006 from $72 million at the start
of
the year reflecting higher demand and competition for shorter maturity
structures following two years of interest rate hikes. The cost of interest
bearing deposits increased to 3.5% in the fourth quarter of 2006 from 2.5%
in
the same quarter of 2005, as both money market and time deposit costs increased
by about 1.0% over this period due to the impact of rate hikes in 2006 and
2005.
The
Bank’s strategy is to promote lower cost transaction accounts, along with money
market accounts which can be tied to other relationship banking. With this
strategy, the Bank has also enhanced its commercial payment services and
municipal account solicitation in order to broaden its footprint and improve
cross sales with loan and insurance products. After year-end 2006, the Bank
unveiled its “I’m so excited” branding initiative and implemented new goals and
incentives for increasing the pool of customers and products.
Borrowings.
Total
borrowings decreased by $52 million during 2006 due to the reduction of FHLBB
borrowings with funds provided from the securities restructuring and
deleveraging at the end of the third quarter. During 2006, the Bank borrowed
$56
million in FHLBB term advances over one year. These maturities were generally
in
the 2-3 year range and were used to fund growth of intermediate term loans.
Most
of these advances were bullet advances without optional calls. Total year-end
borrowings over three years declined to $68 million from $111 million, as the
Bank favored maturities of three years and under to fund loan growth. Borrowings
maturing under a year decreased to $122 million at year-end 2006 from $140
million at the prior year-end. Short term borrowings had been used to partially
fund loan growth during the year, and then were significantly paid down with
proceeds from the securities restructuring at the end of the third quarter.
Borrowings in 2006 also included a $15 million short term note payable at the
holding company which was used to provide partial funding for the insurance
agency acquisitions. The cost of borrowings increased to
4.4%
in
the fourth quarter of 2006 from 3.8% in the same quarter of 2005. This cost
rose
due to rate hikes, but benefited in the fourth quarter from the reduction in
overnight borrowings with proceeds from the investment
restructuring.
Equity.
Total
stockholders’ equity increased by $12 million to $258 million at year-end 2006
from $246 million at year-end 2005. This included the benefit of $11 million
in
earnings less $5 million in dividends and $3 million in stock repurchases.
Due
to the $22 million increase in intangible assets related to the insurance agency
acquisitions, tangible stockholders’ equity decreased by $10 million to $137
million. There were 76,000 shares of treasury stock repurchased and there were
249,000 shares issued for option exercises and stock grants. Outstanding shares
increased by 173,000 (2%) to 8,713,000. The Company paid cash dividends of
$0.14
per share in each of the four quarters in 2006. The ratio of stockholders’
equity to total assets decreased slightly to 12.0% at year-end 2006 from 12.1%
at the end of 2005. The ratio of tangible stockholders’ equity to total assets
decreased to 6.7% from 7.67% due to the purchase of the insurance agencies.
Book
value per share increased to $29.63 from $28.81 in 2006.
The
Bank
met all regulatory capital requirements and continued to satisfy the conditions
necessary to be classified as “Well Capitalized” in accordance with federal
regulatory standards. The Bank’s risk-based capital decreased to 10.3% from
11.1% during 2006 due to loan growth and dividends totaling $15.1 million paid
to the holding company, including the stock of Berkshire Insurance Group, which
was contributed to the holding company in conjunction with the insurance agency
acquisitions in the fourth quarter. Because the Bank’s dividends exceeded
retained earnings from recent operations in accordance with certain regulatory
measurements, the Bank’s dividends to the Company in 2006 required specific
regulatory approval. Such dividends in the immediate future would also require
specific regulatory approval. The Bank has applied for approval to pay $10
million in dividends to the Company in 2007. This application has been approved
by the Massachusetts Department of Banking and the Bank is waiting for approval
from the Office of Thrift Supervision. Such payment is subject to various
conditions, including that the Bank maintain its “well capitalized”
classification after factoring in the payment.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND
2005
Net
Income. Net
income increased by 37% to $11.3 million in 2006, compared to $8.2 million
in
the prior year. Net income in 2006 included third quarter charges related to
a
$5.3 million loss on the securities portfolio restructuring and a $5.5 million
adjustment of loan loss allowance pool reserve levels. Net income in 2006 also
included total costs of $1.8 million for the New York de novo branch program,
which the Company views as an investment in franchise expansion. The return
on
average assets for the year 2006 was 0.53%. Before the above charges, which
total $12.6 million in the aggregate ($8.2 million after adjusting for taxes
at
a 35% tax rate), income was $19.5 million which represented a return of
approximately 0.92% on assets. The return on average equity was 4.4% for the
year, and the return before the above charges was approximately 7.6%. Results
in
2006 also included non-cash charges of $2.0 million for the amortization of
intangible assets. Before these additional charges, the return on equity was
approximately 8.1%, which the Company regards as a measure of its ongoing cash
return on invested capital before its investment in franchise expansion. Most
major categories of income and expense increased in 2006 compared to 2005 due
to
the full year benefit of the Woronoco acquisition, along with expansion and
organic growth.
Total
Net Revenue. Total
net
revenue consists of net interest income and non-interest income. Total net
revenue increased by $5.7 million (9%) in 2006. Excluding net securities losses
of $3.1 million in 2006 and gains of $4.3 million in 2005, total net revenue
increased by $13.2 million (21%) due to acquisitions, de novo expansion, and
organic growth. Excluding securities gains and losses, total net revenue per
diluted share was $8.64 in 2006, increasing by 4% from $8.30 in the prior year.
Including securities gains and losses, this measure was $8.28 and $8.87 in
2006
and 2005, respectively.
Net
Interest Income.
Net
interest income increased by $8.6 million (17%) to $60.2 million in 2006
compared to 2005. Average earning assets increased by 21% due to higher loan
balances. This favorable volume variance was offset by an unfavorable rate
variance, as the net interest margin decreased to 3.24% in 2006 from 3.33%
in
2005 due to the impact of the flat yield curve and deposit balance shifts
towards higher cost accounts. This margin tightening produced an unfavorable
rate variance of approximately $2.9 million, which was offset by the benefit
of
the strong increase in average loans which produced a positive volume variance
of approximately $12.0 million to fully taxable equivalent net interest
income.
The
Federal Reserve Bank completed the final interest rate hike in a series of
seventeen sequential interest rate hikes over a two year period ending at
mid-year 2006. Short term interest rates increased by 1% during the first half
of the year and then remained constant through year-end. The year-end federal
funds rate was 5.25% and the prime rate was 8.25%. The ten year treasury rate
increased by approximately 0.30% to 4.70% over the course of the year, peaking
around 5.25% at mid-year. The yield curve was inverted for much of the year,
with short-term rates exceeding long-term rates. The Company had modest
liability sensitivity at the end of 2005 which was expected to produce a 0.02%
decrease in the net interest margin based on a 1% increase in rates, but the
margin decreased by 0.09% due to the aforementioned flat yield curve and deposit
mix shifts.
The
net
interest margin decreased from 3.36% in the fourth quarter of 2005 to 3.16%
in
the second quarter of 2006 and then rebounded to 3.31% in the fourth quarter
of
2006. Fourth quarter net interest income included some of the benefit of the
securities restructuring. This was partially offset by borrowings to fund the
insurance agency acquisitions. Seasonal time account repricings, narrower
commercial loan spreads, and a continuing negative yield curve were expected
to
push the net interest margin towards 3.20% in 2007. In order to combat these
margin pressures, the Bank intended to promote low cost transaction accounts
and
to continue to emphasize commercial loan originations which are its highest
yielding assets.
Balance
sheet average balances reflected the full year benefit of the Woronoco Bancorp
acquisition in June 2005. The average balances of the major loan categories
generally increased throughout 2006, increasing by 31% for the year 2006
compared to 2005. Securities average balances decreased gradually during the
year and then fell sharply in the fourth quarter due to the portfolio
restructuring. For the year, the average balance declined by 10%. Deposit
balances increased throughout the year, with the yearly average increasing
by
29% over 2005. NOW and savings account balances trended down during the year
due
to the migration of balances into higher yield and faster growing money market
and time deposit accounts. Average demand deposit accounts declined in the
first
two quarters but then increased at an 8% annualized rate in the second half
of
2006, producing yearly growth of 17% compared to 2005. Average borrowings
declined in the first half of the year, increased in the third quarter due
to
the strong loan growth in the second quarter, and then declined in the fourth
quarter due to the deleveraging related to the securities portfolio
restructuring. Average borrowings decreased by 4% for the year. Average equity
increased by 30% for the year due primarily to the full year impact of the
equity issued in conjunction with the Woronoco acquisition.
All
major
categories of interest-earning assets and interest-bearing liabilities produced
higher yields and costs in 2006 due to the cumulative impact of increasing
interest rates over the last two years except for savings costs which were
flat
year-to-year. Several categories have contracted future repricings which will
produce additional increases based on current interest rate levels. Commercial
business loans, money market deposit accounts, and time deposits have the most
sensitivity to rate changes and the quarterly average rates in these three
categories increased in the range of 0.9% - 1.0% due to the 1.0% increase in
short term rates in 2006. Residential mortgages and savings accounts showed
the
least sensitivity, with quarterly average rates increasing by less than 0.30%.
The average interest spread decreased by approximately 0.19% to 2.81% in 2006
from 3.00% in 2005. The decrease in the net interest margin was less than the
decrease in the spread due to the benefit from growth in non-interest bearing
demand deposits and stockholders’ equity.
Provision
for Loan Losses. The
provision for loan losses is a charge to earnings in an amount sufficient to
maintain the allowance for loan losses at a level deemed adequate by the
Company. The level of the allowance is a critical accounting estimate, which
is
subject to uncertainty. The level of the allowance was included in the
discussion of financial condition. The loan loss provision totaled $7.9 million
for the year 2006, compared to $1.3 million in 2005. The year’s provision
included approximately $5.5 million related to the third quarter increase in
the
pool reserves as a result of the higher inherent losses due to economic changes.
The year’s provision also increased due to loan growth and higher impairment
reserves. Net loan charge-offs were $1.1 million (0.07% of average loans) in
2006, compared to $1.0 million (0.08% of average loans) in the prior year.
Non-Interest
Income.
Non-interest income decreased by $2.9 million (19%) to $12.0 million in 2006
compared to $14.9 million in 2005. This was due to a $7.4 million swing from
securities gains to securities losses, which the Company does not view as part
of its basic operating income. All other non-interest income increased by $4.5
million (43%). This increase primarily reflected the benefit of fee income
from
acquisitions and organic growth. Deposit fee income increased by $1.3 million
(28%), insurance fee income increased by $2.5 million (199%), and wealth
management fee income increased by $0.5 million (16%). Fourth quarter insurance
fee income increased by $1.0 million in 2006 compared to 2005 due to two months’
revenues from insurance agencies acquired at the end of October
2006.
On
a proforma basis, assuming that the agencies had been acquired at the beginning
of 2006 and excluding securities gains and losses, proforma non-interest income
measured 29% of total 2006 proforma net revenue, compared to an historic ratio
of 17% in 2005. Including securities gains and losses, this measure was 26%
and
22% in 2006 and 2005, respectively.
The
Company is strategically emphasizing growth of fee income sources both to
enhance cross sales in its pool of customers and products, and to reduce its
reliance on net interest income which may continue to be impacted by tighter
margins based on competitive industry conditions.
The
Company recorded gross securities losses of $5.6 million in 2006 due primarily
to the securities portfolio restructuring in the third quarter. Gross losses
of
$1.9 million were recorded in 2005 in relation to a deleveraging in the first
half, in connection with the Woronoco Bancorp acquisition. The Company recorded
gross securities gains of $2.4 million in 2006 which were primarily related
to
the sale of equity securities. The Company had recorded $6.1 million in
securities gains in 2005 which were also mostly related to equity securities
sales. As of the end of 2006, the Company had substantially liquidated its
portfolio of equity securities and no further significant equity securities
gains were expected to be recorded. All other non-interest income increased
to
$1.6 million in 2006 from $1.3 million in 2005. This income was primarily
related to increases in cash surrender value of life insurance, and the increase
in 2006 was primarily related to life insurance death benefits
received.
Non-Interest
Expense.
Total
non-interest expense was essentially unchanged in 2006 compared to 2005, with
increases related to growth, branch expansion, and acquisitions offset by the
impact of the one-time non-cash $8.8 million charge for the ESOP termination
in
2005. Excluding the ESOP termination charge, total non-interest expense
increased by $8.7 million (22%) in 2006. This increase included approximately
$1.2 million in higher New York expansion charges, which totaled $1.8 million
for the de novo branch program for 2006. These charges are viewed by the Company
as an investment in franchise expansion. All other non-interest expenses
increased by $7.5 million (19%) in 2006 compared to 2005. The $0.6 million
decrease in non-recurring expense was due to the Woronoco indirect acquisition
related charges in 2005. Nonrecurring expenses in 2006 were primarily related
to
insurance agency integration expenses and severance costs. All other categories
of expense increased due to the acquisitions, de novo branching, and organic
growth. Total full time equivalent staff increased by 31% to 522 at year-end
2006 from 399 at the prior year-end, primarily due to the staff of the insurance
agencies acquired in the fourth quarter. While the Company has significantly
expanded its loan origination activities, much of the impact on expenses has
been offset by higher deferrals of loan origination related expenses; these
deferrals increased by $3.9 million in 2006 compared to 2005. The Company’s
strategy continues to emphasize the realization of efficiencies from expanded
operations, targeted programs developed in the Company’s Six Sigma process
improvement discipline, and ongoing expense controls. Amortization of intangible
assets increased to $2.0 million in 2006 from $1.1 million in 2005 and is
scheduled to increase to $2.7 million in 2007 due to the insurance agency
acquisitions. The Company evaluates its profitability both including and
excluding this non-cash charge which is related to acquisitions of relationships
which are expected to provide ongoing value beyond the period of the related
deposit and insurance contracts which comprise the majority of intangible assets
and related amortization. The ratio of non-interest expense to total assets
decreased to 2.31% in 2006 from 2.81% in the prior year.
Income
Tax Expense and Income from Discontinued Operations. The
effective tax rate for 2006 was 30.3%. The effective tax rate in 2005 was 49.3%
due to the non-deductibility of most of the ESOP termination charge. Excluding
this charge, the effective tax rate was approximately 32% in 2005. The
improvement in the effective tax rate included a benefit of approximately 2.7%
compared to pre-tax income which was related to a higher average balance of
municipal securities in 2006. Results for the second and third quarters of
2006
also included income from discontinued operations from the sale of the Company’s
data processing subsidiary in June 2004. The Company does not expect to record
additional income or expense from these discontinued operations.
Comprehensive
Income. Comprehensive
income is a component of total stockholders’ equity on the balance sheet.
Comprehensive income includes changes in accumulated other comprehensive income,
which consist primarily of changes (after-tax) in the unrealized market
gains and losses of investment securities available for sale. The Company
recorded comprehensive income of $13.6 million in 2006 compared to $1.8 million
in 2005. Results in 2005 included the impact of a $10.2 million unrealized
loss
on available for sale investment securities due to higher interest rates.
Results in 2006 included a $3.9 million unrealized gain which remained after
the
realization of $3.1 million in net securities losses through the income
statement.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
2004
Net
Income. Net
income for 2005 was $8.2 million, compared to $11.5 million in 2004. Results
in
2005 included a non-cash charge of $8.8 million for the termination of the
ESOP.
This charge had no negative impact on stockholders’ equity due to offsetting
credits to unearned compensation and additional
paid in capital. Diluted earnings per share totaled $1.10 in 2005, compared
to
$2.01 in 2004.
Net
Interest Income.
Net
interest income increased by $11.3 million, (28%) due to the balance sheet
growth related primarily to the acquired assets and liabilities of Woronoco.
The
net interest margin (fully taxable equivalent) decreased to 3.33% from 3.37%,
including the impact of the Woronoco acquisition and deleveraging. The primary
impact of market conditions was the flattening of the interest rate yield curve,
which narrowed the marginal earnings spread on many asset/liability
combinations. The flattening of the yield curve was due to a steady increase
in
short term rates during the year, with a much smaller increase in long term
rates. The increase in short term rates benefited the Bank’s interest sensitive
assets, but also produced significant competition for deposits, which had fallen
to very low rates in recent years. The net impact of these market conditions
was
unfavorable, and management sought to mitigate this by promoting transaction
deposit accounts and relationship deposit offerings, and also by continuing
to
focus on commercial loan growth. The decline in the net interest margin also
included a 0.02% annualized impact from the purchase of bank owned life
insurance in the fourth quarter of 2004. Due to rising interest rates, both
asset yields and liability costs increased during 2005. The Bank was modestly
liability sensitive at the end of 2005, reflecting the effect of higher
optionality in the Woronoco balance sheet under the higher interest rate
conditions prevailing at the end of 2005.
Provision
for Loan Losses.
The
provision for loan losses was $1.3 million in 2005, compared to $1.6 million
in
2004. Net loan charge-offs were at a five year low in 2005, and the ratio of
net
charge-offs to average loans declined to a relatively low 0.08% in 2005. The
provision measured 135% of net charge-offs in 2005, compared to 131% in the
prior year.
Non-Interest
Income.
Non-interest income increased by $7.2 million (92%) in 2005 compared to 2004.
This increase was primarily due to the addition of the Woronoco contribution
beginning on June 1, together with higher securities gains and organic revenue
growth. Service fee income totaled $9.4 million for the year 2005, and measured
0.54% of average assets, compared to 0.43% of average assets in the previous
year. About half of the improvement in
this
ratio was due to growth in insurance commissions and loan servicing fees, and
this growth was directly tied to the Woronoco acquisition. Additionally,
Woronoco had a larger residential mortgage loan servicing portfolio. The other
half of the improvement in this ratio was primarily due to growth in overdraft
fees, as 2005 was the first full year of operations of the Bank’s courtesy
overdraft protection
program. Many other categories of fee income also increased in line with the
organic growth of loans and deposits during the year. Additionally, total wealth
management fees increased by 3% to $2.7 million, and the total amount of assets
under management increased by 17% to $418 million at year-end 2005, compared
to
$358 million at the prior year-end.
Net
realized securities gains totaled $3.5 million in 2005, compared to $1.4 million
in 2004. These gains were related to the sale of equity securities, reducing
equity price risk in the investment portfolio. Non-interest income also
benefited from gains on the sale of loans and securitized loans, which totaled
$773 thousand in 2005. These gains followed steps taken by the Company in 2003
and 2004 to improve liquidity by securitizing residential mortgages. Other
non-interest income included $893 thousand in revenues recorded on life
insurance policies, compared to $638 thousand in the prior year, reflecting
the
purchase of additional bank owned life insurance policies in the fourth quarter
of 2004.
Non-Interest
Expense.
Non-interest expense increased by $20.0 million (69%) in 2005. The increase
included the $8.8 million non-cash charge related to the ESOP termination,
together with merger and conversion charges totaling $2.1 million. Excluding
these charges, the increase was $9.0 million (31%), primarily reflecting the
impact of the acquired Woronoco operations on all expense categories. The merger
and system conversion charges included indirect costs of the Woronoco
acquisition, together with costs of converting the Company’s core banking
systems and of converting the acquired Woronoco systems and integrating the
Woronoco operations. Also included in these charges were interim staffing and
systems costs of Woronoco operations
in the third quarter through the conversion in August.
The
ratio
of non-interest expense to average assets was 2.81% in 2005, compared to 2.25%
in 2004. Excluding the ESOP termination and merger and conversion expenses,
this
ratio decreased to 2.18% in 2005, illustrating the efficiencies resulting
from the merger. The Company estimated that total cost savings and integration
efficiencies
related
to the Woronoco acquisition equated to about 37% of Woronoco's first quarter
non-interest expense, excluding merger-related charges. These cost savings
exceeded the Company's original 30% objective for cost savings. Expenses in
2005
included $573 thousand in operating costs of new branches and expanded
commercial lending. Additionally, amortization of intangible assets increased
to
$1.1 million in 2005 due to the amortization of the core deposit intangible
and
non-competition agreement intangible assets recorded as part of the Woronoco
acquisition.
Income
Tax Expense and Discontinued Operations.
The
effective income tax rate measured 33% in 2005, excluding the ESOP termination
charge and a related $288 thousand benefit, compared to 32% in 2004. The Bank
benefits from securities purchased in the Bank’s subsidiary securities
corporations, which are taxed at a lower state income tax rate. Additionally,
the effective income tax rate benefited from tax preferences on income from
municipal securities, equity securities qualifying for the dividends received
deduction, and bank owned life insurance contracts. Results in 2004 also
included net losses of $431 thousand in the first six months, representing
the
after-tax loss on discontinued operations of EastPoint Technologies, LLC, which
was sold in June 2004.
Comprehensive
Income. The
Company recorded $1.8 million in total comprehensive income in 2005 compared
to
$10.2 million in 2004. This reflected the lower net income recorded, along
with
a $6.5 million other net comprehensive loss in 2005 related primarily to changes
in securities values.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is the ability to meet cash needs at all times with available cash or by
conversion of other assets to cash at a reasonable price. The primary source
of
funding for the Company is dividend payments from the Bank and from Berkshire
Insurance Group. Additional sources of liquidity are proceeds from borrowings
and capital offerings, and from stock option exercises. The main uses of
liquidity are the payment of stockholder dividends, purchases of treasury stock,
debt service on outstanding borrowings and debentures, and the cash portion
of
business acquisitions. There are certain restrictions on the payment of
dividends as discussed in the Stockholders’ Equity note to the consolidated
financial statements.
The
Bank’s primary source of liquidity is customer deposits. Additional sources are
borrowings, repayments of loans and investment securities, and the sale and
repayments of investment securities. The Bank closely monitors its liquidity
position on a daily basis. Sources of borrowings include advances from the
FHLBB
and a repurchase agreement line of credit with a nationally recognized
broker-dealer. The greatest sources of uncertainty affecting liquidity are
deposit withdrawals and usage of loan commitments, which are influenced by
interest rates, economic conditions, and competition. The Bank relies on
competitive rates, customer service, and long-standing relationships with
customers to manage deposit and loan liquidity. Based on its historical
experience, management believes that it has adequately provided for deposit
and
loan liquidity needs. Both liquidity and capital resources are managed according
to policies approved by the Board of Directors.
The
Bank
must satisfy various regulatory capital requirements, which are discussed in
the
Regulation and Supervision section of Item 1 and in the Stockholders’ Equity
note to the consolidated financial statements. At year-end 2006, the Company
was
engaged in its eight stock repurchase program as further described in Item
12.
Please see the Equity section of the discussion of financial condition for
additional information about liquidity and capital at year-end 2006. In
September 2006, the Company filed a universal shelf registration with the
Securities and Exchange Commission for the issuance of up to $125 million in
debt securities, common stock, or preferred stock. There were no securities
issued pursuant to this registration at year-end 2006.
Contractual
Obligations.
The
year-end 2006 contractual obligations were as follows:
|
|
|
Less
than One
|
|
One
to Three
|
|
Three
to Five
|
|
After
Five
|
|
|||||||
|
(In
thousands)
|
|
Total
|
|
Year
|
|
Years
|
|
Years
|
|
Years
|
||||||
|
FHLBB
borrowings
|
$
|
330,005
|
$
|
121,626
|
$
|
140,341
|
$
|
60,610
|
$
|
7,428
|
||||||
|
Junior
subordinated debentures
|
15,464
|
-
|
-
|
-
|
15,464
|
|||||||||||
|
Operating
lease obligations
|
34,813
|
2,745
|
5,173
|
4,690
|
22,205
|
|||||||||||
|
Note
payable
|
15,000
|
15,000
|
-
|
-
|
-
|
|||||||||||
|
Equity
contribution commitments
|
9,135
|
9,135
|
-
|
-
|
-
|
|||||||||||
|
Purchase
obligations
|
8,831
|
2,115
|
4,963
|
1,753
|
-
|
|||||||||||
|
Total
Contractual Obligations
|
$
|
413,248
|
$
|
150,621
|
$
|
150,477
|
$
|
67,053
|
$
|
45,097
|
||||||
Further
information about borrowings and lease obligations is contained in Notes 10
and
12 in the financial statements. Equity contribution commitments are primarily
related to community and historic development entities with transferable tax
credits.
Off-Balance
Sheet Arrangements. In
the
normal course of operations, the Company engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles
are not recorded in the Company’s financial instruments. These transactions
involve, to varying degrees, elements of credit, interest rate and liquidity
risk. Such transactions are used primarily to manage customers’ requests for
funding and take the form of loan commitments and lines of credit. A further
presentation of the Company’s off-balance sheet arrangements is presented in
Note 12, “Commitments, Contingencies, and Off-Balance Sheet Activities” in the
Notes to the financial statements.
For
2006,
the Company did not engage in any off-balance sheet transactions reasonably
likely to have a material effect on the Company’s financial condition, results
of operation or cash flows.
IMPACT
OF INFLATION AND CHANGING PRICES
The
financial statements and related financial data presented in this Form 10-K
have
been prepared in conformity with accounting principles generally accepted in
the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
liabilities of Berkshire Bank are monetary in nature. As a result, interest
rates have a more significant impact on Berkshire Bank’s performance than the
general level of inflation. Interest rates may be affected by inflation, but
the
direction and magnitude of the impact may vary. A sudden change in inflation
(or
expectations about inflation), with a related change in interest rates, would
have a significant impact on our operations.
IMPACT
OF NEW ACCOUNTING PRONOUNCEMENTS
Please
refer to the note on Recent Accounting Pronouncements in Note 1 to the financial
statements for a detailed discussion of new accounting pronouncements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
MANAGEMENT
OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
Qualitative
Aspects of Market Risk.
The
Bank’s most significant form of market risk is interest rate risk. The Bank
seeks to avoid fluctuations in its net interest income and to maximize net
interest income within acceptable levels of risk through periods of changing
interest rates. Berkshire Bank maintains an Asset/Liability Committee that
is
responsible for reviewing its asset/liability policies and interest rate risk
position. This Committee meets at least quarterly and reports trends and
interest rate risk position to the Risk Management Committee and Board of
Directors on a quarterly basis. The extent of the movement of interest rates
is
an uncertainty that could have a negative impact on the Company’s earnings. The
Bank has managed interest rate risk by emphasizing assets with shorter term
repricing durations, periodically selling long term fixed-rate assets, promoting
low cost core deposits, and using FHLBB advances to structure its liability
repricing durations.
Quantitative
Aspects of Market Risk.
Berkshire Hills uses a simulation model to measure the potential change in
net
interest income that an instantaneous increase or decrease of market interest
rates would cause assuming a simultaneous parallel shift along the entire yield
curve. Loans, deposits and borrowings were expected to reprice at the new
repricing or maturity date. The Company uses prepayment guidelines set forth
by
market sources as well as Company generated data where applicable. Cash flows
from loans and securities are assumed to be reinvested based on current
operating conditions and strategies. Other assumptions about balance sheet
mix
are generally held constant. However,
in addition to the instantaneous interest rate shock simulation model previously
disclosed, the Company has regularly utilized other types of analyses in
assessing its interest rate sensitivities. While primary emphasis was given
to
the rate shock model in the past, the Company has also periodically utilized
a
rate change ramp simulation model, which modeled the impact of interest rate
changes which were ramped evenly over a twelve month period, rather than as
an
instantaneous shock. Emphasis was previously placed on the shock model in part
due to the generational low levels of interest rates and the anticipation of
a
future rebound. In recent periods, the Federal Reserve Bank has raised interest
rates on a ramped basis and the Company now views the ramp model as more
relevant for assessing the risk of the current and anticipated interest rate
environments. Accordingly, the simulation results presented below are for a
twelve month ramped interest rate change, and the year-end 2005 results have
also been changed to reflect this assumption. Additionally, the model has been
extended to include a second simulated year in order to fully assess the impact
of changes which were ramped in the first year. No other material changes have
been made to the methodologies used in the model. When comparing the year-end
2005 rate shock sensitivity as reported in the 2005 Form 10-K to the ramp rate
change scenario shown above, there is no material change in the assessment
of
overall interest rate sensitivity of the Bank.
|
Change
in
|
|||||||||||||
|
Interest
Rates-Basis
|
1
-
12 Months
|
|
13
- 24 Months
|
|
|||||||||
|
Points
(Rate Ramp)
|
|
$
Change
|
|
%
Change
|
|
$
Change
|
|
%
Change
|
|||||
|
(Dollars
in thousands)
|
|||||||||||||
|
At
December 31, 2006
|
|||||||||||||
|
+
200
|
$
|
(1,402
|
)
|
(2.26
|
)%
|
$
|
(3,380
|
)
|
(5.31
|
)%
|
|||
|
+
100
|
(415
|
)
|
(0.67
|
)
|
(1,255
|
)
|
(1.97
|
)
|
|||||
|
-
100
|
238
|
0.38
|
453
|
0.71
|
|||||||||
|
-
200
|
(3
|
)
|
(0.01
|
)
|
(1,188
|
)
|
(1.87
|
)
|
|||||
|
At
December 31, 2005
|
|||||||||||||
|
+
200
|
$
|
(210
|
)
|
(0.34
|
)%
|
$
|
830
|
1.29
|
%
|
||||
|
+
100
|
(327
|
)
|
(0.53
|
)
|
291
|
0.45
|
|||||||
|
-
100
|
1,140
|
1.86
|
1,480
|
2.30
|
|||||||||
|
-
200
|
915
|
1.49
|
(1,189
|
)
|
(1.85
|
)
|
|||||||
At
year-end 2006, the Company displayed a modestly negative income sensitivity
to
higher interest rates (liability sensitivity) due to shifts in the deposit
mix
to money market deposits and to shorter duration time accounts and due to the
growth of loans with intermediate term pricing durations. The Company’s
liability sensitivity also increased due to lower prepayments of loans and
investments as a result of higher prevailing interest rates. Due to the
Company’s growth plans, these factors are anticipated to continue to influence
potential changes in the Company’s interest rate risk in future periods. The
Company is using some longer-term borrowings and is considering promoting
certain longer term time accounts. The securities deleveraging at the end of
the
third quarter of 2006 helped to reduce liability sensitivity. The sale of the
interest rate swaps hedging certain brokered time deposits subsequent to
year-end also reduced liability sensitivity. The Company would consider other
financial instruments to partially offset further liability sensitivity related
to loan and deposit growth. The Company believes that short term rates may
be
near a peak and it is willing to accept some moderate liability sensitivity
in
support of its overall strategic objectives.
Due
to
the limitations and uncertainties relating to model assumptions, these
computations should not be relied on as projections of income. Further, the
computations do not reflect any actions that management may undertake in
response to changes in interest rates. The most significant assumption relates
to expectations for the interest sensitivity of non-maturity deposit accounts
in
a rising rate environment. The model assumes that deposit rate sensitivity
will
be a percentage of the market interest rate change as follows: NOW
accounts-ranging between 0 and 40% depending on product type; money market
accounts-ranging between 50 and 75% depending on the balance and product type;
and savings accounts-65% (35% at the prior year-end). One of the significant
limitations of the simulation is that it assumes parallel shifts in the yield
curve. Actual interest rate risks are often more complex than this scenario.
A
key interest rate change in 2006 was the inverting of the yield curve, which
generated downward pressure on net interest income. Assumption changes in 2006
were based on a review of past performance and future expectations and were
not
viewed as material.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The internal control
process has been designed under our supervision to provide
reasonable assurance
regarding the reliability of financial reporting and the preparation of
the
Company’s financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States
of America.
Management
conducted an assessment of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2006, utilizing
the framework established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based
on
this assessment, management has determined that the Company’s
internal control
over financial reporting as of December 31, 2006 is effective.
Our
internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that accurately and
fairly reflect,
in reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as
necessary to
permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures
are being made only in accordance with authorizations of management and
the
directors of the Company; and (3) unauthorized acquisition, use, or
disposition of
the
Company’s assets that could have a material effect on the Company’s financial
statements are prevented or timely detected.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can
provide only reasonable assurance with respect to financial
statement preparation
and presentation. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
the
policies or procedures may deteriorate.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 has been audited by Wolf & Company, P.C.,
an independent registered public accounting firm, as stated in their report,
which follows. This report expresses an unqualified opinion on management’s
assessment and on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2006.
|
/s/
Michael P. Daly
|
/s/
John S. Millet
|
||
|
Michael
P. Daly
|
John
S. Millet
|
||
|
President,
Chief Executive Officer and Director
|
Senior
Vice President,
|
||
|
|
Interim
Chief Financial Officer
|
||
|
March
13, 2007
|
and
Treasurer
|
||
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of
Berkshire
Hills Bancorp, Inc.
We
have
audited the accompanying consolidated balance sheets of Berkshire Hills Bancorp,
Inc. and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2006.
We
also have audited management's assessment, included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting, that
Berkshire Hills Bancorp, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established
in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Berkshire Hills Bancorp, Inc.'s management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control
over
financial reporting. Our responsibility is to express an opinion on these
financial statements, an opinion on management's assessment, and an opinion
on
the effectiveness of the company's internal control over financial reporting
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a
test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining
an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as
we
considered necessary in the circumstances. We believe that our audits provide
a
reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Berkshire Hills Bancorp,
Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of
their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, management’s
assessment that Berkshire Hills Bancorp, Inc. maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on criteria established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Furthermore, in our opinion, Berkshire Hills Bancorp, Inc. maintained, in
all
material respects, effective internal control over financial reporting as
of
December 31, 2006, based on criteria established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/
Wolf
& Company, P.C.
Boston,
Massachusetts
March
13,
2007
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
||||||
|
(In
thousands, except share data)
|
2006
|
2005
|
|||||
|
Assets
|
|||||||
|
Total
cash and cash equivalents
|
$
|
30,985
|
$
|
31,087
|
|||
|
Securities
available for sale, at fair value
|
194,206
|
390,412
|
|||||
|
Securities
held to maturity (fair values of $39,686 in 2006 and $29,763 in
2005)
|
39,968
|
29,908
|
|||||
|
Residential
mortgages
|
599,273
|
549,791
|
|||||
|
Commercial
mortgages
|
567,074
|
410,720
|
|||||
|
Commercial
business loans
|
189,758
|
158,746
|
|||||
|
Consumer
loans
|
342,882
|
300,973
|
|||||
|
Total
loans
|
1,698,987
|
1,420,230
|
|||||
|
Less:
Allowance for loan losses
|
(19,370
|
)
|
(13,001
|
)
|
|||
|
Net
loans
|
1,679,617
|
1,407,229
|
|||||
|
Premises
and equipment, net
|
29,130
|
26,236
|
|||||
|
Goodwill
|
104,531
|
88,092
|
|||||
|
Other
intangible assets
|
16,810
|
11,524
|
|||||
|
Cash
surrender value of life insurance policies
|
30,338
|
30,505
|
|||||
|
Other
assets
|
24,057
|
20,560
|
|||||
|
Total
assets
|
$
|
2,149,642
|
$
|
2,035,553
|
|||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Liabilities
|
|||||||
|
Demand
deposits
|
$
|
178,109
|
$
|
180,136
|
|||
|
NOW
deposits
|
153,087
|
148,644
|
|||||
|
Money
market deposits
|
297,155
|
244,784
|
|||||
|
Savings
deposits
|
202,213
|
222,387
|
|||||
|
Total
non-maturity deposits
|
830,564
|
795,951
|
|||||
|
Brokered
time deposits
|
41,741
|
56,933
|
|||||
|
Other
time deposits
|
649,633
|
518,334
|
|||||
|
Total
time deposits
|
691,374
|
575,267
|
|||||
|
Total
deposits
|
1,521,938
|
1,371,218
|
|||||
|
Borrowings
|
345,005
|
397,453
|
|||||
|
Junior
subordinated debentures
|
15,464
|
15,464
|
|||||
|
Other
liabilities
|
9,074
|
5,352
|
|||||
|
Total
liabilities
|
1,891,481
|
1,789,487
|
|||||
|
Commitments
and contingencies (note 12)
|
|||||||
|
Stockholders’
equity
|
|||||||
|
Preferred
stock ($.01 par value; 1,000,000 shares authorized; none
issued)
|
-
|
-
|
|||||
|
Common
stock ($.01 par value; 26,000,000 shares authorized; 10,600,472
shares
issued)
|
106
|
106
|
|||||
|
Additional
paid-in capital
|
200,975
|
198,667
|
|||||
|
Unearned
compensation
|
(1,896
|
)
|
(1,435
|
)
|
|||
|
Retained
earnings
|
105,731
|
99,429
|
|||||
|
Accumulated
other comprehensive income (loss)
|
92
|
(2,239
|
)
|
||||
|
Treasury
stock, at cost (1,887,068 shares in 2006 and 2,060,604 in
2005)
|
(46,847
|
)
|
(48,462
|
)
|
|||
|
Total
stockholders' equity
|
258,161
|
246,066
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
2,149,642
|
$
|
2,035,553
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Years
Ended December 31,
|
|||||||||
|
(In
thousands, except per share data)
|
2006
|
2005
|
2004
|
|||||||
|
Interest
and dividend income
|
||||||||||
|
Loans
|
$
|
100,836
|
$
|
70,103
|
$
|
43,766
|
||||
|
Securities
|
16,957
|
17,517
|
17,276
|
|||||||
|
Cash
and cash equivalents
|
258
|
112
|
39
|
|||||||
|
Total
interest and dividend income
|
118,051
|
87,732
|
61,081
|
|||||||
|
Interest
expense
|
||||||||||
|
Deposits
|
41,044
|
21,048
|
12,393
|
|||||||
|
Borrowings
and junior subordinated debentures
|
16,767
|
15,067
|
8,331
|
|||||||
|
Total
interest expense
|
57,811
|
36,115
|
20,724
|
|||||||
|
Net
interest income
|
60,240
|
51,617
|
40,357
|
|||||||
|
Non-interest
income
|
||||||||||
|
Deposit
service fees
|
5,803
|
4,539
|
2,347
|
|||||||
|
Wealth
management fees
|
3,287
|
2,828
|
2,670
|
|||||||
|
Insurance
commissions and fees
|
3,757
|
1,257
|
102
|
|||||||
|
Loan
service fees
|
692
|
749
|
374
|
|||||||
|
(Loss)
gain on sale of securities
|
(3,130
|
)
|
4,283
|
1,483
|
||||||
|
Other
|
1,639
|
1,267
|
788
|
|||||||
|
Total
non-interest income
|
12,048
|
14,923
|
7,764
|
|||||||
|
Total
net revenue
|
72,288
|
66,540
|
48,121
|
|||||||
|
Provision
for loan losses
|
7,860
|
1,313
|
1,565
|
|||||||
|
Non-interest
expense
|
||||||||||
|
Salaries
and employee benefits
|
24,708
|
20,281
|
16,882
|
|||||||
|
Termination
of Employee Stock Ownership Plan (ESOP)
|
-
|
8,836
|
-
|
|||||||
|
Occupancy
and equipment
|
7,699
|
5,798
|
4,085
|
|||||||
|
Marketing,
data processing, and professional services
|
6,648
|
4,881
|
3,954
|
|||||||
|
Non-recurring
expense
|
1,510
|
2,142
|
-
|
|||||||
|
Amortization
of intangible assets
|
2,035
|
1,140
|
98
|
|||||||
|
Other
|
6,268
|
5,920
|
3,958
|
|||||||
|
Total
non-interest expense
|
48,868
|
48,998
|
28,977
|
|||||||
|
Income
from continuing operations before income taxes
|
15,560
|
16,229
|
17,579
|
|||||||
|
Income
tax expense
|
4,668
|
8,003
|
5,639
|
|||||||
|
Income
from continuing operations
|
10,892
|
8,226
|
11,940
|
|||||||
|
Income
(loss) from discontinued operations before income taxes
|
606
|
-
|
(653
|
)
|
||||||
|
Income
tax expense (benefit)
|
235
|
-
|
(222
|
)
|
||||||
|
Net
income (loss) from discontinued operations
|
371
|
-
|
(431
|
)
|
||||||
|
Net
income
|
$
|
11,263
|
$
|
8,226
|
$
|
11,509
|
||||
|
Basic
earnings per share
|
||||||||||
|
Continuing
operations
|
$
|
1.28
|
$
|
1.16
|
$
|
2.26
|
||||
|
Discontinued
operations
|
0.04
|
-
|
(0.08
|
)
|
||||||
|
Total
|
$
|
1.32
|
$
|
1.16
|
$
|
2.18
|
||||
|
Diluted
earnings per share
|
||||||||||
|
Continuing
operations
|
$
|
1.25
|
$
|
1.10
|
$
|
2.08
|
||||
|
Discontinued
operations
|
0.04
|
-
|
(0.07
|
)
|
||||||
|
Total
|
$
|
1.29
|
$
|
1.10
|
$
|
2.01
|
||||
|
Weighted
average shares outstanding
|
||||||||||
|
Basic
|
8,538
|
7,122
|
5,284
|
|||||||
|
Diluted
|
8,730
|
7,503
|
5,731
|
|||||||
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
Years
Ended December 31, 2006, 2005 and 2004
|
Accumulated
|
|||||||||||||||||||||||||
|
Additional
|
Unearned
|
other
comp-
|
|||||||||||||||||||||||
|
Common
stock
|
paid-in
|
compen-
|
Retained
|
rehensive
|
Treasury
|
||||||||||||||||||||
|
(In
thousands)
|
Shares
|
Amount
|
capital
|
sation
|
earnings
|
income
(loss)
|
stock
|
Total
|
|||||||||||||||||
|
Balance
at December 31, 2003
|
5,903
|
$
|
77
|
$
|
75,764
|
$
|
(8,507
|
)
|
$
|
86,276
|
$
|
5,559
|
$
|
(35,994
|
)
|
$
|
123,175
|
||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
11,509
|
-
|
-
|
11,509
|
|||||||||||||||||
|
Other
net comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
(1,345
|
)
|
-
|
(1,345
|
)
|
|||||||||||||||
|
Total
comprehensive income
|
10,164
|
||||||||||||||||||||||||
|
Reversals
from discontinued operations
|
-
|
-
|
142
|
-
|
(142
|
)
|
-
|
-
|
-
|
||||||||||||||||
|
Cash
dividends declared ($0.48 per share)
|
-
|
-
|
-
|
-
|
(2,614
|
)
|
-
|
-
|
(2,614
|
)
|
|||||||||||||||
|
Treasury
stock purchased
|
(78
|
)
|
-
|
-
|
-
|
-
|
-
|
(2,545
|
)
|
(2,545
|
)
|
||||||||||||||
|
Exercise
of stock options
|
33
|
-
|
-
|
-
|
(33
|
)
|
-
|
576
|
543
|
||||||||||||||||
|
Reissuance
of treasury stock - other
|
16
|
-
|
358
|
-
|
-
|
-
|
238
|
596
|
|||||||||||||||||
|
Change
in unearned compensation
|
-
|
-
|
1,324
|
1,093
|
-
|
-
|
-
|
2,417
|
|||||||||||||||||
|
Balance
at December 31, 2004
|
5,874
|
77
|
77,588
|
(7,414
|
)
|
94,996
|
4,214
|
(37,725
|
)
|
131,736
|
|||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
8,226
|
-
|
-
|
8,226
|
|||||||||||||||||
|
Other
net comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
(6,453
|
)
|
-
|
(6,453
|
)
|
|||||||||||||||
|
Total
comprehensive income
|
1,773
|
||||||||||||||||||||||||
|
Acquisition
of Woronoco Bancorp
|
2,927
|
29
|
111,810
|
-
|
-
|
-
|
-
|
111,839
|
|||||||||||||||||
|
Termination
of Employee Stock
|
|||||||||||||||||||||||||
|
Ownership
Plan
|
-
|
-
|
8,459
|
5,105
|
-
|
-
|
-
|
13,564
|
|||||||||||||||||
|
Cash
dividends declared ($0.52 per share)
|
-
|
-
|
-
|
-
|
(3,707
|
)
|
-
|
-
|
(3,707
|
)
|
|||||||||||||||
|
Treasury
stock purchased/transferred
|
(382
|
)
|
-
|
-
|
-
|
-
|
-
|
(12,837
|
)
|
(12,837
|
)
|
||||||||||||||
|
Exercise
of stock options
|
103
|
-
|
-
|
-
|
(86
|
)
|
-
|
1,777
|
1,691
|
||||||||||||||||
|
Reissuance
of treasury stock - other
|
18
|
-
|
315
|
-
|
-
|
-
|
323
|
638
|
|||||||||||||||||
|
Tax
benefit from stock compensation
|
-
|
-
|
279
|
-
|
-
|
-
|
-
|
279
|
|||||||||||||||||
|
Change
in unearned compensation
|
-
|
-
|
216
|
874
|
-
|
-
|
-
|
1,090
|
|||||||||||||||||
|
Balance
at December 31, 2005
|
8,540
|
106
|
198,667
|
(1,435
|
)
|
99,429
|
(2,239
|
)
|
(48,462
|
)
|
246,066
|
||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
11,263
|
-
|
-
|
11,263
|
|||||||||||||||||
|
Other
net comprehensive income
|
-
|
-
|
-
|
-
|
-
|
2,331
|
-
|
2,331
|
|||||||||||||||||
|
Total
comprehensive income
|
13,594
|
||||||||||||||||||||||||
|
Cash
dividends declared ($0.56 per share)
|
-
|
-
|
-
|
-
|
(4,834
|
)
|
-
|
-
|
(4,834
|
)
|
|||||||||||||||
|
Treasury
stock purchased
|
(76
|
)
|
-
|
-
|
-
|
-
|
-
|
(2,876
|
)
|
(2,876
|
)
|
||||||||||||||
|
Exercise
of stock options
|
197
|
-
|
-
|
-
|
(127
|
)
|
-
|
3,556
|
3,429
|
||||||||||||||||
|
Reissuance
of treasury stock - other
|
52
|
-
|
853
|
-
|
-
|
-
|
935
|
1,788
|
|||||||||||||||||
|
Stock-based
compensation
|
-
|
-
|
195
|
-
|
-
|
-
|
-
|
195
|
|||||||||||||||||
|
Tax
benefit from stock compensation
|
-
|
-
|
1,260
|
-
|
-
|
-
|
-
|
1,260
|
|||||||||||||||||
|
Change
in unearned compensation
|
-
|
-
|
-
|
(461
|
)
|
-
|
-
|
-
|
(461
|
)
|
|||||||||||||||
|
Balance
at December 31, 2006
|
8,713
|
$
|
106
|
$
|
200,975
|
$
|
(1,896
|
)
|
$
|
105,731
|
$
|
92
|
$
|
(46,847
|
)
|
$
|
258,161
|
||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
2006
|
2005
|
2004
|
|||||||
|
(In
thousands)
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Continuing
operations:
|
||||||||||
|
Net
income
|
$
|
10,892
|
$
|
8,226
|
$
|
11,940
|
||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||
|
provided
by continuing operating activities:
|
||||||||||
|
Provision
for loan losses
|
7,860
|
1,313
|
1,565
|
|||||||
|
Net
amortizaton of securities
|
943
|
1,349
|
1,203
|
|||||||
|
Net
loan amortization and deferrals
|
2,981
|
312
|
602
|
|||||||
|
Premises
depreciation and amortization expense
|
2,831
|
2,268
|
1,880
|
|||||||
|
Stock-based
compensation and ESOP expense
|
1,338
|
10,396
|
2,594
|
|||||||
|
Excess
tax benefits from stock-based payment arrangements
|
(1,260
|
)
|
(279
|
)
|
-
|
|||||
|
Amortization
of other intangibles
|
2,035
|
1,140
|
98
|
|||||||
|
Increase
in cash surrender value of bank-owned life insurance
|
(1,034
|
)
|
(893
|
)
|
(479
|
)
|
||||
|
Loss
(gain) on sales of securities, net
|
3,130
|
(4,283
|
)
|
(1,483
|
)
|
|||||
|
Deferred
income tax (benefit) provision, net
|
(1,762
|
)
|
1,689
|
1,521
|
||||||
|
Net
change in other assets
|
(5,208
|
)
|
2,122
|
2,016
|
||||||
|
Net
change in other liabilities
|
1,668
|
(3,654
|
)
|
(1,087
|
)
|
|||||
|
Net
cash provided by continuing operating activities
|
24,414
|
19,706
|
20,370
|
|||||||
|
Discontinued
operations:
|
||||||||||
|
Pre-tax income
(loss)
|
606
|
-
|
(653
|
)
|
||||||
|
Net
adjustments to reconcile net income (loss) to net cash
|
||||||||||
|
provided
(used) by operating activities
|
-
|
-
|
(99
|
)
|
||||||
|
Net
cash provided (used) by discontinued operations
|
606
|
-
|
(752
|
)
|
||||||
|
Total
net cash provided by operating activities:
|
25,020
|
19,706
|
19,618
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Continuing
operations:
|
||||||||||
|
Securities
available for sale:
|
||||||||||
|
Sales
|
190,009
|
134,195
|
16,169
|
|||||||
|
Proceeds
from maturities, calls, and prepayments
|
46,138
|
80,816
|
92,257
|
|||||||
|
Purchases
|
(40,155
|
)
|
(46,523
|
)
|
(127,633
|
)
|
||||
|
Securities
held to maturity:
|
||||||||||
|
Proceeds
from maturities, calls, and prepayments
|
16,319
|
22,858
|
27,770
|
|||||||
|
Purchases
|
(26,379
|
)
|
(22,843
|
)
|
(25,049
|
)
|
||||
|
Purchase
of bank owned life insurance
|
-
|
-
|
(10,000
|
)
|
||||||
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Concluded)
Years
Ended December 31, 2006, 2005 and 2004
|
|
2006
|
2005
|
2004
|
|||||||
|
(In
thousands)
|
||||||||||
|
Increase
in loans, net
|
(279,458
|
)
|
(63,458
|
)
|
(89,458
|
)
|
||||
|
Proceeds
from sales of loans
|
-
|
3,635
|
12,737
|
|||||||
|
Additions
to premises and equipment
|
(6,095
|
)
|
(4,133
|
)
|
(4,583
|
)
|
||||
|
Proceeds
from sales of foreclosed real estate
|
-
|
-
|
23
|
|||||||
|
Net
cash paid for business acquisitions
|
(22,541
|
)
|
(26,640
|
)
|
(1,415
|
)
|
||||
|
Net
cash (used) provided by continuing investing activities
|
(122,162
|
)
|
77,907
|
(109,182
|
)
|
|||||
|
Discontinued
operations:
|
||||||||||
|
Net
proceeds from sale of assets
|
-
|
-
|
2,511
|
|||||||
|
Net
cash provided by discontinued investing activities
|
-
|
-
|
2,511
|
|||||||
|
Total
net cash (used) provided by investing operations:
|
(122,162
|
)
|
77,907
|
(106,671
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Net
increase in deposits
|
150,720
|
82,755
|
15,545
|
|||||||
|
Proceeds
from Federal Home Loan Bank advances
|
257,014
|
889,653
|
675,500
|
|||||||
|
Repayments
of Federal Home Loan Bank advances
|
(324,462
|
)
|
(1,063,248
|
)
|
(599,039
|
)
|
||||
|
Proceeds
from junior subordinated debentures
|
-
|
15,464
|
-
|
|||||||
|
Proceeds
from note payable
|
15,000
|
-
|
-
|
|||||||
|
Decrease
in loans sold with recourse
|
-
|
-
|
(473
|
)
|
||||||
|
Payments
to acquire treasury stock
|
(2,876
|
)
|
(7,953
|
)
|
(2,545
|
)
|
||||
|
Proceeds
from reissuance of treasury stock
|
5,218
|
2,329
|
1,139
|
|||||||
|
Excess
tax benefits from stock-based payment arrangements
|
1,260
|
279
|
-
|
|||||||
|
Cash
dividends paid
|
(4,834
|
)
|
(3,707
|
)
|
(2,614
|
)
|
||||
|
Net
cash provided (used) by financing activities
|
97,040
|
(84,428
|
)
|
87,513
|
||||||
|
Net
change in cash and cash equivalents
|
(102
|
) |
13,185
|
460
|
||||||
|
Cash
and cash equivalents at beginning of year
|
31,087
|
17,902
|
17,442
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
30,985
|
$
|
31,087
|
$
|
17,902
|
||||
|
Supplemental
cash flow information:
|
||||||||||
|
Interest
paid on deposits
|
$
|
40,992
|
$
|
20,356
|
$
|
12,386
|
||||
|
Interest
paid on borrowed funds
|
16,760
|
14,283
|
8,073
|
|||||||
|
Income
taxes paid, net
|
931
|
3,310
|
2,440
|
|||||||
|
Securitization
of and transfer of loans to securities
|
-
|
-
|
39,657
|
|||||||
|
Non-cash
transfer treasury shares to pay off ESOP loan
|
-
|
4,897
|
-
|
|||||||
|
Fair
value of non-cash assets acquired
|
9,835
|
827,780
|
-
|
|||||||
|
Fair
value of liabilities assumed
|
3,492
|
702,622
|
-
|
|||||||
|
Fair
value of common stock issued
|
-
|
108,318
|
-
|
|||||||
The
accompanying notes are an integral part of
these consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2006, 2005 and 2004
1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation and consolidation
The
consolidated financial statements (the “financial statements”) of Berkshire
Hills Bancorp, Inc. (the “Company”) have been prepared in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”). The Company is a Delaware corporation and the holding company for
Berkshire Bank (the “Bank”), a Massachusetts-chartered savings bank
headquartered in Pittsfield, Massachusetts. These consolidated financial
statements include the accounts of Berkshire Hills Bancorp, Inc. and its
wholly-owned subsidiaries, Berkshire Bank and Berkshire Insurance Group,
together with the Bank’s consolidated subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior year balances to conform
to
the current year presentation.
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 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.
Use
of estimates
In
preparing consolidated financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated balance sheets
and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to
the
determination of the allowance for loan losses; the measurement of tax related
assets and liabilities; and the estimates related to the initial measurement
of
goodwill and intangible assets and subsequent impairment analysis and
amortization of intangible assets.
Cash
and cash equivalents
Cash
and
cash equivalents include cash, balances due from banks, and short-term
investments, all of which mature within ninety days. Cash and cash equivalents
are carried at cost.
Securities
Debt
securities that management has the positive intent and ability to hold to
maturity are classified as “held to maturity” and recorded at amortized cost.
The Company has no trading securities. All other securities, including equity
securities with readily determinable fair values, are classified as “available
for sale” and recorded at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income. The Company’s
investment in the stock of the Federal Home Loan Bank of Boston (FHLBB) is
included with equity securities available for sale. The fair value of this
stock
equals book value, and this investment is restricted by certain FHLBB
rules.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase
premiums and discounts are recognized in interest income using a method which
approximates the interest method over the terms of the securities. Declines
in
the fair value of held to maturity and available for sale securities below
their
cost that are deemed to be other than temporary are reflected in earnings
as
realized losses. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to
retain
its investment in the issuer for a period of time sufficient to allow for
any
anticipated recovery in fair value. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the specific
identification method.
Loans
Held for Sale / Gains and Losses on Sales of Mortgage
Loans
Residential
mortgage loans originated and held for sale are carried at the lower of
aggregate cost or market value and are included with other assets on the
balance
sheet. Gains and losses on sales of mortgage loans are recognized in
non-interest income at the time of the sale. Market value is based on committed
secondary market prices.
Accounting
for Derivatives
The
Company recognizes all derivatives as either assets or liabilities on the
balance sheet and measures those instruments at fair value. Changes in fair
value of a derivative that is highly effective, and that is designated and
qualifies as a fair value hedge, along with changes in fair value of the
hedged
asset or liability that is attributable to the hedged risk (including losses
or
gains on firm commitments), are recorded currently in noninterest income.
If a
derivative has ceased to be highly effective, hedge accounting is discontinued
prospectively.
Forward
sale commitments related to closed residential mortgage loans are accounted
for
as fair value hedges. Changes in the fair value of such commitments and loans
are both recorded in the consolidated income statements and, accordingly,
any
hedge ineffectiveness is included in net income. However, because the Company's
forward sale commitments relate to specific closed loans, changes in the
fair
value of the forward commitments offset changes in the fair value of the
related
loans and, accordingly, there is no hedge ineffectiveness recognized as a
gain
or loss in earnings.
The
Company acquired interest rate swaps when it acquired Woronoco Bancorp,
Inc. in June 2005. Swaps with a $20 million notional amount were designated
as fair value hedges and were used to convert a portion of the Company’s
fixed-rate liabilities to a variable rate, and no material amount of hedge
ineffectiveness was recognized as a gain or loss in earnings. The Company
has
discontinued the use of hedge accounting for these swaps. Changes in the
fair
value of the related liabilities will not be recorded to income, and future
changes in the fair value of these swaps will be recorded as gains or losses
in
current earnings. These swaps were liquidated subsequent to
year-end.
Additionally,
a swap with a $5 million notional amount was designated as a cash flow hedge
and
was used to convert a portion of the Company’s variable-rate mortgages to a
fixed rate. The gain or loss on this hedge was recorded as a component of
other
comprehensive income, and there was no gain or loss recorded in current
earnings. The Company has discontinued the use of hedge accounting of this
swap.
Future changes in the fair value of this swap will be recorded in current
earnings. This swap matures in May, 2007.
Loans
The
Bank
originates residential mortgage, commercial mortgage, commercial business,
and
consumer loans to customers. A substantial portion of the loan portfolio
is
secured by real estate in Western Massachusetts and Northeastern New York.
The
ability of many of the Bank’s debtors to honor their contracts is dependent,
among other things, on the local economy and the local real estate market.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Loans
that management has the intent and ability to hold for the foreseeable future
or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses,
any
deferred fees or costs on originated loans, and any premiums or discounts
on
loans purchased or acquired through mergers. Interest income is accrued on
the
unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method. Interest on loans, excluding automobile
loans, is generally not accrued on loans which are ninety days or more past
due
unless the loan is well-secured and in the process of collection. Past due
status is based on contractual terms of the loan. Automobile loans generally
continue accruing to one hundred and twenty days delinquent at which time
they
are charged off. All interest accrued but not collected for loans that are
placed on non-accrual or charged-off is reversed against interest income
except
for certain loans designated as well-secured. The interest on non-accrual
loans
is accounted for on the cash-basis or cost-recovery method, until qualifying
for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Allowance
for loan losses
The
allowance for loan losses is established through a provision for loan losses
charged to earnings to account for losses that are probable to have been
incurred at the financial statement date and which can be reasonably
estimated. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any,
are credited to the allowance.
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, the composition and volume of the loan
portfolio, 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 impaired, pool, and unallocated components. For loans
that
are classified as impaired, an allowance is established based on the methodology
discussed below. The pool component covers pools of non-impaired loans
segregated by loan type 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
impaired and pool losses in the portfolio.
A
loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect the scheduled payments
of
principal or interest when due according to the contractual terms of the
loan
agreement. Impairment is measured on a loan by loan basis 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.
Substantially all of the Company’s loans that have been identified as impaired
have been measured by the fair value of existing collateral. Large groups
of
smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer
loans
or residential mortgage loans for impairment disclosures.
Foreclosed
and repossessed assets
Assets
acquired through, or in lieu of, loan foreclosure or repossession are held
for
sale and are initially recorded at the lower of the investment in the loan
or
fair value less estimated costs to sell at the date of foreclosure or
repossession, establishing a new cost basis. Subsequently, valuations are
periodically performed by management and the assets are carried at the lower
of
carrying amount or fair value less estimated costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in net
expenses from foreclosed real estate and repossessed assets.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage
servicing rights
Servicing
assets are recognized when rights are acquired through purchase or sale of
residential mortgage loans. Capitalized servicing rights are amortized against
mortgage servicing income in proportion to, and over the period of, the
estimated future net servicing income of the underlying mortgage loans.
Servicing assets are evaluated regularly for impairment based upon the fair
value of the servicing rights as compared to their amortized cost. Fair value
is
determined using prices for similar assets with similar characteristics,
when
available, or based upon discounted cash flows using market-based
assumptions.
Premises
and equipment
Land
is
carried at cost. Buildings and improvements and equipment are carried at
cost,
less accumulated depreciation and amortization computed on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements
are
amortized over the initial term of the lease, plus optional terms if certain
conditions are met.
Goodwill
and other intangibles
The
tangible assets, identifiable intangible assets, and liabilities acquired
in a
business combination are recorded at fair value at the date of acquisition.
The
fair values of tangible assets and liabilities are established based on specific
guidance set forth in Statements of Financial Accounting Standards (SFAS)
141,
“Business Combinations”. Identifiable intangible assets arise from
contractual or other legal rights. The fair values of these assets are generally
determined based on appraisals. Deferred tax liabilities or assets are
recognized for differences between the assigned values and the tax bases
of the
recognized assets and acquired liabilities. Premiums and discounts recorded
on
interest bearing assets and liabilities are recognized as an adjustment of
interest yield or cost using the interest method, or based on a straight
line
amortization over an estimated average life if that is the most practicable
estimate. Identifiable intangible assets are subsequently amortized on a
straight-line basis or accelerated basis over their estimated lives. Management
assesses the recoverability of intangible assets whenever events or changes
in
circumstances indicate that their carrying value may not be recoverable.
If
carrying amount exceeds fair value, an impairment charge is recorded to income.
Goodwill
is recognized for the excess of the acquisition cost over the fair values
of the
net assets acquired and is not subsequently amortized. Goodwill includes
direct
costs of the business combination. Contingently payable costs are recorded
to
goodwill at the time that it is determined that the contingency will be
satisfied. Goodwill may be adjusted for a reasonable period of time after
acquisition based on additional information that is received about the fair
values of acquired net assets. Management evaluates each material component
of
goodwill for impairment annually, with the test being performed in the same
period of each year. The impairment test compares the fair value of an acquired
unit to its carrying value, including goodwill. The fair value is based on
observable market prices, when practicable; other valuation techniques may
be
used when market prices are unavailable. If the fair value exceeds the carrying
value, then there is no impairment. If there is impairment, the fair value
of
the assets and liabilities of the unit are evaluated as they would be in
a
contemporaneous purchase. If the resulting net fair value is less than the
carrying value, an impairment charge is recorded to net income to reduce
the
carrying value to net fair value.
Transfers
of financial assets
Transfers
of financial assets are accounted for as sales, when control over the assets
has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage
of
that right) to pledge or exchange the transferred assets and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes”, which results in two components of
income tax expense: current and deferred. Current income tax expense
approximates taxes to be paid or refunded for the current period. Deferred
tax
assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities
are
expected to be realized or settled. Valuation allowances are then recorded
as
necessary to reduce deferred tax assets to the amounts management concludes
are
more likely than not to be realized. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities, and the related valuation
allowance, are adjusted accordingly through the provision for income taxes.
The
Bank’s base amount of its federal income tax reserve for loan losses is a
permanent difference for which there is no recognition of a deferred tax
liability. However, the loan loss allowance maintained for financial reporting
purposes is a temporary difference with allowable recognition of a related
deferred tax asset, if it is deemed realizable.
The
Company estimates its income taxes for each of the jurisdictions in which
it
operates to determine the appropriate components of income tax expense.
Significant management judgment is required in determining income tax expense,
deferred tax assets and liabilities, and any valuation allowances. Management
calculates and discloses the reasons for the differences between the statutory
federal income tax rate and the effective tax rates. Management also calculates
and discloses the significant components of year-end tax assets and liabilities.
Management annually reviews the final tax returns for accuracy and adjusts
its
current assumptions and estimates based on the completed tax returns. The
Company uses the deferral method of accounting for income tax
credits.
Insurance
commissions
Most
commission revenue is recognized as of the effective date of the insurance
policy or the date the customer is billed, whichever is later, net of return
commissions related to policy cancellations. In addition, the Company may
receive additional performance commissions based on achieving certain sales
and
loss experience measures. Such commissions are recognized when determinable,
which is generally when such commissions are received or when the Company
receives data from the insurance companies that allows the reasonable estimation
of these amounts.
Stock-based
compensation
Prior
to
January 1, 2006, employee compensation expense under stock option plans was
reported only if options were granted below market price at the grant date
in
accordance with the intrinsic value method of Accounting Principles Board
Opinion (APB) No. 25, “Accounting
for Stock Issued to Employees,”
and
related interpretations. Because the exercise price of the Company’s employee
stock options always equaled the market price of the underlying stock on
the
date of grant, no compensation expense was recognized on options granted.
The
Company adopted the provisions of SFAS No. 123, “Stock-based
Payment (Revised 2004),”
on
January 1, 2006. There was no material impact on the financial statements
from
the adoption of SFAS 123R. SFAS 123R eliminates the ability to account for
stock-based compensation using APB 25 and requires that such transactions
be
recognized as compensation cost in the income statement based on their fair
values on the measurement date, which, for the Company, is the date of the
grant. The Company transitioned to fair-value based accounting for stock-based
compensation using a modified version of prospective application (“modified
prospective application”). Under modified prospective application, as it is
applicable to the Company, SFAS 123R applies to new awards and to awards
modified, repurchased, or cancelled after January 1, 2006. Additionally,
compensation cost for the portion of awards for which the requisite service
has
not been rendered (generally referring to non-vested awards) that were
outstanding as of January 1, 2006 is being recognized as the remaining requisite
service is rendered after the adoption of SFAS 123R. The attribution of
compensation cost for those earlier awards is based on the same method and
on
the same grant-date fair values previously determined for the pro forma
disclosures required for companies that did not previously adopt the fair
value
accounting method for stock-based employee compensation. Compensation expense
for non-vested stock awards is based on the fair value of the awards, which
is
generally the market price of the stock on the measurement date, which, for
the
Company, is the date of grant, and is recognized ratably over the service
period
of the award.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS
No.
123R requires pro forma disclosures of net income and earnings per share
for all
periods prior to the adoption of the fair value accounting method for
stock-based employee compensation. The pro forma disclosures presented in
Note
15, Stock-Based Compensation Plans and Employee Stock Ownership Plan, use
the
fair value method of SFAS 123 to measure compensation expense for stock-based
employee compensation plans for years prior to 2006.
The
fair
market value of the stock awards, based on the market price at date of grant,
is
recorded as unearned compensation. Unearned compensation is amortized over
the
vesting period. Vested stock award shares are considered outstanding for
basic
earnings per share. Stock award shares not vested are considered in the
calculation of diluted earnings per share.
Employee
stock ownership plan (“ESOP”)
The
Company’s ESOP was terminated on June 30, 2005. Prior to this, compensation
expense was recognized as ESOP shares were committed to be released. Allocated
and committed to be released ESOP shares were considered outstanding for
earnings per share calculations. Other ESOP shares were excluded from earnings
per share calculations. Dividends declared on allocated ESOP shares were
charged
to retained earnings. Dividends declared on unallocated ESOP shares were
used to
satisfy debt service. The value of unearned shares to be allocated to ESOP
participants for future services not yet performed was reflected as a reduction
of stockholders’ equity.
Earnings
per common share
Earnings
per common share have been computed based on the following (average diluted
shares outstanding is calculated using the treasury stock method):
|
|
Years
Ended December 31,
|
|||||||||
|
(In
thousands, except per share data)
|
2006
|
2005
|
2004
|
|||||||
|
Net
income applicable to common stock
|
$
|
11,263
|
$
|
8,226
|
$
|
11,509
|
||||
|
Average
number of common shares issued
|
10,600
|
9,390
|
7,674
|
|||||||
|
Less:
average number of treasury stock shares
|
(1,963
|
)
|
(1,935
|
)
|
(1,779
|
)
|
||||
|
Less:
average number of unallocated ESOP shares
|
(2
|
)
|
(200
|
)
|
(436
|
)
|
||||
|
Less:
average number of unvested stock award shares
|
(97
|
)
|
(133
|
)
|
(175
|
)
|
||||
|
Average
number of basic shares outstanding
|
8,538
|
7,122
|
5,284
|
|||||||
|
Plus:
average number of unvested stock award shares
|
78
|
133
|
175
|
|||||||
|
Plus:
net dilutive effect of stock compensation
|
114
|
248
|
272
|
|||||||
|
Average
number of diluted shares outstanding
|
8,730
|
7,503
|
5,731
|
|||||||
|
Earnings
per average basic share
|
$
|
1.32
|
$
|
1.16
|
$
|
2.18
|
||||
|
Earnings
per average diluted share
|
$
|
1.29
|
$
|
1.10
|
$
|
2.01
|
||||
Trust
assets
Trust
assets held in a fiduciary or agent capacity are not included in the
accompanying consolidated balance sheets because they are not assets of the
Company.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Business
segments
An
operating segment is a component of a business for which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and evaluate performance.
The Company’s operations are limited to financial services provided within the
framework of a community bank, and decisions are based generally on specific
market areas and or product offerings. Accordingly, based on the financial
information which is presently evaluated by the Company’s chief operating
decision-maker, the Company operates in a single business segment.
Off-balance
sheet financial instruments
In
the
ordinary course of business, the Bank enters into off-balance sheet financial
instruments, consisting primarily of credit related financial instruments.
These
financial instruments are recorded in the consolidated financial statements
when
they are funded or related fees are incurred or received.
Recent
accounting pronouncements
Statements
of Financial Accounting Standards (“SFAS”)
SFAS No. 123,
“Stock-based Payment (Revised 2004).” SFAS 123R
establishes standards for the accounting for transactions in which an entity
(i) exchanges its equity instruments for goods or services, or
(ii) incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to
account for stock-based compensation using APB 25 and requires that such
transactions be recognized as compensation cost in the income statement based
on
their fair values on the measurement date, which is generally the date of
the
grant. The Company adopted the provisions of SFAS 123R on January 1,
2006. Details related to the adoption of SFAS 123R and the impact to the
Company’s financial statements are more fully discussed in an earlier section of
this note.
SFAS No. 154,
“Accounting Changes and Error Corrections, a Replacement of APB Opinion
No. 20 and FASB Statement No. 3.” SFAS 154
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to a newly adopted accounting principle.
Previously, most changes in accounting principle were recognized by including
the cumulative effect of changing to the new accounting principle in net
income
of the period of the change. SFAS 154 carries forward the guidance in APB
Opinion 20 “Accounting Changes,” requiring justification of a change in
accounting principle on the basis of preferability. SFAS 154 also carries
forward without change the guidance contained in APB Opinion 20, for
reporting the correction of an error in previously issued financial statements
and for a change in an accounting estimate. The adoption of SFAS 154 on
January 1, 2006 did not impact the Company’s financial statements.
SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments — an amendment of FASB
Statements No. 133 and 140.” SFAS 155
amends SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” and SFAS 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities.” SFAS 155
(i) permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
(ii) clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS 133, (iii) establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation,
(iv) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives, and (v) amends SFAS 140 to
eliminate the prohibition on a qualifying special purpose entity from holding
a
derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. SFAS 155 is effective for the
Company on January 1, 2007 and is not expected to have a significant impact
on the Company’s financial statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 156,
“Accounting for Servicing of Financial Assets — an amendment of FASB
Statement No. 140.” SFAS 156
amends SFAS 140. “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities — a replacement of FASB Statement
No. 125,” by requiring, in certain situations, an entity to recognize
a servicing asset or servicing liability each time it undertakes an obligation
to service a financial asset by entering into a servicing contract. All
separately recognized servicing assets and servicing liabilities are required
to
be initially measured at fair value. Subsequent measurement methods include
the
amortization method, whereby servicing assets or servicing liabilities are
amortized in proportion to and over the period of estimated net servicing
income
or net servicing loss or the fair value method, whereby servicing assets
or
servicing liabilities are measured at fair value at each reporting date,
and
changes in fair value are reported in earnings in the period in which they
occur. If the amortization method is used, an entity must assess servicing
assets or servicing liabilities for impairment or increased obligation based
on
the fair value at each reporting date. SFAS 156 is effective for the
Company on January 1, 2007 and is not expected to have a significant impact
on the Company’s financial statements.
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. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R).”
SFAS 158
requires an employer to recognize the overfunded or underfunded status of
defined benefit post-retirement benefit plans as an asset or a liability
in its
statement of financial position. The funded status is measured as the difference
between plan assets at fair value and the benefit obligation (the projected
benefit obligation for pension plans or the accumulated benefit obligation
for
other post-retirement benefit plans). An employer is also required to measure
the funded status of a plan as of the date of its year-end statement of
financial position with changes in the funded status recognized through
comprehensive income. SFAS 158 also requires certain disclosures regarding
the effects on net periodic benefit cost for the next fiscal year that arise
from delayed recognition of gains or losses, prior service costs or credits,
and
the transition asset or obligation. SFAS 158 is effective for the Company
beginning in 2006; it had no impact on the Company’s financial
statements.
SFAS
No. 159,
“The
Fair Value Option for Financial Assets
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 Staff Position, Interpretation, and Task Force
Issue
FASB
Staff Position (“FSP”) No. 115-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.” FSP
115-1
provides guidance for determining when an investment is considered impaired,
whether impairment is other-than-temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment
is less than its cost. If, after consideration of all available evidence
to
evaluate the realizable value of its investment, impairment is determined
to be
other-than-temporary, then an impairment loss should be recognized equal
to the
difference between the investment’s cost and its fair value. FSP 115-1 nullifies
certain provisions of Emerging Issues Task Force (“EITF”) Issue No. 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments,” while retaining the disclosure requirements of EITF
03-1 which were adopted in 2003. The adoption of FSP 115-1 on January 1,
2006 did not impact the Company’s financial statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FASB
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement 109.” 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. 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. FIN 48 is effective for the Company on January 1,
2007 and is not expected to have a significant impact on the Company’s financial
statements.
EITF
No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance
Arrangements”.
EITF
06-4 addresses accounting for split-dollar life insurance arrangements whereby
the employer purchases a policy to insure the life of an employee, and
separately enters into an agreement to split the policy benefits between
the
employer and the employee. This EITF states that an obligation arises as
a
result of a substantive agreement with an employee to provide future
postretirement benefits. Under EITF 06-4, the obligation is not settled upon
entering into an insurance arrangement. Since the obligation is not settled,
a
liability should be recognized in accordance with applicable authoritative
guidance. EITF 06-4 is effective for fiscal years beginning after December
15,
2007. The Company is in the process of evaluating the potential impacts of
adopting EITF 06-4 on its financial statements.
SEC
Staff Accounting Bulletin
Staff
Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of a Prior
Year Misstatements When Quantifying Misstatements in Current Year Financial
Statements.”
SAB 108 addresses how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial
statements. The effects of prior year uncorrected errors include the potential
accumulation of improper amounts that may result in a material misstatement
on
the balance sheet or the reversal of prior period errors in the current period
that result in a material misstatement of the current period income statement
amounts. Adjustments to current or prior period financial statements would
be
required in the event that after application of various approaches for assessing
materiality of a misstatement in current period financial statements and
consideration of all relevant quantitative and qualitative factors, a
misstatement is determined to be material. SAB 108 is applicable to all
financial statements issued by the Company after November 15, 2006.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
MERGERS
AND ACQUISITIONS
On
October 31, 2006, the Company acquired five Western Massachusetts insurance
agencies: Reynolds, Barnes & Hebb and McCormick, Smith & Curry Insurance
Agency, both of Pittsfield; Minkler Insurance Agency, of Stockbridge; H.S.
Andrews Insurance Agency, of Great Barrington; and MassOne Insurance Agency,
of
Greenfield. These acquisitions were all structured as the purchase of all
outstanding common shares, except that the assets and liabilities of the
Andrews
agency were acquired by the Minkler agency as part of the purchase agreement,
and the MassOne acquisition was structured as the purchase of assets and
liabilities. These agencies offer personal and commercial lines of property
and
casualty, life, disability, and health insurance. These agencies had previously
been affiliated as part of the Alliance Berkshire consortium. They are
collectively viewed by the Company as the foundation for this important business
line, which contributes to the amount of goodwill. The agencies were merged
into
the Berkshire Insurance Group and are expected to be the Company’s primary
source of non-interest income.
The
acquisitions were accounted for under the purchase method of accounting,
with
their results from operations included in the Company’s financial statements
beginning on the acquisition date. The purchase price of $22.5 million was
paid
in cash. The Company recorded an identifiable intangible asset of $7.3 million
for the appraised value of the purchased insurance contracts; this asset
is
being amortized over ten years on a straight-line basis. The other assets
and
liabilities of the acquired agencies were recorded at their fair values of
$2.5
million and $3.5 million, respectively. The Company recorded goodwill in
the
amount of $16.2 million, which is not expected to be deductible for tax
purposes. Additionally, the Company is obligated to pay a cash amount of
$2.8
million in conditional purchase consideration based on performance targets
over
the next two years. This amount will be recorded to goodwill as it becomes
determinable and payable.
The
results of these insurance agencies are included in the historical results
of
the Company beginning on October 31, 2006. The following table presents
unaudited pro forma information for 2006 and 2005 as if the acquisitions
had
been consummated as of the beginning of each of these years. This pro forma
information gives effect to certain adjustments, including purchase accounting
fair value adjustments, amortization of the purchased insurance contract
intangible, financing costs, and related income tax effects. The pro forma
information is theoretical in nature and does not necessarily reflect the
results of operations that would have occurred had the Company acquired these
agencies at the beginning of each of these years. In particular, revenue
enhancements, cost savings and indirect merger and integration costs are
not
reflected in the pro forma amounts. Additionally, the historic expenses of
these
agencies included compensation paid to the owners, and this is not reflective
of
compensation expected to be paid to the former owners after the acquisition
date.
The
Company’s unaudited pro forma condensed consolidated statements of income for
the years 2006 and 2005, assuming that the insurance agencies had been acquired
as of the beginning of the year are as follows:
|
(In
thousands, except per share data)
|
2006
|
2005
|
|||||
|
Net
interest income
|
$
|
58,949
|
$
|
50,081
|
|||
|
Non-interest
income
|
21,073
|
23,840
|
|||||
|
Net
income
|
11,082
|
7,359
|
|||||
|
Basic
earnings per share
|
$
|
1.30
|
$
|
1.03
|
|||
|
Diluted
earnings per share
|
1.27
|
0.98
|
|||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
2005, the Company acquired all of the outstanding common stock of Woronoco
Bancorp, Inc. Headquartered in Westfield, Massachusetts, Woronoco provided
banking and other financial services through ten banking offices in the Pioneer
Valley, including Hampden and Hampshire Counties in Western Massachusetts.
The
purchase price of this acquisition was $146.9 million. The Company recorded
total assets of $849.5 million, including goodwill of $80.4 million and
identifiable intangible assets of $12.0 million.
During
2005, the Company also acquired the business and assets of each of MacDonald
& Johnson, Inc., a full-service property and casualty insurance agency
located in East Longmeadow, Massachusetts and Onofrey Insurance and Financial
Services, Inc., an agency specializing in life, disability and health insurance
products located in Springfield, Massachusetts. These acquisitions, in
aggregate, were not viewed as material to the financial statements.
3.
CASH
AND CASH EQUIVALENTS
Cash
and
cash equivalents includes cash on hand, amounts due from banks, and short-term
investments with original maturities of three months or less. The balances
at
December 31, 2006 and 2005 were as follows:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Cash
and due from banks
|
$
|
30,774
|
$
|
30,904
|
|||
|
Short-term
investments
|
211
|
183
|
|||||
|
Total
cash and cash equivalents
|
$
|
30,985
|
$
|
31,087
|
|||
The
Federal Reserve system requires nonmember banks to maintain certain reserve
requirements of vault cash and/or deposits. The reserve requirement included
in
cash and equivalents was $3.1 million and $6.7 million at year-end 2006 and
2005, respectively.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
SECURITIES
A
summary
of securities follows:
|
(In
thousands)
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||
|
December
31, 2006
|
|||||||||||||
|
Securities
available for sale
|
|||||||||||||
|
Debt
securities:
|
|||||||||||||
|
Municipal
bonds and obligations
|
$ |
63,788
|
$ |
799
|
$ |
(84
|
)
|
$ |
64,503
|
||||
|
Mortgaged-backed
securities
|
85,102
|
112
|
(880
|
)
|
84,334
|
||||||||
|
Other
bonds and obligations
|
20,392
|
169
|
(122
|
)
|
20,439
|
||||||||
|
Total
debt securities
|
169,282
|
1,080
|
(1,086
|
)
|
169,276
|
||||||||
|
Equity
securities:
|
|||||||||||||
|
Federal
Home Loan Bank stock
|
21,766
|
-
|
-
|
21,766
|
|||||||||
|
Other
equity securities
|
2,921
|
253
|
(10
|
)
|
3,164
|
||||||||
|
Total
equity securities
|
24,687
|
253
|
(10
|
)
|
24,930
|
||||||||
|
Total
securities available for sale
|
193,969
|
1,333
|
(1,096
|
)
|
194,206
|
||||||||
|
Securities
held to maturity
|
|||||||||||||
|
Municipal
bonds and obligations
|
35,572
|
-
|
(286
|
)
|
35,286
|
||||||||
|
Mortgaged-backed
securities
|
4,396
|
49
|
(45
|
)
|
4,400
|
||||||||
|
Total
securities held to maturity
|
39,968
|
49
|
(331
|
)
|
39,686
|
||||||||
|
Total
securities
|
$
|
233,937
|
$
|
1,382
|
$
|
(1,427
|
)
|
$
|
233,892
|
||||
|
December
31, 2005
|
|||||||||||||
|
Securities
available for sale
|
|||||||||||||
|
Debt
securities:
|
|||||||||||||
|
U.S.
government agencies
|
$
|
69
|
$
|
-
|
$
|
(6
|
)
|
$
|
63
|
||||
|
Municipal
bonds and obligations
|
63,701
|
364
|
(392
|
)
|
63,673
|
||||||||
|
Mortgaged-backed
securities
|
264,705
|
59
|
(6,260
|
)
|
258,504
|
||||||||
|
Other
bonds and obligations
|
24,356
|
454
|
(107
|
)
|
24,703
|
||||||||
|
Total
debt securities
|
352,831
|
877
|
(6,765
|
)
|
346,943
|
||||||||
|
Equity
securities:
|
|||||||||||||
|
Federal
Home Loan Bank stock
|
36,717
|
-
|
-
|
36,717
|
|||||||||
|
Other
equity securities
|
4,486
|
2,266
|
-
|
6,752
|
|||||||||
|
Total
equity securities
|
41,203
|
2,266
|
-
|
43,469
|
|||||||||
|
Total
securities available for sale
|
394,034
|
3,143
|
(6,765
|
)
|
390,412
|
||||||||
|
Securities
held to maturity
|
|||||||||||||
|
Municipal
bonds and obligations
|
23,851
|
-
|
-
|
23,851
|
|||||||||
|
Mortgaged-backed
securities
|
6,057
|
-
|
(145
|
)
|
5,912
|
||||||||
|
Total
securities held to maturity
|
29,908
|
-
|
(145
|
)
|
29,763
|
||||||||
|
Total
securities
|
$
|
423,942
|
$
|
3,143
|
$
|
(6,910
|
)
|
$
|
420,175
|
||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
amortized cost and estimated fair value of debt securities by contractual
final
maturity at year-end 2006 was as follows: Mortgage-backed securities are
shown
in total.
|
|
Available
for sale
|
Held
to maturity
|
|||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
||||||||||
|
(In
thousands)
|
Cost
|
Value
|
Cost
|
Value
|
|||||||||
|
Within
1 year
|
$
|
1,353
|
$
|
1,348
|
$
|
7,806
|
$
|
7,806
|
|||||
|
Over
1 year to 5 years
|
-
|
-
|
1,378
|
1,378
|
|||||||||
|
Over
5 years to 10 years
|
7,372
|
7,258
|
924
|
924
|
|||||||||
|
Over
10 years
|
75,455
|
76,336
|
25,464
|
25,178
|
|||||||||
|
Total
bonds and obligations
|
84,180
|
84,942
|
35,572
|
35,286
|
|||||||||
|
Mortgage-backed
securities
|
85,102
|
84,334
|
4,396
|
4,400
|
|||||||||
|
Total
debt securities
|
$
|
169,282
|
$
|
169,276
|
$
|
39,968
|
$
|
39,686
|
|||||
At
year-end 2006 and 2005, the Company had pledged securities with amortized
costs
of $15.2 million and $18.3 million and fair values of $15.0 million and $18.2
million, respectively. Additionally, there is a blanket lien on certain
securities to collateralize borrowings from the Federal Home Loan Bank of
Boston, as discussed further.
Sales
of
securities available for sale were as follows:
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Proceeds
from sales
|
$
|
190,009
|
$
|
134,195
|
$
|
16,169
|
||||
|
Gross
realized gains
|
2,449
|
6,134
|
1,914
|
|||||||
|
Gross
realized losses
|
5,579
|
1,851
|
431
|
|||||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Year-end
securities with unrealized losses, segregated by length of impairment, are
summarized as follows:
|
|
Less
Than Twelve Months
|
Over
Twelve Months
|
|||||||||||
|
Gross
|
Gross
|
||||||||||||
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
||||||||||
|
(In
thousands)
|
Losses
|
Value
|
Losses
|
Value
|
|||||||||
|
December
31, 2006
|
|||||||||||||
|
Securities
available for sale:
|
|||||||||||||
|
Mortgaged-backed
securities
|
$
|
71
|
$
|
30,944
|
$
|
809
|
$
|
34,453
|
|||||
|
Other
securities available for sale
|
14
|
1,598
|
202
|
17,289
|
|||||||||
|
Total
available for sale
|
85
|
32,542
|
1,011
|
51,742
|
|||||||||
|
Securities
held to maturity:
|
|||||||||||||
|
Mortgaged-backed
securities
|
-
|
35
|
45
|
1,330
|
|||||||||
|
Municipal
bonds and obligations
|
-
|
-
|
286
|
35,286
|
|||||||||
|
Total
|
$
|
85
|
$
|
32,577
|
$
|
1,342
|
$
|
88,358
|
|||||
|
December
31, 2005
|
|||||||||||||
|
Securities
available for sale:
|
|||||||||||||
|
Mortgaged-backed
securities
|
$
|
2,576
|
$
|
140,291
|
$
|
3,684
|
$
|
103,147
|
|||||
|
Other
securities available for sale
|
361
|
35,133
|
144
|
10,019
|
|||||||||
|
Total
available for sale
|
2,937
|
175,424
|
3,828
|
113,166
|
|||||||||
|
Securities
held to maturity:
|
|||||||||||||
|
Mortgaged-backed
securities
|
5
|
261
|
140
|
5,566
|
|||||||||
|
Total
|
$
|
2,942
|
$
|
175,685
|
$
|
3,968
|
$
|
118,732
|
|||||
Management
evaluates impaired securities to determine if any impairments are other than
temporary. The determination includes an evaluation of the severity of the
impairment, the duration of the impairment, changes in market conditions,
changes in credit quality, and the performance and prospects for the securities.
Based on management's review, no securities were deemed impaired on an
other-than-temporary basis in 2006, 2005, and 2004, and all securities performed
in accordance with their terms during these periods. At year-end 2006, all
impairments were deemed to be temporary and related to changes in market
interest rates, and not related to the underlying credit quality of the issuers.
There were 65 securities with gross unrealized losses at year-end 2006, with
no
unrealized loss exceeding 4% of amortized cost. Total unrealized losses over
twelve months were 2.0% of amortized cost of the related securities. The
Company
expects that these securities will continue to perform in accordance with
their
terms. The unrealized losses primarily relate to pass-through mortgage-backed
securities issued by Fannie Mae and Freddie Mac. The largest number of impaired
securities were either purchased at a discount or were adjustable-rate
securities expected to improve to premium pricing at the time of the rate
adjustment. The Company has the intent and ability to hold these investments
for
a time necessary to recover the amortized cost.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5.
LOANS
Year-end
loans consisted of the following:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Residential
mortgages:
|
|||||||
|
1-4
family
|
$
|
566,951
|
$
|
514,423
|
|||
|
Construction
|
32,322
|
35,368
|
|||||
|
Total
residential mortgages
|
599,273
|
549,791
|
|||||
|
Commercial
mortgages:
|
|||||||
|
Construction
|
129,798
|
58,968
|
|||||
|
Single
and multifamily
|
64,619
|
68,570
|
|||||
|
Other
commercial mortgages
|
372,657
|
283,182
|
|||||
|
Total
commercial mortgages
|
567,074
|
410,720
|
|||||
|
Commercial
business loans
|
189,758
|
158,746
|
|||||
|
Consumer
loans:
|
|||||||
|
Auto
|
195,912
|
147,286
|
|||||
|
Home
equity and other
|
146,970
|
153,687
|
|||||
|
Total
consumer loans
|
342,882
|
300,973
|
|||||
|
Total
loans
|
$
|
1,698,987
|
$
|
1,420,230
|
|||
Included
in year-end total loans were the following:
|
Unamortized
net loan origination costs
|
$
|
8,537
|
$
|
4,677
|
|||
|
Unamortized
net premiums on purchased loans
|
166
|
173
|
|||||
|
Total
unamortized net costs and premiums
|
$
|
8,703
|
$
|
4,850
|
Activity
in the allowance for loan losses was as follows:
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Balance
at beginning of year
|
$
|
13,001
|
$
|
9,337
|
$
|
8,969
|
||||
|
Provision
for loan losses
|
7,860
|
1,313
|
1,565
|
|||||||
|
Transfer
of commitment reserve
|
(425
|
)
|
-
|
-
|
||||||
|
Allowance
attributed to acquired loans
|
-
|
3,321
|
-
|
|||||||
|
Loans
charged-off
|
(1,776
|
)
|
(1,542
|
)
|
(2,202
|
)
|
||||
|
Recoveries
|
710
|
572
|
1,005
|
|||||||
|
Balance
at end of year
|
$
|
19,370
|
$
|
13,001
|
$
|
9,337
|
||||
Most
of
the Company’s lending activity occurs within its primary markets in Western
Massachusetts and Northeastern New York. Most of the loan portfolio is secured
by real estate, including residential mortgages, commercial mortgages, and
home
equity loans. During 2006 and 2005, there were no concentrations of loans
related to any one industry in excess of 10% of total loans.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
At
year-end 2006 and 2005, Bank loans outstanding to related parties totaled
$6.3
million and $4.3 million, respectively. Related parties include directors
and
executive officers of the Company and its subsidiaries and their respective
affiliates in which they have a controlling interest, and immediate family
members. For the years 2006 and 2005, all related party loans were performing.
Year-end Bank aggregate extensions of credit to one related party interest
totaled $5.8 million in 2006 and $4.7 million in 2005. In these years, aggregate
additions to extensions of credit to this interest totaled $1.2 million and
$0.6
million, and related aggregate reductions of extensions of credit (including
loan repayments) totaled $70 thousand and $50 thousand in 2006 and 2005,
respectively.
The
following is a summary of year-end information pertaining to impaired loans,
non-accrual loans, and troubled debt restructurings:
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Investment
in impaired loans
|
$
|
13,632
|
$
|
1,914
|
$
|
1,180
|
||||
|
Impaired
loans with no valuation allowance
|
5,115
|
1,430
|
787
|
|||||||
|
Impaired
loans with a valuation allowance
|
8,517
|
484
|
393
|
|||||||
|
Specific
valuation allowance allocated to impaired loans
|
812
|
257
|
230
|
|||||||
|
Average
investment in impaired loans during year
|
2,954
|
3,806
|
2,412
|
|||||||
|
Cash
basis impaired loan income during year
|
290
|
66
|
18
|
|||||||
|
Non-accrual
loans
|
7,592
|
1,186
|
1,152
|
|||||||
|
Total
loans past due ninety days or more and still accruing
|
281
|
110
|
65
|
|||||||
There
was
no foreclosed real estate at year-end 2006 or 2005. There were no commitments
to
lend additional funds to debtors of troubled debt restructurings.
The
Bank
has sold loans in the secondary market and has retained the servicing
responsibility and receives fees for the services provided. Mortgage loans
sold
and serviced for others amounted to $90.3 million and $106.3 million at year-end
2006 and 2005, respectively.
Included
in other assets are capitalized mortgage servicing rights, which represent
the
capitalized net present value of fee income streams generated from servicing
residential mortgage loans for other financial institutions. The fair value
of
these rights is based on discounted cash flow projections. The fair value
approximated carrying value at year-end 2006 and 2005, and no valuation
allowance was recorded at these dates.
The
components of mortgage servicing rights were as follows:
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Balance
at beginning of year
|
$
|
1,168
|
$
|
279
|
$
|
100
|
||||
|
Additions
|
-
|
988
|
233
|
|||||||
|
Amortization
|
(182
|
)
|
(99
|
)
|
(54
|
)
|
||||
|
Balance
at end of year
|
$
|
986
|
$
|
1,168
|
$
|
279
|
||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
6.
PREMISES
AND EQUIPMENT
Year-end
premises and equipment are summarized as follows:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Land
|
$
|
3,524
|
$
|
3,639
|
|||
|
Buildings
and improvements
|
30,863
|
27,492
|
|||||
|
Furniture
and equipment
|
20,237
|
18,100
|
|||||
|
Construction
in process
|
890
|
542
|
|||||
|
Premises
and equipment, gross
|
55,514
|
49,773
|
|||||
|
Accumulated
depreciation and amortization
|
(26,384
|
)
|
(23,537
|
)
|
|||
|
Premises
and equipment, net
|
$
|
29,130
|
$
|
26,236
|
|||
Depreciation
and amortization expense for the years 2006, 2005 and 2004 amounted to $2.8
million, $2.3 million, and $1.9 million, respectively.
7.
GOODWILL
AND OTHER INTANGIBLES
The
Company recorded $16.2 million of goodwill related to the acquisition of
five
insurance agencies in October 2006. Goodwill totaled $104.5 million and $88.1
million at year-end 2006 and 2005, respectively. The Company recorded $80.4
million in goodwill in connection with the acquisition of Woronoco Bancorp,
Inc.
in June 2005. The Company recorded $0.9 million in goodwill in connection
with
insurance agency acquisitions in the fourth quarter of 2005. See Note 2 -
Mergers and Acquisitions for further information about goodwill and other
intangible assets acquired in 2006 and 2005.
Other
intangible assets were as follows:
|
(In
thousands)
|
Gross
Intangible Assets
|
Accumulated
Amortization
|
Net
Intangible Assets
|
|||||||
|
December
31, 2006
|
||||||||||
|
Non-maturity
deposits
|
$
|
9,886
|
$
|
(1,673
|
)
|
$
|
8,213
|
|||
|
Insurance
contracts
|
7,438
|
(169
|
)
|
7,269
|
||||||
|
Non-compete
agreements
|
2,318
|
(1,224
|
)
|
1,094
|
||||||
|
All
other intangible assets
|
375
|
(141
|
)
|
234
|
||||||
|
Total
|
$
|
20,017
|
$
|
(3,207
|
)
|
$
|
16,810
|
|||
|
December
31, 2005
|
||||||||||
|
Non-maturity
deposits
|
$
|
9,886
|
$
|
(622
|
)
|
$
|
9,264
|
|||
|
Insurance
contracts
|
117
|
(32
|
)
|
85
|
||||||
|
Non-compete
agreements
|
2,318
|
(451
|
)
|
1,867
|
||||||
|
All
other intangible assets
|
375
|
(67
|
)
|
308
|
||||||
|
Total
|
$
|
12,696
|
$
|
(1,172
|
)
|
$
|
11,524
|
|||
Other
intangible assets are amortized on a straight line basis over their estimated
lives, which range from five to ten years. Amortization expense related to
intangible assets totaled $2.0 million in 2006, $1.1 million in 2005, and
$0.1
million in 2004. The estimated aggregate future amortization expense for
intangible assets remaining as of year-end 2006 is as follows: 2007 - $2.7
million; 2008 - $2.2 million; 2009 - $1.9 million; 2010 - $1.9 million; 2011
-$1.8 million; and thereafter -$6.3 million.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
OTHER
ASSETS
Year-end
other assets are summarized as follows:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Loans
held for sale
|
$
|
-
|
$
|
2,093
|
|||
|
Net
deferred tax asset
|
4,432
|
4,218
|
|||||
|
Capitalized
mortgage servicing rights
|
986
|
1,168
|
|||||
|
Accrued
interest receivable
|
9,165
|
8,508
|
|||||
|
Other
equity investments
|
4,737
|
160
|
|||||
|
Other
|
4,737
|
4,413
|
|||||
|
Total
other assets
|
$
|
24,057
|
$
|
20,560
|
|||
9.
DEPOSITS
A
summary
of year-end time deposits is as follows:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Maturity
date:
|
|||||||
|
Within
1 year
|
$
|
513,854
|
$
|
350,385
|
|||
|
Over
1 year to 3 years
|
126,342
|
152,937
|
|||||
|
Over
3 years
|
51,178
|
71,945
|
|||||
|
Total
|
$
|
691,374
|
$
|
575,267
|
|||
|
Account
balance:
|
|||||||
|
Less
than $100,000
|
$
|
369,590
|
$
|
308,354
|
|||
|
$100,000
or more
|
321,784
|
266,913
|
|||||
|
Total
|
$
|
691,374
|
$
|
575,267
|
|||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
BORROWINGS
& JUNIOR SUBORDINATED DEBENTURES
Federal
Home Loan Bank of Boston (“FHLBB”) borrowings outstanding at year-end 2006 and
2005 consisted of various advances totaling $330.0 million and $397.5 million,
respectively. The year-end weighted average interest rate on outstanding
advances was 4.18% in 2006 and 3.77% in 2005. The contractual maturities
of
FHLBB advances at year-end 2006 were as follows: 2007 - $121.7 million; 2008
-
$63.8 million; 2009 - $76.5 million; 2010 - $25.0 million; 2011 - $35.6 million;
and thereafter - $7.4 million. Year-end 2006 advances outstanding included
callable advances totaling $103.5 million and amortizing advances totaling
$16.1
million. The Bank maintains a $13.1 million line of credit with the FHLBB
which
carries interest at a rate that adjusts daily and had no outstanding balance
at
year-end 2006 and 2005. All FHLBB borrowings are secured by a blanket security
agreement on certain qualified collateral; principally all first mortgage
loans,
and certain securities.
There
were no securities sold under agreements to repurchase in 2006, and none
outstanding at year-end 2005. During 2005, the average amount outstanding
was
$1.0 million; the highest month-end balance was $4.9 million; and the weighted
average interest rate during the year was 2.79%. The Bank has a $50.0 million
repurchase agreement line of credit with a major broker-dealer to be secured
by
securities or other assets of the Bank. There was no usage of this agreement
in
2006 or 2005.
At
year-end 2006, the Company had $15.0 million outstanding under a six month
unsecured bank note maturing in April 2007. This note bears variable interest
at
Prime - 1% and had a rate of 7.25% at year-end 2006.
In
June
2005, a
statutory business trust, Berkshire Hills Capital Trust I (“Trust I”), was
formed of which the Company holds 100% of the common stock. The sole asset
of
Trust I is $15.5 million of the Company’s junior subordinated debentures
due in 2035. These debentures bear interest at a variable rate equal to LIBOR
plus 1.85% and had a rate of 7.22% at year-end 2006. The Company has the
right
to defer payments of interest for up to five years on the debentures at any
time, or from time to time, with certain limitations, including a restriction
on
the payment of dividends to stockholders while such interest payments on
the
debentures have been deferred. The Company has the right to redeem the
debentures without penalty after August 23, 2010. Trust I is considered a
variable interest entity for which the Company is not the primary beneficiary.
Accordingly, the financial statements of Trust I are not included in the
Company’s financial statements.
11.
INCOME
TAXES
Income
tax expense was as follows:
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Current
:
|
||||||||||
|
Federal
|
$
|
5,159
|
$
|
5,501
|
$
|
3,632
|
||||
|
State
|
1,506
|
813
|
264
|
|||||||
|
Total
current
|
6,665
|
6,314
|
3,896
|
|||||||
|
Deferred
:
|
||||||||||
|
Federal
|
(1,779
|
)
|
1,647
|
875
|
||||||
|
State
|
(335
|
)
|
(93
|
)
|
188
|
|||||
|
Total
deferred (benefit) expense
|
(2,114
|
)
|
1,554
|
1,063
|
||||||
|
Change
in valuation allowance
|
352
|
135
|
458
|
|||||||
|
Total
income tax expense
|
$
|
4,903
|
$
|
8,003
|
$
|
5,417
|
||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
reasons for the differences between the statutory federal income tax rate
and
the effective tax rates are summarized as follows:
|
|
2006
|
2005
|
2004
|
|||||||
|
Statutory
tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
Increase
(decrease) resulting from:
|
||||||||||
|
State
taxes, net of federal tax benefit
|
6.1
|
3.4
|
1.7
|
|||||||
|
Dividends
received deduction
|
(0.2
|
)
|
(0.7
|
)
|
(0.9
|
)
|
||||
|
Tax
exempt income - investments
|
(8.3
|
)
|
(5.6
|
)
|
(2.4
|
)
|
||||
|
Bank-owned
life insurance
|
(2.2
|
)
|
(1.9
|
)
|
(1.3
|
)
|
||||
|
Employee
stock ownership plan termination
|
-
|
17.7
|
-
|
|||||||
|
Change
in valuation allowance
|
2.2
|
0.8
|
2.7
|
|||||||
|
Investment
tax credits
|
(1.4
|
)
|
-
|
-
|
||||||
|
Other,
net
|
(0.9
|
)
|
0.6
|
(2.8
|
)
|
|||||
|
Effective
tax rate
|
30.3
|
%
|
49.3
|
%
|
32.0
|
%
|
||||
Year-end
deferred tax
assets (liabilities) related to the following:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Allowance
for loan losses
|
$
|
8,169
|
$
|
5,438
|
|||
|
Employee
benefit plans
|
1,208
|
1,132
|
|||||
|
Net
unrealized (gain) loss on securities available for sale
|
(113
|
)
|
1,436
|
||||
|
Goodwill
amortization
|
(1,348
|
)
|
(1,050
|
)
|
|||
|
Investments
|
(730
|
)
|
(590
|
)
|
|||
|
Purchase
accounting adjustments
|
(717
|
)
|
(574
|
)
|
|||
|
Other
|
(1,092
|
)
|
(981
|
)
|
|||
|
Valuation
allowance
|
(945
|
)
|
(593
|
)
|
|||
|
Deferred
tax asset, net
|
$
|
4,432
|
$
|
4,218
|
|||
A
valuation allowance has been established for the full amount of the
Massachusetts net deferred tax asset, due to uncertainties of realization.
Management believes it is more likely than not that the Company will realize
its
remaining net deferred tax assets, based on its recent historical and
anticipated future levels of pre-tax income. There can be no absolute assurance,
however, that any specific level of future income will be
generated.
The
Bank
does not intend to pay nondividend distributions that would result in a
recapture of any portion of its base year bad debt reserves, and a related
deferred federal income tax liability of $346 thousand has not been provided.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
12.
COMMITMENTS,
CONTINGENCIES, AND OFF-BALANCE SHEET ACTIVITIES
Credit
related financial instruments. The
Company is a party to financial instruments with off-balance-sheet risk in
the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Such commitments involve, to varying degrees, elements of credit
and
interest rate risk in excess of the amount recognized in the accompanying
consolidated balance sheets.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument is represented by the contractual amount
of
these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments. A summary of financial
instruments outstanding whose contract amounts represent credit risk is as
follows at year-end:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Commitments
to grant loans
|
$
|
54,439
|
$
|
68,555
|
|||
|
Unused
funds on commercial lines of credit
|
120,090
|
100,937
|
|||||
|
Unadvanced
funds on home equity, reddi-cash and
|
|||||||
|
other
consumer lines of credit
|
150,600
|
141,270
|
|||||
|
Unadvanced
funds on construction loans
|
113,497
|
82,395
|
|||||
|
Standby
letters of credit
|
16,019
|
12,710
|
|||||
|
Commercial
letters of credit
|
1,500
|
1,500
|
|||||
Commitments
to extend credit are agreements to lend to a customer as long as there is
no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment
of a fee. The commitments for lines of credit may expire without being drawn
upon. Therefore, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. Funds to be disbursed for loans and home equity
lines
of credit are collateralized by real estate. Commercial lines of credit are
generally secured by business assets and securities. Reddi-cash lines of
credit
are unsecured.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. These letters of credit are
primarily issued to support borrowing arrangements. The credit risk involved
in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
Operating
lease commitments.
Future
minimum rental payments required under operating leases that have remaining
noncancellable lease terms of more than one year at December 31, 2006 are
as
follows: 2007 - $2.7 million; 2008 - $2.7 million; 2009 - $2.5 million; 2010
-
$2.3 million; 2011 - $2.4 million; and all years thereafter - $22.2 million.
The
leases contain options to extend for periods up to twenty years. The cost
of
such rental options is not included above. Total rent expense for the years
2006, 2005 and 2004 amounted to $1.4 million, $0.9 million and $0.4 million,
respectively.
Investment
commitments. As
of
December 31, 2006, the Company was contractually committed to make equity
investments of approximately $9.1 million in nonpublicly traded entities.
Employment
and change in control agreements. The
Company has entered into an employment agreement with one senior executive
with
a two year term. The Bank also has change in control agreements with several
officers which provide a severance payment in the event employment is terminated
in conjunction with a defined change in control.
Legal
claims. Various
legal claims arise from time to time in the normal course of business. In
the
opinion of management, claims outstanding at December 31, 2006 will have
no
material effect on the Company’s consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
13.
SHAREHOLDERS’
EQUITY
Minimum
regulatory capital requirements
The
Bank
is subject to various regulatory capital requirements administered by the
federal and state banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by
regulators that, if undertaken, could have a direct material effect on the
Company’s consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must
meet
specific capital guidelines that involve quantitative measures of its assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject
to
qualitative judgments by the regulators about components, risk weighting
and
other factors. Savings and loan holding companies have no specific quantitative
capital requirements.
Quantitative
measures established by regulation to ensure capital adequacy require the
Bank
to maintain minimum amounts and ratios (set forth in the following table)
of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets
(as defined) and of Tier 1 capital to average assets (as defined). As of
December 31, 2006 and 2005, the Bank met the capital adequacy
requirements.
As
of
December 31, 2006, Berkshire Bank met the conditions 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 following tables.
The
Bank’s actual and required capital amounts were as follows:
|
Minimum
|
|||||||||||||||||||
|
To
Be Well
|
|||||||||||||||||||
|
Minimum
|
Capitalized
Under
|
||||||||||||||||||
|
Capital
|
Prompt
Corrective
|
||||||||||||||||||
|
|
Actual
|
Requirement
|
Action
Provisions
|
||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
December
31, 2006
|
|||||||||||||||||||
|
Total
capital to risk weighted assets
|
$
|
175,808
|
10.27
|
%
|
$
|
136,925
|
8.00
|
%
|
$
|
171,156
|
10.00
|
%
|
|||||||
|
Tier
1 capital to risk weighted assets
|
156,013
|
9.12
|
68,463
|
4.00
|
102,694
|
6.00
|
|||||||||||||
|
Tier
1 capital to average assets
|
156,013
|
7.69
|
81,183
|
4.00
|
101,479
|
5.00
|
|||||||||||||
|
December
31, 2005
|
|||||||||||||||||||
|
Total
capital to risk weighted assets
|
$
|
164,642
|
11.12
|
%
|
$
|
118,461
|
8.00
|
%
|
$
|
148,076
|
10.00
|
%
|
|||||||
|
Tier
1 capital to risk weighted assets
|
150,621
|
10.17
|
59,230
|
4.00
|
88,846
|
6.00
|
|||||||||||||
|
Tier
1 capital to average assets
|
150,621
|
7.79
|
77,326
|
4.00
|
96,658
|
5.00
|
|||||||||||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
reconciliation of the Company’s year-end total stockholders’ equity to the
Bank’s regulatory capital is as follows:
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Total
stockholders' equity per consolidated financial statements
|
$
|
258,161
|
$
|
246,066
|
|||
|
Adjustments
for Bank Tier 1 Capital:
|
|||||||
|
Holding
company equity adjustment
|
(8,300
|
)
|
2,991
|
||||
|
Net
unrealized (gains) losses on available for sale securities
|
(92
|
)
|
2,239
|
||||
|
Disallowed
goodwill and intangible assets
|
(93,756
|
)
|
(100,675
|
)
|
|||
|
Total
Bank Tier 1 Capital
|
156,013
|
150,621
|
|||||
|
Adjustments
for total capital:
|
|||||||
|
Allowed
unrealized gains on equity securities
|
-
|
1,020
|
|||||
|
Includible
allowance for loan losses
|
19,795
|
13,001
|
|||||
|
Total
Bank capital per regulatory reporting
|
$
|
175,808
|
$
|
164,642
|
|||
Common
stock
The
Bank
is subject to dividend restrictions imposed by various regulators, including
a
limitation on the total of all dividends that the Bank may pay to the Company
in
any calendar year, to an amount that shall not exceed the Bank’s net income for
the current year, plus the Bank’s net income retained for the two previous
years, without regulatory approval. Due to the dividend paid by the Bank
to the
Company to fund the cash consideration paid in the Woronoco acquisition in
2005,
the Bank’s cumulative dividends exceed the regulatory limit. The Bank received
approval in 2006 and 2005 to pay dividends to the Company in an amount exceeding
the preceding regulatory restriction. At year-end 2006, any additional Bank
dividends would require specific regulatory approval, which would be expected
to
include the condition that the Bank remain well capitalized. In addition,
the
Bank may not declare or pay dividends on any of its shares of common stock
if
the effect thereof would cause stockholders’ equity to be reduced below
applicable regulatory capital maintenance requirements or if such declaration,
payment or repurchase would otherwise violate regulatory
requirements.
In
conjunction with Massachusetts conversion regulations, the Bank established
a
liquidation account for eligible account holders, which at the time of
conversion amounted to approximately $70 million. In the event of a liquidation
of the Bank, the eligible account holders will be entitled to receive their
pro-rata share of the net worth of the Bank prior to conversion. However,
as
qualifying deposits are reduced, the liquidation account will also be reduced
in
an amount proportionate to the reduction in the qualifying deposit accounts.
Due
to the acquisition of Woronoco Bancorp, Inc. in 2005, the Bank also acquired
the
Woronoco Savings Bank liquidation account, which amounted to approximately
$33
million at the time of the Woronoco conversion.
The
payment of dividends by the Company is subject to Delaware law, which generally
limits dividends to an amount equal to an excess of the net assets of a company
(the amount by which total assets exceed total liabilities) over statutory
capital, or if there is no excess, to the company’s net profits for the current
and/or immediately preceding fiscal year.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Other
comprehensive income
Comprehensive
income is the total of net income and all other non-owner changes in equity.
It
is displayed in the Consolidated Statements of Changes in Stockholders’ Equity.
Reclassification detail is shown for the years below.
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Change
in net unrealized holding gains/losses on
|
||||||||||
|
available
for sale securities
|
$
|
768
|
$
|
(5,901
|
)
|
$
|
(477
|
)
|
||
|
Reclassification
adjustment for net loss (gains) realized in income
|
3,130
|
(4,283
|
)
|
(1,483
|
)
|
|||||
|
Net
change in unrealized gains/losses
|
3,898
|
(10,184
|
)
|
(1,960
|
)
|
|||||
|
Tax
effects
|
(1,549
|
)
|
3,784
|
615
|
||||||
|
Net-of-tax
change in available for sale securities
|
2,349
|
(6,400
|
)
|
(1,345
|
)
|
|||||
|
Net
gain on other instruments
|
(18
|
)
|
(53
|
)
|
-
|
|||||
|
Total
other comprehensive income (loss)
|
2,331
|
(6,453
|
)
|
(1,345
|
)
|
|||||
Year-end components
of accumulated other comprehensive (loss) income were as follows:
|
(In
thousands)
|
2006
|
|
|
2005
|
|||
|
Net
unrealized holding gains (losses) on available for sale
securites
|
$
|
237
|
$
|
(3,622
|
)
|
||
|
Net
gain on other instruments
|
(71
|
)
|
(53
|
)
|
|||
|
Tax
effects
|
(74
|
)
|
1,436
|
||||
|
Accumulated
other comprehensive income (loss)
|
$
|
92
|
$
|
(2,239
|
)
|
14.
EMPLOYEE
BENEFIT PLANS
The
Company provides a 401(K) Plan which most employees participate in. The Company
contributes a non-elective 3% of gross annual wages for each participant,
regardless of the participant’s deferral, in addition to a 100% match up to 4%
of gross annual wages. The Company’s contributions vest immediately. Expense
related to the plan was $893 thousand, $771 thousand, and $624 thousand for
the
years 2006, 2005, and 2004, respectively.
The
Company has in the past offered its retirees optional medical insurance
coverage. All participating retirees are required to contribute in part to
the
cost of this coverage. No new retirees can participate in this program. The
year-end accrued liability for payment of future premiums was $390 thousand
in
2006 and $403 thousand in 2005. Annual expense of this program was $25 thousand
in 2006, $50 thousand in 2005, and $50 thousand in 2004.
The
Company maintains a supplemental executive retirement plan (“SERP”) for one
active key executive. Benefits generally commence no earlier than age sixty-two
and are payable at the executive’s option, either as an annuity or as a lump
sum. At year-end 2006 and 2005, the accrued liability for this SERP was $443
thousand and $268 thousand, respectively. SERP expense was $175 thousand
in
2006, $148 thousand in 2005, and $111 thousand in 2004, and is recognized
over
the required service period.
The
Company owns endorsement split-dollar life insurance arrangements pertaining
to
certain prior executives. Under these arrangements, the Company purchased
policies insuring the lives of the executives, and separately entered into
agreements to split the policy benefits with the executive. The Company has
no
recorded liability for these arrangements. EITF 06-4, effective for fiscal
years
beginning after December 15, 2007 sets forth requirements for the recognition
of
a liability. The Company is evaluating EITF 06-4, which is described further
in
Recent Accounting Pronouncements in Note 1.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
15.
STOCK-BASED
COMPENSATION PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN
The
Company has two stock-based compensation plans: the 2001 Stock-Based Incentive
Plan and the 2003 Equity Compensation Plan. These plans, which are
stockholder-approved, permit the grant of stock awards and incentive and
non-qualified stock options to employees and directors. The plans authorized
1.374 million shares of the Company’s common stock for awards as stock or
options. Authorized shares included 767,000 shares reserved for options,
307,000
shares reserved for stock awards, and 300,000 shares available for either
options or stock awards. The Company believes that such awards better align
the
interests of plan participants with those of its stockholders.
Option
awards are granted with an exercise price equal to the market price of the
Company’s stock at the date of grant, and vest over periods up to five years.
The options grant the holder the right to acquire a share of the Company’s
common stock for each option held, and have a contractual life of ten years.
The
Company assumed the outstanding unexercised options issued by Woronoco Bancorp,
Inc., which was acquired on June 1, 2005. Each Woronoco option was converted
to
a vested option for one of the Company’s shares with an exercise price equal to
the market price of Woronoco’s stock at the date of grant and a maximum original
term of ten years based on the original grant date. The Company generally
transfers shares from treasury stock when issuing shares as options are
exercised. The Company normally purchases shares into treasury during the
year,
and it expects to purchase at least 20,000 shares into treasury in 2007.
Stock
awards vest over periods up to five years and are valued at the closing price
of
the stock on the grant date.
The
total
compensation cost for stock-based payment arrangements recognized in income
was
$1.3 million, $1.4 million, and $1.2 million in the years 2006, 2005, and
2004,
respectively. For all of these years, the total recognized tax benefit related
to this compensation cost was $0.5 million. In 2005, the total stock-based
compensation cost capitalized as part of the goodwill of the Woronoco Bancorp
acquisition was $3.5 million.
The
fair
value of stock awards is based on the closing stock price on the grant date.
The
weighted average fair value of stock awards granted was $33.96, $35.10, and
$33.80 in 2006, 2005, and 2004. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions and grant date fair values (no options
were granted in 2005). The expected dividend yield and expected term are
based
on management estimates. The expected volatility is based on historical
volatility. The risk-free interest rates for the expected term are based
on the
U.S. Treasury yield curve in effect at the time of the grant.
|
|
2006
|
2004
|
|||||
|
Expected
dividends
|
1.85
|
%
|
1.85
|
%
|
|||
|
Expected
term
|
6
years
|
6
years
|
|||||
|
Expected
volatility
|
19
|
%
|
21
|
%
|
|||
|
Risk-free
interest rate
|
4.86
|
%
|
3.20
|
%
|
|||
|
Weighted
average grant date fair value
|
$
|
8.05
|
$
|
7.98
|
|||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of activity in the Company’s stock compensation plans is shown
below:
|
|
Non-Vested
Stock
Awards
Outstanding
|
Stock
Options Outstanding
|
|||||||||||
|
(shares
in thousands)
|
Number
of
Shares
|
Weighted-
Average
Grant
Date
Fair
Value
|
Number
of
Shares
|
Weighted-
Average
Exercise
Price
|
|||||||||
|
Balance,
December 31, 2005
|
111
|
$
|
24.42
|
791
|
$
|
19.79
|
|||||||
|
Granted
|
54
|
33.96
|
3
|
34.45
|
|||||||||
|
Stock
options exercised
|
-
|
-
|
(194
|
)
|
17.12
|
||||||||
|
Stock
awards vested
|
(63
|
)
|
22.11
|
-
|
-
|
||||||||
|
Forfeited
|
(9
|
)
|
29.66
|
(14
|
)
|
22.78
|
|||||||
|
Balance,
December 31, 2006
|
93
|
30.98
|
586
|
$
|
20.62
|
||||||||
|
Exercisable
options, December 31, 2006
|
538
|
20.25
|
|||||||||||
The
total
intrinsic value of options exercised was $3.4 million, $1.8 million, and
$0.7
million for the years 2006, 2005, and 2004, respectively. The total fair
value
of stock awards vested during these respective years was $2.1 million, $2.0
million, and $2.0 million. As of year end 2006, unrecognized stock-based
compensation expense related to nonvested options amounted to $160 thousand.
This amount is expected to be recognized over a weighted average period of
1.2
years. The weighted average year-end 2006 intrinsic value of stock options
outstanding was $7.5 million, and the similar value of exercisable options
was
$7.1 million. The unrecognized stock-based compensation expense related to
nonvested stock awards was $1.9 million. This amount is expected to be
recognized over a weighted average period of 1.6 years.
The
following pro forma information presents net income and earnings per share
for
the years 2005 and 2004 as if the fair value method of SFAS 123R had been
used
to measure compensation cost for stock-based compensation plan
expense.
|
(In
thousands, except per share data)
|
2005
|
2004
|
|||||
|
Net
income as reported
|
$
|
8,226
|
$
|
11,509
|
|||
|
Add:
Stock-based employee compensation expense included
|
|||||||
|
in
reported net income, net of related tax effects
|
822
|
717
|
|||||
|
Less:
Total stock-based employee compensation expense
|
|||||||
|
determined
under fair value method for all awards, net of
|
|||||||
|
related
tax effects
|
(1,255
|
)
|
(1,151
|
)
|
|||
|
Pro
forma net income
|
$
|
7,793
|
$
|
11,075
|
|||
|
Income
per share:
|
|||||||
|
Basic
- as reported
|
$
|
1.16
|
$
|
2.18
|
|||
|
Basic
- pro forma
|
1.09
|
2.10
|
|||||
|
Diluted
- as reported
|
1.10
|
2.01
|
|||||
|
Diluted
- pro forma
|
1.04
|
1.93
|
|||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Employee
Stock Ownership Plan
The
Bank
had established an Employee Stock Ownership Plan (“ESOP”) for the benefit of
each employee that had reached the age of 21 and had completed at least 1
thousand hours of service in the previous twelve-month period. This plan
was
terminated by the Bank as of June 30, 2005. A total of 444 thousand shares
were
held in trust as of year-end 2006 to be distributed to plan participants.
These
shares were treated as allocated as of July 1, 2005 for purposes of calculating
earnings per share.
Berkshire
Hills Funding Corporation had provided a loan to the Berkshire Bank Employee
Stock Ownership Plan Trust which was originally used to purchase the Company’s
outstanding stock in the open market. The loan bore interest equal to 9.5%,
provided for quarterly payments of interest and principal, and was secured
by
the unallocated shares in the plan through June 30, 2005. The Bank made
contributions to the ESOP sufficient to support the debt service of the loan
and
made a $900 thousand prepayment of the loan in June 2005. Following the
prepayment, the Board of Directors terminated the plan. As provided in the
plan,
the outstanding loan was repaid through the sale of 147 thousand shares by
the
plan to the Company. Those shares were recorded as treasury shares at the
June
30, 2005 share closing price of $33.32.
Total
expense applicable to the termination of the plan was recorded in the amount
of
$8.7 million in 2005. The effect on
capital of this expense was offset by credits to unearned
compensation and
additional paid in capital in stockholders’ equity. The Bank recorded an
additional $168 thousand in expense related to the termination of the ESOP
supplemental executive retirement plan. Additionally, total compensation
expense
applicable to the operation of the ESOP prior to its termination amounted
to
$340 thousand and $1.4 million for the years 2005 and 2004,
respectively.
In
connection with the acquisition of Woronoco, Berkshire Bank assumed the
obligations of the Woronoco Savings Bank Employee Stock Ownership Plan. The
Woronoco Savings Bank Employee Stock Ownership Plan was terminated by Woronoco
Savings Bank as of the effective date of the merger and all outstanding loan
obligations under the plan were repaid. Participant shares in the plan totaled
305 thousand shares at year-end 2005 and these shares were distributed to
participants in 2006.
16.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is
best
determined based upon quoted market prices. However, in many instances, there
are no quoted market prices for the Company’s various financial instruments. In
cases where quoted market prices are not available, fair values are based
on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate
and estimates of future cash flows. Accordingly, the fair value estimates
may
not be realized in an immediate settlement of the instrument. SFAS 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. The aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the Company.
The
following methods and assumptions were used by the Company in estimating
fair
value disclosures for financial instruments:
Cash
and cash equivalents:
The
carrying amounts of these instruments approximate fair values.
Securities:
Fair
values for securities are based on quoted market prices, where available.
Non-marketable equity securities are assumed to have fair values equal to
carrying values. The fair value of municipal securities without quoted market
prices is based on discounted cash flow analyses using year-end market rates
for
similar instruments.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Loans:
For
variable-rate loans that reprice frequently, fair values are based on carrying
values. Fair values for all other loans are estimated using discounted cash
flow
analyses, using interest rates offered at year-end for loans with similar
terms.
These values are stated net of the allowance for loan losses, which is the
estimated adjustment of fair value due to credit quality.
Non-maturity
deposits:
The
fair values for non-maturity deposits are, by definition, equal to the amount
payable on demand at the reporting date which is their carrying
amounts.
Time
deposits:
Fair
values for time deposits are estimated using a discounted cash flow calculation
that applies interest rates offered at year-end for deposits of similar
remaining maturities.
Borrowings:
The
fair values of borrowings are estimated using discounted cash flow analyses
using year-end market rates for similar borrowings.
Junior
subordinated debentures:
Junior
subordinated debentures reprice every ninety days and the carrying amount
approximates fair value.
Off-balance-sheet
financial instruments:
Fair
values for off-balance-sheet lending commitments are immaterial. In its credit
commitments, the Company does not normally provide interest rate locks exceeding
sixty days, and most credit commitments are for adjustable-rate
loans.
The
year-end carrying amounts and estimated fair values of the Company’s financial
instruments are as follows:
|
|
2006
|
2005
|
|||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
(In
thousands)
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
30,985
|
$
|
30,985
|
$
|
31,087
|
$
|
31,087
|
|||||
|
Securities
available for sale
|
194,206
|
194,206
|
390,412
|
390,412
|
|||||||||
|
Securities
held to maturity
|
39,968
|
39,686
|
29,908
|
29,763
|
|||||||||
|
Loans,
net
|
1,679,617
|
1,683,030
|
1,407,229
|
1,397,372
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Non-maturity
deposits
|
830,564
|
830,564
|
795,951
|
795,951
|
|||||||||
|
Time
deposits
|
691,374
|
692,298
|
575,267
|
573,412
|
|||||||||
|
Borrowings
|
345,005
|
338,669
|
397,453
|
392,366
|
|||||||||
|
Junior
subordinated debentures
|
15,464
|
15,464
|
15,464
|
15,464
|
|||||||||
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instruments. These estimates
do
not reflect any premium or discount that could result from offering for sale
at
one time the Company’s entire holdings of a particular financial instrument.
These estimates are subjective in nature and require considerable judgment
to
interpret market data. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange, nor are they intended to represent the fair value of the
Company as a whole. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value estimates presented herein are based on pertinent information
available to management as of the respective balance sheet dates. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since the presentation dates, and therefore, estimates of fair value
after the balance sheet date may differ significantly from the amounts presented
herein.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
addition, other assets, such as property and equipment, and liabilities of
the
Company that are not defined as financial instruments are not included in
the
above disclosures. Also, nonfinancial instruments typically not recognized
in
financial statements nevertheless may have value but are not included in
the
above disclosures. These include, among other items, the estimated earning
power
of non-maturity deposit accounts, the trained work force, customer goodwill
and
similar items.
17.
CONDENSED
FINANCIAL STATEMENTS OF PARENT COMPANY
Condensed
financial information pertaining only to the parent company, Berkshire Hills
Bancorp, Inc., is as follows:
CONDENSED
BALANCE SHEETS
|
|
December
31,
|
||||||
|
(
In thousands)
|
2006
|
2005
|
|||||
|
Assets
|
|||||||
|
Cash
due from Berkshire Bank
|
$
|
5,520
|
$
|
10,335
|
|||
|
Investment
in subsidiaries
|
278,328
|
249,521
|
|||||
|
Other
assets
|
5,259
|
1,898
|
|||||
|
Total
assets
|
$
|
289,107
|
$
|
261,754
|
|||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Accrued
expenses payable
|
$
|
482
|
$
|
224
|
|||
|
Notes
payable
|
15,000
|
-
|
|||||
|
Junior
subordinated debentures
|
15,464
|
15,464
|
|||||
|
Stockholders'
equity
|
258,161
|
246,066
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
289,107
|
$
|
261,754
|
|||
CONDENSED
STATEMENTS OF INCOME
|
|
Years
Ended December 31,
|
|||||||||
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Income:
|
||||||||||
|
Dividends
from subsidiaries
|
$
|
15,087
|
$
|
43,255
|
$
|
524
|
||||
|
Other
|
606
|
67
|
11
|
|||||||
|
Total
income
|
15,693
|
43,322
|
535
|
|||||||
|
Interest
expense
|
1,271
|
450
|
-
|
|||||||
|
Operating
expenses
|
714
|
325
|
156
|
|||||||
|
Total
expense
|
1,985
|
775
|
156
|
|||||||
|
Income
before income taxes and equity in
|
||||||||||
|
undistributed
income of subsidiaries
|
13,708
|
42,547
|
379
|
|||||||
|
Income
tax benefit
|
(471
|
)
|
(153
|
)
|
(860
|
)
|
||||
|
Income
before equity in undistributed
|
||||||||||
|
income
of subsidiaries
|
14,179
|
42,700
|
1,239
|
|||||||
|
Equity
in undistributed income of subsidiaries
|
(2,916
|
)
|
(34,474
|
)
|
10,270
|
|||||
|
Net
income
|
$
|
11,263
|
$
|
8,226
|
$
|
11,509
|
||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|||||||||
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
11,263
|
$
|
8,226
|
$
|
11,509
|
||||
|
Adjustments
to reconcile net income
|
||||||||||
|
to
net cash provided by operating activities:
|
||||||||||
|
Equity
in undistributed income of subsidiaries
|
2,916
|
34,474
|
(10,270
|
)
|
||||||
|
Other,
net
|
(2,359
|
)
|
(1,394
|
)
|
91
|
|||||
|
Net
cash provided by operating activities
|
11,820
|
41,306
|
1,330
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Investment
in insurance subsidiary
|
(28,843
|
)
|
-
|
-
|
||||||
|
Investment
in bank subsidiary
|
-
|
(14,898
|
)
|
-
|
||||||
|
Liquidation
of Berkshire Hills Funding Corporation
|
-
|
6,680
|
-
|
|||||||
|
Cash
paid for Woronoco acquisition
|
-
|
(35,088
|
)
|
-
|
||||||
|
Sale
of investment in Berkshire Hills Technology, Inc.
|
-
|
-
|
2,587
|
|||||||
|
Purchase
of investment securities
|
(300
|
)
|
-
|
-
|
||||||
|
Net
cash (used) provided by investing activities
|
(29,143
|
)
|
(43,306
|
)
|
2,587
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from note payable
|
15,000
|
-
|
-
|
|||||||
|
Proceeds
from junior subordinated debentures
|
-
|
15,464
|
-
|
|||||||
|
Proceeds
from reissuance of treasury stock
|
5,218
|
2,329
|
1,139
|
|||||||
|
Payments
to acquire treasury stock
|
(2,876
|
)
|
(7,953
|
)
|
(2,545
|
)
|
||||
|
Cash
dividends paid
|
(4,834
|
)
|
(3,707
|
)
|
(2,614
|
)
|
||||
|
Net
cash provided (used) by financing activities
|
12,508
|
6,133
|
(4,020
|
)
|
||||||
|
Net
change in cash and cash equivalents
|
(4,815
|
)
|
4,133
|
(103
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
10,335
|
6,202
|
6,305
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
5,520
|
$
|
10,335
|
$
|
6,202
|
||||
18.
DISCONTINUED
OPERATIONS
On
June
18, 2004, the business assets of EastPoint Technologies, LLC were sold to
a
subsidiary of Open Solutions Inc. for $7.0 million. EastPoint was a vendor
of
bank core systems software. The Company owned a 60% interest in EastPoint,
with
the remaining 40% interest recorded as minority interest. Net of escrows
and
minority interest, the Company received $2.6 million in net cash proceeds.
The
transaction resulted in a net loss of $75 thousand ($50 thousand after taxes),
which was included in the net loss from discontinued operations in 2004.
The
Company recorded contingent revenue receipts of $606 thousand in 2006. There
were no contingent future revenues remaining at year-end 2006. Net income
and
cash flows related to EastPoint have been reclassified as related to
discontinued operations in the financial statements.
|
(In
thousands)
|
2006
|
2004
|
|||||
|
Depreciation
and amortization
|
$
|
-
|
$
|
282
|
|||
|
Licensing
and other fee revenues
|
606
|
2,695
|
|||||
|
Minority
interest
|
-
|
(381
|
)
|
||||
|
Net
income (loss) before taxes
|
606
|
(653
|
)
|
||||
|
Capital
expenditures
|
-
|
76
|
|||||
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
19.
QUARTERLY
DATA (UNAUDITED)
Quarterly
results of operations were as follows. Quarterly data may not sum to annual
data
due to rounding.
|
|
2006
|
2005
|
|||||||||||||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||||||||
|
(In
thousands, except per share data)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||||||
|
Interest
and dividend income
|
$
|
31,381
|
$
|
31,388
|
$
|
28,212
|
$
|
27,070
|
$
|
26,512
|
$
|
25,839
|
$
|
19,348
|
$
|
16,037
|
|||||||||
|
Interest
expense
|
15,810
|
15,785
|
13,754
|
12,462
|
11,475
|
10,785
|
7,840
|
6,010
|
|||||||||||||||||
|
Net
interest income
|
15,571
|
15,603
|
14,458
|
14,608
|
15,037
|
15,054
|
11,508
|
10,027
|
|||||||||||||||||
|
Non-interest
income
|
5,831
|
(1,784
|
)
|
3,910
|
4,091
|
4,297
|
3,955
|
3,916
|
2,744
|
||||||||||||||||
|
Total
revenue
|
21,402
|
13,819
|
18,368
|
18,699
|
19,334
|
19,009
|
15,424
|
12,771
|
|||||||||||||||||
|
Provision
for loan losses
|
785
|
6,185
|
600
|
290
|
315
|
204
|
300
|
493
|
|||||||||||||||||
|
Non-interest
expense
|
14,652
|
11,353
|
11,638
|
11,225
|
11,801
|
11,601
|
18,061
|
7,536
|
|||||||||||||||||
|
Income
(loss) from continuing operations
|
|||||||||||||||||||||||||
|
before
income taxes
|
5,965
|
(3,719
|
)
|
6,130
|
7,184
|
7,218
|
7,204
|
(2,937
|
)
|
4,742
|
|||||||||||||||
|
Income
taxes-continuing operations
|
1,880
|
(1,466
|
)
|
1,888
|
2,366
|
2,381
|
2,459
|
1,671
|
1,490
|
||||||||||||||||
|
Income
(loss) from continuing operations
|
4,085
|
(2,253
|
)
|
4,242
|
4,818
|
4,837
|
4,745
|
(4,608
|
)
|
3,252
|
|||||||||||||||
|
Net
income from discontinued operations
|
18
|
133
|
221
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Net
income (loss)
|
$
|
4,103
|
$
|
(2,120
|
)
|
$
|
4,463
|
$
|
4,818
|
$
|
4,837
|
$
|
4,745
|
$
|
(4,608
|
)
|
$
|
3,252
|
|||||||
|
Basic
earnings (loss) per share
|
|||||||||||||||||||||||||
|
Continuing
operations
|
$
|
0.48
|
$
|
(0.26
|
)
|
$
|
0.50
|
$
|
0.57
|
$
|
0.57
|
$
|
0.56
|
$
|
(0.74
|
)
|
$
|
0.61
|
|||||||
|
Discontinued
operations
|
-
|
0.01
|
0.02
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Net
income (loss)
|
$
|
0.48
|
$
|
(0.25
|
)
|
$
|
0.52
|
$
|
0.57
|
$
|
0.57
|
$
|
0.56
|
$
|
(0.74
|
)
|
$
|
0.61
|
|||||||
|
Diluted
earnings (loss) per share
|
|||||||||||||||||||||||||
|
Continuing
operations
|
$
|
0.47
|
$
|
(0.26
|
)
|
$
|
0.48
|
$
|
0.55
|
$
|
0.55
|
$
|
0.54
|
$
|
(0.74
|
)
|
$
|
0.57
|
|||||||
|
Discontinued
operations
|
-
|
0.01
|
0.03
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Net
income (loss)
|
$
|
0.47
|
$
|
(0.25
|
)
|
$
|
0.51
|
$
|
0.55
|
$
|
0.55
|
$
|
0.54
|
$
|
(0.74
|
)
|
$
|
0.57
|
|||||||
2006
quarterly interest and dividend income continued to grow at a steady pace
in
accordance with organic growth and continued branch expansion in our New
York
region, and paused in the fourth quarter due to the deleveraging. Third quarter
non-interest income was ($1.8) million due to $5.1 million in net securities
losses, due to an investment portfolio repositioning. Fourth quarter
non-interest income included two months of revenues from newly acquired
insurance agencies. The provision for loan losses increased in the third
quarter
due to higher estimated loan losses reflecting economic changes observed
in the
third quarter. Fourth quarter non-interest expense increased primarily due
to
the insurance agency acquisitions. Income from discontinued operations reflected
final contingency payments received from the sale of the company’s data
processing subsidiary in 2004.
In
June,
2005 the Bank terminated its Employee Stock Ownership Plan. Second quarter
non-interest expense of $18.06 million included a charge of $8.67 million
for
this termination resulting in a loss for the quarter. This change was offset
by
credits to additional paid-in capital and unearned compensation, and therefore
stockholders’ equity was not negatively impacted by this event. On June 1, 2005
the Company completed its acquisition of Woronoco Bancorp, Inc., issuing
2.93
million common shares and recording the purchase of approximately $850 million
in assets. All major categories of income and expense increased as a result
of
this acquisition, which was estimated to be slightly accretive to earnings
per
share, excluding merger and conversion expenses which totaled $2.14 million
in
the June-December period. The Company also recorded higher securities gains
totaling $3.10 million in the final nine months of 2005.
None.
The
Company’s management, including the Company’s principal executive officer
and principal financial officer, have evaluated the effectiveness of
the Company’s
“disclosure controls and procedures,” as such term is defined in
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal
executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and
procedures were
effective for the purpose of ensuring that the information required to
be disclosed
in the reports that the Company files or submits under the Exchange Act
with
the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s
rules and forms, and (2) is accumulated and communicated to the
Company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure.
No
change
in the Company’s internal control over financial reporting occurred
during the quarter ended December 31, 2006 that has materially affected,
or is reasonably likely to affect, the Company’s internal control
over financial
reporting.
Management's
report on internal control over financial reporting and Wolf & Company,
P.C.'s attestation report on management's assessment of Berkshire Hills'
internal control on financial reporting are contained in "Item 8 - Financial
Statements and Supplementary Data" in this annual report on Form
10-K.
Other
Events
The
annual meeting of stockholders will be held on Thursday, May 4, 2007 at the
Crowne Plaza Hotel, One West Street, Pittsfield, Massachusetts.
PART
III
For
information concerning the directors of the Company, the information contained
under the section captioned “Proposal 1 -- Election of Directors” in Berkshire
Hills’ Proxy Statement for the 2007 Annual Meeting of Stockholders is
incorporated by reference.
The
following table sets forth, as of December 31, 2006, certain information
regarding the executive officers of Berkshire Hills and Berkshire
Bank.
|
Age
|
Position
|
|
|
Michael
P. Daly
|
45
|
President
and Chief Executive Officer
|
|
John
J. Howard
|
40
|
Executive
Vice President of Retail Banking
|
|
Michael
J. Oleksak
|
48
|
Executive
Vice President of Commercial Banking
|
|
John
S. Millet
|
41
|
Senior
Vice President, Interim Chief Financial Officer and
Treasurer
|
The
executive officers are elected annually and hold office until their successors
have been elected and qualified or until they are removed or replaced. The
Chief
Executive Officer is employed pursuant to a three year contract which renews
automatically if not otherwise terminated pursuant to its terms.
BIOGRAPHICAL
INFORMATION
Michael
P. Daly
was
appointed President and Chief Executive Officer of the Company and the Bank
in
October 2002. Prior to his appointment, Mr. Daly served as Senior Vice
President, Commercial Lending from October 1997 until January 2000 and then
as
Executive Vice President of the Company and the Bank from January 2000 to
October 2002.
John
J. Howard serves
as
Executive Vice President of Retail Banking. Prior
to
joining Berkshire Hills Bancorp, Inc. in October 2006, Mr. Howard was Senior
Vice President and Consumer Market Executive with Bank of America. Mr. Howard
is
responsible for developing and executing the Bank's retail strategy, including
all branch activities, facilities, bank-wide operations, consumer lending,
marketing, information technology, product development and sales.
Michael
J. Oleksak serves
as
Executive Vice President of Commercial Banking. Mr.
Oleksak joined the Company and the Bank in February 2006 as Regional President
for the Pioneer Valley, a position he continues to hold. Mr. Oleksak is
responsible for the development and implementation of all commercial banking
strategies, including products, pricing and geography. Prior to joining the
Company and the Bank, Mr. Oleksak was Senior Vice President and Co-Regional
Executive of Western Massachusetts at TD Banknorth. During his 26 year banking
career, Mr. Oleksak has had extensive commercial lending experience throughout
New England, and served in various capacities at Fleet Bank and Shawmut
Bank.
John
S. Millet currently
serves as Senior Vice President, Interim Chief Financial Officer and
Treasurer.
Mr.
Millet joined the Company and the Bank in May 2005 where he has overseen
development of strategic risk management and profitability measurement policies
and systems. Previously, Mr. Millet was President of GTL, Inc., a health
care
telecommunications company located in Pittsfield, Massachusetts since 1998.
In
his 17-year career as a certified public accountant, Mr. Millet has also
worked
in public accounting and as a financial consultant to Fortune 50
companies.
Reference
is made to the cover page of this report and to the section captioned
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement for information regarding compliance with Section 16(a) of the
Exchange Act. For information concerning the audit committee and its composition
and the audit committee financial expert, reference is made to the section
captioned “Corporate Governance - Committees of the Board of Directors - Audit
Committee” in the Proxy Statement.
For
information concerning the Company’s code of ethics, the information contained
under the section captioned “Corporate Governance - Code of Business Conduct” in
the Proxy Statement is incorporated by reference. A copy of the Company’s code
of ethics is available to stockholders on the Company’s website at
“www.berkshirebank.com.”
ITEM
11. EXECUTIVE COMPENSATION
For
information regarding executive compensation, the information contained under
the section captioned “Executive Compensation” in the Proxy Statement is
incorporated herein by reference.
For
information regarding the compensation committee report, the section captioned
“Compensation Committee Report” in the Proxy Statement is incorporated by
reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|
(a)
|
Security
Ownership of Certain Beneficial
Owners
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in the Proxy Statement.
|
(b)
|
Security
Ownership of Management
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in the Proxy Statement.
|
(c)
|
Changes
in Control
|
Management of
Berkshire Hills knows of no arrangements, including any pledge by any person
of
securities of Berkshire Hills, the operation of which may at a subsequent
date
result in a change in control of the registrant.
|
(d)
|
Equity
Compensation Plan Information
|
The
following table sets forth information, as of December 31, 2006, about Company
common stock that may be issued upon exercise of options under stock-based
benefit plans maintained by the Company.
|
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
the first column)
|
|
Equity
compensation plans
|
||||||
|
approved
by security holders
|
586,000
|
$20.62
|
275,000
|
|||
|
Equity
compensation plans
|
||||||
|
not
approved by security holders
|
-
|
-
|
-
|
|||
|
Total
|
586,000
|
$20.62
|
275,000
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information regarding certain relationships and related transactions required
by
this item is incorporated herein by reference to the section captioned
“Transactions with Related Persons” in the Proxy Statement.
For
information regarding director independence, the section captioned “Proposal 1 -
Election of Directors” in the Proxy Statement is incorporated by
reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this item is incorporated herein by reference to
the
section captioned “Proposal 2 - Ratification of Independent Registered Public
Accounting Firm” in the Proxy Statement.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) [1] Financial
Statements
|
·
|
Report
of Independent Registered Public Accounting
Firm
|
|
·
|
Consolidated
Balance Sheets as of December 31, 2006 and
2005
|
|
·
|
Consolidated
Statements of Income for the Years Ended December 31, 2006, 2005
and
2004
|
|
·
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended December
31, 2006, 2005 and 2004
|
|
·
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006,
2005 and
2004
|
|
·
|
Notes
to Consolidated Financial
Statements
|
|
[2]
|
Financial
Statement Schedules
|
All
financial statement schedules are omitted because the required information
is
either included or is not applicable.
|
[3]
|
Exhibits
|
|
3.1
|
Certificate
of Incorporation of Berkshire Hills Bancorp, Inc.(1)
|
|
3.2
|
Bylaws
of Berkshire Hills Bancorp, Inc.
(2)
|
|
4.1
|
Draft
Stock Certificate of Berkshire Hills Bancorp, Inc.(1)
|
|
4.2
|
No
long-term debt instrument issued by the Registrant exceeds 10%
of
consolidated assets or is registered. In accordance with paragraph
4(iii)
of Item 601(b) of Regulation S-K, the Registrant will furnish the
Securities and Exchange Commission copies of long-term debt instruments
and related agreements upon
request.
|
|
10.1
|
*Employment
Agreement between Berkshire Bank and Michael P. Daly(3)
|
|
10.2
|
*Employment
Agreement between Berkshire Hills Bancorp, Inc. and
Michael P. Daly(3)
|
|
10.3
|
*Change
in Control Agreement between Berkshire Bank and John J.
Howard
|
|
10.4
|
*Change
in Control Agreement between Berkshire Hills Bancorp, Inc. and
John J.
Howard
|
|
10.5
|
*Supplemental
Executive Retirement Agreement between Berkshire Bank and Michael
P.
Daly
|
|
10.6
|
*Berkshire
Hills Bancorp, Inc. 2003 Equity Compensation Plan(4)
|
|
10.7
|
*Form
of Berkshire Bank Employee Severance Compensation Plan(1)
|
|
10.8
|
*Form
of Berkshire Bank Supplemental Executive Retirement Plan(1)
|
|
10.9
|
*Berkshire
Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(5)
|
|
10.10
|
*Woronoco
Bancorp, Inc. 1999 Stock-Based Incentive Plan(6)
|
|
10.11
|
*Woronoco
Bancorp, Inc. 2001 Stock Option Plan(7)
|
|
10.12
|
*Woronoco
Bancorp, Inc. 2004 Equity Compensation Plan(8)
|
|
11.0
|
Statement
re: Computation of Per Share Earnings is incorporated herein by
reference
to Part II, Item 8, “Financial Statements and Supplementary
Data”
|
|
21.0
|
Subsidiary
Information is incorporated herein by reference to Part I, Item
1,
“Business - Subsidiary Activities”
|
|
23.0
|
Consent
of Wolf & Company, P.C.
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
32.1
|
Section
1350 Certification of Chief Executive
Officer
|
|
32.2
|
Section
1350 Certification of Chief Financial Officer
|
_______________________________________________
*Management
contract or compensatory plan, contract or arrangement.
|
(1)
|
Incorporated
herein by reference from the Exhibits to Form S-1, Registration
Statement
and amendments thereto, initially filed on March 10, 2000, Registration
No. 333-32146.
|
|
(2)
|
Incorporated
herein by reference from the Exhibits to the Form 10-K as filed
on March
16, 2006.
|
|
(3)
|
Incorporated
herein by reference from the Exhibits to the Form 10-Q as filed
on August
13, 2003.
|
|
(4)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as
filed on
March 27, 2003.
|
|
(5)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as
filed on
December 7, 2000.
|
|
(6)
|
Incorporated
herein by reference from the Proxy Statement as filed on March
20, 2000 by
Woronoco Bancorp, Inc.
|
|
(7)
|
Incorporated
herein by reference from the Proxy Statement as filed on March
12, 2001 by
Woronoco Bancorp, Inc.
|
|
(8)
|
Incorporated
herein by reference from the Proxy Statement as filed on March
22, 2004 by
Woronoco Bancorp, Inc.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
Berkshire
Hills Bancorp, Inc.
|
|||
|
Date:
March 14, 2007
|
By:
|
/s/
Michael P. Daly
|
|
|
Michael
P. Daly
|
|||
|
President,
Chief Executive Officer and
Director
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
|
/s/
Michael P. Daly
|
President,
Chief Executive Officer
|
March
14, 2007
|
||
|
Michael
P. Daly
|
and
Director
|
|||
|
(principal
executive officer)
|
||||
|
/s/
John S. Millet
|
Senior
Vice President,
|
March
14, 2007
|
||
|
John
S. Millet
|
Interim
Chief Financial Officer and
|
|||
|
Treasurer
|
||||
|
(principal
financial and accounting officer)
|
||||
|
/s/
Lawrence A. Bossidy
|
Non-Executive
Chairman
|
March
14, 2007
|
||
|
Lawrence
A. Bossidy
|
||||
|
|
Director
|
|
||
|
Wallace
W. Altes
|
||||
|
/s/
John B. Davies
|
Director
|
March
14, 2007
|
||
|
John
B. Davies
|
||||
|
/s/
Rodney C. Dimock
|
Director
|
March
14, 2007
|
||
|
Rodney
C. Dimock
|
||||
|
/s/
David B. Farrell
|
Director
|
March
14, 2007
|
||
|
David
B. Farrell
|
||||
|
/s/
Cornelius D. Mahoney
|
Director
|
March
14, 2007
|
||
|
Cornelius
D. Mahoney
|
||||
|
/s/
Edward G. McCormick, Esq.
|
Director
|
March
14, 2007
|
||
|
Edward
G. McCormick, Esq.
|
||||
|
/s/
Catherine B. Miller
|
Director
|
March
14, 2007
|
||
|
Catherine
B. Miller
|
||||
|
/s/
David E. Phelps
|
Director
|
March
14, 2007
|
||
|
David
E. Phelps
|
||||
|
/s/
D. Jeffrey Templeton
|
Director
|
March
14, 2007
|
||
|
D.
Jeffrey Templeton
|
||||
|
/s/
Corydon L. Thurston
|
Director
|
March
14, 2007
|
||
|
Corydon
L. Thurston
|
-91-