UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM10-K
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ý
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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, 2007
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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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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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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24
North Street, Pittsfield, Massachusetts
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01201
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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:
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Title
of each class
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Name
of Exchange on which registered
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Common
stock, par value $0.01 per share
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NASDAQ
Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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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
¨
No
ý
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
¨
No
ý
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes ý No
¨
Indicate
by check mark 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. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
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Large
Accelerated Filer ¨
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Accelerated
Filer ý
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Non-Accelerated
Filer ¨
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Smaller
Reporting Company ¨
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
ý
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $279 million, based upon the closing price
of
$31.51 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 5,
2008 was 10,515,102.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2008 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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3
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22
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27
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27
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27
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27
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27
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28
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28
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31
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32
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45
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46
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86
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86
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87
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87
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87
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88
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88
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89
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89
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||
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90
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90
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92
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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., Berkshire Bank and Berkshire Insurance Group. 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 38 full-service banking offices serving communities
throughout Western Massachusetts, Northeastern New York and in Southern Vermont.
The Bank operates in four regions:
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·
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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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·
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The
New York Region with ten offices serving Albany and the surrounding
area
in Northeastern New York. This region represents a de novo expansion
by
the Bank begun in 2005.
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·
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The
Vermont region with seven offices serving Southern Vermont. The Company
entered this region through the acquisition of Factory Point Bancorp,
Inc.
in September 2007.
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These
four regions are viewed as having favorable demographics and provide an
attractive regional niche for the Bank to distinguish itself from larger
super-regional banks and smaller community banks. The Company is pursuing growth
through acquisitions, de novo branching, product development, and organic
growth. It made acquisitions of insurance and financial planning providers
in
2004 and 2005, followed by the acquisition of five 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.
Berkshire Insurance Group operates from ten locations in the Berkshire County
and Pioneer Valley regions in Massachusetts. The Bank promotes itself as
“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.
This
brand and culture statement is expected to drive customer delight, emotional
engagement, loyalty, market share and profitability.
The
Bank
offers a full-scale of deposit, lending, investment, and insurance products
through 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 fair pricing of loan and deposit
products and wealth management and asset management services. The location
and
convenience of branch offices is also a significant competitive factor,
particularly regarding new offices. The Company does not rely on any individual,
group, or entity for a material portion of its deposits.
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 market areas.
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. The Bank retains most of the loans it
originates, although the Bank may sell longer-term one- to four-family
residential loans and participations in some commercial loans.
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.
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2007
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2006
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2005
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2004
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2003
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||||||||||||||||||||||||||||||||||||
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Percent
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Percent
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Percent
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Percent
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Percent
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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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(Dollars
in millions)
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Amount
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Total
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Amount
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Total
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Amount
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Total
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Amount
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Total
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Amount
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Total
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||||||||||||||||||||||||||||||
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Residential
mortgages
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$ | 657.0 | 34 | % | $ | 599.2 | 36 | % | $ | 549.8 | 39 | % | $ | 235.2 | 28 | % | $ | 265.5 | 34 | % | ||||||||||||||||||||
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Commercial
mortgages
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704.8 | 36 | 566.4 | 33 | 410.7 | 29 | 260.5 | 32 | 206.4 | 26 | ||||||||||||||||||||||||||||||
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Commercial
business
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203.6 | 11 | 190.5 | 11 | 158.7 | 11 | 150.9 | 18 | 166.3 | 21 | ||||||||||||||||||||||||||||||
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Total
commercial loans
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908.4 | 47 | 756.9 | 44 | 569.4 | 40 | 411.4 | 50 | 372.7 | 47 | ||||||||||||||||||||||||||||||
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Consumer
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378.6 | 19 | 342.9 | 20 | 301.0 | 21 | 181.5 | 22 | 154.0 | 19 | ||||||||||||||||||||||||||||||
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Total
loans
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1,944.0 | 100 | % | 1,699.0 | 100 | % | 1,420.2 | 100 | % | 828.1 | 100 | % | 792.2 | 100 | % | |||||||||||||||||||||||||
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Allowance
for loan losses
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(22.1 | ) | (19.4 | ) | (13.0 | ) | (9.3 | ) | (9.0 | ) | ||||||||||||||||||||||||||||||
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Net
loans
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$ | 1,921.9 | $ | 1,679.6 | $ | 1,407.2 | $ | 818.8 | $ | 783.2 | ||||||||||||||||||||||||||||||
Residential
mortgages.
The
Bank
offers conforming and a limited number of non-conforming, fixed-rate and
adjustable-rate residential mortgage loans with maturities of up to 30 years.
The Bank offers both fixed- and adjustable-rate conventional mortgage loans
(“ARMs”) with terms of 10 to 30 years that are fully amortizing with monthly
loan payments. One- to four-family residential mortgage loans are generally
underwritten according to Fannie Mae and Freddie Mac guidelines for loans they
designate as “A” or “A-“. Loans that conform to such guidelines are referred to
as “conforming loans.” The Bank generally originates both fixed-rate and ARM
loans in amounts up to the maximum conforming loan limits as established by
Fannie Mae and Freddie Mac, which are currently $417,000 for single-family
homes. Private mortgage insurance is generally required for loans with
loan-to-value ratios in excess of 80%. The Bank does not actively engage in
the
business of sub-prime mortgage lending, but may, from time to time originate
residential mortgage loans with FICO scores below 660 when merited by other
underwriting considerations.
The
Bank
also originates loans above conforming limits, referred to as “jumbo loans,”
which have been underwritten to the substantially same credit standards as
conforming loans, which are generally eligible for sale to various firms that
specialize in the purchase of such non-conforming loans. The Bank also
originates loans other than jumbo loans that are not saleable to Fannie Mae
or
Freddie Mac, but are deemed to be acceptable risks.
The
Bank
actively monitors its interest rate risk position to determine the desirable
level of investment in fixed-rate mortgages, The Bank may decide to sell all
or
a portion of such loans in the secondary mortgage market to government-sponsored
entities such as Fannie Mae and Freddie Mac or other purchasers depending on
market interest rates and our capital and liquidity position.
The
Bank
generally retains the servicing rights on large portfolio loan sales to generate
fee income and reinforce our commitment to customer service, although the Bank
may also sell loans to mortgage banking companies, on a servicing-released
basis. As of December 31, 2007, residential mortgage loans serviced for others
totaled $128.0 million.
The
Bank
currently offers several ARM loan products secured by residential properties
with rates that are fixed for a period ranging from six months to ten years.
After the initial term, if the loan is not already refinanced, the interest
rates on these loans generally reset every year based upon a contractual spread
or margin above the average yield on U.S. Treasury securities, adjusted to
a
constant maturity of one year, as published weekly by the Federal Reserve Board
and subject to certain periodic and lifetime limitations on interest rate
changes. ARM loans generally pose different credit risks than fixed-rate loans
primarily because the underlying debt service payments of the borrowers rise
as
interest rates
rise,
thereby increasing the potential for default. At December 31, 2007, our ARM
portfolio totaled $338.3 million. The Bank’s adjustable rate loans do
not have interest-only or negative amortization features.
The
Bank
requires title insurance on all its one- to four-family mortgage loans, and
also
requires that borrowers maintain fire and extended coverage or all risk casualty
insurance (and, if appropriate, flood insurance) in an amount at least equal
to
the lesser of the loan balance or the replacement cost of the improvements,
but
in any event in an amount calculated to avoid the effect of any coinsurance
clause. For loans with initial loan-to-value ratios in excess of 80%, the Bank
generally requires private mortgage insurance.
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 $46.8 million
at
year-end 2007.
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 short-term 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.
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. Berkshire Bank seeks to minimize
these
risks through strict adherence to its underwriting standards and portfolio
management processes.
The
Bank
originates land acquisition, development and construction loans to builders
in
our market area. These loans totaled $125.3 million, or 6.4% of our total loan
portfolio at December 31, 2007. Acquisition loans help finance the purchase
of
land intended for further development, including single-family houses,
multi-family housing, and commercial income property. In some cases, the Bank
may make an acquisition loan before the borrower has received approval to
develop the land as planned. In general, the maximum loan-to-value ratio for
a
land acquisition loan is 50% of the appraised value of the property, although
for certain borrowers deemed to be the lowest risk, higher loan-to-value ratios
may be allowed. The Bank also makes development loans to builders in its market
area to finance improvements to real estate, consisting mostly of single-family
subdivisions, typically to finance the cost of utilities, roads, sewers and
other development costs. Builders generally rely on the sale of single-family
homes to repay development loans, although in some cases the improved building
lots may be sold to another builder. The maximum amount loaned is generally
limited to the cost of the improvements plus an interest reserve, if one is
required. Advances are made in accordance with a schedule reflecting the cost
of
the improvements.
The
Bank
also grants construction loans to area builders, often in conjunction with
development loans. In the case of residential subdivisions, these loans finance
the cost of completing homes on the improved property. Advances on construction
loans are made in accordance with a schedule reflecting the cost of
construction. Repayment of construction loans on residential subdivisions is
normally expected from the sale of units to individual purchasers. In the case
of income-producing property, repayment is usually expected from permanent
financing upon completion of construction. The Bank commits to provide the
permanent mortgage financing on most of our construction loans on
income-producing property.
Land
acquisition, development and construction lending exposes the Bank to greater
credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event the Bank makes an acquisition
loan
on property that is not yet approved for the planned development, there is
the
risk that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose the Bank to the risk that
improvements will not be completed on time in accordance with specifications
and
projected costs. In addition, the ultimate sale or rental of the property may
not occur as anticipated.
Commercial
Business Loans. The Bank offers secured commercial term loans with
repayment terms which are normally limited to 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 other loan portfolios, which is viewed as normal
for this segment. Collections are more sensitive to changes in borrower
financial circumstances, and the collateral can depreciate or be damaged prior
to repossession. Additionally, collections are more subject to the limitations
of federal and state laws. Automobile loans outstanding totaled $190.6 million
at year-end 2007.
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 increased sensitivity to
rate changes and increased 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 2007 totaled
$181.9 million.
Maturity
and
Sensitivity of Loan Portfolio. The following table shows contractual
final maturities of selected loan categories at year-end 2007. The contractual
maturities do not reflect premiums, discounts, and deferred costs, and do not
reflect prepayments.
|
December
31,
2007
|
||||||||||||||||
|
Contractual
Maturity
|
One
Year
|
More
Than
One
|
More
Than
|
|||||||||||||
|
(In
Thousands)
|
or
Less
|
to
Five
Years
|
Five
Years
|
Total
|
||||||||||||
|
Construction
Mortgage
Loans:
|
||||||||||||||||
|
Residential
|
$ | 9,266 | $ | 37,548 | $ | ---- | $ | 46,814 | ||||||||
|
Commercial
|
36,854 | 88,495 | ---- | 125,349 | ||||||||||||
|
Commercial
Business
Loans
|
92,262 | 49,368 | 61,934 | 203,564 | ||||||||||||
|
Total
|
$ | 138,382 | $ | 175,411 | $ | 61,934 | $ | 375,727 | ||||||||
For
the
$237 million total of loans above which mature in more than one year, $101
million of these loans are fixed-rate and $136 million are
variable-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 sixty days
from
approval; some commercial commitments are made for longer terms. Total lending
commitments, including lines and letters of credit, were $571 million at
year-end 2007.
The
loan
policy sets certain limits on concentrations of credit and requires periodic
reporting of concentrations to the Board. Loans outstanding to the ten largest
relationships totaled $159 million at year-end 2007. Total year-end commercial
construction loans outstanding were 74% of the Bank’s risk based capital at
year-end, and total commercial mortgage outstandings (including 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. 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 finances residential and condominium construction
and development projects as well.
Problem
Assets.
While the Bank generally prefers to work with borrowers to resolve
problems, the 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 automobile loans are
maintained on accrual until they reach 120 days delinquent, and then they are
generally charged-off. Interest income that would have been recorded for 2007
had nonaccruing loans been current according to their original terms, amounted
to $0.8 million. The amount of interest income on those loans that was included
in net income in 2007 was $0.1 million.
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 2007, Berkshire Bank had two properties
of
residential foreclosed real estate totaling $866 thousand.
The
following table sets forth additional information on year-end problem
assets.
|
(Dollars
in
thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Nonaccruing
loans:
|
||||||||||||||||||||
|
Residential
mortgages
|
$ | 726 | $ | 15 | $ | 261 | $ | 327 | $ | 348 | ||||||||||
|
Commercial
mortgages
|
5,177 | 308 | 271 | 147 | 496 | |||||||||||||||
|
Commercial
business
|
4,164 | 7,203 | 553 | 523 | 1,887 | |||||||||||||||
|
Consumer
|
441 | 66 | 101 | 155 | 468 | |||||||||||||||
|
Total
nonperforming
loans
|
10,508 | 7,592 | 1,186 | 1,152 | 3,199 | |||||||||||||||
|
Real
estate
owned
|
866 | - | - | - | - | |||||||||||||||
|
Total
nonperforming
assets
|
$ | 11,374 | $ | 7,592 | $ | 1,186 | $ | 1,152 | $ | 3,199 | ||||||||||
|
Troubled
debt
restructurings
|
$ | 4,613 | $ | 5,268 | $ | 1,234 | $ | 510 | $ | 214 | ||||||||||
|
Accruing
loans 90+ days past
due
|
823 | 281 | 110 | 65 | 306 | |||||||||||||||
|
Total
nonperforming loans/total
loans
|
0.54 | % | 0.45 | % | 0.08 | % | 0.14 | % | 0.40 | % | ||||||||||
|
Total
nonperforming assets/total
assets
|
0.45 | % | 0.35 | % | 0.06 | % | 0.09 | % | 0.26 | % | ||||||||||
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. “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.”
Nonperforming
loans increased from $7.6 million at year-end 2006 to $10.5 million at year-end
2007. The increase in nonperforming loans was due mainly to an increase in
nonaccrual commercial mortgages offset by a decrease in nonaccrual commercial
business loans. There was one commercial mortgage totaling $2.7 million and
several commercial mortgages with balances less than $1.0 million placed on
nonaccrual status during 2007. Nonperforming loans also were impacted by
increases in residential mortgages of $0.7 million and consumer loans (home
equity loans) of $0.4 million. The increase in these nonperforming loan
categories was due mainly to softening economic conditions in portions of the
Company’s market area.
At
year-end 2007, there were no loan balances classified as loss. The balance
of
loans classified as doubtful was $1.3 million having an impaired valuation
allowance of $0.8 million. Loans classified as substandard totaled $30.7
million. There were $7.7 million in loans classified as substandard and reported
as nonperforming at year-end 2007. Included in the substandard nonperforming
category are two commercial business loans in excess of $1.0 million, which
totaled $4.2 million with an impaired valuation allowance of $0.2 million.
The
remaining $3.5 million of substandard nonperforming loans are commercial
mortgages with outstanding balances of less than $1.0 million and an impaired
valuation allowance of $0.2 million at year-end 2007. The remaining
$23.0 million in loans classified as substandard are collectively regarded
as
having the potential to be nonperforming in the future, which included 6 loans
with
balances
in excess of $1.0 million totaling $14.2 million at year-end 2007. Loans rated
special mention totaled $32.8 million at year end 2007. Loans delinquent 30
– 90
days totaled $7.6 million at year-end 2007.
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, a general component for pools of outstanding
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.
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
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 or loan portfolio category deteriorate as a result of the factors discussed
above. Additionally, 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. Any material increase in the allowance for loan losses may adversely
affect Berkshire Bank’s financial condition and results of
operations.
The
following table presents an analysis of the allowance for loan losses for the
years indicated.
|
(Dollars
in
thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Balance
at beginning of
year
|
$ | 19,370 | $ | 13,001 | $ | 9,337 | $ | 8,969 | $ | 10,308 | ||||||||||
|
Charged-off
loans:
|
||||||||||||||||||||
|
Residential
mortgages
|
110 | 27 | - | - | - | |||||||||||||||
|
Commercial
mortgages
|
- | - | - | 138 | - | |||||||||||||||
|
Commercial
business
|
4,850 | 461 | 432 | 218 | 157 | |||||||||||||||
|
Consumer
|
1,416 | 1,288 | 1,110 | 1,846 | 4,207 | |||||||||||||||
|
Total
charged-off
loans
|
6,376 | 1,776 | 1,542 | 2,202 | 4,364 | |||||||||||||||
|
Recoveries
on charged-off
loans:
|
||||||||||||||||||||
|
Commercial
business
|
13 | 43 | 55 | 296 | 440 | |||||||||||||||
|
Consumer
|
356 | 667 | 517 | 709 | 1,125 | |||||||||||||||
|
Total
recoveries
|
369 | 710 | 572 | 1,005 | 1,565 | |||||||||||||||
|
Net
loans
charged-off
|
6,007 | 1,066 | 970 | 1,197 | 2,799 | |||||||||||||||
|
Allowance
attributed to loans
acquired by merger
|
4,453 | - | 3,321 | - | - | |||||||||||||||
|
Provision
for loan
losses
|
4,300 | 7,860 | 1,313 | 1,565 | 1,460 | |||||||||||||||
|
Transfer
of commitment
reserve
|
- | (425 | ) | - | - | - | ||||||||||||||
|
Allowance
for loan losses, balance
at end of year
|
$ | 22,116 | $ | 19,370 | $ | 13,001 | $ | 9,337 | $ | 8,969 | ||||||||||
|
Ratios:
|
||||||||||||||||||||
|
Net
loans charged-off/average
total loans
|
0.34 |
%
|
0.07 |
%
|
0.08 |
%
|
0.15 |
%
|
0.35 |
%
|
||||||||||
|
Recoveries/charged-off
loans
|
5.79 | 39.98 | 37.09 | 45.64 | 35.86 | |||||||||||||||
|
Net
loans charged-off/allowance
for loan losses
|
27.16 | 5.50 | 7.46 | 12.82 | 31.21 | |||||||||||||||
|
Allowance
for loan losses/total
loans
|
1.14 | 1.14 | 0.92 | 1.13 | 1.13 | |||||||||||||||
|
Allowance
for loan
losses/nonperforming loans
|
2.10 |
x
|
2.55 |
x
|
10.96 |
x
|
8.11 |
x
|
2.80 |
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.
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||||||||||||
|
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
|
$ | 2,028 | 34 | % | $ | 1,845 | 36 | % | $ | 1,649 | 39 | % | $ | 435 | 28 | % | $ | 491 | 34 | % | ||||||||||||||||||||
|
Commercial
mortgages
|
12,040 | 36 | 9,939 | 33 | 5,933 | 29 | 3,828 | 32 | 2,945 | 26 | ||||||||||||||||||||||||||||||
|
Commercial
business
|
5,787 | 11 | 5,199 | 11 | 3,517 | 11 | 3,344 | 18 | 3,362 | 21 | ||||||||||||||||||||||||||||||
|
Consumer
|
2,261 | 19 | 2,387 | 20 | 1,902 | 21 | 1,730 | 22 | 2,171 | 19 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 22,116 | 100 | % | $ | 19,370 | 100 | % | $ | 13,001 | 100 | % | $ | 9,337 | 100 | % | $ | 8,969 | 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 Risk
Management Committee of the Board of Directors receives a quarterly report
of
all securities transactions made during the period.
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 mortgaged backed securities that have an average duration between
two
to four years and that offer a steady stream of principal and interest payments
that can be reinvested at current market rates. Generally, in 2007, these
securities consisted of purchases of collateralized mortgage obligation PACs
for
shorter durations and ten-year fixed-rate mortgage pass-through securities
for
slightly longer duration. 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 2007. 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. 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
(“FHLBB”). The Bank has substantially liquidated its actively managed portfolio
of exchange traded equity securities of bank, utility and industrial stocks.
In
2006 and 2007, the Bank executed deleveraging programs to reduce leverage,
improve yield, and improve interest rate sensitivity.
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.
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||||||||
|
(In
thousands)
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||||||||
|
Available
for sale
securities
|
||||||||||||||||||||||||
|
U.S.
Government
agencies
|
$ | - | $ | - | $ | - | $ | - | $ | 69 | $ | 63 | ||||||||||||
|
Municipal
bonds and
obligations
|
74,223 | 75,186 | 63,788 | 64,503 | 63,701 | 63,673 | ||||||||||||||||||
|
Mortgage-backed
securities
|
103,387 | 104,518 | 85,102 | 84,334 | 264,705 | 258,504 | ||||||||||||||||||
|
Other
bonds and
obligations
|
15,601 | 15,265 | 20,392 | 20,439 | 24,356 | 24,703 | ||||||||||||||||||
|
Equity
securities
|
23,913 | 24,073 | 24,687 | 24,930 | 41,667 | 43,933 | ||||||||||||||||||
|
Total
available for sale
securities
|
$ | 217,124 | $ | 219,042 | $ | 193,969 | $ | 194,206 | $ | 394,498 | $ | 390,876 | ||||||||||||
|
Held
to maturity
securities
|
||||||||||||||||||||||||
|
Municipal
bonds and
obligations
|
$ | 36,981 | $ | 37,233 | $ | 35,572 | $ | 35,286 | $ | 23,851 | $ | 23,851 | ||||||||||||
|
Mortgage-backed
securities
|
2,475 | 2,456 | 4,396 | 4,400 | 6,057 | 5,912 | ||||||||||||||||||
|
Total
held to maturity
securities
|
$ | 39,456 | $ | 39,689 | $ | 39,968 | $ | 39,686 | $ | 29,908 | $ | 29,763 | ||||||||||||
The
following table summarizes year-end 2007 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
|
$ | 10.5 | 4.02 | % | $ | 6.5 | 3.87 | % | $ | 18.8 | 3.90 | % | $ | 75.4 | 4.47 | % | $ | 111.2 | 4.08 | % | ||||||||||||||||||||
|
Mortgage-backed
securities
|
1.4 | 4.53 | 2.4 | 4.08 | 23.0 | 5.26 | 79.1 | 5.17 | 105.9 | 5.11 | ||||||||||||||||||||||||||||||
|
Other
bonds and
obligations
|
1.0 | 5.48 | 2.0 | 5.31 | 3.0 | 5.18 | 9.6 | 6.60 | 15.6 | 6.09 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 12.9 | 4.19 | % | $ | 10.9 | 4.17 | % | $ | 44.8 | 4.68 | % | $ | 164.1 | 4.93 | % | $ | 232.7 | 4.69 | % | ||||||||||||||||||||
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 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. The holding company has
$50
million available in lines of credit and term loans and $35 million outstanding
against the lines and term loans at December 31, 2007. The lines of credit
at
the holding company were used to fund the cash portion of the Factory Point
acquisition as well as repurchases of its common stock.
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 ten years. Additionally, the Bank offers
a variety of retirement deposit accounts to personal and business
customers.
The
following table presents information concerning average balances and weighted
average interest rates on Berkshire Bank’s interest-bearing deposit accounts for
the years indicated.
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
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
|
$ | 190.4 | 12 | % | - | % | $ | 174.5 | 12 | % | - | % | $ | 149.6 | 13 | % | - | % | ||||||||||||||||||
|
NOW
|
157.9 | 10 | 1.46 | 137.8 | 9 | 1.09 | 121.7 | 11 | 0.39 | |||||||||||||||||||||||||||
|
Money
market
|
339.2 | 21 | 3.60 | 284.4 | 19 | 3.41 | 209.0 | 18 | 2.13 | |||||||||||||||||||||||||||
|
Savings
|
201.6 | 13 | 1.09 | 210.6 | 14 | 0.90 | 205.8 | 18 | 0.90 | |||||||||||||||||||||||||||
|
Time
|
714.1 | 44 | 4.75 | 651.7 | 46 | 4.28 | 445.2 | 40 | 3.20 | |||||||||||||||||||||||||||
|
Total
|
$ | 1,603.2 | 100 | % | 3.16 | % | $ | 1,459.0 | 100 | % | 2.81 | % | $ | 1,131.3 | 100 | % | 1.86 | % | ||||||||||||||||||
At
year-end 2007, 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
|
$ | 100,607 | 4.83 | % | ||||
|
Over
3 months through 6
months
|
65,520 | 4.49 | ||||||
|
Over
6 months through 12
months
|
81,992 | 4.80 | ||||||
|
Over
12
months
|
49,889 | 4.96 | ||||||
|
Total
|
$ | 298,008 | 4.77 | % | ||||
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 secured by a blanket lien on most of the Bank’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 funding
sources.
WEALTH
MANAGEMENT SERVICES
The
Bank’s Asset Management/Trust Group provides consultative investment management
and trust relationships to individuals, businesses, and institutions, with
an
emphasis on personal investment management. The group has built a track record
over more than a decade with its dedicated in-house investment management team.
At year-end 2007, assets under management totaled $781 million. The group
provides financial planning, investment management and brokerage services
utilizing Commonwealth Financial Network as the broker/dealer.
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, 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 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 upstate New
York and northwestern Connecticut. Berkshire Insurance Group has instituted
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. 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. Berkshire Municipal Bank was
renamed Berkshire Bank Municipal Bank in February 2008.
PERSONNEL
At
year-end 2007, the Company had 560 full-time equivalent employees, representing
an increase of 38 from 522 at year-end 2006. This growth was primarily due
to
the Factory Point acquisition in the third quarter. Year-end personnel included
94 full-time equivalent employees in Berkshire Insurance Group and 466 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 Bank 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 Bank Municipal Bank, all
subsidiaries of Berkshire Bank are incorporated in Massachusetts.
During
2007, the Company acquired Factory Point Bancorp, Inc. Between the acquisition
date and the end of the year, all of the Factory Point subsidiaries were merged
into existing Berkshire entities. During 2005, the Company acquired Woronoco
Bancorp. Between the acquisition date and the end of 2005, 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
The
Company has two reportable operating segments, Banking and Insurance, which
are
delineated by the consolidated subsidiaries of Berkshire Hills
Bancorp. Banking includes the activities of Berkshire Bank and its
subsidiaries, which provide commercial and consumer banking
services. Insurance includes the activities of Berkshire Insurance
Group, which provides commercial and consumer insurance services. The
only other consolidated financial activity of the Company is the Parent, which
consists of the transactions of Berkshire Hills Bancorp. For more
information about the Company’s reportable operating segments, see Footnote 17
in Item 8. of this Form 10-K.
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 Massachusetts legislature, 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 Commissioner who oversees
regular bank examinations. The Commissioner’s approval is required to establish
or close branches, to merge with another bank, 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. 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. In 2004, Berkshire Bank purchased a branch in
Oriskany Falls, New York. At year-end 2005, Berkshire Bank had received
regulatory approval for a new branch in East Greenbush, New York and was in
the
process of obtaining regulatory approval for new branches in Delmar and
Guilderland, New York. Since 2005, Berkshire Bank opened nine branches in
upstate New York’s capital region. At its interstate branches, Berkshire Bank
may conduct any activity that is authorized under Massachusetts law that is
permissible either for a savings bank chartered in that state (subject to
applicable federal restrictions) or a branch in that state of an out-of-state
national bank. The New York State Superintendent of Banks and the Vermont
Commissioner of Banking and Insurance may exercise certain regulatory authority
over, the Bank’s New York and Vermont 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, 2007, 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, 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 in 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 was $1.2
million, of which $0.7 million was used in 2007 and $0.5 million remains for
use
in 2008.. 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, 2007 averaged 1.18
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 2008,
which was unchanged from 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 2007 of $21.1 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 2007, 2006, 2005, 2004,
and 2003, cash dividends from the Federal Home Loan Bank of Boston to Berkshire
Bank amounted to approximately $1.4 million, $1.6 million, $1.3 million, $0.5
million and $0.2 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 fund, 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 Lender Test. Under the Qualified Thrift Lender Test (the “QLT 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 and
commercial 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 2007, 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 any of the following: any company becoming
a bank holding company; any bank holding company acquiring 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 merging with another bank holding company. Although the Company is
not a
bank holding company for purposes of Massachusetts law, any future acquisition
of ownership, control, or the power to vote 25% or more of the voting stock
of
another banking institution or bank holding company would cause it to become
such.
BERKSHIRE
BANK 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.
In
February 2008, Berkshire Municipal Bank was renamed Berkshire Bank Municipal
Bank. Berkshire Bank 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.
OTHER
REGULATIONS
Berkshire
Bank is subject to federal and state consumer protection statues and
regulations promulgated under these laws, including, but not limited to,
the:
|
|
·
|
Truth-In-Lending
Act, governing disclosures of credit terms to consumer borrowers;
Home
Mortgage Disclosure Act, requiring financial institutions to provide
certain information about home mortgage and refinance loans; Equal
Credit
Opportunity Act, prohibiting discrimination on the basis of race,
creed or
other prohibited factors in extending
credit;
|
|
|
·
|
Fair
Credit Reporting Act, governing the provision of consumer information
to
credit reporting agencies and the use of consumer
information;
|
|
|
·
|
Fair
Debt Collection Act, governing the manner in which consumer debts
may be
collected by collection agencies;
and
|
|
|
·
|
Electronic
Funds Transfer Act, governing automatic deposits to and withdrawals
from
deposit accounts and customers’ rights and liabilities arising from the
use of automated teller machines and other electronic banking
services.
|
Berkshire
Bank also is subject to federal laws protecting the confidentiality of consumer
financial records, and limiting the ability of the institution to share
non-public personal information with third parties.
Finally,
Berkshire Bank is subject to extensive anti-money laundering provisions and
requirements, which require the institution to have in place a comprehensive
customer identification program and an anti-money laundering program and
procedures. These laws and regulations also prohibit financial institutions
from
engaging in business with foreign shell banks; require financial institutions
to
have due diligence procedures and, in some cases, enhanced due diligence
procedures for foreign correspondent and private banking accounts; and improve
information sharing between financial institutions and the U.S. government.
The
Bank has established polices and procedures intended to comply with these
provisions.
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 due 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. Carry forwards and carry backs 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 $757 million at year-end 2006 to $908 million at year-end 2007. 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 reduction
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 collectability 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 project. 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 collateral 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 and 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 classified 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 $4.3 million for the year ended December 31, 2007 and acquired $4.5
million in allowance for loan losses from the Factory Point Bancorp acquisition
to bring our allowance for loan losses at year-end 2007 to $22.1 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
79% of our loans were secured by real estate as of year-end 2007. 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, our
success 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 and adversely affect our net interest
spread, asset quality, origination volume and overall
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 includes mortgage-backed securities, which are insured
or
guaranteed by U.S. government agencies or government-sponsored enterprises..
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, proceeds from
the
sale of loans and liquidity resources at the holding company. At December 31,
2007, we had approximately $299 million of FHLB 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 industry 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, we outsource our data processing
to a third party. If our third party provider encounters difficulties or if
we
have difficulty in communicating with such third party, 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 Factory Point Bancorp, Inc. in 2007, and Woronoco Bancorp 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 Factory Point Bancorp acquisition, Woronoco Bancorp
acquisition, and the acquisition of five insurance agencies 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 62,450 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 are located in an owned facility located in Pittsfield,
Massachusetts. The Company also owns or leases other facilities within its
primary market areas: Berkshire County, Massachusetts; Pioneer Valley,
Massachusetts; Southern Vermont, and the Capital Region, Northeastern New York.
The Company operates 38 full service banking offices, of which 21 are premises
owned by the Company. The Company considers its properties to be suitable and
adequate for its present and immediately foreseeable needs.
ITEM
3. LEGAL PROCEEDINGS
At
December 31, 2007, neither the Company nor the Bank was 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 2007.
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”. The following table sets forth the quarterly high and low
closing sales price information and dividends declared per share of common
stock
in 2007 and 2006.
|
Dividends
|
||||||||||||
|
2007
|
High
|
Low
|
Declared
|
|||||||||
|
First
quarter
|
$ | 34.71 | $ | 32.59 | $ | 0.14 | ||||||
|
Second
quarter
|
33.75 | 31.51 | 0.14 | |||||||||
|
Third
quarter
|
32.52 | 26.10 | 0.15 | |||||||||
|
Fourth
quarter
|
31.31 | 24.27 | 0.15 | |||||||||
|
2006
|
||||||||||||
|
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 | |||||||||
Holders
The
Company had approximately 2,239 holders of record of common stock at March
10,
2008.
Dividends
The
principal sources of the Company’s cash reserves are dividends received from the
Bank and 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 comply with minimum applicable regulatory capital
requirements. Under applicable regulations, prior regulatory approval is
required for any capital distribution by the Bank to the Company if the total
capital distributions for the calendar year exceed net income for that year
plus
the amount of retained net income for the preceding two years. 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 13 in the
financial statements in Item 8 of this Form 10-K.
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
acquisitions of Factory Point Bancorp and 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.
|
Total
number of
shares
|
Maximum
number
of
|
|||||||||||||||
| Total number |
Average
|
purchased
as part
of
|
shares
that may
yet
|
|||||||||||||
|
of
shares
|
price
paid
|
publicly
announced
|
be
purchased
under
|
|||||||||||||
|
Period
|
purchased
|
per
share
|
plans
or
programs
|
the
plans or
programs
|
||||||||||||
|
October
1-31,
2007
|
40,529 | $ | 27.96 | 40,529 | 227,393 | |||||||||||
|
November
1-30,
2007
|
167,500 | 26.52 | 167,500 | 59,893 | ||||||||||||
|
December
1-31,
2007
|
61,900 | 25.69 | 61,900 | 297,993 | ||||||||||||
|
Total
|
269,929 | $ | 26.55 | 269,929 | 297,993 | |||||||||||
On
February 23, 2006, the Company authorized the purchase of up to 300,000 shares,
from time to time, subject to market conditions. The last of the shares under
the February 23, 2006 plan were purchased on December 18, 2007. On
December 14, 2007, the Company authorized the purchase of up to 300,000
additional 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. 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, 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, 2002.
| Period Ending | ||||||||||||||||||||||||
|
Index
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
||||||||||||||||||
|
Berkshire
Hills Bancorp
Inc.
|
$ | 100.00 | $ | 156.34 | $ | 162.61 | $ | 148.90 | $ | 151.15 | $ | 119.80 | ||||||||||||
|
NASDAQ
Composite
|
100.00 | 150.01 | 162.89 | 165.13 | 180.85 | 198.60 | ||||||||||||||||||
|
SNL
Bank and Thrift
Index
|
100.00 | 135.57 | 151.82 | 154.20 | 180.17 | 137.40 | ||||||||||||||||||
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.
|
At
or For the Years Ended December
31,
|
||||||||||||||||||||
|
(Dollars
in thousands, except per
share data)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Selected
Financial
Data:
|
||||||||||||||||||||
|
Total
assets
|
$ | 2,513,432 | $ | 2,149,642 | $ | 2,035,553 | $ | 1,310,115 | $ | 1,218,548 | ||||||||||
|
Securities
|
258,497 | 234,174 | 420,320 | 414,363 | 359,294 | |||||||||||||||
|
Loans,
net
|
1,921,900 | 1,679,617 | 1,407,229 | 818,842 | 783,258 | |||||||||||||||
|
Goodwill
and
intangibles
|
182,452 | 121,341 | 99,616 | 7,254 | 10,233 | |||||||||||||||
|
Deposits
|
1,822,563 | 1,521,938 | 1,371,218 | 845,789 | 830,244 | |||||||||||||||
|
Borrowings
and subordinated
debentures
|
349,938 | 360,469 | 412,917 | 327,926 | 251,465 | |||||||||||||||
|
Total
stockholders’
equity
|
326,837 | 258,161 | 246,066 | 131,736 | 123,175 | |||||||||||||||
|
Selected
Operating
Data:
|
||||||||||||||||||||
|
Total
interest and dividend
income
|
$ | 131,944 | $ | 118,051 | $ | 87,732 | $ | 61,081 | $ | 56,308 | ||||||||||
|
Total
interest
expense
|
68,019 | 57,811 | 36,115 | 20,724 | 18,742 | |||||||||||||||
|
Net
interest
income
|
63,925 | 60,240 | 51,617 | 40,357 | 37,566 | |||||||||||||||
|
Provision
for loan
losses
|
4,300 | 7,860 | 1,313 | 1,565 | 1,460 | |||||||||||||||
|
Service
charges and fee
income
|
26,654 | 13,539 | 9,373 | 5,493 | 5,023 | |||||||||||||||
|
All
other non-interest income
(loss)
|
(2,011 | ) | (1,491 | ) | 5,550 | 2,271 | 1,425 | |||||||||||||
|
Total
non-interest
expense
|
65,494 | 48,868 | 48,998 | 28,977 | 28,243 | |||||||||||||||
|
Provision
for income taxes -
continuing operations
|
5,239 | 4,668 | 8,003 | 5,639 | 5,161 | |||||||||||||||
|
Net
income (loss) from
discontinued operations
|
- | 371 | - | (431 | ) | (185 | ) | |||||||||||||
|
Net
income
|
$ | 13,535 | $ | 11,263 | $ | 8,226 | $ | 11,509 | $ | 8,965 | ||||||||||
|
Dividends
per
share
|
$ | 0.58 | $ | 0.56 | $ | 0.52 | $ | 0.48 | $ | 0.48 | ||||||||||
|
Basic
earnings per
share:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 1.47 | $ | 1.28 | $ | 1.16 | $ | 2.26 | $ | 1.74 | ||||||||||
|
Discontinued
operations
|
- | 0.04 | - | (0.08 | ) | (0.04 | ) | |||||||||||||
|
Total
|
$ | 1.47 | $ | 1.32 | $ | 1.16 | $ | 2.18 | $ | 1.70 | ||||||||||
|
Diluted
earnings per
share:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 1.44 | $ | 1.25 | $ | 1.10 | $ | 2.08 | $ | 1.60 | ||||||||||
|
Discontinued
operations
|
- | 0.04 | - | (0.07 | ) | (0.03 | ) | |||||||||||||
|
Total
|
$ | 1.44 | $ | 1.29 | $ | 1.10 | $ | 2.01 | $ | 1.57 | ||||||||||
|
Average
shares
outstanding:
|
||||||||||||||||||||
|
Basic
|
9,223 | 8,538 | 7,122 | 5,284 | 5,266 | |||||||||||||||
|
Diluted
|
9,370 | 8,730 | 7,503 | 5,731 | 5,703 | |||||||||||||||
|
At
or For the Years Ended December
31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Selected
Operating Ratios and
Other Data:
|
||||||||||||||||||||
|
Performance
Ratios:
|
||||||||||||||||||||
|
Return
on average
assets
|
0.60 |
%
|
0.53 |
%
|
0.47 |
%
|
0.89 |
%
|
0.80 |
%
|
||||||||||
|
Return
on average
equity
|
4.69 | 4.40 | 4.19 | 9.06 | 7.28 | |||||||||||||||
|
Interest
rate
spread
|
2.79 | 2.81 | 3.00 | 3.10 | 3.29 | |||||||||||||||
|
Net
interest
margin
|
3.26 | 3.24 | 3.33 | 3.37 | 3.61 | |||||||||||||||
|
Non-interest
income/total net
revenue
|
27.82 | 16.67 | 22.43 | 16.13 | 14.65 | |||||||||||||||
|
Non-interest
expense/average
assets
|
2.90 | 2.31 | 2.81 | 2.25 | 2.53 | |||||||||||||||
|
Dividend
payout
ratio
|
40.28 | 42.92 | 45.06 | 22.02 | 28.24 | |||||||||||||||
|
Bank
Capital
Ratios:
|
||||||||||||||||||||
|
Tier
1 capital to average
assets
|
7.97 | 7.69 | 7.79 | 8.08 | 7.87 | |||||||||||||||
|
Total
capital to risk-weighted
assets
|
10.40 | 10.27 | 11.12 | 12.69 | 12.55 | |||||||||||||||
|
Stockholders’
equity/total
assets
|
13.00 | 12.01 | 12.09 | 10.06 | 10.11 | |||||||||||||||
|
Asset
Quality
Ratios:
|
||||||||||||||||||||
|
Nonperforming
loans/total
loans
|
0.54 | 0.45 | 0.08 | 0.14 | 0.40 | |||||||||||||||
|
Nonperforming
assets/total
assets
|
0.45 | 0.35 | 0.06 | 0.09 | 0.26 | |||||||||||||||
|
Net
loans charged-off/average
total loans
|
0.34 | 0.07 | 0.08 | 0.15 | 0.35 | |||||||||||||||
|
Allowance
for loan losses/total
loans
|
1.14 | 1.14 | 0.92 | 1.13 | 1.13 | |||||||||||||||
|
Allowance
for loan
losses/nonperforming loans
|
2.10 |
x
|
2.55 |
x
|
10.96 |
x
|
8.11 |
x
|
2.80 |
x
|
||||||||||
|
Share
Data:
|
||||||||||||||||||||
|
Book
value per
share
|
$ | 31.15 | $ | 29.63 | $ | 28.81 | $ | 22.43 | $ | 20.87 | ||||||||||
|
Market
price at year
end
|
$ | 26.00 | $ | 33.46 | $ | 33.50 | $ | 37.15 | $ | 36.20 | ||||||||||
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 appropriate available information to establish the
allowance for loan losses, future additions to the allowance may be necessary
if
certain future events occur that cause actual results to differ from the
assumptions used in making the evaluation. 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 assets, 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 acquisitions of
Factory Point Bancorp, Inc. in 2007 and 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 related to insurance contracts 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
Net
income increased by 20% to $13.5 million in 2007, compared to $11.3 million
in
the prior year. Net income per diluted share increased by 12% to $1.44 in 2007
from $1.29 in 2006. Earnings growth was driven primarily by a $3.7 million
increase in net interest income, a $3.6 million decrease in provision for loan
losses and a $12.6 million increase in non-interest income offset by a $16.6
million increase in non-interest expense. The increases in non-interest income
and non-interest expense were due primarily to the acquisition of the five
insurance agencies in the fourth quarter of 2006 and Factory Point in the third
quarter of 2007. All earnings per share references are to diluted shares, and
also reflect the additional shares issued in the Factory Point
acquisition.
Financial
highlights in 2007 included:
|
|
·
|
$10.0
million increase in insurance commissions and fees (from first full
year
of operations from acquired insurance
agencies)
|
|
|
·
|
33%
increase in deposit service fees
|
|
|
·
|
34%
increase in wealth management fees
|
|
|
·
|
14%
increase in loans (primarily from the Factory Point
acquisition)
|
|
|
·
|
32%
non-maturity deposit growth (23% from the Factory Point acquisition
and 9%
from organic growth)
|
Other
highlights in 2007 included:
|
|
·
|
Acquired
Factory Point Bancorp, contributing to a 17% increase in total
assets
|
|
|
·
|
Opened
four new branches in New York increasing our presence to ten branches
in
the New York Capital region
|
|
|
·
|
Introduced
a new brand identity to improve our overall competitive
positioning
|
|
|
·
|
First
full year of operations for the expanded Berkshire Insurance Group
–
contributed $2.5 million in net
income
|
|
|
·
|
Net
interest margin of 3.38% for the fourth quarter of 2007 – highest level in
fourteen quarters
|
|
|
·
|
Solid
asset quality with nonperforming assets at 0.45% of total assets
at
December 31, 2007
|
Results
in 2007 included a third quarter after-tax loss of $2.4 million
($0.25 per share) due to a $3.8 million loss from a balance sheet restructuring,
$1.7 million in expenses from the Factory Point acquisition ($1.1 million
after-tax or $0.11 per share), $1.3 million in other restructuring expenses
($0.8 million after-tax or $0.08 per share), and a $2.5 million provision for
loan losses ($1.5 million after-tax or $0.16 per share) related to a $2.5
million charge-off for one commercial loan that was impacted by borrower
fraud. Collectively, these charges lowered 2007 net income by $5.6
million or $0.61 per share. 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
in
2006 also included a $6.2 million loan loss provision due to an adjustment
of
the loan loss allowance.
COMPARISON
OF FINANCIAL CONDITION AT DECEMBER 31, 2007 AND
2006
Balance
Sheet
Summary. Total assets were $2.51 billion at year-end 2007, increasing by
$364 million (17%). Most categories of assets and liabilities
increased due to the acquisition of Factory Point and organic
growth. In conjunction with the acquisition, the Company restructured
its balance sheet in the third quarter by selling $32 million in securities
and
$50 million in residential mortgage loans. Total loans increased by
$245 million, including acquired Factory Point loans. Organic loan
growth in 2007 totaled $58 million (3%) primarily due to growth of $40 million
(7%) in commercial mortgages.
Total
deposits increased by $301 million in 2007, including acquired Factory Point
deposits. Organic deposit growth in 2007 totaled $25 million (2%) due
to growth of $49 million (6%) in core non-maturity deposit
balances. The Company allowed expensive time deposits to decrease as
loan growth declined, and the Company promoted non-time accounts to take
advantage of more favorable cost and cross sale
characteristics. Total borrowings decreased by $11 million in 2007,
with the increase relating to the Factory Point acquisition being more than
offset by the third quarter balance sheet deleveraging. Stockholders’
equity increased in 2007 primarily due to $63 million recorded in conjunction
with the Factory Point acquisition, including the issuance of 1.91 million
common shares. Goodwill increased by $57 million, primarily due to
the Factory Point acquisition. Total book value per share increased
to $31.15. The ratio of total equity to assets increased to 13.0%
reflecting the benefit of the new shares issued and the balance sheet
deleveraging. Net income of $14 million in 2007 was
primarily used for dividends of $5 million and treasury stock buybacks of $8
million. In the fourth quarter, the Company repurchased 270,000
shares at an average price of $26.55 per share.
Investment
Securities. Total investment securities increased $24.3 million at
year-end 2007 compared to year-end 2006. The Factory Point acquisition increased
investment securities by $68 million. This increase was offset primarily by
the
sale of securities in connection with the deleveraging program, which totaled
$32 million and the sale of $25 million of securities from Factory Point sold
shortly after the merger date. The sale of $25 million of Factory
Point securities was comprised mainly of municipal securities and other debt
securities. These securities were marked to market as of the acquisition date,
and they were sold for an amount that approximated this value. The Company
reinvested approximately $34 million of the proceeds in agency mortgage-backed
securities and municipal bonds with average lives of 2-3 years. The
remaining securities from Factory Point were comprised mainly of conventional
government agency and mortgage-backed securities, and municipal bonds. The
loss
from the securities sold in connection with the deleveraging program was $0.6
million. These securities had an estimated average life of approximately 4
years
and a book yield of 4.75%. As a result of the actions noted above, the Company’s
investment portfolio estimated average life was reduced by approximately three
quarters of a year.
At
year-end 2007, the total investment securities portfolio of $258 million
included $112 million of municipal bonds and obligations, $107 million of
mortgage backed securities, Federal Home Loan Bank stock of $21 million, and
$18
million of other securities which consisted primarily of trust preferred
securities. The fully taxable equivalent yield on investment securities remained
unchanged at 5.6% in the fourth quarter of 2007 compared to the same period
in
2006. This reflected the benefit of deleveraging in the third quarter of
2007.
Loans.
Total loans increased by
$245 million (14%) in 2007. The Factory Point acquisition accounted for $237
million of the increase. Excluding the impact of the $50 million residential
mortgage loan sale, organic loan growth totaled $58 million (3%) due primarily
to growth in commercial mortgages of $40 million, residential construction
loans
of $10 million and home equity loan growth of $6 million. The Company slowed
the
pace of loan growth in 2007 in order to maintain adherence to strong credit
standards and pricing objectives in order to strengthen its net interest
margin.
Residential
mortgages increased $58 million in 2007 including $69 million from the Factory
Point acquisition. As mentioned previously, the Company sold $50 million in
residential mortgages in the third quarter of 2007 as part of a deleverage
program to improve the Company’s interest rate risk profile. The Company has no
subprime lending programs and does not offer Alt-A or other non-conforming
loan
documentation programs. The growth in residential construction lending of $10
million was driven primarily by the Company’s expansion in the Albany, NY
market. The Company will focus on selling long-term fixed rate residential
mortgages and maintaining adjustable rate products in its portfolio in
2008.
Commercial
loans and mortgages increased $151 million (20%) in 2007 including $136 million
from the Factory Point acquisition. Excluding the increase from the Factory
Point acquisition, commercial mortgages increased $40 million organically,
primarily in the Berkshire and Pioneer Valley markets. Commercial loans
decreased by $25 million, primarily from the outplacement of a large credit
in
2007. The Company forecasts solid growth in the commercial loan and mortgage
portfolio for 2008, given the opportunity to book larger commercial real estate
and commercial loans in Vermont as a result of the Factory Point
acquisition, penetration in the expanding Albany market and our dominant
position in the Berkshire and Pioneer Valley region.
Consumer
loans increased $36 million (10%) in 2007 including $32 million from the Factory
Point acquisition. Indirect automobile lending growth remained relatively flat
and home equity lines of credit experienced moderate growth from pricing
promotions. Loans with repricings over five years totaled $518 million at
year-end 2007, which was an increase of $17 million over the $501 million total
at year-end 2006. The average yield on loans remained unchanged at 6.7% in
the
fourth quarter of 2007 compared to the same period in 2006.
Asset
Quality.
The Company’s asset quality measures remained solid at year-end 2007, despite
softening economic conditions taking hold in the second half of 2007.
Nonperforming loans increased to $10.5 million at year-end 2007 (0.54% of total
loans) compared to $7.6 million at year-end 2006 (0.45% of total loans).
Nonaccruing commercial business loans decreased from $7.2 million at year-end
2006 to $4.2 million at year-end 2007, primarily due to charge-offs of $4.0
million related to one commercial loan stemming from borrower fraud. Offsetting
this decrease in nonaccruing commercial business loans was a $4.9 million
increase in nonaccruing commercial mortgages. The increase in nonaccruing
commercial mortgages resulted mainly from the classification of one large
commercial mortgage totaling $2.6 million in the third quarter of 2007 and
several smaller credits placed on nonaccrual during the year.
In
addition to the nonperforming loans discussed above, the Company has identified
approximately $23.1 million in potential problem loans at year-end 2007 as
compared to $16.2 million at year-end 2006. Potential problem loans are loans
that are currently performing, but where known information about possible credit
problems of the related borrowers causes management to have doubts as to the
ability of such borrowers to comply with the present loan repayment terms and
which may result in disclosure of such loans as nonperforming at some time
in
the future. Potential problem loans are typically loans that are performing
but
are classified by the Company’s loan rating system as “substandard.” At December
31, 2007 and 2006, potential problem loans primarily consisted of commercial
business loans and commercial mortgages. At year-end 2007, there were six
potential problem loans that exceeded $1.0 million, totaling $14.2 million
in
aggregate compared to six potential problem loans exceeding $1.0 million,
totaling $10.0 million at year-end 2006. Management cannot predict the extent
to
which economic conditions may worsen or other factors which may impact borrowers
and the potential problem loans. Accordingly, there can be no assurance that
other loans will not become 90 days or more past due, be placed on nonaccrual,
become restructured, or require increased allowance coverage and provision
for
loan losses.
As
a
result of the softening economic conditions in 2007, the Company did experience
a modest increase in nonaccruing residential mortgages and consumer loans
(mostly home equity loans). Nonaccruing residential mortgages totaled $0.7
million and nonaccruing consumer loans totaled $0.4 million at year-end 2007.
Other real estate owned totaled $0.9 million at year-end 2007 and was comprised
of two residential mortgage properties.
Loan
Loss
Allowance. The determination of the allowance for loan losses is a
critical accounting estimate. The Company’s methodologies for determining and
allocating the allowance for loan losses focus on ongoing reviews of larger
individual loans, historical net charge-offs, delinquencies in the loan
portfolio, the level of impaired and non-performing assets, values of underlying
loan collateral, the overall risk characteristics of the portfolios, changes
in
composition or size of the portfolio, geographic location, prevailing economic
conditions and other relevant factors. The various factors used in the
methodologies are reviewed on a periodic basis.
The
Company considers the allowance for loan losses of $22.1 million appropriate
to
cover losses inherent in the loan portfolio as of December 31, 2007.
However, no assurance can be given that the Company will not, in any particular
period, sustain loan losses that are sizable in relation to the amount reserved,
or that subsequent evaluations of the loan portfolio, in light of factors then
prevailing, including economic conditions, the Company’s ongoing credit review
process or regulatory requirements, will not require significant changes in
the
allowance for loan losses. Among other factors, a protracted economic slowdown
and/or a decline in commercial or residential real estate values in the
Company’s markets may have an adverse impact on the current adequacy of the
allowance for loan losses by increasing credit risk and the risk of potential
loss. The ratio of the loan loss allowance to total loans was 1.14% at year-end
2007 and year-end 2006.
The
total
allowance for loan losses is generally available to absorb losses from any
segment of the portfolio. The allocation of the Company’s allowance for loan
losses disclosed in a table on page 12 of this document is subject to change
based on the changes in criteria used to evaluate the allowance and is not
necessarily indicative of the trend of future losses in any particular
portfolio.
In
2006,
the Company refined its allowance for loan losses allocation methodology. In
addition, management determined in the third quarter of 2006, loan losses would
increase above negligible levels of recent years due to signs of an economic
slowdown and increasing risk factors in the commercial and real estate loan
portfolios. These changes resulted in a third quarter 2006 provision for loan
losses of $5.5 million to increase general pool reserve levels due to a higher
percentage of inherent losses in the loan portfolio.
Other
Assets.
The net book value of premises increased $9.7 million due primarily
to
the Factory Point acquisition and the de-novo branching program in the Company’s
New York market. Goodwill and other intangible assets increased $61.1 million
mainly from the acquisition of Factory Point. All other assets
increased primarily due to equity investments in community and historic
development entities which provide transferable tax credits utilized by the
Company and an increase in current income tax receivable and net deferred tax
assets.
Deposits
and
Borrowings. Total deposits increased by $300.6 million (20%) in 2007. The
Factory Point acquisition resulted in $274 million of this increase. Organic
non-maturity deposit growth was $72 million and time deposits decreased $45
million. Deposit growth was centered in higher yielding money market
accounts and demand deposits. Time deposits continued to decrease in 2007,
as
the Company has shifted its focus, generating growth in demand deposits, NOW
accounts and money market accounts. 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.
In 2007, the Bank unveiled its “I’m so excited” branding initiative and
implemented new goals and incentives for increasing the pool of customers and
products. The de novo branch program in New York generated $29 million in
deposit growth, with total New York deposits increasing to $131 million at
year-end 2007.
Total
borrowings decreased by $11 million during 2007 due to the reduction of FHLBB
borrowings with $82 million in funds provided from the deleveraging at the
end
of the third quarter offset by the assumption of $34 million in borrowings
from
Factory Point and a $20 million increase in borrowings at the holding company
to
fund the cash portion of the Factory Point acquisition and stock repurchases.
During 2007, the Bank borrowed $65 million in FHLBB term advances over one
year.
The average maturity of these term borrowings was 4.8 years and they were used
to fund growth of intermediate term loans. Most of these advances were bullet
advances without optional calls. Total year-end borrowings with
maturities over three years increased to $80 million from $68 million. FHLBB
Borrowings maturing under a year increased slightly to $124 million at year-end
2007 from $122 million at the prior year-end. Borrowings in 2007 also included
$35 million in short term note payables at the holding company which were used
to provide funding for the Factory Point acquisition and stock repurchases
mentioned previously. The cost of borrowings increased to 4.7%
in
the
fourth quarter of 2007 from 4.4% in the same quarter of 2006. This cost rose
primarily due to extending term borrowings and the cost of holding company
short-term note payables.
Equity.
Stockholders’ equity increased in 2007 primarily due to $63 million recorded in
conjunction with the Factory Point acquisition, including the issuance of 1.91
million common shares. Total book value per share increased to
$31.15. The ratio of total equity to assets increased to 13.0%
reflecting the benefit of the new shares issued and the balance sheet
deleveraging. Net income of $14 million in 2007 was primarily used
for dividends of $5 million and treasury stock buybacks of $8 million. There
were 272,600 shares of treasury stock repurchased at a total cost of $7.8
million ($26.52 per share on average), and there were 138,548 shares issued
for
option exercises and stock grants.
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 was 10.4% at year-end 2007
compared to 10.3% at year-end 2006 Because the Bank’s dividends exceeded
retained earnings from recent operations in accordance with certain regulatory
measurements in 2006, the Bank’s dividends to the Company required specific
regulatory approval. Such dividends in the immediate future would also require
specific regulatory approval. The Bank received regulatory approval to pay
$10
million in dividends to the Company in 2007. For 2008,
the
Bank can declare aggregate
additional dividends of $9 million without obtaining regulatory
approval.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Net
Income.
Net income increased by 20% to $13.5 million in 2007, compared to $11.3
million in the prior year. Net income in 2007 included a third quarter after-tax
charge of $2.4 million ($0.25 per share) due to a $3.8 million charge from
a
balance sheet restructuring, $1.7 million in expenses from the Factory Point
acquisition ($1.1 million after-tax), $1.3 million in other restructuring
expenses ($0.8 million after-tax), and a $2.5 million provision for loan losses
($1.5 million after-tax) related to a $2.5 million charge-off for one commercial
loan that was impacted by borrower fraud. Collectively, these charges
lowered 2007 net income by $5.6 million. Net income in 2007
also
included total costs of $4.2 million for the New York de novo branch program
and
the costs of the Company’s branding program, which the Company views as an
investment in franchise expansion and brand awareness. The above charges are
not
viewed as related to usual operations. The return on average assets for the
year
2007 was 0.60% and the return on average equity was 4.69% for the
year.
Total
Revenue.
Total revenue consists of net interest income and non-interest income.
Total revenue increased by $16.3 million (23%) in 2007. This increase was due
primarily to a full year of insurance commissions and fees from Berkshire
Insurance Group, acquisitions, de novo expansion, and organic
growth.
Net
Interest
Income. Net interest income increased by $3.7 million (6%) to $63.9
million in 2007 compared to 2006. The increase in net interest income
resulted primarily from an increase in average earning assets of 6% due to
higher loan balances (primarily from the Factory Point acquisition and organic
loan growth). The net interest margin improved by 2 basis points (“bp”) to 3.26%
for 2007 compared to 3.24% in 2006. The Company improved its net interest margin
during the second half of 2007 despite the difficult market conditions. As
previously mentioned, the Company restructured the balance sheet in the third
quarter of 2007 by selling $32 million in investment securities and $50 million
in residential mortgages and paid down $82 million in borrowings. In addition,
the Company acquired Factory Point which had a net interest margin in excess
of
4% and implemented new pricing strategies. These actions led to the improvement
in the net interest margin increasing to 3.38% in the fourth quarter of 2007
from 3.15% for the second quarter of 2007.
The
yield
on earning assets increased 36 bp to 6.61% in 2007 compared to 2006. This
increase was due primarily to the deleveraging transactions in 2006 and 2007
as
well as an increase in yield on loan originations and purchases of new
securities during an increasing rate environment that was prevalent for 2006
and
most of 2007. The average rate paid for interest bearing liabilities increased
38 bp to 3.82% in 2007 compared to 2006. The increase in the rate paid on
interest bearing liabilities can be attributed to a higher average federal
funds
rate in 2007 compared to 2006. The increase in average balances on interest
earning assets and interest bearing liabilities was impacted by the Factory
Point acquisition and offset somewhat by the third quarter balance sheet
restructuring.
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 $4.3 million for the
year 2007, compared to $7.9 million in 2006. The provision for loan
losses for 2007 reflected a $2.5 million charge-off related to a commercial
credit with borrower fraud. The total charge-offs in 2007 related to this
commercial credit with borrower fraud totaled $4.0 million. Total net loan
charge-offs were $6.0 million in 2007. Excluding the $4.0 million charge-off
mentioned above, all other net charge-offs totaled $2.0 million (0.11% of
average loans), compared to net charge-offs of $1.1 million (0.07% of average
loans) in 2006. The decrease in the provision for loan losses in 2007
from 2006 was due primarily to the previously mentioned $5.5 million charge
in
2006 for increases in general pool reserve levels due to management’s evaluation
of a higher percentage of inherent losses in the loan portfolio at that
time.
Non-Interest
Income. Non-interest income increased $12.6 million in 2007 to $24.6
million from $12.0 million in 2006. The increase was driven primarily by a
$10.0
million increase in insurance commissions and fees from a full year of activity
of Berkshire Insurance Group as well as increases in deposit service fees and
wealth management. Deposit service fees increased $1.9 million (33%) in 2007
from growth in core deposit accounts, pricing increases and the Factory Point
acquisition. Wealth management fees increased $1.1 million (34%) in 2007 from
organic growth and the Factory Point acquisition. The Company will continue
to
focus on diversifying and expanding its sources of non-interest income.
Non-interest income included $3.8 million in losses for the previously mentioned
deleveraging in the third quarter of 2007 and $3.1 million in losses from a
balance sheet restructuring in the third quarter of 2006.
Non-Interest
Expense. Non-interest expense increased by $16.6 million (34%) in 2007
compared to 2006. For 2007, additional expense from the acquired
insurance agencies totaled $6.5 million, merger, integration and restructuring
expenses increased $1.4 million, marketing expenses increased $1.1 million
from
the branding campaign and acquisitions, amortization of intangible assets
increased $1.0 million from acquisitions, and expenses related to the de novo
branch program increased by $1.5 million to $3.4 million in 2007, compared
to
$1.9 million in 2006. Berkshire views the de novo branch costs as an
investment in franchise expansion in the attractive Albany and Tech Valley,
New
York area. The remaining $5.1 million increase (10%) in total non-interest
expense was in all
other non-interest expense related to higher overhead for the Company’s
transition into a regional bank, together with initiatives to develop sales
and
products which resulted in increases in personnel, data processing and
professional fees.
Income
Tax
Expense. The effective tax rate for 2007 was 27.9%. The
effective tax rate in 2006 was 30.3%. The decrease in the effective tax rate
resulted mainly from increases in tax credits and tax-exempt income in
2007.
Results
of
Segment Operations. The Company acquired
five
affiliated insurance agencies in the fourth quarter of 2006. The
Company had not previously established operating segments for the purposes
of
financial statement disclosure. Due to the change in the composition
of the Company’s business as a result of the insurance agency acquisitions, the
Company has designated two operating segments for financial statement
disclosure: banking and insurance. Additional information about the
Company’s accounting for segment operations is contained in Note 17 to the
financial statements contained in Item 8 of this 10-K.
One
of
the Company's strategies is to emphasize non-depository products and increase
fee income to diversify revenues, enhance customer benefit, and reduce reliance
on net interest income. The Company's acquisition of insurance agencies in
the
fourth quarter of 2006 was a significant step in implementing this
strategy. Net income of the insurance segment for 2007 increased by
$2.2 million due to the impact of the acquired insurance agencies and
earnings due to the impact of annual contingency revenues which are received
in
the first half of the year. Net income for the banking segment for
2007 increased $1.1 million due to increases in net interest income (primarily
due to growth in earning assets and the Factory Point acquisition) and
non-interest income (increases in deposit service and wealth management fees)
as
well as a decrease in the provision for loan losses offset by an increase in
non-interest expense (driven by the de novo branches, marketing costs and the
Factory Point merger costs).
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 of changes (after-tax) in the unrealized
market gains and losses of investment securities available for sale and the
net
gain/(loss) on derivative instruments used as cash flow hedges. The Company
recorded comprehensive income of $14.7 million in 2007 compared to $13.6 million
in 2006.
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 downward 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 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 pro forma basis, assuming that the agencies had
been acquired at the beginning of 2006 and excluding securities gains and
losses, pro forma non-interest income measured 29% of total 2006 pro forma
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 average 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.
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 presented. Tax exempt interest
revenue is shown on a tax-equivalent basis for proper comparison using a
statutory, federal income tax rate of 35%.
| 2007 |
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
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)
|
$ | 1,789.0 | $ | 120.1 | 6.71 | % | $ | 1,547.3 | $ | 100.8 | 6.51 | % | $ | 1,182.3 | $ | 70.1 | 5.93 | % | ||||||||||||||||||
|
Investment
securities (2)
|
235.2 | 13.9 | 5.91 | 370.8 | 19.1 | 5.15 | 413.0 | 19.2 | 4.64 | |||||||||||||||||||||||||||
|
Short-term
investments
|
4.7 | 0.1 | 3.02 | 4.9 | 0.3 | 6.12 | 2.8 | 0.1 | 3.30 | |||||||||||||||||||||||||||
|
Total
interest-earning assets
|
2,028.9 | 134.1 | 6.61 | 1,923.0 | 120.2 | 6.25 | 1,598.1 | 89.4 | 5.59 | |||||||||||||||||||||||||||
|
Intangible
assets
|
138.3 | 103.2 | 62.0 | |||||||||||||||||||||||||||||||||
|
Other
non-interest earning assets
|
95.2 | 90.1 | 85.1 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 2,262.4 | $ | 2,116.3 | $ | 1,745.2 | ||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
NOW
accounts
|
$ | 157.9 | 2.3 | 1.46 | % | $ | 137.8 | 1.5 | 1.09 | % | $ | 121.7 | 0.5 | 0.39 | % | |||||||||||||||||||||
|
Money
market accounts
|
339.2 | 12.2 | 3.60 | 284.4 | 9.7 | 3.41 | 209.0 | 4.4 | 2.13 | |||||||||||||||||||||||||||
|
Savings
accounts
|
201.6 | 2.2 | 1.09 | 210.6 | 1.9 | 0.90 | 205.8 | 1.8 | 0.90 | |||||||||||||||||||||||||||
|
Certificates
of deposit
|
714.1 | 33.9 | 4.75 | 651.7 | 27.9 | 4.28 | 445.2 | 14.3 | 3.20 | |||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
1,412.8 | 50.6 | 3.58 | 1,284.5 | 41.0 | 3.19 | 981.7 | 21.0 | 2.14 | |||||||||||||||||||||||||||
|
Borrowings
|
365.8 | 17.4 | 4.76 | 394.4 | 16.8 | 4.26 | 410.8 | 15.1 | 3.67 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,778.6 | 68.0 | 3.82 | 1,678.9 | 57.8 | 3.44 | 1,392.5 | 36.1 | 2.59 | |||||||||||||||||||||||||||
|
Non-interest-bearing
demand
|
||||||||||||||||||||||||||||||||||||
|
deposits
|
190.4 | 174.5 | 149.6 | |||||||||||||||||||||||||||||||||
|
Other
non-interest-bearing
|
||||||||||||||||||||||||||||||||||||
|
liabilities
|
5.4 | 7.2 | 6.6 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
1,974.4 | 1,860.6 | 1,548.7 | |||||||||||||||||||||||||||||||||
|
Equity
|
288.0 | 255.7 | 196.5 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and equity
|
$ | 2,262.4 | $ | 2,116.3 | $ | 1,745.2 | ||||||||||||||||||||||||||||||
|
Net
interest-earning assets
|
$ | 250.3 | $ | 244.1 | $ | 205.6 | ||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 66.1 | $ | 62.4 | $ | 53.3 | ||||||||||||||||||||||||||||||
|
Interest
rate spread
|
2.79 | % | 2.81 | % | 3.00 | % | ||||||||||||||||||||||||||||||
|
Net
interest margin
|
3.26 | % | 3.24 | % | 3.33 | % | ||||||||||||||||||||||||||||||
|
Interest-earning
assets/interest-bearing liabilities
|
114.07 | % | 114.54 | % | 114.76 | % | ||||||||||||||||||||||||||||||
|
Fully
taxable equivalent adjustment
|
$ | 2.2 | $ | 2.1 | $ | 1.6 | ||||||||||||||||||||||||||||||
|
(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. Tax exempt interest revenue is shown
on
a tax-equivalent basis for proper comparison using a statutory, federal income
tax rate of 35%. 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.
|
2007
Compared with
2006
|
2006
Compared with
2005
|
|||||||||||||||||||||||
|
Increase
(Decrease) Due
to
|
Increase
(Decrease) Due
to
|
|||||||||||||||||||||||
|
(In
thousands)
|
Rate
|
Volume
|
Net
|
Rate
|
Volume
|
Net
|
||||||||||||||||||
|
Interest
income:
|
||||||||||||||||||||||||
|
Loans
|
$ | 2,944 | $ | 16,280 | $ | 19,224 | $ | 7,355 | $ | 23,378 | $ | 30,733 | ||||||||||||
|
Investment
securities
|
2,548 | (7,714 | ) | (5,166 | ) | 1,970 | (2,062 | ) | (92 | ) | ||||||||||||||
|
Short-term
investments
|
(103 | ) | (11 | ) | (114 | ) | 40 | 106 | 146 | |||||||||||||||
|
Total
interest
income
|
5,389 | 8,555 | 13,944 | 9,365 | 21,422 | 30,787 | ||||||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||||||
|
NOW
accounts
|
616 | 235 | 851 | 924 | 70 | 994 | ||||||||||||||||||
|
Money
market
accounts
|
601 | 1,953 | 2,554 | 3,272 | 1,970 | 5,242 | ||||||||||||||||||
|
Savings
accounts
|
442 | (77 | ) | 365 | (29 | ) | 42 | 13 | ||||||||||||||||
|
Certificates
of
deposit
|
2,996 | 2,812 | 5,808 | 5,813 | 7,934 | 13,747 | ||||||||||||||||||
|
Total
deposits
|
4,655 | 4,923 | 9,578 | 9,980 | 10,016 | 19,996 | ||||||||||||||||||
|
Borrowings
|
1,926 | (1,273 | ) | 653 | 2,319 | (619 | ) | 1,700 | ||||||||||||||||
|
Total
interest
expense
|
6,581 | 3,650 | 10,231 | 12,299 | 9,397 | 21,696 | ||||||||||||||||||
|
Change
in net interest
income
|
$ | (1,192 | ) | $ | 4,905 | $ | 3,713 | $ | (2,934 | ) | $ | 12,025 | $ | 9,091 | ||||||||||
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 and in a timely manner.
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
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 eighth 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 2007. 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 2007.
Contractual
Obligations. The year-end 2007 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
(1)
|
$ | 299,664 | $ | 124,364 | $ | 95,525 | $ | 55,610 | $ | 24,165 | ||||||||||
|
Junior
subordinated
debentures
|
15,464 | - | - | - | 15,464 | |||||||||||||||
|
Operating
lease obligations
(2)
|
32,286 | 2,454 | 4,692 | 4,515 | 20,625 | |||||||||||||||
|
Note
payable
|
35,000 | 15,000 | 20,000 | - | - | |||||||||||||||
|
Purchase
obligations
(3)
|
4,036 | 1,441 | 1,743 | 852 | - | |||||||||||||||
|
Total
Contractual
Obligations
|
$ | 386,450 | $ | 143,259 | $ | 121,960 | $ | 60,977 | $ | 60,254 | ||||||||||
|
(1)
Consists of borrowings from
the Federal Home Loan Bank. The maturities extend through 2022
and the
rates vary by borrowing.
|
|
(2)
Consists of leases of four
Bank offices through 2030.
|
|
(3)
Consists of obligations with
multiple vendors to purchase a broad range of services and contractual
estimates of capital
|
|
renovations
to Bank
buildings.
|
Further
information about borrowings and lease obligations is contained in Notes 10
and
12 to the consolidated 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. In January 2008, the Company entered into interest rate swaps related
to $60 million of FHLBB borrowings. The interest rate swaps are for terms up
to
10 years and require the Company to receive a floating rate of interest tied
to
3 month LIBOR and pay a fixed rate at 4.53% based on the $60 million notional
amount. A further presentation of the Company’s off-balance sheet
arrangements presented is in note 12, “Commitments, Contingencies, and
Off-Balance Sheet Activities” in the notes to the financial
statements.
For
2007,
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 operations 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
consolidated 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. Berkshire
Bank also has used off-balance sheet derivative instruments in the past and
may
do so in the future in order to enhance its interest rate risk position and
manage its balance sheet.
Quantitative
Aspects of Market Risk. Berkshire Hills uses a simulation model to
measure the potential change in net interest income that would result from
both
an instantaneous or ramped increase or decrease of market interest rates
assuming a parallel shift along the entire yield curve. While
emphasis has previously been placed on the shocked model, in recent years,
the
Company has come to stress the importance of the ramped interest rate scenario
as management believes this more accurately reflects actions that will be taken
by the Federal Reserve Bank and the path of interest
rates. Loans, deposits and borrowings were expected to reprice
at the 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. No material changes have been made to the
methodologies used in the model.
|
Change
in
|
|||||||||||||||||||||
|
Interest
Rates-Basis
|
Net
Interest
|
1
- 12
Months
|
13
-
24 Months
|
||||||||||||||||||
|
Points
(Rate
Ramp)
|
Amount
|
$
Change
|
%
Change
|
$
Change
|
%
Change
|
||||||||||||||||
|
(Dollars
in
thousands)
|
|||||||||||||||||||||
|
At
December 31,
2007
|
|||||||||||||||||||||
| + 200 | $ | 56,317 | $ | (1,373 | ) | (1.88 | ) % | $ | (1,704 | ) | (2.31 | ) % | |||||||||
|
+
100
|
|
58,430 | (732 | ) | (1.00 | ) | (649 | ) | (0.88 | ) | |||||||||||
|
-
100
|
60,944 | 428 | 0.59 | (119 | ) | (0.16 | ) | ||||||||||||||
|
-
200
|
59,078 | 101 | 0.14 | (1,971 | ) | (2.67 | ) | ||||||||||||||
|
At
December 31,
2006
|
|||||||||||||||||||||
|
+
200
|
$ | 60,226 | $ | (1,402 | ) | (2.26 | ) % | $ | (3,380 | ) | (5.31 | ) % | |||||||||
|
+
100
|
60,982 | (415 | ) | (0.67 | ) | (1,255 | ) | (1.97 | ) | ||||||||||||
|
-
100
|
62,765 | 238 | 0.38 | 453 | 0.71 | ||||||||||||||||
|
-
200
|
60,057 | (3 | ) | (0.01 | ) | (1,188 | ) | (1.87 | ) | ||||||||||||
At
year-end 2007, the Company displayed an improved, but still modestly negative
income sensitivity to higher interest rates (liability sensitivity) than it
did
at the end of 2006. The primary factors for the decrease in liability
sensitivity has to do with the mortgage and securities deleverage that took
place at the end of the third quarter and the execution of $60 million pay
fixed- receive floating swaps that the Bank committed to on the last day of
2007. These transactions were able to offset items such as the
acquisition of Factory Point National Bank and the emphasis on growing money
market type core accounts that would have increased the Bank’s liability
sensitive position. Berkshire believes that growing money market
deposit accounts is an effective strategy to grow customer relationships and
increase fee revenue and as such has reduced the emphasis on short-term high
rate certificates of deposit. Berkshire Bank also realizes that
these money market accounts could potentially be even more rate sensitive than
the certificates and management will closely monitor this potential impact
to
the Bank’s interest rate risk position and may use longer term FHLBB advances
and interest rate swaps to hedge this risk.
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%. 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
2007 was the steepening of the yield curve in the second half of the year.
Assumption changes in 2007 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
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, 2007, 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, 2007 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) 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 Company’s financial
statements.
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.
The
effectiveness of the Company’s internal control
over
financial reporting as of December 31, 2007 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
the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007.
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, 2007 and 2006, 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,
2007. We also have audited Berkshire Hills Bancorp, Inc.’s internal
control over financial reporting as of December 31, 2007, 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 included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and an opinion on 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 audits 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, assessing the risk that a material weakness exists, and testing
and
evaluating the design and operating effectiveness of internal control based
on
the assessed risk. Our audits also included 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, 2007 and 2006, and the results of
their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion,
Berkshire Hills Bancorp, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, 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
12,
2008
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
(In
thousands, except share
data)
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Total
cash and cash
equivalents
|
$ | 41,142 | $ | 30,985 | ||||
|
Securities
available for sale, at
fair value
|
219,041 | 194,206 | ||||||
|
Securities
held to maturity (fair
values of $39,689 and $39,686)
|
39,456 | 39,968 | ||||||
|
Residential
mortgages
|
657,045 | 599,273 | ||||||
|
Commercial
mortgages
|
704,764 | 566,339 | ||||||
|
Commercial
business
loans
|
203,564 | 190,493 | ||||||
|
Consumer
loans
|
378,643 | 342,882 | ||||||
|
Total
loans
|
1,944,016 | 1,698,987 | ||||||
|
Less: Allowance
for
loan losses
|
(22,116 | ) | (19,370 | ) | ||||
|
Net
loans
|
1,921,900 | 1,679,617 | ||||||
|
Premises
and equipment,
net
|
38,806 | 29,130 | ||||||
|
Goodwill
|
161,632 | 104,531 | ||||||
|
Other
intangible
assets
|
20,820 | 16,810 | ||||||
|
Cash
surrender value of life
insurance
|
35,316 | 30,338 | ||||||
|
Other
assets
|
35,319 | 24,057 | ||||||
|
Total
assets
|
$ | 2,513,432 | $ | 2,149,642 | ||||
|
Liabilities
and stockholders’
equity
|
||||||||
|
Liabilities
|
||||||||
|
Demand
deposits
|
$ | 231,994 | $ | 178,109 | ||||
|
NOW
deposits
|
213,150 | 153,087 | ||||||
|
Money
market
deposits
|
439,341 | 297,155 | ||||||
|
Savings
deposits
|
210,186 | 202,213 | ||||||
|
Total
non-maturity
deposits
|
1,094,671 | 830,564 | ||||||
|
Brokered
time
deposits
|
21,497 | 41,742 | ||||||
|
Other
time
deposits
|
706,395 | 649,632 | ||||||
|
Total
time
deposits
|
727,892 | 691,374 | ||||||
|
Total
deposits
|
1,822,563 | 1,521,938 | ||||||
|
Borrowings
|
334,474 | 345,005 | ||||||
|
Junior
subordinated
debentures
|
15,464 | 15,464 | ||||||
|
Other
liabilities
|
14,094 | 9,074 | ||||||
|
Total
liabilities
|
2,186,595 | 1,891,481 | ||||||
|
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;
|
||||||||
|
12,513,825
shares issued in 2007
and 10,600,472 in 2006)
|
125 | 106 | ||||||
|
Additional
paid-in
capital
|
266,134 | 200,975 | ||||||
|
Unearned
compensation
|
(2,009 | ) | (1,896 | ) | ||||
|
Retained
earnings
|
113,387 | 105,731 | ||||||
|
Accumulated
other comprehensive
income
|
1,217 | 92 | ||||||
|
Treasury
stock, at cost (2,021,120
shares in 2007 and 1,887,068 shares in 2006)
|
(52,017 | ) | (46,847 | ) | ||||
|
Total
stockholders'
equity
|
326,837 | 258,161 | ||||||
|
Total
liabilities and
stockholders' equity
|
$ | 2,513,432 | $ | 2,149,642 | ||||
|
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)
|
2007
|
2006
|
2005
|
|||||||||
|
Interest
and dividend
income
|
||||||||||||
|
Loans
|
$ | 120,059 | $ | 100,836 | $ | 70,103 | ||||||
|
Securities
|
11,743 | 16,957 | 17,517 | |||||||||
|
Short-term
investments
|
142 | 258 | 112 | |||||||||
|
Total
interest and dividend
income
|
131,944 | 118,051 | 87,732 | |||||||||
|
Interest
expense
|
||||||||||||
|
Deposits
|
50,597 | 41,044 | 21,048 | |||||||||
|
Borrowings
and junior subordinated
debentures
|
17,422 | 16,767 | 15,067 | |||||||||
|
Total
interest
expense
|
68,019 | 57,811 | 36,115 | |||||||||
|
Net
interest
income
|
63,925 | 60,240 | 51,617 | |||||||||
|
Non-interest
income
|
||||||||||||
|
Deposit
service
fees
|
7,747 | 5,803 | 4,539 | |||||||||
|
Wealth
management
fees
|
4,407 | 3,287 | 2,742 | |||||||||
|
Insurance
commissions and
fees
|
13,728 | 3,757 | 1,343 | |||||||||
|
Loan
service
fees
|
772 | 692 | 749 | |||||||||
|
(Loss)
gain on sales of
securities, net
|
(591 | ) | (3,130 | ) | 4,283 | |||||||
|
Loss
on sale of
loans
|
(1,950 | ) | - | - | ||||||||
|
Loss
on prepayment of
borrowings
|
(1,180 | ) | - | - | ||||||||
|
Other
|
1,710 | 1,639 | 1,267 | |||||||||
|
Total
non-interest
income
|
24,643 | 12,048 | 14,923 | |||||||||
|
Total
revenue
|
88,568 | 72,288 | 66,540 | |||||||||
|
Provision
for loan
losses
|
4,300 | 7,860 | 1,313 | |||||||||
|
Non-interest
expense
|
||||||||||||
|
Salaries
and employee
benefits
|
34,018 | 24,708 | 20,281 | |||||||||
|
Termination
of employee stock
ownership plan
|
- | - | 8,836 | |||||||||
|
Occupancy
and
equipment
|
9,945 | 7,699 | 5,798 | |||||||||
|
Marketing,
data processing, and
professional services
|
8,598 | 6,648 | 4,881 | |||||||||
|
Merger,
integration and
restructuring
|
2,956 | 1,510 | 2,142 | |||||||||
|
Amortization
of intangible
assets
|
3,058 | 2,035 | 1,140 | |||||||||
|
Other
|
6,919 | 6,268 | 5,920 | |||||||||
|
Total
non-interest
expense
|
65,494 | 48,868 | 48,998 | |||||||||
|
Income
from continuing operations
before income taxes
|
18,774 | 15,560 | 16,229 | |||||||||
|
Income
tax
expense
|
5,239 | 4,668 | 8,003 | |||||||||
|
Net
income from continuing
operations
|
13,535 | 10,892 | 8,226 | |||||||||
|
Income
from discontinued
operations before income taxes
|
- | 606 | - | |||||||||
|
Income
tax
expense
|
- | 235 | - | |||||||||
|
Net
income from discontinued
operations
|
- | 371 | - | |||||||||
|
Net
income
|
$ | 13,535 | $ | 11,263 | $ | 8,226 | ||||||
|
Basic
earnings per
share
|
||||||||||||
|
Continuing
operations
|
$ | 1.47 | $ | 1.28 | $ | 1.16 | ||||||
|
Discontinued
operations
|
- | 0.04 | - | |||||||||
|
Total
|
$ | 1.47 | $ | 1.32 | $ | 1.16 | ||||||
|
Diluted
earnings per
share
|
||||||||||||
|
Continuing
operations
|
$ | 1.44 | $ | 1.25 | $ | 1.10 | ||||||
|
Discontinued
operations
|
- | 0.04 | - | |||||||||
|
Total
|
$ | 1.44 | $ | 1.29 | $ | 1.10 | ||||||
|
Weighted
average shares
outstanding
|
||||||||||||
|
Basic
|
9,223 | 8,538 | 7,122 | |||||||||
|
Diluted
|
9,370 | 8,730 | 7,503 | |||||||||
|
The
accompanying notes are an
integral part of these consolidated financial
statements.
|
||||||||||||
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2007, 2006 and 2005
|
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,
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/transferred
|
(76 | ) | - | - | - | - | - | (2,876 | ) | (2,876 | ) | |||||||||||||||||||||
|
Exercise
of stock
options
|
197 | - | - | - | (127 | ) | - | 3,556 | 3,429 | |||||||||||||||||||||||
|
Reissuance
of treasury stock -
other
|
53 | - | 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 | ||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 13,535 | - | - | 13,535 | ||||||||||||||||||||||||
|
Other
net comprehensive
income
|
- | - | - | - | - | 1,125 | - | 1,125 | ||||||||||||||||||||||||
|
Total
comprehensive
income
|
14,660 | |||||||||||||||||||||||||||||||
|
Acquisition
of Factory Point
Bancorp, Inc.
|
1,913 | 19 | 63,331 | - | - | - | - | 63,350 | ||||||||||||||||||||||||
|
Cash
dividends declared ($0.58 per
share)
|
- | - | - | - | (5,398 | ) | - | - | (5,398 | ) | ||||||||||||||||||||||
|
Treasury
stock
purchased
|
(290 | ) | - | - | - | - | - | (7,822 | ) | (7,822 | ) | |||||||||||||||||||||
|
Forfeited
shares
|
(41 | ) | - | (36 | ) | - | - | - | (1,112 | ) | (1,148 | ) | ||||||||||||||||||||
|
Exercise
of stock
options
|
132 | - | - | - | (481 | ) | - | 2,598 | 2,117 | |||||||||||||||||||||||
|
Reissuance
of treasury stock -
other
|
66 | - | 1,001 | - | - | - | 1,166 | 2,167 | ||||||||||||||||||||||||
|
Stock-based
compensation
|
- | - | 187 | - | - | - | - | 187 | ||||||||||||||||||||||||
|
Tax
benefit from stock
compensation
|
- | - | 676 | - | - | - | - | 676 | ||||||||||||||||||||||||
|
Change
in unearned
compensation
|
- | - | - | (113 | ) | - | - | - | (113 | ) | ||||||||||||||||||||||
|
Balance
at December 31,
2007
|
10,493 | $ | 125 | $ | 266,134 | $ | (2,009 | ) | $ | 113,387 | $ | 1,217 | $ | (52,017 | ) | $ | 326,837 | |||||||||||||||
|
The
accompanying notes are an
integral part of these consolidated financial
statements.
|
||||||||||||||||||||||||||||||||
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2007, 2006 and 2005
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Cash
flows from operating
activities:
|
||||||||||||
|
Continuing
operations:
|
||||||||||||
|
Net
income
|
$ | 13,535 | $ | 10,892 | $ | 8,226 | ||||||
|
Adjustments
to reconcile net
income to net cash provided
|
||||||||||||
|
by
continuing operating
activities:
|
||||||||||||
|
Provision
for loan
losses
|
4,300 | 7,860 | 1,313 | |||||||||
|
Net
amortizaton of
securities
|
250 | 943 | 1,349 | |||||||||
|
Net
loan amortization and
deferrals
|
1,070 | 2,981 | 312 | |||||||||
|
Premises
depreciation and
amortization expense
|
3,404 | 2,831 | 2,268 | |||||||||
|
Stock-based
compensation and ESOP
expense
|
1,604 | 1,338 | 10,396 | |||||||||
|
Excess
tax benefits from
stock-based payment arrangements
|
(676 | ) | (1,260 | ) | (279 | ) | ||||||
|
Amortization
of other
intangibles
|
3,058 | 2,035 | 1,140 | |||||||||
|
Increase
in cash surrender value
of bank owned life insurance
|
(1,078 | ) | (1,034 | ) | (893 | ) | ||||||
|
Loss
(gain) on sales of
securities, net
|
591 | 3,130 | (4,283 | ) | ||||||||
|
Loss
on sale of
loans
|
1,950 | - | - | |||||||||
|
Loss
on prepayment of
borrowings
|
1,180 | - | - | |||||||||
|
Deferred
income tax (benefit)
provision, net
|
986 | (1,762 | ) | 1,689 | ||||||||
|
Other,
net
|
(6,743 | ) | (3,540 | ) | (1,532 | ) | ||||||
|
Net
cash provided by continuing
operating activities
|
23,431 | 24,414 | 19,706 | |||||||||
|
Discontinued
operations:
|
||||||||||||
|
Pre-tax
income
|
- | 606 | - | |||||||||
|
Net
cash (used) provided by
discontinued operations
|
- | 606 | - | |||||||||
|
Total
net cash provided by
operating activities:
|
23,431 | 25,020 | 19,706 | |||||||||
|
Cash
flows from investing
activities:
|
||||||||||||
|
Securities
available for
sale:
|
||||||||||||
|
Sales
|
59,141 | 190,009 | 134,195 | |||||||||
|
Proceeds
from maturities, calls,
and prepayments
|
31,152 | 46,138 | 80,816 | |||||||||
|
Purchases
|
(45,810 | ) | (40,155 | ) | (46,523 | ) | ||||||
|
Securities
held to
maturity:
|
||||||||||||
|
Proceeds
from maturities, calls,
and prepayments
|
14,850 | 16,319 | 22,858 | |||||||||
|
Purchases
|
(14,344 | ) | (26,379 | ) | (22,843 | ) | ||||||
|
(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, 2007, 2006 and 2005
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Increase
in loans,
net
|
(77,679 | ) | (279,458 | ) | (63,458 | ) | ||||||
|
Proceeds
from sales of
loans
|
55,612 | - | 3,635 | |||||||||
|
Additions
to premises and
equipment
|
(5,571 | ) | (6,095 | ) | (4,133 | ) | ||||||
|
Net
cash paid for business
acquisitions
|
(8,050 | ) | (22,541 | ) | (26,640 | ) | ||||||
|
Net
cash provided (used) by
investing activities
|
9,301 | (122,162 | ) | 77,907 | ||||||||
|
Cash
flows from financing
activities:
|
||||||||||||
|
Net
increase in
deposits
|
31,598 | 150,720 | 82,755 | |||||||||
|
Proceeds
from Federal Home Loan
Bank advances
|
150,214 | 257,014 | 889,653 | |||||||||
|
Repayments
of Federal Home Loan
Bank advances
|
(216,127 | ) | (324,462 | ) | (1,063,248 | ) | ||||||
|
Proceeds
from junior subordinated
debentures
|
- | - | 15,464 | |||||||||
|
Proceeds
from notes
payable
|
35,000 | 15,000 | - | |||||||||
|
Repayments
of notes
payable
|
(15,000 | ) | - | - | ||||||||
|
Payments
to acquire treasury
stock
|
(7,822 | ) | (2,876 | ) | (7,953 | ) | ||||||
|
Proceeds
from reissuance of
treasury stock
|
4,284 | 5,218 | 2,329 | |||||||||
|
Excess
tax benefits from
stock-based payment arrangements
|
676 | 1,260 | 279 | |||||||||
|
Cash
dividends
paid
|
(5,398 | ) | (4,834 | ) | (3,707 | ) | ||||||
|
Net
cash provided (used) by
financing activities
|
(22,575 | ) | 97,040 | (84,428 | ) | |||||||
|
Net
change in cash and cash
equivalents
|
10,157 | (102 | ) | 13,185 | ||||||||
|
Cash
and cash equivalents at
beginning of year
|
30,985 | 31,087 | 17,902 | |||||||||
|
Cash
and cash equivalents at end
of year
|
$ | 41,142 | $ | 30,985 | $ | 31,087 | ||||||
|
Supplemental
cash flow
information:
|
||||||||||||
|
Interest
paid on
deposits
|
$ | 50,759 | $ | 40,992 | $ | 20,356 | ||||||
|
Interest
paid on borrowed
funds
|
17,686 | 16,760 | 14,283 | |||||||||
|
Income
taxes paid,
net
|
5,405 | 931 | 3,310 | |||||||||
|
Non-cash
transfer treasury shares
to pay off ESOP loan
|
- | - | 4,897 | |||||||||
|
Fair
value of non-cash assets
acquired
|
376,656 | 9,835 | 827,780 | |||||||||
|
Fair
value of liabilities
assumed
|
305,592 | 3,492 | 702,622 | |||||||||
|
Fair
value of common stock
issued
|
63,350 | - | 108,318 | |||||||||
Years
Ended December 31, 2007, 2006 and 2005
|
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, southern Vermont and northeastern New York. Its primary
deposit products are checking, NOW, money market, savings, and time deposit
accounts. Its primary lending products are residential mortgages,
commercial mortgages, 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 agent for complete
lines of property and casualty, life, disability, and health
insurance.
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 has two reportable operating segments, Banking and Insurance, which
are delineated by the consolidated subsidiaries of Berkshire Hills
Bancorp. Banking includes the activities of Berkshire Bank and its
subsidiaries, which provide commercial and consumer banking
services. Insurance includes the activities of Berkshire Insurance
Group, which provides commercial and consumer insurance services. The
only other consolidated financial activity of the Company is the Parent, which
consists of the transactions of Berkshire Hills Bancorp.
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 analyses.
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.
Purchase
premiums and discounts are recognized in interest income using 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.
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, southern Vermont 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.
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 in addition to premiums and discounts on loans, 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 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,
the 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, and pool 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. 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 estimated 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 other
non-interest expense.
Mortgage
servicing rights
Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. For sales of mortgage loans,
a
portion of the cost of originating the loan is allocated to the servicing right
based on relative fair value. Fair value is based on market prices for
comparable mortgage servicing contracts, when available, or alternatively,
is
based on a valuation model that calculates the present value of estimated future
net servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the
cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses.
Servicing assets are evaluated for impairment based upon the fair value of
the
rights as compared to amortized cost. Impairment is determined by stratifying
rights into tranches based on predominant characteristics, such as interest
rate, loan type and investor type. Impairment is recognized through a valuation
allowance for an individual tranche, to the extent that fair value is less
than
the capitalized amount for the tranches. If the Company later determines that
all or a portion of the impairment no longer exists for a particular tranche,
a
reduction of the allowance may be recorded as an increase to income. Capitalized
servicing rights are reported in other assets and are amortized into noninterest
income in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets.
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 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 value and the tax basis 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 an 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 a reportable
business 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.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”
(SFAS 109), 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.
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.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 during the period of and/or the periods 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, on the date of grant, and is recognized ratably over
the service period of the award.
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 stock grants, 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)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
income applicable to common
stock
|
$ | 13,535 | $ | 11,263 | $ | 8,226 | ||||||
|
Average
number of common shares
issued
|
11,135 | 10,600 | 9,390 | |||||||||
|
Less:
average number of treasury
shares
|
(1,812 | ) | (1,963 | ) | (1,935 | ) | ||||||
|
Less:
average number of
unallocated ESOP shares
|
- | (2 | ) | (200 | ) | |||||||
|
Less:
average number of unvested
stock award shares
|
(100 | ) | (97 | ) | (133 | ) | ||||||
|
Average
number of basic shares
outstanding
|
9,223 | 8,538 | 7,122 | |||||||||
|
Plus: average
number of
unvested stock award shares
|
100 | 78 | 133 | |||||||||
|
Plus: net
dilutive
effect of stock options outstanding
|
47 | 114 | 248 | |||||||||
|
Average
number of diluted shares
outstanding
|
9,370 | 8,730 | 7,503 | |||||||||
|
Earnings
per average basic
share
|
$ | 1.47 | $ | 1.32 | $ | 1.16 | ||||||
|
Earnings
per average diluted
share
|
$ | 1.44 | $ | 1.29 | $ | 1.10 | ||||||
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.
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
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.
This Statement defines
fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. It clarifies
that fair value is the price that would be received to sell an asset or paid
to
transfer a liability in an orderly transaction between market participants
in
the market in which the reporting entity transacts. This Statement does not
require any new fair value measurements, but rather, it provides enhanced
guidance to other pronouncements that require or permit assets or liabilities
to
be measured at fair value. This Statement is effective for fiscal years
beginning after November 15, 2007. On February 12, 2008, the FASB issued FASB
Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement
No.157.” This FSP defers the effective date of SFAS No.157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company does not expect that
the
adoption of this Statement will have a material impact on its financial
position, results of operations or cash flows.
At
its
September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, “Accounting for Deferred
Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The consensus stipulates that an agreement by an employer
to share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement
required to be accounted for under SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” or Accounting Principles
Board Opinion ("APB") No. 12, "Omnibus Opinion - 1967." The
consensus concludes that the purchase of a split-dollar life insurance policy
does not constitute a settlement under SFAS No. 106 and, therefore, a liability
for the postretirement obligation must be recognized under SFAS No. 106 if
the
benefit is offered under an arrangement that constitutes a plan or under APB
No.
12, if it is not part of a plan. Issue 06-04 is effective for annual or interim
reporting periods beginning after December 15, 2007. The Company does not expect
that the adoption of this Statement will have a material impact on its financial
position, results of operations or cash flows.
In
March
2007, the FASB ratified the consensus of the EITF and released Issue 06-10,
“Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Collateral Assignment
Split-Dollar Life Insurance Arrangements.” This Issue addresses questions
raised about whether the consensus reached in Issue 06-4 should apply to
collateral assignment split-dollar life insurance arrangements and the
recognition and measurement of the employer’s asset in such arrangements. The
EITF concluded that an employer should recognize a liability for the
postretirement benefit related to a collateral assignment split-dollar life
insurance arrangement in accordance with either SFAS No. 106 or APB No. 12
based
on the substantive agreement with the employee. In addition the EITF reached
a
conclusion that an employer should recognize and measure an asset based on
the
nature and substance of the collateral assignment split-dollar arrangement
based
on what future cash flows the employer is entitled to, if any, as well as the
employee’s obligation and ability to repay the employer. The effective date of
EITF 06-10 is for fiscal years beginning after December 15, 2007. The Company
does not expect that the implementation of EITF 06-10 will have a material
impact on its financial position, results of operations or cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial
Assets and Financial Liabilities.” This Statement permits companies to
elect to follow fair value accounting for certain financial assets and
liabilities in an effort to mitigate volatility in earnings without having
to
apply complex hedge accounting provisions. The Statement also establishes
presentation and disclosure requirements designed to facilitate comparison
between entities that choose different measurement attributes for similar types
of assets and liabilities. The effective date of SFAS No. 159 is for fiscal
years beginning after November 15, 2007. The Company does not expect that the
adoption of this Statement will have a material impact on its financial
position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
141(R)”). This Statement replaces SFAS No. 141, “Business Combinations” (“SFAS
141”). SFAS No.141(R), among other things, establishes principles and
requirements for how the acquirer in a business combination (i) recognizes
and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquired business,
(ii) recognizes and measures the goodwill acquired in the business combination
or a gain from a bargain purchase, and (iii) determines what information to
disclose to enable users of the financial statements to evaluate the nature
and
financial effects of the business combination. The Company is required to adopt
SFAS No. 141(R) for all business combinations for which the acquisition date
is
on or after January 1, 2009. Earlier adoption is prohibited. The Statement
will
change the Company’s accounting treatment for business combinations on a
prospective basis.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in
Consolidated Financial Statements-an amendment of ARB No. 51.” This
Statement establishes accounting and reporting standards for noncontrolling
interests in a subsidiary and for the deconsolidation of a subsidiary. Minority
interests will be recharacterized as noncontrolling interests and classified
as
a component of equity. The Statement also establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary and
requires expanded disclosures. This Statement is effective for fiscal years,
and
interim periods within those fiscal years, beginning on or after December 15,
2008 with earlier adoption prohibited. The Company does not expect that the
adoption of this Statement will have a material impact on its financial
position, results of operations or cash flows.
In
June
2007, the FASB ratified the consensus reached in EITF 06-11 “Accounting for Income
Tax Benefits
of Dividends on Share-Based Payment Awards.” EITF 06-11 applies to
entities that have share-based payment arrangements that entitle employees
to
receive dividends or dividend equivalents on equity-classified unvested shares
when those dividends or dividend equivalents are charged to retained earnings
and result in an income tax deduction. Entities that have share-based payment
arrangements that fall within the scope of EITF 06-11 will be required to
increase capital surplus for any realized income tax benefit associated with
dividends or dividend equivalents paid to employees for equity classified
unvested equity awards. The Company adopted EITF 06-11 on January 1,
2008 for dividends declared on share-based payment awards subsequent to this
date. The adoption did not have a material impact on financial condition,
results of operations, or liquidity.
In
November 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 109, “Written Loan Commitments
Recorded at
Fair Value Through Earnings” (SAB 109). SAB No. 109
supersedes SAB 105, “Application of Accounting
Principles
to Loan Commitments,” and indicates that the expected net future cash
flows related to the associated servicing of the loan should be included
in the
measurement of all written loan commitments that are accounted for at fair
value
through earnings. The guidance in SAB 109 is applied on a prospective basis
to derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. SAB 109 is not expected to have a material
impact on the Company’s financial position, results of operations or cash
flows.
|
2.
|
MERGERS
AND ACQUISITIONS
|
On
September 21, 2007, the Company completed its acquisition of Factory Point
Bancorp, Inc. and its subsidiary, Factory Point National Bank of Manchester
Center, (collectively “Factory Point”) for $79.4 million, including the
assumption of Factory Point stock options. Under the terms of the agreement,
the
Company issued 1,913,353 shares of the Company’s common stock and paid $16.0
million in cash in exchange for all outstanding Factory Point shares and also
assumed all outstanding Factory Point stock options. Concurrent with the merger
of Berkshire Hills Bancorp and Factory Point Bancorp, the Bank and Factory
Point
National Bank merged with the Bank surviving. The results of
operations for Factory Point are included in our results subsequent to the
acquisition date.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed as the date of acquisition. The Company is in the process
of
finalizing the purchase accounting for the acquisition; thus, the allocation
of
purchase price is subject to change.
|
(In
Thousands)
|
September
21,
2007
|
|||
|
Assets
|
||||
|
Cash
and cash
equivalents
|
$ | 14,076 | ||
|
Investments
|
68,403 | |||
|
Loans,
net
|
231,846 | |||
|
Premises
and equipment,
net
|
7,509 | |||
|
Cash
surrender value of life
insurance policies
|
3,900 | |||
|
Goodwill
|
53,385 | |||
|
Intangible
assets
|
7,092 | |||
|
Other
assets
|
4,521 | |||
|
Total
assets
acquired
|
$ | 390,732 | ||
|
Liabilities
|
||||
|
Deposits
|
$ | 269,027 | ||
|
Borrowings
|
34,202 | |||
|
Other
liabilities
|
2,363 | |||
|
Total
liabilities
assumed
|
$ | 305,592 | ||
|
Net
assets
acquired
|
$ | 85,140 | ||
The
$7.1
million of acquired intangible assets was assigned to the core deposit premium
intangible, subject to amortization. The core deposit premiums are being
amortized over their estimated useful life of eight years using an accelerated
method. At December 31, 2007, the goodwill recognized in the acquisition of
approximately $53.7 million is not expected to be deductible for tax
purposes.
The
Company’s cost to acquire Factory Point is as follows:
|
Cash
paid to Factory Point stockholders
|
$ | 16,015 | ||
|
Common
stock issued to Factory Point
|
||||
|
stockholders
and stock options assumed
|
63,350 | |||
|
Total
consideration
|
79,365 | |||
|
Professional
fees and other acquisition costs
|
5,775 | |||
|
Net
assets acquired
|
$ | 85,140 |
The
unaudited pro forma financial information assumes that the Factory Point
acquisition was consummated on January 1 of the periods presented. The pro
forma
adjustments are based on information available and certain assumptions that
we
believe are reasonable. Certain acquisition related adjustments are not included
in the pro forma information since they were recorded after completion of the
acquisition. This pro forma information is presented for
informational purposes only and is not necessarily indicative of the results
of
future operations that would have been achieved had the acquisition taken place
at the beginning of 2006. Pro forma information is as follows:
|
For
the years ended December
31,
|
||||||||
|
(In
thousands, except per share
data)
|
2007
|
2006
|
||||||
|
Interest
income
|
$ | 147,382 | $ | 138,852 | ||||
|
Interest
expense
|
74,881 | 66,518 | ||||||
|
Net
interest
income
|
72,501 | 72,334 | ||||||
|
Provision
for loan
losses
|
4,840 | 8,250 | ||||||
|
Net
interest income after
provision for loan losses
|
67,661 | 64,084 | ||||||
|
Non-interest
income
|
27,192 | 15,758 | ||||||
|
Non-interest
expense
|
74,921 | 57,358 | ||||||
|
Income
before income
taxes
|
19,932 | 22,484 | ||||||
|
Income
tax
expense
|
5,561 | 6,556 | ||||||
|
Net
income
|
$ | 14,371 | $ | 15,928 | ||||
|
Basic
earnings per
share
|
$ | 1.35 | $ | 1.52 | ||||
|
Diluted
earnings per
share
|
$ | 1.33 | $ | 1.49 | ||||
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 transaction with MassOne Insurance Agency was an asset
purchase. 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 recorded $2.9 million in conditional purchase consideration based on
performance targets in 2007 which was recorded to goodwill.
|
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, 2007 and 2006 were as follows:
|
(In
thousands)
|
2006
|
2006
|
||||||
|
Cash
and due from
banks
|
$ | 41,091 | $ | 30,774 | ||||
|
Short-term
investments
|
51 | 211 | ||||||
|
Total
cash and cash
equivalents
|
$ | 41,142 | $ | 30,985 | ||||
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 $6.0 million and $3.1 million at year-end 2007 and
2006, respectively.
4. SECURITIES
A
summary
of securities follows:
|
(In
thousands)
|
Amortized
Cost |
Gross
Unrealized
Gains
|
Gross
Unrealized Losses |
Fair
Value
|
||||||||||||
|
December
31,
2007
|
||||||||||||||||
|
Securities
available for
sale
|
||||||||||||||||
|
Debt
securities:
|
||||||||||||||||
|
Municipal
bonds and
obligations
|
$ | 74,223 | $ | 1,028 | $ | (65 | ) | $ | 75,186 | |||||||
|
Mortgaged-backed
securities
|
103,387 | 1,152 | (21 | ) | 104,518 | |||||||||||
|
Other
bonds and
obligations
|
15,601 | 38 | (374 | ) | 15,265 | |||||||||||
|
Total
debt
securities
|
193,211 | 2,218 | (460 | ) | 194,969 | |||||||||||
|
Equity
securities:
|
||||||||||||||||
|
Federal
Home Loan Bank
stock
|
21,077 | - | - | 21,077 | ||||||||||||
|
Other
equity
securities
|
2,836 | 197 | (38 | ) | 2,995 | |||||||||||
|
Total
equity
securities
|
23,913 | 197 | (38 | ) | 24,072 | |||||||||||
|
Total
securities available for
sale
|
217,124 | 2,415 | (498 | ) | 219,041 | |||||||||||
|
Securities
held to
maturity
|
||||||||||||||||
|
Municipal
bonds and
obligations
|
36,981 | 377 | (125 | ) | 37,233 | |||||||||||
|
Mortgaged-backed
securities
|
2,475 | - | (19 | ) | 2,456 | |||||||||||
|
Total
securities held to
maturity
|
39,456 | 377 | (144 | ) | 39,689 | |||||||||||
|
Total
securities
|
$ | 256,580 | $ | 2,792 | $ | (642 | ) | $ | 258,730 | |||||||
|
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 | |||||||
The
amortized cost and estimated fair value of debt securities by contractual final
maturity at year-end 2007 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
|
$ | 4,571 | $ | 4,579 | $ | 6,879 | $ | 6,879 | ||||||||
|
Over
1 year to 5
years
|
7,351 | 7,423 | 1,163 | 1,172 | ||||||||||||
|
Over
5 years to 10
years
|
19,343 | 19,441 | 2,470 | 2,470 | ||||||||||||
|
Over
10
years
|
58,559 | 59,008 | 26,469 | 26,712 | ||||||||||||
|
Total
bonds and
obligations
|
89,824 | 90,451 | 36,981 | 37,233 | ||||||||||||
|
Mortgage-backed
securities
|
103,387 | 104,518 | 2,475 | 2,456 | ||||||||||||
|
Total
debt
securities
|
$ | 193,211 | $ | 194,969 | $ | 39,456 | $ | 39,689 | ||||||||
At
year-end 2007 and 2006, the Company had pledged securities, for municipal
deposits, with amortized costs of $12.6 million and $15.2 million and fair
values of $12.8 million and $15.0 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 in the Borrowings note
to
these financial statements.
Sales
of
securities available for sale were as follows:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Proceeds
from
sales
|
$ | 59,141 | $ | 190,009 | $ | 134,195 | ||||||
|
Gross
realized
gains
|
88 | 2,449 | 6,134 | |||||||||
|
Gross
realized
losses
|
679 | 5,579 | 1,851 | |||||||||
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,
2007
|
||||||||||||||||
|
Securities
available for
sale:
|
||||||||||||||||
|
Mortgaged-backed
securities
|
$ | - | $ | 149 | $ | 21 | $ | 6,713 | ||||||||
|
Other
bonds and
obligations
|
259 | 7,281 | 180 | 8,213 | ||||||||||||
|
Total
available for
sale
|
259 | 7,430 | 201 | 14,926 | ||||||||||||
|
Securities
held to
maturity:
|
||||||||||||||||
|
Mortgaged-backed
securities
|
2 | 1,382 | 17 | 1,032 | ||||||||||||
|
Municipal
and other bonds and
obligations
|
125 | 8,243 | - | - | ||||||||||||
|
Total
|
$ | 386 | $ | 17,055 | $ | 218 | $ | 15,958 | ||||||||
|
December
31,
2006
|
||||||||||||||||
|
Securities
available for
sale:
|
||||||||||||||||
|
Mortgaged-backed
securities
|
$ | 71 | $ | 30,944 | $ | 809 | $ | 34,453 | ||||||||
|
Other
bonds and
obligations
|
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
and other bonds and
obligations
|
- | - | 286 | 35,286 | ||||||||||||
|
Total
|
$ | 85 | $ | 32,577 | $ | 1,342 | $ | 88,358 | ||||||||
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 2007, 2006, and 2005, and all securities performed
in accordance with their terms during these periods. At year-end 2007, all
impairments were deemed to be temporary and related to changes in market
interest rates, not to the underlying credit quality of the issuers. There
were
46 securities with gross unrealized losses at year-end 2007, with no unrealized
loss exceeding 10% of amortized cost. Total unrealized losses existing for
more
than twelve months were 1.3% 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.
|
5.
|
LOANS
|
Year-end
loans consisted of the following:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Residential
mortgages
|
||||||||
|
1-4
family
|
$ | 610,231 | $ | 566,951 | ||||
|
Construction
|
46,814 | 32,322 | ||||||
|
Total
residential
mortgages
|
657,045 | 599,273 | ||||||
|
Commercial
mortgages
|
||||||||
|
Construction
|
125,349 | 129,798 | ||||||
|
Single
and
multifamily
|
69,724 | 64,570 | ||||||
|
Other
|
509,691 | 371,971 | ||||||
|
Total
commercial
mortgages
|
704,764 | 566,339 | ||||||
|
Commercial
business
|
203,564 | 190,493 | ||||||
|
Consumer
|
||||||||
|
Auto
|
196,748 | 195,912 | ||||||
|
Home
equity and
other
|
181,895 | 146,970 | ||||||
|
Total
consumer
|
378,643 | 342,882 | ||||||
|
Total
loans
|
$ | 1,944,016 | $ | 1,698,987 | ||||
Included
in year-end total loans were the following:
|
Unamortized
net loan origination
costs
|
$ | 9,574 | $ | 8,537 | ||||
|
Unamortized
net premium on
purchased loans
|
199 | 166 | ||||||
|
Total
unamortized net costs and
premiums
|
$ | 9,773 | $ | 8,703 |
Activity
in the allowance for loan losses was as follows:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Balance
at beginning of
year
|
$ | 19,370 | $ | 13,001 | $ | 9,337 | ||||||
|
Provision
for loan
losses
|
4,300 | 7,860 | 1,313 | |||||||||
|
Transfer
of commitment
reserve
|
- | (425 | ) | - | ||||||||
|
Allowance
attributed to acquired
loans
|
4,453 | - | 3,321 | |||||||||
|
Loans
charged-off
|
(6,376 | ) | (1,776 | ) | (1,542 | ) | ||||||
|
Recoveries
|
369 | 710 | 572 | |||||||||
|
Balance
at end of
year
|
$ | 22,116 | $ | 19,370 | $ | 13,001 | ||||||
Most
of
the Company’s lending activity occurs within its primary markets in western
Massachusetts, southern Vermont and northeastern New York. Most of the loan
portfolio is secured by real estate, including residential mortgages, commercial
mortgages, and home equity loans. During 2007 and 2006, there were no
concentrations of loans related to any one industry in excess of 10% of total
loans.
At
year-end 2007 and 2006, the Bank’s commitments outstanding to related parties
totaled $11.0 million and $7.6 million, respectively, and the loans outstanding
against these commitments totaled $6.5 million and $6.3 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 2007 and 2006, all related
party loans were performing. Year-end Bank aggregate extensions of credit to
one
related party interest totaled $5.4 million in 2007 and $5.8 million in 2006.
In
2007, there were no new extensions of credit to this party and related aggregate
reductions of extensions of credit (including loan repayments) were $0.4 million
and $0.1 million in 2007 and 2006, respectively.
The
following is a summary of year-end (unless otherwise stated) information
pertaining to impaired loans, non-accrual loans, and troubled debt
restructurings:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Investment
in impaired
loans
|
$ | 14,751 | $ | 13,632 | $ | 1,914 | ||||||
|
Impaired
loans with no valuation
allowance
|
7,224 | 5,115 | 1,430 | |||||||||
|
Impaired
loans with a valuation
allowance
|
7,527 | 8,517 | 484 | |||||||||
|
Specific
valuation allowance
allocated to impaired loans
|
1,230 | 812 | 257 | |||||||||
|
Average
investment in impaired
loans during the year
|
9,259 | 2,954 | 3,806 | |||||||||
|
Cash
basis impaired loan income
received during the year
|
881 | 290 | 66 | |||||||||
|
Non-accrual
loans
|
10,508 | 7,592 | 1,186 | |||||||||
|
Total
loans past due ninety days
or more and still accruing
|
823 | 281 | 110 | |||||||||
There
were two residential mortgage properties totaling $866 thousand classified
as
foreclosed real estate at year-end 2007. There was no foreclosed real estate
at
year-end 2006. 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 $128.0 million
and $90.3 million at year-end 2007 and 2006, 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 2007 and 2006, and no impairment charges
were recognized at these dates.
The
fair
value of mortgage servicing rights at December 31, 2007 was $1.3 million and
the
contractually specified servicing fees for the year ended December 31, 2007
were
$168 thousand. The significant assumptions used in the valuation included a
discount rate of 10% and a pre-payment speed assumption of 12.4%.
The
components of mortgage servicing rights were as follows:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Balance
at beginning of
year
|
$ | 986 | $ | 1,168 | $ | 279 | ||||||
|
Additions
|
395 | - | 988 | |||||||||
|
Amortization
|
(179 | ) | (182 | ) | (99 | ) | ||||||
|
Balance
at end of
year
|
$ | 1,203 | $ | 986 | $ | 1,168 | ||||||
|
6.
|
PREMISES
AND EQUIPMENT
|
Year-end
premises and equipment are summarized as follows:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Land
|
$ | 4,175 | $ | 3,524 | ||||
|
Buildings
and
improvements
|
39,427 | 30,863 | ||||||
|
Furniture
and
equipment
|
24,437 | 20,237 | ||||||
|
Construction
in
process
|
555 | 890 | ||||||
|
Premises
and equipment,
gross
|
68,594 | 55,514 | ||||||
|
Accumulated
depreciation and
amortization
|
(29,788 | ) | (26,384 | ) | ||||
|
Premises
and equipment,
net
|
$ | 38,806 | $ | 29,130 | ||||
Depreciation
and amortization expense for the years 2007, 2006 and 2005 amounted to $3.4
million, $2.8 million, and $2.3 million, respectively.
|
7.
|
GOODWILL
AND OTHER INTANGIBLES
|
The
Company recorded $53.4 million of goodwill related to the acquisition of Factory
Point in September 2007 and recorded an additional $2.9 million in goodwill
in
2007 related to contingent consideration for the acquisition of five insurance
agencies in 2006. The Company recorded $16.2 million of goodwill related to
the
acquisition of five insurance agencies in October 2006. Goodwill totaled $161.6
million and $104.5 million at year-end 2007 and 2006, respectively. See Note
2 –
Mergers and Acquisitions for further information about goodwill and other
intangible assets acquired in 2007 and 2006.
Other
intangible assets were as follows:
|
(In
thousands)
|
Gross
Intangible
Assets
|
Accumulated
Amortization
|
Net
Intangible
Assets
|
|||||||||
|
December
31,
2007
|
||||||||||||
|
Non-maturity
deposits
|
$ | 16,978 | $ | (3,140 | ) | $ | 13,838 | |||||
|
Insurance
contracts
|
7,463 | (961 | ) | 6,502 | ||||||||
|
Non-compete
agreements
|
2,318 | (1,996 | ) | 322 | ||||||||
|
All
other intangible
assets
|
375 | (217 | ) | 158 | ||||||||
|
Total
|
$ | 27,134 | $ | (6,314 | ) | $ | 20,820 | |||||
|
December
31,
2006
|
||||||||||||
|
Non-maturity
deposits
|
$ | 9,886 | $ | (1,673 | ) | $ | 8,213 | |||||
|
Insurance
contracts
|
$ | 7,463 | $ | (194 | ) | 7,269 | ||||||
|
Non-compete
agreements
|
2,318 | (1,224 | ) | 1,094 | ||||||||
|
All
other intangible
assets
|
375 | (141 | ) | 234 | ||||||||
|
Total
|
$ | 20,042 | $ | (3,232 | ) | $ | 16,810 | |||||
Other
intangible assets are amortized on a straight-line and accelerated basis over
their estimated lives, which range from five to ten years. Amortization expense
related to intangible assets totaled $3.1 million in 2007, $2.0 million in
2006,
and $1.1 million in 2005. The estimated aggregate future amortization expense
for intangible assets remaining as of year-end 2007 is as follows: 2008 - $3.8
million; 2009 - $3.3 million; 2010 - $3.2 million; 2011 - $3.2
million; 2012 - $2.8 million and thereafter – $4.7
million.
|
8.
|
OTHER
ASSETS
|
Year-end
other assets are summarized as follows:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Loans
held for
sale
|
$ | 3,444 | $ | - | ||||
|
Net
deferred tax
asset
|
4,310 | 4,432 | ||||||
|
Capitalized
mortgage servicing
rights
|
1,203 | 986 | ||||||
|
Accrued
interest
receivable
|
10,077 | 9,165 | ||||||
|
Other
equity
investments
|
5,884 | 4,737 | ||||||
|
Other
|
10,401 | 4,737 | ||||||
|
Total
other
assets
|
$ | 35,319 | $ | 24,057 | ||||
|
9.
|
DEPOSITS
|
A
summary
of year-end time deposits is as follows:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Maturity
date:
|
||||||||
|
Within
1
year
|
$ | 596,319 | $ | 513,854 | ||||
|
Over
1 year to 2
years
|
67,767 | 106,318 | ||||||
|
Over
2 years to 3
years
|
18,245 | 20,036 | ||||||
|
Over
3 years to 4
years
|
9,261 | 11,127 | ||||||
|
Over
4 years to 5
years
|
12,841 | 5,887 | ||||||
|
Over
5
years
|
23,459 | 34,152 | ||||||
|
Total
|
$ | 727,892 | $ | 691,374 | ||||
|
Account
balance:
|
||||||||
|
Less
than
$100,000
|
$ | 429,884 | $ | 369,590 | ||||
|
$100,000
or
more
|
298,008 | 321,784 | ||||||
|
Total
|
$ | 727,892 | $ | 691,374 | ||||
|
10.
|
BORROWINGS
& JUNIOR SUBORDINATED
DEBENTURES
|
Federal
Home Loan Bank of Boston (“FHLBB”) borrowings outstanding at year-end 2007 and
2006 consisted of various advances totaling $299.7 million and $330.0 million,
respectively. The year-end weighted average interest rate on outstanding
advances was 4.03% in 2007 and 4.18% in 2006. The contractual maturities of
FHLBB advances at year-end 2007 were as follows: 2008 - $124.4 million; 2009
-
$55.5 million; 2010 - $40.0 million; 2011 - $45.6 million; 2012 - $10.0 million;
and thereafter - $24.2 million. Year-end 2007 advances outstanding included
callable advances totaling $61.5 million and amortizing advances totaling $11.8
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 2007. All FHLBB borrowings are secured by a blanket security agreement
on certain qualified collateral; principally all first mortgage loans, certain
securities, and any funds on deposit with the FHLBB. 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 2007 or 2006.
At
year-end 2007, the Company had two
unsecured lines of credit totaling $30.0 million, of which $15 million had
been
drawn down and had a rate of 6.07%. Both lines have available credit
of $15 million and the first bears interest of overnight LIBOR plus 1.25% and
matures in September 2008. The second bears interest of one-month
LIBOR plus 1.625% and matures in September 2008. The Company also has two $10
million unsecured term notes that mature in September 2010 that bear interest
of
overnight LIBOR plus 1.25% and 3 three month LIBOR plus 1.25%, respectively,
and
had rates of 6.07% and 6.11%, respectively, at year-end
2007.
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 6.84% at year-end 2007. 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)
|
2007
|
2006
|
2005
|
|||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 2,924 | $ | 5,159 | $ | 5,501 | ||||||
|
State
|
1,329 | 1,506 | 813 | |||||||||
|
Total
current
|
4,253 | 6,665 | 6,314 | |||||||||
|
Deferred
|
||||||||||||
|
Federal
|
677 | (1,779 | ) | 1,647 | ||||||||
|
State
|
461 | (335 | ) | (93 | ) | |||||||
|
Total
deferred
|
1,138 | (2,114 | ) | 1,554 | ||||||||
|
Change
in valuation
reserve
|
(152 | ) | 352 | 135 | ||||||||
|
Total
income tax
expense
|
$ | 5,239 | $ | 4,903 | $ | 8,003 | ||||||
The
reasons for the differences between the statutory federal income tax rate and
the effective tax rates are summarized as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Statutory
tax
rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Increase
(decrease) resulting
from:
|
||||||||||||
|
State
taxes, net of federal tax
benefit
|
6.2 | 6.1 | 3.4 | |||||||||
|
Dividends
received
deduction
|
(0.1 | ) | (0.2 | ) | (0.7 | ) | ||||||
|
Tax
exempt income -
investments
|
(8.0 | ) | (8.3 | ) | (5.6 | ) | ||||||
|
Bank
owned life
insurance
|
(2.0 | ) | (2.2 | ) | (1.9 | ) | ||||||
|
Employee
stock ownership plan
termination
|
- | - | 17.7 | |||||||||
|
Change
in valuation
allowance
|
(0.8 | ) | 2.2 | 0.8 | ||||||||
|
Investment
tax
credits
|
(1.9 | ) | (1.4 | ) | - | |||||||
|
Other,
net
|
(0.5 | ) | (0.9 | ) | 0.6 | |||||||
|
Effective
tax
rate
|
27.9 | % | 30.3 | % | 49.3 | % | ||||||
Year-end
deferred tax assets (liabilities) related to the following:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Allowance
for loan
losses
|
$ | 9,395 | $ | 8,169 | ||||
|
Employee
benefit
plans
|
1,835 | 1,208 | ||||||
|
Net
unrealized loss (gain) on
securities available for sale
|
(699 | ) | (113 | ) | ||||
|
Goodwill
amortization
|
(1,525 | ) | (1,348 | ) | ||||
|
Investments
|
(711 | ) | (730 | ) | ||||
|
Purchase
accounting
adjustments
|
(3,786 | ) | (717 | ) | ||||
|
Other
|
594 | (1,092 | ) | |||||
|
Valuation
allowance
|
(793 | ) | (945 | ) | ||||
|
Deferred
tax asset,
net
|
$ | 4,310 | $ | 4,432 | ||||
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.
|
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)
|
2007
|
2006
|
||||||
|
Commitments
to grant
loans
|
$ | 46,813 | $ | 54,439 | ||||
|
Unused
funds on commercial lines
of credit
|
204,527 | 120,090 | ||||||
|
Unadvanced
funds on home equity,
reddi-cash and other consumer lines of credit
|
187,015 | 150,600 | ||||||
|
Unadvanced
funds on construction
loans
|
102,311 | 113,497 | ||||||
|
Standby
letters of
credit
|
29,013 | 16,019 | ||||||
|
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. The Company considers standby letters of credit
to
be guarantees and the amount of the recorded liability related to such
guarantees was not material at December 31, 2007.
Operating
lease
commitments. Future minimum rental payments required under operating
leases at December 31, 2007 are as follows: 2008 – $2.4 million; 2009 – $2.3
million; 2010 – $2.3 million; 2011 – $2.3 million; 2012 – $2.2 million; and all
years thereafter – $20.6 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 2007, 2006 and 2005 amounted to $2.4
million, $1.4 million and $0.9 million, respectively.
Employment
and
change in control agreements. The Company has entered into an employment
agreement with one senior executive with a two-year term. Berkshire Insurance
Group has entered into an employment agreement with one senior executive with
a
term ending on December 31, 2009. 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.
Derivative
Contracts. At December 31, 2007, the
Company was committed to pay fixed-receive floating interest rate swap
agreements with notional amounts aggregating $60 million that settled in January
2008.
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, 2007 will have no material effect
on the Company’s consolidated financial statements.
|
13.
|
STOCKHOLDERS’
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. The Company, as a savings and loan holding company has 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, 2007 and 2006, the Bank met the capital adequacy
requirements.
As
of
December 31, 2007, 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,
2007
|
||||||||||||||||||||||||
|
Total
capital to risk weighted
assets
|
$ | 206,080 | 10.40 | % | $ | 158,462 | 8.00 | % | $ | 198,077 | 10.00 | % | ||||||||||||
|
Tier
1 capital to risk weighted
assets
|
183,530 | 9.27 | 79,231 | 4.00 | 118,846 | 6.00 | ||||||||||||||||||
|
Tier
1 capital to average
assets
|
183,530 | 7.97 | 92,136 | 4.00 | 115,169 | 5.00 | ||||||||||||||||||
|
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 | ||||||||||||||||||
A
reconciliation of the Company’s year-end total stockholders’ equity to the
Bank’s regulatory capital is as follows:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Total
stockholders' equity per
consolidated financial statements
|
$ | 326,837 | $ | 258,161 | ||||
|
Adjustments
for Bank Tier 1
Capital:
|
||||||||
|
Holding
company equity
adjustment
|
10,648 | (8,300 | ) | |||||
|
Net
unrealized gains on available
for sale securities
|
(1,241 | ) | (92 | ) | ||||
|
Disallowed
goodwill and intangible
assets
|
(152,714 | ) | (93,756 | ) | ||||
|
Total
Bank Tier 1
Capital
|
183,530 | 156,013 | ||||||
|
Adjustments
for total
capital:
|
||||||||
|
Allowed
unrealized gains on equity
securities
|
89 | - | ||||||
|
Includible
allowances for loan
losses and unused lines of credit
|
22,461 | 19,795 | ||||||
|
Total
Bank capital per regulatory
reporting
|
$ | 206,080 | $ | 175,808 | ||||
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 2007 and 2006 to pay dividends to the Company in an amount exceeding
the preceding regulatory restriction. For 2008, the Bank can declare
aggregate additional dividends of $9 million without obtaining regulatory
approval.
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.
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.
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)
|
2007
|
2006
|
2005
|
|||||||||
|
Change
in net unrealized holding
losses (gains) on
|
||||||||||||
|
available
for sale
securities
|
$ | 1,089 | $ | 768 | $ | (5,901 | ) | |||||
|
Reclassification
adjustment for
net loss (gains) realized in income
|
591 | 3,130 | (4,283 | ) | ||||||||
|
Net
change in unrealized
gains/losses
|
1,680 | 3,898 | (10,184 | ) | ||||||||
|
Tax
effects
|
(626 | ) | (1,549 | ) | 3,784 | |||||||
|
Net-of-tax
change in available for
sale securities
|
1,054 | 2,349 | (6,400 | ) | ||||||||
|
Net
loss (gain) on other
instruments
|
71 | (18 | ) | (53 | ) | |||||||
|
Total
other comprehensive income
(loss), net
|
$ | 1,125 | $ | 2,331 | $ | (6,453 | ) | |||||
Year-end
components of accumulated other comprehensive income (loss) was as
follows:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Net
unrealized holding gains on
available for sale securities
|
$ | 1,917 | $ | 237 | ||||
|
Net
loss on other
instruments
|
- | (71 | ) | |||||
|
Tax
effects
|
(700 | ) | (74 | ) | ||||
|
Accumulated
other comprehensive
income
|
$ | 1,217 | $ | 92 | ||||
|
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 $1.3 million, $893 thousand and $771 thousand for the
years 2007, 2006, and 2005, respectively.
The
Company maintains a supplemental executive retirement plan (“SERP”) for one
executive officer. 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 2007 and 2006, the accrued liability for this SERP was $756 thousand
and $443 thousand, respectively. SERP expense was $313 thousand in 2007, $175
thousand in 2006, and $148 thousand in 2005, 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. See Note 1 – Recent Accounting
Pronouncements.
|
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 Factory Point
Bancorp, Inc., which was acquired on September 21, 2007. Each Factory Point
option was converted to a vested option for one of the Company’s shares with an
exercise price equal to the market price of Factory Point’s stock at the date of
grant and a maximum original term of ten years based on the original grant
date
subject to the exchange ratio set forth in the merger agreement. The Company
generally issues shares from treasury stock as options are exercised. 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 as expense
was
$1.6 million, $1.3 million, and $1.4 million in the years 2007, 2006, and 2005,
respectively. For all of these years, the total recognized tax benefit related
to this compensation cost was $0.6 million, $0.5 million and $0.6 million in
the
years 2007, 2006, and 2005, respectively. In 2007, the total stock-based
compensation cost capitalized as part of the goodwill of the Factory Point
acquisition was $2.1 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 $33.06, $33.96, and
$35.10 in 2007, 2006, and 2005. 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.
|
2007
|
2006
|
|||||||
|
Expected
dividends
|
1.85 | % | 1.85 | % | ||||
|
Expected
term
|
6
years
|
6
years
|
||||||
|
Expected
volatility
|
19 | % | 19 | % | ||||
|
Risk-free
interest
rate
|
4.68 | % | 4.86 | % | ||||
|
Weighted
average grant date fair
value
|
$ | 7.67 | $ | 8.05 | ||||
A
summary
of activity in the Company’s stock compensation plans is shown
below:
|
Non-vested
Stock
Awards
Outstanding
|
Stock
Options
Outstanding
|
|||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Number
of
|
Grant
Date
|
Number
of
|
Exercise
|
|||||||||||||
|
(Shares
in
thousands)
|
Shares
|
Fair
Value
|
Shares
|
Price
|
||||||||||||
|
Balance,
December 31,
2006
|
93 | $ | 30.98 | 586 | $ | 20.62 | ||||||||||
|
Granted
|
66 | 33.06 | 20 | 33.46 | ||||||||||||
|
Acquired
|
- | - | 172 | 20.43 | ||||||||||||
|
Stock
options
exercised
|
- | - | (132 | ) | 16.04 | |||||||||||
|
Stock
awards
vested
|
(43 | ) | 31.03 | - | - | |||||||||||
|
Forfeited
|
(11 | ) | 34.56 | (2 | ) | 22.30 | ||||||||||
|
Balance,
December 31,
2007
|
105 | $ | 31.88 | 644 | $ | 21.90 | ||||||||||
|
Exercisable
options, December 31,
2007
|
606 | $ | 21.46 | |||||||||||||
The
total
intrinsic value of options exercised was $1.9 million, $3.4 million, and $1.8
million for the years 2007, 2006 and 2005, respectively. The total fair value
of
stock awards vested during these respective years was $1.4 million, $2.1
million, and $2.0 million. As of year end 2007, unrecognized stock-based
compensation expense related to unvested options amounted to $135 thousand.
This
amount is expected to be recognized over a weighted average period of 1.0 year.
The weighted average year-end 2007 intrinsic value of stock options outstanding
was $3.8 million, and the similar value of exercisable options was $3.7 million.
The unrecognized stock-based compensation expense related to unvested stock
awards was $2.0 million. This amount is expected to be recognized over a
weighted average period of 1.7 years.
The
following pro forma information presents net income and earnings per share
for
2005 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
|
|||
|
Net
income as
reported
|
$ | 8,226 | ||
|
Add:
Stock-based employee
compensation expense included
|
||||
|
in
reported net income, net of
related tax effects
|
822 | |||
|
Less:
Total stock-based employee
compensation expense
|
||||
|
determined
under fair value method
for all awards, net of
|
||||
|
related
tax
effects
|
(1,255 | ) | ||
|
Pro
forma net
income
|
$ | 7,793 | ||
|
Income
per
share:
|
||||
|
Basic
- as
reported
|
$ | 1.16 | ||
|
Basic
- pro
forma
|
1.09 | |||
|
Diluted
- as
reported
|
1.10 | |||
|
Diluted
- pro
forma
|
1.04 | |||
Employee
Stock Ownership Plan
The
Bank
had established an Employee Stock Ownership Plan (“ESOP”) for the benefit of
certain employees. This plan was terminated by the Bank as of June 30, 2005.
A
total of 444 thousand shares were held in trust and distributed to plan
participants in 2007. These shares were treated as allocated as of July 1,
2005
for purposes of calculating earnings per share.
Berkshire
Hills Funding Corporation, a subsidiary of the Company, 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 for 2005.
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. Certain financial
instruments and all nonfinancial instruments are excluded 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.
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:
|
2007
|
2006
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(In
thousands)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash
equivalents
|
$ | 41,142 | $ | 41,142 | $ | 30,985 | $ | 30,985 | ||||||||
|
Securities
available for
sale
|
219,041 | 219,041 | 194,206 | 194,206 | ||||||||||||
|
Securities
held to
maturity
|
39,456 | 39,689 | 39,968 | 39,686 | ||||||||||||
|
Loans,
net
|
1,921,900 | 1,964,983 | 1,679,617 | 1,683,030 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Non-maturity
deposits
|
1,094,671 | 1,094,671 | 830,564 | 830,564 | ||||||||||||
|
Time
deposits
|
727,892 | 733,034 | 691,374 | 692,298 | ||||||||||||
|
Borrowings
|
334,474 | 336,231 | 345,005 | 338,669 | ||||||||||||
|
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.
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.
|
OPERATING
SEGMENTS
|
The
Company has two reportable operating segments, Banking and Insurance, which
are
delineated by the consolidated subsidiaries of Berkshire Hills
Bancorp. Banking includes the activities of Berkshire Bank and its
subsidiaries, which provide commercial and consumer banking
services. Insurance includes the activities of Berkshire Insurance
Group, which provides commercial and consumer insurance services. The
only other consolidated financial activity of the Company is the Parent, which
consists of the transactions of Berkshire Hills Bancorp. Management fees for
corporate services provided by the Bank to Berkshire Insurance Group and the
Parent are eliminated.
The
accounting policies of each reportable segment are the same as those of the
Company. The Insurance segment and the Parent reimburse the Bank for
administrative services provided to them. Income tax expense for the
individual segments is calculated based on the activity of the segments, and
the
Parent records the tax expense or benefit necessary to reconcile to the
consolidated total. The Parent does not allocate capital
costs. Average assets include securities available-for-sale based on
amortized cost.
A
summary
of the Company’s operating segments was as follows:
|
Total
|
||||||||||||||||||||
|
(In
thousands)
|
Banking
|
Insurance
|
Parent
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
Year
ended December 31,
2007
|
||||||||||||||||||||
|
Net
interest
income
|
$ | 66,115 | $ | - | $ | 6,265 | $ | (8,455 | ) | $ | 63,925 | |||||||||
|
Provision
for loan
losses
|
4,300 | - | - | - | 4,300 | |||||||||||||||
|
Net
interest income after
provision for loan losses
|
61,815 | - | 6,265 | (8,455 | ) | 59,625 | ||||||||||||||
|
Non-interest
income
|
11,010 | 13,954 | 6,981 | (7,302 | ) | 24,643 | ||||||||||||||
|
Non-interest
expense
|
55,198 | 9,919 | 775 | (398 | ) | 65,494 | ||||||||||||||
|
Income
(loss) before income
taxes
|
17,627 | 4,035 | 12,471 | (15,359 | ) | 18,774 | ||||||||||||||
|
Income
tax expense
(benefit)
|
4,746 | 1,557 | (1,064 | ) | - | 5,239 | ||||||||||||||
|
Net
income
(loss)
|
$ | 12,881 | $ | 2,478 | $ | 13,535 | $ | (15,359 | ) | $ | 13,535 | |||||||||
|
Average
assets(in
millions)
|
$ | 2,229 | $ | 31 | $ | 378 | $ | (376 | ) | $ | 2,262 | |||||||||
|
Total
|
||||||||||||||||||||
|
(In
thousands)
|
Banking
|
Insurance
|
Parent
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
Year
ended December 31,
2006
|
||||||||||||||||||||
|
Net
interest
income
|
$ | 61,478 | $ | - | $ | 13,741 | $ | (14,979 | ) | $ | 60,240 | |||||||||
|
Provision
for loan
losses
|
7,860 | - | - | - | 7,860 | |||||||||||||||
|
Net
interest income after
provision for loan losses
|
53,618 | - | 13,741 | (14,979 | ) | 52,380 | ||||||||||||||
|
Non-interest
income
|
8,321 | 3,811 | - | (84 | ) | 12,048 | ||||||||||||||
|
Non-interest
expense
|
44,865 | 3,372 | 3,630 | (2,999 | ) | 48,868 | ||||||||||||||
|
Income
(loss) from
continuing operations before income taxes
|
17,074 | 439 | 10,111 | (12,064 | ) | 15,560 | ||||||||||||||
|
Income
tax expense
(benefit)
|
5,273 | 176 | (781 | ) | - | 4,668 | ||||||||||||||
|
Net
income (loss) from
continuing operations
|
11,801 | 263 | 10,892 | (12,064 | ) | 10,892 | ||||||||||||||
|
Net
income from discontinued
operations
|
- | - | 371 | - | 371 | |||||||||||||||
|
Net
income
(loss)
|
$ | 11,801 | $ | 263 | $ | 11,263 | $ | (12,064 | ) | $ | 11,263 | |||||||||
|
Average
assets(in
millions)
|
$ | 2,103 | $ | 10 | $ | 289 | $ | (286 | ) | $ | 2,116 | |||||||||
|
18.
|
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)
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Cash
due from Berkshire
Bank
|
$ | 8,804 | $ | 5,520 | ||||
|
Investment
in
subsidiaries
|
364,808 | 278,328 | ||||||
|
Other
assets
|
4,007 | 5,259 | ||||||
|
Total
assets
|
$ | 377,619 | $ | 289,107 | ||||
|
Liabilities
and Stockholders'
Equity
|
||||||||
|
Accrued
expenses
payable
|
$ | 318 | $ | 482 | ||||
|
Notes
payable
|
35,000 | 15,000 | ||||||
|
Junior
subordinated
debentures
|
15,464 | 15,464 | ||||||
|
Stockholders'
equity
|
326,837 | 258,161 | ||||||
|
Total
liabilities and
stockholders' equity
|
$ | 377,619 | $ | 289,107 | ||||
CONDENSED
STATEMENTS OF INCOME
|
Years
Ended December
31,
|
||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Income:
|
||||||||||||
|
Dividends
from
subsidiaries
|
$ | 8,445 | $ | 15,087 | $ | 43,255 | ||||||
|
Other
|
113 | 606 | 67 | |||||||||
|
Total
income
|
8,558 | 15,693 | 43,322 | |||||||||
|
Interest
expense
|
2,227 | 1,271 | 450 | |||||||||
|
Operating
expenses
|
775 | 714 | 325 | |||||||||
|
Total
expense
|
3,002 | 1,985 | 775 | |||||||||
|
Income
before income taxes and
equity in
|
||||||||||||
|
undistributed
income
of subsidiaries
|
5,556 | 13,708 | 42,547 | |||||||||
|
Income
tax
benefit
|
(1,064 | ) | (471 | ) | (153 | ) | ||||||
|
Income
before equity in
undistributed
|
||||||||||||
|
income
of
subsidiaries
|
6,620 | 14,179 | 42,700 | |||||||||
|
Equity
in undistributed income
(loss) of subsidiaries
|
6,915 | (2,916 | ) | (34,474 | ) | |||||||
|
Net
income
|
$ | 13,535 | $ | 11,263 | $ | 8,226 | ||||||
CONDENSED
STATEMENTS OF CASH FLOWS
|
Years
Ended December
31,
|
||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
flows from operating
activities:
|
||||||||||||
|
Net
income
|
$ | 13,535 | $ | 11,263 | $ | 8,226 | ||||||
|
Adjustments
to reconcile net
income
|
||||||||||||
|
to
net cash provided
by operating activities:
|
||||||||||||
|
Equity
in undistributed (income)
loss of subsidiaries
|
(6,915 | ) | 2,916 | 34,474 | ||||||||
|
Other,
net
|
1,207 | (2,359 | ) | (1,394 | ) | |||||||
|
Net
cash provided by operating
activities
|
7,827 | 11,820 | 41,306 | |||||||||
|
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 | |||||||||
|
Net
cash paid for Factory Point
acquisition
|
(12,665 | ) | - | - | ||||||||
|
Net
cash paid for Woronoco
acquisition
|
- | - | (35,088 | ) | ||||||||
|
Purchase
of investment
securities
|
(120 | ) | (300 | ) | - | |||||||
|
Net
cash used by investing
activities
|
(12,785 | ) | (29,143 | ) | (43,306 | ) | ||||||
|
Cash
flows from financing
activities:
|
||||||||||||
|
Net
proceeds from notes
payable
|
20,000 | 15,000 | - | |||||||||
|
Proceeds
from junior subordinated
debentures
|
- | - | 15,464 | |||||||||
|
Proceeds
from reissuance of
treasury stock
|
1,462 | 5,218 | 2,329 | |||||||||
|
Payments
to acquire treasury
stock
|
(7,822 | ) | (2,876 | ) | (7,953 | ) | ||||||
|
Cash
dividends
paid
|
(5,398 | ) | (4,834 | ) | (3,707 | ) | ||||||
|
Net
cash provided by financing
activities
|
8,242 | 12,508 | 6,133 | |||||||||
|
Net
change in cash and cash
equivalents
|
3,284 | (4,815 | ) | 4,133 | ||||||||
|
Cash
and cash equivalents at
beginning of year
|
5,520 | 10,335 | 6,202 | |||||||||
|
Cash
and cash equivalents at end
of year
|
$ | 8,804 | $ | 5,520 | $ | 10,335 | ||||||
|
19.
|
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.
|
20.
|
QUARTERLY
DATA (UNAUDITED)
|
Quarterly
results of operations were as follows. Quarterly data may not sum to annual
data
due to rounding.
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
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
|
$ | 35,849 | $ | 32,631 | $ | 31,994 | $ | 31,470 | $ | 31,381 | $ | 31,388 | $ | 28,212 | $ | 27,070 | ||||||||||||||||
|
Interest
expense
|
17,631 | 17,152 | 16,956 | 16,280 | 15,810 | 15,785 | 13,754 | 12,462 | ||||||||||||||||||||||||
|
Net
interest
income
|
18,218 | 15,479 | 15,038 | 15,190 | 15,571 | 15,603 | 14,458 | 14,608 | ||||||||||||||||||||||||
|
Non-interest
income
|
7,069 | 2,444 | 6,893 | 8,237 | 5,831 | (1,784 | ) | 3,910 | 4,091 | |||||||||||||||||||||||
|
Total
revenue
|
25,287 | 17,923 | 21,931 | 23,427 | 21,402 | 13,819 | 18,368 | 18,699 | ||||||||||||||||||||||||
|
Provision
for loan
losses
|
3,060 | 390 | 100 | 750 | 785 | 6,185 | 600 | 290 | ||||||||||||||||||||||||
|
Non-interest
expense
|
18,393 | 16,589 | 15,103 | 15,409 | 14,652 | 11,353 | 11,638 | 11,225 | ||||||||||||||||||||||||
|
Income
from continuing operations
before
|
||||||||||||||||||||||||||||||||
|
income
taxes
|
3,834 | 944 | 6,728 | 7,268 | 5,965 | (3,719 | ) | 6,130 | 7,184 | |||||||||||||||||||||||
|
Income
taxes-continuing
operations
|
761 | - | 2,152 | 2,326 | 1,880 | (1,466 | ) | 1,888 | 2,366 | |||||||||||||||||||||||
|
Income
(loss) from continuing
operations
|
3,073 | 944 | 4,576 | 4,942 | 4,085 | (2,253 | ) | 4,242 | 4,818 | |||||||||||||||||||||||
|
Net
income from discontinued
operations
|
- | - | - | - | 18 | 133 | 221 | - | ||||||||||||||||||||||||
|
Net
income
(loss)
|
$ | 3,073 | $ | 944 | $ | 4,576 | $ | 4,942 | $ | 4,103 | $ | (2,120 | ) | $ | 4,463 | $ | 4,818 | |||||||||||||||
|
Basic
earnings (loss) per
share
|
||||||||||||||||||||||||||||||||
|
Continuing
operations
|
$ | 0.29 | $ | 0.11 | $ | 0.52 | $ | 0.57 | $ | 0.48 | $ | (0.26 | ) | $ | 0.50 | $ | 0.57 | |||||||||||||||
|
Discontinued
operations
|
- | - | - | - | - | 0.01 | 0.02 | - | ||||||||||||||||||||||||
|
Net
income
(loss)
|
$ | 0.29 | $ | 0.11 | $ | 0.52 | $ | 0.57 | $ | 0.48 | $ | (0.25 | ) | $ | 0.52 | $ | 0.57 | |||||||||||||||
|
Diluted
earnings (loss) per
share
|
||||||||||||||||||||||||||||||||
|
Continuing
operations
|
$ | 0.29 | $ | 0.11 | $ | 0.52 | $ | 0.56 | $ | 0.47 | $ | (0.26 | ) | $ | 0.48 | $ | 0.55 | |||||||||||||||
|
Discontinued
operations
|
- | - | - | - | - | 0.01 | 0.03 | - | ||||||||||||||||||||||||
|
Net
income
(loss)
|
$ | 0.29 | $ | 0.11 | $ | 0.52 | $ | 0.56 | $ | 0.47 | $ | (0.25 | ) | $ | 0.51 | $ | 0.55 | |||||||||||||||
2007
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 the Factory Point acquisition in the third quarter of 2007. Third
quarter non-interest income was $2.4 million due to $3.8 million in losses,
due
to the execution of an $82 million deleverage strategy. First and second quarter
non-interest income was up primarily from the newly acquired insurance agencies
and the associated contingent premium revenues collected in the first and second
quarter of 2007. The provision for loan losses increased in the fourth quarter
due to a $2.5 million charge-off related to one commercial credit with borrower
fraud. Third and fourth quarter non-interest expense increased primarily due
to
the Factory Point acquisition.
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, resulting from 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.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
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.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No
change
in the Company’s internal control over financial reporting occurred
during the quarter ended December 31, 2007 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 over financial reporting are contained in
“Item 8 – Financial Statements and Supplementary Data” in this annual report in
Form 10-K.
ITEM
9B. OTHER INFORMATION
Other
Events
The
annual meeting of stockholders will be held on Thursday, May 15, 2008 at the
Crowne Plaza Hotel, One West Street, Pittsfield, Massachusetts.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
For
information concerning the directors of the Company, the information contained
under the sections captioned “Items to be Voted on by Stockholders – Item 1 --
Election of Directors” in Berkshire Hills’ Proxy Statement for the 2008 Annual
Meeting of Stockholders is incorporated by reference.
The
following table sets forth certain information regarding the executive officers
of Berkshire Hills, Berkshire Bank and Berkshire Insurance Group.
|
Name
|
Age
|
Position
|
|
Michael
P.
Daly
|
46
|
President
and Chief Executive
Officer
|
|
Kevin
P.
Riley
|
48
|
Executive
Vice President, Chief
Financial Officer and Treasurer
|
|
Michael
J.
Oleksak
|
49
|
Executive
Vice President of
Commercial Banking
|
|
Guy
H.
Boyer
|
53
|
Executive
Vice President of Retail
Banking
|
|
Ross
D.
Gorman
|
57
|
President
and Chief Executive
Officer - Berkshire Insurance
Group
|
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
Mr.
Daly is employed pursuant to a two year employment agreement, which
renews automatically if not otherwise terminated pursuant to its terms. Mr.
Gorman is employed pursuant to an emplyment agreement with a term expiring
in
December 31, 2009.
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.
Kevin
P. Riley serves as
Executive Vice President, Chief Financial Officer and Treasurer. Mr. Riley
joined the Company on August 1, 2007. Prior to joining the Company, Mr. Riley
was Executive Vice President for Client Information and Relationship Management
with KeyCorp where he was responsible for bank-wide customer relationship
management, data governance and facilities. Previously from 1996 to 2002, he
served as Executive Vice President and Chief Financial Officer of KeyBank
National Association, Key Corp's flagship community bank and was a member of
its
executive team.
Michael
J. Oleksak serves as Executive
Vice
President of Commercial Banking and Regional President of Pioneer Valley. 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.
Guy
H. Boyer serves as
Executive Vice President of Retail Banking. Mr. Boyer, a Certified Public
Accountant, was formerly President and Chief Executive Officer of Factory Point
Bancorp in Manchester Center, Vermont from 1997 through September 2007 when
the
institution was acquired by Berkshire. From 1980 to 1997 Mr. Boyer served as
Vice President and Senior Trust Officer, Senior Vice President and Chief
Financial Officer and Executive Vice President/Director and Chief Administrative
Officer in charge of Commercial Banking, Heritage Bancorp in Pottsville,
Pennsylvania. Mr. Boyer is a member of the American Institute of Certified
Public Accountants and has served on numerous community boards. Mr. Boyer
currently is a speaker at the Northern New England School of Banking, at the
University of New Hampshire. He currently serves on the boards of the
Maple Street School, as Chairman of Blue Cross/Blue Shield of Vermont
and the executive committee of the Vermont Bankers Association.
Ross
D. Gorman serves as
President and Chief Executive Officer of Berkshire Insurance Group, Inc. His
current position is to coordinate the integration of five independent agencies
that were merged into Berkshire Insurance Group, Inc. in November of 2006.
The
new agency is one of the largest in New England with ten offices, almost 100
employees and over $80 million in premium volume. Mr. Gorman is a CPCU, RPLU,
Licensed Insurance Advisor. Prior to joining the Company in November 2006,
Mr.
Gorman was President of MassOne Insurance Agency, Inc. in Greenfield,
Massachusetts since 1980.
Reference
is made to the cover page of this report and to the section captioned “Other
Information Relating to Directors and Executive Officers - 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 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 sections captioned “Compensation Discussion
and
Analysis,” “Executive Compensation” and“Director Compensation” in
the Proxy Statement are incorporated 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
|
Information
required by this Item is incorporated herein by reference to the section
captioned “Items to be Voted
on by Stockholders – Item 2 – Approval of Amendment to the Berkshire Hills
Bancorp, Inc. 2003 Equity Compensation Plan – Equity Compensation Plan
Information” in the Proxy Statement.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this item is incorporated herein by reference to the
sections captioned “Other
Information Relating to Directors and Executive Officers – Policies and
Procedures for Approval of Related Persons Transactions” and“Transactions with
Management” in the Proxy Statement.
Information
regarding director independence is incorporated herein by reference to the
section captioned “Items to be
Voted on by Stockholders – Proposal 1 – Election of Directors” in the
Proxy Statement.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by this item is incorporated herein by reference to the
section captioned “Items to be
Voted on by Stockholders - Item 3 – 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, 2007 and
2006
|
|
|
·
|
Consolidated
Statements of Income for the Years Ended December 31, 2007,
2006 and 2005
|
|
|
·
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended December
31, 2007, 2006 and 2005
|
|
|
·
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006
and
2005
|
|
|
·
|
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
|
*Supplemental
Executive Retirement Agreement between Berkshire Bank and Michael
P. Daly
(4)
|
|
|
10.4
|
*Berkshire
Hills Bancorp, Inc. 2003 Equity Compensation Plan(5)
|
|
|
10.5
|
*Form
of Berkshire Bank Employee Severance Compensation Plan(1)
|
|
|
10.6
|
*Form
of Berkshire Bank Supplemental Executive Retirement Plan(1)
|
|
|
10.7
|
*Berkshire
Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(6)
|
|
|
10.8
|
*Woronoco
Bancorp, Inc. 1999 Stock-Based Incentive Plan(7)
|
|
|
10.9
|
*Woronoco
Bancorp, Inc. 2001 Stock Option Plan(8)
|
|
|
10.10
|
*Woronoco
Bancorp, Inc. 2004 Equity Compensation Plan(9)
|
|
|
10.11
|
Factory
Point Bancorp, Inc. 1999
Non-Employee Directors Stock Option Plan, as amended and restated
(10)
|
|
|
10.12
|
Factory
Point Bancorp, Inc. 1999 Stock Incentive Plan(10)
|
|
|
10.13
|
Factory
Point Bancorp, Inc. 2004 Stock Incentive Plan, as amended and restated
(10)
|
|
|
*
Change in Control Agreement by and between Berkshire Hills Bancorp,
Inc.
and Kevin P. Riley
|
|
|
*
Change in Control Agreement by and between Berkshire Bank and Kevin
P.
Riley
|
|
|
*
Change in Control Agreement by and between Berkshire Hills Bancorp,
Inc.
and Michael J. Oleksak
|
|
|
*
Change in Control Agreement by and between Berkshire Bank and Michael
J.
Oleksak
|
|
|
*
Senior Executive Employment Agreement by and between Berkshire Insurance
Group, Inc. and Ross D. Gorman
|
|
|
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”
|
|
|
Consent
of Wolf & Company, P.C.
|
|
|
Rule
13a-14(a) Certification of Chief Executive
Officer
|
|
|
Rule
13a-14(a) Certification of Chief Financial
Officer
|
|
|
Section
1350 Certification of Chief Executive
Officer
|
|
|
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 8-K as filed on
February
29, 2008.
|
|
|
(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 Exhibits to the Form 10-K as filed on
March
16, 2007.
|
|
|
(5)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as filed
on
March 27, 2003.
|
|
|
(6)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as filed
on
December 7, 2000.
|
|
|
(7)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 20,
2000 by
Woronoco Bancorp, Inc.
|
|
|
(8)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 12,
2001 by
Woronoco Bancorp, Inc.
|
|
|
(9)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 22,
2004 by
Woronoco Bancorp, Inc.
|
|
|
(10)
|
Incorporated
herein by reference from the exhibits to the registration statement
on
Form S-8 as filed on October 10, 2007, registration No.
333-146604.
|
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,
2008
|
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,
2008
|
||
|
Michael
P.
Daly
|
and
Director
|
|||
|
(principal
executive
officer)
|
||||
|
/s/
Kevin P.
Riley
|
March
14,
2008
|
|||
|
Kevin
P.
Riley
|
Chief
Financial Officer and
Treasurer
|
|||
|
(principal
financial and
accounting officer)
|
||||
|
/s/
Lawrence A.
Bossidy
|
Non-Executive
Chairman
|
March
14,
2008
|
||
|
Lawrence
A.
Bossidy
|
||||
|
/s/
Wallace W.
Altes
|
Director
|
March
14,
2008
|
||
|
Wallace
W.
Altes
|
||||
|
/s/
John B.
Davies
|
Director
|
March
14,
2008
|
||
|
John
B.
Davies
|
||||
|
/s/
Rodney C.
Dimock
|
Director
|
March
14,
2008
|
||
|
Rodney
C.
Dimock
|
||||
|
/s/
David B.
Farrell
|
Director
|
March
14,
2008
|
||
|
David
B.
Farrell
|
||||
|
/s/
Susan M.
Hill
|
Director
|
March
14,
2008
|
||
|
Susan
M.
Hill
|
||||
|
/s/
Cornelius D.
Mahoney
|
Director
|
March
14,
2008
|
||
|
Cornelius
D.
Mahoney
|
||||
| /s/ Edward G. McCormick, Esq. |
|
Director
|
March
14,
2008
|
|
|
Edward
G. McCormick,
Esq.
|
||||
|
/s/
Catherine B.
Miller
|
Director
|
March
14,
2008
|
||
|
Catherine
B.
Miller
|
||||
|
/s/
David E.
Phelps
|
Director
|
March
14,
2008
|
||
|
David
E.
Phelps
|
||||
|
/s/
D. Jeffrey
Templeton
|
Director
|
March
14,
2008
|
||
|
D.
Jeffrey
Templeton
|
||||
|
/s/
Corydon L.
Thurston
|
Director
|
March
14,
2008
|
||
|
Corydon
L.
Thurston
|
||||
-92-