UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended:December 31, 20092010
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _____ __________
Commission File Number: 000-51584
BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 04-3510455 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 24 North Street, Pittsfield, Massachusetts | 01201 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(413) 443-5601
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of Exchange on which registered |
| Common stock, par value $0.01 per share | NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Yeso¨ Noþx
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 Yeso¨ Noþx
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. Yesþx Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Yeso¨ Noo¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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)
Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþx
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yeso¨ Noþx
The aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately $273$257 million, based upon the closing price of $20.78$19.48 as quoted on the NASDAQ Global Select Market as of the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares outstanding of the registrant’s common stock as of March 1, 201010, 2011 was 14,027,325.14,115,328.
DOCUMENTS INCORPORATED BY REFERENCE:Portions of the Proxy Statement for the 20102011 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
INDEX
| PART I | ||||||||
| 3 | ||||||||
| BUSINESS | 3 | |||||||
| ITEM 1A. | RISK FACTORS | 27 | ||||||
| ITEM 1B. | UNRESOLVED STAFF COMMENTS | 32 | ||||||
| ITEM 2. | PROPERTIES | 33 | ||||||
| ITEM 3. | LEGAL PROCEEDINGS | 33 | ||||||
| ITEM 4. | (REMOVED AND RESERVED) | 34 | ||||||
| PART II | 35 | |||||||
| 5. | ||||||||
| 35 | ||||||||
| ITEM 6. | SELECTED FINANCIAL DATA | 38 | ||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 39 | ||||||
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 59 | ||||||
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 61 | ||||||
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND | |||||||
| FINANCIAL DISCLOSURE | 113 | |||||||
| ITEM 9A. | CONTROLS AND PROCEDURES | 113 | ||||||
| ITEM 9B. | OTHER INFORMATION | 114 | ||||||
| PART III | 115 | |||||||
| 10. | ||||||||
| 115 | ||||||||
| ITEM 11. | EXECUTIVE COMPENSATION | 116 | ||||||
| 12. | ||||||||
| 116 | ||||||||
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 117 | |||||||
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES | 117 | ||||||
| PART IV | 118 | |||||||
| 15. | 118 | |||||||
| SIGNATURES | ||||||||
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 Hills Bancorp” or the “Parent”), Berkshire Bank (the "Bank") and Berkshire Insurance Group.Group, Inc. ("Berkshire Insurance Group" or "BIG"), collectively (the "Company"). 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. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. 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
The Company is headquartered in Pittsfield, Massachusetts. Berkshire Hills Bancorp, Inc. (the “Company” or “Berkshire”) is a Delaware corporation and the holding company for Berkshirethe Bank (the “Bank”).and BIG. Established in 1846, Berkshirethe Bank is one of Massachusetts’Massachusetts' oldest and largest independent banks and is the largest banking institution based in Western Massachusetts. The Company andAt year-end 2010, the Bank are headquartered in Pittsfield, Massachusetts. Berkshire had $2.7$2.9 billion in assets at year-end 2009. Berkshireassets. BIG is also the holding company for Berkshire Insurance Group, one of the largest independent insurance agencies in Western Massachusetts. Berkshire operates a total of 45 financial centers, including 40 bank branches as well as insurance offices. Berkshire’sBIG's 2010 revenues totaled $11.1 million.
The Company's common shares are traded on the NASDAQ Global Select Market under the symbol “BHLB”. At year-end 2009,2010, the Company had 13.9 million common shares outstanding and the year-endCompany's closing stock price was $20.68.$22.11 and 14.1 million common shares were outstanding.
The Company is the largest locally headquartered regional bank servicingand financial services company serving its markets. The Company seeks to distinguish itself based on the following attributes:
| — | Strong growth from organic, de novo, product and acquisition strategies | ||
| — | Solid capital, core funding and risk management culture | ||
| — | Experienced executive team focused on earnings and stockholder value | ||
| — | Distinctive brand and culture as America’s Most Exciting BankSM | ||
| — | Diversified integrated financial service revenues | ||
| — | Positioned to be regional consolidator in attractive markets |
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The Company profiles its growing regional franchise as follows:
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The Bank operates under the brand America’s Most Exciting BankSMand portrays its brand and culture as follows:
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The Bank operates 4042 full-service banking offices serving communities throughout Western Massachusetts, Northeastern New York and in Southern Vermont. The Bank operates in four regions:
| · | The Berkshire County Region, with twelve offices in Berkshire County. Berkshire County is the Company’s traditional market, where it has a leading market share in many of its product lines. Berkshire County is renowned for its combination of nature, culture, and harmony which makes it a leisure and tourism destination and an attractive location for an emerging creative economy. Berkshire County is within commuting range of both Albany, New York and Springfield, Massachusetts and is also part of a mountain recreational area shared with Southern Vermont. Berkshire is an attractive second home and vacation area for New York City and Boston. The Pittsfield metropolitan statistical area (“MSA”) 2009 GDP was $5 billion. In 2010, this region had average gross loans of $867 million and average deposits of $880 million. In 2009, this region had average gross loans of $957 million and average deposits of $868 million. The decrease in average loans in 2010 reflected planned runoff of indirect auto loans, along with elevated prepayments of residential mortgage loans, together with writedowns and workouts of commercial loans in accordance with the Company’s risk management initiatives. |
| · | The Springfield Region, in the Pioneer Valley area with eleven offices along the Connecticut River valley in Springfield, Massachusetts, and north and west of Springfield. The Company entered this region through the acquisition of Woronoco Bancorp in June 2005 and also manages other New England commercial business through this region. The Company opened its new regional headquarters in Springfield, along with a new branch in the fourth quarter of 2009. This region is the metropolitan hub of Western Massachusetts and part of the Hartford/Springfield economic region; centrally located between Boston and New York City at the crossroads of Interstate 91 which traverses the length of New England and Interstate 90 which traverses the width of Massachusetts. This region also has easy access to Bradley International Airport, which is a major airport serving central New England. The Springfield MSA 2009 GDP was $23 billion. In 2010, this region had average gross loans of $592 million (including loans in other New England markets) and average deposits of $517 million. In 2009, this region had average gross loans of $545 million and average deposits of $517 million. |
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| · | The Albany New York Region, with twelve offices serving Albany and the surrounding area in Northeastern New York. This region represents a de novo expansion by the Company begun in 2005. In 2009, the Company recruited a prominent New York Chairman and an experienced commercial banking team to serve this market. Albany is the state capital and is part of New York’s Tech Valley which is gaining prominence as a world technology hub including leading edge nanotechnology initiatives representing a blend of private enterprise and public investment. In the latter part of 2010, the Company opened two new branches in this region in the towns of Albany and Latham. Additionally, the Bank plans to open another two new branches in this region in 2012. The Albany/Schenectady MSA 2009 GDP was $40 billion. In 2010, this region had average gross loans of $293 million and average deposits of $297 million. In 2009, the Company's Albany region had average gross loans of $251 million and average deposits of $234 million. Growth of loans and deposits in 2010 reflected ongoing growth of recently opened branches and business development by the commercial banking team. |
| · | The Vermont Region, with seven branches serving Southern Vermont. The Company entered this region through the acquisition of Factory Point Bancorp in September 2007. The Southern Vermont region is contiguous to Berkshire County and shares similar characteristics, with a more pronounced focus on recreation activities in Vermont’s Green Mountains. Additionally, this region shares commerce with both the Berkshire and Albany markets, and provides the Company with access to selected accounts in Northern Vermont. In 2010, the Vermont region had average loans of $229 million and average deposits of $313 million. In 2009, this region had average loans of $229 million and average deposits of $303 million. |
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. Berkshire is the largest locally headquartered regional bankbanks while serving its three state market area, which is centrally located in the Northeast. Berkshire views its markets as geographically conservative, and thesearea. The Company’s markets have experienced less exposure to speculative development, real estate inflation, and subprime lending activities compared to many other regions of the country. The Company’s markets are not contiguous with the densely populated Boston and New York City metropolitan areas. The New England area is traditionally slower to enter and slower to exit national recessions, and the outlook for 2011 and 2012 is that employment and economic activity will not rebound as quickly as national averages. State and local municipal government deficits may also constrain economic activity in the region. Additionally, some of the Company’s markets face slow or negative long term population growth. The Company believes it has attractive long term growth prospects because of itsthe Bank's positioning as the largest locally headquartered regional bank which can serve the retail and commercial markets with a strong product set and responsive local management. The Company also has a goal to deepen its wallet share as a result of its focused cross sales program across its various business lines including insurance and wealth management. Recently, the Bank announced further expansion of its business. It recruited an experienced New England commercial middle market asset based lending team, which is located in Woburn, Massachusetts — in the Greater Boston area. This team will originate short term loans secured by receivables and inventory to businesses located throughout the Northeast. Additionally, the Bank recruited an experienced private banking team in its Springfield region and expects to expand this function to its other regions in the future.
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The Company is pursuing expansion through organic growth, de novo branching, product development, recruitment of banking teams, and through acquisitions. 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 locations in the Berkshire County and Pioneer Valley regions in Massachusetts. The Bank promotes itself as America’s Most Exciting BankSM. It has set out to change the financial service experience. Its vision is to excel as a high performing market leader with the right people, attitude, and energy providing an engaging and exciting customer and team member experience. This brand and culture statement is expected to drive customer engagement, loyalty, market share and profitability.
The Company offers a wide range of deposit, lending, investment,insurance, wealth management, and insurance products to retail, commercial, not-for-profit, and municipal customers in its market areas. The Company’s product offerings also include retail and commercial electronic banking, commercial cash management, and commercial interest rate swaps. The Company’s traditional commercial banking products are offered within its regions and to commercial relationships in Massachusetts, Connecticut, and Rhode Island. The Company stresses a culture of teamwork and performance excellence to produce customer satisfaction to support its strategic growth and profitability. The Company utilizes Six Sigma tools to improve operational effectiveness and efficiency.
The Company has recruited executives with experience in regional bank management and has augmented its management team as it has expanded into a three state diversified regional financial services provider. The Company has invested in its infrastructure in order to position itself for further growth as a regional consolidator with an objective of filling in and expanding its footprint in its New England and New York markets. The Company has absorbed expenses related to its ten-branch de novo expansion into the attractive New York market and other costs of building its infrastructure. Its acquisitions of banks, insurance agencies, and wealth management companies have resulted in initial dilution to book value and tangible book value per share in order forbut position the Company to achieve the scale positioning, and momentum to support future beneficial growth. In 2008 and 2009, the Company conducted successful common stock offerings to obtain capital for growth opportunities and to strengthen its capital base to support its markets.
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The Company has sought opportunities to participate in regional consolidation in its markets throughand made several offers to acquire other institutions during the current periodyear, resulting in merger agreements with two institutions – Rome Bancorp in New York and Legacy Bancorp in Berkshire’s hometown of economicPittsfield. The Company plans to complete the Rome acquisition early in the second quarter of 2011 and financial challenges.the Legacy acquisition in the following quarter. These acquisitions are anticipated to enhance the Company’s positioning as a major regional provider.
COMPANY WEBSITE AND AVAILABILITY OF SECURITIES AND EXCHANGE COMMISSION FILINGS
On the Company’s Internet website in the Investor Relations section atwww.berkshirebank.com, the Company makes available free of charge, 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.
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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 Bank, Citizens Bank, Sovereign Bank, and CitizensKey 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 insurance 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. Recent economic and financial events have significantly impacted the competitive environment. The Federal Reserve System reduced short-term interest rates to close to zero and numerous financial companies converted to bank charters and began accepting FDICdeposits insured deposits.by the Federal Deposit Insurance Corporation (“FDIC”). A number of nonbank sources of competition have withdrawn from the market, and national competitors have reduced their commitment to some activities in the region.
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. Most 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 generally sells its longer-term, fixed-rate, one- to four-family residential loans and sometimes buys and sells participations in some commercial loans.
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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.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||
| of | of | of | of | of | ||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | ||||||||||||||||||||||||||||||
| Residential mortgages | $ | 609.0 | 31 | % | $ | 677.2 | 34 | % | $ | 657.0 | 33 | % | $ | 599.2 | 36 | % | $ | 549.8 | 39 | % | ||||||||||||||||||||
| Commercial mortgages | 851.8 | 43 | 805.5 | 40 | 704.8 | 36 | 566.4 | 33 | 410.7 | 29 | ||||||||||||||||||||||||||||||
| Commercial business | 186.0 | 10 | 178.9 | 9 | 203.6 | 11 | 190.5 | 11 | 158.7 | 11 | ||||||||||||||||||||||||||||||
| Total commercial loans | 1,037.8 | 53 | 984.4 | 49 | 908.4 | 47 | 756.9 | 44 | 569.4 | 40 | ||||||||||||||||||||||||||||||
| Consumer | 314.8 | 16 | 345.5 | 17 | 378.6 | 20 | 342.9 | 20 | 301.0 | 21 | ||||||||||||||||||||||||||||||
| Total loans | $ | 1,961.6 | 100 | % | $ | 2,007.1 | 100 | % | $ | 1,944.0 | 100 | % | $ | 1,699.0 | 100 | % | $ | 1,420.2 | 100 | % | ||||||||||||||||||||
| Allowance for loan losses | (31.8 | ) | (22.9 | ) | (22.1 | ) | (19.4 | ) | (13.0 | ) | ||||||||||||||||||||||||||||||
| Net loans | $ | 1,929.8 | $ | 1,984.2 | $ | 1,921.9 | $ | 1,679.6 | $ | 1,407.2 | ||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||
| of | of | of | of | of | ||||||||||||||||||||||||||||||||||||
| (In millions) | Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | ||||||||||||||||||||||||||||||
| Residential mortgages | $ | 645.0 | 30 | % | $ | 609.0 | 31 | % | $ | 677.2 | 34 | % | $ | 657.0 | 33 | % | $ | 599.2 | 36 | % | ||||||||||||||||||||
| Commercial mortgages | 925.6 | 43 | 851.8 | 43 | 805.5 | 40 | 704.8 | 36 | 566.4 | 33 | ||||||||||||||||||||||||||||||
| Commercial business | 286.1 | 13 | 186.0 | 10 | 178.9 | 9 | 203.6 | 11 | 190.5 | 11 | ||||||||||||||||||||||||||||||
| Total commercial loans | 1,211.7 | 56 | 1,037.8 | 53 | 984.4 | 49 | 908.4 | 47 | 756.9 | 44 | ||||||||||||||||||||||||||||||
| Consumer | 285.5 | 14 | 314.8 | 16 | 345.5 | 17 | 378.6 | 20 | 342.9 | 20 | ||||||||||||||||||||||||||||||
| Total loans | $ | 2,142.2 | 100 | % | $ | 1,961.6 | 100 | % | $ | 2,007.1 | 100 | % | $ | 1,944.0 | 100 | % | $ | 1,699.0 | 100 | % | ||||||||||||||||||||
| Allowance for loan losses | (31.9 | ) | (31.8 | ) | (22.9 | ) | (22.1 | ) | (19.4 | ) | ||||||||||||||||||||||||||||||
| Net loans | $ | 2,110.3 | $ | 1,929.8 | $ | 1,984.2 | $ | 1,921.9 | $ | 1,679.6 | ||||||||||||||||||||||||||||||
Residential mortgages.The Bank offers fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years that are fully amortizing with monthly loan payments. Residential mortgages are generally underwritten according to the Federal National Mortgage Association (“Fannie Mae and Mae”) or the Federal Home Loan Mortgage Association (“Freddie MacMac”) guidelines for loans they designate as “A” or “A-” (these are referred to as “conforming loans”). Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%. The Bank also originates loans above conforming loan amount limits, referred to as “jumbo loans,” which are generally conforming to secondary market guidelines for these loans. The Bank does not offer subprime mortgage lending programs, but may from time to time originate residential mortgages loans with FICO scores below 660, or otherwise not consistent with conforming loan criteria, when merited by other underwriting considerations.programs.
The Bank often sellsmay sell its newly originated fixed rate mortgages. It also monitors its interest rate risk position and sometimes may decide to sell existing mortgage loans in the secondary mortgage market. During 2008, the Bank became approved as a direct seller to Fannie Mae, retaining the servicing rights. The Bank may also sell loans to other secondary market investors, either on a servicing retained or servicing released basis. The Bank sometimes originates loans for sale to the FHA, VA,Federal Housing Administration (“FHA”), U.S. Department of Veteran Affairs (“VA”), and state housing agency programs. As of year-end 2009,2010, residential mortgage loans serviced for others totaled $245$320 million.
The Bank offers adjustable rate (“ARM”) mortgages which do not contain interest-only or negative amortization features. After an initial term of six months to ten years, the rates on these loans generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities. ARM loan interest rates may rise as interest rates rise, thereby increasing the potential for default. At December 31, 2009,2010, the Bank’s ARM portfolio totaled $356$287 million.
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 $22$25 million at year-end 2009.2010.
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).
The 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 at origination 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. BerkshireThe Bank seeks to minimize these risks through strict adherence to its underwriting standards and portfolio management processes.
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The Bank began offeringoffers interest rate swaps to certain larger commercial mortgage borrowers. These swaps allow the Bank to originate a mortgage based on short-term LIBOR rates and allow the borrower to swap into a longer term fixed rate. The Bank simultaneously sells an offsetting back-to-back swap to an investment grade national bank so that it does not retain this fixed-rate risk. The Bank also records fee income on these interest rate swaps. In 2008, the Bank also purchased one interest rate swap on a fixed-rate tax-advantaged economic development bond provided to a local borrower, which is being accounted for as a trading security.
The Bank originates construction loans to builders and commercial borrowers in and around its markets. These loans totaled $111$127 million, or 6% of the total loan portfolio at year-end 2009.2010. Construction loans finance the acquisition and/or improvement of commercial and residential properties. The maximum loan to value limits for construction loans follow FDIC supervisory limits, up to a maximum of 80%. The Bank commits to provide the permanent mortgage financing on most of our construction loans on income-producing property. Advances on construction loans are made in accordance with a schedule reflecting the cost of the improvements. Construction loans include land acquisition loans up to a maximum 65% loan to value on raw land.
Construction loans may have greater credit risk than permanent loans. In many cases, the loan’s repayment is dependent on the completion of construction and other real estate improvements, which entails risk that construction permits may be delayed or may not be received, or that there may be delays or cost overruns during construction. Repayment is also often dependent on the sale or rental of the improved property, which depends on market conditions and the availability of permanent financing. Developers and contractors may also encounter liquidity risks or other risks related to other projects which are not being financed.
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. BerkshireThe 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.
In the first quarter of 2010, the Bank recruited an experienced asset based lending team with a long track record of serving middle-market companies in New England. This Asset Based Lending Group will continue to serve its traditional New England market, as well as the Bank’s market in northeastern New York. This new group expands the Bank’s business lending offerings to include revolving lines of credit and term loans secured by accounts receivable, inventory, and other assets to manufacturers, distributors and select service companies experiencing seasonal working capital needs, rapid sales growth, a turnaround, buyout or recapitalization with credit needs ranging from $2 to $25 million. Asset based lending involves monitoring loan collateral so that outstanding balances are always properly secured by business assets. This new business line expands the Bank’s business services, diversifies its loan portfolio, and provides important credit services across a wider geography. The Asset Based Lending Group is located in Woburn, Massachusetts in the Greater Boston area where this lending team has been based for many years. The recruitment of this team included the operations personnel and the acquisition of lending systems which are critical to this form of lending. The Company's Chief Risk Officer, who was also recruited in 2010, brings extensive experience in the oversight of asset based lending functions, and has instituted underwriting and review policies appropriate for the integration of this form of lending into the Bank’s overall lending risk management processes.
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 monitor and appraise and may fluctuate in value. The Bank gives additional consideration to the borrower’s credit history and the guarantor’s 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.The Bank’s consumer loans consist principally of prime indirect automobile loans and home equity loans. In 2008, the Company substantially ended the origination of new indirect automobile loans due to its assessment of credit and pricing conditions in that market. Collections are more sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged prior to repossession. Additionally, collections are subject to the limitations of federal and state laws. Automobile loans outstanding totaled $38 million at year-end 2010 as compared to $77 million at year-end 2009.2009 due to this planned run-off.
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The Bank’s home equity lines of credit are typically secured by first or second mortgages on borrowers’ residences. Home equity lines have an initial revolving period up to tenfifteen years, followed by an amortizing term up to fifteentwenty 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. The maximum combined loan-to-value is 80%. 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. Additionally, there may be possible compression of collateral coverage on second lien home equity lines. 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 20092010 totaled $238$226 million.
Maturity and Sensitivity of Loan Portfolio.The following table shows contractual final maturities of selected loan categories at year-end 2009.2010. The contractual maturities do not reflect premiums, discounts, and deferred costs and do not reflector prepayments.
| Contractual Maturity | One Year | More than One | More Than | One Year | More than One | More Than | ||||||||||||||||||||||||||
| (In thousands) | or Less | to Five Years | Five Years | Total | or Less | to Five Years | Five Years | Total | ||||||||||||||||||||||||
| Construction mortgage loans: | ||||||||||||||||||||||||||||||||
| Residential | $ | 9,479 | $ | 12,424 | $ | — | $ | 21,903 | $ | 11,237 | $ | 13,767 | $ | - | $ | 25,004 | ||||||||||||||||
| Commercial | 63,835 | 46,868 | — | 110,703 | 52,386 | 74,438 | - | 126,824 | ||||||||||||||||||||||||
| Commercial business loans | 111,718 | 41,931 | 32,395 | 186,044 | 158,873 | 86,676 | 40,538 | 286,087 | ||||||||||||||||||||||||
| Total | $ | 185,032 | $ | 101,223 | $ | 32,395 | $ | 318,650 | $ | 222,496 | $ | 174,881 | $ | 40,538 | $ | 437,915 | ||||||||||||||||
For the $134$215 million of loans above which mature in more than one year, $47$53 million of these loans are fixed-rate and $87$162 million are variable rate.
Loan Administration.Lending activities are governed by a loan policy approved by the Board’s Risk Management Committee. Internal staff perform post-closing loan documentation review, quality control, and monitor commercial loan administration. The lending staff assigns a risk rating to all commercial loans. Management employs an independent third party to review the risk ratings of the majority of commercial loan balances.
The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Board’s Risk Management Committee and Management. The Risk Management Committee has approvedestablished loan limits and individual and combined lending approval authorities up to specified limits for loans with certain risk ratings.authorities. Management’s Executive Loan Committee is responsible for commercial loan approval above $5 million and residential mortgage approval above $2 million.loan approvals in accordance with these standards and procedures. Management’s underwriting is based on a review of certain factors including risk ratings, recourse, loan-to-value ratios and material policy exceptions.
The Bank’s lending activities are conducted by its salaried and commissioned loan personnel. From time to time, the Bank will purchase whole loans or participations in loans. These loans are underwritten according to Berkshirethe 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 $461$528 million at year-end 2009.2010.
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The loan policy sets certain limits on concentrations of credit and requires periodic reporting of concentrations to the Risk Management Committee. Loans outstanding to the ten largest relationships were 91%84% of risk based capital at year-end 2009.2010. Total year-end commercial construction loans outstanding were 49%53% of the Bank’s risk based capital at year-end, and total commercial mortgage outstandings (including certain owner-occupied loans) were estimated at 313%323% of risk based capital. The FDIC has 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 residential and condominium construction projects. Additionally, the Bank finances construction of multifamily, lodging, leisure, and retail properties. For the majority of these loans, the Bank provides permanent or semi-permanent financing after the construction period.
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Problem Assets.The Bank prefers to work with borrowers to resolve problems rather than proceeding to foreclosure. For commercial loans, this may result in a period of forbearance or restructuring of the loan. For residential mortgage loans, the Bank generally follows FDIC guidelines to attempt a restructuring that will enable an owner-occupant to remain in their home. However, if these processes fail to result in a performing loan, then 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 quarterly delinquent loans and nonperformingnon-performing 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 20092010 if non-accruing loans had nonaccruing loans been current according to their original terms, amounted to $1.3$1.0 million. Included in this amount is $263$210 thousand related to TDRs.troubled debt restructurings (“TDR”). The amount of interest income on those loans that was included in net income in 20092010 was $0.1$0.6 million. Included in this amount is $40$58 thousand related to TDRs. Interest income on accruing TDR loans totaled $0.5$0.3 million for 2009.2010. The total carrying value of accruing and non-accruing TDR loans was $31$8 million at year-end.
Real estate acquired by Berkshirethe 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 2009,2010, total foreclosed real estate was $30 thousand consisting$3.4 million. Management believes this carrying value is a reasonable approximation of one residential property. Management has achieved a low balance of other real estate owned by recognizing realistic market prices at which to allow third parties to purchase properties when they go to foreclosure auction. This has allowed the Bank to avoid significant carrying costs of owning and maintaining real estate while seeking a buyer.exit price.
The following table sets forth additional information on year-end problem assets and accruing troubled debt restructurings.TDRs.
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| Nonaccruing loans: | ||||||||||||||||||||
| Residential mortgages | $ | 3,304 | $ | 1,646 | $ | 726 | $ | 15 | $ | 261 | ||||||||||
| Commercial mortgages | 31,917 | 7,738 | 5,177 | 308 | 271 | |||||||||||||||
| Commercial business | 3,115 | 1,921 | 4,164 | 7,203 | 553 | |||||||||||||||
| Consumer | 364 | 866 | 441 | 66 | 101 | |||||||||||||||
| Total nonperforming loans | 38,700 | 12,171 | 10,508 | 7,592 | 1,186 | |||||||||||||||
| Real estate owned | 30 | 498 | 866 | — | — | |||||||||||||||
| Total nonperforming assets | $ | 38,730 | $ | 12,669 | $ | 11,374 | $ | 7,592 | $ | 1,186 | ||||||||||
| Troubled debt restructurings (accruing) | $ | 17,818 | $ | 7,456 | $ | 4,613 | $ | 5,268 | $ | 1,234 | ||||||||||
| Accruing loans 90+ days past due | 91 | 923 | 823 | 281 | 110 | |||||||||||||||
| Total nonperforming loans/total loans | 1.97 | % | 0.61 | % | 0.54 | % | 0.45 | % | 0.08 | % | ||||||||||
| Total nonperforming assets/total assets | 1.43 | % | 0.48 | % | 0.45 | % | 0.35 | % | 0.06 | % | ||||||||||
| (In thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
| Non-accruing loans: | ||||||||||||||||||||
| Residential mortgages | $ | 2,173 | $ | 3,304 | $ | 1,646 | $ | 726 | $ | 15 | ||||||||||
| Commercial mortgages | 9,488 | 31,917 | 7,738 | 5,177 | 308 | |||||||||||||||
| Commercial business | 1,305 | 3,115 | 1,921 | 4,164 | 7,203 | |||||||||||||||
| Consumer | 746 | 364 | 866 | 441 | 66 | |||||||||||||||
| Total non-performing loans | 13,712 | 38,700 | 12,171 | 10,508 | 7,592 | |||||||||||||||
| Real estate owned | 3,386 | 30 | 498 | 866 | - | |||||||||||||||
| Total non-performing assets | $ | 17,098 | $ | 38,730 | $ | 12,669 | $ | 11,374 | $ | 7,592 | ||||||||||
| Troubled debt restructurings (accruing) | $ | 5,283 | $ | 17,818 | $ | 7,456 | $ | 4,613 | $ | 5,268 | ||||||||||
| Accruing loans 90+ days past due | $ | 1,054 | $ | 91 | $ | 923 | $ | 823 | $ | 281 | ||||||||||
| Total non-performing loans/total loans | 0.64 | % | 1.97 | % | 0.61 | % | 0.54 | % | 0.45 | % | ||||||||||
| Total non-performing assets/total assets | 0.59 | % | 1.43 | % | 0.48 | % | 0.45 | % | 0.35 | % | ||||||||||
Asset Classification and Delinquencies.The Bank performs an internal analysis of its commercial 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 loans with higher than normal risk: loss, doubtful, substandardLoss, Doubtful, Substandard and special mention.Special Mention. An asset classified as “Loss”Loss is normally fully charged-off. “Substandard”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”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 “SpecialSpecial Mention.”
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At year-end 2009,2010, there were no loan balances classified as loss.Loss. The balance of commercial loans classified as doubtfulDoubtful was $2 million.$395 thousand. Commercial loans classified as substandardSubstandard totaled $94$84 million, including $61$73 million of accruing balances and $33$11 million of non-accruing balances. Please see the additional discussion of non-accruing and potential problem loans in Item 7.7 and additional information about loans by risk rating in the Loans note to the consolidated financial statements. Total loans rated special mentionSpecial Mention totaled $80$42 million at year-end.year-end 2010.
Allowance for Loan Losses.BerkshireThe Bank’s loan portfolio is regularly reviewed by management to evaluate the adequacy of the allowance for loan losses. 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 “specific loan loss reserve”), a general component for portfolios of all outstanding loans (a “general loan loss reserve”), and an unallocated reserve component for estimated model imprecision.
Management assesses specific loan loss reserves when it deems that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms stipulated in the loan agreement. Management weighs various factors in its assessment, including but not limited to, its review of the borrower’s payment history and the borrower’s future ability to service the debt, the current value of any pledged collateral, and the strength of any guarantor support. Generally non-accruing commercial loans are deemed impaired and evaluated for specific valuation allowances. Confirmed loan losses are charged-off directly to the allowance. Losses are deemed confirmed when upon review of all the available evidence, any portion of the loan balance is deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Management estimates general loan loss reserves when it is probable that there would be credit losses in portfolios of loans with similar characteristics. Management has identified four primary loan portfolios: residential mortgages, commercial mortgages, commercial business and consumer loans. Sub-portfolios within these primary loan portfolios are also evaluated in order to arrive at a more precise general loan loss allowance. These sub-portfolios include the Bank’s construction loan, auto loan, home equity and high risk loan portfolios. The Bank’s high risk loan portfolio is designated for loans with greater inherent credit risk of loss characteristics meriting higher reserves.
Management’s methodology for assessing general loan loss reserves includes an assessment of historical loss rates adjusted for qualitative and environmental factors, industry data and economic conditions. In addition, management employs an independent third party to perform an annual review of the risk ratings of all of the Bank’s commercial loan relationships exceeding $1 million, all material credits on the Bank’s watch list or classified as substandard,Substandard, and a random sampling of new loans.
Management also records an unallocated reserve for inherent, yet undefined credit losses in its various portfolios. As ofAt year-end 2010, the Bank’s unallocated reserve totaled $1$1.2 million or 3%4% of the total reserve as compared to $1 million or 4%3% of the total reserve as of December 31, 2008.at year-end 2009.
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 the Bank’s allowance for loan losses. Such agencies may require the 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 the Bank’s financial condition and results of operations.
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The following table presents an analysis of the allowance for loan losses for the years indicated.
| (Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 22,908 | $ | 22,116 | $ | 19,370 | $ | 13,001 | $ | 9,337 | $ | 31,816 | $ | 22,908 | $ | 22,116 | $ | 19,370 | $ | 13,001 | ||||||||||||||||||||
Charged-off loans: | ||||||||||||||||||||||||||||||||||||||||
| Residential mortgages | 2,016 | 143 | 110 | 27 | — | 409 | 2,016 | 143 | 110 | 27 | ||||||||||||||||||||||||||||||
| Commercial mortgages | 27,596 | 1,384 | — | — | — | 6,403 | 27,596 | 1,384 | - | - | ||||||||||||||||||||||||||||||
| Commercial business | 5,945 | 884 | 4,850 | 461 | 432 | 2,685 | 5,945 | 884 | 4,850 | 461 | ||||||||||||||||||||||||||||||
| Consumer | 3,586 | 2,031 | 1,416 | 1,288 | 1,110 | 1,188 | 3,586 | 2,031 | 1,416 | 1,288 | ||||||||||||||||||||||||||||||
| Total charged-off loans | 39,143 | 4,442 | 6,376 | 1,776 | 1,542 | 10,685 | 39,143 | 4,442 | 6,376 | 1,776 | ||||||||||||||||||||||||||||||
Recoveries on charged-off loans: | ||||||||||||||||||||||||||||||||||||||||
| Residential mortgages | 213 | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Commercial mortgages | 22 | 100 | — | — | — | 794 | 22 | 100 | - | - | ||||||||||||||||||||||||||||||
| Commercial business | 64 | 290 | 13 | 43 | 55 | 1,094 | 64 | 290 | 13 | 43 | ||||||||||||||||||||||||||||||
| Consumer | 235 | 264 | 356 | 667 | 517 | 140 | 235 | 264 | 356 | 667 | ||||||||||||||||||||||||||||||
| Total recoveries | 321 | 654 | 369 | 710 | 572 | 2,241 | 321 | 654 | 369 | 710 | ||||||||||||||||||||||||||||||
| Net loans charged-off | 38,822 | 3,788 | 6,007 | 1,066 | 970 | 8,444 | 38,822 | 3,788 | 6,007 | 1,066 | ||||||||||||||||||||||||||||||
| Allowance attributed to loans acquired by merger | — | — | 4,453 | — | 3,321 | - | - | - | 4,453 | - | ||||||||||||||||||||||||||||||
| Provision for loan losses | 47,730 | 4,580 | 4,300 | 7,860 | 1,313 | 8,526 | 47,730 | 4,580 | 4,300 | 7,860 | ||||||||||||||||||||||||||||||
| Transfer of commitment reserve | — | — | — | (425 | ) | — | - | - | - | - | (425 | ) | ||||||||||||||||||||||||||||
| Balance at end of year | $ | 31,816 | $ | 22,908 | $ | 22,116 | $ | 19,370 | $ | 13,001 | $ | 31,898 | $ | 31,816 | $ | 22,908 | $ | 22,116 | $ | 19,370 | ||||||||||||||||||||
Ratios: | ||||||||||||||||||||||||||||||||||||||||
| Net loans charged-off/average total loans | 1.96 | % | 0.19 | % | 0.34 | % | 0.07 | % | 0.08 | % | ||||||||||||||||||||||||||||||
| Net charge-offs/average loans | 0.42 | % | 1.96 | % | 0.19 | % | 0.34 | % | 0.07 | % | ||||||||||||||||||||||||||||||
| Recoveries/charged-off loans | 0.82 | 14.72 | 5.79 | 39.98 | 37.09 | 20.91 | 0.82 | 14.72 | 5.79 | 39.98 | ||||||||||||||||||||||||||||||
| Allowance for loan losses/total loans | 1.62 | 1.14 | 1.14 | 1.14 | 0.92 | 1.49 | 1.62 | 1.14 | 1.14 | 1.14 | ||||||||||||||||||||||||||||||
| Allowance for loan losses/nonperforming loans | 82.21 | 188.22 | 210.47 | 255.14 | 1,096.21 | |||||||||||||||||||||||||||||||||||
| Allowance for loan losses/non-accruing loans | 232.63 | 82.21 | 188.22 | 210.47 | 255.14 | |||||||||||||||||||||||||||||||||||
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 (including an apportionment of the unallocated amount). 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.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Percent of | Percent of | Percent of | Percent of | Percent of | ||||||||||||||||||||||||||||||||||||
| Amount Allocated | Amount Allocated | Amount Allocated | Amount Allocated | Amount Allocated | ||||||||||||||||||||||||||||||||||||
| to Total | to Total | to Total | to Total | to Total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans in Each | Amount | Loans in Each | Amount | Loans in Each | Amount | Loans in Each | Amount | Loans in Each | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Allocated | Category | Allocated | Category | Allocated | Category | Allocated | Category | Allocated | Category | ||||||||||||||||||||||||||||||
| Residential mortgages | $ | 3,169 | 0.52 | % | $ | 2,006 | 0.30 | % | $ | 2,028 | 0.31 | % | $ | 1,845 | 0.31 | % | $ | 1,649 | 0.30 | % | ||||||||||||||||||||
| Commercial mortgages | 19,659 | 2.31 | 13,539 | 1.68 | 12,040 | 1.71 | 9,939 | 1.75 | 5,933 | 1.44 | ||||||||||||||||||||||||||||||
| Commercial business | 6,099 | 3.28 | 4,184 | 2.34 | 5,787 | 2.84 | 5,199 | 2.74 | 3,517 | 2.22 | ||||||||||||||||||||||||||||||
| Consumer | 2,889 | 0.92 | 3,179 | 0.92 | 2,261 | 0.60 | 2,387 | 0.70 | 1,902 | 0.63 | ||||||||||||||||||||||||||||||
| Total | $ | 31,816 | 1.62 | % | $ | 22,908 | 1.14 | % | $ | 22,116 | 1.14 | % | $ | 19,370 | 1.14 | % | $ | 13,001 | 0.92 | % | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| Percent of | Percent of | Percent of | Percent of | Percent of | ||||||||||||||||||||||||||||||||||||
| Amount Allocated | Amount Allocated | Amount Allocated | Amount Allocated | Amount Allocated | ||||||||||||||||||||||||||||||||||||
| to Total | to Total | to Total | to Total | to Total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans in Each | Amount | Loans in Each | Amount | Loans in Each | Amount | Loans in Each | Amount | Loans in Each | |||||||||||||||||||||||||||||||
| (In thousands) | Allocated | Category | Allocated | Category | Allocated | Category | Allocated | Category | Allocated | Category | ||||||||||||||||||||||||||||||
| Residential mortgages | $ | 3,200 | 0.15 | % | $ | 3,169 | 0.52 | % | $ | 2,006 | 0.30 | % | $ | 2,028 | 0.31 | % | $ | 1,845 | 0.31 | % | ||||||||||||||||||||
| Commercial mortgages | 19,923 | 0.93 | 19,659 | 2.31 | 13,539 | 1.68 | 12,040 | 1.71 | 9,939 | 1.75 | ||||||||||||||||||||||||||||||
| Commercial business | 6,498 | 0.30 | 6,099 | 3.28 | 4,184 | 2.34 | 5,787 | 2.84 | 5,199 | 2.74 | ||||||||||||||||||||||||||||||
| Consumer | 2,277 | 0.11 | 2,889 | 0.92 | 3,179 | 0.92 | 2,261 | 0.60 | 2,387 | 0.70 | ||||||||||||||||||||||||||||||
| Total | $ | 31,898 | 1.49 | % | $ | 31,816 | 1.62 | % | $ | 22,908 | 1.14 | % | $ | 22,116 | 1.14 | % | $ | 19,370 | 1.14 | % | ||||||||||||||||||||
INVESTMENT SECURITIES ACTIVITIES
The securities portfolio provides cash flow and liquidity to protect the safety of customer deposits. The portfolio is also used to manage interest rate risk and to earn a reasonable return on investment. Investment decisions are made in accordance with the Bank’sCompany's investment policy and include consideration of risk, return, duration, and portfolio concentrations. Day-to-day oversight of the portfolio rests with the Chief Financial Officer and the Treasurer. The Asset/Liability Committee meets monthly and reviews investment strategies. The Risk Management Committee of the Board of Directors reviews all securities transactions and provides general oversight of the investment function.
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The BankCompany has historically maintained a high-quality portfolio of limited duration mortgage-backed securities, together with a portfolio of municipal bonds including national and local issuers and local economic development bonds issued to non-profit organizations. Nearly all of the mortgage-backed securities are issued by Fannie Mae or Freddie Mac, and they generally have an average duration of two to four years. They principally consist of collateralized mortgage obligation PACsobligations and hybrid ARM pass-through securities. Other than securities issued by Fannie Mae and Freddie Mac, no other issuer concentrations exceeding 10% of stockholders’ equity existed at year-end 2009.2010. The municipal portfolio provides tax-advantaged yield, and the local economic development bonds were originated by the Company to area borrowers. Nearly all of the Bank’sCompany's available for sale municipal securities are investment grade rated. Over 95% of these securities have ratings of A or better and over 90% of the portfolio also carries credit enhancement protection. Other corporate bonds include financial institution trust preferred bonds totaling $7$20 million, other financial institution bonds totaling $11$9 million, and other high grade corporate bonds totaling $26$9 million. During 2010, the Company became more active in the purchase of local financial institution equity securities. The BankCompany will invest in certain equity securities when management feels that it is a prudent, safe investment and expects an acceptable return. The Company may also invest in equity securities of local financial institutions for a variety of reasons, including if it concludes the financial institution is undervalued or if the Company might consider partnering with the financial institution in the future. The Company owns $21 million of equity in the Federal Home Loan Bank of Boston (“FHLBB”). This investment is based on the operating relationship with the FHLBB and historically has paid dividends based on current money market rates. It is carried on the cost basis since the FHLBB must repurchase it at cost if the BankCompany terminates the operating relationship. Due to the stresses in the U.S. financial system, the Federal Home Loan Bank of BostonFHLBB did not pay dividends in 2009 and Berkshire expects that dividends will not be paid for the foreseeable near future.or 2010, but a nominal dividend was restored in 2011. During 2008, the BankCompany entered into an interest rate swap against a $15 million tax advantaged economic development bond issued to a local non-profit organization, and as a result this security is carried as a trading account security. None of the Company’s investment securities were other than temporarily impaired at year-end, and theThe Bank did not record any material losses or write-downs of investment securities during the year.year as none of the Company’s investment securities were other-than-temporarily impaired at year-end.
The following table presents the year-end amortized cost and fair value of Berkshire Bank’sthe Company's securities, by type of security, for the years indicated.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
| (In thousands) | Cost | Value | Cost | Value | Cost | Value | ||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 73,277 | $ | 74,784 | $ | 76,843 | $ | 75,414 | $ | 74,223 | $ | 75,186 | ||||||||||||
| Mortgage-backed securities | 192,597 | 197,276 | 174,896 | 176,824 | 103,387 | 104,518 | ||||||||||||||||||
| Other bonds and obligations | 51,707 | 49,722 | 24,341 | 21,043 | 15,601 | 15,265 | ||||||||||||||||||
| Marketable equity securities | 2,679 | 2,563 | 1,177 | 1,099 | 793 | 952 | ||||||||||||||||||
| Total securities available for sale | $ | 320,260 | $ | 324,345 | $ | 277,257 | $ | 274,380 | $ | 194,004 | $ | 195,921 | ||||||||||||
Securities held to maturity | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 14,737 | $ | 14,737 | $ | 9,892 | $ | 9,892 | $ | 9,017 | $ | 9,017 | ||||||||||||
| Tax advantaged economic development bonds | 42,572 | 43,515 | 15,002 | 15,862 | 27,791 | 28,043 | ||||||||||||||||||
| Other bonds and obligations | 173 | 173 | 172 | 172 | 173 | 173 | ||||||||||||||||||
| Mortgage-backed securities | 139 | 142 | 806 | 803 | 2,475 | 2,456 | ||||||||||||||||||
| Total securities held to maturity | $ | 57,621 | $ | 58,567 | $ | 25,872 | $ | 26,729 | $ | 39,456 | $ | 39,689 | ||||||||||||
Trading account security | $ | 15,000 | $ | 15,880 | $ | 15,000 | $ | 18,144 | $ | — | $ | — | ||||||||||||
Restricted equity securities | $ | 23,120 | $ | 23,120 | $ | 23,120 | $ | 23,120 | $ | 23,120 | $ | 23,120 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
| (In thousands) | Cost | Value | Cost | Value | Cost | Value | ||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 79,292 | $ | 79,906 | $ | 73,277 | $ | 74,784 | $ | 76,843 | $ | 75,414 | ||||||||||||
| Mortgage-backed securities | 170,294 | 172,883 | 192,597 | 197,276 | 174,896 | 176,824 | ||||||||||||||||||
| Other bonds and obligations | 40,931 | 38,548 | 51,707 | 49,722 | 24,341 | 21,043 | ||||||||||||||||||
| Marketable equity securities | 15,756 | 18,905 | 2,679 | 2,563 | 1,177 | 1,099 | ||||||||||||||||||
| Total securities available for sale | $ | 306,273 | $ | 310,242 | $ | 320,260 | $ | 324,345 | $ | 277,257 | $ | 274,380 | ||||||||||||
| Securities held to maturity | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 7,069 | $ | 7,069 | $ | 14,737 | $ | 14,737 | $ | 9,892 | $ | 9,892 | ||||||||||||
| Mortgage-backed securities | 83 | 86 | 139 | 142 | 806 | 803 | ||||||||||||||||||
Tax advantaged economic development bonds | 48,861 | 50,016 | 42,572 | 43,515 | 15,002 | 15,862 | ||||||||||||||||||
| Other bonds and obligations | 423 | 423 | 173 | 173 | 172 | 172 | ||||||||||||||||||
| Total securities held to maturity | $ | 56,436 | $ | 57,594 | $ | 57,621 | $ | 58,567 | $ | 25,872 | $ | 26,729 | ||||||||||||
| Trading account security | $ | 14,560 | $ | 16,155 | $ | 15,000 | $ | 15,880 | $ | 15,000 | $ | 18,144 | ||||||||||||
| Restricted equity securities | $ | 23,120 | $ | 23,120 | $ | 23,120 | $ | 23,120 | $ | 23,120 | $ | 23,120 | ||||||||||||
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The following table summarizes year-end 20092010 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 | |||||||||||||||||||||||||||||||||||||||
| One Year or Less | Year to Five Years | 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 | $ | 13.3 | 1.84 | % | $ | 5.2 | 3.62 | % | $ | 50.8 | 3.98 | % | $ | 61.5 | 4.53 | % | $ | 130.8 | 4.01 | % | ||||||||||||||||||||
| Mortgage-backed securities | 10.3 | 0.67 | 21.7 | 1.88 | 35.4 | 3.66 | 125.4 | 4.30 | 192.7 | 3.72 | ||||||||||||||||||||||||||||||
| Other bonds and obligations | 18.1 | 3.62 | 23.8 | 3.08 | 0.0 | 8.16 | 9.7 | 3.30 | 51.7 | 3.31 | ||||||||||||||||||||||||||||||
| Total | $ | 41.7 | 2.33 | % | $ | 50.7 | 2.62 | % | $ | 86.2 | 3.85 | % | $ | 196.6 | 4.32 | % | $ | 375.2 | 3.76 | % | ||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||
| (In millions) | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | ||||||||||||||||||||||||||||||
| Municipal bonds and obligations and tax advantaged economic development bonds | $ | 5.9 | 2.73 | % | $ | 2.1 | 5.29 | % | $ | 52.7 | 5.45 | % | $ | 74.5 | 6.11 | % | $ | 135.2 | 5.70 | % | ||||||||||||||||||||
| Mortgage-backed securities | 3.2 | 3.39 | 8.5 | 2.36 | 51.2 | 2.39 | 107.5 | 3.33 | 170.4 | 3.00 | ||||||||||||||||||||||||||||||
| Other bonds and obligations | 13.3 | 3.23 | 3.1 | 5.17 | 2.0 | 5.01 | 23.0 | 5.26 | 41.4 | 4.59 | ||||||||||||||||||||||||||||||
| Total | $ | 22.4 | 3.12 | % | $ | 13.7 | 3.43 | % | $ | 105.9 | 3.97 | % | $ | 205.0 | 4.56 | % | $ | 347.0 | 4.24 | % | ||||||||||||||||||||
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
Deposits are the major source of funds for Berkshire Bank’sthe Bank's lending and investment activities. Deposit accounts are the primary product and service interaction with the Bank’s customers. The Bank serves personal, commercial, non-profit, and municipal deposit customers. 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. BerkshireThe 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. The Bank is promoting remote deposit capture devices so that commercial accounts can make deposits from their place of business. 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. Deposit service fee income also includes other miscellaneous transaction and convenience services sold to customers through the branch system as part of an overall service relationship.
The Bank offers 100% insurance on all deposits as a result of a combination of insurance from the FDIC and the Massachusetts Depositors Insurance Fund, a mutual insurance fund sponsored by Massachusetts-chartered savings banks. This provides a competitive advantage compared to banks which do not offer this insurance. In the fourth quarter of 2008, the FDIC temporarily increased its insurance limits from $100 thousand per person to $250 thousand per person. Additionally, the FDIC optionally offered unlimited insurance on most categories of transaction deposit accounts, and the Bank opted to participate in this program. These higher FDIC insurance amounts currently have a targeted expirationThe $250 thousand limit was made permanent by the passage of mid-year 2010.the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act also extended the unlimited coverage on non-interest bearing demand accounts through December 31, 2012.
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The following table presents information concerning average balances and weighted average interest rates on Berkshirethe Bank’s interest-bearing deposit accounts for the years indicated.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 256.4 | 13 | % | — | % | $ | 225.2 | 12 | % | — | % | $ | 190.4 | 12 | % | — | % | ||||||||||||||||||
| NOW | 188.2 | 10 | 0.43 | 200.1 | 11 | 0.75 | 157.9 | 10 | 1.46 | |||||||||||||||||||||||||||
| Money market | 499.6 | 26 | 1.28 | 464.9 | 25 | 2.15 | 339.2 | 21 | 3.60 | |||||||||||||||||||||||||||
| Savings | 212.3 | 11 | 0.33 | 216.4 | 12 | 0.74 | 201.6 | 13 | 1.09 | |||||||||||||||||||||||||||
| Time | 777.1 | 40 | 3.18 | 725.4 | 40 | 3.94 | 714.1 | 44 | 4.75 | |||||||||||||||||||||||||||
| Total | $ | 1,933.6 | 100 | % | 1.69 | % | $ | 1,832.0 | 100 | % | 2.28 | % | $ | 1,603.2 | 100 | % | 3.16 | % | ||||||||||||||||||
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| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||
| of Total | Weighted | of Total | Weighted | of Total | Weighted | |||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | Average | Average | Average | ||||||||||||||||||||||||||||
| (In millions) | Balance | Deposits | Rate | Balance | Deposits | Rate | Balance | Deposits | Rate | |||||||||||||||||||||||||||
| Demand | $ | 279.2 | 14 | % | - | % | $ | 256.4 | 13 | % | - | % | $ | 225.2 | 12 | % | - | % | ||||||||||||||||||
| NOW | 199.3 | 10 | 0.35 | 188.2 | 10 | 0.43 | 200.1 | 11 | 0.75 | |||||||||||||||||||||||||||
| Money market | 597.3 | 29 | 0.94 | 499.6 | 26 | 1.28 | 464.9 | 25 | 2.15 | |||||||||||||||||||||||||||
| Savings | 224.3 | 11 | 0.27 | 212.3 | 11 | 0.33 | 216.4 | 12 | 0.74 | |||||||||||||||||||||||||||
| Time | 749.2 | 36 | 2.59 | 777.1 | 40 | 3.18 | 725.4 | 40 | 3.94 | |||||||||||||||||||||||||||
| Total | $ | 2,049.3 | 100 | % | 1.29 | % | $ | 1,933.6 | 100 | % | 1.69 | % | $ | 1,832.0 | 100 | % | 2.28 | % | ||||||||||||||||||
At year-end 2009, Berkshire2010, the Bank had time deposit accounts in amounts of $100 thousand or more maturing as follows:
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Maturity Period | Amount | Rate | Amount | Rate | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| (In thousands) | ||||||||||||||||
| Three months or less | $ | 73,841 | 2.81 | % | $ | 48,757 | 1.81 | % | ||||||||
| Over 3 months through 6 months | 36,166 | 1.87 | 38,832 | 1.54 | ||||||||||||
| Over 6 months through 12 months | 109,298 | 2.88 | 93,362 | 2.42 | ||||||||||||
| Over 12 months | 171,116 | 3.76 | 191,403 | 2.98 | ||||||||||||
| Total | $ | 390,421 | 3.16 | % | $ | 372,354 | 2.54 | % | ||||||||
The BankCompany 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. The FHLBB functions as a central reserve bank providing credit for member institutions. As an FHLBB member, Berkshire Bankthe Company 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 BankCompany has a $15 million trust preferred debenture outstanding and maintains a $3 million line of credit, which was unused at year-end 2009.2010. Subject to certain limitations, the Company can also choose to issue common and preferred stock. The Company has a $15 million trust preferred debenture outstanding and issued common stock to the public and preferred stock to the U.S. Treasury in 2008, and funds were used for general corporate purposes. The Company issued common stock to the public in 2009 and these funds were used in the repayment of the U.S. Treasury preferred stock.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swap instruments for its own account and also offers them for sale to commercial customers for their own accounts, normally in conjunction with commercial loans offered by the Bank to these customers. At year-end 2009,2010, the Company held derivatives with a total notional amount of $408$475 million. The Company has a policy for managing its derivative financial instruments, and the policy and program activity are overseen by the Risk Management Committee of the Board of Directors.Committee. Interest rate swap counterparties are limited to a select number of national financial institutions and commercial borrower customers. Collateral may be required based on financial condition tests. The Company works with a third-party firm which assists in marketing swap transactions, documenting transactions, and providing information for bookkeeping and accounting purposes.
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WEALTH MANAGEMENT SERVICES
The Bank’s Asset Management/TrustCompany's Wealth Management Group provides consultative investment management and trust relationships to individuals, businesses, and institutions, with an emphasis on personal investment management. The Wealth Management Group has built a track record over more than a decade with its dedicated in-house investment management team. At year-end 2009,2010, assets under management totaled $668$667 million. Specialized wealth management services offered include investment management, trust administration, estate planning, and private banking. The Wealth Management Group provides a full line of investment products, financial planning, and brokerage services utilizing Commonwealth Financial Network as the broker/dealer.
As an independent insurance agent, itthe Berkshire Insurance Group represents a carefully selected group of financially sound, reputable insurance companies offering attractive coverage at competitive prices. When there is a loss, Berkshire Insurance Group works with its customers to assure that claims are processed fairly and promptly. The GroupBIG offers a full line of personal and commercial property and casualty insurance. It also offers employee benefits insurance and a full line of personal life, health, and financial services insurance products. Berkshire Insurance GroupBIG sells all lines of insurance in Western Massachusetts, Southern Vermont, Upstate New York and Northwestern Connecticut. The GroupBIG operates a focused cross-sell program of insurance and banking products through all offices and branches of Berkshirethe Bank andwith some of BIG’s offices co-located within the group’s offices are co-located with Berkshire BankBank’s branches.
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PERSONNEL
At year-end 2009,2010, the Company had 622599 full-time equivalent employees, compared to 622 at the end of 2009 and 610 at the prior year-end.end of 2008. The increase2010 staffing totals included employees innew staff for the new Asset Based Lending group, staffGroup, the Private Banking Group, and two new branches opened in 2010. These additional employees were more than offset by reductions related to the re-engineering of BIG and other organizational changes in the new Springfield branch, and members of the commercial banking team hired in New York.Company. Year-end personnel included 9179 full-time equivalent employees in Berkshire Insurance GroupBIG and 531520 in the Bank. The Company's employees are not represented by a collective bargaining unit andunit.
SUBSIDIARY ACTIVITIES
The Parent wholly owns two active consolidated subsidiaries: the Bank will strive to continue its strong relationship with its employees.
The Parent also owns all of the common stock of a Delaware statutory business trust, Berkshire Hills Capital Trust I. The capital trust was organized under Delaware law to facilitate the issuance of trust preferred securities and is not consolidated into the Company’s financial results. Its only activity has been the issuance of the $15 million trust preferred security related to the junior subordinated debentures reported in the Company’s consolidated financial statements.
SEGMENT REPORTING
The Company has two reportable operating segments, Banking and Insurance, which are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp.Insurance. Banking includes the activities of Berkshirethe Bank and its subsidiaries, which provide commercial and consumerretail banking services. Insurance includes the activities of Berkshire Insurance Group,BIG, which provides commercial and consumer insurance services. The only other consolidated financial activity of the Company is the Parent, which consiststhat of the transactions of Berkshire Hills Bancorp. Berkshire Hills Capital Trust I is not included with the consolidated financial statements of the Company.Parent. For more information about the Company’s reportable operating segments, see the related note in the consolidated financial statements.
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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 Berkshire Hills Bancorp and its subsidiaries. Federal and state regulation of savings banks and their holding companies is intended primarily for the protection of depositors and deposit insurance funds rather than for the protection of stockholders and creditors.
Berkshire Hills Bancorp is a Delaware corporation and savings and loan holding company registered with the Office of Thrift Supervision (“OTS”). Berkshire Bank’sThe Bank's deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”)FDIC and by the Depositors Insurance Fund of Massachusetts for amounts in excess of the FDIC insurance limits. BerkshireThe Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks (the “Commissioner”) as its chartering agency, and by the FDIC, as its deposit insurer. BerkshireThe Bank is required to 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 the FDIC conduct periodic examinations to test Berkshirethe Bank’s safety and soundness and compliance with various regulatory requirements. As a savings and loan holding company, Berkshire Hills Bancorp is required by federal law to file reports with, and otherwise comply with the rules and regulations of, the OTS. 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, the OTS or Congress, could have a material adverse impact on Berkshire Hills Bancorp, Berkshirethe Parent, the Bank and their operations.
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The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) made extensive changes in the regulation of insured depository institution. Under the Dodd-Frank Act, the OTS will be eliminated. Responsibility for the supervision and regulation of federal savings banks will be transferred to the Office of the Comptroller of the Currency, which is the agency that is currently primarily responsible for the regulation and supervision of national banks. The transfer of regulatory functions will take place over a transition period of up to one year from the Dodd-Frank Act enactment date of July 21, 2010, subject to a possible six-month extension. At the same time, responsibility for the regulation and supervision of savings and loan holding companies, such as Berkshire Hills Bancorp, will be transferred to the Federal Reserve Board, which currently supervises bank holding companies.
Additionally, the Dodd-Frank Act creates a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau will assume responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function currently assigned to prudential regulators, and will have authority to impose new requirements. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the primary enforcement authority of, their prudential regulator rather than the Consumer Financial Protection Bureau. In addition, the Dodd-Frank Act directs changes in the way that institutions are assessed for deposit insurance, mandates the imposition of consolidated capital requirements on savings and loan holding companies such as Berkshire Hills Bancorp, requires originators of certain securitized loans to retain a percentage of the risk for the transferred loans, stipulates regulatory rate-setting for certain debit card interchange fees, repeals restrictions on the payment of interest on commercial demand deposits and contains a number of reforms related to mortgage originations. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations. Their impact on operations cannot yet be fully assessed. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense for the Company.
Certain regulatory requirements applicable to Berkshire Bank and to Berkshire Hills Bancorpthe Company, including certain changes made by the Dodd-Frank Act, 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 Bancorpthe Company and is qualified in its entirety by reference to the actual laws and regulations.
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Massachusetts Banking Laws and Supervision
General.As a Massachusetts-chartered savings bank, Berkshirethe Bank is subject to supervision, regulation and examination by the Commissioner and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, Berkshirethe Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Commissioner is required for a Massachusetts-chartered bank to establish or close branches, merge with other financial institutions, organize a holding company, issue stock and undertake certain other activities.
Massachusetts regulations generally allow Massachusetts banks to engage in activities permissible for federally chartered banks or banks chartered by another state. The Commissioner has adopted procedures reducing regulatory burdens and expense and expediting branching by well-capitalized and well-managed banks.
Dividends.A Massachusetts stock bank may declare cash dividends from net profits cash dividends not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. The approval of the Commissioner is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes.
Loans to One Borrower Limitations.Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations of one borrower to a bank may not exceed 20.0% of the total of the bank’s capital, which is defined under Massachusetts law as the sum of the bank’s capital stock, surplus account and undivided profits.
Loans to a Bank’s Insiders.The Massachusetts banking laws prohibit any executive officer, director or trustee from borrowing, otherwise becoming indebted, or becoming liable for a loan or other extension of credit by such bank to any other person, except for any of the following loans or extensions of credit: (i) loans or extensions of credit, secured or unsecured, to an officer of the bank in an amount not exceeding $100,000; (ii) loans or extensions of credit intended or secured for educational purposes to an officer of the bank in an amount not exceeding $200,000; (iii) loans or extensions of credit secured by a mortgage on residential real estate to be occupied in whole or in part by the officer to whom the loan or extension of credit is made, in an amount not exceeding $750,000; and (iv) loans or extensions of credit to a director or trustee of the bank who is not also an officer of the bank in an amount permissible under the bank’s loan to one borrower limit.
The loans listed above require approval of the majority of the members of Berkshirethe Bank’s Board of Directors, excluding any member involved in the loan or extension of credit. No such loan or extension of credit may be granted with an interest rate or other terms that are preferential in comparison to loans granted to persons not affiliated with the savings bank.
Investment Activities.In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered savings banks may in addition invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in Massachusetts which have pledged to the Commissioner that such monies will be used for further development within the Commonwealth. However, these powers are constrained by federal law.
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Regulatory Enforcement Authority.Any Massachusetts-chartered bank that does not operate in accordance with the regulations, policies and directives of the Commissioner may be subject to sanctions for non-compliance, including seizure of the property and business of the bank and suspension or revocation of its charter. The Commissioner may under certain circumstances suspend or remove officers or directors who have violated the law, conducted the bank’s business in a manner which is unsafe, unsound or contrary to the depositors interests or been negligent in the performance of their duties. In addition, upon finding that a bank has engaged in an unfair or deceptive act or practice, the Commissioner may issue an order to cease and desist and impose a fine on the bank concerned. Finally, Massachusetts consumer protection and civil rights statutes applicable to Berkshirethe Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.
Depositors Insurance Fund.All Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund (“DIF”), a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. The DIF is a private, industry-sponsored insurance company and is not backed by the federal government or the Commonwealth of Massachusetts. The DIF is authorized to charge savings banks an annual assessment of up to 1/50th of 1.0% of a savings bank’s deposit balances in excess of amounts insured by the FDIC.
The combination of FDIC and DIF insurance provides customers of Massachusetts-chartered savings banks with full deposit insurance on all their deposit accounts. No depositor has ever lost a penny in a bank insured by both the FDIC and the DIF. DIF insurance coverage requires no applications or special forms. Depositors automatically receive this added insurance benefit at no cost whenever they make a deposit to a new or existing account at a DIF member bank. The DIF is examined annually by the Massachusetts Division of Banks and audited by an independent auditor.
Massachusetts has other statutes or regulations that are similar to the federal provisions discussed below.
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 Berkshirethe 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 average assets (as defined) 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 certain other items. BerkshireThe 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.
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As a savings and loan holding company regulated by the OTS, Berkshirethe Parent is not currently subject to any separate regulatory capital requirements. BerkshireThe Bank’s regulatory capital is included in the Stockholders’ Equity note of the Company’s financial statements in Item 8 of this report. At December 31, 2009, Berkshireyear-end 2010, the Bank met each of its capital requirements.
Interstate Banking and Branching.Federal law permits a bank, such as Berkshirethe Bank, to acquire an institution by merger in a state other than Massachusetts unless the other state has opted out. Federal law, alsoas amended by the Dodd-Frank Act, authorizes de novo branching into another state if the host state enacts a law expressly permitting out ofallows its state chartered banks to establish such branches within its borders. BerkshireThe Bank operates branches in New York and Vermont. At its interstate branches, Berkshirethe 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.
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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.
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, 2009, BerkshireAt year-end 2010, the 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.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.
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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 Berkshirethe Bank’s employees and does not give preference to the insider over the employees. Federal law places additional limitations on loans to executive officers.
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Enforcement.The FDIC has extensive enforcement authority over insured savings banks, including Berkshirethe 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.Our deposit accounts are insured by the Deposit Insurance Fund of the FDIC up to applicable legal limits, and, as discussed above under “Massachusetts Banking Laws and Supervision—Depositors Insurance Fund”, by the Massachusetts Depositors Insurance Fund for amounts in excess of federal deposit insurance coverage.
The FDIC insures deposits up to reform federalthe standard maximum deposit insurance was signed into law. This legislation merged the Savings Association Insurance Fund and the Bank Insurance Fund into a unified Deposit Insurance Fund; increased theamount (“SMDIA”) of $250 thousand. The deposit insurance limit for certain retirement accounts to $250,000 and indexed that limit to inflation; established a range of 1.15% to 1.50% for the FDIC’s designated reserve ratio; and granted the FDIC discretion to set insurance premium rates accordingwas increased in response to the risk for all insured banks regardlessDodd-Frank Act of 2010, which, among other provisions, made permanent the level ofincrease in the reserve ratio. The legislation also granted a one-time initial assessment creditSMDIA from $100 thousand to certain banks$250 thousand. Additionally, in recognition of their past contributions to the fund. The Bank used up the benefit of this credit in 2008.
The FDIC calculates federal deposithas adopted a risk-based insurance assessment rates beginning insystem. The FDIC assigns an institution to one of four risk categories based on the second quarter of 2009.institution’s financial condition and supervisory ratings. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned, based on a final rule which becomes effective April 1, 2011. Under the newfinal rule, the FDIC first establishes an institution’s initial base assessment rate. This initialbanks in Risk Category 1 have a base assessment rate ranges, depending onof 5-9 basis points and those in Risk Category 2 have a rate of 14 basis points, subject to adjustment. Maximum base assessment rates are 45 basis points in the highest risk categorycategories. Assessment rates are scheduled to decline as the FDIC Reserve Ratio improves. The FDIC has stated that nearly all of the institution, from 12 to 45 basis points. The FDIC then adjusts7,600-plus institutions with assets less than $10 billion will pay smaller assessments as a result of this final rule.
In the initial base assessment (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate are based upon an institution’s levelsfourth quarter of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate ranges from 7 to 77.5 basis points of the institution’s deposits. Additionally, the FDIC issued an interim rule that would impose a special 20 basis points assessment on June 30, 2009, which would be collected on September 30, 2009. The interim rule also allowed for additional special assessments.
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In addition, FDIC insured institutions are required to pay assessments to the Federal Deposit Insurance Corporation at an annual rate of approximately 0.01141.04 basis points of insuredassessable deposits to fund interest payments on bonds issued by the Financing Corporations,Corporation, an agency of the federal government established to recapitalize thea predecessor to the Savings Association Insurance Fund.deposit insurance fund. These assessments will continue until the Financing Corporation bonds mature in 2017 through 2019. The assessment rate is adjusted quarterly to reflect changes in the assessment bases of the fund based on quarterly Call Report and Thrift Financial Report submissions.
Insurance of deposits may be terminated by the FDIC 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 FDIC or the OTS. The management of Berkshire BankManagement does not know of any practice, condition or violation that might lead to termination of deposit insurance.
The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC announced a new program —must seek to achieve the Temporary Liquidity Guarantee Program (“TLGP”). This program has two components. One guaranteed newly issued senior unsecured debt1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the participating organizations, upFDIC. The FDIC has recently exercised that discretion by establishing a long range fund ratio of 2%.
The FDIC has authority to certain limits established for each institution, issued between October 14, 2008increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and June 30, 2009. The Company and the Bank opted to participate in this componentresults of operations of the TLGP, although their initial eligibility to issue FDIC guaranteed debt was immaterial, and neitherBank. Management cannot predict what insurance assessment rates will be in the Company nor the Bank issued guaranteed debt under this program prior to its termination.future.
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. BerkshireThe Bank, as a member, is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Boston. BerkshireFHLBB. The Bank was in compliance with this requirement with an investment in Federal Home Loan Bank of BostonFHLBB stock at year-end 20092010 of $21 million.
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The Federal Home Loan Banks are required to provide funds for certain purposes including contributing funds for affordable housing programs. These requirements, and general financial results, 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 2008, 2007, 2006, and 2005,2006, cash dividends from the Federal Home Loan Bank of BostonFHLBB to Berkshirethe Bank amounted to approximately $0.8 million, $1.4 million, $1.6 million, and $1.3$1.6 million, respectively. Due to losses initially reported in the fourth quarter of 2008, the Federal Home Loan Bank of BostonFHLBB suspended its dividend to members in the first quarter of 2009, and the2009. The dividend remained suspended at year-end 2009.2010 and was recently restored in a nominal amount in the first quarter of 2011.
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Holding Company Regulation
General.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 CompanyParent 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 CompanyParent 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. By regulation, the OTS may restrict or prohibit the Bank from paying dividends.
The Dodd-Frank Act provides for the elimination of the OTS and transfers its authority over and responsibilities for savings and loan holding companies to the Federal Reserve Board. That transfer is effective July 21, 2011, subject to a possible six month extension.
As a unitary savings and loan holding company, the CompanyBerkshire Hills Bancorp 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 Bankbank must qualify as a Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, the Bankbank 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 2009, Berkshire2010, the Bank maintained 74%65% of its portfolio assets in qualified thrift investments. Berkshire Bank alsoinvestments and met the QTL Test for the year.
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Unlike bank holding companies, savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in eachterms of components of capital, than those applicable to institutions themselves. That will eliminate the inclusion of certain instruments from Tier 1 capital, such as trust preferred securities, that are currently includable for bank holding companies. Instruments issued before May 19, 2010 by companies of less than $15 billion in assets (as of December 31, 2009) are grandfathered. There is a five year transition period from the July 21, 2010 date of enactment of the prior twelve monthsDodd-Frank Act before the capital requirements will apply to savings and therefore, metloan holding companies.
The Dodd-Frank Act also extends the QTL Test.“source of strength” doctrine to savings and loan holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy, which requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial distress.
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 CompanyBerkshire Hills Bancorp 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.
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Legislation. The U.S. Congress, state lawmaking bodies and federal and state regulatory agencies continue to consider a number of wide-ranging and comprehensive proposals for altering the structure, regulation and competitive relationships of the nation’s financial institutions, including rules and regulations related to the administration’s proposals. Separate comprehensive financial reform bills intended to address the proposals set forth by the administration were introduced in both houses of Congress in the second half of 2009 and remain under review by both the U.S. House of Representatives and the U.S. Senate.institutions. In addition, both the U.S. Treasury Department and the Basel Committee have issued policy statements regarding proposed significant changes to the regulatory capital framework applicable to banking organizations as discussed above. The Company cannot predict whether or in what form further legislation or regulations may be adopted or the extent to which the Company may be affected thereby.
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Berkshire Bank Municipal Bank
Berkshire Bank Municipal Bank is a state chartered limited purpose commercial bank in New York, to accept deposits of municipalities and other governmental entities in the State of New York. Berkshire 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. As of December 31, 2009,year-end 2010, Berkshire Bank Municipal Bank met all of its capital requirements and met the capital conditions to be classified as a “well capitalized” institution.
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Other Regulations
Consumer Protection Laws.Berkshire The 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. |
The 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.
The Community Reinvestment Act (“CRA”) establishes a requirement for federal banking agencies that, in connection with examinations of financial institutions within their jurisdiction, the agencies evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs"outstanding," "satisfactory," "needs to improve,”" or “substantial"substantial non-compliance.”" A less than “satisfactory” rating would result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent CRA examination by the FDIC, the Bank’s CRA rating was “satisfactory.”
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Anti-Money Laundering Laws.Berkshire The 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 policespolicies and procedures intended to comply with these provisions.
TAXATION
The Company and the Bank report theirreports its 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. Further discussion of income taxation is contained in the income taxes note to the consolidated financial statements.
Federal
The federal income tax laws apply to the Company in the same manner as do other corporations with some exceptions. We may exclude from income 100% of dividends received from the Bank and from Berkshire Insurance GroupBIG as members of the same affiliated group of corporations. WeFor federal income tax purposes, we may carry back net operating losses to the preceding two taxable years for federal income tax purposes and forward to the succeeding twenty taxable years, for federal and state income tax purposes, subject to certain limitations. At December 31, 2009, we had net operating loss carryforwards of $1.1 million for federal
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State
The Company reports income tax purposes.
Massachusetts. The Massachusetts exciseincome tax rate for savings banks is currently 10.5% of federal taxable income, adjusted for certain items. Under current statutes, this rate will be reduced tofinancial institutions was 10% in 2010 and is scheduled to decline to 9.5% in 2011, and 9% in 2012 and thereafter. The Company’s taxable income under Massachusetts tax law includes gross income as defined under the Internal Revenue Code, plus interest from non-Massachusetts 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.Code. Carry forwards and carry backs of net operating losses are not allowed. Aallowed under Massachusetts tax law. Also no deduction is allowed for bonus depreciation or state income taxes paid.
Massachusetts tax law generally permits special tax treatment for 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.
The BankCompany also pays certain franchise taxes annually in the states of Vermont and New York. These taxes were immaterial to the Company are subject to routine audits of our tax returns by the Internal Revenue Service and the Massachusetts Department of Revenue. With few exceptions, we are no longer subject to federal and state income tax examinations by tax authorities for years before 2006.Company’s results.
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Overall Business Risks
The Company’s Business May Be Adversely Affected by Conditions in the Financial Markets and Economic Conditions Generally and Locally
From December 2007 through June 2009, the U.S. economy has experienced a severe recession and financial crisis, which was particularly acute in the United States. Financial and economic stabilization emerged in the second half of 2009, but excess leverage and unemployment continue to pose risk to growth and to stability.recession. Business activity across a wide range of industries and regions isin the U.S. was greatly reducedreduced. Although economic conditions have begun to improve, certain sectors, such as real estate, remain weak and localunemployment remains high. U.S. fiscal and monetary policy have been stimulative, but the policy outlook remains uncertain amidst concerns about public debt levels and financial market conditions. International developments in the Mideast and elsewhere are affecting oil and commodities prices which may have a negative economic impact. Local governments and many businesses are in serious difficulty due to declines in revenues, the lack oflower consumer spending and the lack of liquidity in the credit markets. Real estate valuesA deterioration of business and the values of many asset classes remain well below prior peaks. The northeastern region in which the Company operates historically is late into and out of recessions, and current economic forecasts for the region indicate that the region will lag the nation in recovery. While the region was not hampered by the development excesses in many other U.S. regions and does not have the same pronounced real estate overhangs, the region has higher costs and less favorable demographics than many other U.S. regions, and is therefore potentially slower to respond to growth factors. There can be no assurance that economic and financial conditions will improve in the near term. Such conditions could adversely affect the credit quality of the Company’s loans, results of operations and financial condition.
Lending
Continued and Prolonged Deterioration in the Housing Sector, Commercial Real Estate, and Related Markets May Adversely Affect Our Business and Financial Results.
Softening residential housing markets, increasing delinquency and default rates and constrained secondary credit markets have been affecting the mortgage industry generally. Commercial and residential real estate markets have declined throughoutbeen impacted by the country, with prices in many areas have declined to levels last seen in 2003. Commercial real estate values are also widely reported to be under pressure. Real estate activity is depressed in many of the Company’s markets.broader economic conditions previously discussed. Real estate lending is a major business activity for the Company, and 85% of the Company’s loans were real estate secured at year-end 2009.Company. Real estate market conditions affect the value and marketability of this real estate collateral, and they also affect the cash flows, liquidity, and net worth of many borrowers whose operations and finances depend on real estate market conditions. Adverse conditions in our market areas could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations.
Our Emphasis on Commercial Lending May Expose Us to Increased Lending Risks, Which Could Hurt Our Profits.
We plan to continue to emphasize the origination of commercial loans, which generally exposes us to a greater risk of nonpayment and loss because repayment of such loans often depends on the successful operations and income stream of the borrowers. Commercial loans are historically more sensitive to economic downturns. Such sensitivity includes potentially higher default rates and possible reduction of collateral values. Commercial lending involves larger loan sizes and larger relationship exposures, which can have a greater impact on profits in the event of adverse loan performance. The majority of the Company’s commercial loansmortgages are secured by real estate secured, and are subject to the national outlook for commercialpreviously discussed real estate is an ongoing source of concern among bank regulators. Commercial lending involves more development financing, which is dependent on the future success of new operations.risk factors. Residential construction loans depend significantly on the residential real estate and lending markets for the repayment of these loans. Commercial loans also include lending to nonprofit organizationssometimes involves other development financing, which in some cases are particularly sensitive to negative economic events. Additionally,is dependent on the future success of new operations. The Company’s commercial lending activities extend beyond the area of its traditional branch footprint, which is the area that the Company has a significant exposurethe most knowledge of. The Company’s commercial lending includes asset based lending, which depends on the Company’s processes for monitoring and being able to liquidate collateral on which these loans in the lodging and hospitality sectors which are prominent in some of its markets, and these sectors have been pressured by the recession. Lodging loans totaled $128 million at year-end 2009. Commercial loan net charge-offs measured 86% of total loan net charge-offs in 2009, while commercial loans totaled 53% of total loans.rely. Commercial loans may increase as a percentage of total loans, and commercial lending may continue to expose the company to increased risks.
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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 which is our estimate of the probable losses that are inherent in the loan portfolio as of the financial statement 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. The accounting measurements related to impairment and the loan loss allowance require significant estimates which are subject to uncertainty and changes relating to new information and changing circumstances. 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. In 2009, the total amount of net charge-offs exceeded the balance of the allowance for loan losses at the start of the year. This reflected the development of additional loan losses during the year as the severe recession affected the financial condition of borrowers and the value of collateral beyond what was inherent in the portfolio at year-end 2008. Continued adverse economic and market conditions could give rise to future loan losses which were not inherent in the portfolio at year-end 2009, which could require additional future charges to income. Additionally, the allowance can only reflect those losses which are reasonably estimable, and there are constraints in our ability to estimate losses in this period of unusual economic and financial stress. This is particularly relevant for our estimates of losses for pools of loans. Accordingly, at any time, there may be probable losses inherent in the portfolio but which we are not reasonably able to estimate until additional information emerges which can form the basis for a reasonable estimate.
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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.
Operating
Our Expansion, Growth, and Growth, If Not Successful,Acquisitions Could Negatively Impact Earnings.Earnings If Not Successful.
We plan to achieve significant growth organically, by geographic expansion, through business line expansion, and through acquisitions. We have recently expanded into new geographic markets and anticipate that we will expand into additional new geographic markets as we expand as a regional bank. The success of this expansion depends on our ability to continue to maintain and develop an infrastructure appropriate to support and integrate such growth. Also, our success depends 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 recruitment and retention of key personnel and acquired customer relationships. The profitability of our expansion strategy also depends 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 continue to identify and evaluate opportunities to expand through acquisition of banks, insurance agencies, and wealth management firms. Some of these opportunities could result in further geographic expansion. Merger and acquisition activities are subject to a number of risks, including lending, operating, and integration risks.
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The Company’s recruitment of new executive and commercial lending management has in several cases brought in new management from larger institutions. These individuals have often served larger customers than the Company has historically serviced, and they have had the benefit of larger capital and administrative resources than are present in the Company’s current structure. The success of this recruitment may depend on the successful integration of these individuals into the Company and may expose the Company to lending and operating losses related to large new customers in newer markets. The Company’s commercial banking strategy has particularly focused on taking market share from larger national institutions and in many cases these new accounts are larger than the Company’s historic accounts. Additionally, the Company’s ability to service these accounts may in some cases involve arranging loan participations and syndications. These activities can expose the Company to additional lending, administrative, and liquidity risks.
The Company also recruited aactively recruits in other business lines, including private banking team in 2009 and plans to focus on the development of this business line in the future.wealth management. This activity can give the Company additional access to large customers in its markets in order to expand our business. The retention of this new business in this business line and other new business lines and new leadershipSuch recruitment can be affected byaffect the retention of the new talent,and old business, and can also be affected by competitive reactions and other relationship risks in retaining large new accounts.
Competition From Financial Institutions and Other Financial Service Providers May Adversely Affect Our Growth and Profitability.
Competition in the banking businessand financial services industry is highly competitiveintense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and we experience competition in each of our markets from many other financial institutions. Due to the recent interventions of the federal government, some of thebrokerage and investment banking firms operating locally and elsewhere. Larger banking institutions have substantially greater resources and lending limits and may offer certain services that we competedo not. Local competitors with are receiving substantial federalexcess capital may accept lower returns on new business. There is increased competition by out-of-market competitors through the internet. Federal regulations and financial support whichprograms may not be available to our Company. Many institutions have been allowed to convert to banking charters and to offer insured deposits for the first time. The federal government has guaranteed money market funds which traditionally compete with bank deposits. The federal government has offered significant guarantees of new debt issuances to some of the Company’s competitors to help them fund their operations. Fannie Mae and Freddie Mac are now in federal receivership and may operate directly as a competitor in some lending markets in the future. Emergency measures designed to support some of the Company’scases favor competitors may provide no advantage to the Company or place itus at aan economic disadvantage. Emergency changes in deposit insurance, financial market regulation, bank regulation, and policy of the Federal Home Loan Bank system may all affect the competitive environment for the Company and other market participants.
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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. We utilize third party core banking software and for some systems we outsource our data processing to a third party. If our third party providers encounter difficulties or if we have difficulty in communicating with such third parties, it could significantly affect our ability to adequately process and account for customer transactions, which could significantly affect our business operations. We utilize file encryption in designated internal systems and networks and are subject to certain state and federal regulations regarding how we manage the security of the data that we are responsible for. Due to the recession, there may be a rising risk of fraud or illegal acts. Disaster and disaster recovery risks could affect our ability to operate and our reputation.
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Financial and Operating Counterparties Expose Us to RisksRisks.
We have increased our use of derivative financial instruments, primarily interest rate swaps, which expose us to financial and contractual risks with counterparty banks. We maintain correspondent bank relationships, manage certain loan participations, engage in securities transactions, and engage in other activities with financial counterparties that are customary to our industry. We also utilize services from major vendors of technology, telecommunications, and other essential operating services. There is financial and operating risk in these relationships, which we seek to manage through internal controls and procedures, but there is no assurance that we could not experience loss or interruption of our business as a result of unforeseen events with these providers.
We May Not Be Able to Attract and Retain Skilled People.
Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of financial institutions. Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire these people or to retain them.
Our Controls and Procedures May Fail or Be Circumvented.
Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.
Liquidity
Our Wholesale Funding Sources May Prove Insufficient to Replace Deposits at Maturity and Support Our Operations and 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 may become more dependent on theseThese sources which include Federal Home Loan Bank advances, proceeds from the sale of loans, and liquidity resources at the holding company. 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 costs. 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.
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Our Ability to Service Our Debt, Pay Dividends and Otherwise Pay Our Obligations as They Come Due Is Substantially Dependent on Capital Distributions from Berkshirethe Bank, and These Distributions Are Subject to Regulatory Limits and Other Restrictions.
A substantial source of our holding company income from which we service our debt, pay our obligations and from which we can pay dividends is the receipt of dividends from Berkshirethe Bank. The availability of dividends from Berkshirethe Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of Berkshirethe 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 Berkshirethe 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 Berkshirethe Bank would adversely affect our business, financial condition, results of operations and prospects. At year-end 2009,2010, under existing dividend regulations, Berkshirethe Bank was not eligible to provide dividends to the CompanyParent due to the loss incurred during the year.in 2009. We anticipate that as a result of future profits, the Bank will regain its eligibility to pay dividends to the Company,Parent, but there is no assurance as to the specific timing and magnitude of this event.
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Interest Rates
Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition.
Net interest income is our largest source of income. Changes in interest rates can affect the level of net interest income. The Company’s interest rate sensitivity is discussed in more detail in Item 7A of this report. 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 interest rates can also affect the demand for our products and services, and the supply conditions in the U.S. financial and capital markets. Changes in the level of interest rates 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.
Securities Market Values
Declines in the Value of Certain Investment Securities Could Require Write-Downs, Which Would Reduce Our Earnings.
Unrealized losses on the investment securities portfolio result from changes in credit spreads and liquidity issues in the marketplace, along with changes in the credit profile of individual securities issuers. We have concluded that, as of year-end 2009,2010, any unrealized losses are temporary in nature, and we have the intent and ability to hold these investments for a time necessary to recover our cost or stated maturity (at which time, full payment is expected). However, a continued decline in the value of these securities or other factors could result in an other-than-temporary impairment write-down which would reduce our earnings. Some of the Bank’sCompany’s securities are locally originated economic development bonds. These securities could become impaired due to economic and real estate market conditions which also affect loan risk.
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Regulatory
Legislative and Regulatory InitiativesInitiatives.
The potential exists for additional federal or state laws and regulations regarding lending, funding practices, capital, and liquidity standards, and bank regulatory agencies are expected to be more active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. In addition, new laws, regulations, and other regulatory changes may also increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. The FDIC sets the cost of our FDIC insurance premiums, which can affect our profitability.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Regulatory capital requirements and their impact on the Company may change. We may need to raise additional capital in the future to support our operations and 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. If we cannot raise additional capital when needed, it could affect our operations and our ability to execute our strategic plan, which includes further expanding our operations through internal growth and acquisitions.
The Dodd-Frank Act made extensive changes in the regulation of insured depository institution. In addition to eliminating the OTS and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, directs changes in the way that institutions are assessed for deposit insurance, mandates the imposition of consolidated capital requirements on savings and loan holding companies, requires originators of certain securitized loans to retain a percentage of the risk for the transferred loans, stipulates regulatory rate-setting for certain debit card interchange fees, repeals restrictions on the payment of interest on commercial demand deposits and contains a number of reforms related to mortgage originations. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations. Their impact on operations cannot yet be fully assessed. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense for the Company.
New laws, regulations, and other regulatory changes, along with negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability. For more information, see “Regulation“Regulation and Supervision”in Item 1 of this report.
Provisions of our certificateOur Certificate of incorporation, bylawsIncorporation, Bylaws and Delaware law,Law, as wellWell as stateState and federal banking regulations, could delayFederal Banking Regulations, Could Delay or preventPrevent a takeoverTakeover of usUs by a third party.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, super majoritysupermajority 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 boardBoard of directorsDirectors 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.
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Goodwill and Other Intangible Assets
Our Acquisitions Have Resulted in Significant Goodwill, Which if it Becomes Impaired Would be Required to be Written Down, Which Would NegativelyResulting in a Negative Impact on Earnings.
The initial recording and subsequent impairment testing of goodwill and other intangible assets requires subjective judgments about the estimates of the fair value of assets acquired. Factors that may significantly affect the estimates include specific industry or market sector conditions, changes in revenue growth trends, customer behavior, competitive forces, cost structures and changes in discount rates. It is possible that future impairment testing could result in an impairment of the value of goodwill or intangible assets, or both. If we determine impairment exists at a given point in time, our earnings and the book value of the related intangible asset(s) will be reduced by the amount of the impairment. Notwithstanding the foregoing, the results of impairment testing on goodwill and core deposit intangible assets have no impact on our tangible book value or regulatory capital levels. These are non-GAAP financial measures. They are not a substitute for GAAP measures and should only be considered in conjunction with the Company’s GAAP financial information.
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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 Thethe NASDAQ Global Select Market. The average daily trading volume of our common stock during 2009 was approximately 50 thousand shares. The level of interest and trading in our stock depends on many factors beyond our 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:
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 youour stockholders from selling yourtheir 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. a desirable price.
In the past, stockholders sometimes have brought securities class action litigation against a company following periods of volatility in the market price of their securities. We could be the target of similar litigation in the future, which could result in substantial costs and divert management’s attention and resources.
Pending Mergers
Failure to Complete the Pending Mergers with Rome and Legacy Could Negatively Impact Our Stock Price and Future Business and Financial Results.
If either of the mergers is not completed, our ongoing business may be adversely affected. In addition, if either merger is not completed, we may experience negative reactions from the financial markets and from customers and employees. We also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against us to perform certain obligations under the merger agreement. If either merger is not completed, we cannot assure our stockholders that the risks described above will not materialize and will not materially affect our business, financial results and stock price. Litigation may prevent the merger from being completed or from being completed within the expected timeframe. Please see Item 3 regarding legal proceedings.
None.
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The Company’s headquarters are located in owned and leased facilities located in Pittsfield, Massachusetts. The Company also owns or leases other facilities within its primary market areas: Berkshire County, Massachusetts; Pioneer Valley (Springfield area), Massachusetts; Southern Vermont, and the Capital Region, and Northeastern New York. The Company operates 45 financial service centers including 4042 full service banking offices, and it is in the process of combining its banking and insurance offices in several communities.offices. The Company’s new Asset Based Lending Group operates from leased facilities in Woburn, Massachusetts. The Company considers its properties to be suitable and adequate for its present and immediately foreseeable needs.
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At December 31, 2009, neitheryear-end 2010, the Company nor the Bank was not 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,Company, such as claims to enforce liens, condemnation proceedings on properties in which the BankCompany holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’sCompany’s business. However, neither the Company nor the Bank is not 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.
Following the public announcement of the execution of the Agreement and Plan of Merger, dated October 12, 2010 (the "Merger Agreement"), by and among the Company and Rome Bancorp, Inc. (“Rome Bancorp”), on October 18, 2010, Stephen Bushansky filed a stockholder class action lawsuit in the Supreme Court of the State of New York, County of the Bronx. On October 27, 2010, James and Liliana DiCastro filed a stockholder class action lawsuit in the Chancery Court of the State of Delaware, and on November 15, 2010, Samuel S. Rapasodi filed a stockholder class action lawsuit in the Supreme Court of the State of New York, County of Oneida. Each suit was brought against Rome Bancorp, the Directors of Rome Bancorp, and the Company. The lawsuit filed in Delaware was subsequently withdrawn voluntarily. The active lawsuits in New York state (collectively, the "Rome shareholder litigation") purport to be brought on behalf of all of Rome Bancorp's public stockholders and allege that the directors of Rome Bancorp breached their fiduciary duties to Rome Bancorp's stockholders by failing to take steps necessary to obtain a fair and adequate price for Rome Bancorp's common stock and that the Company knowingly aided and abetted Rome Bancorp directors' breach of fiduciary duty.
On February 23, 2011, solely to avoid the costs, risks and uncertainties inherent in litigation and to allow stockholders to vote on the proposals required in connection with the merger at the scheduled meeting, Rome Bancorp entered into a memorandum of understanding with plaintiffs’ counsel and other named defendants regarding the settlement of the Rome shareholder litigation. Under the terms of the memorandum negotiated by Rome Bancorp, Rome Bancorp, the other named defendants and the plaintiffs have agreed to settle the two lawsuits subject to court approval. If the court approves the settlement contemplated in the memorandum, the Rome shareholder litigation will be dismissed with prejudice. Pursuant to the terms of the memorandum, Rome Bancorp has agreed to make available additional information to its stockholders. In return, the plaintiffs have agreed to the dismissal of the Rome shareholder litigation and to withdraw all motions filed in connection with such lawsuits, including any motions seeking to enjoin the proposed merger from proceeding.
In connection with the settlement, plaintiffs intend to seek an award of attorneys’ fees and expenses subject to court approval. Rome Bancorp and its insurance carrier have agreed to pay the legal fees and expenses of plaintiffs’ counsel, in an amount not to exceed $395 thousand. This payment is not being made by the Company and will not affect the amount of merger consideration to be paid in the merger. If the settlement is finally approved by the court, it is anticipated that it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the proposed merger, the Merger Agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law).
Rome Bancorp, the Company and the other defendants have vigorously denied, and continue to vigorously deny, that they have committed or aided and abetted in the commission of any violation of law or engaged in any of the wrongful acts that were or could have been alleged in the Rome shareholder litigation, and expressly maintain that, to the extent applicable, they diligently and scrupulously complied with their fiduciary and other legal burdens and are entering into the contemplated settlement solely to eliminate the burden and expense of further litigation, to put the claims that were or could have been asserted to rest, and to avoid any possible delay in the consummation of the merger. As a result of the settlement, management of the Company believes the Rome shareholder litigation will not have any material adverse effect on the financial condition or operations of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common shares of Berkshirethe Company 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 20092010 and 2008.2009.
| Dividends | ||||||||||||
| High | Low | Declared | ||||||||||
2009 | ||||||||||||
| First quarter | $ | 31.39 | $ | 18.46 | $ | 0.16 | ||||||
| Second quarter | 26.99 | 19.87 | 0.16 | |||||||||
| Third quarter | 24.88 | 19.92 | 0.16 | |||||||||
| Fourth quarter | 22.85 | 18.05 | 0.16 | |||||||||
2008 | ||||||||||||
| First quarter | $ | 26.29 | $ | 19.50 | $ | 0.15 | ||||||
| Second quarter | 27.10 | 22.25 | 0.16 | |||||||||
| Third quarter | 32.00 | 20.67 | 0.16 | |||||||||
| Fourth quarter | 31.01 | 22.48 | 0.16 | |||||||||
| High | Low | Dividends Declared | ||||||||||
| 2010 | ||||||||||||
| First quarter | $ | 20.99 | $ | 16.20 | $ | 0.16 | ||||||
| Second quarter | 22.84 | 16.81 | 0.16 | |||||||||
| Third quarter | 20.94 | 17.08 | 0.16 | |||||||||
| Fourth quarter | 22.49 | 17.90 | 0.16 | |||||||||
| 2009 | ||||||||||||
| First quarter | $ | 31.39 | $ | 18.46 | $ | 0.16 | ||||||
| Second quarter | 26.99 | 19.87 | 0.16 | |||||||||
| Third quarter | 24.88 | 19.92 | 0.16 | |||||||||
| Fourth quarter | 22.85 | 18.05 | 0.16 | |||||||||
Holders
The Company had approximately 2,1812,139 holders of record of common stock at March 12, 2010.10, 2011.
Dividends
The Company intends to pay regular cash dividends to common stockholders; however, there can be no assurance as to future dividends because they are dependent on the Company’s future earnings, capital requirements, financial condition, and regulatory environment. Dividends from the Bank have been a source of cash used by the Company to pay its dividends, and these dividends from the Bank are dependent on the Bank’s future earnings, capital requirements, and financial condition. In the second quarter of 2009, the Company repaid the preferred stock and common stock warrant issued to the U.S. Treasury in 2008, and the Company has no remaining preferred stock outstanding and is not subject to any dividend restrictions under the Treasury’s Capital Purchase program. Further information about dividend restrictions is provided in the Stockholders’ Equity note in the consolidated financial statements in Item 8 of this Form 10-K.statements.
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
In 2008, the consideration for the acquisitions of Factory Point Bancorp and Woronoco Bancorp. Registered securities were issued in 2008 in the Company’s offerings of common stock and preferred stock. The Company issued 1.725 million common shares in a public stock offering.offering of registered securities. Net proceeds from this offering totaled $39 million. The bulk of $39 millionthese proceeds were primarily deposited by the Company into the Bank whichand were used the funds to pay off short-term borrowings and to purchase investment securities. The same year, the Company also issued 40 thousand shares of preferred stock and raised proceeds of $40 million in connection with its participation in the U.S. Department of the Treasury Capital Purchase Program. The offeringOf these proceeds, were $40 million, of which $30 million was providedcontributed to the Bank as additional contributed capital and the remaining balance was deposited into the Bank.Berkshire Hills Bancorp. The Bank used the funds to purchase investment securities and to purchase short-term investments pending anticipated reinvestment in the expansion of credit through lending activities in 2009.activities. The preferred stock offering included the grant of a warrant to purchase 226 thousand shares of common stock; there was no additional cash consideration received for this grant. In May 2009, the Company issued 1.61 million common shares in a public stock offering. Net proceeds ofoffering and raised an additional $32 million werewhich was used to repay the U.S. Treasury preferred stock.
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Purchases of Equity Securities by the Issuer and Affiliated Purchases
There were no purchases of equity securities during the fourth quarter of 20092010 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. On December 14, 2007, the Company authorized the purchase of up to 300 thousand 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 intentions to terminate this plan or to cease any potential future purchases. As of year-end 2009,2010, there were 98 thousand maximum shares that may yet be purchased under this publicly announced plan.
The following table sets forth information regarding the activity during the fourth quarter of 2010:
| Total number of shares | Maximum number of | |||||||||||||||
| purchased as part of | shares that may yet | |||||||||||||||
| Total number of | Average price | publicly announced | be purchased under | |||||||||||||
| Period | shares purchased (1) | paid per share | plans or programs | the plans or programs | ||||||||||||
| October 1-31, 2010 | 1,301 | $ | 19.01 | - | 97,993 | |||||||||||
| November 1-30, 2010 | - | - | - | 97,993 | ||||||||||||
| December 1-31, 2010 | - | - | - | 97,993 | ||||||||||||
| Total | 1,301 | $ | 19.01 | - | 97,993 | |||||||||||
(1) Shares represent common stock withheld by the Company to satisfy tax withholding requirements on the vesting of shares under the Company’s benefit plans.
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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, 2004.2005.
| Period Ending | ||||||||||||||||||||||||
| Index | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | ||||||||||||||||||
| Berkshire Hills Bancorp, Inc. | 100.00 | 91.57 | 92.96 | 73.67 | 89.60 | 61.82 | ||||||||||||||||||
| NASDAQ Composite | 100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||||||||||||||
| SNL Bank and Thrift | 100.00 | 101.57 | 118.68 | 90.50 | 52.05 | 51.35 | ||||||||||||||||||
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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, | ||||||||||||||||||||
| (In thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Selected Financial Data: | ||||||||||||||||||||
| Total assets | $ | 2,700,424 | $ | 2,666,729 | $ | 2,513,432 | $ | 2,149,642 | $ | 2,035,553 | ||||||||||
| Securities | 420,966 | 341,516 | 258,497 | 234,174 | 420,320 | |||||||||||||||
| Loans | 1,961,658 | 2,007,152 | 1,944,016 | 1,698,987 | 1,420,230 | |||||||||||||||
| Allowance for loan loss | (31,816 | ) | (22,908 | ) | (22,116 | ) | (19,370 | ) | (13,001 | ) | ||||||||||
| Goodwill and other intangibles | 176,100 | 178,830 | 182,452 | 121,341 | 99,616 | |||||||||||||||
| Deposits | 1,986,762 | 1,829,580 | 1,822,563 | 1,521,938 | 1,371,218 | |||||||||||||||
| Borrowings and subordinated debentures | 306,668 | 374,621 | 349,938 | 360,469 | 412,917 | |||||||||||||||
| Total stockholders’ equity | 384,581 | 408,425 | 326,837 | 258,161 | 246,066 | |||||||||||||||
Selected Operating Data: | ||||||||||||||||||||
| Total interest and dividend income | $ | 115,476 | $ | 133,211 | $ | 131,944 | $ | 118,051 | $ | 87,732 | ||||||||||
| Total interest expense | 45,880 | 57,471 | 68,019 | 57,811 | 36,115 | |||||||||||||||
| Net interest income | 69,596 | 75,740 | 63,925 | 60,240 | 51,617 | |||||||||||||||
| Fee income | 28,181 | 30,334 | 26,654 | 13,539 | 9,373 | |||||||||||||||
| All other non-interest income (loss) | 808 | 1,261 | (2,011 | ) | (1,491 | ) | 5,550 | |||||||||||||
| Total net revenue | 98,585 | 107,335 | 88,568 | 72,288 | 66,540 | |||||||||||||||
| Provision for loan losses | 47,730 | 4,580 | 4,300 | 7,860 | 1,313 | |||||||||||||||
| Total non-interest expense | 78,571 | 71,699 | 65,494 | 48,868 | 48,998 | |||||||||||||||
| Income tax (benefit) expense — continuing operations | (11,649 | ) | 8,812 | 5,239 | 4,668 | 8,003 | ||||||||||||||
| Net income from discontinued operations | — | — | — | 371 | — | |||||||||||||||
| Net (loss) income | $ | (16,067 | ) | $ | 22,244 | $ | 13,535 | $ | 11,263 | $ | 8,226 | |||||||||
| Less: Cumulative preferred stock dividends and accretion | 1,030 | — | — | — | — | |||||||||||||||
| Less: Deemed dividend from preferred stock repayment | 2,954 | — | — | — | — | |||||||||||||||
Net (loss) income available to common stockholders | $ | (20,051 | ) | $ | 22,244 | $ | 13,535 | $ | 11,263 | $ | 8,226 | |||||||||
| Dividends per common share | $ | 0.64 | $ | 0.63 | $ | 0.58 | $ | 0.56 | $ | 0.52 | ||||||||||
| Basic earnings per common share | $ | (1.52 | ) | $ | 2.08 | $ | 1.47 | $ | 1.32 | $ | 1.16 | |||||||||
| Diluted earnings per common share | $ | (1.52 | ) | $ | 2.06 | $ | 1.44 | $ | 1.29 | $ | 1.10 | |||||||||
| Weighted average common shares outstanding — basic | 13,189 | 10,700 | 9,223 | 8,538 | 7,122 | |||||||||||||||
| Weighted average common hares outstanding — diluted | 13,189 | 10,791 | 9,370 | 8,730 | 7,503 | |||||||||||||||
| At or For the Years Ended December 31, | ||||||||||||||||||||
| (In thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
| Selected Financial Data: | ||||||||||||||||||||
| Total assets | $ | 2,880,716 | $ | 2,700,424 | $ | 2,666,729 | $ | 2,513,432 | $ | 2,149,642 | ||||||||||
| Securities | 405,953 | 420,966 | 341,516 | 258,497 | 234,174 | |||||||||||||||
| Loans | 2,142,162 | 1,961,658 | 2,007,152 | 1,944,016 | 1,698,987 | |||||||||||||||
| Allowance for loan loss | (31,898 | ) | (31,816 | ) | (22,908 | ) | (22,116 | ) | (19,370 | ) | ||||||||||
| Goodwill and intangibles | 173,079 | 176,100 | 178,830 | 182,452 | 121,341 | |||||||||||||||
| Deposits | 2,204,441 | 1,986,762 | 1,829,580 | 1,822,563 | 1,521,938 | |||||||||||||||
| Borrowings and subordinated debentures | 260,301 | 306,668 | 374,621 | 349,938 | 360,469 | |||||||||||||||
| Total stockholders’ equity | 387,960 | 384,581 | 408,425 | 326,837 | 258,161 | |||||||||||||||
| Selected Operating Data: | ||||||||||||||||||||
| Total interest and dividend income | $ | 112,277 | $ | 115,476 | $ | 133,211 | $ | 131,944 | $ | 118,051 | ||||||||||
| Total interest expense | 35,330 | 45,880 | 57,471 | 68,019 | 57,811 | |||||||||||||||
| Net interest income | 76,947 | 69,596 | 75,740 | 63,925 | 60,240 | |||||||||||||||
| Service charges and fee income | 29,859 | 28,181 | 30,334 | 26,654 | 13,539 | |||||||||||||||
| All other non-interest income (loss) | 1,300 | 808 | 1,261 | (2,011 | ) | (1,491 | ) | |||||||||||||
| Total net revenue | 108,106 | 98,585 | 107,335 | 88,568 | 72,288 | |||||||||||||||
| Provision for loan losses | 8,526 | 47,730 | 4,580 | 4,300 | 7,860 | |||||||||||||||
| Total non-interest expense | 81,729 | 78,571 | 71,699 | 65,494 | 48,868 | |||||||||||||||
| Income tax expense (benefit) - continuing operations | 4,113 | (11,649 | ) | 8,812 | 5,239 | 4,668 | ||||||||||||||
| Net income from discontinued operations | - | - | - | - | 371 | |||||||||||||||
| Net income (loss) | $ | 13,738 | $ | (16,067 | ) | $ | 22,244 | $ | 13,535 | $ | 11,263 | |||||||||
| Less: Cumulative preferred stock dividend and accretion | - | 1,030 | - | - | - | |||||||||||||||
| Less: Deemed dividend from preferred stock repayment | - | 2,954 | - | - | - | |||||||||||||||
| Net income (loss) available to common stockholders | $ | 13,738 | $ | (20,051 | ) | $ | 22,244 | $ | 13,535 | $ | 11,263 | |||||||||
| Dividends per common share | $ | 0.64 | $ | 0.64 | $ | 0.63 | $ | 0.58 | $ | 0.56 | ||||||||||
| Basic earnings (loss) per common share | $ | 0.99 | $ | (1.52 | ) | $ | 2.08 | $ | 1.47 | $ | 1.32 | |||||||||
| Diluted earnings (loss) per common share | $ | 0.99 | $ | (1.52 | ) | $ | 2.06 | $ | 1.44 | $ | 1.29 | |||||||||
| Weighted average common shares outstanding - basic | 13,862 | 13,189 | 10,700 | 9,223 | 8,538 | |||||||||||||||
| Weighted average common hares outstanding - diluted | 13,896 | 13,189 | 10,791 | 9,370 | 8,730 | |||||||||||||||
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| At or For the Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Selected Operating Ratios and Other Data: | ||||||||||||||||||||
Performance Ratios: | ||||||||||||||||||||
| Return on average assets | (0.60 | )% | 0.87 | % | 0.60 | % | 0.53 | % | 0.47 | % | ||||||||||
| Return on average equity | (3.90 | ) | 6.47 | 4.69 | 4.40 | 4.19 | ||||||||||||||
| Interest rate spread | 2.61 | 3.06 | 2.79 | 2.81 | 3.00 | |||||||||||||||
| Net interest margin | 3.00 | 3.44 | 3.26 | 3.24 | 3.33 | |||||||||||||||
| Non-interest income/total net revenue | 29.41 | 29.44 | 27.82 | 16.67 | 22.43 | |||||||||||||||
| Non-interest expense/average assets | 2.93 | 2.81 | 2.90 | 2.31 | 2.81 | |||||||||||||||
| Dividend payout ratio | N/M | 30.58 | 40.28 | 42.92 | 45.06 | |||||||||||||||
Growth Ratios: | ||||||||||||||||||||
| Total loans | (2.27 | ) | 3.24 | 14.43 | 19.36 | 71.86 | ||||||||||||||
| Total deposits | 8.59 | 0.39 | 19.75 | 10.99 | 62.12 | |||||||||||||||
| Total net revenues | (8.15 | ) | 21.19 | 22.52 | 8.64 | 38.28 | ||||||||||||||
Capital Ratios: | ||||||||||||||||||||
| Tier 1 capital to average assets — bank | 7.86 | 9.34 | 7.97 | 7.69 | 7.79 | |||||||||||||||
| Total capital to risk-weighted assets — bank | 10.71 | 12.28 | 10.40 | 10.27 | 11.12 | |||||||||||||||
| Stockholders’ equity/total assets | 14.24 | 15.32 | 13.00 | 12.01 | 12.09 | |||||||||||||||
| Tangible common stockholders’ equity to tangible assets (1) | 8.26 | 7.75 | 6.22 | 6.75 | 7.56 | |||||||||||||||
Asset Quality Ratios: | ||||||||||||||||||||
| Nonperforming loans/total loans | 1.97 | 0.61 | 0.54 | 0.45 | 0.08 | |||||||||||||||
| Nonperforming assets/total assets | 1.43 | 0.48 | 0.45 | 0.35 | 0.06 | |||||||||||||||
| Net loans charged-off/average total loans | 1.96 | 0.19 | 0.34 | 0.07 | 0.08 | |||||||||||||||
| Allowance for loan losses/total loans | 1.62 | 1.14 | 1.14 | 1.14 | 0.92 | |||||||||||||||
| Allowance for loan losses/nonperforming loans | 0.82 | x | 1.88 | x | 2.10 | x | 2.55 | x | 10.96 | x | ||||||||||
Share Data: | ||||||||||||||||||||
| Book value per share | $ | 27.64 | $ | 30.33 | $ | 31.15 | $ | 29.63 | $ | 28.81 | ||||||||||
| Market price at year end | $ | 20.68 | $ | 30.86 | $ | 26.00 | $ | 33.46 | $ | 33.50 | ||||||||||
| At or For the Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Selected Operating Ratios and Other Data: | ||||||||||||||||||||
| Performance Ratios: | ||||||||||||||||||||
| Return on average assets | 0.50 | % | (0.60 | ) % | 0.87 | % | 0.60 | % | 0.53 | % | ||||||||||
| Return on average equity | 3.54 | (3.90 | ) | 6.47 | 4.69 | 4.40 | ||||||||||||||
| Interest rate spread | 3.00 | 2.61 | 3.06 | 2.79 | 2.81 | |||||||||||||||
| Net interest margin | 3.27 | 3.00 | �� | 3.44 | 3.26 | 3.24 | ||||||||||||||
| Non-interest income/total net revenue | 28.82 | 29.41 | 29.44 | 27.82 | 16.67 | |||||||||||||||
| Non-interest expense/average assets | 2.97 | 2.93 | 2.81 | 2.90 | 2.31 | |||||||||||||||
| Dividend payout ratio | 64.65 | N/M | 30.58 | 40.28 | 42.92 | |||||||||||||||
| Growth Ratios: | ||||||||||||||||||||
| Total loans | 9.20 | % | (2.27 | ) % | 3.24 | % | 14.43 | % | 19.36 | % | ||||||||||
| Total deposits | 10.96 | 8.59 | 0.39 | 19.75 | 10.99 | |||||||||||||||
| Total net revenues | 9.66 | (8.15 | ) | 21.19 | 22.52 | 8.64 | ||||||||||||||
| Capital Ratios: | ||||||||||||||||||||
| Tier 1 capital to average assets - Bank | 8.02 | % | 7.86 | % | 9.34 | % | 7.97 | % | 7.69 | % | ||||||||||
| Total capital to risk-weighted assets - Bank | 10.58 | 10.71 | 12.28 | 10.40 | 10.27 | |||||||||||||||
| Stockholders’ equity/total assets | 13.47 | 14.24 | 15.32 | 13.00 | 12.01 | |||||||||||||||
| Tangible common stockholders' equity to tangible assets (1) | 7.94 | 8.26 | 7.75 | 6.22 | 6.75 | |||||||||||||||
| Asset Quality Ratios: | ||||||||||||||||||||
| Non-performing loans/total loans | 0.64 | % | 1.97 | % | 0.61 | % | 0.54 | % | 0.45 | % | ||||||||||
| Non-performing assets/total assets | 0.59 | 1.43 | 0.48 | 0.45 | 0.35 | |||||||||||||||
| Net loans charged-off/average total loans | 0.42 | 1.96 | 0.19 | 0.34 | 0.07 | |||||||||||||||
| Allowance for loan losses/total loans | 1.49 | 1.62 | 1.14 | 1.14 | 1.14 | |||||||||||||||
| Allowance for loan losses/non-performing loans | 233 | 82 | 188 | 210 | 255 | |||||||||||||||
| Share Data: | ||||||||||||||||||||
| Book value per share | $ | 27.56 | $ | 27.64 | $ | 30.33 | $ | 31.15 | $ | 29.63 | ||||||||||
| Market price at year end | $ | 22.11 | $ | 20.68 | $ | 30.86 | $ | 26.00 | $ | 33.46 | ||||||||||
Note: All performance ratios are based on average balance sheet amounts where applicable.
N/M = Not Meaningful
| (1) | Tangible common |
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.
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CRITICAL ACCOUNTING POLICIES
The SEC defines “critical accounting policies” as those that require application of management’sManagement’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. 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. Management believes that the following policies would be considered critical under the SEC’s definition:
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Allowance for Loan Losses. The allowance for loan losses is the Company’s estimate of probable credit losses that are inherent in the loan portfolio at the financial statement date. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although 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. Conditions in the local economy and real estate values could 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.The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company’s asset and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income, to which “carry back” refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. In determining the valuation allowance, the Company uses historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. These underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.
Goodwill and Identifiable Intangible Assets. Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. If the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and market multiples analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.
Determination of Other-Than-Temporary Impairment of Securities.ManagementThe Company evaluates debt and equity securities within the Company’s available for sale and held to maturity portfolios for other-than-temporary impairment (“OTTI”) on, at least quarterly. If the fair value of a quarterlydebt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and more frequently when economic or market concerns warrant such evaluation. Consideration is givenability to (1)hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost (2)and the financial condition and near-termnear 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.issuer. Any OTTI on marketable equity securities is recognized immediately through earnings. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.
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Fair ValuationValue of Financial Instruments.The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.
SUMMARY
Berkshire achieved record total net revenue of $108 million in 2010, surpassing the previous record of $107 million set in 2008. Total net revenue grew by 10% in 2010, aided by strong balance sheet growth, including a 9% increase in total loans and an 11% increase in total deposits during the year. This growth reflected strong business development in Berkshire’s regions, along with the benefit of new product lines in asset based lending and private banking. Revenue growth also benefited from an increase in the net interest margin to 3.27% in 2010, resulting from a strong focus on pricing and product disciplines to offset margin pressures as a result of ongoing low interest rates.
The Company produced net income of $13.7 million ($0.99 per share) in 2010. In 2009, the impacts of the recession affected all of the Company’s major categories of income and expense, and the Company recorded a net loss of $16.1 million ($1.52 per share), including a $48 million provision for loan losses.
Berkshire’s financial achievements in 2010 resulted from disciplined business development in the Company’s regions, together with careful control of operating expenses and the costs of business expansion. Total pre-tax, pre-provision income increased by $6.4 million (32%) in 2010 compared to 2009, demonstrating the positive operating leverage from revenue growth and expense control. The Company achieved this result while also absorbing the start-up costs of its successful expansion initiatives, including asset based lending, private banking, two de novo branches, and merger related costs connected to the merger agreements with Rome Bancorp and Legacy Bancorp.
The year’s results also reflected a number of aggressive actions that management undertook to build and strengthen the Company. Below is a summary of accomplishments of these strategic initiatives:
· Successful recruitment and integration of two new product line teams:
| o | The Asset Based Lending Group was formed to add an important commercial lending program that serves additional industries, diversifies lending risk, and expands the lending geography to include all of New England, with a Boston area headquarters. |
| o | The Private Banking Group was formed in the Springfield Region, increasing our services to this region centrally located in New England and creating a vehicle for expanding private banking in the Company’s other regions. |
· Opened two de novo branches in the strategically important New York Albany Region.
· Reorganized the integrated financial services business lines:
| o | Consolidated insurance offices and created an insurance service center to reduce costs, improve service, and create a scalable platform for future expansion. Also integrated management with the Retail and Commercial Banking divisions. |
· Recruited a new Risk Management Executive who successfully completed targeted reductions in problem assets during the year.
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| · | Enrolled the entire Company in America’s Most Exciting Bank University, having every team member attend and complete first semester offerings in the third quarter of the year. |
While achieving its growth objectives, the Company also maintained a strong financial condition, completing the year with a 7.9% ratio of tangible equity/assets and a 13.5% ratio of total equity to assets. Additionally, the Company’s liquidity strengthened further as a result of the strong deposit growth, with the ratio of loans/deposits decreasing to 97% by year-end.
The Company aggressively sought opportunities to participate in regional consolidation in its markets, and made several offers to acquire other institutions during the year culminating in merger agreements with two institutions – Rome Bancorp in New York and Legacy Bancorp in Berkshire’s hometown of Pittsfield. When completed and integrated, these acquisitions are expected to enhance its positioning as a major regional provider, including:
· Increasing assets by approximately 40% to $4 billion
· Increasing branch offices by approximately 50% to more than 60 offices
· Increasing core revenue by more than 40% to approximately $150 million
· Improving core earnings per share by approximately 20% or $0.20 per share
· Improving most of the combined core performance and condition financial metrics
· Producing a double-digit return on investment
Berkshire plans to complete the Rome acquisition around the beginning of the second quarter of 2011 and the Legacy acquisition in the following quarter. At a meeting on March 9, 2011, the shareholders of Rome Bancorp approved the merger agreement with the Company.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2010 AND 2009
Balance Sheet Summary. Total assets increased by $180 million (7%) to $2.9 billion in 2010 due to a $174 million (17%) increase in total commercial loans. The increase in commercial loans reflected ongoing business development in the Company’s regions, together with $98 million in net new outstandings contributed by the Company’s new Asset Based Lending Group. This growth was funded by deposit growth, which totaled $218 million (11%) including $106 million of net growth in the New York region and nearly $50 million contributed by the new Springfield Private Banking Group. The strong deposit growth improved the Company’s liquidity, with loans/deposits measuring 97% at year-end 2010. All major asset quality measures improved in 2010, with non-performing assets decreasing to a favorable 0.59% of total assets at year-end. Reflecting the strong growth, capital measures decreased modestly but remained strong, with tangible equity/assets of 7.9% and total equity/assets of 13.5% at year-end. At year-end, the Company had pending agreements to acquire Rome Bancorp and Legacy Bancorp. These acquisitions are expected to be completed by around mid-year 2011 and are expected to increase total assets to approximately $4 billion (40%). Most of the merger consideration is planned to be newly issued stock, which is expected to increase total equity to more than $500 million and to be neutral or accretive to regulatory capital metrics. These mergers are expected to improve most of the Company’s performance and condition measures as a result of improved efficiencies.
Investment Securities. Total investment securities decreased by $15 million (4%) in 2010, with most of the proceeds held in short-term investments at year-end. In the ongoing low rate environment, prepayments of mortgage-backed securities remained elevated. The portfolio of available for sale mortgage-backed securities decreased by $24 million. In order to maintain most of the yield on the portfolio, the Company increased its portfolio of higher yielding trust preferred securities by $13 million and also purchased dividend paying equity securities, resulting in a $16 million increase in total marketable equity securities. The trust preferred securities are mostly investment grade securities issued by national banks. The equity securities are mostly issued by Northeast community banks. The marketable equity securities portfolio had a $3.1 million net unrealized gain at year-end 2010, including unrealized gains totaling $1.7 million on investments in Rome Bancorp and Legacy Bancorp common stock which are expected to be realized in income in 2011 when the pending merger agreements are completed.
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Berkshire’s goal is to maintain a high quality portfolio consisting primarily of liquid investment securities with managed durations to limit the potential for market value declines in rising rate markets. At year-end 2010, Berkshire’s $406 million securities portfolio was primarily comprised of $310 million of available for sale securities, consisting of 56% government and government-sponsored agency mortgage-backed securities, 26% municipal obligations, and 18% other bonds and equities. The remaining securities consisted mainly of $65 million of locally issued development bonds (classified as held to maturity except for one security classified as a trading obligation as a result of a related interest rate swap) and a $21 million investment in the stock of the Federal Home Loan Bank of Boston.
None of the Company’s investment securities were deemed impaired on an other-than-temporary basis during 2010. At year-end 2010, all available for sale debt securities carried at least one investment grade rating by a major rating agency except for two securities: a $2.6 investment in the Mezzanine Class B tranche of a pooled trust preferred security which was rated Ca by Moodys, and an unrated school district bond with a year-end premium fair value and an unrealized gain. During the year, the pool trust secured security was downgraded from Caa and the unrealized loss increased to 92% of book value from 67% at year-end 2009. This security is performing. The Company evaluated the security, with a Level 3 fair value of $0.2 million, for potential OTTI at year-end 2010 and determined that other-than-temporary impairment was not evident based on both the Company’s more likely than not ability to hold the security until the recovery of its remaining amortized cost and the protection from credit loss afforded by $38 million in excess subordination above current and projected losses. The Company’s analysis included a break-even analysis with the assistance of an independent third-party valuation-specialist to calculate the excess subordination of the Mezzanine Class B Tranche. The Company modeled actual cash flows from the pool’s underlying securities as provided by Intex Solutions, Inc. and adjusted these for actual defaults and assumed defaults to determine the amount of future credit losses that could be absorbed by the pool’s junior tranches before a single dollar of credit loss would be attributed to the Mezzanine Class B tranche. The Level 3 fair value of the security was determined with the assistance of a third party by a subjective assessment of market conditions for similar securities. The Company’s held to maturity securities are generally unrated local securities, all of which are performing and none of which is deemed substandard according to the Company’s internal ratings systems. The FHLBB had previously suspended dividends on its common stock, but in early 2011 announced the resumption of a modest dividend. The Company expects that it could redeem its investment in FHLBB stock at par in the future.
The net unrealized gain on securities available for sale totaled $4.0 million, or 1.3% of book value, at year-end 2010. The gain as a percentage of book value was unchanged from the prior year-end. The percentage gains on municipal and mortgage-backed securities declined in 2010. Pricing on municipal securities reflected increased market risk premiums related to state and local budget deficits, and mortgage-backed securities prices reflected run-off of higher yielding securities due to prepayments. The decrease in these gains was offset by an increase in unrealized gains on marketable equity securities, which had nearly a 20% unrealized gain at year-end mainly due to the bank stocks that were purchased during the year. The Company also had net unrealized gains on its held to maturity securities and trading security at year-end 2010, which were little changed from gains at year-end 2009.
The tax equivalent yield on investment securities declined slightly to 3.9% in the fourth quarter of 2010, compared to 4.0% in the fourth quarter of 2009, as higher yields on securities purchased mostly offset the impact of run-off of higher yielding securities during the year. Excluding the held to maturity tax advantaged economic development bonds, the duration of the debt securities was approximately 3.4 years at year-end 2010. Total non-mortgage-backed securities with maturities of five or more years increased to $150 million at year-end 2010 from $121 million at the start of the year. The duration of the mortgage-backed securities portfolio has been held to a relatively short life of about 1.7 years, reflecting the ongoing short duration objective of this most liquid portion of the portfolio.
Loans. Total loans increased by $181 million (9%) to $2.1 billion in 2010 primarily due to the previously mentioned $174 million (17%) increase in commercial loans. Residential mortgages increased by $36 million (6%) to $645 million and home equity loans increased by $15 million (7%) to $226 million. Other consumer loans decreased by $44 million (43%) due primarily to a $37 million (56%) decrease in indirect automobile loans to $29 million due to planned runoff of this portfolio.
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The Company actively pursued loan originations in all of its markets in 2010. In addition to offsetting the run-off of indirect automobile loans, its 9% loan growth was achieved despite elevated loan prepayments and lower commercial line utilization resulting from a low rate environment and local business conditions. The Company’s loans are originated in and around its markets according to disciplined underwriting standards. It does not offer subprime lending programs. Growth in commercial loans reflects ongoing market share gains, particularly from larger national providers which have reduced their focus on the Company’s core markets. This growth included higher originations of commercial business loans, which further diversify the Company’s portfolio by industry and geography. Growth also included new relationships with high grade institutional borrowers, including health systems and higher education institutions. Growth in commercial loans was funded in part by an $85 million increase in commercial non-maturity deposit balances, which grew by 19% for the year, reflecting the relationship emphasis of the commercial banking strategy. In commercial lending, excluding the new Asset Based Lending Group, total originations increased by 11% in 2010 compared to 2009, and new loan originations spreads exceeded the Company’s targets. At year-end 2010, the ten largest outstanding loans originated in 2010 totaled $95 million and included two apartment buildings, two wholesalers, two metal/machinery manufacturers, two equipment leasing companies, and two commercial real estate investment properties. The Company sets risk adjusted return on equity targets for the majority of its commercial loan originations in order to support its long range return on equity goals. All commercial loans are risk rated according to its internal ratings systems, which are regularly reviewed by independent reviewers. The average risk rating of the Bank’s commercial loan portfolio continued to improve in 2010, due to lower levels of problem loans, improvements in performing loans, and lower risk of new originations.
Growth in retail lending reflects ongoing expansion of the Company’s retail banking franchise. The portfolio of sold mortgages serviced for others totaled $320 million at year-end 2010, compared to $245 million at the prior year-end. In the current rate environment, the Company retains most variable and jumbo mortgage loans originated and sells most conforming fixed rate residential mortgages to the secondary market to minimized long term interest rate risk. Additionally, the Company regularly evaluates opportunities to purchase residential mortgages in the region’s markets to offset portfolio run-off and improve net interest income. In the first quarter of 2010, the Company purchased $32 million in prime, seasoned thirty-year, fixed rate Massachusetts residential mortgages from another institution in the state. The Company has upgraded its mortgage loan origination systems and internet banking applications and is using Six Sigma process management disciplines to expand and strengthen its consumer lending functions as part of its commitment to meeting credit needs as a steady local market provider against the backdrop of continuing change and uncertainty in the national mortgage financing markets. The Company’s 7% growth in home equity loan balances also reflected the expanding consumer lending effort, with a 3% increase in total home equity lines, and a 3% increase in average usage to 57% from 54%. Its consumer lending quality metrics continued to improve in 2010, with average FICO scores on mortgage originations rising to about 750 at year-end, and near 775 on home equity line originations.
The Bank offers back-to-back interest rate swaps to certain commercial loan customers, which effectively allows the Bank to book a variable rate loan while providing the customer with an option to fix its interest rate. This allows the Company to be more competitive with national financing sources and to avoid booking long-term, fixed rate assets at current low interest rates, as well as providing a source of fee income. Commercial loan swap fee income increased by 21% to $1.3 million in 2010, reflecting the higher commercial business volumes. The outstanding notional amount of interest rate swaps sold to commercial loan customers increased to $137 million from $94 million during 2010.
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Total year-end loans with repricings over five years increased to $527 million at year-end 2010 compared to $446 million at the beginning of the year. While the Company emphasizes variable rate loans to maintain its asset sensitive interest rate risk profile, the Company also chose to increase holdings of certain higher rate fixed rate loans at certain times during the year in order to offset the impact of loan prepayments and indirect auto loan run-off on interest income. The average yield on loans was 4.77% in the fourth quarter of 2010, compared to 4.95% in the fourth quarter of 2009. An increasing amount of commercial lending is also based on short term LIBOR indices, which remained low throughout the year. LIBOR based commercial loans totaled approximately $400 million of the $1.2 billion total commercial loans at year-end 2010, compared to $230 million of the $1.0 billion total at year-end 2009. In 2010, the Company exceeded its targets for commercial loan origination spreads compared to the internally assigned cost of funds, although deposit funding costs resulted in net interest margins on new commercial loans that were often below the total average net interest margin for the Company. Berkshire benefited from interest rate floors, which in many situations established an initial rate higher than the contracted rate due to the current low rate environment. The total amount of loans with such floors was about $120 million at year-end 2010. The average balance of loans increased by 2% in 2010 as a result of accelerated growth in the second half of 2010 and loan charge-offs recorded at the end of 2009. As a result, the earnings benefit from higher second half 2010 loan growth will provide additional momentum to interest income growth in 2011.
Asset Quality. The level and trend of asset quality remained favorable through year-end 2010. Non-performing assets decreased to 0.59% of total assets and accruing delinquent loans were 0.31% of total loans at year-end, while performing restructured loans were 0.25% of total loans. Year-end other real estate owned totaling $3.4 million consisted primarily of one commercial resort condominium totaling $2.9 million which was being actively marketed for sale. Non-performing loans totaled $13.7 million at that date and included three commercial loans with balances around $1 million; all other non-performing loans were less than $1 million.
Annualized net loan charge-offs decreased to 0.37% of average loans in the fourth quarter, bringing the full year charge-off rate down to 0.42%. Mortgage and home equity net charge-off rates remained very favorable, measuring less than 0.05% of average balances. The Company only took ownership of two residential properties through foreclosure during the year. Commercial loan net charge-offs were 0.66% of average balances in 2010 and were expected to continue to decline based on the Company’s aggressive risk mitigation and improving economic conditions.
Asset quality metrics improved throughout the year as the Company followed its strategies to reduce risk following its loan quality initiative in the fourth quarter of 2009. A number of relationships were upgraded during the year as a result of restructurings completed in this initiative, and reflecting improved business conditions for a number of borrowers. The Company’s risk management process focuses primary attention on loans with higher than normal risk, which includes loans rated special mention and classified (substandard and lower). The credit risk profile of the Company’s loan portfolio is described in the Loans note to the consolidated financial statements. Commercial loans rated as special mention decreased by 50% during the year. Commercial loans rated as substandard or lower decreased by 12% during the year. Substandard loans include performing loans which are viewed as potential problem loans with a possibility of loss if identified weaknesses are not corrected. The balance of commercial potential problem loans totaled $73 million at year-end 2010, including one $13 million commercial relationship consisting primarily of a Massachusetts commercial retail property which was downgraded at midyear and which was performing and was not deemed impaired at year-end as it was following a plan to liquidate assets and cure established weaknesses, and it continued to make payments in accordance with the contractual loan terms. Potential problem loans included five other commercial relationships over $4 million totaling $27 million at year-end, including two lodging properties, two nonprofit borrowers, and office property. These loans were performing at year-end and were not deemed impaired.
Loan Loss Allowance. The determination of the allowance for loan losses is a critical accounting estimate. The Company’s methodologies for determining the loan loss allowance are discussed in Item I of this report. The Company considers the allowance for loan losses appropriate to cover probable losses which can be reasonably estimated and which are inherent in the loan portfolio as of December 31, 2010. The $32 million allowance was unchanged from the start of the year.
The specific valuation allowance assigned to impaired loans decreased to $2.5 million from $6.4 million during 2010. Total loans deemed impaired decreased to $16.6 million from $56.9 million as a result of the problem asset resolution strategies discussed earlier. Total pool reserves increased to $29.4 million from $25.4 million, an increase of 16% compared to the 9% increase in total loans. This reflected the higher percentage of commercial loans in the portfolio, which carry higher reserves compared to most retail loans.
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The allowance decreased to 1.49% of total loans at year-end 2010 compared to 1.62% at the start of the period, due mainly to the decline in impaired loan reserves noted above. The allowance provided 3.8X coverage of net loan charge-offs in 2010 and 233% coverage of year-end non-accruing loans.
Other Assets. During the fourth quarter of 2010, the Company purchased an additional $10 million of bank-owned life insurance (“BOLI”) as part of a strategy to partially offset the cost of its employee benefits. The premium was split among three carriers rated AAA or AA. The new BOLI policies bear a combined initial yield of approximately 6% on a tax equivalent basis. Increases in the cash surrender value on these policies will be reflected through non-interest income.
The total cash surrender value of BOLI totaled $46 million at year-end 2010, which was below the $53 million regulatory limit for such investments based on 25% of Tier one regulatory capital as of that date. The balance of the net deferred tax asset increased to $16 million from $12 million during the year due to an increase in the asset related to the loan loss allowance. The Company expects to realize the value of the net deferred tax asset during its normal operations. The federal and state tax receivable had increased to $12 million at the end of 2009 as a result of the pre-tax loss recorded in that year. This receivable decreased to $3 million at year-end 2010.
Deposits. Total deposits increased by $218 million (11%) in 2010, including $105 million of net growth in the New York region and nearly $50 million contributed by the new Springfield Private Banking Group. The New York growth reflected ongoing deposit growth related to the Bank’s de novo branches opened in recent years in this strategically important region. The Bank opened an additional two branches in this region late in 2010. New York deposit growth also benefited from commercial balance growth developed by the commercial banking team that joined the region in 2009. The Company achieved low single digit deposit growth in all of its other regions, reflecting ongoing business development.
The 11% deposit growth resulted from 20% growth of non-maturity deposits which was partially offset by a 4% decrease in time deposits. The decrease in time deposits reflected shifting consumer preferences to more liquid balances in light of the continuing low interest rate environment and the run-off of higher yielding maturing time account balances. The increase in non-maturity deposits included a $163 million (21%) increase in retail balances and an $85 million (19%) increase in commercial balances. All categories of non-maturity deposits increased, with most of the growth concentrated in a $183 million (34%) increase in money market deposits which the Company promoted throughout the year as an alternative to time deposits and as a vehicle to other relationship product sales. Transaction account balances increased by 8% in 2010, and the Company continues to promote demand deposit and NOW accounts as core components to the total banking relationship. Demand deposit growth of 8% included a 2% increase in the number of accounts and a 6% increase in balances, reflecting higher liquidity held by customers in these accounts.
By emphasizing lower cost non-maturity deposits and lowering time deposit costs, the Company has reduced the cost of its deposits in order to offset the impact of lower asset yields in the current low interest rate environment. The average annualized cost of deposits decreased to 1.15% in the fourth quarter of 2010 from 1.48% in the fourth quarter of 2009. A total of $394 million in time deposits were scheduled to mature within twelve months at year-end 2010, and the weighted average cost of time deposits was expected to continue to decline based on continuing low interest rates. The average balance of deposits increased by 6% in 2010, with higher deposit growth being recorded in the second half of the year.
The Dodd-Frank Act permanently raised deposit insurance levels to $250 thousand, retroactive to January 1, 2008, and extended for two years the Transaction Account Guarantee Program, which became mandatory for all insured depository institutions. While the FDIC insurance fund had a negative balance of $7.4 billion at year-end 2010, the FDIC viewed 2010 as a turnaround year for the industry as a result of lower loan loss provisions. The average cost of FDIC insurance expense measured approximately 0.17% of average deposits in 2010. Under new premium rules, FDIC insurance expense will be based on total assets rather than total deposits, and will include higher assessment rates for banks over $10 billion. The FDIC expects that most institutions under $10 billion will pay lower assessments as a result of these new rules.
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Borrowings and Debentures. Total borrowings and debentures decreased by $46 million to $260 million in 2010, as excess liquidity from deposit growth was used to pay down short-term borrowings from the Federal Home Loan Bank. The Company purchased $40 million in forward starting interest rate swaps on FHLBB borrowings in 2010 which will have the effect of extending protection from rising rates in future years. Additionally, in the third quarter, the Company terminated $40 million of cash flow hedges against FHLBB borrowings maturing in 6-8 years based on a determination that this level of protection against rising interest rates was not necessary given the Company’s continuing asset sensitive interest rate risk profile. The average cost of borrowings decreased from 4.30% in the fourth quarter of 2009 to 3.27% in the first quarter of 2010 due to the borrowings prepayments made at the end of 2009. The cost of borrowings further declined to 2.92% in the fourth quarter of 2010 including the benefit of the hedging changes discussed above.
Derivative Financial Instruments. The Company has relationships with several national banks which are counterparties for its interest rate swaps. At year-end 2010, the Company had $137 million in total notional value of interest rate swaps with commercial loan customers, which were offset with back-to-back swaps with bank counterparties. This was a 46% increase over the $94 million notional value of these swaps at the start of the year.
The Company also had $160 million in total notional value of interest rate swaps with bank counterparties which were hedging borrowings and debentures, and $15 million hedging the tax advantaged economic development bond designated as a trading security. These totals were unchanged from the start of the year, although the component swaps were changed as discussed in the borrowings discussion. The effect of these changes was to shorten the overall maturity of borrowings hedges and to reduce the current and future period payments contracted under the swaps. The $6 million loss on the $40 million in terminated cash flow hedges remained in accumulated other comprehensive income and will be amortized into earnings in the same periods during which the originally hedged forecasted transaction affects earnings. This amortization is expected to be more than offset by the lower interest cost on the related borrowings.
The net fair value of derivative financial instruments was estimated at a net loss of $11 million at year-end 2010, which was slightly more than the loss estimated at the prior year-end. This unrealized estimated loss is primarily due to the impact of the unanticipated ongoing low interest rate environment on the value of the swaps on borrowings which were intended to fix the rates on variable rate borrowings. The increase in other liabilities was primarily due to an increase in the gross derivatives liability to $19 million at year-end 2010 from $14 million at the start of the year and resulted from the higher liability on fixed rate swaps sold to commercial customers; this liability is offset by a similar asset on the offsetting back to back swaps, with little impact on the $11 million net derivatives liability discussed above.
Stockholders’ Equity. Capital remained strong at year-end 2010, with equity/assets at 13.5% and tangible equity/assets at 7.9%. Tangible common equity increased by 3% in 2010, rising to $15.27 per share at year-end. Total common equity measured $27.56 per share at year-end, and was little changed during the year. Based on the year-end closing stock price of $22.11 and year-end outstanding shares totaling 14.1 million, the Company’s market capitalization at that date was $311 million, which was an 8% increase over $288 million at the start of the year.
Total stockholders’ equity increased slightly to $388 million from $385 million in 2010 as the increase in retained earnings was partially offset by an increase in the accumulated other comprehensive loss primarily related to derivative instruments. The Company paid dividends totaling $9 million, or 65% of the $14 million in 2010 net income. The $0.64 per share dividend in 2010 provided a 3.3% yield based on the average closing price of the Company’s common stock in 2010. Equity also increased by $2 million as a result of stock based compensation relating to grants of restricted stock totaling 139,000 shares, including 26,000 performance based shares, with vesting scheduled over a 2-3 year period. Additionally, equity increased by $1 million due to proceeds received from the exercise of stock options during the year.
At year-end 2010, the Bank’s regulatory capital ratios exceeded the requirements to be considered “well capitalized”, with the total risk-based capital ratio measuring 10.6%. The Bank is regulated by the FDIC and Berkshire Hills Bancorp is regulated by the OTS, which does not establish required holding company capital ratios similar to those of the other bank regulatory agencies. Based on federal regulatory changes, the OTS is being merged into another federal agency, and the regulation and supervision of Berkshire Hills Bancorp will become the responsibility of the Federal Reserve Bank of Boston, beginning in the third quarter of 2011. The Boston Federal Reserve Bank already supervises the majority of bank holding companies located in New England. The Federal Reserve Bank requires capital ratios and capital standards for consolidated holding companies, which are similar in many respects to those required by the FDIC for regulated banks. The Company does not expect that there will be any material impact on its business as a result of this holding company regulatory change.
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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
Summary. The Company recorded earnings of $14 million in 2010, compared to a loss of $16 million in 2009. Total pre-tax, pre-provision income increased by $6.4 million (32%) in 2010 compared to 2009, demonstrating the positive operating leverage from revenue growth and expense control. Results in 2009 included a $48 million provision for loan losses, which decreased to $9 million in 2010. The loan loss provision in 2009 included the results of a fourth quarter loan initiative undertaken by management resulting in a comprehensive loan review to assess the impacts of the recession and to take actions to reduce current and future risk.
On a per share basis, the Company recorded earnings of $0.99 per share in 2010 compared to a loss of $1.52 in 2009. All references to results per share in this report are to diluted earnings per common share unless otherwise noted. In 2009, per share results were impacted by preferred dividends in the first half of the year, which reduced income available to common shareholders by $0.30 per share.
Financial highlights in 2010 included:
· 10% net revenue growth
· 11% net interest income growth
· 6% fee income growth
· 9% loan growth
· 11% deposit growth
· 4% non-interest expense growth including costs of business expansion
Reflecting the improved earnings, the return on assets was 0.50% and the return on average common equity was 3.54% in 2010. In addition to absorbing the costs of business expansion, the Company has maintained a modest asset sensitive interest rate risk profile and has sacrificed higher current income in order to avoid the negative impact of anticipated future interest rate increases. The Company’s long term objectives are to produce a return on assets exceeding 1% and a return on equity exceeding 10%.
Total Net Revenue. The Company achieved a record $108 million of total net revenue in 2010. The record net revenue in 2010 was due to record net interest income totaling $77 million. Net revenue per share increased by 4% to $7.78 in 2010 from $7.47 in the prior year. Fee income was 28% of total net revenue in 2010, down slightly from 29% in the prior year. Berkshire continues to focus on long-term growth of this ratio to diversify revenue and to increase franchise value reflecting higher market share achieved through improved cross sales.
Net Interest Income. Net interest income increased by $7 million (11%) to $77 million in 2010. Most of this increase was due to an improvement in the net interest margin to 3.27% in 2010 from 3.00% in 2009. Additionally, net interest income benefited from a 2% increase in average earning assets resulting from the 2% increase in average loans. The improvement in the net interest margin resulted largely from the Company’s strategies to reduce funding costs and included the benefit of prepayments made at the end of 2009 on certain borrowings. Both asset yields and funding costs decreased during the year due to the effects of the ongoing low interest rate environment. Funding costs were reduced at a greater rate, and both deposit and borrowings costs declined during the year. This produced a steady improvement in the net interest margin from 3.05% in the fourth quarter of 2009 to 3.30% in the final two quarters of 2010.
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The Company adheres to disciplines in pricing its assets and liabilities in order to maintain an appropriate net interest margin while also achieving its asset/liability objectives. The Company strives to maintain a modestly asset sensitive interest rate risk profile so that long term earnings will benefit when interest rates increase from the very low levels that have existed in the most recent years. At the start of 2010, the Company’s interest rate model indicated that the margin would be under further pressure if interest rates did not increase in 2010. The Company undertook various initiatives previously described to offset this margin pressure and to increase the net interest margin towards its long term goal of 3.50%. At year-end 2010, the model continued to indicate the potential for gradual margin pressure until interest rates increase. The Company continues to pursue strategies intended to avoid a reduction in the net interest margin and expects that the net interest margin will improve as a result of the completion of the pending merger agreements with Rome and Legacy.
Non-Interest Income. Non-interest income increased by $2 million (7%) to $31 million in 2010 due to a similar increase in fee income. Banking fees increased by $3 million (27%) for the year. A $2 million increase in loan fee income included increases in net residential mortgage loan sale income, mortgage servicing income, and commercial lending fees. Total checking and related fees increased by $1 million (12%) in 2010 due primarily to higher business volumes. Amendments to Regulation E requiring customer opt-in for eligibility for certain overdraft privileges became effective in the third quarter of 2010 for all banks. The Company aggressively solicited checking account customers to obtain opt-ins in order to minimize the potential negative impact on overdraft volume and fee income, with more than 80% of solicited accounts choosing the opt-in. Additionally, the Company made other changes to its checking account offerings. The fourth quarter of 2010 was the first complete quarter following the implementation of this regulatory change. Total checking and related fee income was flat in the fourth quarter of 2010 compared to 2009, reflecting the Company’s strategy to avoid any negative income impact from this regulatory change. Insurance fee income decreased by $1 million (9%) due primarily to lower contingency fee income, as well as lower premium income, related to the soft pricing and profitability conditions in the property casualty insurance business. Insurance results also include the impact of lower premium volumes as a result of the recession and competitive auto insurance conditions, which was partially offset by growth in commercial insurance accounts in 2010. In the fourth quarter of the year, insurance premium income increased by 8% over the prior year comparable period, reflecting improved business conditions in the most recent period. For the year 2010, wealth management income decreased by 7% due to competitive factors. In October 2010, the Company announced organization changes in this business line, and the Company is taking steps to increase future wealth management fee revenues. An unfavorable change in hedge revaluations caused the decrease in all other non-interest income. In 2009, the $1 million charge for non-recurring non-interest income items included prepayment fees, a swap termination gain, and a credit for a merger termination fee.
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 provision for loan losses totaled $9 million in 2010, compared to $48 million in 2009. As was previously discussed, the provision in 2009 was mostly recorded near the end of the year in conjunction with a loan initiative to proactively assess and mitigate current and future risk. In 2010, the provision for loan losses slightly exceeded total net loan charge-offs for the year. The level and trend of most asset quality indicators remained favorable throughout 2010. There was no material change in the balance of the loan loss allowance. Reflecting the improved credit characteristics of the loan portfolio, the ratio of the allowance to total loans decreased to 1.49% in 2010, compared to 1.62% at the start of the year.
Non-Interest Expense and Income Tax Expense. Total non-interest expense increased by $3 million (4%) in 2010 compared to 2009. By holding expense growth below revenue growth, the Company produced positive operating leverage, which contributed to the 32% increase in pre-tax pre-provision earnings from year to year. As was previously noted, expense growth in 2010 included the impact of investments in business expansion, including new business lines, new branches, and targeted resource additions in certain business lines and infrastructure development. The Company measures its recurring non-interest expense in relation to total assets. Compared to average assets, this measure increased to 2.97% in 2010 from 2.93% in the prior year. However, most asset growth was in the second half of the year, and compared to year-end assets, this measure declined to 2.82% from 2.89%. The Company also measures itself by the efficiency ratio, which decreased to 71% from 73% from year-to-year, indicating that expenses were declining as a percentage of revenues. The Company’s long term target is to operate with this measure below 60%, and expects a significant improvement towards that goal on the completion of the pending bank mergers in 2011.
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The increase in non-interest expense in 2010 resulted from a $6 million (15%) increase in compensation related expense, which was partially offset by decreases of $1 million (21%) in marketing and professional services and $1 million (25%) in FDIC insurance expense. All other total non-interest expenses were flat from year-to-year. In addition to business growth, compensation related expense in 2010 included a $2 million increase for the restoration of incentive compensation, which was substantially eliminated in 2009 due to the operating loss. Additionally, 2010 compensation related expense included $2 million related to severance charges and a decrease in compensation cost credited against expense and charged against loan sales income due to the mortgage refinancing wave in 2009. Excluding the above items, all other compensation related expense increased by $2 million, which was equivalent to a 4% increase over 2009 total compensation related expense. The Company had 599 full time equivalent employees at year-end 2010, compared to 622 at the end of 2009.
The $1 million decrease in marketing and professional fees was due to the higher professional fees in 2009 related to strategic initiatives undertaken in the fourth quarter of that year. The $1 million decrease in FDIC insurance expense was due to a special assessment levied in 2009 on all banks based on their size. Non-recurring expense in 2010 consisted of charges related to the pending merger agreements with Rome Bancorp and Legacy Bancorp. Nonrecurring expense in 2009 included costs associated with the terminated merger agreement with CNB Financial Corp. and other charges related to operational restructurings together with a legal settlement related charge.
The Company’s effective income tax rate was 23% in 2010 and included the proportionately greater benefit of tax exempt income on investment securities and other tax preference items compared to total pre-tax income. The Company recorded a $12 million income tax benefit in 2009, measuring 42% of the pre-tax loss.
Results of Segment and Parent Operations. Results in the banking segment generally followed the levels and trends of consolidated results, which have been previously discussed. In the insurance segment, revenues declined by 9% as a result of non-interest income changes previously discussed. Due to re-engineering of the operations in this segment, non-interest expenses decreased by 8% in 2010. Insurance segment earnings decreased by 9%. Fourth quarter insurance revenues increased by 8% in 2010 compared to 2009, and the Company expected improved non-contingency income in the future due to improved market conditions and business development. The Parent did not receive dividends from subsidiaries in 2010; the Parent had $13 million in cash on deposit at the Bank at year-end 2010. The charge to non-interest income for the Parent in 2010 represented interest on the trust preferred securities and non-interest expense included $0.4 million in charges related to the pending merger agreements with Rome Bancorp and Legacy Bancorp.
Comprehensive (Loss) Income. Comprehensive (loss) income is a component of total stockholders’ equity on the balance sheet. It includes changes in accumulated other comprehensive (loss) income, which consist of changes (after-tax) in the unrealized market gains and losses on securities available for sale and the net gain (loss) on derivative instruments used as cash flow hedges, including a terminated hedge. The Company recorded comprehensive income of $10 million in 2010, compared to a comprehensive loss of $7 million in 2009. In 2010, net income of $14 million was partially offset by an other comprehensive loss relating to unrealized losses on derivatives instruments due to ongoing low interest rates. In 2009, the $16 million operating loss was partially offset by unrealized gains in the prices of securities and derivatives instruments. These results reflected the impact on interest rates and market prices of the financial turmoil in the second half of 2008 and the partial recovery to more normalized market conditions in 2009.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Summary.Events in 2009 were affected by the severe recession and the financial market turmoil in the second half of 2008 and first half of 2009 which affected the U.S. and global economies. Federal stabilization measures were utilized which were unprecedented since the Great Depression. Financial impacts on the Company included the reduction of short-term government interest rates to near zero, and sharp increases in FDIC insurance premiums and assessments. While economic conditions were moderating beginning in the third quarter of the year, numerous economic indicators remained stressed through year-end. The recession followed a real estate bubble earlier in the decade, which led to a decline in real estate market prices and activity throughout the year.
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The impacts of the recession affected all of the Company’s major categories of income and expense. The Company recorded a net loss of $16 million in 2009 including a $48 million provision for loan losses. Income before income taxes and the provision for loan losses was $20 million in 2009, down from $36 million in the prior year. The net loss per share of $1.52 in 2009 included the impact of additional common shares issued and charges related to dividends on preferred stock which was repaid in the first half of the year.
The provision for loan losses primarily reflected the impact of higher commercial loan net charge-offs and reserves. While the Company’s loan performance remained comparatively strong throughout the year, the Company initiated a comprehensive loan review in the fourth quarter to assess the impacts of the recession on the portfolio. Based on this review, managementManagement acted to restructure, outplace, or sell a number of larger commercial loans. Following this initiative, non-performing commercial loans increased to $35 million at year-end while the Company pursued the anticipated completion of workout strategies on the majority of this balance. Subsequent to year-end, the
The Company finalized restructure agreements on $9 million of these balances which are targeted to resolve these situations in 2010.
The Company’s strategies have emphasized long term over short term earnings. Its actions to increase capital and liquidity have decreased certain short term profit measures. Its ongoing discipline to remain asset sensitive willwas targeted to benefit future earnings if rates increase asat the time of future rate increases anticipated by the market, anticipates, but this resultsresulted in a lower current net interest margin. The Company held significant liquidity at the Federal Reserve Bank in the first half of the year, which provided maximum protection and flexibility, but comparatively little interest income. The Company also absorbed various expense charges, particularly in the fourth quarter, to be better positioned for the future.
Despite the impacts of the recession, Berkshirethe Company continued to move forward with organic growth of deposits and targeted loans. The Bank’s 100% insured deposits provided an attractive alternative to other investments in the unsettled financial markets. The Bank’s Community Investment Program, with a goal of $500 million in new loans, produced in excess of $600 million of loan originations to support the needs of its markets in the face of the tighter credit environment.
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Berkshire maintained its forward looking focus in 2009, following record revenues and earnings in 2008. It expanded its business lines through the recruitment of high profile banking teams, and opened new regional and branch facilities in Springfield.Springfield, MA. The Company recruited important new executive leadership, reorganized and re-engineered key fee income business lines, and accomplished a major core systems upgrade. Highlights of the year’s activities were as follows:
| · | 9% deposit growth |
| · | 8% commercial loan growth, excluding net charge-offs |
| · | 10% wealth management new business generation |
| · | 3.00% net interest margin |
| · | $32 million common stock raise in May followed by the $40 million TARP preferred stock repayment |
| · | Borrowings restructuring, lowering future interest expense |
| · | 8.3% tangible common equity to tangible assets and total year-end equity to assets of 14.2% at year-end |
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Total Net Revenue.Total net revenue consists of net interest income and non-interest income. Total net revenue decreased by $9 million (8%) in 2009 compared to 2008 due to the impacts of the severe recession. This was comprised of a $6 million (8%) decrease in net interest income and a $3 million (8%) decrease in non-interest income. Net revenue per share decreased by 25% to $7.47 from $9.95, reflecting the additional shares issued. Fee income increased slightly to 29% of total net revenue in 2009 from 28% in 2008. Berkshire continues to focusThe Company focuses on long-term growth of this ratio to diversify revenue and to increase franchise value reflecting higher market share achieved through improved cross sales.
Net Interest Income.The 8% decrease in net interest income was due to a decrease in the net interest margin to 3.00% in 2009 from 3.44% in the prior year. The Company’s asset liability model had predicted a decrease in net interest income from 2008 in an unchanged rate environment. U.S. Treasury rates remained fairly stable in 2009, with near zero short term rates as a result of Federal Reserve stimulus policy and a positively sloped yield curve. Due to the Company’s asset sensitive interest rate profile, this environment created substantial pressure on margins as variable rate assets repriced and fixed rate assets refinanced. While the Company had anticipated that commercial loan growth would offset some of this pressure, the benefit of this growth was largely offset by the tightening of LIBOR spreads and by the high level of mortgage refinancings and repricings. Other factors contributing to the decrease in net interest income included the planned runoff of higher yielding indirect auto loans, market floors on deposit pricing in the very low rate environment, and the elimination of the dividend by the FHLBB, which had contributed $0.8 million in revenue in 2008.
Average earning assets increased by 6% during 2009, as deposit growth was channeled into investment securities with low market yields. Deposit growth was strongest in the first half of the year, at a time when commercial loan demand was soft due to the economic contraction and new funds were held in overnight investments with little yield. Mortgage runoff was also highest during the first half of the year, with the market responding to federal interventions to reduce long term mortgage rates. The Bank sold most of these low fixed rate mortgages rather than holding them in portfolio. The net interest margin decreased from 3.41% in the fourth quarter of 2008 to 2.91% in the second quarter of 2009. Around midyear, the Company began investing overnight funds in 1-3 year investment securities, more residential mortgage originations were retained, commercial loan growth accelerated, and there was continued focus on loan and deposit pricing to offset the impact of market conditions. With the benefit of these actions, the net interest margin improved to 3.05% in the fourth quarter of 2009. This margin was also affected by the increase in nonperforming assets, which management intends to reduce in 2010. Additionally, the prepayment of higher rate borrowings in the fourth quarter is expected to contribute to an improved margin in 2010.non-performing assets.
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The average yields on all major categories of earning assets decreased steadily throughout the year as repricings were affected by the low market rates. Additionally, higher yielding auto loans and mortgages ran-off and were replaced in part by lower yielding investments and home equity loans. The yield on total earning assets decreased by 0.91% from 5.67% in the fourth quarter of 2008 to 4.76% in the fourth quarter of 2009. Average costs of interest bearing liabilities generally decreased throughout the year, while borrowing costs increased slightly due to changes in the borrowing mix. The cost of interest bearing liabilities decreased by 0.57% from 2.64% in the fourth quarter of 2008 to 2.07% in the fourth quarter of 2009. For the year, the net interest spread decreased by 0.45%. Much of the growth in interest bearing assets was funded by non-interest bearing demand deposit accounts and contributed capital. The net interest margin decreased by a lesser amount of 0.44%. Of note, in calculating yields and margins, earning assets include nonaccruing loans and FHLBB stock, and calculations are adjusted for the fully tax equivalent benefit of municipal bonds and other tax advantaged securities.
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Non-Interest Income.The $3 million (8%) decrease in non-interest income included a $2 million (7%) decrease in fee income. Berkshire posted increases in deposit and interest rate swap fee revenues. Deposit service fee income increased by $0.3 million (3%) due to higher business volumes related to deposit growth. Commercial interest rate swap fees increased by $0.6 million reflecting increased marketing of these instruments and improved competitive and interest rate conditions in this market. These swaps are generally written in conjunction with certain larger commercial loan originations. Loan fee income decreased by $0.8 million. While the Company processed higher mortgage loan refinancing volume in 2009, the costs of handling the volume surge generally offset the benefit of higher secondary market income. Mortgage servicing fee income decreased due to amortization and impairment charges for mortgage servicing rights as a result of the high refinancing volumes. Wealth management fee income decreased by $0.9 million (16%) primarily due to the lower stock market prices on which some of this income is based. After prices recovered towards the end of the year, total assets under management reached $668 million at year-end 2009, compared to $670 million at the start of the year. Wealth management new business volume measured 10%, reflecting ongoing new business in this segment. Fourth quarter 2009 wealth management fees had recovered to within 3% of results in the fourth quarter of the prior year. Insurance revenues decreased by $1.4 million (11%) due to lower contingency income and ongoing tighter pricing conditions in the consumer and commercial markets. Retail income has also been affected by more competitive conditions in Massachusetts, and commercial income has been affected by reductions in commercial insurance in force due to the impact of downsizings on local businesses. Insurance fee income is seasonal, with most contingency income received in the first half of the year. The Company is pursuing fee income initiatives in all of its business lines through product development and cross sale programs. In the insurance group, the Company is planning to intensively market employee benefits programs which it began offering a year ago in conjunction with a third party partner. Additionally, the insurance group is being restructured to reduce costs based on the current revenue environment, and also to improve service and make growth more scaleable as it expands throughout the Company’s regions.
The Company recorded an increase in other non-interest income due to the benefit of hedge accounting revaluations. Non-recurring non-interest income items included prepayment fees, a swap termination gain, and a credit for a merger termination fee. The Company recorded $3 million in costs for the prepayment of FHLBB borrowings in the first and fourth quarters. The company recorded a $1 million gain on an interest rate swap termination in the first quarter. The Company recorded $1 million in revenue related to the June termination of a merger agreement with CNB Financial Corp. as a result of an unsolicited offer that was accepted by CNB.
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 provision for loan losses totaled $48 million in 2009 compared to $5 million in 2008. The loan loss provision in 2009 exceeded net charge-offs of $39 million, and as a result, the allowance for loan losses increased to 1.62% of total loans from 1.14% at the start of the year.
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Total net loan charge-offs measured 1.96% of average total loans in 2009, compared to 0.19% in the prior year. The Company’s 2009 loan losses compared favorably to FDIC 2009 averages, with the national average measuring 2.49% and the average for banks headquartered in the Northeast region measuring 2.75%. Berkshire’sThe Company’s commercial net loan charge-offs totaled 3.32% of average commercial loans in 2009. Residential mortgages averaged 0.32% of average loans. Auto loan charge-offs measured 2.29% of average auto loans. Home equity and other consumer loan losses averaged 0.45% of average loans.
Non-Interest Expense and Income Tax Expense.Total non-interest expense increased by $7 million (10%) in 2009 compared to 2008. The increase included $4 million in higher expense for FDIC insurance and $2 million for the cost of fourth quarter initiatives. The increase in FDIC insurance cost was related to higher charges levied against the industry, as was previously discussed. Additionally, the Bank chose to voluntarily participate in the unlimited transaction account insurance, which resulted in additional premium charges. Before FDIC expense, total expense in the first nine months of 2009 was $1 million less than in the same period of 2008. The Company recorded $2 million in expense for fourth quarter initiatives, including the loan review/restructuring initiative, insurance re-engineering, sign-on bonus and severance expense, and costs for the expanded review of goodwill.
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Before the cost of FDIC expense and fourth quarter initiatives, total expense for the year increased by $1 million (1.5%) compared to the prior year. Expenses in 2009 included fourth quarter costs related to the start-up of the asset based lending groupAsset Based Lending Group and the opening of the Springfield regional headquarters and the new Springfield branch. Total salary and benefit expense was flat from year to year. Executive bonuses were forfeited in 2009, and total incentive compensation decreased by $1 million. Compensation expense also declined as a result of a $1 million increase in direct compensation costs that were recorded as charges against non-interest income as a result of current year loan sale activity. Excluding these factors, total salaries and wages increased by $2 million (6%) in 2009 compared to 2008. The Company had 622 full time equivalent employees at year-end 2009, compared to 610 in 2008, including new positions related to its expansion and new business initiatives. Amortization expense for intangibles decreased based on lower intangibles. Nonrecurring expense in 2009 included costs associated with the terminated CNB merger and other charges related to the restructuring of the Integrated Services division which was created at the beginning of the second quarter, together with a legal settlement related charge. Other expense included an increase in loan expense due to higher problem and potential problem loans. Due to the increase in total expense, the ratio of non-interest expense to average total assets increased to 2.93% in 2009 from 2.81% in 2008.
The Company recorded a $12 million income tax benefit in 2009, measuring 42% of the pre-tax loss, due to the full recoverability of prior period federal tax expense through carrybacks and carryforwards. There is no state income tax loss carryback or carryforward benefit, whereas there is normally a 6-7% effective state tax rate on pre-tax income. The Company also has a tax benefit related to tax exempt investment income, which provided a 6% rate benefit in 2009. The effective tax rate was 28% in 2008, including a rate benefit of 3% related to the elimination of a state tax valuation allowance as a result of growth in the Bank’s taxable income, along with the ongoing benefit from tax advantaged investments and other ongoing tax credits.
Results of Segment and Parent Operations. The banking segment reported a $16 million loss in 2009, and the consolidated result was a $16 million loss. In comparison, the results were record income of $22 million in 2008 for both the banking segment and the consolidated total. The change in results in the banking segment was primarily due to the same factors that affected consolidated results, which have been discussed previously. Net income of the insurance segment decreased to $1 million from $2 million due to aan 11% decrease in revenues reflecting the soft pricing conditions in the industry and other impacts of the recession and competition on revenues. The parentBerkshire Hills Bancorp received $12 million in dividends from the Bank and $3 million in dividends from the insurance group. The parentBIG and recorded a $1 million merger termination fee credit to revenue representing a merger termination fee received, andwhich was partially offset by increased operating expenses increased and included expenses related tostemming from the terminated merger agreement. The parentParent had $24 million in cash on deposit at the Bank at year-end 2009.
Comprehensive (Loss) Income.Comprehensive (loss) income is a component of total stockholders’ equity on the balance sheet. It includes changes in accumulated other comprehensive income (loss), which consist of changes (after-tax) in the unrealized market gains and losses on securities available for sale and the net gain (loss) on derivative instruments used as cash flow hedges. The Company recorded a comprehensive loss of $7 million in 2009, which was less than the $16 million operating loss due to the improved market prices of securities and derivative instruments. In 2008, the Company recorded $9 million in comprehensive income which was lower than the $22 million net income for the year due to the decrease in market prices of securities and derivatives instruments. These results reflected the impact on interest rates and market prices of the financial turmoil in the second half of 2008 and the partial recovery to more normalized market conditions in 2009.
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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%.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| 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) | $ | 1,982.5 | $ | 101.7 | 5.13 | % | $ | 1,980.1 | $ | 120.6 | 6.09 | % | $ | 1,789.0 | $ | 120.1 | 6.71 | % | ||||||||||||||||||
| Investment securities (2) | 368.5 | 16.0 | 4.34 | 271.2 | 14.5 | 5.37 | 235.2 | 13.9 | 5.91 | |||||||||||||||||||||||||||
| Federal funds sold and short-term investments | 42.1 | 0.1 | 0.24 | 12.2 | 0.2 | 1.64 | 4.7 | 0.1 | 3.02 | |||||||||||||||||||||||||||
| Total interest-earning assets | 2,393.1 | 117.8 | 4.92 | 2,263.5 | 135.3 | 5.98 | 2,028.9 | 134.1 | 6.61 | |||||||||||||||||||||||||||
| Intangible assets | 177.6 | 180.3 | 138.3 | |||||||||||||||||||||||||||||||||
| Other non-interest earning assets | 112.2 | 107.0 | 95.2 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 2,682.9 | $ | 2,550.8 | $ | 2,262.4 | ||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||
| NOW accounts | $ | 188.2 | $ | 0.8 | 0.43 | % | $ | 200.1 | $ | 1.5 | 0.75 | % | $ | 157.9 | $ | 2.3 | 1.46 | % | ||||||||||||||||||
| Money market accounts | 499.6 | 6.4 | 1.28 | 464.9 | 10.0 | 2.15 | 339.2 | 12.2 | 3.60 | |||||||||||||||||||||||||||
| Savings accounts | 212.3 | 0.7 | 0.33 | 216.4 | 1.6 | 0.74 | 201.6 | 2.2 | 1.09 | |||||||||||||||||||||||||||
| Certificates of deposit | 777.1 | 24.7 | 3.18 | 725.4 | 28.6 | 3.94 | 714.1 | 33.9 | 4.75 | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,677.2 | 32.6 | 1.94 | 1,606.8 | 41.7 | 2.60 | 1,412.8 | 50.6 | 3.58 | |||||||||||||||||||||||||||
| Borrowings and debentures | 312.9 | 13.3 | 4.25 | 363.8 | 15.8 | 4.34 | 365.8 | 17.4 | 4.76 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,990.1 | 45.9 | 2.31 | 1,970.6 | 57.5 | 2.92 | 1,778.6 | 68.0 | 3.82 | |||||||||||||||||||||||||||
| Non-interest-bearing demand deposits | 256.4 | 225.2 | 190.4 | |||||||||||||||||||||||||||||||||
| Other non-interest-bearing liabilities | 24.2 | 11.0 | 5.4 | |||||||||||||||||||||||||||||||||
| Total liabilities | 2,270.7 | 2,206.8 | 1,974.4 | |||||||||||||||||||||||||||||||||
| Equity | 412.2 | 344.0 | 288.0 | |||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 2,682.9 | $ | 2,550.8 | $ | 2,262.4 | ||||||||||||||||||||||||||||||
| Net interest-earning assets | $ | 403.0 | $ | 292.9 | $ | 250.3 | ||||||||||||||||||||||||||||||
| Net interest income | $ | 71.9 | $ | 77.8 | $ | 66.1 | ||||||||||||||||||||||||||||||
Supplementary data | ||||||||||||||||||||||||||||||||||||
| Total non-maturity deposits | $ | 1,156.5 | $ | 1,106.6 | $ | 889.1 | ||||||||||||||||||||||||||||||
| Total deposits | 1,933.6 | 1,832.0 | 1,603.2 | |||||||||||||||||||||||||||||||||
| Fully taxable equivalent adjustment | 2.3 | 2.1 | 2.2 | |||||||||||||||||||||||||||||||||
| Interest rate spread | 2.61 | % | 3.06 | % | 2.79 | % | ||||||||||||||||||||||||||||||
| Net interest margin | 3.00 | % | 3.44 | % | 3.26 | % | ||||||||||||||||||||||||||||||
| Cost of funds | 2.04 | % | 2.62 | % | 3.45 | % | ||||||||||||||||||||||||||||||
| Cost of deposits | 1.69 | % | 2.28 | % | 3.16 | % | ||||||||||||||||||||||||||||||
| Interest-earning assets/interest-bearing liabilities | 120.25 | % | 114.86 | % | 114.07 | % | ||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| 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): | ||||||||||||||||||||||||||||||||||||
| Residential loans | $ | 633.5 | $ | 32.9 | 5.19 | % | $ | 642.9 | $ | 34.7 | 5.40 | % | $ | 669.1 | $ | 37.9 | 5.66 | % | ||||||||||||||||||
| Commercial real estate loans | 881.9 | 43.3 | 4.91 | 829.3 | 42.3 | 5.10 | 725.2 | 48.0 | 6.62 | |||||||||||||||||||||||||||
| Commercial business loans | 204.0 | 10.5 | 5.15 | 177.8 | 10.0 | 5.62 | 379.8 | 13.5 | 3.55 | |||||||||||||||||||||||||||
| Consumer loans | 299.9 | 11.7 | 3.90 | 332.5 | 14.7 | 4.42 | 206.0 | 21.2 | 10.29 | |||||||||||||||||||||||||||
| Total loans | 2,019.3 | 98.4 | 4.87 | 1,982.5 | 101.7 | 5.13 | 1,980.1 | 120.6 | 6.09 | |||||||||||||||||||||||||||
| Investment securities (2) | 408.3 | 16.7 | 4.09 | 368.5 | 16.0 | 4.34 | 271.2 | 14.5 | 5.37 | |||||||||||||||||||||||||||
| Federal funds sold and short-term investments | 11.4 | - | - | 42.1 | 0.1 | 0.24 | 12.2 | 0.2 | 1.64 | |||||||||||||||||||||||||||
| Total interest-earning assets | 2,439.0 | 115.1 | 4.72 | 2,393.1 | 117.8 | 4.92 | 2,263.5 | 135.3 | 5.98 | |||||||||||||||||||||||||||
| Intangible assets | 174.5 | 177.6 | 180.3 | |||||||||||||||||||||||||||||||||
| Other non-interest earning assets | 134.9 | 112.2 | 107.0 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 2,748.4 | $ | 2,682.9 | $ | 2,550.8 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||
| NOW accounts | 199.3 | 0.7 | 0.35 | % | 188.2 | 0.8 | 0.43 | % | 200.1 | 1.5 | 0.75 | % | ||||||||||||||||||||||||
| Money market accounts | 597.3 | 5.6 | 0.94 | 499.6 | 6.4 | 1.28 | 464.9 | 10.0 | 2.15 | |||||||||||||||||||||||||||
| Savings accounts | 224.3 | 0.6 | 0.27 | 212.3 | 0.7 | 0.33 | 216.4 | 1.6 | 0.74 | |||||||||||||||||||||||||||
| Certificates of deposit | 749.2 | 19.4 | 2.59 | 777.1 | 24.7 | 3.18 | 725.4 | 28.6 | 3.94 | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,770.1 | 26.3 | 1.49 | 1,677.2 | 32.6 | 1.94 | 1,606.8 | 41.7 | 2.60 | |||||||||||||||||||||||||||
| Borrowings and debentures | 282.0 | 9.0 | 3.19 | 312.9 | 13.3 | 4.25 | 363.8 | 15.8 | 4.34 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 2,052.1 | 35.3 | 1.72 | 1,990.1 | 45.9 | 2.31 | 1,970.6 | 57.5 | 2.92 | |||||||||||||||||||||||||||
| Non-interest-bearing demand | ||||||||||||||||||||||||||||||||||||
| deposits | 279.2 | 256.4 | 225.2 | |||||||||||||||||||||||||||||||||
| Other non-interest-bearing | ||||||||||||||||||||||||||||||||||||
| liabilities | 29.2 | 24.2 | 11.0 | |||||||||||||||||||||||||||||||||
| Total liabilities | 2,360.5 | 2,270.7 | 2,206.8 | |||||||||||||||||||||||||||||||||
| Equity | 387.9 | 412.2 | 344.0 | |||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 2,748.4 | $ | 2,682.9 | $ | 2,550.8 | ||||||||||||||||||||||||||||||
| Net interest-earning assets | $ | 386.9 | $ | 403.0 | $ | 292.9 | ||||||||||||||||||||||||||||||
| Net interest income | $ | 79.8 | $ | 71.9 | $ | 77.8 | ||||||||||||||||||||||||||||||
| Supplementary data | ||||||||||||||||||||||||||||||||||||
| Total non-maturity deposits | $ | 1,300.1 | $ | 1,156.5 | $ | 1,106.6 | ||||||||||||||||||||||||||||||
| Total deposits | 2,049.3 | 1,933.6 | 1,832.0 | |||||||||||||||||||||||||||||||||
| Fully taxable equivalent adjustment | 2.3 | 2.3 | 2.1 | |||||||||||||||||||||||||||||||||
| Interest rate spread | 3.00 | % | 2.61 | % | 3.06 | % | ||||||||||||||||||||||||||||||
| Net interest margin | 3.27 | 3.00 | 3.44 | |||||||||||||||||||||||||||||||||
| Cost of funds | 4.52 | 2.04 | 2.62 | |||||||||||||||||||||||||||||||||
| Cost of deposits | 1.29 | 1.69 | 2.28 | |||||||||||||||||||||||||||||||||
| Interest-earning assets/interest-bearing liabilities | 118.85 | 120.25 | 114.86 | |||||||||||||||||||||||||||||||||
(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.
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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.
| 2009 Compared with 2008 | 2008 Compared with 2007 | |||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
| (In thousands) | Rate | Volume | Net | Rate | Volume | Net | ||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
| Loans | $ | (19,031 | ) | $ | 143 | $ | (18,888 | ) | $ | (11,686 | ) | $ | 12,194 | $ | 508 | |||||||||
| Investment securities | (3,813 | ) | 5,225 | 1,412 | (1,362 | ) | 1,979 | 617 | ||||||||||||||||
| Short-term investments | (591 | ) | 491 | (100 | ) | (92 | ) | 134 | 42 | |||||||||||||||
| Total interest income | (23,436 | ) | 5,859 | (17,577 | ) | (13,140 | ) | 14,307 | 1,167 | |||||||||||||||
Interest expense: | ||||||||||||||||||||||||
| NOW accounts | (602 | ) | (90 | ) | (692 | ) | (1,318 | ) | 506 | (812 | ) | |||||||||||||
| Money market accounts | (4,347 | ) | 747 | (3,600 | ) | (5,874 | ) | 3,654 | (2,220 | ) | ||||||||||||||
| Savings accounts | (870 | ) | (30 | ) | (900 | ) | (783 | ) | 146 | (637 | ) | |||||||||||||
| Certificates of deposit | (5,938 | ) | 2,038 | (3,900 | ) | (5,728 | ) | 533 | (5,195 | ) | ||||||||||||||
| Total deposits | (11,757 | ) | 2,665 | (9,092 | ) | (13,703 | ) | 4,839 | (8,864 | ) | ||||||||||||||
| Borrowings | (288 | ) | (2,212 | ) | (2,500 | ) | (1,587 | ) | (97 | ) | (1,684 | ) | ||||||||||||
| Total interest expense | (12,045 | ) | 453 | (11,592 | ) | (15,290 | ) | 4,742 | (10,548 | ) | ||||||||||||||
| Change in net interest income | $ | (11,391 | ) | $ | 5,406 | $ | (5,985 | ) | $ | 2,150 | $ | 9,565 | $ | 11,715 | ||||||||||
| 2010 Compared with 2009 | 2009 Compared with 2008 | |||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
| (In thousands) | Rate | Volume | Net | Rate | Volume | Net | ||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Loans | $ | (5,243 | ) | $ | 1,897 | $ | (3,346 | ) | $ | (19,002 | ) | $ | 139 | $ | (18,863 | ) | ||||||||
| Investment securities | (1,035 | ) | 1,728 | 693 | (3,813 | ) | 5,225 | 1,412 | ||||||||||||||||
| Short-term investments | (27 | ) | (73 | ) | (100 | ) | (591 | ) | 491 | (100 | ) | |||||||||||||
| Total interest income | (6,305 | ) | 3,552 | (2,753 | ) | (23,406 | ) | 5,855 | (17,551 | ) | ||||||||||||||
| �� | ||||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| NOW accounts | (97 | ) | 45 | (52 | ) | (652 | ) | (90 | ) | (742 | ) | |||||||||||||
| Money market accounts | (2,082 | ) | 1,250 | (832 | ) | (4,384 | ) | 750 | (3,634 | ) | ||||||||||||||
| Savings accounts | (181 | ) | 42 | (139 | ) | (865 | ) | (2 | ) | (867 | ) | |||||||||||||
| Certificates of deposit | (4,389 | ) | (886 | ) | (5,275 | ) | (5,911 | ) | 2,036 | (3,875 | ) | |||||||||||||
| Total deposits | (6,749 | ) | 451 | (6,298 | ) | (11,812 | ) | 2,694 | (9,118 | ) | ||||||||||||||
| Borrowings | (2,944 | ) | (1,308 | ) | (4,252 | ) | (269 | ) | (2,203 | ) | (2,472 | ) | ||||||||||||
| Total interest expense | (9,693 | ) | (857 | ) | (10,550 | ) | (12,081 | ) | 491 | (11,590 | ) | |||||||||||||
| Change in net interest income | $ | 3,388 | $ | 4,409 | $ | 7,797 | $ | (11,355 | ) | $ | 5,368 | $ | (5,987 | ) | ||||||||||
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. At year-end 2009, Berkshire Hills Bancorp2010, the Parent had $33$13 million in cash and equivalents, due primarilycompared to its stock offerings and to $15$24 million in dividends received from subsidiaries in 2009.at the start of the year. This cash was held on deposit in the Bank. The primary ongoing source of funding for the parent companyParent is dividend payments from the Bank and from Berkshire Insurance Group. TheseBIG. There were no dividend payments totaled $12 million and $3 million in 2009 forfrom these subsidiaries respectively.in 2010. Additional potential sources of liquidity are proceeds from borrowings and capital offerings, and from stock option exercises. The main uses of liquidity are the payment of common and preferred stockholder dividends, purchases of treasury stock,routine operating expenses, debt service on outstanding borrowings and debentures, purchases of treasury stock, and business acquisitions. In 2009,Sources and uses of cash at the Parent Company also prepaid $17 millionare reported in term loans and redeemed $40 millionthe condensed financial statements included in U.S. Treasury preferred stock.the notes to the consolidated financial statements. There are certain restrictions on the payment of dividends by the Bank as discussed in the Stockholders’ Equity note to the consolidated financial statements. At year-end 2009,2010, under state statutes and based on its condition at that date, the Bank’s retained earnings were $11$8 million below the statutory amount necessary to be eligible to pay dividends from future earnings. The Company expects that the Bank’s retained earnings will increase to an amount in excess of the statutory requirement in 2011, and that dividends from the Bank to the Bancorp will be resumed in 2011. Additionally, BIG had $3 million in cash at year-end 2010 which was available for future dividends to the Bancorp. In the past, the Parent has maintained credit facilities with correspondent banks and such facilities may be arranged in the future.
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 borrowings at the Federal Reserve Bank of Boston. As of year-end 2009,2010, based on its arrangements and collateral amounts, the Bank had potential borrowing capacity totaling $282$328 million with the Federal Home Loan Bank of Boston.
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. TheUnder the 2010 Dodd-Frank Act, FDIC deposit insurance limits were permanently increased from $100 thousand to $250 thousand and transaction accounts were provided with unlimited insurance through December 31, 2010. Additionally, the Bank offers 100% insurance on all deposit balances as a result of the combination of FDIC insurance and the Massachusetts Depositors Insurance Fund. The Bank also relies on competitive rates, customer service, and long-standing relationships with customers to manage deposit and loan liquidity. Based on its historical experience, managementManagement 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. Both the Bank and the Company opted in to the FDIC Temporary Liquidity Guarantee Program in 2008, and the Bank continued to opt-in to the optional unlimited transaction account insurance with expires in June 2010. The Bank does not expect to experience a significant impact when this program expires. Neither the Bank nor the Company issued any FDIC guaranteed debt under this program. The Bank’s liquidity was strong and improved at year-end 2009, and the Parent Company’s cash balances were well in excess of all planned cash uses for 2010.
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The Bank must satisfy various regulatory capital requirements. Additionally, the Parent will need to satisfy additional regulatory capital requirements whichwhen its supervision is changed from the Office of Thrift Supervision to the Federal Reserve Bank of Boston in 2011. Regulatory capital requirements are discussed in the Regulation and Supervision section of Item 1, in the Risk Factors discussion, and in the Stockholders’ Equity note to the consolidated financial statements. Please also see the Equity section of themanagement’s discussion of financial condition for additional information about liquidity and capital at year-end 2009.2010. In September 2006,the fourth quarter of 2009, the Company filed a universal shelf registration with the Securities and Exchange Commission for the issuance of up to $125$150 million in securities, including debt securities, common stock, or preferred stock. This registration replaced an earlier $125 million universal shelf registration. The Company used this registration for its common and preferred stock issuances in 2008 and 2009. Following the expiration of this registration in 2009, the Company renewed the universal shelf registration in an increased amount of $150 million in the fourth quarter of 2009. The Company hadhas not issued any securities under this latest registration, at year-end 2009 and diddoes not have any specific plans for issuances under this registration, which will expire in three years under SEC rules.
Contractual Obligations.The year-end 20092010 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) | $ | 291,204 | $ | 93,860 | $ | 35,417 | $ | 91,411 | $ | 70,516 | ||||||||||
| Junior subordinated debentures | 15,464 | — | — | — | 15,464 | |||||||||||||||
| Operating lease obligations (2) | 47,292 | 2,954 | 5,700 | 5,595 | 33,043 | |||||||||||||||
| Investment tax credit obligations | 5,177 | 5,177 | — | — | — | |||||||||||||||
| Purchase obligations (3) | 10,474 | 4,543 | 5,827 | 104 | — | |||||||||||||||
| Total Contractual Obligations | $ | 369,611 | $ | 106,534 | $ | 46,944 | $ | 97,110 | $ | 119,023 | ||||||||||
| Less than One | One to Three | Three to Five | After Five | |||||||||||||||||
| (In thousands) | Total | Year | Years | Years | Years | |||||||||||||||
| FHLBB borrowings (1) | $ | 244,837 | $ | 47,640 | $ | 96,547 | $ | 50,207 | $ | 50,443 | ||||||||||
| Junior subordinated debentures | 15,464 | - | - | - | 15,464 | |||||||||||||||
| Operating lease obligations (2) | 54,697 | 3,340 | 6,329 | 6,154 | 38,874 | |||||||||||||||
| Investment tax credit obligations | 4,648 | 4,648 | - | - | - | |||||||||||||||
| Purchase obligations (3) | 9,081 | 5,181 | 3,856 | 44 | - | |||||||||||||||
| Total Contractual Obligations | $ | 328,727 | $ | 60,809 | $ | 106,732 | $ | 56,405 | $ | 104,781 | ||||||||||
Merger related obligations are not included.
(1) Consists of borrowings from the Federal Home Loan Bank. The maturities extend through 2027 and the rates vary by borrowing.
(2) Consists of leases, bank branches and ATMs through 2031.
(3) Consists of obligations with multiple vendors to purchase a broad range of services.
Further information about borrowings and lease obligations is in the Borrowingsnotes on borrowings and Commitment notescommitments to the financial statements. There was no change in the debenture obligation. Operating lease obligations increased due to the Company’s expansion. The tax credit obligations are expected to be funded in 20102011 based primarily on the current project schedule of a low income housing tax credit partnership entered into in 2009. Purchase obligations increased primarily duedecreased slightly and consist of numerous vendor contracts.
Pending Merger Agreements. In the fourth quarter of 2010, the Company announced merger agreements with Rome Bancorp and Legacy Bancorp. These acquisitions are expected to information technology contracts for upgradedbe completed in 2011, subject to regulatory and expanded services, along with construction commitments for new branches planned for New Yorkshareholder approvals. These agreements are discussed in 2010.the Mergers and Acquisitions Note of the consolidated financial statements and elsewhere in this Item 7. These acquisitions are expected to significantly increase the size of the Company, and to materially affect its financial condition and operations. Most financial condition and performance metrics are expected to improve as a result of these acquisitions. By providing access to additional sources of deposits, they are expected to enhance the Company’s liquidity. Additionally, the total number of the Company’s shares outstanding is expected to increase to approximately 21 million, which will improve the Company’s overall stock liquidity and sources of equity capital.
The Company expects to pay approximately $20 million. CNB was the parent of Commonwealth National Bank, located in Worcester, Massachusetts with six branches and nearly $300$72 million in assets. Subsequently, CNB received two additional unsolicited merger offersconsideration for the Rome acquisition, which will be financed with new stock to be issued in the approximate amount of $50 million and cash payments to Rome shareholders totaling about $22 million. Berkshire expects to pay approximately $108 million in June, Berkshireconsideration for the Legacy acquisition, which will be financed with new stock to be issued in the approximate amount of $90 million, cash payments of $10 million, and CNB announcedother consideration totaling about $8 million. The actual amount of consideration paid will depend on conditions at the time that they had terminated their merger agreement and that CNB had entered intothe acquisitions are completed. Rome has applied with federal regulatory authorities for Rome Savings Bank to provide a merger agreementspecial cash dividend with another entity. Berkshire received a $1 million termination fee in June. Berkshire’s original purchase price represented approximately 99%which to finance the cash component of CNB’s tangible book value and no premium to core deposits. Berkshire expected to implement ongoing cost savings equal to approximately 25% of CNB’s total non-interest expenses.the Rome consideration. The Company expected thatexpects to utilize existing cash balances held by Berkshire Hills Bancorp and Legacy Bancorp to finance the transaction would be dilutive to its tangible common stock book value per share in 2009 due to closing adjustments and net transaction expenses and that this dilution would be offset within three years based oncash consideration for the accretion related to the merger. The Company provided an enhanced offer equivalent to approximately 106% of CNB’s tangible book value, but declined to offer further enhanced offers and a competing offer was ultimately chosen by CNB, leading to the termination of the agreement with Berkshire.Legacy acquisition.
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Off-Balance Sheet Arrangements.In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States, are not recorded in the Company’s financial statements. 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. ForOff-balance sheet activities are described in a related note to the consolidated financial statements. Aside from the above-mentioned merger agreements, for 2010 and 2009, and 2008, 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.
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Fair Value Measurements.The companyCompany records fair value measurements of certain assets and liabilities, as described in the related note in the financial statements. Recurring fair values of financial instruments primarily relate to securities and derivative instruments. A valuation hierarchy is utilized based on generally accepted accounting principles. Measurements based on Level 3 inputs rely the most on subjective management judgments. Level 3 recurring measurements relate primarily to the $16 million fair value of a local tax advantaged economic development bond issued to a Berkshire County non-profit, which is classified as a trading security. Changes in the fair value of this security are recorded in non-interest income, as are offsetting changes in the accompanying interest rate swap. Additionally, a pooled trust preferred security and two limited partnership securities are valued on this basis. Non-recurring fair values of financial instruments relate primarily to impairment analysis of economic development bonds recorded as held-to-maturity, restricted equity securities, and loans. The only assets deemed impaired were $57$17 million in loans, which were evaluated based on Level 3 inputs, which gave rise to a $6$2 million impairment reserve at December 31, 2009.year-end 2010. Fair value measurements of non-financial assets and liabilities primarily relate to impairment analyses of intangibles and goodwill. The Company performed an impairment analysis of its goodwill in the most recent quarter, and determined that there was no impairment as of December 31, 2009.at year-end 2010. The Company also provides a summary of estimated fair values of financial instruments at each quarter-end. The category of financial assets with the most significant difference between carrying value and fair value is the net loan category. The fair value of loans is estimated to be at a $58 million (3%) discount to carrying value at year-end 2010, compared to a $96 million (5%) discount to carrying value as ofat year-end 2009. This is a change from a slight premium atimprovement reflected the beginningimproved credit profile of the year, and primarily reflects an increaseloan portfolio in the amount of problem and potential problem loans,2010, along with a decrease in the estimated fair valuesimpact of these assets,lower medium term rates and of loans in general due to higher market liquidity discounts in 2009.pricing spreads for loans. For financial liabilities, the total fair value of deposits, borrowings, and borrowingsdebentures is estimated to be $22$8 million (1%(0%) higher than carrying value becauseat year-end 2010, which is not significantly changed from $16 million (1%) at the start of fixed rate obligations which arethe year. The improvement in the unrealized loss on these liabilities was primarily due to an improvement in deposits related to the runoff of higher costing time deposits during the year. The combined $46 million improvement in the unrealized loss on the above current market rates. The fairloans and liabilities reflected an overall improvement in the economic value of the Company’s $15 million debenture has declined considerablyequity related to a $6 million discount (39%) at year-end due to the poor market conditions for privately issued unrated trust preferred securities.these instruments.
IMPACT OF INFLATION AND CHANGING PRICESPRICE
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 Berkshirethe Bank are monetary in nature. As a result, interest rates have a more significant impact on Berkshirethe 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’sCompany’s most significant form of market risk is interest rate risk. The BankComany 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 BankThe Company maintains an Asset/Liability Committee that is responsible for reviewing its asset/liability policies and interest rate risk position. This Committee meets monthly 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 BankCompany 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 BankThe Company also uses interest rate swaps in order to enhance its interest rate risk position and manage its balance sheet.
Quantitative Aspects of Market Risk.The Company uses a simulation model to measure the potential change in net interest income that would result from both an instantaneous or ramped change in market interest rates assuming a parallel shift along the entire yield curve. The chart below shows the analysis of a ramped change. The range of the ramp was shifted up at year-end 2008 in the chart due to the very low interest rates prevailing at that date. 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 | 1- 12 Months | 13- 24 Months | ||||||||||||||||||||||||||||||
| Points (Rate Ramp) | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| At December 31, 2010 | ||||||||||||||||||||||||||||||||
| + 300 | $ | 3,413 | 4.34 | % | $ | 8,780 | 11.38 | % | ||||||||||||||||||||||||
| + 200 | 2,047 | 2.60 | 5,934 | 7.69 | ||||||||||||||||||||||||||||
| + 100 | 1,497 | 1.90 | 4,528 | 5.87 | ||||||||||||||||||||||||||||
| - 100 | (1,510 | ) | (1.92 | ) | (6,254 | ) | (8.11 | ) | ||||||||||||||||||||||||
| Change in | ||||||||||||||||||||||||||||||||
| Interest Rates-Basis | 1- 12 Months | 13- 24 Months | ||||||||||||||||||||||||||||||
| Points (Rate Ramp) | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
At December 31, 2009 | ||||||||||||||||||||||||||||||||
| + 300 | $ | 1,748 | 2.39 | % | $ | 7,531 | 10.62 | % | $ | 1,748 | 2.39 | % | $ | 7,531 | 10.62 | % | ||||||||||||||||
| + 200 | 1,059 | 1.44 | 5,116 | 7.22 | 1,059 | 1.44 | 5,116 | 7.22 | ||||||||||||||||||||||||
| + 100 | 986 | 1.35 | 3,982 | 5.62 | 986 | 1.35 | 3,982 | 5.62 | ||||||||||||||||||||||||
| - 100 | (1,411 | ) | (1.93 | ) | (4,586 | ) | (6.47 | ) | (1,411 | ) | (1.93 | ) | (4,586 | ) | (6.47 | ) | ||||||||||||||||
At December 31, 2008 | ||||||||||||||||||||||||||||||||
| + 300 | $ | 2,207 | 3.07 | % | $ | 7,065 | 10.24 | % | ||||||||||||||||||||||||
| + 200 | 1,587 | 2.21 | 5,283 | 7.66 | ||||||||||||||||||||||||||||
| + 100 | 869 | 1.21 | 2,778 | 4.03 | ||||||||||||||||||||||||||||
| - 100 | (1,977 | ) | (2.75 | ) | (5,779 | ) | (8.38 | ) | ||||||||||||||||||||||||
During 2009,2010, the Company maintained its moderately asset sensitive interest rate risk profile. This reflects the Company’s general preference and also reflects management’sManagement’s expectations that inflation and interest rates will rise from recent low levels. One factor contributing to this profile included the continued shiftBank’s new asset based lending program which began in consumer lending from fixed2010. Nearly all of the loans in this program have rate indirect auto loans to prime based home equity lines. The Bank entered into $145 million in cash flow interest rate swaps in the past two years to fix the rate on adjustable-rate Federal Home Loan Bank advances to match the rate duration on existing residential and commercial mortgage loans. The Company also entered into swaps to convert a $15 million fixed rate economic development bond to variable rate and to fix the interest rate on the Company’s $15 million in trust preferred debentures in 2008.reset frequencies of one month or less. Additionally, the Company continues to offer back-to-back interest rate swaps to certain commercial borrowers, and thereby was able to originate adjustable rate commercial loans which the customers swapped into fixed interest rates. Back to back interest rate swaps totaled $94$137 million at December 31, 2009year-end 2010 and allowed the Bank to fund these loans with short term deposits; including money market accounts which help the Company grow its core transaction based customer deposit franchise.
Due to the limitations and uncertainties relating to model assumptions, the above computations should not be relied on as projections of income. Further, the computations do not reflect any actions that managementManagement 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. The rate sensitivity depends on the underlying amount of market rate change and the type of deposit account. The percentage rate movements are as follows: NOW accounts—accounts–ranging between 0 and 35%; money market accounts—accounts–ranging between 30 and 70%; and savings accounts—accounts–ranging between 25 and 50%. 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. Assumption changes in 20092010 were based on a review of past performance and future expectations and were not viewed as material.
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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, 2009,2010, utilizing the framework established inInternal Control—Integrated Frameworkissued 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, 20092010 is effective.
Our 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’sCompany's assets that could have a material effect on the 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, 20092010 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, 2009.2010.
/s/ Michael P. Daly | /s/ Kevin P. Riley | |||
| Michael P. Daly | Kevin P. Riley | |||
| President and Chief Executive Officer | Executive Vice President, | and | ||
| March | Treasurer | |||
| March | 16, 2011 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Berkshire Hills Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Berkshire Hills Bancorp, Inc. and subsidiaries as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations, changes in stockholders’stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2009.2010. We also have audited Berkshire Hills Bancorp, Inc.’s internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Berkshire Hills Bancorp, Inc.’s'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 Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’sCompany'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’scompany'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’scompany'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’scompany'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, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009,2010, 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, 2009,2010, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 12, 201014, 2011
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BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| (In thousands, except share data) | 2009 | 2008 | ||||||
Assets | ||||||||
| Cash and due from banks | $ | 25,770 | $ | 25,783 | ||||
| Short-term investments | 6,838 | 19,015 | ||||||
| Total cash and cash equivalents | 32,608 | 44,798 | ||||||
| Trading security | 15,880 | 18,144 | ||||||
| Securities available for sale, at fair value | 324,345 | 274,380 | ||||||
| Securities held to maturity (fair values of $58,567 and $26,729) | 57,621 | 25,872 | ||||||
| Federal Home Loan Bank stock and other restricted securities | 23,120 | 23,120 | ||||||
| Total investment securities | 420,966 | 341,516 | ||||||
| Loans held for sale | 4,146 | 1,768 | ||||||
| Residential mortgages | 609,007 | 677,254 | ||||||
| Commercial mortgages | 851,828 | 805,456 | ||||||
| Commercial business loans | 186,044 | 178,934 | ||||||
| Consumer loans | 314,779 | 345,508 | ||||||
| Total loans | 1,961,658 | 2,007,152 | ||||||
| Less: Allowance for loan losses | (31,816 | ) | (22,908 | ) | ||||
| Net loans | 1,929,842 | 1,984,244 | ||||||
| Premises and equipment, net | 37,390 | 37,448 | ||||||
| Goodwill | 161,725 | 161,178 | ||||||
| Other intangible assets | 14,375 | 17,652 | ||||||
| Cash surrender value of bank-owned life insurance | 36,904 | 35,668 | ||||||
| Derivative assets | 3,267 | 3,740 | ||||||
| Other assets | 59,201 | 38,717 | ||||||
| Total assets | $ | 2,700,424 | $ | 2,666,729 | ||||
Liabilities | ||||||||
| Demand deposits | $ | 276,587 | $ | 233,040 | ||||
| NOW deposits | 197,176 | 190,828 | ||||||
| Money market deposits | 532,840 | 448,238 | ||||||
| Savings deposits | 208,597 | 211,156 | ||||||
| Time deposits | 771,562 | 746,318 | ||||||
| Total deposits | 1,986,762 | 1,829,580 | ||||||
| Short-term debt | 83,860 | 23,200 | ||||||
| Long-term Federal Home Loan Bank advances | 207,344 | 318,957 | ||||||
| Other long-term debt | — | 17,000 | ||||||
| Junior subordinated debentures | 15,464 | 15,464 | ||||||
| Derivative liabilities | 13,720 | 24,068 | ||||||
| Other liabilities | 8,693 | 30,035 | ||||||
| Total liabilities | 2,315,843 | 2,258,304 | ||||||
| Commitments and contingencies (See notes 6 and 15) | ||||||||
Stockholders’ equity | ||||||||
| Preferred stock ($.01 par value; 1,000,000 shares authorized; 40,000 shares issued in 2009 and none oustanding; 40,000 shares issued and outstanding in 2008 with a $1,000 liquidation value) | — | 36,822 | ||||||
| Common stock ($.01 par value; 26,000,000 shares authorized; 15,848,825 shares issued in 2009 and 14,238,825 in 2008) | 158 | 142 | ||||||
| Additional paid-in capital | 338,822 | 307,620 | ||||||
| Unearned compensation | (1,318 | ) | (1,905 | ) | ||||
| Retained earnings | 99,033 | 127,773 | ||||||
| Accumulated other comprehensive loss | (2,968 | ) | (11,574 | ) | ||||
| Treasury stock (1,932,731 shares in 2009 and 1,985,381 shares in 2008) | (49,146 | ) | (50,453 | ) | ||||
| Total stockholders’ equity | 384,581 | 408,425 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,700,424 | $ | 2,666,729 | ||||
| December 31, | ||||||||
| (In thousands, except share data) | 2010 | 2009 | ||||||
| Assets | ||||||||
| Cash and due from banks | $ | 24,643 | $ | 25,770 | ||||
| Short-term investments | 19,497 | 6,838 | ||||||
| Total cash and cash equivalents | 44,140 | 32,608 | ||||||
| Trading security | 16,155 | 15,880 | ||||||
| Securities available for sale, at fair value | 310,242 | 324,345 | ||||||
| Securities held to maturity (fair values of $57,594 and $58,567 in 2010 and 2009, respectively) | 56,436 | 57,621 | ||||||
| Federal Home Loan Bank stock and other restricted securities | 23,120 | 23,120 | ||||||
| Total securities | 405,953 | 420,966 | ||||||
| Loans held for sale | 1,043 | 4,146 | ||||||
| Residential mortgages | 644,973 | 609,007 | ||||||
| Commercial mortgages | 925,573 | 851,828 | ||||||
| Commercial business loans | 286,087 | 186,044 | ||||||
| Consumer loans | 285,529 | 314,779 | ||||||
| Total loans | 2,142,162 | 1,961,658 | ||||||
| Less: Allowance for loan losses | (31,898 | ) | (31,816 | ) | ||||
| Net loans | 2,110,264 | 1,929,842 | ||||||
| Premises and equipment, net | 38,546 | 37,390 | ||||||
| Other real estate owned | 3,386 | 30 | ||||||
| Goodwill | 161,725 | 161,725 | ||||||
| Other intangible assets | 11,354 | 14,375 | ||||||
| Cash surrender value of bank-owned life insurance | 46,085 | 36,904 | ||||||
| Other assets | 58,220 | 62,438 | ||||||
| Total assets | $ | 2,880,716 | $ | 2,700,424 | ||||
| Liabilities | ||||||||
| Demand deposits | $ | 297,502 | $ | 276,587 | ||||
| NOW deposits | 212,143 | 197,176 | ||||||
| Money market deposits | 716,078 | 532,840 | ||||||
| Savings deposits | 237,594 | 208,597 | ||||||
| Time deposits | 741,124 | 771,562 | ||||||
| Total deposits | 2,204,441 | 1,986,762 | ||||||
| Short-term debt | 47,030 | 83,860 | ||||||
| Long-term Federal Home Loan Bank advances | 197,807 | 207,344 | ||||||
| Junior subordinated debentures | 15,464 | 15,464 | ||||||
| Other liabilities | 28,014 | 22,413 | ||||||
| Total liabilities | 2,492,756 | 2,315,843 | ||||||
| Commitments and contingencies (See notes 6 and 15) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock ($.01 par value; 1,000,000 shares authorized; 40,000 issued in 2009 and none outstanding) | - | - | ||||||
| Common stock ($.01 par value; 26,000,000 shares authorized; 15,848,825 shares issued in 2010 and 2009; 14,076,148 outstanding in 2010 and 13,916,094 in 2009) | 158 | 158 | ||||||
| Additional paid-in capital | 337,537 | 338,822 | ||||||
| Unearned compensation | (1,776 | ) | (1,318 | ) | ||||
| Retained earnings | 103,285 | 99,033 | ||||||
| Accumulated other comprehensive loss | (6,410 | ) | (2,968 | ) | ||||
| Treasury stock, at cost (1,772,677 shares in 2010 and 1,932,731 shares in 2009) | (44,834 | ) | (49,146 | ) | ||||
| Total stockholders' equity | 387,960 | 384,581 | ||||||
| Total liabilities and stockholders' equity | $ | 2,880,716 | $ | 2,700,424 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| (In thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
Interest and dividend income | ||||||||||||
| Loans | $ | 101,705 | $ | 120,567 | $ | 120,059 | ||||||
| Securities | 13,683 | 12,460 | 11,743 | |||||||||
| Other | 88 | 184 | 142 | |||||||||
| Total interest and dividend income | 115,476 | 133,211 | 131,944 | |||||||||
Interest expense | ||||||||||||
| Deposits | 32,614 | 41,733 | 50,597 | |||||||||
| Borrowings and junior subordinated debentures | 13,266 | 15,738 | 17,422 | |||||||||
| Total interest expense | 45,880 | 57,471 | 68,019 | |||||||||
Net interest income | 69,596 | 75,740 | 63,925 | |||||||||
Non-interest income | ||||||||||||
| Deposit, loan and interest rate swap fees | 11,198 | 11,011 | 8,519 | |||||||||
| Wealth management fees | 4,812 | 5,704 | 4,407 | |||||||||
| Insurance commissions and fees | 12,171 | 13,619 | 13,728 | |||||||||
| Total fee income | 28,181 | 30,334 | 26,654 | |||||||||
| Loss on sales of securities, net | (4 | ) | (22 | ) | (591 | ) | ||||||
| Non-recurring losses, net | (893 | ) | — | (3,130 | ) | |||||||
| Other | 1,705 | 1,283 | 1,710 | |||||||||
| Total non-interest income | 28,989 | 31,595 | 24,643 | |||||||||
Total net revenue | 98,585 | 107,335 | 88,568 | |||||||||
Provision for loan losses | 47,730 | 4,580 | 4,300 | |||||||||
Non-interest expense | ||||||||||||
| Salaries and employee benefits | 38,280 | 38,282 | 34,018 | |||||||||
| Occupancy and equipment | 11,614 | 11,238 | 9,945 | |||||||||
| Marketing, data processing, and professional services | 10,674 | 7,741 | 8,413 | |||||||||
| FDIC premiums and special assessment | 4,544 | 761 | 185 | |||||||||
| Non-recurring expenses | 601 | 683 | 2,956 | |||||||||
| Amortization of intangible assets | 3,277 | 3,830 | 3,058 | |||||||||
| Other | 9,581 | 8,905 | 6,919 | |||||||||
| Total non-interest expense | 78,571 | 71,699 | 65,494 | |||||||||
| (Loss) income before income taxes | (27,716 | ) | 31,056 | 18,774 | ||||||||
| Income tax (benefit) expense | (11,649 | ) | 8,812 | 5,239 | ||||||||
Net (loss) income | $ | (16,067 | ) | $ | 22,244 | $ | 13,535 | |||||
| Less: Cumulative preferred stock dividends and accretion | 1,030 | — | — | |||||||||
| Less: Deemed dividend from preferred stock repayment | 2,954 | — | — | |||||||||
Net (loss) income available to common stockholders | $ | (20,051 | ) | $ | 22,244 | $ | 13,535 | |||||
Basic (loss) earnings per common share | $ | (1.52 | ) | $ | 2.08 | $ | 1.47 | |||||
Diluted (loss) earnings per common share | $ | (1.52 | ) | $ | 2.06 | $ | 1.44 | |||||
Weighted average common shares outstanding : | ||||||||||||
| Basic | 13,189 | 10,700 | 9,223 | |||||||||
| Diluted | 13,189 | 10,791 | 9,370 | |||||||||
| Years Ended December 31, | ||||||||||||
| (In thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
| Interest and dividend income | ||||||||||||
| Loans | $ | 98,359 | $ | 101,705 | $ | 120,567 | ||||||
| Securities | 13,903 | 13,683 | 12,460 | |||||||||
| Other | 15 | 88 | 184 | |||||||||
| Total interest and dividend income | 112,277 | 115,476 | 133,211 | |||||||||
| Interest expense | ||||||||||||
| Deposits | 26,316 | 32,614 | 41,733 | |||||||||
| Borrowings and junior subordinated debentures | 9,014 | 13,266 | 15,738 | |||||||||
| Total interest expense | 35,330 | 45,880 | 57,471 | |||||||||
| Net interest income | 76,947 | 69,596 | 75,740 | |||||||||
| Non-interest income | ||||||||||||
| Deposit, loan and interest rate swap fees | 14,266 | 11,198 | 11,011 | |||||||||
| Wealth management fees | 4,457 | 4,812 | 5,704 | |||||||||
| Insurance commissions and fees | 11,136 | 12,171 | 13,619 | |||||||||
| Total fee income | 29,859 | 28,181 | 30,334 | |||||||||
| Loss on sales of securities, net | - | (4 | ) | (22 | ) | |||||||
| Non-recurring losses, net | - | (893 | ) | - | ||||||||
| Other | 1,300 | 1,705 | 1,283 | |||||||||
| Total non-interest income | 31,159 | 28,989 | 31,595 | |||||||||
| Total net revenue | 108,106 | 98,585 | 107,335 | |||||||||
| Provision for loan losses | 8,526 | 47,730 | 4,580 | |||||||||
| Non-interest expense | ||||||||||||
| Compensation and benefits | 43,920 | 38,280 | 38,282 | |||||||||
| Occupancy and equipment | 12,029 | 11,614 | 11,238 | |||||||||
| Technology and communications | 5,733 | 5,466 | 5,085 | |||||||||
| Marketing and professional services | 5,186 | 6,549 | 3,676 | |||||||||
| Supplies, postage and delivery | 2,088 | 2,610 | 2,883 | |||||||||
| FDIC premiums and special assessment | 3,427 | 4,544 | 761 | |||||||||
| Other real estate owned | 311 | 281 | 238 | |||||||||
| Amortization of intangible assets | 3,021 | 3,278 | 3,830 | |||||||||
| Non-recurring expenses | 447 | 601 | 683 | |||||||||
| Other | 5,567 | 5,348 | 5,023 | |||||||||
| Total non-interest expense | 81,729 | 78,571 | 71,699 | |||||||||
| Income (loss) before income taxes | 17,851 | (27,716 | ) | 31,056 | ||||||||
| Income tax expense (benefit) | 4,113 | (11,649 | ) | 8,812 | ||||||||
| Net income (loss) | 13,738 | (16,067 | ) | 22,244 | ||||||||
| Less: Cumulative preferred stock dividends and accretion | - | 1,030 | - | |||||||||
| Less: Deemed dividend from preferred stock repayment | - | 2,954 | - | |||||||||
| Net income (loss) available to common stockholders | $ | 13,738 | $ | (20,051 | ) | $ | 22,244 | |||||
| Basic earnings (loss) per common share | $ | 0.99 | $ | (1.52 | ) | $ | 2.08 | |||||
| Diluted earnings (loss) per common share | $ | 0.99 | $ | (1.52 | ) | $ | 2.06 | |||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 13,862 | 13,189 | 10,700 | |||||||||
| Diluted | 13,896 | 13,189 | 10,791 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
- 6664 -
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2010, 2009 2008 and 20072008
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Unearned | other comp- | ||||||||||||||||||||||||||||||||||
| Common stock | Preferred | paid-in | compen- | Retained | rehensive | Treasury | ||||||||||||||||||||||||||||||
| (In thousands) | Shares | Amount | stock | capital | sation | earnings | income (loss) | stock | Total | |||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 22,244 | — | — | 22,244 | |||||||||||||||||||||||||||
| Other net comprehensive loss | — | — | — | — | — | — | (12,791 | ) | — | (12,791 | ) | |||||||||||||||||||||||||
| Total comprehensive income | 9,453 | |||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | — | — | 36,802 | — | — | — | — | — | 36,802 | |||||||||||||||||||||||||||
| Fair value of warrant issued with preferred stock | — | — | — | 3,198 | — | — | — | — | 3,198 | |||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs of $2,879 | 1,725 | 17 | — | 38,504 | — | — | — | — | 38,521 | |||||||||||||||||||||||||||
| Cash dividends declared ($0.63 per share) | — | — | — | — | — | (6,837 | ) | — | — | (6,837 | ) | |||||||||||||||||||||||||
| Treasury stock purchased | (200 | ) | — | — | — | — | — | — | (4,880 | ) | (4,880 | ) | ||||||||||||||||||||||||
| Forfeited shares | (3 | ) | — | — | (5 | ) | 70 | — | — | (65 | ) | — | ||||||||||||||||||||||||
| Exercise of stock options | 185 | — | — | — | — | (1,206 | ) | — | 4,714 | 3,508 | ||||||||||||||||||||||||||
| Reissuance of treasury stock — other | 68 | — | — | (193 | ) | (1,546 | ) | — | — | 1,739 | — | |||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 55 | 1,580 | — | — | — | 1,635 | |||||||||||||||||||||||||||
| Tax loss from stock compensation | — | — | — | (73 | ) | — | — | — | — | (73 | ) | |||||||||||||||||||||||||
| Other, net | (15 | ) | — | 20 | — | — | 185 | — | 56 | 261 | ||||||||||||||||||||||||||
Balance at December 31, 2008 | 12,253 | 142 | 36,822 | 307,620 | (1,905 | ) | 127,773 | (11,574 | ) | (50,453 | ) | 408,425 | ||||||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (16,067 | ) | — | — | (16,067 | ) | |||||||||||||||||||||||||
| Other net comprehensive income | — | — | — | — | — | — | 8,606 | — | 8,606 | |||||||||||||||||||||||||||
| Total comprehensive loss | (7,461 | ) | ||||||||||||||||||||||||||||||||||
| Redemption of preferred stock, including deemed dividend of $2,954 | — | — | (37,046 | ) | — | — | (2,954 | ) | — | — | (40,000 | ) | ||||||||||||||||||||||||
| Preferred stock discount accretion and dividends | — | — | 224 | — | — | (1,030 | ) | — | — | (806 | ) | |||||||||||||||||||||||||
| Repurchase of warrant issued with preferred stock | — | — | — | (1,040 | ) | — | — | — | — | (1,040 | ) | |||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs of $2,266 | 1,610 | 16 | — | 32,349 | — | — | — | — | 32,365 | |||||||||||||||||||||||||||
| Cash dividends declared ($0.64 per share) | — | — | — | — | — | (8,390 | ) | — | — | (8,390 | ) | |||||||||||||||||||||||||
| Forfeited shares | (24 | ) | — | — | 12 | 579 | — | — | (591 | ) | — | |||||||||||||||||||||||||
| Exercise of stock options | 23 | — | — | — | — | (236 | ) | — | 580 | 344 | ||||||||||||||||||||||||||
| Reissuance of treasury stock — other | 59 | — | — | (136 | ) | (1,354 | ) | — | 1,490 | — | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 43 | 1,362 | — | — | — | 1,405 | |||||||||||||||||||||||||||
| Other, net | (5 | ) | — | — | (26 | ) | — | (63 | ) | — | (172 | ) | (261 | ) | ||||||||||||||||||||||
Balance at December 31, 2009 | 13,916 | $ | 158 | $ | — | $ | 338,822 | $ | (1,318 | ) | $ | 99,033 | $ | (2,968 | ) | $ | (49,146 | ) | $ | 384,581 | ||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Unearned | other comp- | ||||||||||||||||||||||||||||||||||
| Common stock | Preferred | paid-in | compen- | Retained | rehensive | Treasury | ||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Shares | Amount | stock | capital | sation | earnings | income (loss) | stock | Total | |||||||||||||||||||||||||||
| Balance at December 31, 2007 | 10,493 | $ | 125 | $ | - | $ | 266,134 | $ | (2,009 | ) | $ | 113,387 | $ | 1,217 | $ | (52,017 | ) | $ | 326,837 | |||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 22,244 | - | - | 22,244 | |||||||||||||||||||||||||||
| Other net comprehensive loss | - | - | - | - | - | - | (12,791 | ) | - | (12,791 | ) | |||||||||||||||||||||||||
| Total comprehensive income | 9,453 | |||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | - | - | 36,802 | - | - | - | - | - | 36,802 | |||||||||||||||||||||||||||
| Fair value of warrant issued with | ||||||||||||||||||||||||||||||||||||
| preferred stock | - | - | - | 3,198 | - | - | - | - | 3,198 | |||||||||||||||||||||||||||
| Issuance of common stock, | ||||||||||||||||||||||||||||||||||||
| net of issuance costs of $2,879 | 1,725 | 17 | - | 38,504 | - | - | - | - | 38,521 | |||||||||||||||||||||||||||
| Cash dividends declared ($0.63 per share) | - | - | - | - | - | (6,837 | ) | - | - | (6,837 | ) | |||||||||||||||||||||||||
| Treasury stock purchased | (200 | ) | - | - | - | - | - | - | (4,880 | ) | (4,880 | ) | ||||||||||||||||||||||||
| Forfeited shares | (3 | ) | - | - | (5 | ) | 70 | - | - | (65 | ) | - | ||||||||||||||||||||||||
| Exercise of stock options | 185 | - | - | - | - | (1,206 | ) | - | 4,714 | 3,508 | ||||||||||||||||||||||||||
| Restricted stock grants | 68 | - | - | (193 | ) | (1,546 | ) | - | - | 1,739 | - | |||||||||||||||||||||||||
| Stock-based compensation | - | - | - | 55 | 1,580 | - | - | - | 1,635 | |||||||||||||||||||||||||||
| Net tax expense related to stock-based compensation | - | - | - | (73 | ) | - | - | - | - | (73 | ) | |||||||||||||||||||||||||
| Other, net | (15 | ) | - | 20 | - | - | 185 | - | 56 | 261 | ||||||||||||||||||||||||||
| Balance at December 31, 2008 | 12,253 | 142 | 36,822 | 307,620 | (1,905 | ) | 127,773 | (11,574 | ) | (50,453 | ) | 408,425 | ||||||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (16,067 | ) | - | - | (16,067 | ) | |||||||||||||||||||||||||
| Other net comprehensive income | - | - | - | - | - | - | 8,606 | - | 8,606 | |||||||||||||||||||||||||||
| Total comprehensive loss | (7,461 | ) | ||||||||||||||||||||||||||||||||||
| Redemption of preferred stock, | ||||||||||||||||||||||||||||||||||||
| including deemed dividend of $2,954 | - | - | (37,046 | ) | - | - | (2,954 | ) | - | - | (40,000 | ) | ||||||||||||||||||||||||
| Preferred stock discount accretion and dividends | - | - | 224 | - | - | (1,030 | ) | - | - | (806 | ) | |||||||||||||||||||||||||
| Repurchase of warrant issued with | ||||||||||||||||||||||||||||||||||||
| preferred stock | - | - | - | (1,040 | ) | - | - | - | - | (1,040 | ) | |||||||||||||||||||||||||
| Issuance of common stock, | ||||||||||||||||||||||||||||||||||||
| net of issuance costs of $2,266 | 1,610 | 16 | - | 32,349 | - | - | - | - | 32,365 | |||||||||||||||||||||||||||
| Cash dividends declared ($0.64 per share) | - | - | - | - | - | (8,390 | ) | - | - | (8,390 | ) | |||||||||||||||||||||||||
| Forfeited shares | (24 | ) | - | - | 12 | 579 | - | - | (591 | ) | - | |||||||||||||||||||||||||
| Exercise of stock options | 23 | - | - | - | - | (236 | ) | - | 580 | 344 | ||||||||||||||||||||||||||
| Restricted stock grants | 59 | - | - | (136 | ) | (1,354 | ) | - | 1,490 | - | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | 43 | 1,362 | - | - | - | 1,405 | |||||||||||||||||||||||||||
| Other, net | (5 | ) | - | - | (26 | ) | - | (63 | ) | - | (172 | ) | (261 | ) | ||||||||||||||||||||||
| Balance at December 31, 2009 | 13,916 | 158 | - | 338,822 | (1,318 | ) | 99,033 | (2,968 | ) | (49,146 | ) | 384,581 | ||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 13,738 | - | - | 13,738 | |||||||||||||||||||||||||||
| Other net comprehensive loss | - | - | - | - | - | - | (3,442 | ) | - | (3,442 | ) | |||||||||||||||||||||||||
| Total comprehensive income | 10,296 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.64 per share) | - | - | - | - | - | (8,989 | ) | - | - | (8,989 | ) | |||||||||||||||||||||||||
| Forfeited shares | (14 | ) | - | - | 3 | 268 | - | - | (271 | ) | - | |||||||||||||||||||||||||
| Exercise of stock options | 60 | - | - | - | - | (513 | ) | - | 1,517 | 1,004 | ||||||||||||||||||||||||||
| Restricted stock grants | 139 | - | - | (1,199 | ) | (2,322 | ) | - | 3,521 | - | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | 5 | 1,596 | - | - | - | 1,601 | |||||||||||||||||||||||||||
| Net tax expense related to stock-based compensation | - | - | - | (94 | ) | - | - | - | - | (94 | ) | |||||||||||||||||||||||||
| Other, net | (25 | ) | - | - | - | - | 16 | - | (455 | ) | (439 | ) | ||||||||||||||||||||||||
| Balance at December 31, 2010 | 14,076 | $ | 158 | $ | - | $ | 337,537 | $ | (1,776 | ) | $ | 103,285 | $ | (6,410 | ) | $ | (44,834 | ) | $ | 387,960 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
- 6765 -
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net (loss) income | $ | (16,067 | ) | $ | 22,244 | $ | 13,535 | |||||
| Adjustments to reconcile net (loss) income to net cash provided by continuing operating activities: | ||||||||||||
| Provision for loan losses | 47,730 | 4,580 | 4,300 | |||||||||
| Net amortization of securities | 1,784 | 173 | 250 | |||||||||
| Change in unamortized net loan costs and premiums | 1,223 | 1,315 | (1,070 | ) | ||||||||
| Premises depreciation and amortization expense | 3,859 | 3,835 | 3,404 | |||||||||
| Stock-based compensation expense | 1,405 | 1,635 | 1,604 | |||||||||
| Excess tax loss (benefit) from stock-based payment arrangements | — | 73 | (676 | ) | ||||||||
| Amortization of other intangibles | 3,277 | 3,830 | 3,058 | |||||||||
| Income from cash surrender value of bank-owned life insurance policies | (1,236 | ) | (1,462 | ) | (1,078 | ) | ||||||
| Loss on sales of securities, net | 4 | 22 | 591 | |||||||||
| Net (increase) decrease in loans held for sale | (2,378 | ) | 1,676 | (3,444 | ) | |||||||
| Loss on sale of portfolio loans | — | — | 1,950 | |||||||||
| Deferred income tax (benefit) provision, net | (5,166 | ) | 905 | 986 | ||||||||
| Net change in federal and state tax receivable | (10,053 | ) | 2,807 | (4,537 | ) | |||||||
| Increase in prepaid FDIC insurance premiums | (10,401 | ) | — | — | ||||||||
| Net change in other | (371 | ) | (2,191 | ) | 3,557 | |||||||
| Net cash provided by operating activities | 13,610 | 39,442 | 22,430 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Trading account security purchased | — | (15,000 | ) | — | ||||||||
| Securities available for sale: | ||||||||||||
| Sales | 6,303 | 10,058 | 59,141 | |||||||||
| Proceeds from maturities, calls, and prepayments | 72,473 | 25,307 | 31,152 | |||||||||
| Purchases | (143,458 | ) | (98,918 | ) | (45,810 | ) | ||||||
| Securities held to maturity: | ||||||||||||
| Proceeds from maturities, calls, and prepayments | 15,438 | 30,065 | 14,850 | |||||||||
| Purchases | (47,191 | ) | (16,481 | ) | (14,344 | ) | ||||||
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 13,738 | $ | (16,067 | ) | $ | 22,244 | |||||
| Adjustments to reconcile net income (loss) to net cash provided | ||||||||||||
| by continuing operating activities: | ||||||||||||
| Provision for loan losses | 8,526 | 47,730 | 4,580 | |||||||||
| Net amortization of securities | 2,352 | 1,784 | 173 | |||||||||
| Change in unamortized net loan costs and premiums | 1,462 | 1,223 | 1,315 | |||||||||
| Premises and equipment depreciation and amortization expense | 3,817 | 3,859 | 3,835 | |||||||||
| Stock-based compensation expense | 1,601 | 1,405 | 1,635 | |||||||||
| Excess tax loss from stock-based payment arrangements | 94 | - | 73 | |||||||||
| Amortization of intangible assets | 3,021 | 3,278 | 3,830 | |||||||||
| Income from cash surrender value of bank-owned life insurance policies | (1,398 | ) | (1,236 | ) | (1,462 | ) | ||||||
| Loss on sales of securities, net | - | 4 | 22 | |||||||||
| Deferred income tax (benefit) expense, net | (4,525 | ) | (5,166 | ) | 1,698 | |||||||
| Net decrease (increase) in loans held for sale | 3,103 | (2,378 | ) | 1,676 | ||||||||
| Net change in other | 10,384 | (20,826 | ) | 1,457 | ||||||||
| Net cash provided by operating activities | 42,175 | 13,610 | 41,076 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Trading account security: | ||||||||||||
| Proceeds from maturities, calls, and prepayments | 440 | - | - | |||||||||
| Purchases | - | - | (15,000 | ) | ||||||||
| Securities available for sale: | ||||||||||||
| Sales | - | 6,303 | 10,058 | |||||||||
| Proceeds from maturities, calls, and prepayments | 121,326 | 72,473 | 25,307 | |||||||||
| Purchases | (109,690 | ) | (143,458 | ) | (98,918 | ) | ||||||
| Securities held to maturity: | ||||||||||||
| Proceeds from maturities, calls, and prepayments | 19,897 | 15,438 | 30,065 | |||||||||
| Purchases | (18,713 | ) | (47,191 | ) | (16,481 | ) | ||||||
| Net investment in limited partnership tax credits | (537 | ) | (3,197 | ) | (79 | ) | ||||||
| Loan (originations) principal repayments, net | (161,472 | ) | 5,659 | (70,744 | ) | |||||||
| Loan portfolio purchases | (32,324 | ) | - | - | ||||||||
| Proceeds from surrender of bank-owned life insurance | 2,217 | - | - | |||||||||
| Purchase of bank-owned life insurance | (10,000 | ) | - | - | ||||||||
| Capital expenditures | (5,020 | ) | (3,529 | ) | (2,477 | ) | ||||||
| Net cash paid for business acquisitions | - | - | (1,090 | ) | ||||||||
| Net cash used by investing activities | (193,876 | ) | (97,502 | ) | (139,359 | ) | ||||||
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
- 6866 -
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Years Ended December 31, 2009, 2008 and 2007
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
| Net investment in limited partnership tax credits | (3,197 | ) | (79 | ) | (1,139 | ) | ||||||
| Loan originations and principal repayments, net | 5,659 | (69,110 | ) | (75,539 | ) | |||||||
| Proceeds from sale of portfolio loans | — | — | 55,612 | |||||||||
| Capital expenditures | (3,529 | ) | (2,477 | ) | (5,571 | ) | ||||||
| Net cash paid for business acquisitions | — | (1,090 | ) | (8,050 | ) | |||||||
| Net cash (used) provided by investing activities | (97,502 | ) | (137,725 | ) | 10,302 | |||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase in deposits | 157,182 | 7,017 | 31,598 | |||||||||
| Proceeds from Federal Home Loan Bank advances and other borrowings | 208,860 | 145,000 | 185,214 | |||||||||
| Repayments of Federal Home Loan Bank advances and other borrowings | (276,813 | ) | (120,317 | ) | (231,127 | ) | ||||||
| Net proceeds from common stock issuance | 32,365 | 38,521 | — | |||||||||
| Treasury stock purchased | — | (4,880 | ) | (7,822 | ) | |||||||
| Net proceeds from reissuance of treasury stock | 344 | 3,508 | 4,284 | |||||||||
| Excess tax (loss) benefit from stock-based payment arrangements | — | (73 | ) | 676 | ||||||||
| Proceeds from issuance of preferred stock and warrant | — | 40,000 | — | |||||||||
| Redemption of preferred stock | (40,000 | ) | — | — | ||||||||
| Repurchase of warrant issued with preferred stock | (1,040 | ) | — | — | ||||||||
| Preferred stock cash dividends paid | (806 | ) | — | — | ||||||||
| Common stock cash dividends paid | (8,390 | ) | (6,837 | ) | (5,398 | ) | ||||||
| Net cash provided (used) by financing activities | 71,702 | 101,939 | (22,575 | ) | ||||||||
| Net change in cash and cash equivalents | (12,190 | ) | 3,656 | 10,157 | ||||||||
| Cash and cash equivalents at beginning of year | 44,798 | 41,142 | 30,985 | |||||||||
| Cash and cash equivalents at end of year | $ | 32,608 | $ | 44,798 | $ | 41,142 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Interest paid on deposits | $ | 32,614 | $ | 42,089 | $ | 50,759 | ||||||
| Interest paid on borrowed funds | 13,690 | 14,902 | 17,686 | |||||||||
| Income taxes paid, net | 1,970 | 6,043 | 5,405 | |||||||||
| Fair value of non-cash assets acquired | — | 837 | 376,656 | |||||||||
| Fair value of liabilities assumed | — | — | 305,592 | |||||||||
| Fair value of common stock issued in acquisition | — | — | 63,350 | |||||||||
| Due to broker, investment purchase | (19,895 | ) | 19,895 | — | ||||||||
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase in deposits | 217,679 | 157,182 | 7,017 | |||||||||
| Proceeds from Federal Home Loan Bank advances and other borrowings | 259,535 | 208,860 | 145,000 | |||||||||
| Repayments of Federal Home Loan Bank advances and other borrowings | (305,902 | ) | (276,813 | ) | (120,317 | ) | ||||||
| Net proceeds from common stock issuance | - | 32,365 | 38,521 | |||||||||
| Treasury stock purchased | - | - | (4,880 | ) | ||||||||
| Net proceeds from reissuance of treasury stock | 1,004 | 344 | 3,508 | |||||||||
| Excess tax loss from stock-based payment arrangements | (94 | ) | - | (73 | ) | |||||||
| Proceeds from issuance of preferred stock and warrant | - | - | 40,000 | |||||||||
| Redemption of preferred stock | - | (40,000 | ) | - | ||||||||
| Repurchase of warrant issued with preferred stock | - | (1,040 | ) | - | ||||||||
| Preferred stock cash dividends paid | - | (806 | ) | - | ||||||||
| Common stock cash dividends paid | (8,989 | ) | (8,390 | ) | (6,837 | ) | ||||||
| Net cash provided by financing activities | 163,233 | 71,702 | 101,939 | |||||||||
| Net change in cash and cash equivalents | 11,532 | (12,190 | ) | 3,656 | ||||||||
| Cash and cash equivalents at beginning of year | 32,608 | 44,798 | 41,142 | |||||||||
| Cash and cash equivalents at end of year | $ | 44,140 | $ | 32,608 | $ | 44,798 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Interest paid on deposits | $ | 26,748 | $ | 32,614 | $ | 42,089 | ||||||
| Interest paid on borrowed funds | 8,174 | 13,690 | 14,902 | |||||||||
| Income taxes (refunded) paid, net | (3,452 | ) | 1,970 | 6,043 | ||||||||
| Fair value of non-cash assets acquired | - | - | 837 | |||||||||
| Due to broker, investment purchase | - | (19,895 | ) | 19,895 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Years Ended December 31, 2010, 2009 2008 and 20072008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements (the “financial statements”) of Berkshire Hills Bancorp, Inc. and its subsidiaries (the “Company” or “Berkshire”) 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, and Berkshire Insurance Group, Inc. (“BIG”Berkshire Insurance Group” or “BIG”). These financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Bank’s consolidated subsidiaries. One of the Bank’s consolidated subsidiaries is Berkshire Bank Municipal Bank, a New York-chartered limited-purpose commercial bank. 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, businesses, not-for-profit organizations, and municipalities through its offices in western Massachusetts, southern Vermont and northeastern New York. The Company also provides asset-based middle-market commercial lending throughout New England and its New York markets. 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; it also offersservices and interest rate swap contracts to commercial customers. The Company offers wealth management services including trust, financial planning, and investment services. The Company is also an 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, Inc. Banking includes the activities of Berkshirethe Bank and its subsidiaries, which provide commercial and consumer banking services. Insurance includes the activities of Berkshire Insurance Group,BIG and its subsidiaries, which provides commercial and consumer insurance services. The only other consolidated financial activity of the Company consists of the transactions of its parent, Berkshire Hills Bancorp, Inc.
Use of estimates
In preparing the 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 valuation of deferred tax assets; the estimates related to the initial measurement of goodwill and intangible assets and subsequent impairment analyses; the determination of other-than-temporary impairment of securities; and the determination of fair value of financial instruments.instruments and subsequent impairment analysis.
Reclassifications
Certain amounts in the 20082009 and 20072008 consolidated financial statements have been reclassified to conform with the 20092010 presentation.
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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. CashDue to the nature of cash and cash equivalents are carried at cost.and the near term maturity, the Company estimated that the carrying amount of such instruments approximated fair value. The nature of the Bank’s business requires that it maintain amounts due from banks which at times, may exceed federally insured limits. The Bank has not experienced any losses on such amounts and all amounts are maintained with well-capitalized institutions.
Trading account security
The Company elected the fair value option permitted by Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 820,“Fair Value Measurements and Disclosures"Disclosures”, on a tax advantaged economic development bond originated in 2008. The bond has been designated as a trading account security and is recorded at fair value, with unrealized gains and losses recorded through earnings each period as part of non-interest income.
Securities
Other than the security held as a trading security, 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. 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. Restricted equity securities are reflected at cost and consist of $21.1 million of stock in the Federal Home Loan Bank of Boston (“FHLBB”) and $2.0 million of stock in the Savings Bank Life Insurance Company of Massachusetts. There are no quoted market prices for restricted equity securities. The Bank is a member of the FHLBB, which requires that members maintain an investment in FHLBB stock, which may be redeemed based on certain conditions. The Bank reviews for impairment based on the ultimate recoverability of the cost bases in the FHLBB stock. As of December 31, 2009,year-end 2010, no impairment has been recognized. See Note 19 —– Fair Value Measurements.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
The Company evaluates debt and equity securities within the Company’s available for sale and held to maturity portfolios for other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI on marketable equity securities is recognized immediately through earnings.
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. 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.
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Loans
The Bank originatesCompany’s loan portfolio includes residential mortgage, commercial mortgage, commercial business, and consumer loansloan segments to customers. Residential mortgage loans include classes for 1- 4 family owner occupied and construction. Commercial mortgage loans include construction, single and multi-family, and commercial real estate classes. Commercial business loans include asset based lending loans and other commercial business loan classes. Consumer loans include home equity and other. A substantial portion of the loan portfolio is secured by real estate in western Massachusetts, southern Vermont, northeastern New York, and in the Bank’s New England lending areas. The ability of many of the Bank’s debtors to honor their contracts is dependent, among other things, on the economies and real estate markets in these areas.
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. Direct loan originations costs, net of any origination fees, 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 until 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 as losses are estimated to have occurred through a provision for loan losses charged to earnings to account for inherent losses that are probable at the financial statement date and which can be reasonably estimated.earnings. 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 borrowers’ ability to repay, the estimated value of any underlying collateral and prevailing economic conditions.management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of impaired, pool,general, specific and unallocated components. For loans that are classifiedreserves, as impaired, anfurther described below.
General reserves
The general reserve of the allowance is established based on the methodology discussed below. The pool component covers pools of non-impaired loans segregated byfor loan type andlosses is based on historical loss experience adjusted for qualitative factors.factors stratified by the following loan segments: residential mortgage, commercial mortgage, commercial business and consumer. Management utilizes a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends and conditions. There were no changes in the Company's policies or methodology pertaining to the general component of the allowance for loan losses during 2010.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential mortgage — The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
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Commercial mortgage — Loans in this segment are primarily income-producing properties throughout New England. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually and monitors the cash flows of these loans. In addition, construction loans in this segment primarily include real estate development loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial business loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. Loans in this segment include asset based loans which generally have no scheduled repayment and which are closely monitored against formula based collateral advance ratios. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Consumer loans — Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
Allocated reserves
The allocated reserves relate to loans that are classified as impaired. 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, the fair value of the collateral if the loan is collateral dependent or an observable market price. An unallocated componentallowance is maintained to cover uncertaintiesestablished when the measured value of the impaired loan is lower than the carrying value of that could affect management’s estimate of probable losses.loan.
A loan is considered impaired when, based on current information and events, it is probable that the Company 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 measuredFactors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a loan by loancase-by-case basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair valuetaking into consideration all of the collateral ifcircumstances surrounding the loan is collateral dependent. Large groupsand the borrower, including the length of smaller balance homogeneous loans are collectively evaluatedthe delay, the reasons for impairment. Accordingly, the Company does not separately identify individual consumer loans or residential mortgage loans for impairment disclosures, unless such loans are subjectdelay, the borrower's prior payment record, and the amount of the shortfall in relation to a troubled debt restructuring agreement.the principal and interest owed.
The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession that the Company would not otherwise consider is made because a borrower is experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”("TDR"). All TDRs are initially classified as impaired.
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Unallocated reserves
An unallocated reserve is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated reserve of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
Bank-owned Life Insurancelife insurance
Bank-owned life insurance policies are reflected on the consolidated balance sheetsheets at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statementstatements of incomeoperations and are not subject to income taxes.
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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, changes in the valuation allowance, and any direct write-downs and gains or losses on sales are included in other non-interestreal estate owned expense.
Capitalized mortgage servicing rights
Capitalized mortgage servicing rights are included in “other assets” in the consolidated balance sheet. Servicing assets are initially recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets. The Company uses the amortization method to subsequently measure servicing assets. Under that method, capitalized mortgage servicing rights are charged to expense in proportion to and over the period of estimated net servicing income. Fair value of the mortgage servicing rights 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, prepayment speeds and default rates and losses. 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 non-interest 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, 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.
Identifiable intangible assets arise from contractual or other legal rights. The fair values of these assets are generally determined based on appraisals and are subsequently amortized on a straight-line basis or an accelerated basis over their estimated lives. Management assesses the recoverability of these 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. For purchases prior to January 1, 2009, goodwill includes direct costs of the business combination and contingently payable costs are recorded to goodwill at the time that it is determined that the contingency will be satisfied. Subsequent to January 1, 2009, direct costs of the business combinations are expensed and contingently payable costs are recorded on the acquisition date. Goodwill may be adjusted during the year 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. Impairment assessments may occur more frequently, if market conditions warrant such assessment. Step one of the impairment test compares the fair value of a reporting unit to its carrying value, including goodwill. The fair value is based on observable market prices, when practicable. Other valuation techniques, such as discounted cash flow analysis, may be used when market prices are unavailable. If the fair value exceeds the carrying amount, then there is no impairment. If the carrying amount exceeds fair value, step two of the impairment test is undertaken whereby the fair value of the assets and liabilities of the unit are evaluated as they would be in a contemporaneous purchase. If the resulting implied fair value of the goodwill is less than the carrying amount, an impairment charge is recorded to net income to reduce the carrying amount to the implied fair value of the goodwill.
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Transfers of financial assets
Transfers of an entire financial asset, group of entire financial assets, or a participating interest in an entire financial asset 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 agreementassets.
Effective January 1, 2010, the Company adopted accounting guidance pertaining to repurchase them before their maturity.transfers of financial assets. During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.
Income taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company hasdid not identified anyidentify uncertain tax positions at December 31, 2009 requiring accrual or disclosure.disclosure at year-end 2010. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2010, 2009 and 2008.
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.
Advertising costs
Advertising costs are expensed as incurred.
Stock-based compensation
The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. The fair value of restricted stock is recorded as unearned compensation. The deferred expense is amortized to compensation expense based on one of several permitted attribution methods over the longer of the required service period or performance period. For performance-based restricted stock awards, the Company estimates the degree to which performance conditions will be met to determine the number of shares that will vest and the related compensation expense. Compensation expense is adjusted in the period such estimates change.
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Income tax benefits related to stock compensation in excess of grant date fair value, less any proceeds on exercise, are recognized as an increase to additional paid-in capital upon vesting or exercising and delivery of the stock. Any income tax benefits that are less than grant date fair value less any proceeds on exercise would be recognized as a reduction of additional paid-in capital to the extent of previously recognized income tax benefits and then as compensation expense for the remaining amount.
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Earnings per common share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method. Treasury shares are not deemed outstanding for earnings per share calculations.
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) | 2009 | 2008 | 2007 | |||||||||
| Net (loss) income | $ | (16,067 | ) | $ | 22,244 | $ | 13,535 | |||||
| Less: Cumulative preferred stock dividends and accretion | 1,030 | — | — | |||||||||
| Less: Deemed dividend resulting from preferred stock repayment | 2,954 | — | — | |||||||||
| Net (loss) income available to common stockholders | $ | (20,051 | ) | $ | 22,244 | $ | 13,535 | |||||
| Average number of common shares issued | 15,239 | 12,869 | 11,135 | |||||||||
| Less: average number of treasury shares | 1,930 | 2,046 | 1,812 | |||||||||
| Less: average number of unvested stock award shares | 120 | 123 | 100 | |||||||||
| Average number of basic common shares outstanding | 13,189 | 10,700 | 9,223 | |||||||||
| Plus: dilutive effect of unvested stock award shares | — | 20 | 100 | |||||||||
| Plus: dilutive effect of stock options outstanding | — | 71 | 47 | |||||||||
| Average number of diluted common shares outstanding | 13,189 | 10,791 | 9,370 | |||||||||
| (Loss) earnings per average basic common share | $ | (1.52 | ) | $ | 2.08 | $ | 1.47 | |||||
| (Loss) earnings per average diluted common share | $ | (1.52 | ) | $ | 2.06 | $ | 1.44 | |||||
| Years Ended December 31, | ||||||||||||
| (In thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
| Net income (loss) | $ | 13,738 | $ | (16,067 | ) | $ | 22,244 | |||||
| Less: cumulative preferred stock dividends and accretion | - | 1,030 | - | |||||||||
| Less: deemed dividend resulting from preferred stock repayment | - | 2,954 | - | |||||||||
| Net income (loss) available to common stockholders | $ | 13,738 | $ | (20,051 | ) | $ | 22,244 | |||||
| Average number of common shares issued | 15,849 | 15,239 | 12,869 | |||||||||
| Less: average number of treasury shares | 1,818 | 1,930 | 2,046 | |||||||||
| Less: average number of unvested stock award shares | 169 | 120 | 123 | |||||||||
| Average number of basic common shares outstanding | 13,862 | 13,189 | 10,700 | |||||||||
| Plus: dilutive effect of unvested stock award shares | 25 | - | 20 | |||||||||
| Plus: dilutive effect of stock options outstanding | 9 | - | 71 | |||||||||
| Average number of diluted common shares outstanding | 13,896 | 13,189 | 10,791 | |||||||||
| Earnings (loss) per average basic common share | $ | 0.99 | $ | (1.52 | ) | $ | 2.08 | |||||
| Earnings (loss) per average diluted common share | $ | 0.99 | $ | (1.52 | ) | $ | 2.06 | |||||
For 2010, 301 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. For the year ended December 31, 2009, 120 thousand shares of restricted stock and 430 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.calculation. For the year ended December 31, 2008, 115 thousand options were anti-dilutive and therefore excluded from the earnings per share calculation.
Wealth management assets
Wealth management 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.
Derivative instruments and hedging activities
The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy for certain assets and liabilities and not for speculative purposes. Based on the Company’s intended use for the interest rate swap at inception, the Company designates the derivative as either an economic hedge of an asset or liability or a hedging instrument subject to the hedge accounting provisions of FASB ASC Topic 815, “Derivatives and Hedging.”
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Interest rate swaps designated as economic hedges are recorded at fair value within other assets or liabilities. Changes in the fair value of these derivatives are recorded directly through earnings.
For interest rate swaps subject to Topic 815, the Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter, to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship.
The Company has characterized its interest rate swaps subject to Topic 815 hedge accounting as cash flow hedges. Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate fluctuations, and are recorded at fair value in other assets or liabilities within the Company’s balance sheets. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive loss and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any hedge ineffectiveness assessed as part of the Company’s quarterly analysis is recorded directly to earnings.
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheetsheets in other assets and other liabilities with changes in their fair values recorded in other noninterestnon-interest income.
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To protect against the price risk inherent in derivative loan commitments, the Company utilizes “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative commitments. These contracts are accounted for as derivative instruments and are recognized at fair value on the consolidated balance sheetsheets in other assets and other liabilities with changes in their fair values recorded in other noninterestnon-interest income. Subsequent to inception, changes in the fair value of the loan commitment are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.
Off-balance sheet financial instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments, consisting primarily of credit related financial instruments. These financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.received.
Fair Value Hierarchyvalue hierarchy
The Company groups assets and liabilities that are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 —– Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 —– Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 —– Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
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Recent accounting pronouncements
FASB ASC became effective on July 1, 2009. At that date, the ASC became the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the Securities and Exchange CommissionAccounting Standards Update (“SEC”ASU”) under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. The ASC did not have a significant impact on the Company’s financial statements upon adoption.
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FASB ASC Topic 810, “Consolidation.”New authoritative accounting guidance amended prior guidanceASU No. 2010-20, “Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. In July 2010, the FASB issued ASU 2010-20 which requires an entity to establish accountingprovide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s loan portfolio (2) how that risk is analyzed and reporting standardsassessed in arriving at the allowance for non-controlling interests in a subsidiaryloan and lease losses and (3) the changes and reasons for the deconsolidation of a subsidiary. Minority interests will be re-characterized as non-controlling interests and classified as a component of equity. ASC Topic 810 establishes a single method of accounting forthose changes in a parent’s ownership interest in a subsidiarythe allowance for loan and requires expanded disclosures. This accounting guidance became effective forlease losses. For public entities, the Company on January 1, 2009 and did not have a significant impact on the Company’s financial statements.
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2. MERGERS AND ACQUISITIONS
The Rome Bancorp and Legacy Bancorp Mergers
Rome
On October 12, 2010, the Company entered into a merger agreement with Rome Bancorp, Inc. (“Rome”), the parent company of The Rome Savings Bank (“Rome Bank”), pursuant to which Rome will merge with and into the Company in a transaction to be accounted for as a stock purchase. It is expected that Rome Bank will also merge with and into Berkshire Bank. Located in Rome, New York, Rome Bancorp had $327 million in total assets at December 31, 2010 (unaudited) and, through Rome Bank, provides community bank services through five banking offices located in the Rome area.
Under the terms of this merger agreement, 70% of the outstanding shares of Rome common stock will be converted into the right to receive 0.5658 shares of Company common stock for each share of Rome and the remaining 30% of outstanding shares of Rome will be exchanged for $11.25 in cash. Rome stockholders will have the right to elect to receive cash or Company common stock as outlined above, subject to 70% of Rome common stock receiving Company stock and the proration procedures contained in the merger agreement.
On March 9, 2011, the Rome shareholders voted to approve the merger agreement. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals. The merger is currently expected to be completed in April 2011. If the merger is not consummated under certain circumstances, Rome has agreed to pay the Company a termination fee of $3.5 million.
Legacy
On December 21, 2010, the Company entered into a merger agreement with Legacy Bancorp, Inc. (“Legacy”), the parent company of Legacy Banks, pursuant to which Legacy will merge with and into the Company in a transaction to be accounted for as a stock purchase. It is expected that Legacy Banks will also merge with and into Berkshire Bank. Located in Pittsfield, Massachusetts, Legacy had $917 million in total assets at December 31, 2010 (unaudited) and, through Legacy Banks, operates 19 banking offices providing a range of banking services in western Massachusetts and eastern New York.
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Under the terms of this merger agreement, each outstanding share of Legacy common stock will be converted into the right to receive 0.56385 shares of Company common stock and $1.30 in cash.
The transaction is subject to closing conditions, including the receipt of regulatory approvals and approval by the shareholders of the Company and Legacy. The merger is currently expected to be completed in July 2011. It is anticipated that regulatory approval will require the divestiture of some deposits in Berkshire County, Massachusetts, and in certain circumstances, the Legacy shareholders may be entitled to a cash payment for a portion of the divestiture sale proceeds, as set forth in the merger agreement. If the merger is not consummated under specified circumstances, Legacy has agreed to pay the Company a termination fee of $4.3 million.
The Rome and Legacy mergers will be accounted for using acquisition accounting. The results of Rome and Legacy's operations will be included in our 2011 Consolidated Statement of Income from the date of acquisition. The Company incurred $447 thousand in merger and acquisition expenses related to the Rome and Legacy mergers during the year ended December 31, 2010.
The Center for Financial Planning Acquisition
In January 2008, the Company acquired the Center for Financial Planning (“CFP”) in Albany, New York. This acquisition providesprovided a foundation for the Bank’s New York region wealth management and investment services. The acquisition was accounted for as a purchase transaction with all cash consideration funded through internal sources. The operating results of CFP are included with the Company’sCompany's results of operations since the date of acquisition. The purchase of CFP did not significantly impact the Company’s financial statements.
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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. Short-term investments included $1.6$5.6 million pledged as collateral support for derivative financial contracts at year-end 2009;2010; this amount was $14.3$1.6 million at year-end 2008.2009. The Federal Reserve systemBank requires the Bank to maintain certain reserve requirements of vault cash and/or deposits. The reserve requirement, included in cash and equivalents, was $6.4$6.1 million and $8.0$6.4 million at year-end 2010 and 2009, and 2008, respectively.
4. TRADING ACCOUNT SECURITY
The Company originatedholds a $15.0 million tax advantaged economic development bond that is being accounted for at fair value. The security had an amortized cost of $14.6 million and $15.0 million and a fair valuesvalue of $15.9$16.2 million and $18.1$15.9 million at year-end 2010 and 2009, respectively. Gains (losses) recorded through income on this security totaled $0.7 million and 2008,($2.2) million for 2010 and 2009, respectively. As discussed further in Note 14 — Derivative14-Derivative Instruments and Hedging Activities, the Company has entered into a swap contract to swap-out the fixed rate of the security in exchange for a variable rate. This security is classified as a trading security. The Company does not purchase securities with the intent of selling them in the near term, thusand there are no other securities in the trading portfolio at year-end 2010 and 2009.
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5. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
The following is a summary of securities available for sale (“AFS”) and securities held to maturity (“HTM”) follows::
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (In thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
December 31, 2009 | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Debt securities: | ||||||||||||||||
| Municipal bonds and obligations | $ | 73,277 | $ | 1,836 | $ | (329 | ) | $ | 74,784 | |||||||
| Government guaranteed residential mortgage-backed securities | 12,923 | 224 | (116 | ) | 13,031 | |||||||||||
| Government-sponsored residential mortgage-backed securities | 179,674 | 4,714 | (143 | ) | 184,245 | |||||||||||
| Corporate bonds | 36,941 | 641 | (245 | ) | 37,337 | |||||||||||
| Trust preferred securities | 9,285 | — | (2,370 | ) | 6,915 | |||||||||||
| Other bonds and obligations | 5,481 | 9 | (20 | ) | 5,470 | |||||||||||
| Total debt securities | 317,581 | 7,424 | (3,223 | ) | 321,782 | |||||||||||
| Marketable equity securities | 2,679 | 55 | (171 | ) | 2,563 | |||||||||||
Total securities available for sale | 320,260 | 7,479 | (3,394 | ) | 324,345 | |||||||||||
Securities held to maturity | ||||||||||||||||
| Municipal bonds and obligations | 14,737 | — | — | 14,737 | ||||||||||||
| Government-sponsored residential mortgage-backed securities | 139 | 3 | — | 142 | ||||||||||||
| Tax advantaged economic development bonds | 42,572 | 951 | (8 | ) | 43,515 | |||||||||||
| Other bonds and obligations | 173 | — | — | 173 | ||||||||||||
Total securities held to maturity | 57,621 | 954 | (8 | ) | 58,567 | |||||||||||
Total | $ | 377,881 | $ | 8,433 | $ | (3,402 | ) | $ | 382,912 | |||||||
December 31, 2008 | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Debt securities: | ||||||||||||||||
| Municipal bonds and obligations | $ | 76,843 | $ | 401 | $ | (1,830 | ) | $ | 75,414 | |||||||
| Residential mortgage-backed securities | 174,747 | 2,270 | (193 | ) | 176,824 | |||||||||||
| Corporate bonds | 14,810 | 170 | (182 | ) | 14,798 | |||||||||||
| Trust preferred securities | 9,362 | — | (3,414 | ) | 5,948 | |||||||||||
| Other bonds and obligations | 318 | 5 | (26 | ) | 297 | |||||||||||
| Total debt securities | 276,080 | 2,846 | (5,645 | ) | 273,281 | |||||||||||
| Marketable equity securities | 1,177 | 32 | (110 | ) | 1,099 | |||||||||||
Total securities available for sale | 277,257 | 2,878 | (5,755 | ) | 274,380 | |||||||||||
Securities held to maturity | ||||||||||||||||
| Municipal bonds and obligations | 9,892 | — | — | 9,892 | ||||||||||||
| Residential mortgage-backed securities | 806 | 1 | (4 | ) | 803 | |||||||||||
| Tax advantaged economic development bonds | 15,002 | 860 | — | 15,862 | ||||||||||||
| Other bonds and obligations | 172 | — | — | 172 | ||||||||||||
Total securities held to maturity | 25,872 | 861 | (4 | ) | 26,729 | |||||||||||
Total | $ | 303,129 | $ | 3,739 | $ | (5,759 | ) | $ | 301,109 | |||||||
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| December 31, 2010 | ||||||||||||||||
| Securities available for sale | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Municipal bonds and obligations | $ | 79,292 | $ | 1,008 | $ | (394 | ) | $ | 79,906 | |||||||
| Government guaranteed residential mortgage-backed securities | 25,801 | 370 | (7 | ) | 26,164 | |||||||||||
| Government-sponsored residential mortgage-backed securities | 144,493 | 2,806 | (580 | ) | 146,719 | |||||||||||
| Corporate bonds | 18,307 | 73 | (90 | ) | 18,290 | |||||||||||
| Trust preferred securities | 22,222 | 316 | (2,683 | ) | 19,855 | |||||||||||
| Other bonds and obligations | 402 | 2 | (1 | ) | 403 | |||||||||||
| Total debt securities | 290,517 | 4,575 | (3,755 | ) | 291,337 | |||||||||||
| Marketable equity securities | 15,756 | 3,217 | (68 | ) | 18,905 | |||||||||||
| Total securities available for sale | 306,273 | 7,792 | (3,823 | ) | 310,242 | |||||||||||
| Securities held to maturity | ||||||||||||||||
| Municipal bonds and obligations | 7,069 | - | - | 7,069 | ||||||||||||
| Government-sponsored residential mortgage-backed securities | 83 | 3 | - | 86 | ||||||||||||
| Tax advantaged economic development bonds | 48,861 | 1,155 | - | 50,016 | ||||||||||||
| Other bonds and obligations | 423 | - | - | 423 | ||||||||||||
| Total securities held to maturity | 56,436 | 1,158 | - | 57,594 | ||||||||||||
| Total | $ | 362,709 | $ | 8,950 | $ | (3,823 | ) | $ | 367,836 | |||||||
| December 31, 2009 | ||||||||||||||||
| Securities available for sale | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Municipal bonds and obligations | $ | 73,277 | $ | 1,836 | $ | (329 | ) | $ | 74,784 | |||||||
| Government guaranteed residential mortgage-backed securities | 12,923 | 224 | (116 | ) | 13,031 | |||||||||||
| Government-sponsored residential mortgage-backed securities | 179,674 | 4,714 | (143 | ) | 184,245 | |||||||||||
| Corporate bonds | 36,941 | 641 | (245 | ) | 37,337 | |||||||||||
| Trust preferred securities | 9,285 | - | (2,370 | ) | 6,915 | |||||||||||
| Other bonds and obligations | 5,481 | 9 | (20 | ) | 5,470 | |||||||||||
| Total debt securities | 317,581 | 7,424 | (3,223 | ) | 321,782 | |||||||||||
| Marketable equity securities | 2,679 | 55 | (171 | ) | 2,563 | |||||||||||
| Total securities available for sale | 320,260 | 7,479 | (3,394 | ) | 324,345 | |||||||||||
| Securities held to maturity | ||||||||||||||||
| Municipal bonds and obligations | 14,737 | - | - | 14,737 | ||||||||||||
| Government-sponsored residential mortgage-backed securities | 139 | 3 | - | 142 | ||||||||||||
| Tax advantaged economic development bonds | 42,572 | 951 | (8 | ) | 43,515 | |||||||||||
| Other bonds and obligations | 173 | - | - | 173 | ||||||||||||
| Total securities held to maturity | 57,621 | 954 | (8 | ) | 58,567 | |||||||||||
| Total | $ | 377,881 | $ | 8,433 | $ | (3,402 | ) | $ | 382,912 | |||||||
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At year-end 2010 and 2009, and 2008, accumulated net unrealized gains (losses) on AFS securities included in accumulated other comprehensive lossincome were $4.0 million and $4.1 million, and $(2.9) million,respectively, net of thea related income tax (expense) benefitliability of $(1.8)$1.5 million and $1.2 million.for both years.
The amortized cost and estimated fair value of AFS and HTM securities by contractual maturity at year-end 20092010 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable. Equity securities have no maturity and are thereforealso shown in total.
| Available for sale | Held to maturity | Available for sale | Held to maturity | |||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
| (In thousands) | Cost | Value | Cost | Value | Cost | Value | Cost | Value | ||||||||||||||||||||||||
| Within 1 year | $ | 19,737 | $ | 20,033 | $ | 11,800 | $ | 11,800 | $ | 15,062 | $ | 15,150 | $ | 4,153 | $ | 4,153 | ||||||||||||||||
| Over 1 year to 5 years | 27,353 | 27,612 | 1,600 | 1,600 | 3,375 | 3,301 | 1,735 | 1,735 | ||||||||||||||||||||||||
| Over 5 years to 10 years | 19,797 | 20,304 | 30,971 | 31,326 | 24,065 | 24,364 | 30,690 | 31,405 | ||||||||||||||||||||||||
| Over 10 years | 58,097 | 56,557 | 13,111 | 13,699 | 77,721 | 75,639 | 19,775 | 20,215 | ||||||||||||||||||||||||
| Total bonds and obligations | 124,984 | 124,506 | 57,482 | 58,425 | 120,223 | 118,454 | 56,353 | 57,508 | ||||||||||||||||||||||||
| Marketable equity securities | 2,679 | 2,563 | — | — | 15,756 | 18,905 | - | - | ||||||||||||||||||||||||
| Residential mortgage-backed securities | 192,597 | 197,276 | 139 | 142 | 170,294 | 172,883 | 83 | 86 | ||||||||||||||||||||||||
Total | $ | 320,260 | $ | 324,345 | $ | 57,621 | $ | 58,567 | $ | 306,273 | $ | 310,242 | $ | 56,436 | $ | 57,594 | ||||||||||||||||
At year-end 20092010 and 2008,2009, the Company had pledged securities as collateral for certain municipal deposits, for certain customer deposits, and for interest rate swaps with certain counterparties. The total amortized cost and fair values of these pledged securities follows. Additionally, there is a blanket lien on certain securities to collateralize borrowings from the FHLBB, as discussed further in Note 11- Borrowings & Junior Subordinated Debentures.
| 2009 | 2008 | 2010 | 2009 | |||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
| (In thousands) | Cost | Value | Cost | Value | Cost | Value | Cost | Value | ||||||||||||||||||||||||
| Securities pledged to swap counterparties | $ | 22,563 | $ | 23,314 | $ | 9,844 | $ | 10,032 | $ | 30,071 | $ | 30,751 | $ | 22,563 | $ | 23,314 | ||||||||||||||||
| Securities pledged for municipal deposits | 10,882 | 11,297 | 8,257 | 8,480 | 15,078 | 15,465 | 10,882 | 11,297 | ||||||||||||||||||||||||
| Securities pledged for customer deposits | 2,428 | 2,518 | 3,219 | 3,221 | 1,788 | 1,877 | 2,428 | 2,518 | ||||||||||||||||||||||||
| Total | $ | 35,873 | $ | 37,129 | $ | 21,320 | $ | 21,733 | $ | 46,937 | $ | 48,093 | $ | 35,873 | $ | 37,129 | ||||||||||||||||
In 2010, the Company did not sell any AFS securities. Proceeds from the sale of AFS securities in 2009 2008, and 20072008 were $6.3 million $10.1 million, and $59.1$10.1 million, respectively. The components of net realized losses on the sale of AFS securities are as follows. These amounts were reclassified out of accumulated other comprehensive loss and into earnings:
| (In thousands) | 2010 | 2009 | 2008 | |||||||||||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||||||||||||||
| Gross realized gains | $ | 82 | $ | 62 | $ | 88 | $ | - | $ | 82 | $ | 62 | ||||||||||||
| Gross realized losses | 86 | 84 | 679 | - | 86 | 84 | ||||||||||||||||||
| Net realized losses | $ | (4 | ) | $ | (22 | ) | $ | (591 | ) | $ | - | $ | (4 | ) | $ | (22 | ) | |||||||
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The income tax benefit attributable to net realized losses in 2009 2008, and 20072008 was $1 thousand and $7 thousand, and $167 thousand, respectively.
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| Less Than Twelve Months | Over Twelve Months | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
| (In thousands) | Losses | Value | Losses | Value | Losses | Value | ||||||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 17 | $ | 2,984 | $ | 312 | $ | 7,128 | $ | 329 | $ | 10,112 | ||||||||||||
| Government guaranteed residential mortgage-backed securities | 116 | 5,113 | — | — | 116 | 5,113 | ||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | 143 | 21,610 | — | — | 143 | 21,610 | ||||||||||||||||||
| Corporate bonds | — | — | 245 | 2,748 | 245 | 2,748 | ||||||||||||||||||
| Trust preferred securities | — | — | 2,370 | 6,915 | 2,370 | 6,915 | ||||||||||||||||||
| Other bonds and obligations | — | — | 20 | 440 | 20 | 440 | ||||||||||||||||||
| Total debt securities | 276 | 29,707 | 2,947 | 17,231 | 3,223 | 46,938 | ||||||||||||||||||
| Marketable equity securities | — | — | 171 | 1,104 | 171 | 1,104 | ||||||||||||||||||
Total securities available for sale | 276 | 29,707 | 3,118 | 18,335 | 3,394 | 48,042 | ||||||||||||||||||
Securities held to maturity | ||||||||||||||||||||||||
| Tax advantaged economic development bonds | 8 | 1,569 | — | — | 8 | 1,569 | ||||||||||||||||||
Total securities held to maturity | 8 | 1,569 | — | — | 8 | 1,569 | ||||||||||||||||||
Total | $ | 284 | $ | 31,276 | $ | 3,118 | $ | 18,335 | $ | 3,402 | $ | 49,611 | ||||||||||||
December 31, 2008 | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 1,585 | $ | 39,573 | $ | 245 | $ | 4,070 | $ | 1,830 | $ | 43,643 | ||||||||||||
| Residential mortgaged-backed securities | 139 | 16,292 | 54 | 2,142 | 193 | 18,434 | ||||||||||||||||||
| Other bonds and obligations | 472 | 3,741 | 3,150 | 7,142 | 3,622 | 10,883 | ||||||||||||||||||
| Total debt securities | 2,196 | 59,606 | 3,449 | 13,354 | 5,645 | 72,960 | ||||||||||||||||||
| Marketable equity securities | — | 85 | 110 | 640 | 110 | 725 | ||||||||||||||||||
Total securities available for sale | 2,196 | 59,691 | 3,559 | 13,994 | 5,755 | 73,685 | ||||||||||||||||||
Securities held to maturity | ||||||||||||||||||||||||
| Residential mortgaged-backed securities | — | — | 4 | 553 | 4 | 553 | ||||||||||||||||||
Total securities held to maturity | — | — | 4 | 553 | 4 | 553 | ||||||||||||||||||
Total | $ | 2,196 | $ | 59,691 | $ | 3,563 | $ | 14,547 | $ | 5,759 | $ | 74,238 | ||||||||||||
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| Less Than Twelve Months | Over Twelve Months | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
| (In thousands) | Losses | Value | Losses | Value | Losses | Value | ||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 335 | $ | 15,630 | $ | 59 | $ | 1,195 | $ | 394 | $ | 16,825 | ||||||||||||
| Government guaranteed residential | ||||||||||||||||||||||||
| mortgage-backed securities | 7 | 5,125 | - | - | 7 | 5,125 | ||||||||||||||||||
| Government-sponsored residential | ||||||||||||||||||||||||
| mortgage-backed securities | 580 | 54,056 | - | - | 580 | 54,056 | ||||||||||||||||||
| Corporate bonds | 15 | 1,985 | 75 | 2,920 | 90 | 4,905 | ||||||||||||||||||
| Trust preferred securities | 5 | 2,041 | 2,678 | 4,529 | 2,683 | 6,570 | ||||||||||||||||||
| Other bonds and obligations | - | - | 1 | 309 | 1 | 309 | ||||||||||||||||||
| Total debt securities | 942 | 78,837 | 2,813 | 8,953 | 3,755 | 87,790 | ||||||||||||||||||
| Marketable equity securities | - | - | 68 | 1,432 | 68 | 1,432 | ||||||||||||||||||
| Total | $ | 942 | $ | 78,837 | $ | 2,881 | $ | 10,385 | $ | 3,823 | $ | 89,222 | ||||||||||||
| December 31, 2009 | ||||||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Municipal bonds and obligations | $ | 17 | $ | 2,984 | $ | 312 | $ | 7,128 | $ | 329 | $ | 10,112 | ||||||||||||
| Government guaranteed residential | ||||||||||||||||||||||||
| mortgage-backed securities | 116 | 5,113 | - | - | 116 | 5,113 | ||||||||||||||||||
| Government-sponsored residential | ||||||||||||||||||||||||
| mortgage-backed securities | 143 | 21,610 | - | - | 143 | 21,610 | ||||||||||||||||||
| Corporate bonds | - | - | 245 | 2,748 | 245 | 2,748 | ||||||||||||||||||
| Trust preferred securities | - | - | 2,370 | 6,915 | 2,370 | 6,915 | ||||||||||||||||||
| Other bonds and obligations | - | - | 20 | 440 | 20 | 440 | ||||||||||||||||||
| Total debt securities | 276 | 29,707 | 2,947 | 17,231 | 3,223 | 46,938 | ||||||||||||||||||
| Marketable equity securities | - | - | 171 | 1,104 | 171 | 1,104 | ||||||||||||||||||
| Total securities available for sale | 276 | 29,707 | 3,118 | 18,335 | 3,394 | 48,042 | ||||||||||||||||||
| Securities held to maturity | ||||||||||||||||||||||||
| Tax advantaged economic development bonds | 8 | 1,569 | - | - | 8 | 1,569 | ||||||||||||||||||
| Total securities held to maturity | 8 | 1,569 | - | - | 8 | 1,569 | ||||||||||||||||||
| Total | $ | 284 | $ | 31,276 | $ | 3,118 | $ | 18,335 | $ | 3,402 | $ | 49,611 | ||||||||||||
Debt Securities
The Company expects to recover its amortized cost basis on all debt securities in its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of December 31, 2009,2010, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historical low portfolio turnover.sales. The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS and HTM portfoliosportfolio were not other-than-temporarily impaired at December 31, 2009:year-end 2010:
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AFS municipal bonds and obligations
At December 31, 2009, 16year-end 2010, 26 out of a total of 134139 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3%2% of the book valueamortized cost of securities in unrealized loss positions. The securities are insured,all investment grade rated, all insured except for one AAA bond, and all general obligation or water and sewer revenue bonds. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to have to the market. At this time, the Company feels that the bonds in this portfolio carry minimal risk of default and that we are appropriately compensated for that risk. There were no material underlying credit downgrades during the fourth quarter of 2009.2010. All securities are performing.
AFS residential mortgage-backed securities
At December 31, 2009, 9year-end 2010, 13 out of a total of 111103 securities in the Company’s portfolio of AFS residential mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented less than 1% of the book valueamortized cost of securities in unrealized loss positions. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of the Company’s AFS residential mortgage-backed securities. These entities are government-sponsored and are backed by the full faith and credit of the U.S. government. The securities are investment grade rated and there were no material underlying credit downgrades during the fourth quarter of 2009.2010. All securities are performing.
AFS corporate bonds
At December 31, 2009, 1year-end 2010, 2 out of a total of 1910 securities in the Company’s portfolio of AFS corporate bonds waswere in an unrealized loss position. The aggregate unrealized loss represents 8%2% of the book value.amortized cost. The security has a short-term maturity (within 5 years), issecurities are investment grade rated, and there were no material underlying credit downgrades during the fourth quarter of 2009.2010. The security issecurities are performing.
AFS trust preferred securities
At December 31, 2009, allyear-end 2010, 5 out of 7 securities in the Company’s portfolio of AFS trust preferred securities were in unrealized loss positions. Aggregate unrealized losses represented 26%29% of the book valueamortized cost of securities in unrealized loss positions. The Company’s evaluation of the present value of expected cash flows on these securities supports its conclusions about the recoverability of the securities’ amortized cost bases. Except for the security discussed below, the aggregate unrealized loss on the other securities in unrealized loss positions represented less than 2% of their amortized cost.
At December 31, 2009, $1.7year-end 2010, $2.4 million of the total unrealized losses was attributable to a $2.6 million investment in a Mezzanine Class B tranche of a $360 million pooled trust preferred security issued by banking and insurance entities.
The Company evaluated the security, with a Level 3 fair value of $0.9$0.2 million, for potential OTTIother-than-temporary impairment (“OTTI”) at December 31, 20092010 and determined that OTTI was not evident based on both the Company’s more likely than not ability to hold the security until the recovery of its remaining amortized cost and the protection from credit loss afforded by $49$38 million in excess subordination above current and projected losses. The security is performing.
AFS other bonds and obligations
At December 31, 2009, 6year-end 2010, 4 out of a total of 87 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 4%less than 1% of the book valueamortized cost of these private placementthe securities in unrealized loss positions. The securities are investment grade rated and there were no material underlying credit downgrades during the fourth quarter of 2009.2010. All securities are performing.
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Marketable Equity Securities
In evaluating its marketable equity securities portfolio for OTTI, the Company considers its more likely than not ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI is recognized immediately through earnings.
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At December 31, 2009,year-end 2010, 1 out of a total of 414 securities in the Company’s portfolio of marketable equity securities was in an unrealized loss position. The unrealized loss represented 13%5% of the book valueamortized cost of the impaired security. The Company evaluated the security, concluding that the unrealized loss was mostly attributable to a general decline in the markets during the last 12-18 months. The Company has the intent and ablilityability to hold the security until a recovery of its cost basis and does not consider the security other-than-temporarily impaired at December 31, 2009.year-end 2010. As new information becomes available in future periods, changes to the Company’s assumptions may be warranted and could lead to a different conclusion regarding the OTTI of this security.conclusion.
6. LOANS
Year-end loans consisted of the following:
| (In thousands) | 2010 | 2009 | ||||||||||||||
| (In thousands) | 2009 | 2008 | ||||||||||||||
| Residential mortgages: | ||||||||||||||||
| 1-4 family | $ | 587,104 | $ | 642,733 | $ | 619,969 | $ | 587,104 | ||||||||
| Construction | 21,903 | 34,521 | 25,004 | 21,903 | ||||||||||||
| Total residential mortgages | 609,007 | 677,254 | 644,973 | 609,007 | ||||||||||||
| Commercial mortgages: | ||||||||||||||||
| Construction | 110,703 | 129,704 | 126,824 | 110,703 | ||||||||||||
| Single and multifamily | 80,624 | 69,964 | ||||||||||||||
| Other | 660,501 | 605,788 | ||||||||||||||
| Single and multi-family | 86,925 | 80,624 | ||||||||||||||
| Commercial real estate | 711,824 | 660,501 | ||||||||||||||
| Total commercial mortgages | 851,828 | 805,456 | 925,573 | 851,828 | ||||||||||||
| Commercial business | 186,044 | 178,934 | ||||||||||||||
| Commercial business loans: | ||||||||||||||||
| Asset based lending | 98,239 | - | ||||||||||||||
| Other commercial business loans | 187,848 | 186,044 | ||||||||||||||
| Total commercial business loans | 286,087 | 186,044 | ||||||||||||||
| Consumer: | ||||||||||||||||
| Auto | 76,861 | 134,846 | ||||||||||||||
| Home equity and other | 237,918 | 210,662 | ||||||||||||||
| Total commercial loans | 1,211,660 | 1,037,872 | ||||||||||||||
| Total consumer | 314,779 | 345,508 | ||||||||||||||
| Consumer loans: | ||||||||||||||||
| Home equity | 226,458 | 211,727 | ||||||||||||||
| Other | 59,071 | 103,052 | ||||||||||||||
| Total consumer loans | 285,529 | 314,779 | ||||||||||||||
| Total loans | $ | 1,961,658 | $ | 2,007,152 | $ | 2,142,162 | $ | 1,961,658 | ||||||||
Included in year-end total loans were the following:
| (In thousands) | 2009 | 2008 | ||||||
| Unamortized net loan origination costs | $ | 7,133 | $ | 8,329 | ||||
| Unamortized net premium on purchased loans | 102 | 129 | ||||||
| Total unamortized net costs and premiums | $ | 7,235 | $ | 8,458 | ||||
| (In thousands) | 2010 | 2009 | ||||||
| Unamortized net loan origination costs | $ | 5,478 | $ | 7,133 | ||||
| Unamortized net premium on purchased loans | 296 | 102 | ||||||
| Total unamortized net costs and premiums | $ | 5,774 | $ | 7,235 | ||||
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The Company occasionally transfers a portion of its originated commercial real estate loans to participating lending partners. The amounts transferred have been accounted for as sales and are therefore not included in the allowanceCompany’s accompanying consolidated balance sheets. The Company and its lending partners share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans, collects cash payments from the borrowers, remits payments (net of servicing fees), and disburses required escrow funds to relevant parties. At year-end 2010 and 2009, the Company was servicing loans for loan losses was as follows:participants totaling $69 million and $57 million, respectively.
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
| Balance at beginning of year | $ | 22,908 | $ | 22,116 | $ | 19,370 | ||||||
| Provision for loan losses | 47,730 | 4,580 | 4,300 | |||||||||
| Allowance attributed to acquired loans | — | — | 4,453 | |||||||||
| Loans charged-off | (39,143 | ) | (4,442 | ) | (6,376 | ) | ||||||
| Recoveries | 321 | 654 | 369 | |||||||||
| Balance at end of year | $ | 31,816 | $ | 22,908 | $ | 22,116 | ||||||
During 2010, the Company purchased residential mortgage loans aggregating $32.3 million and sold residential mortgage loans aggregating $105.9 million.
Most of the Company’s lending activity occurs within its primary markets in western Massachusetts, southern Vermont and northeastern New York, along with commercial loan originations in Massachusetts, Connecticut, and Rhode Island.York. Most of the loan portfolio is secured by real estate, including residential mortgages, commercial mortgages, and home equity loans. Year-end loans to operators of non-residential buildings totaled $253 million, or 11.8%, and $238 million, or 12.1%, and $231 million, or 11.5%, of total loans in 20092010 and 2008,2009, respectively. There were no other concentrations of loans related to any one industry in excess of 10% of total loans at year-end 20092010 or 2008.2009.
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At year-end 2009,2010, the Company had pledged loans totaling $46.8$70.8 million to the Federal Reserve Bank of Boston as collateral for certain borrowing arrangements. Also, residential first mortgage loans are subject to a blanket lien on securities for FHLBB advances. See Note 11- Borrowings & Junior Subordinated Debentures.
At year-end 2010 and 2009, and 2008, the Bank’sCompany’s commitments outstanding to related parties totaled $33.4$41.5 million and $10.5$33.4 million, respectively, and the loans outstanding against these commitments totaled $26.5$32.6 million and $6.4$26.5 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 20092010 and 2008,2009, all related party loans were performing. Year-end Bank aggregate extensions of credit to one related party totaled $31.4 million in 2010 and $25.3 million in 2009 and $4.6 million in 2008.2009. There were new extensions of credit to this party in the amount of $8.2 million and $37.8 million in 2010 and $30 thousand in 2009, and 2008, respectively. Reductions of extensions of credit (including loan repayments) to this party were $2.1 million and $16.8 million in 2010 and $0.8 million in 2009, and 2008, respectively.
The following is a summary information pertaining toof past due loans at year-end 2010:
| (in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Current | Total Loans | Past Due> 90 days and Accruing | |||||||||||||||||||||
| Residential mortgages: | ||||||||||||||||||||||||||||
| 1-4 family | $ | 2,103 | $ | 1,598 | $ | 1,936 | $ | 5,637 | $ | 614,332 | $ | 619,969 | $ | - | �� | |||||||||||||
| Construction | - | 104 | 237 | 341 | 24,663 | 25,004 | - | |||||||||||||||||||||
| Total | 2,103 | 1,702 | 2,173 | 5,978 | 638,995 | 644,973 | - | |||||||||||||||||||||
| Commercial mortgages: | ||||||||||||||||||||||||||||
| Construction | - | - | 1,962 | 1,962 | 124,862 | 126,824 | - | |||||||||||||||||||||
| Single and multi-family | - | - | 1,514 | 1,514 | 85,411 | 86,925 | 88 | |||||||||||||||||||||
| Commercial real estate | 389 | 74 | 6,442 | 6,905 | 704,919 | 711,824 | 342 | |||||||||||||||||||||
| Total | 389 | 74 | 9,918 | 10,381 | 915,192 | 925,573 | 430 | |||||||||||||||||||||
| Commercial Business loans: | ||||||||||||||||||||||||||||
| Asset based lending | - | - | - | - | 98,239 | 98,239 | - | |||||||||||||||||||||
| Other | 111 | 128 | 1,617 | 1,856 | 185,992 | 187,848 | 312 | |||||||||||||||||||||
Total | 111 | 128 | 1,617 | 1,856 | 284,231 | 286,087 | 312 | |||||||||||||||||||||
| Consumer loans: | ||||||||||||||||||||||||||||
| Home equity | 119 | 20 | 856 | 995 | 225,463 | 226,458 | 147 | |||||||||||||||||||||
| Other | 780 | 245 | 202 | 1,227 | 57,844 | 59,071 | 165 | |||||||||||||||||||||
| Total | 899 | 265 | 1,058 | 2,222 | 283,307 | 285,529 | 312 | |||||||||||||||||||||
| Total | $ | 3,502 | $ | 2,169 | $ | 14,766 | $ | 20,437 | $ | 2,121,725 | $ | 2,142,162 | $ | 1,054 | ||||||||||||||
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Activity in the allowance for loan losses for 2010 and 2009 was as follows:
| (In thousands) | Residential mortgages | Commercial mortgages | Commercial business | Consumer | Unallocated | Total | ||||||||||||||||||
| 2010 | ||||||||||||||||||||||||
| Balance at beginning of year | $ | 2,897 | $ | 19,282 | $ | 6,011 | $ | 2,749 | $ | 877 | $ | 31,816 | ||||||||||||
| Charged-off loans | (409 | ) | (6,403 | ) | (2,685 | ) | (1,188 | ) | - | (10,685 | ) | |||||||||||||
| Recoveries on charged-off loans | 213 | 794 | 1,094 | 140 | - | 2,241 | ||||||||||||||||||
| Provision for loan losses | 376 | 5,788 | 1,618 | 489 | 346 | 8,526 | ||||||||||||||||||
| Balance at end of year | 3,077 | 19,461 | 6,038 | 2,099 | 1,223 | 31,898 | ||||||||||||||||||
| Ending balance: individually evaluated for impairment | 246 | 2,151 | 92 | - | - | 2,489 | ||||||||||||||||||
| Ending balance: collectively evaluated for impairment | 2,831 | 17,310 | 5,946 | 2,099 | 1,223 | 29,409 | ||||||||||||||||||
| 2009 | ||||||||||||||||||||||||
| Balance at beginning of year | $ | 1,895 | $ | 12,814 | $ | 3,982 | $ | 3,003 | $ | 1,214 | $ | 22,908 | ||||||||||||
| Charged-off loans | (2,016 | ) | (27,596 | ) | (5,945 | ) | (3,586 | ) | - | (39,143 | ) | |||||||||||||
| Recoveries on charged-off loans | - | 22 | 64 | 235 | - | 321 | ||||||||||||||||||
| Provision for loan losses | 3,018 | 34,042 | 7,910 | 3,097 | (337 | ) | 47,730 | |||||||||||||||||
| Balance at end of year | 2,897 | 19,282 | 6,011 | 2,749 | 877 | 31,816 | ||||||||||||||||||
| Ending balance: individually evaluated for impairment | 230 | 4,121 | 2,058 | - | - | 6,409 | ||||||||||||||||||
| Ending balance: collectively evaluated for impairment | 2,667 | 15,161 | 3,953 | 2,749 | 877 | 25,407 | ||||||||||||||||||
Activity in the allowance for loan losses for 2008 was as follows:
| (In thousands) | 2008 | |||
| Balance at beginning of year | $ | 22,116 | ||
| Provision for loan losses | 4,580 | |||
| Loans charged-off | (4,442 | ) | ||
| Recoveries | 654 | |||
| Balance at end of year | $ | 22,908 | ||
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The following is a summary of impaired loans at year-end 2010 and non-accrual loans as of year-end (unless otherwise stated):2009 and for the years then ended:
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
| Investment in impaired loans | $ | 56,897 | $ | 28,607 | $ | 14,751 | ||||||
| Impaired loans with no valuation allowance | 27,015 | 21,503 | 7,224 | |||||||||
| Impaired loans with a valuation allowance | 29,882 | 7,104 | 7,527 | |||||||||
| Specific valuation allowance allocated to impaired loans | 6,409 | 1,014 | 1,230 | |||||||||
| Average investment in impaired loans during the year | 39,310 | 16,293 | 9,259 | |||||||||
| Cash basis impaired loan income received during the year | 1,124 | 560 | 881 | |||||||||
| Non-accrual loans | 38,700 | 12,171 | 10,508 | |||||||||
| Total loans past due ninety days or more and still accruing | 91 | 923 | 823 | |||||||||
| At December 31, 2010 | Year Ended December 31, 2010 | |||||||||||||||||||
| (In thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Cash Basis Interest Income Recognized | |||||||||||||||
| With no related allowance: | ||||||||||||||||||||
| Residential mortgages - 1-4 family | $ | 201 | $ | 201 | $ | - | $ | 995 | $ | 18 | ||||||||||
| Residential mortgages - construction | - | - | - | 91 | - | |||||||||||||||
| Commercial business - other | 8,596 | 8,596 | - | 8,972 | 227 | |||||||||||||||
| Consumer - home equity | 397 | 397 | - | 237 | 5 | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Residential mortgages - 1-4 family | $ | 973 | $ | 1,206 | $ | 233 | $ | 1,108 | $ | 18 | ||||||||||
| Residential mortgages - construction | 178 | 191 | 13 | 32 | - | |||||||||||||||
| Commercial mortgages - construction | 1,432 | 1,735 | 303 | 1,236 | - | |||||||||||||||
| Commercial mortgages - single and multifamily | 772 | 1,211 | 439 | 307 | 12 | |||||||||||||||
| Commercial mortgages - real estate | 1,594 | 3,003 | 1,409 | 9,886 | 404 | |||||||||||||||
| Commercial business - other | 10 | 102 | 92 | 17,490 | 33 | |||||||||||||||
| Total | ||||||||||||||||||||
| Residential mortgages | $ | 1,352 | $ | 1,598 | $ | 246 | $ | 2,226 | $ | 36 | ||||||||||
| Commercial mortgages | 3,798 | 5,949 | 2,151 | 11,429 | 416 | |||||||||||||||
| Commercial business | 8,606 | 8,698 | 92 | 26,462 | 260 | |||||||||||||||
| Consumer | 397 | 397 | - | 237 | 5 | |||||||||||||||
| Total impaired loans | $ | 14,153 | $ | 16,642 | $ | 2,489 | $ | 40,354 | $ | 717 | ||||||||||
| At December 31, 2009 | Year Ended December 31, 2009 | |||||||||||||||||||
| (In thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Cash Basis Interest Income Recognized | |||||||||||||||
| With no related allowance: | ||||||||||||||||||||
| Residential mortgages - 1-4 family | $ | 1,456 | $ | 1,456 | $ | - | $ | 771 | $ | 57 | ||||||||||
| Residential mortgages - construction | 109 | 109 | - | 36 | 2 | |||||||||||||||
| Commercial mortgages - construction | 5,181 | 5,181 | - | 5,989 | 182 | |||||||||||||||
| Commercial mortgages - real estate | 16,508 | 16,508 | - | 17,574 | 529 | |||||||||||||||
| Commercial business - other | 3,761 | 3,761 | - | 1,708 | 70 | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Residential mortgages - 1-4 family | $ | 1,068 | $ | 1,298 | $ | 230 | $ | 511 | $ | 21 | ||||||||||
| Commercial mortgages - construction | 5,224 | 5,694 | 470 | 4,670 | 39 | |||||||||||||||
| Commercial mortgages - single and multifamily | 70 | 75 | 5 | 100 | 8 | |||||||||||||||
| Commercial mortgages - real estate | 16,140 | 19,786 | 3,646 | 5,763 | 159 | |||||||||||||||
| Commercial business - other | 971 | 3,029 | 2,058 | 1,736 | 56 | |||||||||||||||
| Total | ||||||||||||||||||||
| Residential mortgages | $ | 2,633 | $ | 2,863 | $ | 230 | $ | 1,318 | $ | 80 | ||||||||||
| Commercial mortgages | 43,123 | 47,244 | 4,121 | 34,096 | 917 | |||||||||||||||
| Commercial business | 4,732 | 6,790 | 2,058 | 3,444 | 126 | |||||||||||||||
| Total impaired loans | $ | 50,488 | $ | 56,897 | $ | 6,409 | $ | 38,858 | $ | 1,123 | ||||||||||
No additional funds of $100 thousand are committed to be advanced in connection with impaired loans.
The following is a summary of impaired loans at year-end 2008 and for the year then ended:
| (In thousands) | 2008 | |||
| Investment in impaired loans | $ | 28,607 | ||
| Impaired loans with no valuation allowance | 21,503 | |||
| Impaired loans with a valuation allowance | 7,104 | |||
| Specific valuation allowance allocated to impaired loans | 1,014 | |||
| Average investment in impaired loans during the year | 16,293 | |||
| Cash basis impaired loan income received during the year | 560 | |||
| Total loans past due ninety days or more and still accruing | 923 | |||
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The following is summary information pertaining to non-accrual loans at year-end 2010 and 2009:
| (In thousands) | 2010 | 2009 | ||||||
| Residential mortgages: | ||||||||
| 1-4 family | $ | 1,936 | $ | 2,976 | ||||
| Construction | 237 | 328 | ||||||
| Total | 2,173 | 3,304 | ||||||
| Commercial mortgages: | ||||||||
| Construction | 1,962 | 9,672 | ||||||
| Single and multi-family | 1,426 | 259 | ||||||
| Real estate | 6,100 | 21,986 | ||||||
| Total | 9,488 | 31,917 | ||||||
| Commercial business loans - other | 1,305 | 3,115 | ||||||
| Consumer loans: | ||||||||
| Home equity | 709 | 130 | ||||||
| Other | 37 | 234 | ||||||
| Total | 746 | 364 | ||||||
| Total non-accrual loans | $ | 13,712 | $ | 38,700 | ||||
Credit Quality Information
The Company utilizes a ten grade internal loan rating system for each of its commercial real estate, construction and commercial loans as follows:
| 10 | Minimal Risk |
A relationship which provides an adequate return on investment to the Company, have been stable during the last three years and have a superior financial condition as determined by a comparison with the industry. In addition, management must be of unquestionable character and have strong abilities as measured by their long-term financial performance
| 20 | Moderate Risk |
A relationship which does not appear to possess more than the normal degree of credit risk. Overall, the borrower’s financial statements compare favorably with the industry. A strong secondary repayment source exists and the loan is performing as agreed.
| 30 | Acceptable |
A relationship which possesses most of the characteristics found in the Moderate Risk category, however, due to either poor economic conditions or recent capital expenditures additional support is required. Start-up businesses and construction loans will generally be assigned to this category as well.
| 40 | Pass/Watch |
Borrowers in this category may be more highly leveraged than their industry peers and experience moderate losses relative to net worth. Trends and performance i.e. sales and earnings, leverage, etc. may be negative. Management’s ability may be questionable, or perhaps untested. The industry may be experiencing either temporary or long term pressures. Collateral values are seen as more important in assessing risk than in higher quality loans. Failure to meet required line clean-up periods or other terms and conditions, including some slow payments may also predicate this grade.
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| 50 | Watch List |
A classification assigned to all relationships for credits with potential weaknesses which present a higher than normal credit risk, but not to the point of requiring a Substandard loan classification. No loss of principal or interest is anticipated, however, these credits are followed closely, and if necessary, remedial plans to reduce the Company’s risk exposure are established.
| 60 | Substandard - Performing |
A classification assigned to a credit that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans will be evaluated on at least a quarterly basis to determine if an additional allocation of the Company’s allowance for loan loss is warranted.
| 70 | Substandard – Non-performing |
A classification given to Substandard credits which have deteriorated to the point that management has placed the accounts on non-accrual status due to delinquency exceeding 90 days or where the Company has determined that collection of principal and interest in full is unlikely.
| 80 | Doubtful |
Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, highly questionable and improbable. Collection in excess of 50% of the balance owed is not expected.
| 90 | Loss |
Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be possible in the future.
| 100 | Small Business Credit Express Loans |
Grade established for all small business credits deemed pass rated or better.
The Company risk rates its residential mortgages, including 1-4 family and residential construction loans, based on a three rating system: Pass, Special Mention and Substandard. Loans that are current within 59 days are rated Pass. Residential mortgages that are 60-89 days delinquent are rated Special Mention. Loans delinquent for 90 days or greater are rated Substandard. Residential mortgages are put on non-accrual status if rated Special Mention or worse. Home equity loans are risk rated based on the same rating system as the Company’s residential mortgages.
Other consumer loans, including auto loans, are rated based on a two rating system. Loans that are current within 119 days are rated Performing while loans delinquent for 120 days or more are rated Nonperforming. Other consumer loans are placed on non-accrual at such time as they become Nonperforming.
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The following table presents the Company’s loans by risk rating at year-end 2010 and 2009:
Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
| 1-4 family | Construction | Total residential mortgages | ||||||||||||||||||||||
| (In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
| Grade: | ||||||||||||||||||||||||
| Pass | $ | 616,435 | $ | 583,545 | $ | 24,663 | $ | 21,547 | $ | 641,098 | $ | 605,092 | ||||||||||||
| Special mention | 1,598 | 584 | 104 | 27 | 1,702 | 611 | ||||||||||||||||||
| Substandard | 1,936 | 2,975 | 237 | 329 | 2,173 | 3,304 | ||||||||||||||||||
| Total | $ | 619,969 | $ | 587,104 | $ | 25,004 | $ | 21,903 | $ | 644,973 | $ | 609,007 | ||||||||||||
Commercial Mortgages
Credit Risk Profile by Creditworthiness Category
| Construction | Single and multi-family | Real estate | Total commercial mortgages | |||||||||||||||||||||||||||||
| (In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
| Grade: | ||||||||||||||||||||||||||||||||
| Pass | $ | 100,737 | $ | 78,098 | $ | 82,017 | $ | 75,839 | $ | 626,571 | $ | 540,958 | $ | 809,325 | $ | 694,895 | ||||||||||||||||
| Special mention | 10,803 | 9,934 | 381 | 602 | 27,377 | 63,367 | 38,561 | 73,903 | ||||||||||||||||||||||||
| Substandard | 15,095 | 22,482 | 4,527 | 4,183 | 57,752 | 56,018 | 77,374 | 82,683 | ||||||||||||||||||||||||
| Doubtful | 189 | 189 | - | - | 124 | 158 | 313 | 347 | ||||||||||||||||||||||||
| Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total | $ | 126,824 | $ | 110,703 | $ | 86,925 | $ | 80,624 | $ | 711,824 | $ | 660,501 | $ | 925,573 | $ | 851,828 | ||||||||||||||||
Commercial Business Loans
Credit Risk Profile by Creditworthiness Category
| Asset based lending | Other | Total commercial business loans | ||||||||||||||||||||||
| (In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
| Grade: | ||||||||||||||||||||||||
| Pass | $ | 98,239 | $ | - | $ | 180,321 | $ | 166,936 | $ | 278,560 | $ | 166,936 | ||||||||||||
| Special mention | - | - | 1,281 | 6,277 | 1,281 | 6,277 | ||||||||||||||||||
| Substandard | - | - | 6,164 | 11,027 | 6,164 | 11,027 | ||||||||||||||||||
| Doubtful | - | - | 82 | 1,804 | 82 | 1,804 | ||||||||||||||||||
| Loss | - | - | - | - | - | - | ||||||||||||||||||
| Total | $ | 98,239 | $ | - | $ | 187,848 | $ | 186,044 | $ | 286,087 | $ | 186,044 | ||||||||||||
Consumer Loans
Credit Risk Profile Based on Payment Activity
| Home equity | Other | Total consumer loans | ||||||||||||||||||||||
| (In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
| Performing | $ | 225,749 | $ | 211,597 | $ | 59,034 | $ | 102,818 | $ | 284,783 | $ | 314,415 | ||||||||||||
| Non-performing | 709 | 130 | 37 | 234 | 746 | 364 | ||||||||||||||||||
| Total | $ | 226,458 | $ | 211,727 | $ | 59,071 | $ | 103,052 | $ | 285,529 | $ | 314,779 | ||||||||||||
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7. PREMISES AND EQUIPMENT
Year-end premises and equipment are summarized as follows:
| Estimated | |||||||||||||||||||||
| (In thousands) | 2009 | 2008 | Useful Life | 2010 | 2009 | Estimated Useful Life | |||||||||||||||
| Land | $ | 3,836 | $ | 4,146 | N/A | $ | 3,836 | $ | 3,836 | N/A | |||||||||||
| Buildings and improvements | 34,481 | 33,335 | 5 - 39 years | 36,302 | 34,481 | 5 - 39 years | |||||||||||||||
| Furniture and equipment | 22,157 | 20,732 | 3 - 7 years | 25,329 | 22,157 | 3 - 7 years | |||||||||||||||
| Construction in process | 1,794 | 254 | 1,773 | 1,794 | |||||||||||||||||
| Premises and equipment, gross | 62,268 | 58,467 | 67,240 | 62,268 | |||||||||||||||||
| Accumulated depreciation and amortization | (24,878 | ) | (21,019 | ) | (28,694 | ) | (24,878 | ) | |||||||||||||
| Premises and equipment, net | $ | 37,390 | $ | 37,448 | $ | 38,546 | $ | 37,390 | |||||||||||||
Depreciation and amortization expense for the years 2010, 2009 2008 and 20072008 amounted to $3.8 million, $3.9 million, and $3.8 million, and $3.4 million, respectively.
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8. GOODWILL AND OTHER INTANGIBLES
Year-end goodwill relates to the following reporting units:
| (In thousands) | 2009 | 2008 | 2010 | 2009 | ||||||||||||
| Banking | $ | 138,549 | $ | 138,002 | $ | 138,549 | $ | 138,549 | ||||||||
| Insurance | 23,176 | 23,176 | 23,176 | 23,176 | ||||||||||||
| Total | $ | 161,725 | $ | 161,178 | $ | 161,725 | $ | 161,725 | ||||||||
The components of other intangible assets are as follows:
| (In thousands) | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | |||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||
| Non-maturity deposits | $ | 16,978 | $ | (10,371 | ) | $ | 6,607 | |||||||||||||||||
| Insurance contracts | 7,463 | (3,178 | ) | 4,285 | ||||||||||||||||||||
| All other intangible assets | 1,037 | (575 | ) | 462 | ||||||||||||||||||||
| Total | $ | 25,478 | $ | (14,124 | ) | $ | 11,354 | |||||||||||||||||
| Gross | Net | |||||||||||||||||||||||
| Intangible | Accumulated | Intangible | ||||||||||||||||||||||
| (In thousands) | Assets | Amortization | Assets | |||||||||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||
| Non-maturity deposits | $ | 16,978 | $ | (8,209 | ) | $ | 8,769 | $ | 16,978 | $ | (8,209 | ) | $ | 8,769 | ||||||||||
| Insurance contracts | 7,463 | (2,444 | ) | 5,019 | 7,463 | (2,444 | ) | 5,019 | ||||||||||||||||
| All other intangible assets | 1,037 | (450 | ) | 587 | 1,037 | (450 | ) | 587 | ||||||||||||||||
| Total | $ | 25,478 | $ | (11,103 | ) | $ | 14,375 | $ | 25,478 | $ | (11,103 | ) | $ | 14,375 | ||||||||||
December 31, 2008 | ||||||||||||||||||||||||
| Non-maturity deposits | $ | 16,978 | $ | (5,718 | ) | $ | 11,260 | |||||||||||||||||
| Insurance contracts | 7,463 | (1,708 | ) | 5,755 | ||||||||||||||||||||
| Non-compete agreements | 2,318 | (2,318 | ) | — | ||||||||||||||||||||
| All other intangible assets | 1,037 | (400 | ) | 637 | ||||||||||||||||||||
| Total | $ | 27,796 | $ | (10,144 | ) | $ | 17,652 | |||||||||||||||||
Other intangible assets are amortized on a straight-line or accelerated basis over their estimated lives, which range from five to ten years. Amortization expense related to intangible assets totaled $3.0 million in 2010, $3.3 million in 2009, and $3.8 million in 2008, and $3.1 million in 2007.2008. There were no additions to intangible assets in 2009.2010.
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The estimated aggregate future amortization expense for intangible assets remaining asat of year-end 20092010 is as follows: 2010- $3.0 million; 2011- $2.8 million; 2012- $2.6 million; 2013- $2.4 million; 2014- $2.0 million; 2015- $1.0 million and thereafter- $1.6 million.$612 thousand.
For 2010, the Company performed the first step of the goodwill impairment assessment foron its two reporting units, banking and insurance, by applying a combination of market and discounted cash flow valuation methodologies. As a result of this assessment, the Companyno further evaluated its banking unit for goodwillevaluation was required, and no impairment by estimating the fair value of the unit’s net tangible and identifiable assets.was recorded.
For the years 2010, 2009 2008 and 2007,2008, no impairment charges were identified for the Company’s intangible assets.
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| 9. | OTHER ASSETS |
Year-end other assets are summarized as follows:
| (In thousands) | 2009 | 2008 | 2010 | 2009 | ||||||||||||
| Net deferred tax asset | $ | 11,759 | $ | 12,235 | $ | 16,252 | $ | 11,759 | ||||||||
| Capitalized mortgage servicing rights | 1,620 | 901 | 2,035 | 1,620 | ||||||||||||
| Accrued interest receivable | 8,498 | 8,995 | 8,769 | 8,498 | ||||||||||||
| Investment in tax credits | 8,688 | 5,491 | 9,225 | 8,688 | ||||||||||||
| Foreclosed and repossesed assets | 218 | 871 | ||||||||||||||
| FDIC insurance | 10,903 | 344 | ||||||||||||||
| Prepaid FDIC insurance | 8,053 | 10,903 | ||||||||||||||
| Federal and state tax receivable | 12,329 | 2,276 | 2,637 | 12,329 | ||||||||||||
| Derivative assets | 7,673 | 3,267 | ||||||||||||||
| Other | 5,186 | 7,604 | 3,576 | 5,374 | ||||||||||||
| Total other assets | $ | 59,201 | $ | 38,717 | $ | 58,220 | $ | 62,438 | ||||||||
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 $319.8 million, $245.2 million, $110.9 million, and $128.0$110.9 million at year-end 2010, 2009, 2008, and 2007,2008, respectively. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. At inception, capitalized mortgage servicing rights approximates the capitalized net present value of fee income streams generated from servicing these loans. The fair value of these rights is based on discounted cash flow projections. Impairment charges on capitalized mortgage loan servicing rights totaled $144 thousand for the year ended December 31, 2009. The fair value approximated carrying value at year-end 20092010 and 2008.2009. Contractually specified servicing fees were $2.0 million, $1.8 million, $178 thousand, and $72$178 thousand for the years 2010, 2009, 2008, and 2007,2008, respectively. The significant assumptions used in the valuation at year-end 20092010 included a discount rate of 11% and a pre-payment speed assumptionassumptions ranging from 10.413.7% to 13.4%14.9%. Net gains on sales of mortgage loans were $851 thousand, $890 thousand, and $178 thousand for the years 2010, 2009, and 2008, respectively.
Mortgage servicing rights activity was as follows:
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
| Balance at beginning of year | $ | 901 | $ | 1,203 | $ | 986 | ||||||
| Additions | 1,577 | — | 395 | |||||||||
| Valuation allowance | (144 | ) | — | — | ||||||||
| Amortization | (714 | ) | (302 | ) | (178 | ) | ||||||
| Balance at end of year | $ | 1,620 | $ | 901 | $ | 1,203 | ||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
| Balance at beginning of year | $ | 1,620 | $ | 901 | $ | 1,203 | ||||||
| Additions | 1,121 | 1,577 | - | |||||||||
| Amortization | (528 | ) | (714 | ) | (302 | ) | ||||||
| Valuation allowance | (178 | ) | (144 | ) | - | |||||||
| Balance at end of year | $ | 2,035 | $ | 1,620 | $ | 901 | ||||||
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| 10. | DEPOSITS |
A summary of year-end time deposits is as follows:
| (In thousands) | 2009 | 2008 | ||||||
| Maturity date: | ||||||||
| Within 1 year | $ | 464,422 | $ | 453,435 | ||||
| Over 1 year to 2 years | 134,733 | 149,452 | ||||||
| Over 2 years to 3 years | 41,667 | 67,506 | ||||||
| Over 3 years to 4 years | 58,936 | 19,511 | ||||||
| Over 4 years to 5 years | 60,798 | 52,286 | ||||||
| Over 5 years | 11,006 | 4,128 | ||||||
| Total | $ | 771,562 | $ | 746,318 | ||||
| Account balances: | ||||||||
| Less than $100,000 | $ | 381,141 | $ | 394,655 | ||||
| $100,000 or more | 390,421 | 351,663 | ||||||
| Total | $ | 771,562 | $ | 746,318 | ||||
| (In thousands) | 2010 | 2009 | ||||||
| Maturity date: | ||||||||
| Within 1 year | $ | 393,944 | $ | 464,422 | ||||
| Over 1 year to 2 years | 140,842 | 134,733 | ||||||
| Over 2 years to 3 years | 79,436 | 41,667 | ||||||
| Over 3 years to 4 years | 63,258 | 58,936 | ||||||
| Over 4 years to 5 years | 48,765 | 60,798 | ||||||
| Over 5 years | 14,879 | 11,006 | ||||||
| Total | $ | 741,124 | $ | 771,562 | ||||
| Account balances: | ||||||||
| Less than $100,000 | $ | 368,770 | $ | 381,141 | ||||
| $100,000 or more | 372,354 | 390,421 | ||||||
| Total | $ | 741,124 | $ | 771,562 | ||||
| 11. | BORROWINGS & JUNIOR SUBORDINATED DEBENTURES |
Short-term debt includes FHLBB advances with an original maturity of less than one year and outstanding borrowings on lines of credit. Total short-term debt was $83.9$47.0 million and $23.2$83.9 million at year-end 20092010 and 2008,2009, respectively. The weighted-average interest rates on short-term debt at year-end 2010 and 2009 were 0.38% and 2008 were 0.20% and 0.37%, respectively. The Bank also maintains a $3 million secured line of credit with the FHLBB that bears a daily adjustable rate calculated by the FHLBB. There was no outstanding balance on the FHLBB line of credit at year-end 20092010 and 2008.2009.
The Bank is approved to borrow on a short-term basis from the Federal Reserve Bank of Boston as a non-member bank. The Bank has pledged certain loans and securities to the Federal Reserve Bank to support this arrangement. During 2010, the Bank did one overnight borrowing with the Federal Reserve Bank in the amount of $25 million in order to test our borrowing line. The Bank had no other outstanding borrowings with the Federal Reserve Bank in 2010, 2009 2008, or 2007.2008.
Long-term FHLBB advances consist of advances with an original maturity of more than one year. The advances outstanding at year-end 20092010 include callable advances totaling $8 million, and amortizing advances totaling $6$5.8 million. All FHLBB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral;collateral, principally all residential first mortgage loans and certain securities.
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A Summarysummary of long-term FHLBB advances at year-end 20092010 and 20082009 is as follows:
| 2009 | 2008 | 2010 | 2009 | |||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
| (In thousands) | Amount | Average Rate | Amount | Average Rate | Amount | Average Rate | Amount | Average Rate | ||||||||||||||||||||||||
| Fixed rate advances maturing: | ||||||||||||||||||||||||||||||||
| 2009 | $ | — | — | % | $ | 54,311 | 3.95 | % | ||||||||||||||||||||||||
| 2010 | 10,000 | 2.99 | 50,000 | 4.62 | $ | - | - | % | $ | 10,000 | 2.99 | % | ||||||||||||||||||||
| 2011 | 610 | 5.70 | 45,610 | 4.78 | 610 | 5.70 | 610 | 5.70 | ||||||||||||||||||||||||
| 2012 | — | — | 10,000 | 5.01 | ||||||||||||||||||||||||||||
| 2013 | 3,000 | 4.89 | 3,000 | 4.89 | 3,000 | 4.89 | 3,000 | 4.89 | ||||||||||||||||||||||||
| 2014 | 10,219 | 5.00 | 10,231 | 4.99 | 10,207 | 5.00 | 10,219 | 5.00 | ||||||||||||||||||||||||
| 2015 and beyond | 10,516 | 4.14 | 10,805 | 4.14 | ||||||||||||||||||||||||||||
| 2016 and beyond | 10,443 | 4.15 | 10,516 | 4.14 | ||||||||||||||||||||||||||||
| Total fixed rate advances | 34,345 | 4.15 | 183,957 | 4.48 | 24,260 | 4.64 | 34,345 | 4.15 | ||||||||||||||||||||||||
| Variable rate advances maturing: | ||||||||||||||||||||||||||||||||
| 2012 | 34,807 | 0.48 | 30,000 | 1.27 | 34,874 | 0.37 | 34,807 | 0.48 | ||||||||||||||||||||||||
| 2013 | 58,192 | 1.24 | 35,000 | 2.68 | 58,673 | 0.53 | 58,192 | 1.24 | ||||||||||||||||||||||||
| 2014 | 20,000 | 0.46 | 10,000 | 1.95 | 20,000 | 0.51 | 20,000 | 0.46 | ||||||||||||||||||||||||
| 2015 and beyond | 60,000 | 0.34 | 60,000 | 4.10 | ||||||||||||||||||||||||||||
| 2015 | 20,000 | 0.34 | - | - | ||||||||||||||||||||||||||||
| 2016 and beyond | 40,000 | 0.34 | 60,000 | 0.34 | ||||||||||||||||||||||||||||
| Total variable rate advances | 172,999 | 0.68 | 135,000 | 2.94 | 173,547 | 0.43 | 172,999 | 0.68 | ||||||||||||||||||||||||
| Total FHLBB advances | $ | 207,344 | 1.26 | % | $ | 318,957 | 3.83 | % | $ | 197,807 | 0.94 | % | $ | 207,344 | 1.26 | % | ||||||||||||||||
The Company holds 100% of the common stock of Berkshire Hills Capital Trust I (“Trust I”) which is included in other assets with a cost of $0.5 million. 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 2.12%2.13% at year-end 2009.2010. 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 not exercised this right to defer payments. The Company has the right to redeem the debentures without penalty after August 23, 2010.at par value. Trust I is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, Trust I is not consolidated into the Company’s financial statements.
| 12. | OTHER LIABILITIES |
Year-end other liabilities are summarized as follows:
| (In thousands) | 2009 | 2008 | ||||||
| Due to broker | $ | — | $ | 19,895 | ||||
| Other | 8,693 | 10,140 | ||||||
| Total other liabilities | $ | 8,693 | $ | 30,035 | ||||
| (In thousands) | 2010 | 2009 | ||||||
| Derivative liabilities | $ | 18,717 | $ | 13,720 | ||||
| Other | 9,297 | 8,693 | ||||||
| Total other liabilities | $ | 28,014 | $ | 22,413 | ||||
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| 13. | INCOME TAXES |
Income tax expense (benefit) expense is as follows:
| (In thousands) | 2010 | 2009 | 2008 | |||||||||||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||||||||||||||
| Current: | ||||||||||||||||||||||||
| Federal tax (benefit) expense | $ | (6,578 | ) | $ | 4,993 | $ | 2,924 | |||||||||||||||||
| Federal tax expense (benefit) | $ | 6,634 | $ | (6,578 | ) | $ | 4,993 | |||||||||||||||||
| State tax expense | 95 | 2,914 | 1,329 | 2,004 | 95 | 2,914 | ||||||||||||||||||
| Total current (benefit) expense | (6,483 | ) | 7,907 | 4,253 | ||||||||||||||||||||
| Total current expense (benefit) | 8,638 | (6,483 | ) | 7,907 | ||||||||||||||||||||
| Deferred : | ||||||||||||||||||||||||
| Federal tax (benefit) expense | (4,661 | ) | 1,327 | 677 | (3,114 | ) | (4,661 | ) | 1,327 | |||||||||||||||
| State tax (benefit) expense | (505 | ) | 371 | 461 | (1,411 | ) | (505 | ) | 371 | |||||||||||||||
| Total deferred (benefit) expense | (5,166 | ) | 1,698 | 1,138 | (4,525 | ) | (5,166 | ) | 1,698 | |||||||||||||||
| Decrease in valuation allowance | — | (793 | ) | (152 | ) | - | - | (793 | ) | |||||||||||||||
| Total income tax (benefit) expense | $ | (11,649 | ) | $ | 8,812 | $ | 5,239 | |||||||||||||||||
| Total income tax expense (benefit) | $ | 4,113 | $ | (11,649 | ) | $ | 8,812 | |||||||||||||||||
The effective income tax rate differs from the statutory tax rate as a result of the following:
| 2009 | 2008 | 2007 | 2010 | 2009 | 2008 | |||||||||||||||||||
| Statutory tax rate | (35.0 | %) | 35.0 | % | 35.0 | % | 35.0 | % | (35.0 | ) % | 35.0 | % | ||||||||||||
| Increase (decrease) resulting from: | ||||||||||||||||||||||||
| State taxes, net of federal tax benefit | 1.0 | 6.9 | 6.2 | 2.2 | 1.0 | 6.9 | ||||||||||||||||||
| Dividends received deduction | — | (0.1 | ) | (0.1 | ) | |||||||||||||||||||
| Tax exempt income — investments | (6.3 | ) | (5.5 | ) | (8.0 | ) | ||||||||||||||||||
| Tax exempt income - investments | (12.5 | ) | (6.3 | ) | (5.5 | ) | ||||||||||||||||||
| Bank-owned life insurance | (1.6 | ) | (1.6 | ) | (2.0 | ) | (2.5 | ) | (1.6 | ) | (1.6 | ) | ||||||||||||
| Change in valuation allowance | — | (2.6 | ) | (0.8 | ) | - | - | (2.6 | ) | |||||||||||||||
| Investment tax credits | (0.9 | ) | (2.0 | ) | (1.9 | ) | ||||||||||||||||||
| Other, net | 0.8 | (1.7 | ) | (0.5 | ) | 0.8 | (0.1 | ) | (3.8 | ) | ||||||||||||||
| Effective tax rate | (42.0 | %) | 28.4 | % | 27.9 | % | 23.0 | % | (42.0 | ) % | 28.4 | % | ||||||||||||
Year-end deferred tax assets (liabilities) relate to the following:
| (In thousands) | 2009 | 2008 | ||||||
| Allowance for loan losses | $ | 12,997 | $ | 9,358 | ||||
| Employee benefit plans | 1,283 | 1,270 | ||||||
| Net unrealized loss on swaps and securities available for sale in OCI | 2,489 | 8,131 | ||||||
| Goodwill amortization | (3,953 | ) | (3,594 | ) | ||||
| Investments | (1,846 | ) | (840 | ) | ||||
| Purchase accounting adjustments | (3,340 | ) | (3,548 | ) | ||||
| Investment tax credits | 4,582 | 2,243 | ||||||
| Other | (453 | ) | (785 | ) | ||||
| Deferred tax asset, net | $ | 11,759 | $ | 12,235 | ||||
| (In thousands) | 2010 | 2009 | ||||||
| Allowance for loan losses | $ | 18,668 | $ | 12,997 | ||||
| Intangible amortization | (6,916 | ) | (7,367 | ) | ||||
| Bonus depreciation on premises and equipment | (2,686 | ) | 45 | |||||
| Investment tax credits | 2,688 | 4,582 | ||||||
| Net unrealized loss on swaps and securities available for sale in OCI | 2,189 | 2,489 | ||||||
| Employee benefit plans | 1,523 | 1,283 | ||||||
| Investments | 278 | (1,846 | ) | |||||
| Purchase accounting adjustments | 23 | (492 | ) | |||||
| Other | 485 | 68 | ||||||
| Deferred tax asset, net | $ | 16,252 | $ | 11,759 | ||||
Management believes that it is more likely than not that the Company will realize its net deferred tax assets based on anticipated future levels of pre-tax income. As a result, a valuation allowance has not been established. Actual future income may differ from management’s expectations which could lead the Company to establish an allowance in future years.
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The Company is no longer subject to U.S. federal income tax examinations for tax years before 2006.2007. Adjustments, penalties and interest resulting from the most recent examination of the 2002 and 2003 tax years did not have a significant impact on the Company’s financial statements. Management believes that the tax benefits taken by the Company for the years 2006-20092007 - 2010 will more likely than not be sustained upon examination by taxing authorities,authorities; thus no unrecognizedreserves for uncertain tax benefitspositions were recorded at year-end 20092010 and 2008.2009.
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| 14. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
At year-end 2010, the Company held derivatives with a total notional amount of $408$475 million. Of this total, interest rate swaps with a combined notional amount of $160 million were designated as cash flow hedges and $203$289 million have been designated as economic hedges. The remaining $45$26 million notional amount represents commitments to originate residential mortgage loans for sale and commitments to sell residential mortgage loans, which are also accounted for as derivative financial instruments. At December 31, 2009,year-end 2010, no derivatives were designated as hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes.
As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities. Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. The derivatives program is overseen by the Risk Management Committee of the Company’s Board of Directors. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at December 31, 2009.year-end 2010.
The Company pledged collateral to derivative counterparties in the form of cash totaling $1.6$5.6 million and securities with an amortized cost of $22.6$30.1 million and a fair value of $23.3$30.8 million as of December 31, 2009.at year-end 2010. No collateral was posted from counterparties to the Company as of December 31, 2009.in return. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.
Information about interest rate swap agreements and non-hedging derivative assetassets and liabilities at December 31, 2009,year-end 2010 follows:
| Weighted | Estimated | |||||||||||||||||||
| Notional | Average | Weighted Average Rate | Fair Value | |||||||||||||||||
| Amount | Maturity | Received | Paid | Asset (Liability) | ||||||||||||||||
| (In thousands) | (In years) | (In thousands) | ||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
| Interest rate swaps on FHLBB borrowings | $ | 145,000 | 4.7 | 0.28 | % | 4.15 | % | $ | (8,874 | ) | ||||||||||
| Interest rate swaps on junior subordinated debentures | 15,000 | 4.4 | 2.12 | 5.54 | (668 | ) | ||||||||||||||
| Total cash flow hedges | 160,000 | (9,542 | ) | |||||||||||||||||
Economic hedges: | ||||||||||||||||||||
| Interest rate swap on industrial revenue bond | 15,000 | 19.9 | 0.60 | 5.09 | (1,018 | ) | ||||||||||||||
| Interest rate swaps on loans with commercial loan customers | 93,962 | 7.0 | 2.50 | 6.32 | (2,887 | ) | ||||||||||||||
| Reverse interest rate swaps on loans with commercial loan customers | 93,962 | 7.0 | 6.32 | 2.50 | 2,962 | |||||||||||||||
| Total economic hedges | 202,924 | (943 | ) | |||||||||||||||||
Non-hedging derivatives: | ||||||||||||||||||||
| Commitments to originate residential mortgage loans | 22,668 | 0.2 | (273 | ) | ||||||||||||||||
| Commitments to sell residential mortgage loans | 22,668 | 0.2 | 305 | |||||||||||||||||
| Total non-hedging derivatives | 45,336 | 32 | ||||||||||||||||||
Total | $ | 408,260 | $ | (10,453 | ) | |||||||||||||||
| Weighted | Estimated | |||||||||||||||||||
| Notional | Average | Weighted Average Rate | Fair Value | |||||||||||||||||
| Amount | Maturity | Received | Paid | Asset (Liability) | ||||||||||||||||
| (In thousands) | (In years) | (In thousands) | ||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||
| Interest rate swaps on FHLBB borrowings | $ | 105,000 | 2.7 | 0.29 | % | 4.00 | % | $ | (7,696 | ) | ||||||||||
| Forward-starting interest rate swaps on FHLBB borrowings | 40,000 | 2.8 | - | 3.13 | (468 | ) | ||||||||||||||
| Interest rate swaps on junior subordinated debentures | 15,000 | 3.4 | 2.13 | 5.54 | (1,142 | ) | ||||||||||||||
| Total cash flow hedges | 160,000 | (9,306 | ) | |||||||||||||||||
| Economic hedges: | ||||||||||||||||||||
| Interest rate swap on tax advantaged economic development bond | 14,559 | 18.9 | 0.63 | 5.09 | (1,757 | ) | ||||||||||||||
| Interest rate swaps on loans with commercial loan customers | 137,295 | 6.5 | 2.93 | 6.04 | (7,374 | ) | ||||||||||||||
| Reverse interest rate swaps on loans with commercial loan customers | 137,295 | 6.5 | 6.04 | 2.93 | 7,406 | |||||||||||||||
| Total economic hedges | 289,149 | (1,725 | ) | |||||||||||||||||
| Non-hedging derivatives: | ||||||||||||||||||||
| Commitments to originate residential mortgage loans | 13,172 | 0.2 | (280 | ) | ||||||||||||||||
| Commitments to sell residential mortgage loans | 13,172 | 0.2 | 267 | |||||||||||||||||
| Total non-hedging derivatives | 26,344 | (13 | ) | |||||||||||||||||
| Total | $ | 475,493 | $ | (11,044 | ) | |||||||||||||||
- 9194 -
Information about interest rate swap agreements and non-hedging derivative asset and liabilities at December 31, 2008,year-end 2009 follows:
| Weighted | Estimated | |||||||||||||||||||
| Notional | Average | Weighted Average Rate | Fair Value | |||||||||||||||||
| Amount | Maturity | Received | Paid | Gain (Loss) | ||||||||||||||||
| (In thousands) | (In years) | (In thousands) | ||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||
| Interest rate swaps on FHLBB borrowings | $ | 135,000 | 5.7 | 2.57 | % | 4.24 | % | $ | (15,657 | ) | ||||||||||
| Interest rate swaps on junior subordinated debentures | 15,000 | 5.4 | 4.00 | 5.54 | (1,171 | ) | ||||||||||||||
| Total cash flow hedges | 150,000 | (16,828 | ) | |||||||||||||||||
Economic hedges | ||||||||||||||||||||
| Interest rate swap on industrial revenue bond | 15,000 | 20.9 | 2.27 | 5.09 | (3,299 | ) | ||||||||||||||
| Interest rate swaps on loans with commercial loan customers | 38,948 | 6.2 | 4.14 | 6.42 | (3,941 | ) | ||||||||||||||
| Reverse interest rate swaps on loans with commercial loan customers | 38,948 | 6.2 | 6.42 | 4.14 | 3,740 | |||||||||||||||
| Total economic hedges | 92,896 | (3,500 | ) | |||||||||||||||||
| Total | $ | 242,896 | $ | (20,328 | ) | |||||||||||||||
| Weighted | Estimated | |||||||||||||||||||
| Notional | Average | Weighted Average Rate | Fair Value | |||||||||||||||||
| Amount | Maturity | Received | Paid | Asset (Liability) | ||||||||||||||||
| (In thousands) | (In years) | (In thousands) | ||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||
| Interest rate swaps on FHLBB borrowings | $ | 145,000 | 4.7 | 0.28 | % | 4.15 | % | $ | (8,874 | ) | ||||||||||
| Interest rate swaps on junior subordinated debentures | 15,000 | 4.4 | 2.12 | 5.54 | (668 | ) | ||||||||||||||
| Total cash flow hedges | 160,000 | (9,542 | ) | |||||||||||||||||
| Economic hedges: | ||||||||||||||||||||
| Interest rate swap on tax advantaged economic development bond | 15,000 | 19.9 | 0.60 | 5.09 | (1,018 | ) | ||||||||||||||
| Interest rate swaps on loans with commercial loan customers | 93,962 | 7.0 | 2.50 | 6.32 | (2,887 | ) | ||||||||||||||
| Reverse interest rate swaps on loans with commercial loan customers | 93,962 | 7.0 | 6.32 | 2.50 | 2,962 | |||||||||||||||
| Total economic hedges | 202,924 | (943 | ) | |||||||||||||||||
| Non-hedging derivatives: | ||||||||||||||||||||
| Commitments to originate residential mortgage loans | 22,668 | 0.2 | (273 | ) | ||||||||||||||||
| Commitments to sell residential mortgage loans | 22,668 | 0.2 | 305 | |||||||||||||||||
| Total non-hedging derivatives | 45,336 | 32 | ||||||||||||||||||
| Total | $ | 408,260 | $ | (10,453 | ) | |||||||||||||||
Cash flow hedges
The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges are reported in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized. Each quarter, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings.
The Company has entered into several interest rate swaps with an aggregate notional amount of $145$105 million to convert the LIBOR based floating interest rates on a $145$105 million portfolio of FHLBB advances to fixed rates, with the objective of fixing the Company’s monthly interest expense on these borrowings. In the third quarter of 2010, the Company terminated $40 million notional amount of interest rate swaps that were used to convert floating based FHLBB advances to a fixed rate. The Company has retained the floating rate advances and fully anticipates holding these advances until maturity. Net gains and losses for terminated cash flow hedges remain in accumulated other comprehensive income and are amortized into earnings in the same period or periods during which the originally hedged forecasted transaction affects earnings. Management’s decision to terminate the swaps was based on its assessment that these hedges were no longer needed to execute management’s strategy for balance sheet management.
The Company has also entered into four forward-starting interest rate swaps each with a notional value of $10 million. Two of these swaps take effect in April 2012 and the other two take effect in April 2013. Each of these swaps have a one year duration. This hedge strategy converts the LIBOR based rate of interest on certain FHLB advances to fixed interest rates, thereby protecting the Company from floating interest rate variability.
The Company has also entered into an interest rate swap with a notional value of $15 million to convert the floating rate interest on its junior subordinated debentures to a fixed rate of interest. The purpose of the hedge was to protect the Company from the risk of variability arising from the floating rate interest rate on the debentures.
- 9295 -
Amounts included in the Consolidated Statements of Operations and in the other comprehensive income (loss) section of the Consolidated StatementStatements of Changes in Stockholders’ Equity related to interest rate derivatives designated as hedges of cash flows, were as follows:
| Year Ended December 31, | ||||
| (In thousands) | 2009 | |||
Interest rate swaps on FHLBB borrowings: | ||||
| Unrealized gain recognized in accumulated other comprehensive loss | $ | 7,462 | ||
| Reclassification of realized gain from accumulated other comprehensive loss to other non-interest income for termination of swaps | (741 | ) | ||
| Reclassification of unrealized loss from accumulated other comprehensive loss to other non-interest income for hedge ineffectiveness | 62 | |||
| Net tax expense on items recognized in accumulated other comprehensive loss | (2,601 | ) | ||
Interest rate swaps on junior subordinated debentures: | ||||
| Unrealized gain recognized in accumulated other comprehensive loss | 503 | |||
| Net tax expense on items recognized in accumulated other comprehensive loss | (197 | ) | ||
| Other comprehensive income recorded in accumulated other comprehensive loss, net of reclassification adjustments and tax effects | $ | 4,488 | ||
| Net interest expense recognized in interest expense on hedged FHLBB borrowings | $ | (4,587 | ) | |
| Net interest expense recognized in interest expense on junior subordinated debentures | $ | (420 | ) | |
| Years Ended December 31, | ||||||||
| (In thousands) | 2010 | 2009 | ||||||
| Interest rate swaps on FHLBB borrowings: | ||||||||
| Unrealized (loss) gain recognized in accumulated other comprehensive loss | $ | (4,738 | ) | $ | 7,462 | |||
| Elimination of unrealized loss for termination of swaps | 5,448 | - | ||||||
| Realized loss recognized in accumulated other comprehensive loss for termination of swaps | (6,382 | ) | - | |||||
| Reclassification of realized loss (gain) from accumulated other comprehensive loss to interest expense for termination of swaps | 319 | (741 | ) | |||||
| Reclassification of unrealized loss from accumulated other comprehensive loss to other non-interest income for hedge ineffectiveness | 83 | 62 | ||||||
| Net tax benefit (expense) on items recognized in accumulated other comprehensive loss | 2,174 | (2,601 | ) | |||||
| Interest rate swaps on junior subordinated debentures: | ||||||||
| Unrealized (loss) gain recognized in accumulated other comprehensive loss | (474 | ) | 503 | |||||
| Net tax benefit (expense) on items recognized in accumulated other comprehensive loss | 196 | (197 | ) | |||||
| Other comprehensive (loss) income recorded in accumulated other comprehensive loss, net of reclassification adjustments and tax effects | $ | (3,374 | ) | $ | 4,488 | |||
| Net interest expense recognized in interest expense on hedged FHLBB borrowings | $ | 5,327 | $ | 4,587 | ||||
| Net interest expense recognized in interest expense on junior subordinated debentures | $ | 509 | $ | 420 | ||||
The Company’s asset sensitive interest rate risk profile, and its strong liquidity position, it was determined that these longer-term, fixed rate instruments were no longer necessary to manage the Company’s overall balance sheet profile. Gains totaling $741 thousand were generated on the termination of the swaps.
The Company’s accumulated other comprehensive loss totaled $3.0 million at year-end 2009. Of this loss, $5.2 million was attributable to accumulated losses on cash flow derivatives totaled $1.1hedges, net of deferred taxes of $4.3 million, for the year-ended 2008 and $2.2 million was included in interest expenseattributable to accumulated gains on borrowings and junior subordinated debentures in the Consolidated Statementsavailable-for-sale securities, net of Income. deferred taxes of $1.8 million.
Hedge ineffectiveness on interest rate swaps designated as cash flow hedges was immaterial to the Company’s 2008 financial statements.statements during the years ended 2010 and 2009. The Company does not anticipate material events or transactions within the next twelve months that are likely to result in a reclassification of unrealized gains or losses from accumulated other comprehensive loss to earnings.
Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that $5.3 million will be reclassified as an increase to interest expense.
Economic hedges and non-hedging derivatives
The Company simultaneously entered intohas an interest rate swap with a $15.0$14.6 million notional amount to swap out the fixed rate of interest on an economic development bond bearing a fixed rate of 5.09%, currently within the bondCompany’s trading portfolio under the fair value option, in exchange for a LIBOR-based floating rate. The intent of the economic hedge wasis to improve the Company’s asset sensitivity to changing interest rates in anticipation of favorable average floating rates of interest over the 21-year life of the bond. The fair value changes of the economic development bond are mostly offset by fair value changes of the related interest rate swap.
The Company also offers certain derivative products directly to qualified commercial borrowers. The Company economically hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with third-party financial institutions. The transaction allows the Company’s customer to convert a variable-rate loan to a fixed rate loan. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts mostly offset each other in earnings. Credit valuation adjustments arising from the difference in credit worthiness of the commercial loan and financial institution counterparties totaled $75$32 thousand as of December 31, 2009at year-end 2010 and were not material to the financial statements. The interest income and expense on these mirror image swaps exactly offset each other.
- 9396 -
The Company enters into commitments with certain of its retail customers to originate fixed rate mortgage loans and simultaneously enters into an agreement to sell these fixed rate mortgage loans to the Federal National Mortgage Association.Fannie Mae. These commitments are considered derivative financial instruments and are recorded at fair value with any changes in fair value recorded through earnings.
Amounts included in the Consolidated Statements of Operations related to economic hedges and non-hedging derivatives were as follows:
| Year Ended December 31, | ||||
| (In thousands) | 2009 | |||
Economic hedges | ||||
Interest rate swap on industrial revenue bond: | ||||
| Net interest expense recognized in interest and dividend income on securities | $ | (665 | ) | |
| Unrealized gain recognized in other non-interest income | 2,281 | |||
Interest rate swaps on loans with commercial loan customers: | ||||
| Unrealized loss (gain) recognized in other non-interest income | (1,054 | ) | ||
Reverse interest rate swaps on loans with commercial loan customers: | ||||
| Unrealized (loss) gain recognized in other non-interest income | 1,054 | |||
| Favorable change in credit valuation adjustment recognized in other non-interest income | $ | 276 | ||
Non-hedging derivatives | ||||
Commitments to originate residential mortgage loans to be sold: | ||||
| Unrealized loss recognized in other non-interest income | $ | (630 | ) | |
Commitments to sell residential mortgage loans: | ||||
| Unrealized gain recognized in other non-interest income | $ | 769 | ||
| Years Ended December 31, | ||||||||
| (In thousands) | 2010 | 2009 | ||||||
| Economic hedges | ||||||||
| Interest rate swap on industrial revenue bond: | ||||||||
| Net interest expense recognized in interest and dividend income on securities | $ | (666 | ) | $ | (665 | ) | ||
| Unrealized (loss) gain recognized in other non-interest income | (739 | ) | 2,281 | |||||
| Interest rate swaps on loans with commercial loan customers: | ||||||||
| Unrealized gain recognized in other non-interest income | 4,487 | 1,054 | ||||||
| Reverse interest rate swaps on loans with commercial loan customers: | ||||||||
| Unrealized loss recognized in other non-interest income | (4,487 | ) | (1,054 | ) | ||||
| (Unfavorable) favorable change in credit valuation adjustment recognized in other non-interest income | $ | (43 | ) | $ | 276 | |||
| Non-hedging derivatives | ||||||||
| Commitments to originate residential mortgage loans to be sold: | ||||||||
| Unrealized loss recognized in other non-interest income | $ | (519 | ) | $ | (630 | ) | ||
| Commitments to sell residential mortgage loans: | ||||||||
| Unrealized gain recognized in other non-interest income | $ | 535 | $ | 769 | ||||
| 15. | OTHER 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.
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The Company’s exposure to credit loss in the event of nonperformancenon-performance 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.
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A summary of financial instruments outstanding whose contract amounts represent credit risk is as follows at year-end:
| (In thousands) | 2010 | 2009 | ||||||||||||||
| (In thousands) | 2009 | 2008 | ||||||||||||||
| Commitments to originate new loans | $ | 78,800 | $ | 63,108 | $ | 46,214 | $ | 78,800 | ||||||||
| Unused funds on commercial and other lines of credit | 115,493 | 70,156 | 154,716 | 115,493 | ||||||||||||
| Unadvanced funds on home equity lines of credit | 177,118 | 197,343 | 172,117 | 177,118 | ||||||||||||
| Unadvanced funds on construction and real estate loans | 61,004 | 66,135 | 122,086 | 61,004 | ||||||||||||
| Standby letters of credit | 28,503 | 41,402 | 32,404 | 28,503 | ||||||||||||
| Tax credit commitments | 5,177 | 1,299 | 4,648 | 5,177 | ||||||||||||
| Total | $ | 466,095 | $ | 439,443 | $ | 532,185 | $ | 466,095 | ||||||||
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.
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, 2009.year-end 2010.
Tax credit commitments are contractual obligations to provide capital contributions to tax credit partnerships that support solar energy generation and low income housing initiatives.
Operating lease commitments. Future minimum rental payments required under operating leases at December 31, 2009year-end 2010 are as follows: 2010 — $3.0 million; 2011— $2.92011– $3.3 million; 2012 — $2.8– $3.1 million; 2013 — $2.8– $3.2 million; 2014 — $2.8– $3.1 million; 2015 -$3.0 and all years thereafter — $33.0– $38.9 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 2010, 2009 2008 and 20072008 amounted to $3.2 million, $2.7 million and $2.6 million, and $2.4 million, respectively.
Employment and change in control agreements.The Company hasand the Bank have entered into ana three-year employment agreement with one senior executive with a three-year term.executive. The Company and the Bank also hashave change in control agreements with several officers which provide a severance payment in the event employment is terminated in conjunction with a defined change in control.
Legal claims.Various legal claims arise from time to time in the normal course of business. In the opinion of management, claims outstanding at December 31, 2009year-end 2010 will have no material effect on the Company’s financial statements.
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| 16. | 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 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.
- 95 -
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 year-end 20092010 and 2008,2009, the Bank met the capital adequacy requirements. Regulators may set higher expected capital requirements in some cases based on their examinations.
As of year-end 2010 and 2009, and 2008, Berkshirethe 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 to be Well | |||||||||||||||||||||||||||||||||||||||||||||||
| Minimum | Capitalized Under | Minimum | Capitalized Under | |||||||||||||||||||||||||||||||||||||||||||||
| Capital | Prompt Corrective | Capital | Prompt Corrective | |||||||||||||||||||||||||||||||||||||||||||||
| Actual | Requirement | Action Provisions | Actual | Requirement | Action Provisions | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital to risk-weighted assets | $ | 239,668 | 10.58 | % | $ | 181,245 | 8.00 | % | $ | 226,557 | 10.00 | % | ||||||||||||||||||||||||||||||||||||
| Tier 1 capital to risk-weighted assets | 211,304 | 9.33 | 90,623 | 4.00 | 135,934 | 6.00 | ||||||||||||||||||||||||||||||||||||||||||
| Tier 1 capital to average assets | 211,304 | 8.02 | 105,341 | 4.00 | 131,676 | 5.00 | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital to risk-weighted assets | $ | 224,594 | 10.71 | % | $ | 167,804 | 8.00 | % | $ | 209,754 | 10.00 | % | $ | 224,594 | 10.71 | % | $ | 167,804 | 8.00 | % | $ | 209,754 | 10.00 | % | ||||||||||||||||||||||||
| Tier 1 capital to risk-weighted assets | 198,305 | 9.45 | 83,902 | 4.00 | 125,853 | 6.00 | 198,305 | 9.45 | 83,902 | 4.00 | 125,853 | 6.00 | ||||||||||||||||||||||||||||||||||||
| Tier 1 capital to average assets | 198,305 | 7.86 | 100,974 | 4.00 | 126,217 | 5.00 | 198,305 | 7.86 | 100,974 | 4.00 | 126,217 | 5.00 | ||||||||||||||||||||||||||||||||||||
December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital to risk-weighted assets | $ | 250,729 | 12.28 | % | $ | 163,314 | 8.00 | % | $ | 204,142 | 10.00 | % | ||||||||||||||||||||||||||||||||||||
| Tier 1 capital to risk-weighted assets | 227,821 | 11.16 | 81,657 | 4.00 | 122,485 | 6.00 | ||||||||||||||||||||||||||||||||||||||||||
| Tier 1 capital to average assets | 227,821 | 9.34 | 97,602 | 4.00 | 122,002 | 5.00 | ||||||||||||||||||||||||||||||||||||||||||
- 99 -
A reconciliation of the Company’s year-end total stockholders’ equity to the Bank’s regulatory capital is as follows:
| (In thousands) | 2009 | 2008 | ||||||
| Total stockholders’ equity per consolidated financial statements | $ | 384,581 | $ | 408,425 | ||||
Adjustments for Bank Tier 1 Capital: | ||||||||
| Holding company equity adjustment | (40,845 | ) | (45,161 | ) | ||||
| Net unrealized loss (gain) on available for sale securities | (2,675 | ) | 1,778 | |||||
| Net unrealized loss on cash flow hedges | 5,149 | 9,046 | ||||||
| Disallowed goodwill and other intangible assets | (147,905 | ) | (146,267 | ) | ||||
| Total Bank Tier 1 Capital | 198,305 | 227,821 | ||||||
Adjustments for total capital: | ||||||||
| Includible allowances for loan losses | 26,289 | 22,908 | ||||||
| Total Bank capital per regulatory reporting | $ | 224,594 | $ | 250,729 | ||||
| (In thousands) | 2010 | 2009 | ||||||
| Total stockholders' equity per consolidated financial statements | $ | 387,960 | $ | 384,581 | ||||
| Adjustments for Bank Tier 1 Capital: | ||||||||
| Holding company equity adjustment | (33,992 | ) | (40,845 | ) | ||||
| Net unrealized gain on available for sale securities | (2,541 | ) | (2,675 | ) | ||||
| Net unrealized loss on cash flow hedges | 4,693 | 5,149 | ||||||
| Net unrealized loss on terminated swaps | 3,547 | - | ||||||
| Disallowed goodwill and other intangible assets | (148,363 | ) | (147,905 | ) | ||||
| Total Bank Tier 1 Capital | 211,304 | 198,305 | ||||||
| Adjustments for total capital: | ||||||||
| Includible allowances for loan losses | 28,364 | 26,289 | ||||||
| Total Bank capital per regulatory reporting | $ | 239,668 | $ | 224,594 | ||||
Preferred stock and warrant
On December 19, 2008, the Company entered into a definitive agreement with the U.S. Treasury. Pursuant to the agreement, the Company sold 40,00040 thousand shares of Senior Perpetual Preferred Stock, par value $0.01 per share, having a liquidation amount equal to $1,000$1 thousand per share, with an attached warrant (the “Warrant”) to purchase 226,330226 thousand shares of the Company’s common stock, par value $0.01 per share, for the aggregate price of $6.0 million, to the U.S. Treasury. On May 27, 2009, the Company redeemed the preferred stock. On June 24, 2009, the Company entered into a Warrant Repurchase Agreementwarrant repurchase agreement with the United States Department of the Treasury and repurchased the Warrant for $1.0 million. At year-end 2010 and 2009, there were no outstanding preferred stock warrants.
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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. As of year-end 2009,2010, the Bank could not declare aggregate additional dividends without obtaining regulatory approval based on the above statutory calculation. Dividends from the Bank are an important source of funds to the Company to make dividend payments on its common and preferred stock, to make payments on its borrowings, and for its other cash needs. The ability of the Company and the Bank to pay dividends is dependent on regulatory policies and regulatory capital requirements. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies relating to capital, safety and soundness, and other regulatory concerns.
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 would 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 is 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.
In the second quarter of 2009, the Company issued a total of 1,610,0001.6 million shares of $0.01 par value common stock, at a public offering price of $21.50 per share. Total proceeds from the stock issuance totaled $32.4 million net of issuance costs of $2.3 million.
- 97100 -
Other comprehensive (loss) income (loss)
Comprehensive (loss) income (loss) 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) | 2009 | 2008 | 2007 | 2010 | 2009 | 2008 | ||||||||||||||||||
| Unrealized holding gain (loss) on AFS securities during the period | $ | 6,958 | $ | (4,816 | ) | $ | 1,089 | |||||||||||||||||
| Unrealized holding (loss) gain on AFS securities during the period | $ | (116 | ) | $ | 6,958 | $ | (4,816 | ) | ||||||||||||||||
| Reclassification adjustment for net realized loss on sale of AFS securities | 4 | 22 | 591 | - | 4 | 22 | ||||||||||||||||||
| Unrealized gain (loss) on AFS securities at period end | 6,962 | (4,794 | ) | 1,680 | ||||||||||||||||||||
| Net unrealized (loss) gain on AFS securities at period end | (116 | ) | 6,962 | (4,794 | ) | |||||||||||||||||||
| Net loss (gain) on effective cash flow hedging derivatives | 7,286 | (16,828 | ) | 71 | 319 | 7,286 | (16,828 | ) | ||||||||||||||||
| Net loss on terminated swap | (6,063 | ) | - | - | ||||||||||||||||||||
| Tax effects | (5,642 | ) | 8,831 | (626 | ) | 2,418 | (5,642 | ) | 8,831 | |||||||||||||||
| Total other comprehensive income (loss), net | $ | 8,606 | $ | (12,791 | ) | $ | 1,125 | |||||||||||||||||
| Total other comprehensive (loss) income, net | $ | (3,442 | ) | $ | 8,606 | $ | (12,791 | ) | ||||||||||||||||
Year-end components of accumulated other comprehensive loss are as follows:
| (In thousands) | 2009 | 2008 | ||||||
| Net unrealized holding gain (loss) on AFS securities | $ | 4,085 | $ | (2,877 | ) | |||
| Net loss on effective cash flow hedging derivatives | (9,542 | ) | (16,828 | ) | ||||
| Tax effects | 2,489 | 8,131 | ||||||
| Accumulated other comprehensive loss | $ | (2,968 | ) | $ | (11,574 | ) | ||
| (In thousands) | 2010 | 2009 | ||||||
| Net unrealized holding gain on AFS securities | $ | 3,969 | $ | 4,085 | ||||
| Net loss on effective cash flow hedging derivatives | (9,222 | ) | (9,542 | ) | ||||
| Net loss on terminated swap | (6,063 | ) | - | |||||
| Tax effects | 4,906 | 2,489 | ||||||
| Accumulated other comprehensive loss | $ | (6,410 | ) | $ | (2,968 | ) | ||
| 17. | 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 $1.5 million $1.5 million, and $1.3 million for each of the years 2010, 2009, 2008, and 2007, respectively.2008.
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 20092010 and 2008,2009, the accrued liability for this SERP was $1.2$1.4 million and $994 thousand,$1.2 million, respectively. SERP expense was $242 thousand in 2010, $207 thousand in 2009, and $238 thousand in 2008, and $313 thousand in 2007, and is recognized over the required service period.
The Company has endorsement split-dollar life insurance arrangements pertaining to certain current and 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. There are no post-retirement benefits associated with these policies.
| 18. | STOCK-BASED COMPENSATION PLANS |
The 2003 Equity Compensation Plan permits the granting of a combination of stock awards and incentive and non-qualified stock options to employees and directors. A total of 500,000500 thousand common stock shares were authorized under the plan, as amended. As of year-end 2009,2010, the Company had the ability to grant approximately 226,00087 thousand additional stock and option awards under this plan.
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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, 2008 | 123 | $ | 27.40 | 453 | $ | 23.00 | ||||||||||
| Granted | 59 | 23.10 | — | — | ||||||||||||
| Stock options exercised | — | — | (23 | ) | 15.17 | |||||||||||
| Stock awards vested | (59 | ) | 29.16 | — | — | |||||||||||
| Forfeited | (24 | ) | 24.62 | — | — | |||||||||||
Balance, December 31, 2009 | 99 | $ | 24.49 | 430 | $ | 23.35 | ||||||||||
Exercisable options, December 31, 2009 | 415 | $ | 22.98 | |||||||||||||
| 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, 2009 | 99 | $ | 24.49 | 430 | $ | 23.35 | ||||||||||
| Granted | 139 | 16.76 | - | - | ||||||||||||
| Stock options exercised | - | - | (60 | ) | 16.75 | |||||||||||
| Stock awards vested | (53 | ) | 25.09 | - | - | |||||||||||
| Forfeited | (14 | ) | 19.83 | (67 | ) | 16.98 | ||||||||||
| Expired | - | - | (151 | ) | 27.73 | |||||||||||
| Balance, December 31, 2010 | 171 | $ | 18.42 | 152 | $ | 24.41 | ||||||||||
| Exercisable options, December 31, 2010 | 151 | $ | 24.37 | |||||||||||||
Stock awards
The total compensation cost for stock awards recognized as expense was $1.4$1.6 million, $1.6$1.4 million, and $1.6 million, in the years 2010, 2009 2008 and 2007,2008, respectively. The total recognized tax benefit associated with this compensation cost was $0.6 million, $0.6 million, and $0.5$0.6 million, respectively.
The weighted average fair value of stock awards granted was $16.76, $23.10 and $22.80 in 2010, 2009 and $33.06 in 2009, 2008, and 2007.respectively. 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 fair value of stock awards vested during 2010, 2009 and 2008 and 2007 was $1.7 million,$913 thousand, $1.4 million and $1.4 million, respectively. The unrecognized stock-based compensation expense related to unvested stock awards was $1.3$1.8 million as of year-end 2009.2010. This amount is expected to be recognized over a weighted average period of 1 year.2 years.
Option Awards
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 generally issues shares from treasury stock as options are exercised. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. 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. The following weighted-average assumptions were used in the determination of the weighted average grant date fair value for option awards granted in 2007. The Company did not grant option awards in 20092010 or 2008. Option awards granted in 2007 totaled approximately 20 thousand.2009.
| 2007 | ||||
| Expected dividends | 1.85 | % | ||
| Expected term | 6 years | |||
| Expected volatility | 19 | % | ||
| Risk-free interest rate | 4.68 | % | ||
| Weighed average grant date fair value | $ | 7.67 | ||
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The total intrinsic value of options exercised was $198 thousand, $178 thousand, $1.1 million, and $1.9$1.1 million for the years 2010, 2009, 2008, and 2007,2008, respectively. The weighted average intrinsic value of stock options outstanding at year-end 20092010 was $732$195 thousand, and the similar value of exercisable options was $732$195 thousand. The expense pertaining to options vesting in the years 2010, 2009, and 2008 and 2007 was $5 thousand, $43 thousand, $55 thousand, and $187$55 thousand, respectively.
| 19. | FAIR VALUE MEASUREMENTS |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’sCompany's financial assets and financial liabilities that are carried at fair value.
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Recurring fair value measurements of financial instruments
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of year-end 20092010 and 2008,2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
| 2009 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | Inputs | Inputs | Inputs | Fair Value | ||||||||||||
| Trading account security | $ | — | $ | — | $ | 15,880 | $ | 15,880 | ||||||||
| Available-for-sale securities | ||||||||||||||||
| Municipal bonds and obligations | — | 74,784 | — | 74,784 | ||||||||||||
| Government guaranteed residential mortgage-backed securities | — | 13,031 | — | 13,031 | ||||||||||||
| Government-sponsored residential mortgage-backed securities | — | 184,245 | — | 184,245 | ||||||||||||
| Corporate bonds | — | 37,337 | — | 37,337 | ||||||||||||
| Trust preferred securities | — | 6,051 | 864 | 6,915 | ||||||||||||
| Other bonds and obligations | — | 5,470 | — | 5,470 | ||||||||||||
| Marketable equity securities | 1,411 | — | 1,152 | 2,563 | ||||||||||||
| Derivative assets | — | 3,267 | — | 3,267 | ||||||||||||
| Derivative liabilities | — | 13,447 | 273 | 13,720 | ||||||||||||
| 2008 | 2010 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| (In thousands) | Inputs | Inputs | Inputs | Fair Value | Inputs | Inputs | Inputs | Fair Value | ||||||||||||||||||||||||
| Trading account security | $ | — | $ | — | $ | 18,144 | $ | 18,144 | $ | - | $ | - | $ | 16,155 | $ | 16,155 | ||||||||||||||||
| Securities available for sale | 381 | 272,553 | 1,446 | 274,380 | ||||||||||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||||||||||||||
| Municipal bonds and obligations | - | 79,906 | - | 79,906 | ||||||||||||||||||||||||||||
| Government guaranteed residential mortgage-backed securities | - | 26,164 | - | 26,164 | ||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | - | 146,719 | - | 146,719 | ||||||||||||||||||||||||||||
| Corporate bonds | - | 18,290 | - | 18,290 | ||||||||||||||||||||||||||||
| Trust preferred securities | - | 19,637 | 218 | 19,855 | ||||||||||||||||||||||||||||
| Other bonds and obligations | - | 403 | - | 403 | ||||||||||||||||||||||||||||
| Marketable equity securities | 17,428 | - | 1,477 | 18,905 | ||||||||||||||||||||||||||||
| Derivative assets | — | 3,740 | — | 3,740 | - | 7,673 | - | 7,673 | ||||||||||||||||||||||||
| Derivative liabilities | — | 24,068 | — | 24,068 | - | 18,437 | 280 | 18,717 | ||||||||||||||||||||||||
| 2009 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | Inputs | Inputs | Inputs | Fair Value | ||||||||||||
| Trading account security | $ | - | $ | - | $ | 15,880 | $ | 15,880 | ||||||||
| Available-for-sale securities: | ||||||||||||||||
| Municipal bonds and obligations | - | 74,784 | - | 74,784 | ||||||||||||
| Government guaranteed residential mortgage-backed securities | - | 13,031 | - | 13,031 | ||||||||||||
| Government-sponsored residential mortgage-backed securities | - | 184,245 | - | 184,245 | ||||||||||||
| Corporate bonds | - | 37,337 | - | 37,337 | ||||||||||||
| Trust preferred securities | - | 6,051 | 864 | 6,915 | ||||||||||||
| Other bonds and obligations | - | 5,470 | - | 5,470 | ||||||||||||
| Marketable equity securities | 1,411 | - | 1,152 | 2,563 | ||||||||||||
| Derivative assets | - | 3,267 | - | 3,267 | ||||||||||||
| Derivative liabilities | - | 13,447 | 273 | 13,720 | ||||||||||||
Trading Security at Fair Value.The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued by the Company to a local nonprofit organization which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security, therefore, the security meets the definition of a Level 3 security.
Securities Available for Sale.AFS securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. AFS securities classified as Level 2 include certain agency mortgage-backed securities and investment grade-rated municipal bonds and corporate bonds.most of the Company’s debt securities. The pricing on Level 2 was primarily sourced from third party pricing services and is based on models that consider standard input factors such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’sbond's terms and condition, among other things. The Company holds one trust preferred security and two limited partnership securities in its AFS portfolio which are classified as Level 3. These securities’ fair value isvalues are based on unobservable issuer-provided financial information and discounted cash flow models derived from the underlying structured pool.
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Derivative Assets and Liabilities.The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformancenon-performance risk and the respective counterparty’s nonperformancenon-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformancenon-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.
Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2009,2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The Company enters into various commitments to originate residential mortgage loans for sale and commitments to sell residential mortgage loans. Such commitments are considered to be derivative financial instruments and are carried at estimated fair value on the consolidated balance sheets.
The estimated fair value of commitments to originate residential mortgage loans for sale is adjusted to reflect estimates for fall-out rates, associated servicing and origination costs. These assumptions are considered significant unobservable inputs resulting in a Level 3 classification. As of December 31, 2009,At year-end 2010, liabilities derived from commitments to originate residential mortgage loans for sale totaled $273$280 thousand. The estimated fair values of commitments to sell residential mortgage loans were calculated by reference to prices quoted by the Federal National Mortgage AssociationFNMA in secondary markets. These valuations result in a Level 2 classification. As of December 31, 2009,At year-end 2010, assets derived from commitments to sell residential mortgage loans totaled $305$267 thousand.
The table below presents the changes in Level 3 assets that were measured at fair value on a recurring basis for the year-endedyears ended 2010 and 2009.
| Assets | Liabilities | |||||||||||
| Trading | Securities | |||||||||||
| Account | Available | Derivative | ||||||||||
| (In thousands) | Security | for Sale | Liabilities | |||||||||
| Balance as of December 31, 2008 | $ | 18,144 | $ | 1,446 | $ | — | ||||||
| Unrealized loss recognized in other non-interest income | (2,264 | ) | — | (273 | ) | |||||||
| Unrealized gain included in accumulated other comprehensive loss | — | 570 | — | |||||||||
| Balance as of December 31, 2009 | $ | 15,880 | $ | 2,016 | $ | (273 | ) | |||||
| Unrealized gains (losses) relating to instruments still held at December 31, 2009 | $ | 880 | $ | (1,913 | ) | $ | — | |||||
| Assets | Liabilities | |||||||||||
| Trading | Securities | |||||||||||
| Account | Available | Derivative | ||||||||||
| (In thousands) | Security | for Sale | Liabilities | |||||||||
| Balance as of December 31, 2008 | $ | 18,144 | $ | 1,446 | $ | - | ||||||
| Unrealized loss recognized in other non-interest income | (2,264 | ) | - | (273 | ) | |||||||
| Unrealized gain included in accumulated other comprehensive loss | - | 570 | - | |||||||||
| Balance as of December 31, 2009 | 15,880 | 2,016 | (273 | ) | ||||||||
| Unrealized gain (loss) recognized in other non-interest income | 715 | - | (7 | ) | ||||||||
| Unrealized loss included in accumulated other comprehensive loss | - | (321 | ) | - | ||||||||
| Amortization of trading account security | (440 | ) | - | - | ||||||||
| Balance as of December 31, 2010 | $ | 16,155 | $ | 1,695 | $ | (280 | ) | |||||
| Unrealized gains (losses) relating to instruments still held at December 31, 2010 | $ | 1,595 | $ | (2,447 | ) | $ | - | |||||
| Unrealized gains (losses) relating to instruments still held at December 31, 2009 | $ | 880 | $ | (1,913 | ) | $ | - | |||||
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Non-recurring fair value measurements
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured on a non-recurring basis.
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| Year Ended | ||||||||||||||||
| December 31, 2010 | December 31, 2010 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | Inputs | Inputs | Inputs | Losses | ||||||||||||
| Assets | ||||||||||||||||
| Impaired loans | $ | - | $ | - | $ | 4,960 | $ | 1,512 | ||||||||
| Other real estate owned | - | - | 3,386 | 1,100 | ||||||||||||
| Mortgage servicing rights | - | - | 2,035 | 178 | ||||||||||||
| Total Assets | $ | - | $ | - | $ | 10,381 | $ | 2,790 | ||||||||
| Year Ended | ||||||||||||||||
| December 31, 2009 | December 31, 2009 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | Inputs | Inputs | Inputs | Losses | ||||||||||||
| Assets | ||||||||||||||||
| Impaired loans | $ | - | $ | - | $ | 23,473 | $ | 5,999 | ||||||||
| Other real estate owned | - | - | 30 | 227 | ||||||||||||
| Mortgage servicing rights | - | - | 1,620 | 144 | ||||||||||||
| Total Assets | $ | - | $ | - | $ | 25,123 | $ | 6,370 | ||||||||
Securities held to maturity.Held to maturity securities are recorded at amortized cost and are evaluated periodically for impairment. No impairments were recorded on securities held to maturity for the years ended December 31, 20092010 and 2008.2009. Held to maturity securities are fair valued using the same methodologies applied to the available for sale securities portfolio. Most securities in the held to maturity portfolio consist of economic development bonds and issues to local municipalities that are not actively traded and are priced using a discounted cash flows model. The Company views these as Level 3 pricing.
Restricted equity securities.The Company’s restricted equity securities balance is primarily composed of FHLBB stock having a carrying value of $21.0 million as of December 31, 2009.at year-end 2010. FHLBB stock is recorded at par and periodically evaluated for impairment. The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for joining the FHLBB was to obtain funding from the FHLBB and the purchase of stock in the FHLBB is a requirement for a member to gain access to funding. The Company purchases FHLBB stock proportional to the volume of funding received and views the purchases as a necessary long-term investment for the purposes of balance sheet liquidity and not for investment return.
The FHLBB announced that it has indefinitely suspendedreported positive net income for 2010 and reinstated its dividend payment beginning in the first quarter of 2009, and will continue the moratorium, put into effect during the fourth quarter of 2008, on all excess stock repurchases in an effort to help preserve capital. In addition, the FHLBB reported a net loss for the years ended December 31, 2009 and 2008. These factors were considered by the Company’s management when determining if other-than-temporary impairment exists with respect to the Company’s investment in FHLBB.2011. The Company also reviewed recent public filings, rating agency’s analysis which showed investment-grade ratings, capital position which exceeds all required capital levels, and other factors. As a result of the Company’s review for OTTI, management deemed the investment in the FHLBB stock not to be OTTI as of December 31, 2009 and it will continue to be monitored closely.at year-end 2010. There can be no assurance as to the outcome of management’s future evaluation of the Company’s investment in the FHLBB.FHLBB though it will continue to be monitored closely.
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Loans.Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Impaired loans totaling $56.9 million and $28.6 million were subject to nonrecurring fair value measurement at December 31, 2009 and 2008 respectively. Impaired loans with a carrying value of $29.9 million and $7.1 million were determined to require a valuation allowance based on estimated fair value totaling $6.4 million and $1.0 million at December 31, 2009 and 2008 respectively. For the years ended December 31, 2009 and 2008, losses relating to these impaired loans totaled $6 million and $1 million, respectively.
Loans held for sale.Loans originated and held for sale are carried at the lower of aggregate cost or market value. No fair value adjustments were recorded on loans held for sale during 2010 and 2009. The Company holds loans in the years ended December 31, 2009held for sale category for a period generally less than 3 months and 2008. At December 31, 2009 and 2008, carryingas a result fair value approximates faircarrying value.
Capitalized mortgage loan servicing rights.A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. Write-downs on capitalized mortgage loan servicing rights totaled $144 thousand for the year ended December 31, 2009. No write-downs were recorded for the year ended December 31, 2008.
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Other real estate owned (“OREO”).OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals. OREO properties totaled $30 thousand and $498 thousand at December 31, 2009 and 2008, respectively. Write-down on OREO properties held at year-end totaled $227 thousand and $9 thousand for the years ended December 31, 2009 and 2008, respectively.
Intangibles and Goodwill.The Company’s other intangible balance as of December 31, 2009at year-end 2010 totaled $14.4$11.4 million. Other intangibles include core deposit intangibles, insurance customer relationships, and non-compete agreements assumed by the Company as part of historical acquisitions. Other intangibles are initially recorded at fair value based on Level 3 data, such as internal appraisals and customized discounted criteria, and are amortized over their estimated lives on a straight-line or accelerated basis ranging from five to ten years. The Company considered the impact of recent adverse market events on the values of its other intangible assets and deemed the current amortized carrying value of these to be appropriate. No impairment was recorded on other intangible assets during the years ended December 31, 2009for 2010 and 2008.2009.
The Company’s Goodwill balance as of December 31,at year-end 2010 and 2009 and 2008 was $161.7 million and $161.2 million, respectively.million. The Company tests goodwill impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that impairment is possible. No impairments ofimpairment was recorded on goodwill were recognized by the Company for the years ended December 31, 20092010 and 2008.2009. See Note 8 —– Goodwill and Other Intangibles.
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Summary of estimated fair values of financial instruments
The estimated fair values, and related carrying amounts, of the Company’s financial instruments follow. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
| 2009 | 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| (In thousands) | Amount | Value | Amount | Value | ||||||||||||
Financial Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 32,608 | $ | 32,608 | $ | 44,798 | $ | 44,798 | ||||||||
| Trading security | 15,880 | 15,880 | 18,144 | 18,144 | ||||||||||||
| Securities available for sale | 324,345 | 324,345 | 274,380 | 274,380 | ||||||||||||
| Securities held to maturity | 57,621 | 58,567 | 25,872 | 26,729 | ||||||||||||
| Restricted equity securities | 23,120 | 23,120 | 23,120 | 23,120 | ||||||||||||
| Net loans | 1,929,842 | 1,833,404 | 1,984,244 | 1,994,103 | ||||||||||||
| Loans held for sale | 4,146 | 4,146 | 1,768 | 1,768 | ||||||||||||
| Capitalized mortgage servicing rights | 1,620 | 1,620 | 901 | 901 | ||||||||||||
| Accrued interest receivable | 8,498 | 8,498 | 8,995 | 8,995 | ||||||||||||
| Cash surrender value of life insurance policies | 36,904 | 36,904 | 35,668 | 35,668 | ||||||||||||
| Derivative assets | 3,267 | 3,267 | 3,740 | 3,740 | ||||||||||||
Financial Liabilities | ||||||||||||||||
| Total deposits | $ | 1,986,762 | $ | 2,007,774 | $ | 1,829,580 | $ | 1,836,921 | ||||||||
| Short-term debt | 83,860 | 83,860 | 23,200 | 23,200 | ||||||||||||
| Long-term Federal Home Loan Bank advances | 207,344 | 208,831 | 318,957 | 329,356 | ||||||||||||
| Other long-term debt | — | — | 17,000 | 16,683 | ||||||||||||
| Junior subordinated debentures | 15,464 | 9,462 | 15,464 | 13,403 | ||||||||||||
| Derivative liabilities | 13,720 | 13,720 | 23,868 | 23,868 | ||||||||||||
- 103 -
| 2010 | 2009 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| (In thousands) | Amount | Value | Amount | Value | ||||||||||||
| Financial Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 44,140 | $ | 44,140 | $ | 32,608 | $ | 32,608 | ||||||||
| Trading security | 16,155 | 16,155 | 15,880 | 15,880 | ||||||||||||
| Securities available for sale | 310,242 | 310,242 | 324,345 | 324,345 | ||||||||||||
| Securities held to maturity | 56,436 | 57,594 | 57,621 | 58,567 | ||||||||||||
| Restricted equity securities | 23,120 | 23,120 | 23,120 | 23,120 | ||||||||||||
| Net loans | 2,110,264 | 2,051,829 | 1,929,842 | 1,833,404 | ||||||||||||
| Loans held for sale | 1,043 | 1,043 | 4,146 | 4,146 | ||||||||||||
| Accrued interest receivable | 8,769 | 8,769 | 8,498 | 8,498 | ||||||||||||
| Cash surrender value of life insurance policies | 46,085 | 46,085 | 36,904 | 36,904 | ||||||||||||
| Derivative assets | 7,673 | 7,673 | 3,267 | 3,267 | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Total deposits | $ | 2,204,441 | $ | 2,215,307 | $ | 1,986,762 | $ | 2,007,774 | ||||||||
| Short-term debt | 47,030 | 47,030 | 83,860 | 83,860 | ||||||||||||
| Long-term Federal Home Loan Bank advances | 197,807 | 200,746 | 207,344 | 208,831 | ||||||||||||
| Junior subordinated debentures | 15,464 | 9,742 | 15,464 | 9,462 | ||||||||||||
| Derivative liabilities | 18,717 | 18,717 | 13,720 | 13,720 | ||||||||||||
Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.
Cash and cash equivalents.Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.
Restricted equity securities.Carrying value approximates fair value.value based on the redemption provisions of the issuers.
Cash surrender value of life insurance policies.Carrying value approximates fair value.
Loans, net.The carrying value of the loans in the loan portfolio is based on the cash flows of the loans discounted over their respective loan origination rates. The origination rates are adjusted for substandard and special mention loans to factor the impact of declines in the loan’s credit standing. The fair value of the loans is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.
Accrued interest receivable.Carrying value approximates fair value.
Deposits.The fair value of demand, non-interest bearing checking, savings and certain money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.
Borrowed funds.The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.
- 107 -
Junior subordinated debentures.The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.
Off-balance-sheet financial instruments.Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.
| 20. | OPERATING SEGMENTS |
The Company has two reportable operating segments, Banking and Insurance, which are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp, Inc. Banking includes the activities of Berkshirethe Bank and its subsidiaries, which provide retail and commercial banking, along with wealth management and investment services. Insurance includes the activities of Berkshire Insurance Group,BIG, which provides retail and commercial insurance services. The only other consolidated financial activity of the Company is the Parent, which consists of the transactions of Berkshire Hills Bancorp, Inc. Management fees for corporate services provided by the Bank to Berkshire Insurance GroupBIG 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.
- 104108 -
A summary of the Company’s operating segments is as follows:
| Total | ||||||||||||||||||||
| (In thousands) | Banking | Insurance | Parent | Eliminations | Consolidated | |||||||||||||||
Year ended December 31, 2009 | ||||||||||||||||||||
| Net interest income | $ | 70,673 | $ | — | $ | 13,911 | $ | (14,988 | ) | $ | 69,596 | |||||||||
| Provision for loan losses | 47,730 | — | — | — | 47,730 | |||||||||||||||
| Non-interest income | 15,764 | 12,255 | (29,290 | ) | 30,260 | 28,989 | ||||||||||||||
| Non-interest expense | 67,167 | 10,165 | 1,241 | (2 | ) | 78,571 | ||||||||||||||
| (Loss) income before income taxes | (28,460 | ) | 2,090 | (16,620 | ) | 15,274 | (27,716 | ) | ||||||||||||
| Income tax expense (benefit) | (12,015 | ) | 919 | (553 | ) | — | (11,649 | ) | ||||||||||||
| Net (loss) income | $ | (16,445 | ) | $ | 1,171 | $ | (16,067 | ) | $ | 15,274 | $ | (16,067 | ) | |||||||
| Average assets (in millions) | $ | 2,647 | $ | 33 | $ | 385 | $ | (397 | ) | $ | 2,683 | |||||||||
| Total | Total | |||||||||||||||||||||||||||||||||||||||
| (In thousands) | Banking | Insurance | Parent | Eliminations | Consolidated | Banking | Insurance | Parent | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Year ended December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 77,486 | $ | — | $ | 18,722 | $ | (20,468 | ) | $ | 75,740 | |||||||||||||||||||||||||||||
| Year ended December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||
| Net interest income (loss) | $ | 77,802 | $ | - | $ | (855 | ) | $ | - | $ | 76,947 | |||||||||||||||||||||||||||||
| Provision for loan losses | 4,580 | — | — | — | 4,580 | 8,526 | - | - | - | 8,526 | ||||||||||||||||||||||||||||||
| Non-interest income | 17,906 | 13,694 | 3,277 | (3,282 | ) | 31,595 | 19,968 | 11,193 | 15,089 | (15,091 | ) | 31,159 | ||||||||||||||||||||||||||||
| Non-interest expense | 60,448 | 10,450 | 801 | — | 71,699 | 70,925 | 9,380 | 1,426 | (2 | ) | 81,729 | |||||||||||||||||||||||||||||
| Income before income taxes | 30,364 | 3,244 | 21,198 | (23,750 | ) | 31,056 | 18,319 | 1,813 | 12,808 | (15,089 | ) | 17,851 | ||||||||||||||||||||||||||||
| Income tax expense (benefit) | 8,528 | 1,330 | (1,046 | ) | — | 8,812 | 4,298 | 745 | (930 | ) | - | 4,113 | ||||||||||||||||||||||||||||
| Net income | $ | 21,836 | $ | 1,914 | $ | 22,244 | $ | (23,750 | ) | $ | 22,244 | $ | 14,021 | $ | 1,068 | $ | 13,738 | $ | (15,089 | ) | $ | 13,738 | ||||||||||||||||||
| Average assets (in millions) | $ | 2,515 | $ | 32 | $ | 340 | $ | (336 | ) | $ | 2,551 | $ | 2,704 | $ | 32 | $ | 361 | $ | (359 | ) | $ | 2,738 | ||||||||||||||||||
| 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 | |||||||||||||||
| 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 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 | $ | 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, 2009 | ||||||||||||||||||||
| Net interest income | $ | 70,673 | $ | - | $ | 13,911 | $ | (14,988 | ) | $ | 69,596 | |||||||||
| Provision for loan losses | 47,730 | - | - | - | 47,730 | |||||||||||||||
| Non-interest income | 15,764 | 12,255 | (29,290 | ) | 30,260 | 28,989 | ||||||||||||||
| Non-interest expense | 67,167 | 10,165 | 1,241 | (2 | ) | 78,571 | ||||||||||||||
| (Loss) income before income taxes | (28,460 | ) | 2,090 | (16,620 | ) | 15,274 | (27,716 | ) | ||||||||||||
| Income tax expense (benefit) | (12,015 | ) | 919 | (553 | ) | - | (11,649 | ) | ||||||||||||
| Net (loss) income | $ | (16,445 | ) | $ | 1,171 | $ | (16,067 | ) | $ | 15,274 | $ | (16,067 | ) | |||||||
| Average assets (in millions) | $ | 2,647 | $ | 33 | $ | 385 | $ | (397 | ) | $ | 2,683 | |||||||||
| Total | ||||||||||||||||||||
| (In thousands) | Banking | Insurance | Parent | Eliminations | Consolidated | |||||||||||||||
| Year ended December 31, 2008 | ||||||||||||||||||||
| Net interest income | $ | 77,486 | $ | - | $ | 18,722 | $ | (20,468 | ) | $ | 75,740 | |||||||||
| Provision for loan losses | 4,580 | - | - | - | 4,580 | |||||||||||||||
| Non-interest income | 17,906 | 13,694 | 3,277 | (3,282 | ) | 31,595 | ||||||||||||||
| Non-interest expense | 60,448 | 10,450 | 801 | - | 71,699 | |||||||||||||||
| Income before income taxes | 30,364 | 3,244 | 21,198 | (23,750 | ) | 31,056 | ||||||||||||||
| Income tax expense (benefit) | 8,528 | 1,330 | (1,046 | ) | - | 8,812 | ||||||||||||||
| Net income | $ | 21,836 | $ | 1,914 | $ | 22,244 | $ | (23,750 | ) | $ | 22,244 | |||||||||
| Average assets (in millions) | $ | 2,515 | $ | 32 | $ | 340 | $ | (336 | ) | $ | 2,551 | |||||||||
- 105109 -
| 21. | CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY |
Condensed financial information pertaining only to the parent company,Parent, Berkshire Hills Bancorp, Inc., is as follows:
CONDENSED BALANCE SHEETS
| December 31, | ||||||||
| ( In thousands) | 2009 | 2008 | ||||||
Assets | ||||||||
| Cash due from Berkshire Bank | $ | 23,607 | $ | 46,529 | ||||
| Investment in subsidiaries | 370,011 | 389,982 | ||||||
| Other assets | 7,256 | 5,745 | ||||||
| Total assets | $ | 400,874 | $ | 442,256 | ||||
Liabilities and Stockholders’ Equity | ||||||||
| Accrued expenses payable | $ | 829 | $ | 1,367 | ||||
| Notes payable | — | 17,000 | ||||||
| Junior subordinated debentures | 15,464 | 15,464 | ||||||
| Stockholders’ equity | 384,581 | 408,425 | ||||||
| Total liabilities and stockholders’ equity | $ | 400,874 | $ | 442,256 | ||||
| December 31, | ||||||||
| ( In thousands) | 2010 | 2009 | ||||||
| Assets | ||||||||
| Cash due from Berkshire Bank | $ | 13,145 | $ | 23,607 | ||||
| Investment in subsidiaries | 381,431 | 370,011 | ||||||
| Other assets | 10,148 | 7,256 | ||||||
| Total assets | $ | 404,724 | $ | 400,874 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Accrued expenses | $ | 1,300 | $ | 829 | ||||
| Junior subordinated debentures | 15,464 | 15,464 | ||||||
| Stockholders' equity | 387,960 | 384,581 | ||||||
| Total liabilities and stockholders' equity | $ | 404,724 | $ | 400,874 | ||||
CONDENSED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
| Income: | ||||||||||||
| Dividends from subsidiaries | $ | 15,000 | $ | 20,500 | $ | 8,445 | ||||||
| Other | 984 | 27 | 113 | |||||||||
| Total income | 15,984 | 20,527 | 8,558 | |||||||||
| Interest expense | 1,089 | 1,778 | 2,227 | |||||||||
| Operating expenses | 1,241 | 801 | 775 | |||||||||
| Total expense | 2,330 | 2,579 | 3,002 | |||||||||
| Income before income taxes and equity in undistributed income (loss) of subsidiaries | 13,654 | 17,948 | 5,556 | |||||||||
| Income tax benefit | (553 | ) | (1,046 | ) | (1,064 | ) | ||||||
| Income before equity in undistributed income (loss) of subsidiaries | 14,207 | 18,994 | 6,620 | |||||||||
| Equity in undistributed (loss) income of subsidiaries | (30,274 | ) | 3,250 | 6,915 | ||||||||
| Net (loss) income | $ | (16,067 | ) | $ | 22,244 | $ | 13,535 | |||||
| Years Ended December 31, | ||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
| Income: | ||||||||||||
| Dividends from subsidiaries | $ | - | $ | 15,000 | $ | 20,500 | ||||||
| Other | 10 | 984 | 27 | |||||||||
| Total income | 10 | 15,984 | 20,527 | |||||||||
| Interest expense | 865 | 1,089 | 1,778 | |||||||||
| Operating expenses | 1,426 | 1,241 | 801 | |||||||||
| Total expense | 2,291 | 2,330 | 2,579 | |||||||||
| (Loss) income before income taxes and equity in undistributed income (loss) of subsidiaries | (2,281 | ) | 13,654 | 17,948 | ||||||||
| Income tax benefit | (930 | ) | (553 | ) | (1,046 | ) | ||||||
| (Loss) income before equity in undistributed income (loss) of subsidiaries | (1,351 | ) | 14,207 | 18,994 | ||||||||
| Equity in undistributed income (loss) of subsidiaries | 15,089 | (30,274 | ) | 3,250 | ||||||||
| Net income (loss) | $ | 13,738 | $ | (16,067 | ) | $ | 22,244 | |||||
- 106110 -
CONDENSED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net (loss) income | $ | (16,067 | ) | $ | 22,244 | $ | 13,535 | |||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||
| Equity in undistributed loss (income) of subsidiaries | 30,274 | (3,250 | ) | (6,915 | ) | |||||||
| Other, net | (678 | ) | (781 | ) | (1,615 | ) | ||||||
| Net cash provided by operating activities | 13,529 | 18,213 | 5,005 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Investment in insurance subsidiary | (1,400 | ) | — | — | ||||||||
| Investment in bank subsidiary | — | (32,500 | ) | — | ||||||||
| Net cash paid for Factory Point acquisition | — | — | (12,665 | ) | ||||||||
| Purchase of securities | (524 | ) | (300 | ) | (120 | ) | ||||||
| Net cash used by investing activities | (1,924 | ) | (32,800 | ) | (12,785 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from long-term debt | — | — | 20,000 | |||||||||
| Repayment of long-term debt | (17,000 | ) | (18,000 | ) | — | |||||||
| Proceeds from issuance of preferred stock and warrant | — | 40,000 | — | |||||||||
| Redemption of preferred stock and warrant | (41,040 | ) | — | — | ||||||||
| Net proceeds from common stock issuance | 32,365 | 38,521 | — | |||||||||
| Net proceeds from reissuance of treasury stock | 344 | 3,508 | 4,284 | |||||||||
| Treasury stock purchased | — | (4,880 | ) | (7,822 | ) | |||||||
| Preferred stock cash dividends paid | (806 | ) | — | — | ||||||||
| Common stock cash dividends paid | (8,390 | ) | (6,837 | ) | (5,398 | ) | ||||||
| Net cash (used) provided by financing activities | (34,527 | ) | 52,312 | 11,064 | ||||||||
| Net change in cash and cash equivalents | (22,922 | ) | 37,725 | 3,284 | ||||||||
| Cash and cash equivalents at beginning of year | 46,529 | 8,804 | 5,520 | |||||||||
| Cash and cash equivalents at end of year | $ | 23,607 | $ | 46,529 | $ | 8,804 | ||||||
| Years Ended December 31, | ||||||||||||
| (In thousands) | 2010 | 2009 | 2008 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 13,738 | $ | (16,067 | ) | $ | 22,244 | |||||
| Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: | ||||||||||||
| Equity in undistributed (income) loss of subsidiaries | (15,089 | ) | 30,274 | (3,250 | ) | |||||||
| Other, net | 679 | (678 | ) | (781 | ) | |||||||
| Net cash (used) provided by operating activities | (672 | ) | 13,529 | 18,213 | ||||||||
| Cash flows from investing activities: | ||||||||||||
| Investment in insurance subsidiary | - | (1,400 | ) | - | ||||||||
| Investment in bank subsidiary | - | - | (32,500 | ) | ||||||||
| Purchase of securities | (225 | ) | (524 | ) | (300 | ) | ||||||
| Net cash used by investing activities | (225 | ) | (1,924 | ) | (32,800 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Repayment of long-term debt | (1,580 | ) | (17,000 | ) | (18,000 | ) | ||||||
| Proceeds from issuance of preferred stock and warrant | - | - | 40,000 | |||||||||
| Redemption of preferred stock and warrant | - | (41,040 | ) | - | ||||||||
| Net proceeds from common stock issuance | - | 32,365 | 38,521 | |||||||||
| Net proceeds from reissuance of treasury stock | 1,004 | 344 | 3,508 | |||||||||
| Treasury stock purchased | - | - | (4,880 | ) | ||||||||
| Preferred stock cash dividends paid | - | (806 | ) | - | ||||||||
| Common stock cash dividends paid | (8,989 | ) | (8,390 | ) | (6,837 | ) | ||||||
| Net cash (used) provided by financing activities | (9,565 | ) | (34,527 | ) | 52,312 | |||||||
| Net change in cash and cash equivalents | (10,462 | ) | (22,922 | ) | 37,725 | |||||||
| Cash and cash equivalents at beginning of year | 23,607 | 46,529 | 8,804 | |||||||||
| Cash and cash equivalents at end of year | $ | 13,145 | $ | 23,607 | $ | 46,529 | ||||||
- 107111 -
| 22. | QUARTERLY DATA (UNAUDITED) |
Quarterly results of operations were as follows:
| 2009 | 2008 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fourth | Third | Second | First | Fourth | Third | Second | First | Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and dividend income | $ | 28,371 | $ | 28,460 | $ | 28,765 | $ | 29,880 | $ | 32,762 | $ | 33,092 | $ | 32,834 | $ | 34,523 | $ | 28,369 | $ | 28,463 | $ | 27,963 | $ | 27,482 | $ | 28,371 | $ | 28,460 | $ | 28,765 | $ | 29,880 | ||||||||||||||||||||||||||||||||
| Interest expense | 10,375 | 11,295 | 12,041 | 12,169 | 13,292 | 13,763 | 14,187 | 16,229 | 8,274 | 8,779 | 9,092 | 9,185 | 10,375 | 11,295 | 12,041 | 12,169 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | 17,996 | 17,165 | 16,724 | 17,711 | 19,470 | 19,329 | 18,647 | 18,294 | 20,095 | 19,684 | 18,871 | 18,297 | 17,996 | 17,165 | 16,724 | 17,711 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-interest income | 4,652 | 7,260 | 8,405 | 8,672 | 6,377 | 7,235 | 8,511 | 9,472 | 7,783 | 6,915 | 7,963 | 8,498 | 4,652 | 7,260 | 8,405 | 8,672 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | 22,648 | 24,425 | 25,129 | 26,383 | 25,847 | 26,564 | 27,158 | 27,766 | 27,878 | 26,599 | 26,834 | 26,795 | 22,648 | 24,425 | 25,129 | 26,383 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for loan losses | 38,730 | 4,300 | 2,200 | 2,500 | 1,400 | 1,250 | 1,105 | 825 | 2,000 | 2,000 | 2,200 | 2,326 | 38,730 | 4,300 | 2,200 | 2,500 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-interest expense | 21,196 | 18,944 | 19,978 | 18,453 | 17,256 | 17,737 | 18,632 | 18,074 | 21,415 | 20,094 | 20,028 | 20,192 | 21,196 | 18,944 | 19,978 | 18,453 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Loss) income before income taxes | (37,278 | ) | 1,181 | 2,951 | 5,430 | 7,191 | 7,577 | 7,421 | 8,867 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | (13,075 | ) | (741 | ) | 620 | 1,547 | 1,985 | 2,301 | 1,708 | 2,818 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | $ | (24,203 | ) | $ | 1,922 | $ | 2,331 | $ | 3,883 | $ | 5,206 | $ | 5,276 | $ | 5,713 | $ | 6,049 | |||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 4,463 | 4,505 | 4,606 | 4,277 | (37,278 | ) | 1,181 | 2,951 | 5,430 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 893 | 1,081 | 1,198 | 941 | (13,075 | ) | (741 | ) | 620 | 1,547 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 3,570 | $ | 3,424 | $ | 3,408 | $ | 3,336 | $ | (24,203 | ) | $ | 1,922 | $ | 2,331 | $ | 3,883 | |||||||||||||||||||||||||||||||||||||||||||||||
| Less: Preferred stock dividends and accretion | — | — | 393 | 637 | — | — | — | — | - | - | - | - | - | - | 393 | 637 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Deemed dividend from stock repayment | — | — | 2,954 | — | — | — | — | — | - | - | - | - | - | - | 2,954 | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income available to common stockholders | $ | (24,203 | ) | $ | 1,922 | $ | (1,016 | ) | $ | 3,246 | $ | 5,206 | $ | 5,276 | $ | 5,713 | $ | 6,049 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) available to common stockholders | $ | 3,570 | $ | 3,424 | $ | 3,408 | $ | 3,336 | $ | (24,203 | ) | $ | 1,922 | $ | (1,016 | ) | $ | 3,246 | ||||||||||||||||||||||||||||||||||||||||||||||
| Average diluted common shares outstanding (thousands) | 13,817 | 13,857 | 12,946 | 12,247 | 11,892 | 10,400 | 10,384 | 10,457 | 13,934 | 13,893 | 13,894 | 13,858 | 13,817 | 13,857 | 12,946 | 12,247 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Basic (loss) earnings per common share | $ | (1.75 | ) | $ | 0.14 | $ | (0.08 | ) | $ | 0.27 | $ | 0.44 | $ | 0.51 | $ | 0.55 | $ | 0.58 | ||||||||||||||||||||||||||||||||||||||||||||||
| Diluted (loss) earnings per common share | $ | (1.75 | ) | $ | 0.14 | $ | (0.08 | ) | $ | 0.27 | $ | 0.44 | $ | 0.51 | $ | 0.55 | $ | 0.58 | ||||||||||||||||||||||||||||||||||||||||||||||
| Basic earnings (loss) per common share | $ | 0.26 | $ | 0.25 | $ | 0.25 | $ | 0.24 | $ | (1.75 | ) | $ | 0.14 | $ | (0.08 | ) | $ | 0.27 | ||||||||||||||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) per common share | $ | 0.26 | $ | 0.25 | $ | 0.25 | $ | 0.24 | $ | (1.75 | ) | $ | 0.14 | $ | (0.08 | ) | $ | 0.27 | ||||||||||||||||||||||||||||||||||||||||||||||
In 2010, asset yields and funding costs continued to decline throughout the year due to the impact of the ongoing low interest rate environment, including record low long-term mortgage interest rates recorded in October. The Company reduced its funding costs more than the decrease in earning asset yields, and as a result the net interest spread improved throughout the year, and the net interest margin improved in most quarters as well. The average balance of earning assets declined in the first quarter following the recordation of loan charge-offs at the end of 2009. Average earning assets increased in subsequent quarters due primarily to loan growth, reflecting the benefit of higher balances and margins, quarterly net interest income improved throughout the year. Non-interest income continued to include the benefit of seasonal insurance contingency revenues in the first half of the year, although this contingency income was down from the prior year due to industry conditions. Non-interest income increased in the final quarter of 2010 due to volume related growth in banking fees for deposit, loan, and interest rate swap services. The quarterly loan loss provision and non-interest expense were generally flat throughout the year, except that fourth quarter non-interest expense increased including merger and acquisition related costs, along with other costs related to the Company’s expansion. The quarterly effective tax rate was 22% in the first quarter, peaking at 26% due to the improving earnings outlook in the second quarter, and declining to 20% in the final quarter due to proportionately higher tax preference items. Net income increased in every quarter in 2010, primarily reflecting the ongoing growth in net interest income.
2009 quarterly interest income and expense declined due to the ongoing impact of near-zero short term interest rates. Net interest income declined in the first half of the year, due to pressure on the net interest margin, with earning asset yields falling due to repricings and refinancings while deposit costs were affected by market pricing floors. Net interest income and the margin began increasing in the second half of the year as commercial loan growth improved and loan and deposit pricing strategies were adjusted, including the use of more interest rate floors in new loan originations. Non-interest income included the seasonal benefit of contingent insurance revenues in the first half of the year. It included a $1.0 million credit for a merger termination fee in the second quarter and a $2.0 million charge in the fourth quarter for the prepayment of FHLBB borrowings. The loan loss provision continued to increase in 2009 as nonperformingnon-performing assets grew, and then was charged for $38.7 million in the fourth quarter as an intensive review of performing assets led to loan restructurings and charge-offs primarily on commercial loans. Non-interest expense increased primarily due to higher FDIC insurance expense, including a $1.2 million special industry assessment in the second quarter. Additionally, $2.0 million in extra expense was recorded in the fourth quarter related to the costs of the loan initiative and other initiatives to assess condition and improve future profitability. The Company entered the year with a year-to-date effective tax rate near 30%, but it decreased to 15% by the third quarter due to lower profitability, and then increased to a benefit of 42% for the year due to the pre-tax loss and carryback benefits. Income available to stockholders was reduced by dividends on preferred stock issued to the U.S. Treasury. This stock was redeemed in the second quarter, and the Company recorded a non-cash deemed dividend which had no impact on total stockholders’ equity. Results per common share were also reduced by the additional common shares from the October 2008 and May 2009 common stock offerings.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On February 24, 2011, the Company's Audit Committee dismissed Wolf & Company, P.C. ("Wolf & Company") as the Company's principal accountants for the fiscal year ending December 31, 2011, and any quarterly periods therein. The Company's Audit Committee participated in and approved the decision to change its independent registered public accounting firm. Such dismissal will become effective upon completion by Wolf & Company of its audit of the consolidated financial statements of the Company as of and for the year ended December 31, 2010, and the filing of the related Form 10-K, and the Company’s filing with the U.S. Department of Housing and Urban Development.
The audit reports of Wolf & Company on the consolidated financial statements of the Company as of and for the years ended December 31, 2009 and 2008 did not, and the audit report of Wolf & Company on the consolidated financial statements for the year ended December 31, 2010 does not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified, or expected to be modified or qualified, as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2010 and 2009 and the subsequent interim period through February 24, 2011, there were no: (1) disagreements with Wolf & Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Wolf & Company’s satisfaction, would have caused Wolf & Company to make reference in connection with its opinion to the subject matter, or (2) reportable events under Item 304(a)(1)(v) of Regulation S-K.
On February 24, 2011, the Company engaged PricewaterhouseCoopers LLP (“PwC”) as the Company's new principal accountants for the fiscal year ending December 31, 2011. The engagement was approved by the Company's Audit Committee. During the fiscal years ended December 31, 2010 and 2009, and the subsequent interim period prior to the engagement of PwC, the Company did not consult with PwC, regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, has 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”) as of December 31, 2009.year-end 2010. Based upon their evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of that date, 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 most recent fiscal quarter 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 report on the Company’s internal control over financial reporting are contained in “Item 8 —– Financial Statements and Supplementary Data” in this annual report in Form 10-K.
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ITEM 9B. OTHER INFORMATION
None.
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PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
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’s Proxy Statement for the 20102011 Annual Meeting of Stockholders (“Proxy Statement”) is incorporated by reference.
The following table sets forth certain information regarding the executive officers of the Company.
| Name | Age | Position | ||||
| Michael P. Daly | 49 | President and Chief Executive Officer | ||||
| Kevin P. Riley | 51 | Executive Vice President, | ||||
| Michael J. Oleksak | 52 | Executive Vice President, | ||||
| Richard M. Marotta | 52 | Executive Vice President and Chief Risk Officer | ||||
| Sean A. Gray | ||||||
| Linda A. Johnston | 58 | Executive Vice President, Human Resources |
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The executive officers are elected annually and hold office until their successors have been elected and qualified or until they are removed or replaced. Mr. Daly is employed pursuant to a three-year employment agreement which renews automatically if not otherwise terminated pursuant to its terms.
BIOGRAPHICAL INFORMATION
Michael P. Dalyhas served as President and Chief Executive Officer since October 2002. Before these appointments, Mr. Daly served as Executive Vice President and Senior Loan Officer of the Bank. He has been an employee since 1986. He has served as a Director of the Company and the Bank since 2002.
Kevin P. Rileyhas served as Executive Vice President, Chief Financial Officer, and Treasurer since joining the Company in August 2007. Mr. Riley also manages the Information Technology and Deposit Operations departments, and he also serves as Secretary of the Company.Project Management departments. Prior to joining the Company, Mr. Riley was Executive Vice President for Client Information and Relationship Management with KeyCorp. Previously from 1996 to 2002, he served as Executive Vice President and Chief Financial Officer of KeyBank National Association.
Michael J. Oleksakhas served as Executive Vice President, of Commercial Banking since January 2007. Mr. Oleksak’s responsibilities include commercial lending, asset based lending, small business lending, commercial deposit and cash management services, commercial financial derivatives products, and commercial insurance services. Mr. Oleksak joined the Company in February 2006 as Regional President for the Pioneer Valley. Mr. Oleksak was previously Senior Vice President and Co-Regional Executive of Western Massachusetts at TD Banknorth.
Richard M. Marottajoined the Company as Executive Vice President and Chief Risk Officer in January, 2010. He is responsible for overall risk management, loan workout, loan review, loan documentation, internal audit, and compliance. Mr. Marotta was previously Executive Vice President and Group Head, Asset Recovery at KeyBank. He has extensive career experience in credit and risk management, including asset based lending portfolios.
Sean A. Gray was promoted to Executive Vice President, of Integrated ServicesRetail Banking in July, 2009. He is responsible for the Company’s insurance and wealth management business lines. Mr. Farrell2010, having previously served as a member of the Company’s Board of Directors since 2005. Previously, he was a Division President with TJX Companies, a prominent apparel and home fashions retailer.
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Linda A. Johnston was promoted to Executive Vice President, Human Resources in 2010, having previously served as Senior Vice President since November 2002. Ms. Johnston is responsible for overseeing and directing the Company’s human resources functions including compensation and benefits, performance and talent management, training, recruitment, development, executive compensation, and initiatives and practices that support the Company’s strategic direction. Ms. Johnston serves as a key advisor to the Compensation Committee of the Company’s Board of Directors and has been part of the Company for more than 27 years.
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 committeeAudit Committee and the audit committeeAudit 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 herein by reference.
For information regarding the compensation committee report,Compensation Committee Report, the section captioned “Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER 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 knows of no arrangements, including any pledge by any person of securities of Berkshire, the operation of which may at a subsequent date result in a change in control of the registrant.
| (d) | Equity Compensation Plan Information | ||
| Number of securities | ||||||||||||
| Number of securities | remaining available for | |||||||||||
| to be issued upon | Weighted-average | future issuance under | ||||||||||
| exercise of | exercise price of | equity compensation plans | ||||||||||
| outstanding options, | outstanding options, | (excluding securities | ||||||||||
| Plan category | warrants and rights | warrants and rights | reflected in the first column) | |||||||||
| Equity compensation plans approved by security holders | 430,000 | $ | 23.35 | 226,000 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 430,000 | $ | 23.35 | 226,000 | ||||||||
The following table sets forth information, as of December 31, 2010, about Company common stock that may be issued upon exercise of options under stock-based benefit plans maintained by the Company.
| Number of securities | ||||||||||||
| Number of securities | remaining available for | |||||||||||
| to be issued upon | Weighted-average | future issuance under | ||||||||||
| exercise of | exercise price of | equity compensation plans | ||||||||||
| outstanding options, | outstanding options, | (excluding securities | ||||||||||
| Plan category | warrants and rights | warrants and rights | reflected in the first column) | |||||||||
| Equity compensation plans approved by security holders | 152,000 | $ | 24.41 | 87,000 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 152,000 | $ | 24.41 | 87,000 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the sections captioned “Other Information Relating to Directors and Executive Officers —Procedures–Procedures Governing Related Persons Transactions” and “Transactions with Related Persons” in the Proxy Statement.
Information regarding director independence is incorporated herein by reference to the section captioned “Proposals 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 “Proposals to be Voted on by Stockholders —– Proposal 3 —5 – Ratification of the Independent Registered Public Accounting Firm” in the Proxy Statement.
PART IV
| [1] | Financial Statements |
| · | Report of Independent Registered Public Accounting Firm | |
| · | Consolidated Balance Sheets as of December 31, | ||
| · | Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 | ||
| · | Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2010, 2009 | ||
| · | Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 | ||
| · | Notes to Consolidated Financial Statements |
The consolidated financial statements required to be filed in our Annual Report on Form 10-K are included in Part II, Item 8 hereof.
| [2] | Financial Statement Schedules | ||
All financial statement schedules are omitted because the required information is either included or is not applicable.
[3] Exhibits
| 2.1 | Agreement and Plan of Merger by and between Berkshire Hills Bancorp, Inc. and Rome Bancorp, Inc. (1) |
| 2.2 | Agreement and Plan of Merger by and between Berkshire Hills Bancorp, Inc. and Legacy Bancorp, Inc. (2) |
| 3.1 | Certificate of Incorporation of Berkshire Hills Bancorp, Inc. | |||
| 3.2 | Certificate of Designations for the Series A Preferred Stock | |||
| 3.3 | Bylaws of Berkshire Hills Bancorp, Inc. | |||
| 4.1 | 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 | Amended and Restated Employment Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Michael P. Daly | |||
| 10.2 | Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Kevin P. Riley | |||
| 10.3 | Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Sean A. Gray | |||
| 10.4 | Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Michael J. Oleksak | |||
| 10.5 | Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and | |||
| 10.6 | ||||
| 10.7 | Amended and Restated Supplemental Executive Retirement Agreement between Berkshire Bank and Michael P. Daly | |||
| 10.8 | *Amended and Restated Berkshire Hills Bancorp, Inc. 2003 Equity Compensation Plan | |||
| 10.9 | *Form of Berkshire Bank Employee Severance Compensation Plan | |||
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| 10.10 | *Berkshire Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan |
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| 10.11 | *Woronoco Bancorp, Inc. 1999 Stock-Based Incentive Plan | |||
| 10.12 | *Woronoco Bancorp, Inc. 2001 Stock Option Plan | |||
| 10.13 | *Woronoco Bancorp, Inc. 2004 Equity Compensation Plan | |||
| 10.14 | Factory Point Bancorp, Inc. 1999 Non-Employee Directors Stock Option Plan, as amended and restated | |||
| 10.15 | Factory Point Bancorp, Inc. 1999 Stock Incentive Plan | |||
| 10.16 | Factory Point Bancorp, Inc. 2004 Stock Incentive Plan, as amended and restated | |||
| 10.17 | ||||
Form of Split Dollar Agreement entered into with Michael P. Daly, Kevin P. Riley, Michael J. Oleksak, Sean A. Gray, Richard M. Marotta and Linda A. Johnston (15) | ||||
| 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 | |||
| 23.0 | Consent of Wolf & Company, P.C. | |||
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | |||
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |||
| 32.1 | Section 1350 Certification of Chief Executive Officer | |||
| 32.2 | Section 1350 Certification of Chief Financial Officer |
*Management contract or compensatory plan, contract or arrangement.
| (1) | Incorporated herein by reference from the Exhibits to the Form 8-K filed on October 12, 2010. |
| (2) | Incorporated herein by reference from the Exhibits to the Form 8-K filed on December 22, 2010. |
| (3) | Incorporated herein by reference from the Exhibits to the Form S-1, Registration Statement and amendments thereto, initially filed on March 10, 2000, Registration No. 333-32146. |
| (4) | Incorporated herein by reference from the Exhibits to the Form 8-K as filed on December 23, 2008. |
| (5) | Incorporated herein by reference from the Exhibits to the Form 8-K as filed on February 29, 2008. |
| (6) | Incorporated herein by reference from the Exhibits to the Form 8-K as filed on January 6, 2009. |
| (7) | Incorporated herein by reference from the Exhibits to the Form |
| (8) | Incorporated herein by reference from the Exhibits to Form 10-K as filed on March 16, 2009. |
| (9) | Incorporated herein by reference from the Appendix to the Proxy Statement as filed on April 3, 2008. |
| (10) | Incorporated herein by reference from the Appendix to the Proxy Statement as filed on December 7, 2000. |
| (11) | Incorporated herein by reference from the Proxy Statement as filed on March 20, 2000 by Woronoco Bancorp, Inc. |
| (12) | Incorporated herein by reference from the Proxy Statement as filed on March 12, 2001 by Woronoco Bancorp, Inc. |
| (13) | Incorporated herein by reference from the Proxy Statement as filed on March 22, 2004 by Woronoco Bancorp, Inc. |
| (14) | Incorporated herein by reference from the |
| (15) | Incorporated herein by reference from the Exhibit to the Form 8-K as filed on January 19, 2011. |
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 16, | By: | /s/ Michael P. Daly | ||
| Michael P. Daly | ||||
| President and Chief Executive Officer | ||||
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 and Chief Executive Officer | March 16, 2011 | ||
| Michael P. Daly | (principal executive officer) | |||
/s/ Kevin P. Riley | Executive Vice President, and Treasurer | March 16, 2011 | ||
| Kevin P. Riley | (principal financial and accounting officer) | |||
/s/ Lawrence A. Bossidy | Non-Executive Chairman | March 16, | ||
| Lawrence A. Bossidy | ||||
/s/ Robert M. Curley | Director | March 16, | ||
| Robert M. Curley | ||||
/s/ John B. Davies | Director | March 16, | ||
| John B. Davies | ||||
/s/ Rodney C. Dimock | Director | March 16, | ||
| Rodney C. Dimock | ||||
/s/ Susan M. Hill | Director | March 16, | ||
| Susan M. Hill | ||||
/s/ Cornelius D. Mahoney | Director | March 16, | ||
| Cornelius D. Mahoney | ||||
/s/ Catherine B. Miller | Director | March 16, | ||
| Catherine B. Miller | ||||
/s/ David E. Phelps | Director | March 16, | ||
| David E. Phelps | ||||
/s/ D. Jeffrey Templeton | Director | March 16, | ||
| D. Jeffrey Templeton | ||||
/s/ Corydon L. Thurston | Director | March 16, | ||
| Corydon L. Thurston |
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