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.
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/ Kevin P. Riley | | |
Michael P. Daly | | Kevin P. Riley | | |
President and Chief Executive Officer | | Executive Vice President, and Chief Financial Officer | | and |
March 12, 201016, 2011 | | Treasurer |
| | March 12, 2010 | | 16, 2011 |
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
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.
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.
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.
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 | ) |
(continued) | | 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.
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.
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.
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.
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.
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.
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.
Mortgage
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.
Transfers of financial assets
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.
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.”
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.
Recent accounting pronouncements
The
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.
FASB ASC Topic 260, “Earnings Per Share.”No. 2010-06, “Improving Disclosures about Fair Value Measurements”. New authoritative accounting guidance addresses whether instruments grantedunder ASU No. 2010-06 provides guidance that requires more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in share-based payment transactions are participating securities prior to vestingLevel 3 fair value measurements, and therefore, need to be included in(4) the earnings allocation in computing earnings per share under the two-class method.transfers between Levels 1, 2, and 3. This accounting guidance became effective for the Company on January 1, 20092010 and did not have an impact on the Company’s financial statements.
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FASB ASC Topic 320, “Investments — Debt and Equity Securities.”New authoritative accounting guidance (i) changes existing guidance for determining whether an impairment is other than temporary for debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale debt securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of this accounting guidance on June 30, 2009. It did not significantly impact the Company’s financial statements. Please see Note 5- Securities for additional information.
FASB ASC Topic 805, “Business Combinations.”New authoritative accounting guidance became applicable to the Company’s accounting for business combinations closing on or after January 1, 2009. ASC Topic 805 applies to all transactions and other events in which one entity obtains control over one or more other businesses. ASC Topic 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC Topic 805 requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under prior accounting guidance. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, “Contingencies.” This accounting guidance will change the Company’s accounting treatment for business combinations on a prospective basis, and could have a material impact on the Company’s financial statements.
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.
Further new authoritative accounting guidance under ASC Topic 810 amends prior guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The new authoritative accounting guidance under ASC Topic 810 is effectivedisclosures as of the beginningend of each reporting entity’s first annuala reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, andare effective for interim and annual reporting periods thereafter,ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and is not expectedannual reporting periods beginning on or after December 15, 2010. The adoption of this guidance required significant additional loan disclosures included in Notes 1 and 6 to have a significant impact on the Company’s December 31, 2010 financial statements.
FASB ASC Topic 815, “Derivatives and Hedging.” New authoritative accounting guidance amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial statements. To meet those objectives, the new authoritative accounting guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This accounting guidance became effective for the Company on January 1, 2009 and did not have a significant impact on the Company’s financial statements. Please see Note 14 — Derivative Instruments and Hedging Activities for additional information.FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”New authoritative accounting guidance provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. ASC Topic 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company adopted this accounting guidance on June 30, 2009 and it did not significantly impact the Company’s financial statements.
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Further new authoritative accounting guidance under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. This accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This accounting guidance was adopted on September 30, 2009 and did not have a significant impact on the Company’s financial statements.
FASB ASC Topic 855, “Subsequent Events.”New authoritative accounting guidance under ASC Topic 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. This accounting guidance became effective for the Company’s financial statements for periods ending after June 15, 2009 and did not have a significant impact on the Company’s financial statements.
FASB ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. This accounting guidance is effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.
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.
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.
On September 21, 2007, the Company completed its acquisition of Factory Point Bancorp, Inc. and its subsidiary, Factory Point National Bank of Manchester Center, Vermont (collectively “Factory Point”) for $79.4 million, including the assumption of Factory Point stock options. Under the terms of the agreement, the Company issued 1,913,353 shares of the Company’s common stock and paid $16.0 million in cash in exchange for all outstanding Factory Point shares and also assumed all outstanding Factory Point stock options. Concurrent with the merger of Berkshire Hills Bancorp and Factory Point Bancorp, the Bank and Factory Point National Bank merged, with the Bank surviving. The results of operations for Factory Point are included in the financial statements since the acquisition date.
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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
During the second quarter of 2008, the
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.
5. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
A
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 | |
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 | ) |
| | | | | | | | |
The income tax benefit attributable to net realized losses in 2009 2008, and 20072008 was $1 thousand and $7 thousand, and $167 thousand, respectively.
- 81 -
Year-end securitiesSecurities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | |
- 82 -
| | 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:
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.
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.
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 | |
| | | | | | |
Activity(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 | |
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 | |
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 | |
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 | |
Additional | | 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 | |
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:
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
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.
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.
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.
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.
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.
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.
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 | |
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.
- 85 -
8. GOODWILL AND OTHER INTANGIBLES
Goodwill
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.
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.
At December 31, 2009,
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.
- 86 -
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 | |
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 | |
| | | | | | |
11. BORROWINGS & JUNIOR SUBORDINATED DEBENTURES(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.
At year-end 2009, the Company no longer had any outstanding unsecured lines of credit, while at year-end 2008, the Company had a $15.0 million unsecured line of credit. The interest on this line of credit was variable, based on either prime or overnight LIBOR rates. There was no outstanding balance on the line of credit at year-end 2008. In the second half of 2009 Berkshire prepaid $17 million at par of long-term unsecured notes at a weighted average rate of 1.65%. These notes had approximately one year left until maturity and the company determined these borrowings no longer provided a business purpose and lower cost funding was available through other resources. At year end 2008, these notes totaled $17 million with a weighted average cost of 1.98%.
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.
During 2009, Berkshire prepaid or modified $105 million of FHLBB advances that no longer matched the Bank’s asset liability management strategies. In the fourth quarter of 2009 Berkshire modified $30 million of high cost fixed rate debt into lower cost FHLBB borrowings with longer durations. The Bank also extinguished $45 million of high rate advances that matured in approximately one year that did not offer any long term interest rate risk protection. Finally, during the second quarter the Bank prepaid $30 million of adjustable rate advances at par that were no longer needed as vehicles to manage the Bank’s cash flow hedging program.
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 | |
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 | |
| | | | | | |
At December 31, 2009, the Company had a $1.1 million net operating loss carryforward for federal income tax purposes. (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.
14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 | ) |
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.
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 | ) |
In the first quarter of 2009, the Company initiated and subsequently terminated two interest rate swaps with notional amounts totaling $30 million that were hedging FHLBB borrowings. In reviewing the then current interest rate environment, the | | 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.
Unrealized losses recorded inaccumulated other comprehensive loss totaled $6.4 million at year-end 2010. Of this loss, $15.3 million was attributable to accumulated losses on interest rate swaps designated as cash flow hedges, for the year 2008 totaled $16.8 million, before related incomenet of deferred tax benefits of $6.9$6.4 million, and $4.0 million was attributable to accumulated gains on available-for-sale securities, net of deferred tax expenses of $1.5 million. Interest expense recognized
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
In the second quarter of 2008, the Company elected the fair value option on a $15.0 million economic development bond bearing a fixed rate of 5.09%. The bond is classified as a trading security.
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.
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 | |
15. OTHER COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ACTIVITIES | | 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.
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.
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.
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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 | | |
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.
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 | ) |
| | | | | | |
17. EMPLOYEE BENEFIT PLANS(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
In April 2008, the stockholders of the Company voted to terminate the 2001 Stock-Based Incentive Plan while simultaneously increasing by 200,000 the number of shares of common stock that the Company may issue under the 2003 Equity Compensation Plan. These amendments represented a net increase of 118,000 shares available to grant stock and option awards.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.
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
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.
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.
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 | ) | | $ | - | |
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.
In February 2009, the
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.
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.
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 | |
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| | 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.
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.
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 | |
21. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
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 | |
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 | |
22. QUARTERLY DATA (UNAUDITED)
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.
2008 quarterly interest income and expense declined due to declining interest rates, but net interest income increased and the net interest margin reached the highest level since 2003, including the benefit of improved pricing spreads between loans and deposits. Non-interest income included the seasonal benefit of contingent insurance revenues in the first half of the year. Non-interest expense included $0.7 million in charges in the second quarter related to severance payments and reversals of deferred loan costs and late fees receivable. Fourth quarter non-interest expense included the benefit of lower incentive compensation accruals. Second quarter income tax expense included the benefit of a credit resulting from the reduction in the valuation reserve for deferred state tax assets due to higher taxable income in Berkshire Bank. Fourth quarter earnings per share reflected the issuance of 1.7 million additional common shares in a public common stock offering.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 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 | | | 48 | 49 | | President and Chief Executive Officer |
Kevin P. Riley | | | 50 | 51 | | Executive Vice President, and Chief Financial Officer, and Treasurer |
Michael J. Oleksak | | | 51 | 52 | | Executive Vice President, of Commercial Banking |
Richard M. Marotta | | | 51 | 52 | | Executive Vice President and Chief Risk Officer |
David B. Farrell | | | 54 | | | Executive Vice President of Integrated Services |
Sean A. Gray | | | 3334 | | | SeniorExecutive Vice President, of Retail Banking |
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.
David B. Farrelljoined the Company as
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.
Sean A. Grayhas served as Senior Vice President, of Retail Banking since April 2008. In addition to managing the Bank’s branches, Mr. Gray is also responsible for deposit operations, the Call Center, Facilities Management,call center, facilities management, marketing, and Marketing.retail insurance services. Mr. Gray joined the Company in January 2007 as First Vice President, of Retail Banking.Prior to joining the Bank, Mr. Gray was Vice President and Consumer Market Manager at Bank of America, in Waltham, Massachusetts, where he managed the operations of 320 employees in 31 banking centers.
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.
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.
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. |
|
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 |
|
| | | The following table sets forth information, as of December 31, 2009, 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 | | | 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
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)ITEM 15. | | [1] | | Financial Statements EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| •(a) | [1] | Financial Statements |
| · | Report of Independent Registered Public Accounting Firm |
|
| • | · | Consolidated Balance Sheets as of December 31, 20092010 and 20082009 |
|
| • | · | Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 2008 and 20072008 |
|
| • | · | Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2010, 2009 2008 and 20072008 |
|
| • | · | Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 2008 and 20072008 |
|
| • | · | 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.
| | | 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
|
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.(1)(3) |
| | | | |
| 3.2 | | | Certificate of Designations for the Series A Preferred Stock(2)(4) |
| | | | |
| 3.3 | | | Bylaws of Berkshire Hills Bancorp, Inc. (3) (5) |
| | | | |
| 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(4)(6) |
| | | | |
| 10.2 | | | Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Kevin P. Riley(4)(6) |
| | | | |
| 10.3 | | | Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and John S. Millet(4) 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(4)(6) |
| | | | |
| 10.5 | | | Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Shepard D. Rainie(4)Richard M. Marotta (7) |
| | | | |
| 10.6 | | | ConsultingAmended and Restated Three Year Change in Control Agreement betweenby and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and David B. Farrell(5) Linda A. Johnston |
| | | | |
| 10.7 | | | Amended and Restated Supplemental Executive Retirement Agreement between Berkshire Bank and Michael P. Daly(6)(8) |
| | | | |
| 10.8 | | | *Amended and Restated Berkshire Hills Bancorp, Inc. 2003 Equity Compensation Plan(7)(9) |
| | | | |
| 10.9 | | | *Form of Berkshire Bank Employee Severance Compensation Plan(1)(3) |
| | | | |
| 10.10 | | | *Berkshire Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(8)(10) |
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| | | | |
| 10.11 | | | *Woronoco Bancorp, Inc. 1999 Stock-Based Incentive Plan(9)(11) |
| | | | |
| 10.12 | | | *Woronoco Bancorp, Inc. 2001 Stock Option Plan(10)(12) |
| | | | |
| 10.13 | | | *Woronoco Bancorp, Inc. 2004 Equity Compensation Plan(11)(13) |
| | | | |
| 10.14 | | | Factory Point Bancorp, Inc. 1999 Non-Employee Directors Stock Option Plan, as amended and restated (12)(14) |
| | | | |
| 10.15 | | | Factory Point Bancorp, Inc. 1999 Stock Incentive Plan(12)(14) |
| | | | |
| 10.16 | | | Factory Point Bancorp, Inc. 2004 Stock Incentive Plan, as amended and restated(11)(13) |
| | | | |
| 10.17 | | | Berkshire Hills Bancorp, Inc. Management Incentive Compensation Plan |
| | | | |
| 10.18 | | | Three year change in control agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and David B. Farrell |
| | | | |
| 10.19 | | | Three year change in control agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. andForm 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 —- Subsidiary Activities” |
| | | | |
| 23.0 | | | Consent of Wolf & Company, P.C. |
| | | | |
| 31.1 | | | Rule 13a-14(a) Certification of Chief Executive Officer |
| | | | |
| 31.2 | | | Rule 13a-14(a) Certification of Chief Financial Officer |
| | | | |
| 32.1 | | | Section 1350 Certification of Chief Executive Officer |
| | | | |
| 32.2 | | | Section 1350 Certification of Chief Financial Officer |
*Management contract or compensatory plan, contract or arrangement.
| | |
* | | 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. |
|
(2) | (4) | Incorporated herein by reference from the Exhibits to the Form 8-K as filed on December 23, 2008. |
|
(3) | (5) | Incorporated herein by reference from the Exhibits to the Form 8-K as filed on February 29, 2008. |
|
(4) | (6) | Incorporated herein by reference from the Exhibits to the Form 8-K as filed on January 6, 2009. |
|
(5) | (7) | Incorporated herein by reference from the Exhibits to the Form 8-K10-K as filed on December 17, 2008.March 16, 2010. |
|
(6) | (8) | Incorporated herein by reference from the Exhibits to Form 10-K as filed on March 16, 2009. |
|
(7) | (9) | Incorporated herein by reference from the Appendix to the Proxy Statement as filed on April 3, 2008. |
|
(8) | (10) | Incorporated herein by reference from the Appendix to the Proxy Statement as filed on December 7, 2000. |
|
(9) | (11) | Incorporated herein by reference from the Proxy Statement as filed on March 20, 2000 by Woronoco Bancorp, Inc. |
|
(10) | (12) | Incorporated herein by reference from the Proxy Statement as filed on March 12, 2001 by Woronoco Bancorp, Inc. |
|
(11) | (13) | Incorporated herein by reference from the Proxy Statement as filed on March 22, 2004 by Woronoco Bancorp, Inc. |
|
(12) | (14) | Incorporated herein by reference from the exhibitsExhibits to the registration statement on Form S-8 as filed on October 10, 2007, registration No. 333-146604. |
| (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, 2010 2011 | 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 Michael P. Daly | | President and Chief Executive Officer
(principal | | March 16, 2011 |
Michael P. Daly | | (principal executive officer) | | March 16, 2010 |
| | | | |
/s/ Kevin P. Riley Kevin P. Riley | | Executive Vice President, and Chief Financial Officer and Treasurer | | March 16, 2011 |
Kevin P. Riley | | (principal financial and accounting officer) | | March 16, 2010 |
| | | | |
/s/ Lawrence A. Bossidy Lawrence A. Bossidy | | Non-Executive Chairman | | March 16, 20102011 |
Lawrence A. Bossidy | | | | |
/s/ Robert M. Curley Robert M. Curley | | Director | | March 16, 20102011 |
Robert M. Curley | | | | |
/s/ John B. Davies John B. Davies | | Director | | March 16, 20102011 |
John B. Davies | | | | |
/s/ Rodney C. Dimock Rodney C. Dimock | | Director | | March 16, 20102011 |
Rodney C. Dimock | | | | |
/s/ Susan M. Hill Susan M. Hill | | Director | | March 16, 20102011 |
Susan M. Hill | | | | |
/s/ Cornelius D. Mahoney Cornelius D. Mahoney | | Director | | March 16, 20102011 |
Cornelius D. Mahoney | | | | |
/s/ Catherine B. Miller Catherine B. Miller | | Director | | March 16, 20102011 |
Catherine B. Miller | | | | |
/s/ David E. Phelps David E. Phelps | | Director | | March 16, 20102011 |
David E. Phelps | | | | |
/s/ D. Jeffrey Templeton D. Jeffrey Templeton | | Director | | March 16, 20102011 |
D. Jeffrey Templeton | | | | |
/s/ Corydon L. Thurston Corydon L. Thurston | | Director | | March 16, 20102011 |
Corydon L. Thurston | | | | |