EX-23.0
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2005
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from _________ to __________
Commission
File Number: 0-58514
BERKSHIRE
HILLS BANCORP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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04-3510455
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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24
North Street, Pittsfield, Massachusetts
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01201
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (413) 443-5601
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, par value $0.01 per share
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer and accelerated filer” in rule 12b-2 of the Exchange Act.
(Check one):
Large
Accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $235 million, based upon the closing price of $33.32 as
quoted on the American
Stock
Exchange as of the last business day of the registrant’s most recently completed
second fiscal quarter.
The
number of shares outstanding of the registrant’s common stock as of March 1,
2006, was 8,584,230.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2006 Annual Meeting of Stockholders are
incorporated
by
reference in Part III of this Form 10-K.
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3
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BUSINESS
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3
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RISK
FACTORS
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17
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UNRESOLVED
STAFF COMMENTS
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18
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PROPERTIES
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18
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LEGAL
PROCEEDINGS
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18
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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18
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19
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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19
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SELECTED
FINANCIAL DATA
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21
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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22
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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31
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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33
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MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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34
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ON INTERNAL
CONTROL
OVER FINANCIAL REPORTING
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35
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ON CONSOLIDATED
FINANCIAL STATEMENTS
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37
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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72
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CONTROLS
AND PROCEDURES
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72
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OTHER
INFORMATION
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72
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73
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
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73
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EXECUTIVE
COMPENSATION
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73
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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74
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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74
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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74
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75
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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75
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77
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FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements that are based on assumptions and
may
describe future plans, strategies and expectations of Berkshire Hills Bancorp,
Inc. (the “Company” or “Berkshire Hills”) and Berkshire Bank (the “Bank”). These
forward-looking statements are generally identified by use of the words
“believe,” “expect,” "intend,” “anticipate,” “estimate,” “project” or similar
expressions. The Company and the Bank’s ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of Berkshire Hills and
its subsidiaries include, but are not limited to, changes in interest rates,
national and regional economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of
the
U.S. Treasury and the Federal Reserve Board, the quality and composition of
the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in Berkshire Hills’ and the Bank’s
market area, changes in real estate market values in Berkshire Hills’ and the
Bank’s market area, and changes in relevant accounting principles and
guidelines. Additionally, on June 1, 2005, the Company completed the acquisition
of Woronoco Bancorp, Inc. (“Woronoco”). Risks and uncertainties related to the
acquisition include the achievement of anticipated future earnings benefits.
These risks and uncertainties should be considered in evaluating forward looking
statements and undue reliance should not be placed on such statements. Except
as
required by applicable law or regulation, Berkshire Hills does not undertake,
and specifically disclaims any obligation to release publicly the result of
any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of the statements or to reflect the occurrence
of anticipated or unanticipated events.
GENERAL
Berkshire
Hills Bancorp, Inc. is a Delaware corporation and the holding company for
Berkshire Bank. Established in 1846, Berkshire Bank is one of Massachusetts'
oldest and largest independent banks and is the largest banking institution
based in Western Massachusetts. The Bank is headquartered in Pittsfield,
Massachusetts and operates 24 full-service banking offices serving communities
throughout Western Massachusetts and in Northeastern New York. The Bank is
structured to operate in three regions: its traditional Berkshire County Region;
the Pioneer Valley Region along the Connecticut River valley in Massachusetts;
and the New York Region serving Albany and the surrounding area in Northeastern
New York.
The
Bank
is aggressively transitioning from a community bank to a regional bank. It
plans
to approximately double the size of its branch office network over the next
three years by opening additional full-service offices,
and to grow its commercial banking program. Additionally, the Bank seeks growth
through acquisitions, including possible expansion into Southern Vermont and
Northern Connecticut. The Bank entered the Pioneer Valley area of Massachusetts
in 2005 with the acquisition of Woronoco Bancorp, Inc., and has made
acquisitions of insurance and financial planning providers in the last two
years. Berkshire Bank is positioning itself as the financial institution of
choice in its three regions. These three regions are viewed as having favorable
demographics and provide an attractive regional niche for the Bank to
distinguish itself as the preferred choice compared to larger super-regional
banks and smaller community banks.
The
Bank
is a full-scale provider of deposit, lending, investment, and insurance products
by a team of employees with extensive experience in banking, insurance, and
investment management. The Company stresses quality control, including using
Six
Sigma tools to improve operational effectiveness and efficiency. It is enhancing
its credit and risk management functions to maintain strong asset quality and
careful interest rate management. It stresses a culture of teamwork and
performance excellence to produce customer satisfaction as the basis for its
strategic growth and profitability.
COMPANY
WEBSITE AND AVAILABILITY OF SECURITIES AND EXCHANGE COMMISSION
FILINGS
The
Company’s Internet website is www.berkshirebank.com.
The
Company makes available free of charge on or through its website, its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and any amendments to those reports filed pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after the Company electronically files such material with the Securities and
Exchange Commission. Information on the website is not incorporated by reference
and is not a part of this annual report on form 10-K.
COMPETITION
The
Bank
is subject to strong competition from banks and other financial institutions
and
financial service providers. Its competition includes national and
super-regional banks such as Bank of America, TD Banknorth, and Citizens Bank,
which have substantially greater resources and lending limits. Non-bank
competitors include credit unions, brokerage firms, insurance
providers,
financial planners, and the mutual fund industry. New technology is reshaping
customer interaction with financial service providers and the increase of
Internet-accessible financial institutions increases competition for Berkshire
Bank’s customers. The Bank generally competes on the basis of customer service,
relationship management, and the pricing of loan and deposit products and wealth
management services.
The location and convenience of branch offices is also a significant competitive
factor, particularly regarding new offices. The Bank has recently designated
regional headquarters led by regional presidents as an important component
of
its market management. The Company offers a customer-focused brand of “Trusted
Solutions” to maintain hometown, common sense values, building emotionally
connected relationships with customers, and delivering a customized set of
products and services and a consistent and familiar experience.
LENDING
ACTIVITIES
General.
The
Bank
originates loans in the four basic portfolio categories discussed below. Lending
activities are limited by federal and state laws and regulations. Loan interest
rates and other key loan terms are affected principally by the Bank’s
asset/liability strategy, loan demand, competition, and the supply of money
available for lending purposes. These factors, in turn, are affected by general
and economic conditions, monetary policies of the federal government, including
the Federal Reserve Board, legislative tax policies and governmental budgetary
matters. The majority of the Bank’s loans are secured by real estate in its
primary markets, and lending activities are therefore affected by activity
in
these real estate markets. The loan portfolio includes loans acquired through
the acquisition of Woronoco Bancorp, Inc. in 2005.
Loan
Portfolio Analysis. The
following table sets forth the year-end composition of the Bank’s loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates
indicated.
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2005
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2004
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2003
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2002
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2001
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Percent
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Percent
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Percent
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Percent
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Percent
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of
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of
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of
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of
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of
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(Dollars
in millions)
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Amount
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Total
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Amount
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Total
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Amount
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Total
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Amount
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Total
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Amount
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Total
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Residential
mortgages
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$
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549.8
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39
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%
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$ |
235.2
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28
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%
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$
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265.5
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34
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%
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$
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241.6
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33
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%
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$
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232.6
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29
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%
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Commercial
mortgages
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410.7
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29
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260.5
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32
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206.4
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26
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157.1
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22
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128.6
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16
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Commercial
business
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158.7
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11
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150.9
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18
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166.3
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|
21
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165.3
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23
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170.3
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|
21
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Consumer
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297.2
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|
21
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181.5
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|
22
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154.0
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19
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159.0
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|
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22
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|
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271.0
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34
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Total
loans
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|
1,416.4
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|
100
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% |
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828.1
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|
|
100
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%
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792.2
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|
|
100
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%
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723.0
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|
100
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%
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802.5
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100
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%
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Allowance
for loan losses
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(13.0
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)
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(9.3
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)
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(9.0
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)
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(10.3
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)
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(11.0
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)
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Net
loans
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$
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1,403.4
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$
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818.8
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$
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783.2
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|
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$
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712.7
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$
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791.5
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Residential
mortgages. The
Bank
originates first mortgage loans to individuals, secured by one-to-four family
residences in its markets. The Bank originates both fixed-rate and adjustable
rate mortgages to finance primary and secondary residences, as well as non-owner
occupied properties. The Bank also provides construction and land
development first
mortgage loans to individuals.
The
Bank’s loan products generally conform to secondary market guidelines, including
Fannie Mae and Freddie Mac guidelines. The Bank also offers jumbo loan products.
Berkshire Bank generally underwrites, processes and closes its residential
mortgages following conforming secondary market guidelines. The Bank also
participates in certain programs to provide financing for low- and
moderate-income families, including offering Federal Housing Authority, Veterans
Administration, and Massachusetts Housing Finance Agency mortgages.
Berkshire
Bank also originates construction and land development loans to individuals
for
the construction and acquisition of personal residences. These loans generally
provide for the payment of interest only during the construction phase, which
is
usually up to fifteen months. At the end of the construction phase, the loan
converts to a permanent mortgage
loan. Construction and land development loans
are
generally made on the same underwriting terms as Berkshire Bank’s one-to
four-family mortgage
loans. Residential construction loans totaled $35.4 million at year-end
2005.
The
Bank
generally originates adjustable rate mortgage loans for its own portfolio.
The
Bank normally sells on a flow basis most 15 year and 30 year fixed rate
mortgages at the time of origination, and forward sale commitments are made
when
customers choose to rate-lock their mortgage applications. Sometimes the Bank
also sells or securitizes some existing residential mortgages
to adjust interest rate risk or to provide liquidity. Adjustable-rate mortgage
loans help reduce the Bank’s exposure to changes in interest rates, subject to
the limitations of periodic and lifetime interest rate caps which are common
to
these loans. Adjustable-rate mortgage loans have potentially higher credit
risk
in periods of rising interest rates due to the impact of increased payments
on
borrowers. There has been no material adverse impact on the Bank to date related
to the interest rate risk and credit risk of adjustable-rate mortgages.
Commercial
Mortgages. The
Bank
originates commercial mortgages on properties used for business purposes such
as
small office buildings, industrial, healthcare, lodging, recreation, or retail
facilities predominantly located in Berkshire Bank’s primary market area. This
portfolio also includes 1-4 family and multifamily properties. Loans may
generally be made with terms of up to 20 years and with interest rates that
adjust periodically (primarily from floating to five years) and are generally
indexed to Berkshire Bank’s base rate.
Berkshire
Bank generally requires that the properties securing these mortgages have debt
service coverage ratios (the ratio of available cash flows before debt service
to debt service) of at least 1.25 times. Loans may be made up to 80% of
appraised value. Generally, commercial mortgages require personal guarantees
by
the principals. Credit enhancements in the form of additional collateral or
guarantees are normally considered for start-up businesses without a qualifying
cash flow history.
The
Bank
also originates construction loans, including multifamily properties, commercial
properties, single-family subdivisions, and condominiums. These loans generally
have an interest-only phase during construction and then convert to permanent
financing. Berkshire Bank also originates land loans to local contractors and
developers for the purpose of holding or developing the land for sale. Land
loans are offered with a term of three years in which only interest is required
to be paid each month. A balloon payment for the principal plus any accrued
interest is due at the end of the loan term. Commercial construction loans
totaled $59.0 million at year-end 2005.
Commercial
mortgages generally involve larger principal amounts and a greater degree of
risk than residential mortgages. They also often provide higher yields and
involve less interest rate risk, compared to residential mortgages. Because
commercial mortgage payments are often dependent on the successful operation
or
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. Additionally, construction
lending often involves the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather than on
established cash flows. If the Bank is forced to foreclose on a construction
project before or at completion, there is a higher risk of credit loss.
Berkshire Bank seeks to minimize these risks through strict adherence to its
underwriting standards and portfolio management processes.
Commercial
Business Loans. Berkshire
Bank makes commercial business loans primarily in its market area to a variety
of professionals, sole proprietorships and small businesses. The Bank offers
secured commercial term loans, which have maturities of greater than one year
and the repayment of which is dependent on future earnings. The term for
repayment will normally be limited to the lesser of the expected useful life
of
the asset being financed or a fixed amount of time, generally seven years or
less. Berkshire Bank also offers loans originated to
finance a business’ equipment and machinery, revolving loans, lines of credit,
letters of credit, time notes and Small Business Administration guaranteed
loans. Business lines of credit have adjustable rates of interest and are
payable on demand, subject to annual review and renewal.
Commercial
lending policies regarding debt-service coverage ability and
guarantees are
similar to those which govern commercial real estate lending. Commercial
business loans are generally secured by a variety of collateral such as accounts
receivable, inventory and equipment, and are generally supported by personal
guarantees. Depending on the collateral used to secure the loans, commercial
loans are generally made in amounts of up to 95% of the liquidation value of
the
collateral securing the loan. Some commercial loans may also be secured by
liens
on real estate. Berkshire Bank generally does not make unsecured commercial
loans.
Commercial
loans are of higher risk and are made primarily on the basis of the borrower’s
ability to make repayment from the cash flows of its business. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value. The Bank gives additional consideration
to
the borrower’s credit history and capacity to help mitigate these risks.
Commercial loans are often a central component of a total commercial banking
relationship, and are therefore an important component of the Bank’s lending
activities.
Consumer
Loans. Berkshire
Bank’s consumer lending strategy is focused on automobile loans and home equity
loans. The Bank has been offering indirect auto loans through auto dealers
primarily in its market area for more than fifteen years. The auto loan
portfolio is largely comprised of these indirect loans, along with auto loans
originated directly through the branch network. The Bank offers fixed-rate
automobile loans with terms of up to 72 months for new and recent model used
cars and up to 66 months for older model used cars. The Bank generally makes
such loans up to 100% of the retail value shown in the NADA
Used Car Guide.
The
interest rates offered differ depending on the age of the automobile and
interest rates offered by competitors. This program is targeted towards prime
grade credits; the Bank does not offer subprime lending programs. The auto
loans
have produced a higher loan charge-off rate than the Bank’s other loan
portfolios, which is viewed as normal for this segment.
Collections
are more sensitive to changes in borrower financial circumstances, and the
collateral can be depreciated or damaged prior to repossession. Additionally,
collections are more subject to the limitations of federal and state laws.
Auto
loans outstanding totaled $147.3 million at year-end 2005.
The
Bank’s home equity portfolio consists chiefly of borrowings under home equity
lines of credit, which are typically secured by second mortgages on borrower’s
residences. Home equity lines have an initial revolving period up to ten years,
followed by an amortizing term up to fifteen years. These loans are normally
indexed to the prime rate. Home equity loans also include amortizing fixed
rate
second mortgages with terms up to fifteen years. Lending policies for combined
debt service and collateral coverage are similar to those used for residential
first mortgages, although underwriting verifications are
more
streamlined. Home equity line credit risks are similar to those of
adjustable rate
first mortgages, although these loans may be more sensitive to losses when
interest rates are rising due to more sensitivity to rate changes and more
possible compression of collateral coverage on second liens. The Bank also
includes all other consumer loans in this portfolio total, including personal
secured and unsecured loans and overdraft protection facilities. Home equity
and
other loans outstanding at year-end 2005 totaled $149.9 million.
Maturity
and Sensitivity of Loan Portfolio. The
following table shows contractual final maturities of selected loan categories
at year-end 2005. The contractual maturities do not reflect premiums, discounts,
and deferred costs, and do not reflect prepayments.
Contractual
Maturity
|
|
One
Year
|
|
More
than One
|
|
More
Than
|
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(In
thousands)
|
|
or
Less
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|
to
Five Years
|
|
Five
Years
|
|
Total
|
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Construction
mortgage loans:
|
|
|
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|
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Residential
|
|
$
|
1,880
|
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$
|
33,488
|
|
$
|
-
|
|
$
|
35,368
|
|
Commercial
|
|
|
16,192
|
|
|
34,967
|
|
|
7,809
|
|
|
58,968
|
|
Commercial
business loans
|
|
|
58,725
|
|
|
38,592
|
|
|
61,429
|
|
|
158,746
|
|
Total
|
|
$
|
76,797
|
|
$
|
107,047
|
|
$
|
69,238
|
|
$
|
253,082
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
For
the
$176.3 million total of loans above which mature in more than one year, $31.4
million of these loans are fixed rate and $144.9 million are variable
rate.
Loan
Administration.
Lending
activities are governed by a loan policy approved by the Board of Directors.
The
loan policy sets certain limits on concentrations of credit and requires
periodic reporting of concentrations to the Board. The Bank has designated
internal staff who perform post-closing loan documentation review, quality
control and ongoing loan review. The Bank’s policy is to assign a risk rating to
all commercial loans and loan review staff perform an ongoing program of loan
and risk rating reviews. Management also employs an independent third party
for
loan reviews, as discussed in “Allowance for Loan Losses.”
The
Bank’s lending activities follow written, non-discriminatory underwriting
standards and loan origination procedures established by Berkshire Bank’s Board
of Directors and management. All commercial loans in excess of $1.5 million
require the approval of the Risk Management Committee of the Board of Directors
or the full Board of Directors. The Bank’s lending activities are conducted by
its salaried and commissioned loan personnel and through its relationships
with
automobile dealers. From time to time, the Bank will purchase whole loans or
participations in loans. These loans are underwritten according to Berkshire
Bank’s underwriting criteria and procedures and are generally serviced by the
originating lender under terms of the applicable participation agreement. The
Bank from time to time will sell or securitize residential mortgages in the
secondary market based on prevailing market interest rate conditions and an
analysis of the composition and risk of the loan portfolio, the Bank’s interest
rate risk profile and liquidity needs. The Bank sells a limited number of
commercial loan participations on a non-recourse basis. The Bank issues loan
commitments to its prospective borrowers conditioned on the occurrence of
certain events. Commitments are made in writing on specified terms and
conditions and are generally honored for up to 60 days from
approval.
Nonperforming
Assets. While
Berkshire Bank generally prefers to work with borrowers to resolve problems,
Berkshire Bank generally will initiate foreclosure or other proceedings no
later
than the 90th
day of a
delinquency, as necessary, to minimize any potential loss. Management reports
to
the Board of Directors monthly on the amount of loans delinquent more than
30
days, all loans in foreclosure, and all foreclosed and repossessed property
that
Berkshire Bank owns. Berkshire Bank generally ceases accruing interest on all
commercial and residential loans when principal or interest payments are
delinquent 90 days or more unless management determines the loan principal
and
interest to be fully-secured and in the process of collection. Delinquent
automobile loans remain on accrual status until they reach 120 days delinquent.
At that time they are charged-off, except for those customers who are in
bankruptcy proceedings with a secured loan, in which case the loan is
transferred to nonaccrual status.
The
following table sets forth additional
information on year-end problem assets.
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$
|
261
|
|
$
|
327
|
|
$
|
348
|
|
$
|
230
|
|
$
|
310
|
|
Commercial
mortgages
|
|
|
271
|
|
|
147
|
|
|
496
|
|
|
-
|
|
|
-
|
|
Commercial
business
|
|
|
553
|
|
|
523
|
|
|
1,887
|
|
|
2,850
|
|
|
2,077
|
|
Consumer
|
|
|
101
|
|
|
155
|
|
|
468
|
|
|
661
|
|
|
315
|
|
Total
nonperforming loans
|
|
|
1,186
|
|
|
1,152
|
|
|
3,199
|
|
|
3,741
|
|
|
2,702
|
|
Real
estate owned
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,500
|
|
|
-
|
|
Total
nonperforming assets
|
|
$
|
1,186
|
|
$
|
1,152
|
|
$
|
3,199
|
|
$
|
5,241
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled
debt restructurings
|
|
$
|
1,234
|
|
$
|
510
|
|
$
|
214
|
|
$
|
-
|
|
$
|
-
|
|
Accruing
loans 90+ days past due
|
|
|
110
|
|
|
65
|
|
|
306
|
|
|
590
|
|
|
1,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans/total loans
|
|
|
0.08
|
%
|
|
0.14
|
%
|
|
0.40
|
%
|
|
0.52
|
%
|
|
0.34
|
%
|
Total
nonperforming assets/total assets
|
|
|
0.06
|
%
|
|
0.09
|
%
|
|
0.26
|
%
|
|
0.36
|
%
|
|
0.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income that would have been recorded for 2005 had nonaccruing loans been current
according to their original terms, amounted to $112,000. The amount of interest
income on those loans that was included in net income in 2005 was
$14,000.
Real
estate acquired by Berkshire Bank as a result of foreclosure or by deed in
lieu
of foreclosure is classified as real estate owned until sold. When property
is
acquired it is recorded at fair market value less estimated selling costs at
the
date of foreclosure, establishing a new cost basis. Holding costs and decreases
in fair value after acquisition are expensed. At year-end 2005, Berkshire Bank
had no foreclosed real estate.
Asset
Classification. The
Bank
performs an internal analysis of its loan portfolio and assets to classify
such
loans and assets similar to the manner in which such loans and assets are
classified by the federal banking regulators. In addition, Berkshire Bank
regularly analyzes the losses inherent in its loan portfolio and its
nonperforming loans to determine the appropriate level of the allowance for
loan
losses. There are four classifications for problem assets: loss, doubtful,
substandard and special mention. An asset classified as “Loss” is normally fully
charged-off. “Substandard” assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Nonaccruing loans
are
normally classified as substandard. “Doubtful” assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated “Special Mention.”
At
year-end 2005, there were no loan balances classified as
loss.
The balance of loans classified as doubtful was $338,000. Loans classified
as
substandard totaled $9.5 million. Berkshire Bank had no substandard loans
greater than $500,000, which were not performing according to their terms at
year-end 2005. The largest three substandard commercial
relationships totaled $5.4 million. These relationships were performing in
accordance with their terms at year-end 2005.
Loans
classified as substandard are collectively regarded as having the potential
to
be nonperforming in the future. Loans rated special mention totaled $26.5
million at year end 2005.
Allowance
for Loan Losses. Berkshire
Bank maintains an allowance for loan losses to absorb losses inherent in the
loan portfolio. The allowance represents management’s estimate of probable
losses based on information available as of the date of the financial
statements.
The
loan
portfolio and other credit exposures are regularly reviewed by management to
evaluate the adequacy of the allowance for loan losses. The methodology for
assessing the appropriateness of the allowance includes comparison to actual
losses, peer group comparisons, industry data and economic conditions. In
addition, management employs an independent third party to perform an annual
review of all of Berkshire Bank’s commercial loan relationships exceeding
$1 million, all material credits on Berkshire Bank’s watch list or
classified as substandard, and a random sampling of new loans. The regulatory
agencies, as an integral part of their examination process, also periodically
review Berkshire Bank’s allowance for loan losses. Such agencies may require
Berkshire Bank to make additional provisions for estimated losses based upon
judgments different from those of management.
In
assessing the allowance for loan losses, loss factors are applied to various
pools of outstanding loans. Loss factors are based on management’s judgment,
including consideration of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent risks in the nature and volume
of
the portfolio, information about specific borrower situations and estimated
collateral values and economic conditions. The loss factors may be adjusted
for
significant factors that, in management’s judgment, affect the collectibility of
the portfolio as of the evaluation date. Generally, nonaccruing commercial
loans
are deemed impaired and evaluated for specific valuation allowances. Berkshire
Bank primarily segregates the loan portfolio according to the primary loan
types: residential mortgages, commercial mortgages, commercial business loans
and consumer loans.
In
addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management’s subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of
the
loan portfolio. The allowance methodology reflects management’s objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
Although
management believes that it uses the best information available to establish
the
allowance for loan losses, future adjustments to the allowance for loan losses
may be necessary and results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making its
determinations. Because future events affecting borrowers and collateral cannot
be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that increases will not be necessary
should the quality of any loan deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect Berkshire Bank’s financial condition and results of
operations.
The
following table presents an analysis of the allowance for loan losses for the
years indicated.
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
9,337
|
|
$
|
8,969
|
|
$
|
10,308
|
|
$
|
11,034
|
|
$
|
10,216
|
|
Charged-off
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2
|
|
Commercial
mortgages
|
|
|
-
|
|
|
138
|
|
|
-
|
|
|
510
|
|
|
222
|
|
Commercial
business
|
|
|
432
|
|
|
218
|
|
|
157
|
|
|
444
|
|
|
797
|
|
Consumer
|
|
|
1,110
|
|
|
1,846
|
|
|
4,207
|
|
|
9,074
|
|
|
6,041
|
|
Total
charged-off loans
|
|
|
1,542
|
|
|
2,202
|
|
|
4,364
|
|
|
10,028
|
|
|
7,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
on charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
55
|
|
|
296
|
|
|
440
|
|
|
178
|
|
|
265
|
|
Consumer
|
|
|
517
|
|
|
709
|
|
|
1,125
|
|
|
2,944
|
|
|
440
|
|
Total
charged-off recoveries
|
|
|
572
|
|
|
1,005
|
|
|
1,565
|
|
|
3,122
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans charged-off
|
|
|
970
|
|
|
1,197
|
|
|
2,799
|
|
|
6,906
|
|
|
6,357
|
|
Allowance
attributed to loans acquired by merger
|
|
|
3,321
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Provision
for loan losses
|
|
|
1,313
|
|
|
1,565
|
|
|
1,460
|
|
|
6,180
|
|
|
7,175
|
|
Allowance
for loan losses,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
13,001
|
|
$
|
9,337
|
|
$
|
8,969
|
|
$
|
10,308
|
|
$
|
11,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans charged-off/average total loans
|
|
|
0.08
|
%
|
|
0.15
|
%
|
|
0.35
|
%
|
|
0.87
|
%
|
|
0.78
|
%
|
Recoveries/charged-off
loans
|
|
|
37.09
|
|
|
45.64
|
|
|
35.86
|
|
|
31.13
|
|
|
9.98
|
|
Net
loans charged-off/allowance for loan losses
|
|
|
7.46
|
|
|
12.82
|
|
|
31.21
|
|
|
67.00
|
|
|
57.61
|
|
Allowance
for loan losses/total loans
|
|
|
0.92
|
|
|
1.13
|
|
|
1.13
|
|
|
1.43
|
|
|
1.37
|
|
Allowance
for loan losses/nonperforming loans
|
|
|
10.96
|
x |
|
8.11
|
x |
|
2.80
|
x |
|
2.76
|
x |
|
4.08
|
x |
The
following table presents year-end data for the approximate allocation of the
allowance for loan losses by loan categories at the dates indicated and the
percentage of loans in each category. Management believes that the allowance
can
be allocated by category only on an approximate basis. The allocation of the
allowance to each category is not indicative of future losses and does not
restrict the use of any of the allowance to absorb losses in any
category.
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
|
|
|
|
Loans
|
|
|
|
Loans
|
|
|
|
Loans
|
|
|
|
Loans
|
|
|
|
Loans
|
|
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
in
Each
|
|
|
|
Amount
|
Category
to
|
Amount
|
Category
to
|
Amount
|
Category
to
|
Amount
|
Category
to
|
Amount
|
Category
to
|
(Dollars
in thousands)
|
|
Allocated
|
|
Total
Loans
|
|
Allocated
|
|
Total
Loans
|
|
Allocated
|
|
Total
Loans
|
|
Allocated
|
|
Total
Loans
|
|
Allocated
|
|
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$
|
1,649
|
|
|
39
|
%
|
$
|
435
|
|
|
28
|
%
|
$
|
491
|
|
|
34
|
%
|
$
|
446
|
|
|
33
|
%
|
$
|
430
|
|
|
29
|
%
|
Commercial
mortgages
|
|
|
5,933
|
|
|
29
|
|
|
3,828
|
|
|
32
|
|
|
2,945
|
|
|
26
|
|
|
1,843
|
|
|
22
|
|
|
1,917
|
|
|
16
|
|
Commercial
business
|
|
|
3,517
|
|
|
11
|
|
|
3,344
|
|
|
18
|
|
|
3,362
|
|
|
21
|
|
|
3,369
|
|
|
23
|
|
|
4,470
|
|
|
21
|
|
Consumer
|
|
|
1,902
|
|
|
21
|
|
|
1,730
|
|
|
22
|
|
|
2,171
|
|
|
19
|
|
|
4,650
|
|
|
22
|
|
|
4,217
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,001
|
|
|
100
|
%
|
$
|
9,337
|
|
|
100
|
%
|
$
|
8,969
|
|
|
100
|
%
|
$
|
10,308
|
|
|
100
|
%
|
$
|
11,034
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
SECURITIES ACTIVITIES
The
investment securities portfolio is primarily used to provide for Berkshire
Bank’s cash flow needs, to provide adequate liquidity to protect the safety of
customer deposits and to earn a reasonable return on investment. The average
maturity or repricing and the types of securities are based upon the
composition, maturity, and quality of the loan portfolio, interest rate risk
and
Berkshire Bank’s liquidity position and deposit structure.
The
Risk
Management Committee of the Board of Directors is responsible for developing
and
reviewing Berkshire Bank’s investment policy. Investment decisions
are made in accordance with the Bank’s investment policy and are based upon the
quality of a particular investment, its inherent risks, the Bank’s liquidity
needs, prospects for yield and/or appreciation and the potential tax
consequences. General investment strategies are developed and authorized by
the
Risk Management Committee. The execution of specific investment actions and
the
day-to-day oversight of the Bank’s investment portfolio rests with the President
and the Treasurer. The Board of Directors receives a monthly report of all
securities transactions made during the previous month.
The
majority of the Bank’s investments in recent years have been in mortgage-backed
securities issued or guaranteed by U.S. Government sponsored enterprises. The
Bank has focused on buying adjustable rate pass-through mortgage-backed
securities that have limited extension risk,
such as five- and seven-year hybrid and 10-year fixed rate mortgage-backed
securities. These securities typically have an average duration of 3-5 years.
Securities acquired as a result of the Woronoco acquisition also were primarily
U.S. Government sponsored enterprise pass-through mortgage-backed securities,
although these securities were mostly backed by fixed rate loans. Nearly all
the
mortgage-backed securities owned by the Bank are issued by Fannie Mae or Freddie
Mac. No other issuer concentrations exceeding 10% of stockholders’ equity
existed at year-end 2005. The Bank also purchases municipal bonds and
obligations, and purchases and originates industrial
revenue bonds. Some of these securities support local municipal relationships
and these securities provide a tax-advantaged yield. Other corporate bonds
are
primarily investment grade trust preferred securities issued by financial
institutions. The equity securities portfolio consists primarily of investments
in the common stock of the Federal Home Loan Bank of Boston. Berkshire Bank
historically had an actively managed portfolio of exchange traded equity
securities of bank, utility and industrial stocks, but this portfolio has been
decreasing due to securities sales to reduce price risk in this portfolio.
The
cost basis of exchange traded stocks was $2.4 million at year-end
2005.
In
2005,
the Bank executed a deleveraging program in conjunction with the Woronoco
acquisition in order to reduce the leverage of the combined institutions. This
was accomplished primarily through the sale of mortgage-backed securities,
along
with the sale of primarily fixed rate residential mortgage loans. In recent
years, the securities portfolio has been partially funded through borrowings.
Due to the flat interest rate yield curve in 2005, there were fewer
opportunities to earn an attractive spread via this strategy, and purchases
of
securities were accordingly de-emphasized.
Berkshire
Bank’s investment policy allows the use of certain hedging strategies, including
the purchase of options in an effort to increase the return and decrease the
risk on the securities portfolio.
The Bank has used covered call option strategies in the
past
and
may continue to do so in the future. The Bank has not used interest rate futures
or options on futures as part of its interest rate hedging strategies.
The
following table presents the year-end amortized cost and fair value of Berkshire
Bank’s securities, by type of security, for the years indicated
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Available
for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
69
|
|
$
|
63
|
|
$
|
1,106
|
|
$
|
1,113
|
|
$
|
20,840
|
|
$
|
20,969
|
|
Municipal
bonds and obligations
|
|
|
63,701
|
|
|
63,673
|
|
|
19,169
|
|
|
19,172
|
|
|
12,294
|
|
|
12,282
|
|
Mortgage-backed
securities
|
|
|
264,705
|
|
|
258,504
|
|
|
323,956
|
|
|
322,585
|
|
|
239,586
|
|
|
239,870
|
|
Other
bonds and obligations
|
|
|
24,356
|
|
|
24,703
|
|
|
9,418
|
|
|
9,429
|
|
|
19,668
|
|
|
19,416
|
|
Equity
securities
|
|
|
41,667
|
|
|
43,933
|
|
|
24,210
|
|
|
32,122
|
|
|
21,481
|
|
|
29,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available for sale securities
|
|
$
|
394,498
|
|
$
|
390,876
|
|
$
|
377,859
|
|
$
|
384,421
|
|
$
|
313,869
|
|
$
|
322,391
|
|
Hold
to maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$
|
23,851
|
|
$
|
23,851
|
|
$
|
25,227
|
|
$
|
25,227
|
|
$
|
20,545
|
|
$
|
20,545
|
|
Mortgage-backed
securities
|
|
|
6,057
|
|
|
5,912
|
|
|
4,715
|
|
|
4,672
|
|
|
16,358
|
|
|
16,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held to maturity securities
|
|
$
|
29,908
|
|
$
|
29,763
|
|
$
|
29,942
|
|
$
|
29,899
|
|
$
|
36,903
|
|
$
|
36,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes year-end 2005 amortized cost, weighted average yields
and contractual maturities of debt securities. Yields are stated on a book
basis
(not fully taxable equivalent).
|
|
|
|
|
|
More
than One
|
|
More
than Five Years
|
|
|
|
|
|
|
|
|
|
|
|
One
Year or Less
|
|
Year
to Five Years
|
|
to
Ten Years
|
|
More
than Ten Years
|
|
Total
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
Amortized
|
|
Average
|
|
(Dollars
in millions)
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
Cost
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
-
|
|
|
-
|
%
|
$
|
0.1
|
|
|
5.26
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
0.1
|
|
|
5.26
|
%
|
Municipal
bonds and obligations
|
|
|
8.3
|
|
|
3.49
|
|
|
5.0
|
|
|
4.50
|
|
|
2.9
|
|
|
3.85
|
|
|
71.3
|
|
|
4.20
|
|
|
87.5
|
|
|
4.14
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
-
|
|
|
15.1
|
|
|
3.59
|
|
|
81.1
|
|
|
4.22
|
|
|
174.6
|
|
|
4.36
|
|
|
270.8
|
|
|
4.27
|
|
Other
bonds and obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.0
|
|
|
5.18
|
|
|
21.3
|
|
|
5.90
|
|
|
24.3
|
|
|
5.82
|
|
Total
|
|
$
|
8.3
|
|
|
3.49
|
%
|
$
|
20.2
|
|
|
3.82
|
%
|
$
|
87.0
|
|
|
4.24
|
%
|
$
|
267.2
|
|
|
4.44
|
%
|
$
|
382.7
|
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPOSIT
ACTIVITIES AND OTHER SOURCES OF FUNDS
Deposits
are the major source of funds for Berkshire Bank’s lending and investment
activities. Deposit accounts are the primary product and service interaction
with the Bank’s customers. The Bank also uses borrowings from the Federal Home
Loan Bank of Boston (FHLBB) as an additional source of funding, particularly
for
daily cash management and for funding longer duration assets. FHLBB advances
also provide more pricing and option alternatives for particular asset/liability
needs. In 2005, the Company created a trust subsidiary to issue $15.0 million
in
trust preferred securities,
which provided funds which were invested in the Bank as additional paid in
capital, thereby increasing its regulatory capital.
Most
of
the Bank’s deposits are generated from the areas surrounding its branch offices.
The Bank offers a wide variety of deposit accounts with a range of interest
rates and terms. The Bank also periodically offers promotional interest rates
and terms for limited periods of time. Berkshire Bank’s deposit accounts consist
of interest-bearing checking, noninterest-bearing checking, regular savings,
money market savings and time certificates of deposit. The Bank emphasizes
its
transaction deposits - checking and NOW accounts for personal accounts
and checking accounts
promoted to businesses. These accounts have the lowest marginal cost to the
Bank
and are also often a core account for a customer relationship. The Bank offers
a
courtesy overdraft program to improve customer service, and also provides debit
cards and other electronic fee producing payment services to transaction account
customers. Money market accounts have increased in popularity due to their
interest rate structure. Savings accounts include traditional passbook and
statement accounts. The Bank’s time accounts provide maturities from three
months to ten years. Additionally, the Bank offers a variety of retirement
deposit accounts to personal and business customers. The Bank added brokered
time deposit accounts with the acquisition of Woronoco Bancorp, and may utilize
brokered deposits from time to time in the future. The balance of brokered
time
deposits was $56.9 million at year-end 2005.
The
following table presents information concerning average balances and weighted
average interest rates on Berkshire Bank’s deposit accounts for the years
indicated.
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of
Total
|
|
Weighted
|
|
|
|
of
Total
|
|
Weighted
|
|
|
|
of
Total
|
|
Weighted
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
(Dollars
in millions)
|
|
Balance
|
|
Deposits
|
|
Rate
|
|
Balance
|
|
Deposits
|
|
Rate
|
|
Balance
|
|
Deposits
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
149.6
|
|
|
13
|
%
|
|
-
|
%
|
$
|
103.7
|
|
|
12
|
%
|
|
-
|
%
|
$
|
91.6
|
|
|
11
|
%
|
|
-
|
%
|
NOW
|
|
|
121.7
|
|
|
11
|
|
|
0.39
|
|
|
97.9
|
|
|
11
|
|
|
0.09
|
|
|
90.2
|
|
|
11
|
|
|
0.17
|
|
Money
market
|
|
|
209.0
|
|
|
18
|
|
|
2.13
|
|
|
160.3
|
|
|
19
|
|
|
1.29
|
|
|
132.5
|
|
|
16
|
|
|
1.24
|
|
Savings
|
|
|
205.8
|
|
|
18
|
|
|
0.90
|
|
|
168.5
|
|
|
20
|
|
|
0.77
|
|
|
170.7
|
|
|
21
|
|
|
1.01
|
|
Time
|
|
|
445.2
|
|
|
40
|
|
|
2.14
|
|
|
321.0
|
|
|
38
|
|
|
2.78
|
|
|
330.1
|
|
|
41
|
|
|
3.13
|
|
Total
|
|
$
|
1,131.3
|
|
|
100
|
%
|
|
-
|
%
|
$
|
851.4
|
|
|
100
|
%
|
|
1.46
|
%
|
$
|
815.1
|
|
|
100
|
%
|
|
1.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
year-end 2005, Berkshire Bank had time deposit accounts in amounts of $100,000
or more maturing as follows:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Maturity
Period
|
|
Amount
|
|
Rate
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Three
months or less
|
|
$
|
30,858
|
|
|
2.89
|
%
|
Over
3 months through 6 months
|
|
|
40,127
|
|
|
3.12
|
|
Over
6 months through 12 months
|
|
|
76,983
|
|
|
4.24
|
|
Over
12 months
|
|
|
118,945
|
|
|
4.50
|
|
Total
|
|
$
|
266,913
|
|
|
4.03
|
%
|
|
|
|
|
|
|
|
|
The
FHLBB
functions as a central reserve bank
providing credit for member institutions. As an FHLBB member, Berkshire Bank
is
required to own capital stock of the FHLBB. Member banks are eligible to borrow
money from the FHLBB, with borrowings generally secured by most of the member’s
mortgage loans and mortgage-related securities, as well as certain other assets.
Provided certain creditworthiness standards
have been met, advances are made under several different credit programs. Each
credit program has its own interest rate and range of maturities. Depending
on
the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged
to
secure the credit.
WEALTH
MANAGEMENT SERVICES
The
Bank’s Asset Management/Trust Group provides client-centered consultative trust
relationship management to individuals, businesses, and institutions, with
an
emphasis on personal investment management to individuals. The group has built
a
ten year track record with its dedicated in-house investment management team.
At
year-end 2005, assets under management totaled $418 million. The group also
provides brokerage and investment management services in association with
Commonwealth Financial Network.
INSURANCE
With
the
acquisition of Woronoco Bancorp, the Bank acquired a team of licensed insurance
agents operating at two full service offices in Westfield and Longmeadow
Massachusetts. The insurance group offers a complete line of property and
casualty insurance, as well as various life insurance, group life products,
disability, and health insurance products. Berkshire Bank has also separately
acquired insurance agencies
to expand the geographic footprint of this business line. The Bank intends
to
continue to expand this business line through agency acquisitions and through
inclusion in its cross sell programs in the branch network.
GOVERNMENT
BANKING
Berkshire
Bank offers full-service government banking for cities, towns and municipal
school districts in its primary markets and southern Vermont. The Bank offers
municipalities all aspects of financial advisory services for the sale of notes
and bonds,
actively
working with bond counsel, rating agencies, consulting agencies and bond buyers.
Additionally, the Bank offers a wide
range of municipal deposit products and checking accounts. In October 2005,
Berkshire Bank opened Berkshire Municipal Bank, an FDIC-insured, New
York-chartered limited purpose commercial bank, organized principally to accept
deposits from New York municipalities and other governmental
entities.
PERSONNEL
As
of
year-end 2005, the Bank had 399 full-time equivalent employees. The employees
are not represented by a collective bargaining unit and the Bank will strive
to
continue its strong relationship with its employees.
SUBSIDIARY
ACTIVITIES
Berkshire
Hills Bancorp, Inc. wholly owns two active subsidiaries: Berkshire Bank and
Berkshire Hills Capital Trust I. The capital trust subsidiary was created under
Delaware law in 2005 to facilitate the issuance of trust preferred securities.
The Company also owns one dormant Massachusetts subsidiary, Berkshire Hills
Technology, Inc., which discontinued operations in 2004.
Berkshire
Bank is a Massachusetts chartered savings bank which wholly owns six
subsidiaries. The Bank owns three subsidiaries which are qualified as
“securities corporations” for Massachusetts income tax purposes: North Street
Securities Corporation, Woodland Securities, Inc., and Gold Leaf Securities
Corporation. Berkshire Bank also owns Berkshire Municipal Bank, which was
previously discussed under “Government Banking”, and Berkshire Insurance Group,
Inc., which is further discussed below. Additionally, the Bank owns the inactive
subsidiary, Berkshire Financial Planning, Inc., which ceased
offering brokerage services
in 2004. Except for Berkshire Municipal Bank, all subsidiaries of Berkshire
Bank
are incorporated in Massachusetts.
During
2005, the Company acquired Woronoco Bancorp. Between the acquisition date and
the end of the year, all of the Woronoco subsidiaries were merged into existing
Berkshire entities, except for Woronoco Insurance Group, Inc., which was
acquired by Berkshire Bank and renamed Berkshire Insurance Group, Inc.
SEGMENT
REPORTING
Management
monitors the revenue streams of the various products and services in evaluating
the Company’s operations and financial performance. All of the Company’s
operations are considered by management to be aggregated in one reportable
operating segment. Prior to its discontinuation, the operations of Berkshire
Hills Technology, Inc., were evaluated on a stand-alone basis.
REGULATION
AND SUPERVISION
The
following discussion describes elements of an extensive regulatory framework
applicable to bank holding companies and banks and specific information about
the Company and its subsidiaries. Federal and state regulation of banks and
bank
holding companies is intended primarily for the protection of depositors and
the
Bank Insurance Fund rather than for the protection of stockholders and
creditors.
GENERAL
As
a
savings and loan holding company, Berkshire Hills is required by federal law
to
file reports with, and otherwise comply with the rules and regulations of,
the
Office of Thrift Supervision (“OTS”). As a savings bank chartered by the
Commonwealth of Massachusetts, Berkshire Bank is subject to extensive
regulation, examination and supervision by the Massachusetts Commissioner of
Banks (the “Commissioner”), as its primary regulator, and the Federal Deposit
Insurance Corporation (“FDIC”), as the deposit insurer. Berkshire Bank is a
member of the Federal Home Loan Bank system and, with respect to deposit
insurance, of the Bank Insurance Fund managed by the FDIC. Berkshire Bank must
file reports with the Commissioner and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The Commissioner and/or the FDIC conduct periodic
examinations to test Berkshire Bank’s safety and soundness and compliance with
various regulatory requirements. The regulatory structure gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulatory requirements
and
policies, whether by the Commissioner, the FDIC or Congress, could have a
material adverse impact on the Company, the Bank and their operations. Certain
regulatory requirements applicable to Berkshire Bank and to the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this Form 10-K does not purport to be a complete description
of such statutes and regulations and their effects on
Berkshire Bank and Berkshire Hills and is qualified in its entirety by reference
to the actual laws and regulations.
MASSACHUSETTS
BANKING LAWS AND SUPERVISION
Massachusetts
savings banks are regulated and supervised by the Massachusetts Commissioner
of
Banks (the “Commissioner”), who oversees regular bank examinations. The
Commissioner’s approval is required to establish or close branches, to merge
with another bank, to form a holding company, to issue stock or to undertake
many other activities. Any Massachusetts bank
that
does not operate in accordance with the Commissioner’s regulations, policies and
directives may be sanctioned. The Commissioner may suspend or remove directors
or officers of a bank who have violated the law, conducted a bank’s business in
a manner that is unsafe, unsound or contrary to the depositors’ interests, or
been negligent in the performance of their duties. In addition, the Commissioner
has the authority to appoint a receiver or conservator if it is determined
that
the bank is conducting its business in an unsafe or unauthorized manner, and
under certain other circumstances.
All
Massachusetts-chartered
savings
banks
are required to be members of the Depositors Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. Member banks are required to pay fund assessments. In
addition, the Mutual Savings Central Fund acts as a source of liquidity to
its
members in supplying them with low-cost funds, and purchasing qualifying
obligations from them.
Berkshire
Bank must adhere to the Massachusetts banking laws, which govern activities
such
as authorized investments, lending activities and dividend payments. In
particular, a Massachusetts savings bank may only pay dividends on its capital
stock if such payment would not impair the bank’s capital stock. No dividends
may be paid to stockholders of a bank if such dividends would reduce
stockholders’ equity of the bank below the amount of the liquidation account
required by the Massachusetts conversion regulations. Additionally, the
Commissioner may restrict the payment of dividends by a bank if it is determined
that such payment would result in safety and soundness concerns.
FEDERAL
REGULATIONS
CAPITAL
REQUIREMENTS
Under
FDIC regulations, federally insured state-chartered banks that are not members
of the Federal Reserve System (“state non-member banks”), such as Berkshire
Bank, are required to comply with minimum leverage capital requirements. For
an
institution determined by the FDIC to not be anticipating or experiencing
significant growth and to be in general a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Rating System established
by the Federal Financial Institutions Examination Council, the minimum capital
leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For
all
other institutions, the minimum leverage capital ratio is not less than 4%.
Tier
1 capital is the sum of common stockholders’ equity, noncumulative perpetual
preferred stock (including any related surplus) and minority investments in
certain subsidiaries, less intangible assets (except for certain servicing
rights and credit card relationships) and a percentage of certain nonfinancial
equity investments.
Berkshire
Bank must also comply with the FDIC risk-based capital guidelines. The FDIC
guidelines require state non-member banks to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. Risk-based
capital ratios are determined by allocating assets and specified off-balance
sheet items to four risk-weighted categories ranging from 0% to 100%, with
higher levels of capital being required for the categories perceived as
representing greater risk.
State
non-member banks must maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%, of which at least one-half must be Tier 1 capital. Total
capital consists of Tier 1 capital plus Tier 2 or supplementary capital items,
which include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock, a portion of the net
unrealized gain on equity securities and other capital instruments. The
includable amount of Tier 2 capital cannot exceed the amount of the
institution’s Tier 1 capital.
As
a
savings and loan holding company regulated by the OTS, Berkshire Hills is not
subject to any separate regulatory capital requirements. Berkshire Bank’s
regulatory capital is included in the Stockholders’ Equity note of the Company’s
financial statements in Item 8 of this report. For the dates shown, Berkshire
Bank met each of its capital requirements.
INTERSTATE
BANKING AND BRANCHING
Federal
law permits a bank, such as Berkshire Bank,
to
acquire an institution by merger in a state other than Massachusetts unless
the
other state has opted out. Federal law also authorizes de novo branching into
another state if the host state enacts a law expressly permitting out of state
banks to establish such branches within its borders. In 2004, Berkshire Bank
purchased a
branch
in Oriskany Falls, New York. At year-end 2005, Berkshire Bank had received
regulatory approval for a new branch in East Greenbush, New York and was in
the
process of obtaining regulatory approval for new branches in Delmar and
Guilderland, New York. During 2005, Berkshire Bank opened branches in Albany
and
Clifton Park, New York. At its interstate branches, Berkshire Bank may conduct
any activity that is authorized
under Massachusetts law that is permissible either for a New
York
savings
bank (subject to applicable federal restrictions) or a New York branch of an
out-of-state national bank. The New York State Superintendent of Banks may
exercise certain regulatory authority over the Bank’s New York
branches.
PROMPT
CORRECTIVE REGULATORY ACTION
Federal
law requires, among other things, that federal bank regulatory authorities
take
“prompt corrective action” with respect to banks that do not meet minimum
capital requirements. For these purposes, the law establishes three categories
of capital deficient institutions: undercapitalized, significantly
undercapitalized and critically undercapitalized.
The
FDIC
has adopted regulations to implement the prompt corrective action legislation.
An institution is deemed to be “well capitalized” if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater. An institution is “adequately
capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier
1 risk-based capital ratio of 4% or greater and generally a leverage ratio
of 4%
or greater. An institution is “undercapitalized” if it has a total risk-based
capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than
4%, or generally a leverage ratio of less than 4% (3% or less for institutions
with the highest examination rating). An institution is deemed to be
“significantly undercapitalized” if it has a total risk-based capital ratio of
less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is considered to be “critically
undercapitalized” if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%. As of December
31, 2005, Berkshire Bank met the conditions to be classified as a “well
capitalized” institution.
“Undercapitalized”
banks must adhere to growth, capital distribution (including dividend) and
other
limitations and are required to submit a capital restoration plan. No
institution may make a capital distribution, including payment as a dividend,
if
it would be “undercapitalized” after the payment. A bank’s compliance with such
plans is required to be guaranteed by its parent holding company in an amount
equal to the lesser of 5% of the institution’s total assets when deemed
undercapitalized or the amount needed to comply with regulatory capital
requirements. If an “undercapitalized” bank fails to submit an acceptable plan,
it is treated as if it is “significantly undercapitalized.” “Significantly
undercapitalized” banks must comply with one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
holding company. “Critically undercapitalized” institutions must comply with
additional sanctions including, subject to a narrow exception, the appointment
of a receiver or conservator within 270 days after it obtains such
status.
TRANSACTIONS
WITH AFFILIATES
Under
current federal law, transactions between depository institutions and their
affiliates are governed by Sections 23A and 23B of the Federal Reserve Act.
In a
holding company context, at a minimum, the parent holding company of a savings
bank and any companies which are controlled by such parent holding company
are
affiliates of the savings bank. Generally, Section 23A limits the extent to
which the savings bank or its subsidiaries may engage in “covered transactions,”
such as loans,
with any
one affiliate to 10% of such savings bank’s capital stock and surplus, and
contains an aggregate limit on all such transactions with all affiliates to
20%
of capital stock and surplus. Loans to affiliates and certain other specified
transactions must comply with specified collateralization requirements.
Section 23B requires that transactions with affiliates be on terms that are
no
less favorable to the savings bank or its subsidiary as similar transactions
with non-affiliates.
Further,
federal law restricts an institution with respect to loans to directors,
executive officers, and principal stockholders (“insiders”). Loans to insiders
and their related interests may not exceed, together with all other outstanding
loans to such persons and affiliated entities, the institution’s total capital
and surplus. Loans to insiders above specified amounts must receive the prior
approval of the board of directors. Further, loans to insiders must be made
on
terms substantially the same as offered in comparable transactions to other
persons, except that such insiders may receive preferential loans made under
a
benefit or compensation program that is widely available to Berkshire Bank’s
employees and does not give preference to the insider over the employees.
Federal law places additional limitations on loans to executive
officers.
ENFORCEMENT
The
FDIC
has extensive enforcement authority
over insured savings banks, including Berkshire Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties,
to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws
and
regulations and unsafe or unsound practices. The FDIC has authority under
federal law to appoint a conservator or receiver for an insured bank under
limited circumstances.
INSURANCE
OF DEPOSIT ACCOUNTS
The
FDIC
maintains a risk-based assessment system. The FDIC assigns an institution to
one
of three capital categories based on the institution’s financial information and
one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution’s primary federal
regulator and information which the FDIC determines to be relevant to the
institution’s financial condition and the risk posed to the deposit insurance
fund. Assessment rates currently range from 0 basis points for the healthiest
institutions to 27 basis points of assessable deposits for the riskiest. The
FDIC is authorized to raise the assessment rates. The FDIC has exercised this
authority several times in the past and may raise insurance premiums in the
future. If the FDIC takes such action, it could have an adverse effect on the
earnings of Berkshire Bank.
The
FDIC
may terminate insurance of deposits if it finds that the institution is in
an
unsafe or unsound condition to continue operations, has engaged in unsafe or
unsound practices, or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The management of the Bank does not know
of
any practice, condition or violation that might lead to termination of deposit
insurance.
Federal
Deposit Insurance Reform Act of 2005. The
Federal Deposit Insurance Reform Act of 2005 (the “Act”), signed by the
President on February 8, 2006, revised the laws governing the federal deposit
insurance system. The Act provides for the consolidation of the Bank and Savings
Association Insurance Funds into a combined “Deposit Insurance Fund.”
Under
the
Act, insurance premiums are to be determined by the FDIC based on a number
of factors, primarily the risk of loss that insured institutions pose to the
Deposit Insurance Fund. The legislation eliminates the current minimum 1.25%
reserve ratio for the insurance funds, the mandatory assessments when the ratio
falls below 1.25% and the prohibition on assessing the highest quality banks
when the ratio is above 1.25%. The Act provides the FDIC with flexibility to
adjust the new insurance fund’s reserve ratio between 1.15% and 1.5%, depending
on projected losses, economic changes and assessment rates at the end of a
calendar year.
The
Act
increased deposit insurance coverage limits from $100,000 to $250,000 for
certain types of Individual Retirement Accounts, 401(k) plans and other
retirement savings accounts. While it preserved the $100,000 coverage limit
for
individual accounts and municipal deposits, the FDIC was furnished with the
discretion to adjust all coverage levels to keep pace with inflation beginning
in 2010. Also, institutions that become undercapitalized will be prohibited
from
accepting certain employee benefit plan deposits.
The
consolidation of the Bank and Savings Association Insurance Funds must occur
no
later than the first day of the calendar quarter that begins 90-days after
the
date of the Act’s enactment, i.e., July 1, 2006. The Act also states that the
FDIC must promulgate final regulations implementing the remainder of its
provisions not later than 270 days after its enactment.
At
this
time, management cannot predict the effect, if any, that the Act will have
on
insurance premiums paid by the Bank.
FEDERAL
HOME LOAN BANK SYSTEM
The
Bank
is a member of the Federal Home Loan Bank system, which consists of 12 regional
Federal Home Loan Banks that provide a central credit facility primarily for
member institutions. Berkshire Bank, as a member, is required to acquire and
hold shares of capital stock in the Federal Home Loan Bank of Boston. Berkshire
Bank was in compliance with this requirement with an investment in Federal
Home
Loan Bank of Boston stock at year-end 2005 of $36.7 million.
The
Federal Home Loan Banks are required to provide funds for certain purposes
including contributing funds for affordable housing programs. These requirements
could reduce the amount of dividends that the Federal Home Loan Banks pay to
their members and result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members. For the years 2005, 2004, 2003, 2002
and 2001, cash dividends from the Federal Home Loan Bank of Boston to Berkshire
Bank amounted to approximately $1,300,000, $513,000, $249,000, $283,000 and
$304,000, respectively.
HOLDING
COMPANY REGULATION
Federal
law allows a state savings bank that qualifies as a “Qualified Thrift Lender,”
discussed below, to elect to be treated as a savings association for purposes
of
the savings and loan holding company provisions of federal law. Such election
allows its holding company to be regulated as a savings and loan holding company
by the OTS rather than as a bank holding company by the Federal Reserve Board.
Berkshire Bank made such election and the Company is a non-diversified unitary
savings and loan holding company within the meaning of federal law. As such,
the
Company is registered with the OTS and must adhere to the OTS’s regulations and
reporting requirements. In addition, the OTS may examine, supervise and take
enforcement action against
the
Company and has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS
to
restrict or prohibit activities that are determined to be a serious risk to
the
subsidiary savings institution. Additionally, Berkshire Bank is required to
notify the OTS at least 30 days before declaring any dividend to the Company.
By
regulation, the OTS may restrict or prohibit the Bank from paying
dividends.
As
a
unitary savings and loan holding company, the Company is generally unrestricted
under existing laws as to the types of business activities in which it may
engage. The Gramm-Leach-Bliley Act of 1999 provided that unitary savings and
loan holding companies may only engage in activities permitted to a financial
holding company under that legislation and those permitted for a multiple
savings and loan holding company. Unitary savings and loan companies existing
prior to May 4, 1999, such as the Company, were grandfathered as to the
unrestricted activities. The Company would become subject to activities
restrictions upon the acquisition of another savings institution that is held
as
a separate subsidiary.
Federal
law prohibits a savings and loan holding company from, directly or indirectly,
acquiring more than 5% of the voting stock of another savings association or
savings and loan holding company or from acquiring such an institution or
company by merger, consolidation or purchase of its assets, without prior
written approval of the OTS. In evaluating applications by holding companies
to
acquire savings associations, the OTS considers the financial and managerial
resources and future prospects of the Company and the institution involved,
the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
To
be
regulated as a savings and loan holding company by the OTS (rather than as
a
bank holding company by the Federal Reserve Board), the Bank must qualify as
a
Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, the Bank
must
maintain compliance with the test for a “domestic building and loan
association,” as defined in the Internal Revenue Code, or with a Qualified
Thrift Test. Under the Qualified Thrift Lender Test, a savings institution
is
required to maintain at least 65% of its “portfolio assets” (total assets less:
(1) specified liquid assets up to 20% of total assets; (2) intangibles,
including goodwill; and (3) the value of property used to conduct business)
in
certain “qualified thrift investments” (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12-month period. At year-end 2005, Berkshire
Bank maintained 96% of its portfolio assets in qualified thrift investments.
Berkshire Bank also met the QTL test in each of the prior twelve months and,
therefore, met the QTL Test.
Acquisition
of the Company.
Under
the Federal Change in Bank Control Act, a notice must be submitted to the OTS
if
any person (including a company), or group acting in concert, seeks to acquire
“control” of a savings and loan holding company. Under certain circumstances, a
change in control may occur, and prior notice is required, upon the acquisition
of 10% or more of the Company’s outstanding voting stock, unless the OTS has
found that the acquisition will not result in a change of control of the
Company.
Massachusetts
Holding Company Regulation.
In
addition to the federal holding
company regulations,
a bank holding company organized or doing business in Massachusetts must comply
with regulations under Massachusetts law. Approval of the Massachusetts
regulatory authorities would be required for the Company to acquire 25% or
more
of the voting stock of another depository institution. Similarly, prior
regulatory approval would be necessary for any person or company to acquire
25%
or more of the voting stock of the Company. The term “bank holding company,” for
the purpose of Massachusetts law, is defined generally to include any company
which, directly or indirectly, owns, controls or holds with power to vote more
than 25% of the voting stock of each of two or more banking institutions,
including commercial banks and state co-operative banks, savings banks and
savings and loan association and national banks, federal savings banks and
federal savings and loan associations. In general, a holding company
controlling, directly or indirectly, only one banking institution will not
be
deemed to be a bank holding company for the purposes of Massachusetts law.
Under
Massachusetts law, the prior approval of the Board of Bank Incorporation is
required before the following: any company may become a bank holding company;
any bank holding company acquires direct or indirect ownership or control of
more than 5% of the voting stock of, or all or substantially all of the assets
of, a banking institution; or any bank holding company mergers with another
bank
holding company. Although the Company is not a bank holding company for purposes
of Massachusetts law, any future acquisition of ownership, control, or the
power
to vote 25% or more of the voting stock of another banking institution or bank
holding company would cause it to become such. The Company has no current plan
or arrangement to acquire ownership or control, directly or indirectly, of
25%
or more of the voting stock of another banking institution.
BERKSHIRE
MUNICIPAL BANK
In
2005,
Berkshire Bank established a new subsidiary, Berkshire Municipal Bank, as a
state chartered limited
purpose commercial bank in New York, to accept deposits of municipalities and
other governmental entities in the State of New York. Berkshire Municipal Bank
is subject to extensive regulation, examination and supervision by the New
York
State Superintendent
of
Banks,
as its primary regulator and the FDIC, as the deposit insurer. It is also
subject to regulation as to certain matters by the Federal Reserve.
FEDERAL AND
MASSACHUSETTS INCOME TAXATION
The
Company and the Bank report their income on a calendar year basis using the
accrual method of accounting. The federal income tax laws apply to the Company
and Berkshire Bank in the same manner as to other corporations with some
exceptions, including particularly Berkshire Bank’s reserve for bad debts
discussed below. This discussion of tax matters is only a summary and is not
a
comprehensive description of the tax rules applicable to the Company and its
subsidiaries.
Prior
to
1995, the Bank was permitted to use certain favorable provisions to calculate
deductions from taxable income for annual additions to its bad debt reserve.
Federal legislation in 1996 repealed this reserve method and required savings
institutions to recapture or take into income certain portions of their
accumulated bad debt reserves. Approximately $844,000 of the Bank’s accumulated
bad debt reserves will not be recaptured into taxable income unless the Bank
makes a “nondividend distribution” to the Company, including distributions in
excess of the Bank’s current and accumulated earnings
and profits. In the event of a nondividend distribution, approximately 150%
of
the amount of the distribution up to $844,000 would be includable in income
for
federal income tax purposes, resulting in an increase in tax of $346,000
assuming a marginal federal and state tax rate of 41%. The Bank does not intend
to pay dividends that would result in a recapture of any portion of its bad
debt
reserves.
The
Massachusetts excise tax rate for savings banks is currently 10.5% of federal
taxable income, adjusted for certain items. Taxable income includes gross income
as defined under the Internal Revenue Code, plus interest from municipal
obligations of any state, less deductions, but not the credits, allowable under
the provisions of the Internal Revenue Code, except no deduction is allowed
for
bonus depreciation or state income taxes. Carryforwards and carrybacks of net
operating losses are not allowed. A qualifying limited purpose corporation
is
generally entitled to special tax treatment as a “securities corporation.” The
Bank’s three securities corporations all qualify for this treatment, and are
taxed at a 1.32% rate on their gross income.
An
investment in the Company’s common stock involves certain risks. To understand
these risks and to evaluate an investment in the Company’s common stock, you
should read this entire report, including the following risk
factors.
Berkshire
Bank’s emphasis on commercial and consumer lending may expose it to increased
lending risks. Both commercial loans and consumer loans are more sensitive
to
economic downturns and the possible impact of higher interest rates. Such
sensitivity includes potentially higher default rates and possible diminution
of
collateral values. Additionally, commercial loans typically involve larger
loan
balances and larger relationship exposures. Commercial lending also involves
more development financing, which is dependent on the future success of new
operations. In expanding into new commercial lending markets, the Bank will
have
less knowledge and experience with local conditions, compared to its traditional
markets, which could affect the success of its underwriting and loan
collections. In conducting its lending activities, the Bank generally avoids
lending practices identified as high risk by bank regulators, as well as lending
concentrations that would be viewed as high risk under regulatory
guidelines.
The
Company’s geographic expansion and growth, if not successful, could negatively
impact earnings. The Company plans to achieve significant growth both
organically and through acquisitions. It has recently expanded into new
geographic markets and anticipates that it will expand into additional new
geographic markets as it transforms itself into a regional bank. The success
of
this expansion will depend on the acceptance by customers of the Company and
its
services in these new markets. Additionally, the profitability of Berkshire
Bank’s expansion strategy will depend on whether the income it generates in the
new markets will offset the increased expenses of operating a larger entity
with
increased personnel, more branch locations and additional product offerings.
Berkshire Bank expects that it may take a period of time before certain of
its
new branches can become profitable, especially in areas in which Berkshire
Bank
does not have an established physical presence. During this period, operating
these new branches may negatively impact net income. Additionally, in connection
with the Company’s expansion, the Company will need to increase its operational
and financial procedures, systems and controls. If the Company has difficulty
in
doing so, it could harm the Company’s business, results of operations and
financial condition.
The
Company acquired Woronoco Bancorp, Inc. in 2005, and has purchased insurance
and
financial planning businesses in the last two years. The Company will pursue
additional opportunities for acquisitions in the future, including acquisitions
in adjacent states. The success of acquisitions depends on many factors,
including the long term retention of acquired customer relationships. The
Company recorded goodwill and other intangible assets in conjunction with the
Woronoco acquisition, and such assets may be recorded in future acquisitions.
If
these investments were to become impaired, the Company would be required to
write them down.
The
Company is subject to risks which are common to its industry. Large changes
in
market interest rates can compress its margins and make its asset and liability
management less reliable. A downturn in the local economy or a decline in real
estate values could hurt the Company’s profits. Most of the Bank’s loans are
secured by real estate. In recent years, there has been a significant increase
in real estate values in the Bank’s market areas. A decline in real estate
values could expose the Company to a greater risk of loss. Additionally, strong
competition within the Bank’s market area could hurt the Company’s profit and
growth. Berkshire Bank faces intense competition both in making loans and
attracting deposits. Some competitors have substantially greater resources
and
lending limits than it has and may offer services that Berkshire Bank does
not
provide. Competition will likely increase in the future as a result of
legislative, regulatory and technological changes and the continuing trend
of
consolidation in the financial services industry. The Company’s profitability
depends on the Bank’s continued ability to compete successfully in its market
area.
Berkshire
Bank and the Company operate in a highly regulated environment and may be
adversely affected by changes in laws and regulations. The Company is subject
to
extensive regulation, supervision and examination by the Office of Thrift
Supervision, its chartering authority, and Berkshire Bank is subject to
extensive supervision and examination by the Massachusetts Division of Banks,
its chartering authority, and the Federal Deposit Insurance Corporation, as
insurer of Berkshire Bank’s deposits. Such regulations and supervision govern
the activities in which an institution and its holding company may engage,
and
are intended primarily for the protection of the insurance fund and depositors.
Regulatory authorities have extensive discretion in their supervisory and
enforcement activities, including the imposition of restrictions on
operations, the classification of assets and determination of the level of
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, legislation or supervisory claim
may have a material impact on Berkshire Bank’s operations. The Company primarily
depends on the Bank for dividends as a source of funds to service its
indebtedness and to pay dividends to shareholders. Such dividends may be
restricted or prohibited by regulatory authorities.
None.
The
Company’s headquarters is located in an owned facility located in Pittsfield,
Massachusetts. The Company also owns or leases other facilities within its
primary market areas: Berkshire County, Massachusetts; Pioneer Valley,
Massachusetts; and Capital Region, Northeastern New York. The Company operates
24 full service banking offices, of which 14 operate in premises owned by the
Company. At year-end 2005, the Company occupied an additional six office
properties, of which three were owned. The Company considers its properties
to
be suitable and adequate for its present and immediately foreseeable
needs.
At
December 31, 2005, neither the Company nor the Bank was involved in any pending
legal proceedings believed by management to be material to the Company’s
financial condition or results of operations. Periodically, there have been
various claims and lawsuits involving the Bank, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans
and
other issues incident to the Bank’s business. However, neither the Company nor
the Bank is a party to any pending legal proceedings that it believes, in the
aggregate, would have a material adverse effect on the financial condition
or
operations of the Company.
No
matters were submitted to a vote of security holders during the fourth quarter
of 2005.
Market
Information
The
common shares of Berkshire Hills trade on the NASDAQ National Market under
the
symbol “BHLB”. Since its initial public offering, the Company’s shares had
traded on the American Stock Exchange under the symbol “BHL”. The Company’s
shares began trading on the NASDAQ National Market on October 25,
2006.
The
following table sets forth the quarterly high and low price information and
dividends declared per share of common stock in 2005 and 2004. On March 1,
2006,
the closing market price of Berkshire Hills common stock was $33.11. Berkshire
Hills increased its quarterly dividend to $0.14 per share in the third quarter
of 2005.
|
|
High
|
Low
|
Dividends
Declared
|
2005
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
37.64
|
|
$
|
33.40
|
|
$
|
0.12
|
|
Second
quarter
|
|
|
34.90
|
|
|
30.97
|
|
|
0.12
|
|
Third
quarter
|
|
|
35.20
|
|
|
31.90
|
|
|
0.14
|
|
Fourth
quarter
|
|
|
35.57
|
|
|
31.75
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
39.20
|
|
$
|
34.40
|
|
$
|
0.12
|
|
Second
quarter
|
|
|
37.30
|
|
|
32.46
|
|
|
0.12
|
|
Third
quarter
|
|
|
39.20
|
|
|
34.80
|
|
|
0.12
|
|
Fourth
quarter
|
|
|
38.20
|
|
|
34.55
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders
The
Company had approximately 2,052 holders of record of common stock at March
1,
2006.
Dividends
The
principal source of the Company’s cash reserves is dividends received from the
Bank. In addition, the Company has issued subordinated debt to its wholly owned
subsidiary grantor trust. The banking regulators may prohibit banks and holding
companies from paying dividends that would constitute an unsafe or unsound
banking practice, or which would reduce the amount of its capital below that
necessary to minimum applicable regulatory capital requirements. The Company
is
subject to the requirements of Delaware law, which generally limits dividends
to
an amount equal to the excess of the net assets of the Company (the amount
by
which total assets exceed total liabilities) over its statutory capital or,
if
there is no excess, to its net profits for the current and/or immediately
preceding fiscal year.
Securities
Authorized for Issuance under Equity Compensation Plans
Information
regarding securities authorized for issuance under equity compensation plans
appears in Part III, Item 12 of this report.
Recent
Sale of Unregistered Securities; Use of Proceeds From Registered
Securities
No
unregistered securities were sold by the Company within the last three years.
Registered securities were exchanged as part of the consideration for the
acquisition of Woronoco Bancorp.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchases
The
following table provides information with respect to any purchase made by or
on
behalf of the Company or any “affiliated purchaser”, as defined by Section
240.10b-18(a)(3) of the Securities and Exchange Act of 1934, of shares of the
Company’s common stock.
Period
|
Total
Number of
Shares
Purchased
|
|
Average
Price
Paid
Per Share
|
|
Number
of Shares
Purchased
of Total
That
were Part of
Publicly
Announced
Plans
or Programs
|
|
Maximum
number of
Shares
That May Yet Be Purchased Under the Plans or Programs
|
October
1-31, 2005
|
|
|
4,500
|
|
|
$
|
31.92
|
|
|
|
4,500
|
|
|
|
53,100
|
|
November
1-30, 2005
|
|
|
10,000
|
|
|
|
32.00
|
|
|
|
10,000
|
|
|
|
43,100
|
|
December
1-31, 2005
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
|
|
|
14,500
|
|
|
$
|
31.98
|
|
|
|
14,500
|
|
|
|
43,100
|
|
On
May
25, 2005, the Company authorized the purchase of up to 150,000 shares, from
time
to time, subject to market conditions. The repurchase plan will continue until
it is completed or terminated by the Board of Directors. As of December 31,
2005, 43,100 shares remained available for purchase under the plan. No plans
expired during the fourth quarter of 2005. The Company has no plans that it
has
elected to terminate prior to expiration or under which it does not intend
to
make further purchases.
Other
Events
The
annual meeting of shareholders will be held on Thursday, May 4, 2006 at the
Crowne Plaza Hotel, One West Street, Pittsfield, Massachusetts.
ITEM
6. SELECTED FINANCIAL DATA
The
following summary data is based in part on the consolidated financial statements
and accompanying notes, and other schedules appearing elsewhere in this Form
10-K. Historical data is also based in part on, and should be read in
conjunction with, prior filings with the SEC.
|
|
At
or For the Years Ended December 31,
|
|
(Dollars
in thousands, except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,035,553
|
|
$
|
1,310,115
|
|
$
|
1,218,548
|
|
$
|
1,045,947
|
|
$
|
1,030,701
|
|
Securities
|
|
|
420,784
|
|
|
414,363
|
|
|
359,294
|
|
|
226,919
|
|
|
146,779
|
|
Loans,
net
|
|
|
1,403,448
|
|
|
818,842
|
|
|
783,258
|
|
|
712,714
|
|
|
791,920
|
|
Goodwill
and
intangibles
|
|
|
99,616
|
|
|
7,254
|
|
|
10,233
|
|
|
10,436
|
|
|
10,592
|
|
Deposits
|
|
|
1,371,218
|
|
|
845,789
|
|
|
830,244
|
|
|
782,360
|
|
|
742,729
|
|
Borrowings
|
|
|
412,917
|
|
|
327,926
|
|
|
251,465
|
|
|
133,702
|
|
|
135,854
|
|
Total
stockholders’ equity
|
|
|
246,066
|
|
|
131,736
|
|
|
123,175
|
|
|
120,569
|
|
|
139,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest and dividend income
|
|
$
|
87,732
|
|
$
|
61,081
|
|
$
|
56,308
|
|
$
|
64,128
|
|
$
|
75,796
|
|
Total
interest expense
|
|
|
36,115
|
|
|
20,724
|
|
|
18,742
|
|
|
23,428
|
|
|
33,560
|
|
Net
interest income
|
|
|
51,617
|
|
|
40,357
|
|
|
37,566
|
|
|
40,700
|
|
|
42,236
|
|
Provision
for
loan losses
|
|
|
1,313
|
|
|
1,565
|
|
|
1,460
|
|
|
6,180
|
|
|
7,175
|
|
Service
charge and fee income
|
|
|
9,373
|
|
|
5,493
|
|
|
5,023
|
|
|
4,659
|
|
|
4,289
|
|
All
other non-interest income
|
|
|
5,550
|
|
|
2,271
|
|
|
1,425
|
|
|
1,768
|
|
|
2,794
|
|
Total
non-interest expense
|
|
|
48,998
|
|
|
28,977
|
|
|
28,243
|
|
|
37,279
|
|
|
28,927
|
|
Provision
for
income taxes
|
|
|
8,003
|
|
|
5,639
|
|
|
5,161
|
|
|
885
|
|
|
4,334
|
|
Net
(loss) income from discontinued operations
|
|
|
-
|
|
|
(431
|
)
|
|
(185
|
)
|
|
(686
|
)
|
|
28
|
|
Net
income
|
|
$
|
8,226
|
|
$
|
11,509
|
|
$
|
8,965
|
|
$
|
2,097
|
|
$
|
8,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per
share
|
|
$
|
0.52
|
|
$
|
0.48
|
|
$
|
0.48
|
|
$
|
0.48
|
|
$
|
0.43
|
|
Earnings
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.16
|
|
$
|
2.18
|
|
$
|
1.70
|
|
$
|
0.39
|
|
$
|
1.42
|
|
Diluted
|
|
$
|
1.10
|
|
$
|
2.01
|
|
$
|
1.57
|
|
$
|
0.36
|
|
$
|
1.35
|
|
Average
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,122
|
|
|
5,284
|
|
|
5,266
|
|
|
5,435
|
|
|
6,264
|
|
Diluted
|
|
|
7,503
|
|
|
5,731
|
|
|
5,703
|
|
|
5,867
|
|
|
6,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
or For the Years Ended December 31,
|
|
(Dollars
in thousands, except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
0.47
|
%
|
|
0.89
|
%
|
|
0.80
|
%
|
|
0.20
|
%
|
|
0.86
|
%
|
Return
on average equity
|
|
|
4.19
|
|
|
9.06
|
|
|
7.28
|
|
|
1.54
|
|
|
5.74
|
|
Interest
rate
spread
|
|
|
3.00
|
|
|
3.10
|
|
|
3.29
|
|
|
3.70
|
|
|
3.61
|
|
Net
interest margin
|
|
|
3.33
|
|
|
3.37
|
|
|
3.61
|
|
|
4.18
|
|
|
4.41
|
|
Non-interest
income/total net revenue
|
|
|
22.43
|
|
|
16.13
|
|
|
14.65
|
|
|
13.64
|
|
|
14.36
|
|
Non-interest
expense/average assets
|
|
|
2.81
|
|
|
2.25
|
|
|
2.53
|
|
|
3.54
|
|
|
2.80
|
|
Dividend
payout
ratio
|
|
|
45.06
|
|
|
22.02
|
|
|
28.24
|
|
|
123.08
|
|
|
30.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1
capital to average assets - Bank
|
|
|
7.79
|
|
|
8.08
|
|
|
7.87
|
|
|
8.60
|
|
|
9.02
|
|
Total
capital to risk-weighted assets - Bank
|
|
|
11.12
|
|
|
12.69
|
|
|
12.55
|
|
|
13.48
|
|
|
13.40
|
|
Shareholders’
equity/total assets
|
|
|
12.09
|
|
|
10.06
|
|
|
10.11
|
|
|
11.53
|
|
|
13.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming/total
loans
|
|
|
0.08
|
|
|
0.14
|
|
|
0.40
|
|
|
0.52
|
|
|
0.34
|
|
Nonperforming
assets/total assets
|
|
|
0.06
|
|
|
0.09
|
|
|
0.26
|
|
|
0.36
|
|
|
0.26
|
|
Net
loans charged-off/average total loans
|
|
|
0.08
|
|
|
0.15
|
|
|
0.35
|
|
|
0.87
|
|
|
0.78
|
|
Allowance
for
loan losses/total loans
|
|
|
0.92
|
|
|
1.13
|
|
|
1.13
|
|
|
1.43
|
|
|
1.37
|
|
Allowance
for
loan losses/nonperforming loans
|
|
|
10.96
|
x |
|
8.11
|
x |
|
2.80
|
x |
|
2.76
|
x |
|
4.08
|
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per share
|
|
$
|
28.81
|
|
$
|
22.43
|
|
$
|
20.87
|
|
$
|
19.71
|
|
$
|
26.91
|
|
Tangible
book
value per share (2)
|
|
$
|
17.15
|
|
$
|
21.19
|
|
$
|
19.13
|
|
$
|
18.00
|
|
$
|
24.87
|
|
Market
price at year end
|
|
$
|
33.50
|
|
$
|
37.15
|
|
$
|
36.20
|
|
$
|
23.55
|
|
$
|
20.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
All performance ratios are based on average balance sheet amounts
where
applicable.
|
|
|
|
|
|
|
(2)
Tangible book value is total shareholders’ equity less goodwill and other
intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GENERAL
This
discussion is intended to assist in understanding the financial condition and
results of operations of the Company. This discussion should be read in
conjunction with the consolidated financial statements and accompanying notes
contained in this report.
CRITICAL
ACCOUNTING POLICIES
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements. Please see those policies in conjunction
with
this discussion.
Critical
accounting policies are as those that are reflective of significant judgments
and uncertainties, and could potentially result in materially different results
under different assumptions and conditions. Management believes that our most
critical accounting policies, which involve the most complex or subjective
decisions or assessments, are as follows:
Allowance
for Loan Losses.
Arriving at an appropriate level of allowance for loan losses involves a high
degree of judgment. The allowance for loan losses provides for probable losses
based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information, as well as current economic data, to
assess the adequacy of the allowance for loan losses as it is affected by
changing economic conditions and various external factors, which may impact
the
portfolio in
ways
currently unforeseen. Although we believe that we use the appropriate
information available to establish the allowance for loan losses, future
additions to the allowance may be necessary if certain future events occur
that
cause actual results to differ from the assumptions used in making the
evaluation. For example, a downturn in the local economy could cause an increase
in non-performing loans. Additionally, a decline in real estate values could
cause some of our loans to become inadequately collateralized. In either case,
this may require us to increase our provisions for loan losses, which would
negatively impact earnings. The allowance for loan losses discussion in Item
1
provides additional information about the allowance.
Income
Taxes.
Management considers accounting for income taxes as a critical accounting policy
due to the subjective nature of certain estimates that are involved in the
calculation and evaluation of the timing and recognition of resulting tax
liabilities and assets. Management uses the asset liability method of accounting
for income taxes in which deferred tax assets and liabilities are established
for the temporary differences between the financial reporting basis and the
tax
basis of the Company's assets and liabilities. Management must assess the
realizability of the deferred tax asset, including the carry forward of a
portion of the charitable contribution, and to the extent that management
believes that recovery is not likely, a valuation allowance is established.
Adjustments to increase or decrease the valuation allowance are generally
charged or credited, respectively, to income tax expense.
Goodwill
and Identifiable Intangible Assets.
In
conjunction with the acquisition of Woronoco Bancorp in 2005, goodwill was
recorded as an intangible asset equal to the excess of the purchase price over
the estimated fair value of the net assets acquired. Other intangible assets
were recorded for the fair value of core deposits and non-compete agreements.
The valuation techniques used by management to determine the carrying value
of
assets acquired in the acquisition and the estimated lives of identifiable
intangible assets involve estimates for discount rates, projected future cash
flows and time period calculations, all of which are susceptible to change
based
on changes in economic conditions and other factors. Future events or changes
in
the estimates which were used to determine the carrying value of goodwill and
identifiable intangible assets or which otherwise adversely affects their value
or estimated lives could have a material adverse impact on future results of
operations.
SUMMARY
The
Company completed its acquisition of Woronoco Bancorp on June 1, 2005. The
income statement includes the operations of Woronoco Bancorp beginning on that
date. Most categories in the income statement and balance sheet increased
primarily due to this acquisition. Most major financial statement categories
also increased due to the organic growth of Berkshire's business lines, as
well
as expansion into New York and acquisitions of fee producing businesses in
2004
and 2005. Income in 2005 included a non-cash charge of $8.8 million for the
termination of the Employee Stock Ownership Plan (ESOP), which did not reduce
stockholders’ equity due to offsetting credits to equity. Results in 2005 also
included expenses totaling $2.1 million related to merger and conversion
expense.
Highlights
of the year’s performance included:
|
·
|
Acquired
and integrated Woronoco Bancorp, doubling the Massachusetts branch
office
network, achieved 37% cost savings on acquired operations, and increased
related loans and deposits subsequent to the
acquisition.
|
|
·
|
Achieved
double digit organic growth in most key business
lines.
|
|
·
|
Converted
core banking systems to new
technology.
|
|
·
|
Opened
two new branches in New York, opened special purpose Berkshire Municipal
Bank in New York, and acquired two insurance agencies in Massachusetts.
Three additional new branches in New York were pending at
year-end.
|
|
·
|
Announced
new three year plan to transition to a regional bank, including doubling
branch network and major expansion of commercial banking
activities.
|
|
·
|
Implemented
new regional leadership structure in New York Capital Region and
Massachusetts Pioneer Valley
Region.
|
|
·
|
Achieved
0.96% annualized return on assets in fourth quarter, the first full
quarter after Woronoco integration.
|
|
·
|
Credit
quality remained strong.
|
COMPARISON
OF FINANCIAL CONDITION AT YEAR-END DECEMBER 31, 2005 AND 2004
Total
Assets.
Total
assets were $2.04 billion at year-end 2005 compared to $1.31 billion at year-end
2004. The Company acquired $849 million in assets and $702 million in
liabilities in connection with the Woronoco acquisition, and most categories
of
assets and liabilities increased primarily due to this event. The balance sheet
impact of the acquisition was partially offset by a $243 million deleveraging
plan through which borrowings were paid down with proceeds from sales of
securities and residential mortgage loans.
Loans.
Loans
totaled $1.42 billion at December 31, 2005, increasing by $588 million (71%)
from $828 million at year-end 2004. Loan growth included $526 million related
to
the Woronoco acquisition. Loans added through this acquisition were primarily
concentrated in residential mortgages and home equity line borrowings.
Excluding the impact of the loans acquired through the Woronoco acquisition
and
$4 million in loan sales, total loans increased by $66 million (8%) for the
year. Growth was spread among all major loan categories and in all major
markets. Organic commercial loan growth totaled $36 million (9%) for 2005,
and
organic consumer loan growth totaled $24 million (13%) for the year. Loan
originations have benefited from the Bank's expansion into New York State.
Loan
originations also benefited from a strong local real estate market, which was
supported by a generally favorable interest rate environment.
Asset
Quality.
Asset
quality indicators remained favorable throughout the year. The loans added
through the Woronoco acquisition were primarily concentrated in comparatively
low risk residential mortgage and home equity loans. At year-end, the ratio
of
nonperforming loans to total loans decreased to 0.08% in 2005, compared to
0.14%
in 2004. There was no foreclosed real estate at either year-end. Total impaired
loans increased to $1.91 million from $1.18 million during 2005. The ratio
of
net loan charge-offs decreased to 0.08% of average total loans in 2005, compared
to 0.15% in 2004. While the Company believes that the long run credit losses
implicit in the portfolio are higher than the current level of charge-offs,
management did not feel at year-end that there were any evident signals of
near
term changes in the levels of charge-offs and problem loans.
The
allowance for loan losses declined to 0.92% of total loans at year-end 2005,
compared to 1.13% at the prior year-end. This was primarily due to the addition
of low risk residential mortgage and home equity loans from Woronoco. The total
loan loss allowance increased by $3.7 million to $13.0 million at year-end
2005,
primarily due to a $3.3 million allowance for loan losses acquired from
Woronoco. The specific allowance for impaired loans increased only slightly
to
$257,000 from $230,000 during this period. This reserve decreased to 13% of
total impaired loans from 20% during the year, indicating better average
collateral coverage of impaired loans. The ratio of the allowance to
nonperforming loans improved to 10.96x at year-end 2005, compared to 8.11x
at
year-end 2004.
Investment
Securities.
Investment securities totaled $421 million at year-end 2005, increasing by
$7
million (2%) compared to $414 million at year-end 2004. This increase was due
to
securities acquired through the Woronoco acquisition, net of sales and
maturities under the deleveraging plan, along with the sale of securities by
the
Bank, including $46 million sold in the second quarter to provide funds for
the
acquisition. Securities acquired from Woronoco totaled $182 million. The end
result of the year’s changes in 2005 was an increase in municipal bonds and
obligations (including industrial revenue bonds) and a decrease in
mortgage-backed securities. The Bank had increased its mortgage-backed
securities portfolio in 2004 to leverage the Bank's capital and to take
advantage of a steep yield curve. Due to the leverage of the Woronoco
acquisition and the flattening of the yield curve in 2005, the Bank decreased
this portfolio. The increase in the municipal securities portfolio was due
to
the acquisition of Woronoco, which had a higher concentration in these tax
advantaged securities. Additionally, equity securities increased due to the
additional FHLBB stock added through the Woronoco acquisition. FHLBB stock
totaled $36.7 million at year-end 2005.
The
total
net unrealized loss on investment securities was $3.8 million at year-end 2005,
compared to a gain of $6.5 million at the prior year-end. This $10.3 million
decline was primarily due to gains realized on the sale of equity securities
and
to lower market prices for mortgage-backed securities. The Company realized
total gross securities gains of $6.1 million in 2005, and the unrealized gains
on equity securities decreased by $5.6 million. The net unrealized loss on
mortgage-backed securities increased by $4.8 million in 2005 due to lower prices
resulting from higher interest rates at year-end. The net unrealized loss on
these securities was 2.3% of their unamortized cost at year-end 2005. Management
determined that there were no losses which were other than temporary at year-end
2005.
Deposits
and Borrowings.
Deposits
totaled $1.37 billion at year-end 2005, increasing by $525 million (62%) from
year-end 2004. Deposit growth included $443 million related to the Woronoco
acquisition. Excluding the impact of this acquisition, organic deposit growth
measured $82 million (10%) for the year 2005. Included in this growth was $32
million in New York deposits related to the Bank’s expansion in that region.
Additionally, the Bank recorded a $42 million (9%) increase in Pioneer Valley
deposits since the Woronoco acquisition, including growth of $7 million (2%)
in
core account balances. The Bank has promoted lower cost transaction accounts
as
a significant component of its strategic growth. Excluding the impact of
acquired balances, total transaction deposits increased by $27 million (13%)
during the year.
Borrowings
totaled $413 million at year-end 2005, increasing by $85 million (26%) from
$328
million at year-end 2004. This increase included $243 million in borrowings
acquired with Woronoco, partially offset by the deleveraging program, under
which the proceeds of loan and securities sales were used to repay borrowings.
Additionally, proceeds from deposit growth were used to replace maturing
borrowings during the year. Borrowings included $15.5 million of junior
subordinated debentures issued
by
the
Company in June 2005 in conjunction with a trust preferred security offering
used to supplement the Bank’s regulatory capital.
Equity.
Stockholders’ equity totaled $246 million at year-end 2005, increasing by $114
million, or 87%, from year-end 2004. Consideration for the Woronoco acquisition
included the issuance of 2.93 million new common shares valued at $108 million,
with an
additional $4 million credit to equity for the value of outstanding Woronoco
stock options. The ESOP termination had no negative impact on stockholders'
equity because the related charge to earnings was offset by credits to unearned
compensation and additional paid
in
capital. These credits also offset the $5 million impact of the prepayment
of
the ESOP loan, which resulted in the transfer of 146,971 shares to treasury
stock. The contribution of earnings was mostly offset by dividends, additional
treasury stock purchases of $8.0 million, and a $6.5 million net decrease in
accumulated other comprehensive income due to gains recorded on
securities sales and lower debt securities prices due to higher interest rates.
The Company announced an increase in the quarterly cash dividend to $0.14 per
share in August, representing a 17% increase from $0.12 per share in prior
quarters.
Goodwill
increased to $88.1 million and identifiable intangible assets increased to
$11.5
million at year-end 2005 due mainly to the Woronoco acquisition. As a result,
year-end tangible book value per share was $17.15, compared to $21.19 at
year-end 2004. The ratio of stockholders’ equity
to
total assets measured 12.1% at year-end 2005, compared to 10.1% at the prior
year-end, due to the issuance of new common shares and the deleveraging program
executed in conjunction with the Woronoco acquisition. The ratio of tangible
equity to tangible assets measured 7.6% at year-end 2005, a decrease from 9.6%
at year-end 2004, reflecting the impact of the higher goodwill and intangible
assets resulting from the acquisition. At year-end 2005, the Bank met all
regulatory capital requirements and the
Bank
continued to satisfy the conditions necessary to be classified as “Well
Capitalized” in accordance with federal regulatory standards. The Bank paid $43
million in cash dividends to the Company during 2005 relating to the acquisition
of Woronoco Bancorp. Substantially all of the net assets acquired were
contributed to the Bank by the Company as additional paid in capital. Because
the Bank’s dividends exceeded retained earnings from recent operations in
accordance with certain regulatory measurements, the Bank’s dividends to the
Company in 2005 required specific regulatory approval. Any such dividends in
the
immediate future would also require specific regulatory approval. At year-end
2005, the Bank had received regulatory approval to dividend $10 million to
the
Company in 2006. Such payment is subject to various conditions, including that
the Bank maintain its “well capitalized” classification after factoring in the
payment.
Derivative
Instruments.
Woronoco
used on-balance sheet derivative instruments primarily for asset/liability
management. The Company assumed these instruments through the Woronoco
acquisition, including a $5 million interest rate swap agreement to hedge
variable rate home equity line borrowings and $20 million in outstanding
interest rate swaps used to hedge brokered certificates of deposit. These
instruments are described more fully in the notes to consolidated financial
statements.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
2004
Net
Income. Net
income for 2005 was $8.2 million, compared to $11.5 million in 2004. Results
in
2005 included a non-cash charge of $8.8 million for the termination of the
Employee Stock Ownership Plan (ESOP). This charge had no negative impact
on
stockholders’ equity due to offsetting credits to unearned compensation
and additional
paid in capital. Diluted earnings per share totaled $1.10 in 2005, compared
to
$2.01 in 2004.
The
fourth quarter was the first full quarter after the integration of the acquired
Woronoco operations. Fourth quarter net income totaled $4.8 million in 2005,
compared to $3.2 million in 2004. Fourth quarter diluted earnings per share
totaled $0.55 in both years, due to the impact of additional shares issued
in
conjunction with the Woronoco acquisition. The fourth quarter return on assets
measured 0.96% in 2005, compared to 0.97% in 2004. The fourth quarter return
on
equity measured 7.9% compared to 9.7%, reflecting the additional equity recorded
for the issuance of shares for the acquisition.
Net
Interest Income.
Net
interest income increased by $11.3 million, (28%) due to the balance sheet
growth. The net interest margin (fully taxable equivalent) decreased to 3.33%
from 3.37%, including the impact of the Woronoco acquisition and deleveraging.
The primary impact of market conditions was the flattening of the interest
rate
yield curve, which narrowed the marginal earnings spread on many asset/liability
combinations. The flattening of the yield curve was due to a steady increase
in
short term rates during the year, with a much smaller increase in long term
rates. The increase in short term rates benefited the Bank’s interest sensitive
assets, but also produced significant competition for deposits, which had fallen
to very low rates in recent years. The net impact of these market conditions
was
unfavorable, and management sought to mitigate this by promoting transaction
deposit accounts and relationship deposit offerings, and also by continuing
to
focus on commercial loan growth. The decline in the net interest margin also
included a 0.02% annualized impact from the purchase of bank owned life
insurance in the fourth quarter of 2004.
Due
to
rising interest rates, both asset yields and liability costs increased during
2005. In recent years, the Bank has generally positioned itself to be slightly
asset sensitive in order to obtain the benefit of anticipated rising interest
rates. In the case of a sudden interest rate shock, the Bank was modestly
liability sensitive at the end of 2005. This change in sensitivity primarily
reflected the effect of higher optionality in the Woronoco balance sheet
under
the higher interest rate conditions prevailing at the end of 2005. The Bank
believed that its year-end 2005 interest rate risk was generally neutral
to the
impact of gradual parallel shifts in interest rates based on its interest
sensitivity model. However, changes in the yield curve and in other market
conditions could continue to be unfavorable based on the year-end conditions
and
outlook, and the Bank continued to pursue strategies aimed at mitigating
this
impact.
Provision
for Loan Losses.
The
provision for loan losses was $1.3 million in 2005, compared to $1.6 million
in
2004. The provision for loan losses is a charge to earnings in an amount
sufficient to maintain the allowance for loan losses at a level deemed adequate
by the Company. The level of the allowance is a critical accounting estimate,
which is subject to uncertainty. The level of the allowance at December 31,
2005
was discussed in the previous section on Asset Quality in the discussion of
financial condition at year-end 2005. Net loan charge-offs were at a five year
low in 2005, and the ratio of net charge-offs to average loans declined to
a
relatively low 0.08% in 2005. The provision for loan losses was also the lowest
amount in the five year history, and the provision has generally trended down
as
charge-offs have declined. The provision measured 135% of net charge-offs in
2005, compared to 131% in the prior year.
Non-Interest
Income.
Non-interest income increased by $7.2 million (92%) in 2005 compared to 2004.
This increase was primarily due to the addition of the Woronoco contribution
beginning on June 1, together with higher securities gains and organic revenue
growth.
Service
fee income totaled $9.4 million for the year, and measured 0.54% of average
assets, compared to 0.43% of average assets in the previous year. About half
of
the improvement in
this
ratio was due to growth in insurance commissions and loan servicing fees, and
this growth was directly tied to the Woronoco acquisition. Woronoco operated
a
property and casualty insurance subsidiary which has been renamed the Berkshire
Insurance Group. Additionally, Woronoco had a larger residential mortgage loan
servicing portfolio. The other half of the improvement in this ratio was
primarily due to growth in overdraft fees, as 2005 was the first full year
of
operations of the Bank’s courtesy overdraft protection
program. Many other categories of fee income also increased in line with the
organic growth of loans and deposits during the year. Additionally, total wealth
management fees increased by 3% to $2.7 million, and the total amount of assets
under management increased by 17% to $418 million at year-end 2005, compared
to
$358 million at the prior year-end.
Net
realized securities gains totaled $3.5 million in 2005, compared to $1.4 million
in 2004. These gains were related to the sale of equity securities, reducing
equity price risk in the investment portfolio. Non-interest income also
benefited from gains on the sale of loans and securitized loans, which totaled
$773,000 in 2005. These gains followed steps taken by the Company in 2003 and
2004 to improve liquidity by securitizing residential mortgages. Other
non-interest income included $893,000 in revenues recorded on life insurance
policies, compared to $638,000 in the prior year, reflecting the purchase of
additional bank owned life insurance policies in the fourth quarter of
2004.
Non-Interest
Expense.
Non-interest expense increased by $20.0 million (69%) in 2005. The increase
included the $8.8 million non-cash charge related to the ESOP termination,
together with merger and conversion charges totaling $2.1 million. Excluding
these charges, the increase was $9.0 million (31%), primarily reflecting the
impact of the acquired Woronoco operations on all expense categories. The merger
and system conversion charges included indirect costs of the Woronoco
acquisition, together with costs of converting the Company’s core banking
systems and of converting the acquired Woronoco systems and integrating the
Woronoco operations. Also included in these charges were interim staffing and
systems costs of Woronoco operations
in the third quarter through the conversion in August.
The
ratio
of non-interest expense to average assets was 2.81% in 2005, compared to 2.25%
in 2004. Excluding the ESOP termination and merger and conversion expenses,
this
ratio decreased to 2.18% in 2005, illustrating the efficiencies resulting
from the merger. The Company estimated that total cost savings and integration
efficiencies related to the Woronoco acquisition equated to about 37% of
Woronoco's first quarter non-interest expense, excluding merger-related charges.
These cost savings exceeded the Company's original 30% objective for cost
savings.
Expenses
in 2005 included $573,000 in operating costs of new branches and expanded
commercial lending. Additionally, amortization of intangible assets increased
to
$1.1 million in 2005 due to the amortization of the core deposit intangible
and
non-competition agreement intangible assets recorded as part of the Woronoco
acquisition.
Income
Tax Expense and Discontinued Operations.
The
effective income tax rate measured 33% in 2005, excluding the ESOP termination
charge and a related $288,000 benefit, compared to 32% in 2004. The Bank
benefits from securities purchased in
the
Bank’s subsidiary securities corporations, which are taxed at a lower state
income tax rate. Additionally, the effective income tax rate benefits from
tax
preferences on income from municipal securities, equity securities qualifying
for the dividends received deduction, and bank owned life insurance contracts.
Results in 2004 also included net losses of $431,000 in the first six months,
representing the after-tax loss on discontinued operations of EastPoint
Technologies, LLC, which was sold in June 2004.
Comprehensive
Income. Comprehensive
income includes changes in accumulated other comprehensive income, which consist
of changes (after-tax) in the unrealized market gains and losses of investment
securities available for sale and net gain/(loss) on derivative instruments.
The
Company recorded $1.8 million in total comprehensive income in 2005 compared
to
$10.2 million in 2004. This reflected the lower net income recorded, along
with
a $6.5 million other net comprehensive loss in 2005 related primarily to changes
in securities values, which is discussed further in the Securities note of
the
consolidated financial
statements.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
2003
Net
Income. Net
income for the year 2004 was a record $11.5 million, compared to $9.0 million
for 2003. Net income from continuing operations totaled $11.9 million for the
year 2004, compared to $9.2 million for 2003, excluding the loss from
discontinued operations of EastPoint Technologies, LLC, which was sold in June
2004. Earnings from continuing operations were a record $2.08 per diluted share
for the year 2004, an increase of 30% over prior year results. Net income after
the loss from discontinued operations was $2.01 per diluted share, an increase
of 28% over prior year results. The Company’s performance in 2004 benefited from
a $2.8 million increase in net interest income, resulting from growth in loans
and investments. Total service fee income increased by 9% in 2004, while
non-interest expense growth was limited to 3%. The return on average
stockholders’ equity increased to 9.06% in 2004, compared to 7.28% in 2003. The
return on average assets increased to 0.89% from 0.80% for the same periods.
Net
Interest Income.
Net
interest income increased by $2.8 million, or 7%, to $40.4 million in 2004,
compared to $37.6 million in 2003. Average earning assets increased by $171
million, or 16% in 2004. This growth in earning assets more than offset the
impact of a decrease in the net interest margin to 3.37% in 2004 from 3.61%
in
the prior year. Interest rates had declined to relative lows in 2003 and 2004,
prompting higher prepayment speeds for loans and mortgage backed securities.
These proceeds were reinvested at lower yields, reflecting lower market rates
and management’s strategy to shorten the duration of these assets. The Company
used borrowings to fund earning asset growth, lowering the cost of new funds
compared to higher costing time certificates of deposit.
Average
earning asset growth was concentrated in average investment securities, which
increased by $180 million in 2004, reflecting securities purchased during 2003
and 2004, as well as the securitization of $56 million in residential mortgages
during that period. The yield on investment securities improved to 4.28% in
2004
from 3.66% in 2003. The yield on loans decreased to 5.51% from 5.96%. The
benefit of prime rate increases in 2004 was more than offset by the impact
of
prepayments and the mortgage securitization. Due to the declining loan yield
and
the shift in mix towards lower yielding investment securities, the yield on
earning assets decreased to 5.07% from 5.39%.
Average
interest bearing liabilities increased by $162 million, or 18%, in 2004. Growth
in average interest bearing deposits totaled $24 million, or 3%, and was
concentrated in money market accounts, the average balance of which increased
by
$28 million, or 21%. In the generally low rate environment, and with short-term
rates increasing for the first time in several years, deposit demand favored
money market accounts compared to time certificates of deposit, the average
balance of which decreased by $9 million during the year. NOW and savings
account rates also decreased in the low rate environment. These changes led
to a
decrease in the cost of interest bearing deposits to 1.66% in 2004, compared
to
1.92% in the prior year. Average borrowings increased by $138 million, or 82%,
in 2004 as the Bank borrowed in a range of targeted maturities from one month
to
four years to fund asset growth. The cost of borrowings decreased to 2.73%
from
2.91%. These decreases in deposit and borrowing costs both contributed to the
decline in the cost of interest bearing liabilities to 1.97% from
2.10%.
The
reduction in funding costs helped to mitigate the impact of declining asset
yields. Additionally, the decrease in the net interest margin reflected the
higher leveraging strategy in 2004. Also contributing to this change was a
$10
million investment in a bank owned life insurance (“BOLI”) contract, shifting
earnings on this amount from interest income to non-interest income. The Bank
benefited from a $12 million, or 13%, increase in average non-interest bearing
demand deposit accounts. The Bank’s relationship oriented promotional strategies
has resulted in the growth of these attractive balances.
Provision
for Loan Losses.
The
provision for loan losses was $1.57 million in 2004, an increase of $105,000,
or
7%, from 2003. The provision measured 131% of net loan charge-offs in 2004.
This
measurement was 52% in 2003 due primarily to the reversal of about $1.0 million
of previously provided loan loss provision subsequent to the sale of the
remaining sub-prime automobile loan portfolio in December 2003.
Non-Interest
Income.
Non-interest income increased by $1.32 million, or 20%, to $7.76 million in
2004
from $6.45 million in 2003. Wealth management service fees increased by
$395,000, or 17%, due to the Company’s focus on building this source of
revenues. Total assets under management increased by 19% to $358 million at
year-end 2004, compared to $302 million at the prior year-end. Net gains and
losses on sales of loans and securities totaled
$1.57 million in 2004 compared to $1.22 million in 2003. Securities gains in
2004 were primarily related to sales of equity securities, as the Company
continued to reduce its exposure to potential equity price risk. The Company
also reported an $81,000 gain on the sale of $11 million in securitized
mortgages in the
fourth quarter. In 2003, the Company recorded higher securities gains, along
with $1.85 million in loan sale losses related to the sale of sub-prime
automobile loans. All other non-interest income increased by $501,000, or 248%,
to $703,000 in 2004 primarily due to higher income earned on
cash
surrender value
related to the purchase of additional bank owned life insurance in October
2004.
Non-Interest
Expense.
Total
non-interest expense increased by $734,000, or 3%, to $29.0 million in 2004,
compared to $28.2 million in 2003. Excluding foreclosed asset expense and all
other non-interest expense, the other categories of expense all increased,
with
the increase totaling $1.85 million, or 8%, in 2004 compared to 2003. This
growth primarily related to overall growth in the business activities of the
Company. Full-time equivalent employees of the Bank totaled 241 at year-end
2004, decreasing by 2% from 247 at year-end 2003. Salary and benefit expenses
increased by $716,000, or 4%, due to higher benefits, commissions, and stock
awards expense. The net expense of foreclosed real estate and repossessed assets
decreased by $525,000, or 50%, due to the sale of sub-prime automobile loans
in
December 2003. The $587,000 reduction in all other non-interest expense included
the benefit of a $243,000 reduction in FDIC insurance expense, a $211,000 refund
of Delaware franchise tax, and a $131,000 reduction in meetings and travel
expense.
Income
Tax Expense.
Total
income tax expense increased by $353,000, or 7%, in 2004 compared to 2003.
The
effective tax rate declined to 32.0% in 2004 compared to 35.7% in 2003. The
higher rate in 2003 was largely due to the disallowance by Massachusetts of
the
dividends received deduction from the Bank’s REIT. The Bank benefits from
securities purchased in the Bank's subsidiary securities corporations, which
are
taxed at a lower state income tax rate. Additionally, the effective income
tax
rate benefits from tax preferences on income from additional purchases of
municipal securities and bank owned life insurance contracts in
2004.
Net
Loss from Discontinued Operations. The
Company sold its interest in the assets of EastPoint Technologies, LLC in June
2004. All revenues and expenses related to EastPoint were reclassified as
related to discontinued operations. A $75,000 loss recorded on the sale was
included with the loss from operations reported in 2004. The net loss from
discontinued operations, after applicable income tax expense, was $431,000
in
2004, compared to $185,000 in 2003. Results in 2003 included project related
revenues of $2.82 million, which declined to $623,000 for the nearly six months
that EastPoint was operating in 2004.
Average
Balances, Interest and Average Yields/Cost
The
following table presents an analysis of average rates and yields on a fully
taxable equivalent basis for the years included.
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(Dollars
in millions)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$
|
1,182.3
|
|
$
|
70.1
|
|
|
5.93
|
%
|
$
|
795.5
|
|
$
|
43.8
|
|
|
5.51
|
%
|
$
|
800.1
|
|
$
|
47.7
|
|
|
5.96
|
%
|
Investment
securities (2)
|
|
|
413.0
|
|
|
19.2
|
|
|
4.64
|
|
|
424.0
|
|
|
18.1
|
|
|
4.28
|
|
|
244.0
|
|
|
8.9
|
|
|
3.66
|
|
Short-term
investments
|
|
|
2.8
|
|
|
0.1
|
|
|
3.30
|
|
|
3.0
|
|
|
0.1
|
|
|
1.28
|
|
|
7.7
|
|
|
0.1
|
|
|
1.41
|
|
Total
interest-earning assets
|
|
|
1,598.1
|
|
|
89.4
|
|
|
5.59
|
|
|
1,222.5
|
|
|
62.0
|
|
|
5.07
|
|
|
1,051.8
|
|
|
56.7
|
|
|
5.39
|
|
Intangible
assets
|
|
|
62.0
|
|
|
|
|
|
|
|
|
8.7 |
|
|
|
|
|
|
|
|
10.3 |
|
|
|
|
|
|
|
Other
non-interest earning assets
|
|
|
85.1
|
|
|
|
|
|
|
|
|
58.3
|
|
|
|
|
|
|
|
|
53.7
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,745.2
|
|
|
|
|
|
|
|
$
|
1,289.5
|
|
|
|
|
|
|
|
$
|
1,115.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
|
|
121.7
|
|
|
0.5
|
|
|
0.39
|
%
|
|
97.9
|
|
|
0.1
|
|
|
0.09
|
%
|
|
90.2
|
|
|
0.2
|
|
|
0.17
|
%
|
Money
market accounts
|
|
|
209.0
|
|
|
4.4
|
|
|
2.13
|
|
|
160.3
|
|
|
2.1
|
|
|
1.29
|
|
|
132.5
|
|
|
1.7
|
|
|
1.24
|
|
Savings
accounts
|
|
|
205.8
|
|
|
1.8
|
|
|
0.90
|
|
|
168.5
|
|
|
1.3
|
|
|
0.77
|
|
|
170.7
|
|
|
1.7
|
|
|
1.01
|
|
Certificates
of
deposit
|
|
|
445.2
|
|
|
14.3
|
|
|
3.20
|
|
|
321.0
|
|
|
8.9
|
|
|
2.78
|
|
|
330.1
|
|
|
10.3
|
|
|
3.13
|
|
Total
interest-bearing deposits
|
|
|
981.7
|
|
|
21.0
|
|
|
2.14
|
|
|
747.7
|
|
|
12.4
|
|
|
1.66
|
|
|
723.5
|
|
|
13.9
|
|
|
1.92
|
|
Borrowings
|
|
|
410.8
|
|
|
15.1
|
|
|
3.67
|
|
|
305.6
|
|
|
8.3
|
|
|
2.73
|
|
|
167.7
|
|
|
4.8
|
|
|
2.91
|
|
Total
interest-bearing liabilities
|
|
|
1,392.5
|
|
|
36.1
|
|
|
2.59
|
|
|
1,053.3
|
|
|
20.7
|
|
|
1.97
|
|
|
891.2
|
|
|
18.7
|
|
|
2.10
|
|
Non-interest-bearing
demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits
|
|
|
149.6
|
|
|
|
|
|
|
|
|
103.7
|
|
|
|
|
|
|
|
|
91.7
|
|
|
|
|
|
|
|
Other
non-interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
6.6
|
|
|
|
|
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
9.8
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,548.7
|
|
|
|
|
|
|
|
|
1,162.4
|
|
|
|
|
|
|
|
|
992.7
|
|
|
|
|
|
|
|
Equity
|
|
|
196.5
|
|
|
|
|
|
|
|
|
127.1
|
|
|
|
|
|
|
|
|
123.1
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,745.2
|
|
|
|
|
|
|
|
$
|
1,289.5
|
|
|
|
|
|
|
|
$
|
1,115.8
|
|
|
|
|
|
|
|
Net
interest-earning assets
|
|
$
|
205.6
|
|
|
|
|
|
|
|
$
|
169.2
|
|
|
|
|
|
|
|
$
|
160.6
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
53.3
|
|
|
|
|
|
|
|
$
|
41.3
|
|
|
|
|
|
|
|
$
|
38.0
|
|
|
|
|
Interest
rate
spread
|
|
|
|
|
|
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
3.61
|
%
|
Interest-earning
assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
114.76
|
%
|
|
|
|
|
|
|
|
116.06
|
%
|
|
|
|
|
|
|
|
118.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully
taxable equivalent adjustment
|
|
|
|
|
$
|
1.6
|
|
|
|
|
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The average balances of loans includes nonaccrual loans, loans
held for
sale, and deferred fees and costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
The average balance of investment securities is based on ammortized
cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE/VOLUME
ANALYSIS
The
following table presents the effects of changing rates and volumes on the fully
taxable equivalent net interest income. Changes attributable to changes in
both
rate and volume have been allocated proportionately based on the absolute value
of the change due to rate and the change due to volume.
|
|
2005
Compared with 2004
|
|
2004
Compared with 2003
|
|
|
|
Increase
(Decrease) Due to
|
|
Increase
(Decrease) Due to
|
|
(In
thousands)
|
|
Rate
|
|
Volume
|
|
Net
|
|
Rate
|
|
Volume
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
3,555
|
|
$
|
22,782
|
|
$
|
26,337
|
|
$
|
(3,644
|
)
|
$
|
(273
|
)
|
$
|
(3,917
|
)
|
Investment
securities
|
|
|
1,474
|
|
|
(477
|
)
|
|
997
|
|
|
1,696
|
|
|
7,534
|
|
|
9,230
|
|
Short-term
investments
|
|
|
76
|
|
|
(3
|
)
|
|
73
|
|
|
(9
|
)
|
|
(61
|
)
|
|
(70
|
)
|
Total
interest income
|
|
|
5,105
|
|
|
22,302
|
|
|
27,407
|
|
|
(1,957
|
)
|
|
7,200
|
|
|
5,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
|
|
1,624
|
|
|
759
|
|
|
2,383
|
|
|
(82
|
)
|
|
15
|
|
|
(67
|
)
|
Money
market accounts
|
|
|
355
|
|
|
26
|
|
|
381
|
|
|
65
|
|
|
357
|
|
|
422
|
|
Savings
accounts
|
|
|
259
|
|
|
315
|
|
|
574
|
|
|
(413
|
)
|
|
(22
|
)
|
|
(435
|
)
|
Certificates
of
deposit
|
|
|
1,483
|
|
|
3,834
|
|
|
5,317
|
|
|
(1,113
|
)
|
|
(276
|
)
|
|
(1,389
|
)
|
Total
deposits
|
|
|
3,721
|
|
|
4,934
|
|
|
8,655
|
|
|
(1,543
|
)
|
|
74
|
|
|
(1,469
|
)
|
Borrowings
|
|
|
3,375
|
|
|
3,361
|
|
|
6,736
|
|
|
(281
|
)
|
|
3,732
|
|
|
3,451
|
|
Total
interest expense
|
|
|
7,096
|
|
|
8,295
|
|
|
15,391
|
|
|
(1,824
|
)
|
|
3,806
|
|
|
1,982
|
|
Change
in net interest income
|
|
$
|
(1,991
|
)
|
$
|
14,007
|
|
$
|
12,016
|
|
$
|
(133
|
)
|
$
|
3,394
|
|
$
|
3,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is the ability to meet cash needs at all times with available cash or by
conversion of other assets to cash at a reasonable price. The primary source
of
funding for the Company is dividend payments from the Bank. Additional sources
of liquidity are proceeds from borrowings and capital offerings. The main uses
of liquidity are the payment of stockholder dividends, purchases of treasury
stock, and debt service on outstanding debentures. There are certain
restrictions on the payment of dividends as discussed in the Stockholders’
Equity note to the consolidated financial statements.
The
Bank’s primary source of liquidity is customer deposits. Additional sources are
borrowings, repayments of loans and investment securities, and the sale and
repayments of investment securities. The Bank closely monitors its liquidity
position on a daily basis. Sources of borrowings include advances from the
FHLBB
and a repurchase agreement line of credit with a nationally recognized
broker-dealer. The greatest sources of uncertainty affecting liquidity are
deposit withdrawals and usage of loan commitments, which are influenced by
interest rates, economic conditions, and competition. The Bank relies on
competitive rates, customer service, and long-standing relationships with
customers to manage deposit and loan liquidity. Based on its historical
experience, management believes that it has adequately provided for deposit
and
loan liquidity needs.
The
Bank
must satisfy various regulatory capital requirements, which are discussed in
the
Regulation and Supervision section of Item 1 and in the Stockholders’ Equity
note to the consolidated financial statements. At year-end 2005, the Company
was
engaged in its seventh stock repurchase program as further described in Item
12.
Please see the Equity section of the discussion of financial condition for
additional information about liquidity and capital at year-end
2005.
Contractual
Obligations.
The
year-end 2005 contractual obligations were as follows:
|
|
|
|
Less
than One
|
|
One
to Three
|
|
Three
to Five
|
|
After
Five
|
|
(In
thousands)
|
|
Total
|
|
Year
|
|
Years
|
|
Years
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBB
borrowings
|
|
$
|
397,451
|
|
$
|
139,600
|
|
$
|
146,339
|
|
$
|
69,492
|
|
$
|
42,020
|
|
Junior
subordinated debentures
|
|
|
15,464
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,464
|
|
Operating
lease obligations
|
|
|
16,065
|
|
|
1,313
|
|
|
2,377
|
|
|
2,110
|
|
|
10,265
|
|
Limited
partnership commitment
|
|
|
7,840
|
|
|
7,840
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchase
obligations
|
|
|
5,137
|
|
|
1,425
|
|
|
2,000
|
|
|
1,712
|
|
|
-
|
|
Total
Contractual Obligations
|
|
$
|
441,957
|
|
$
|
150,178
|
|
$
|
150,716
|
|
$
|
73,314
|
|
$
|
67,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further
information about borrowings and lease obligations is contained in notes 9
and
11 in the consolidated financial statements. Contractual obligations increased
in 2005 due primarily to the Woronoco acquisition, along with the impact of
organic business growth. The limited partnership commitment is for an affordable
housing and community development program in Massachusetts. Purchase obligations
are primarily related to technology contracts.
Off-Balance
Sheet Arrangements. In
the
normal course of operations, the Company engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles
are not recorded in the Company’s financial instruments. These transactions
involve, to varying degrees, elements of credit, interest rate and liquidity
risk. Such transactions are used primarily to manage customers’ requests for
funding and take the form of loan commitments and lines of credit. A further
presentation of the Company’s off-balance sheet arrangements is presented in
Footnote 11, “Off-Balance Sheet Activities” in the Notes to the Consolidated
Financial Statements.
For
2005,
the Company did not engage in any off-balance sheet transactions reasonably
likely to have a material effect on the Company’s financial condition, results
of operation or cash flows.
IMPACT
OF INFLATION AND CHANGING PRICES
The
consolidated financial statements and related financial data presented in this
Form 10-K have been prepared in conformity with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due
to
inflation. Unlike many industrial companies, substantially all of the assets
and
liabilities of Berkshire Bank are monetary in nature. As a result, interest
rates have a more significant impact on Berkshire Bank’s performance than the
general level of inflation. Interest rates may be affected by inflation, but
the
direction and magnitude of the impact may vary. A sudden change in inflation
(or
expectations about inflation), with a related change in interest rates, would
have a significant impact on our operations.
IMPACT
OF NEW ACCOUNTING PRONOUNCEMENTS
Please
refer to the note on Recent Accounting Pronouncements in Note 1 to the
consolidated financial statements for a detailed discussion of new accounting
pronouncements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
MANAGEMENT
OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
Qualitative
Aspects of Market Risk.
The
Bank’s most significant form of market risk is interest rate risk. The Bank
seeks to avoid fluctuations in its net interest income and to maximize net
interest income within acceptable levels of risk through periods of changing
interest rates. Berkshire Bank maintains an Asset/Liability Committee that
is
responsible for reviewing its asset/liability policies and interest rate risk
position. This Committee meets quarterly and reports trends and interest rate
risk position to the Loan and Investment 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 earnings of Berkshire Bank. The Bank
has managed interest rate risk by emphasizing assets with shorter term repricing
durations, periodically selling long term fixed rate assets, promoting low
cost
core deposits, and using FHLBB advances to structure its liability repricing
durations.
Quantitative
Aspects of Market Risk.
Berkshire Hills uses a simulation model to measure the potential change in
net
interest income that an instantaneous increase or decrease of market interest
rates would cause assuming a simultaneous parallel shift along the entire yield
curve. Loans, deposits and borrowings are expected to reprice at the new
repricing or maturity date. The Company uses prepayment guidelines set forth
by
market sources as well as Company generated data where applicable. Cash flows
from loans and securities are assumed to be reinvested based on current
operating conditions and strategies. Other assumptions about balance sheet
mix
are generally held constant. The model includes the effects of on-balance sheet
derivative instruments acquired by Woronoco for the purpose of interest rate
risk management. The results of those simulations for the next twelve months
are
shown below:
Change
in
|
|
|
|
|
|
|
|
Interest
Rates-Basis
|
|
Net
Interest Income
|
|
|
|
|
|
Points
(Rate Shock)
|
|
Amount
|
|
$
Change
|
|
%
Change
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
+
200
|
|
$
|
60,226
|
|
$
|
(1,187
|
)
|
|
(1.93
|
)%
|
+
100
|
|
|
60,982
|
|
|
(431
|
)
|
|
(0.70
|
)
|
Static
|
|
|
61,413
|
|
|
-
|
|
|
-
|
|
-
100
|
|
|
62,765
|
|
|
1,352
|
|
|
2.20
|
|
-
200
|
|
|
60,057
|
|
|
(1,356
|
)
|
|
(2.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
+
200
|
|
$
|
41,376
|
|
$
|
1,015
|
|
|
2.51
|
%
|
+
100
|
|
|
40,661
|
|
|
300
|
|
|
0.74
|
|
Static
|
|
|
40,361
|
|
|
-
|
|
|
-
|
|
-
100
|
|
|
40,413
|
|
|
52
|
|
|
0.13
|
|
-
200
|
|
|
36,452
|
|
|
(3,909
|
)
|
|
(9.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The
model
indicates that the Bank was modestly liability sensitive to a rate shock at
year-end 2005, compared to a modest asset sensitivity at year-end 2004. This
change was primarily due to the Woronoco acquisition and to the impact of higher
interest rates on optionality in the balance sheet. This sensitivity is
generally reduced in a more likely ramp scenario in which rates gradually change
over a one year period. The modeled sensitivities are within the Bank’s risk
management parameters. The reduction in net interest income in the event of
a
200 basis point downward shock was due to deposit pricing floors incorporated
into the model.
Due
to
the limitations and uncertainties relating
to model assumptions, these computations should not be relied on as projections
of income. Further, the computations do not reflect any actions that management
may undertake in response to changes in interest rates. The most significant
assumption relates to expectations for the interest sensitivity of non-maturity
deposit accounts in a rising rate environment. The model assumes that deposit
rate sensitivity will be a percentage of the market interest rate change as
follows: NOW accounts-ranging between 0 and 40% depending on product type;
money
market accounts-ranging between 50 and 75% depending on the balance and product
type; and savings accounts-35%. One of the significant limitations of the
simulation is that it focuses on a rate shock, versus more gradual ramped
changes, and that it assumes parallel shifts in the yield curve. Actual interest
rate risks are often more complex than this scenario. A key interest rate change
in 2005 was the flattening of the yield curve, which generated downward pressure
on net interest income. The model assumptions about deposit rate sensitivity
in
2004 were as follows: NOW accounts-25%; money market accounts-ranging between
50
and 75% depending on the balance; and savings accounts-50%. Assumption changes
in 2005 were based on a review of past performance and future expectations
and
were not viewed as material.
TABLE
OF CONTENTS
|
|
|
PAGE
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
43
|
|
The
Company’s management, including the Company’s principal executive officer
and principal financial officer, have evaluated the effectiveness of
the Company’s
“disclosure controls and procedures,” as such term is defined in
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal
executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and
procedures were
effective for the purpose of ensuring that the information required to
be disclosed
in the reports that the Company files or submits under the Exchange Act
with
the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s
rules and forms, and (2) is accumulated and communicated to the
Company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No
change
in the Company’s internal control over financial reporting occurred
during the quarter ended December 31, 2005 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
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, 2005, utilizing
the framework established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based
on
this assessment, management has determined that the Company’s
internal control
over financial reporting as of December 31, 2005 is effective.
Our
internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that accurately and
fairly reflect,
in reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as
necessary to
permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures
are being made only in accordance with authorizations of management and
the
directors of the Company; and (3) provide reasonable assurance
regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of
the
Company’s assets that could have a material effect on the Company’s financial
statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can
provide only reasonable assurance with respect to financial
statement preparation
and presentation. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
the
policies or procedures may deteriorate.
Management’s
assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2005 has been audited by Wolf
& Company, P.C., an independent registered public accounting firm,
as stated
in
their report, which follows. This report expresses an unqualified opinion
on management’s assessment and on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005.
[Letterhead
of Wolf & Company, P.C.]
To
the
Board of Directors and Shareholders of Berkshire Hills Bancorp,
Inc.
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on
Internal Control Over Financial Reporting, that Berkshire Hills Bancorp,
Inc. maintained
effective internal control over financial reporting as of December 31,
2005,
based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Berkshire Hills Bancorp Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and
an opinion
on the effectiveness of the company’s internal control over
financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting
Oversight Board (United States). Those standards require that we
plan and
perform the audit to obtain reasonable assurance about whether
effective internal
control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control
over financial
reporting, evaluating management’s assessment, testing and
evaluating the
design and operating effectiveness of internal control, and performing
such other
procedures as we considered necessary in the circumstances. We
believe that
our
audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed
to provide
reasonable assurance regarding the reliability of financial
reporting and
the
preparation of financial statements for external purposes in
accordance with
generally accepted accounting principles. A company’s internal control
over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors
of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection
of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may
not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness
to future periods are subject to the risk that controls may become inadequate
because
of changes in conditions, or that the degree of compliance with
the
policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Berkshire Hills Bancorp, Inc. maintained
effective internal control over financial reporting as of December 31,
2005,
is fairly stated, in all material respects, based on criteria established
in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also in our opinion, Berkshire
Hills Bancorp, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements
of Berkshire Hills Bancorp, Inc. and our report dated March 14, 2006 expressed
an unqualified opinion.
/s/
Wolf
& Company, P.C.
Boston,
Massachusetts
March
14,
2006
[Letterhead
of Wolf & Company, P.C.]
To
the
Board of Directors and Shareholders of
Berkshire
Hills Bancorp, Inc.
We
have
audited the accompanying consolidated balance sheets of Berkshire Hills Bancorp,
Inc. and subsidiaries as of December
31, 2005 and 2004, and the related consolidated statements of income, changes
in
stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are
the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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, 2005 and 2004 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Berkshire Hills Bancorp,
Inc. internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 14, 2006 expressed an unqualified opinion on
management’s assessment of the effectiveness of Berkshire Hills Bancorp, Inc.
internal control over financial reporting and an unqualified opinion on the
effectiveness of Berkshire Hills Bancorp, Inc. internal control over financial
reporting.
/s/
Wolf
& Company, P.C.
Boston,
Massachusetts
March
14,
2006
BERKSHIRE
HILLS BANCORP, INC.
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
30,977
|
|
$
|
15,237
|
|
Short-term
investments
|
|
|
110
|
|
|
2,665
|
|
Total
cash and cash equivalents
|
|
|
31,087
|
|
|
17,902
|
|
|
|
|
|
|
|
|
|
Securities
available for sale, at fair value
|
|
|
390,876
|
|
|
384,421
|
|
Securities
held to maturity (fair value of $29,763 and $29,899
|
|
|
|
|
|
|
|
at
December 31, 2005 and 2004, respectively)
|
|
|
29,908
|
|
|
29,942
|
|
Loans
held for sale
|
|
|
2,093
|
|
|
1,053
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
1,416,449
|
|
|
828,179
|
|
Less:
Allowance for loan losses
|
|
|
(13,001
|
)
|
|
(9,337
|
)
|
Net loans
|
|
|
1,403,448
|
|
|
818,842
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
26,236
|
|
|
14,780
|
|
Accrued
interest receivable
|
|
|
8,508
|
|
|
5,472
|
|
Goodwill
|
|
|
88,092
|
|
|
6,782
|
|
Other
intangible assets
|
|
|
11,524
|
|
|
472
|
|
Bank
owned life insurance
|
|
|
19,002
|
|
|
18,200
|
|
Cash
surrender value – other life insurance
|
|
|
11,503
|
|
|
5,862
|
|
Other
assets
|
|
|
13,276
|
|
|
6,387
|
|
Total
assets
|
|
$
|
2,035,553
|
|
$
|
1,310,115
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,371,218
|
|
$
|
845,789
|
|
Borrowings
|
|
|
412,917
|
|
|
327,926
|
|
Other
liabilities
|
|
|
5,352
|
|
|
4,664
|
|
Total
liabilities
|
|
|
1,789,487
|
|
|
1,178,379
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock
($.01 par value; 1,000,000 shares
|
|
|
|
|
|
|
|
authorized; none issued)
|
|
|
-
|
|
|
-
|
|
Common
stock ($.01 par value; 26,000,000 shares authorized;
|
|
|
|
|
|
|
|
10,600,472 shares issued in 2005 and 7,673,761 in 2004)
|
|
|
106
|
|
|
77
|
|
Additional
paid-in capital
|
|
|
198,667
|
|
|
77,588
|
|
Unearned
compensation
|
|
|
(1,435
|
)
|
|
(7,414
|
)
|
Retained
earnings
|
|
|
99,429
|
|
|
94,996
|
|
Accumulated
other comprehensive (loss) income
|
|
|
(2,239
|
)
|
|
4,214
|
|
Treasury
stock, at cost (2,060,604 shares in 2005 and
|
|
|
|
|
|
|
|
1,800,198
in
2004)
|
|
|
(48,462
|
)
|
|
(37,725
|
)
|
Total
stockholders' equity
|
|
|
246,066
|
|
|
131,736
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,035,553
|
|
$
|
1,310,115
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
|
|
|
|
|
|
|
|
(In
thousands, except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
70,103
|
|
$
|
43,766
|
|
$
|
47,683
|
|
Securities
|
|
|
17,517
|
|
|
17,276
|
|
|
8,516
|
|
Short-term
investments
|
|
|
112
|
|
|
39
|
|
|
109
|
|
Total
interest and dividend income
|
|
|
87,732
|
|
|
61,081
|
|
|
56,308
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
21,048
|
|
|
12,393
|
|
|
13,862
|
|
Borrowings
|
|
|
15,067
|
|
|
8,331
|
|
|
4,880
|
|
Total
interest expense
|
|
|
36,115
|
|
|
20,724
|
|
|
18,742
|
|
Net
interest income
|
|
|
51,617
|
|
|
40,357
|
|
|
37,566
|
|
Provision
for loan losses
|
|
|
1,313
|
|
|
1,565
|
|
|
1,460
|
|
Net
interest income, after provision for loan losses
|
|
|
50,304
|
|
|
38,792
|
|
|
36,106
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
Deposit
service fees
|
|
|
4,539
|
|
|
2,347
|
|
|
2,300
|
|
Wealth
management fees
|
|
|
2,742
|
|
|
2,670
|
|
|
2,275
|
|
Insurance
commissions and fees
|
|
|
1,343
|
|
|
102
|
|
|
62
|
|
Loan
service fees
|
|
|
749
|
|
|
374
|
|
|
386
|
|
Gain
on
sale of securities, net
|
|
|
3,532
|
|
|
1,402
|
|
|
3,077
|
|
Gain
on
sale of securitized loans, net
|
|
|
751
|
|
|
81
|
|
|
-
|
|
Gain
(loss) on sale of loans
|
|
|
22
|
|
|
85
|
|
|
(1,854
|
)
|
Other
|
|
|
1,245
|
|
|
703
|
|
|
202
|
|
Total
non-interest income
|
|
|
14,923
|
|
|
7,764
|
|
|
6,448
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
Salaries
and
employee benefits
|
|
|
20,281
|
|
|
16,882
|
|
|
16,166
|
|
Termination
of
employee stock ownership plan
|
|
|
8,836
|
|
|
-
|
|
|
-
|
|
Occupancy
and
equipment
|
|
|
5,798
|
|
|
4,085
|
|
|
3,800
|
|
Marketing,
data
processing, and professional services
|
|
|
4,881
|
|
|
3,954
|
|
|
3,109
|
|
Merger
and conversion expense
|
|
|
2,142
|
|
|
-
|
|
|
-
|
|
Amortization
of
intangible assets
|
|
|
1,140
|
|
|
98
|
|
|
203
|
|
Other
|
|
|
5,920
|
|
|
3,958
|
|
|
4,965
|
|
Total
non-interest expense
|
|
|
48,998
|
|
|
28,977
|
|
|
28,243
|
|
Income
from continuing operations before income taxes
|
|
|
16,229
|
|
|
17,579
|
|
|
14,311
|
|
Income
tax expense
|
|
|
8,003
|
|
|
5,639
|
|
|
5,161
|
|
Income
from continuing operations
|
|
|
8,226
|
|
|
11,940
|
|
|
9,150
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
(653
|
)
|
|
(282
|
)
|
Income
tax benefit
|
|
|
-
|
|
|
(222
|
)
|
|
(97
|
)
|
Net
loss from discontinued operations
|
|
|
-
|
|
|
(431
|
)
|
|
(185
|
)
|
Net
income
|
|
$
|
8,226
|
|
$
|
11,509
|
|
$
|
8,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.16
|
|
$
|
2.18
|
|
$
|
1.70
|
|
Diluted
earnings per share
|
|
$
|
1.10
|
|
$
|
2.01
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
Years
Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
Common
|
|
paid-in
|
|
Unearned
|
|
Retained
|
|
comprehensive
|
|
Treasury
|
|
|
|
(In
thousands, except per share data)
|
|
stock
|
|
capital
|
|
compensation
|
|
earnings
|
|
income
(loss)
|
|
stock
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
$
|
77
|
|
$
|
74,632
|
|
$
|
(9,535
|
)
|
$
|
80,011
|
|
$
|
5,542
|
|
$
|
(30,158
|
)
|
$
|
120,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,965
|
|
|
-
|
|
|
-
|
|
|
8,965
|
|
Other
net comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17
|
|
|
-
|
|
|
17
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,982
|
|
Cash
dividends declared ($0.48 per share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,628
|
)
|
|
-
|
|
|
-
|
|
|
(2,628
|
)
|
Treasury
stock purchased (285,116 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,099
|
)
|
|
(7,099
|
)
|
Exercise
of stock options (71,064 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(72
|
)
|
|
-
|
|
|
1,263
|
|
|
1,191
|
|
Change
in unearned compensation
|
|
|
-
|
|
|
1,132
|
|
|
1,028
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
77
|
|
|
75,764
|
|
|
(8,507
|
)
|
|
86,276
|
|
|
5,559
|
|
|
(35,994
|
)
|
|
123,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,509
|
|
|
-
|
|
|
-
|
|
|
11,509
|
|
Other
net comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,345
|
)
|
|
-
|
|
|
(1,345
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,164
|
|
Reversals
from discontinued operations
|
|
|
-
|
|
|
142
|
|
|
-
|
|
|
(142
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Cash
dividends declared ($0.48 per share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,614
|
)
|
|
-
|
|
|
-
|
|
|
(2,614
|
)
|
Treasury
stock purchased (77,804 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,545
|
)
|
|
(2,545
|
)
|
Exercise
of stock options (32,415 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(33
|
)
|
|
-
|
|
|
576
|
|
|
543
|
|
Reissuance
of treasury stock - other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,870
shares)
|
|
|
-
|
|
|
358
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
238
|
|
|
596
|
|
Change
in unearned compensation
|
|
|
-
|
|
|
1,324
|
|
|
1,093
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
77
|
|
|
77,588
|
|
|
(7,414
|
)
|
|
94,996
|
|
|
4,214
|
|
|
(37,725
|
)
|
|
131,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,226
|
|
|
-
|
|
|
-
|
|
|
8,226
|
|
Other
net comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,453
|
)
|
|
-
|
|
|
(6,453
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,773
|
|
Acquisition
of Woronoco Bancorp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,926,711
shares)
|
|
|
29
|
|
|
111,810
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
111,839
|
|
Termination
of Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Ownership Plan
|
|
|
-
|
|
|
8,459
|
|
|
5,105
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,564
|
|
Cash
dividends declared ($0.52 per share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,707
|
)
|
|
-
|
|
|
-
|
|
|
(3,707
|
)
|
Treasury
stock purchased/transferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(381,867
shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,837
|
)
|
|
(12,837
|
)
|
Exercise
of stock options (103,271 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(86
|
)
|
|
-
|
|
|
1,777
|
|
|
1,691
|
|
Reissuance
of treasury stock - other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,190
shares)
|
|
|
-
|
|
|
315
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
323
|
|
|
638
|
|
Tax
benefit from stock compensation
|
|
|
-
|
|
|
279
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
279
|
|
Change
in unearned compensation
|
|
|
-
|
|
|
216
|
|
|
874
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
$
|
106
|
|
$
|
198,667
|
|
$
|
(1,435
|
)
|
$
|
99,429
|
|
$
|
(2,239
|
)
|
$
|
(48,462
|
)
|
$
|
246,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
|
|
2005
|
|
2004
|
|
2003
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,226
|
|
$
|
11,940
|
|
$
|
9,150
|
|
Adjustments
to
reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
provided
by
continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
Provision
for
loan losses
|
|
|
1,313
|
|
|
1,565
|
|
|
1,460
|
|
Net
amortization of securities
|
|
|
1,349
|
|
|
1,203
|
|
|
1,795
|
|
Depreciation
and amortization expense
|
|
|
2,268
|
|
|
1,696
|
|
|
1,614
|
|
Management
awards plan expense
|
|
|
1,394
|
|
|
1,216
|
|
|
1,066
|
|
Employee
stock
ownership plan expense
|
|
|
9,002
|
|
|
1,378
|
|
|
1,094
|
|
Amortization
of
other intangibles
|
|
|
1,140
|
|
|
98
|
|
|
203
|
|
Increase
in
cash surrender value of bank owned life insurance
|
|
|
(893
|
)
|
|
(479
|
)
|
|
(221
|
)
|
Gain
on
sales and dispositions of securities, net
|
|
|
(4,283
|
)
|
|
(1,483
|
)
|
|
(3,077
|
)
|
(Gain)
loss on sale of loans, net
|
|
|
(22
|
)
|
|
(85
|
)
|
|
1,854
|
|
Deferred
income
tax provision, net
|
|
|
1,689
|
|
|
1,521
|
|
|
1,088
|
|
Net
change in loans held for sale
|
|
|
(1,040
|
)
|
|
(1,053
|
)
|
|
-
|
|
Decrease
(increase) in interest receivable
|
|
|
560
|
|
|
392
|
|
|
(45
|
)
|
Net
change in other assets
|
|
|
2,801
|
|
|
3,090
|
|
|
(737
|
)
|
Net
change in other liabilities
|
|
|
(3,519
|
)
|
|
(629
|
)
|
|
(384
|
)
|
Net
cash provided by continuing operating activities
|
|
|
19,985
|
|
|
20,370
|
|
|
14,860
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
(653
|
)
|
|
(282
|
)
|
Adjustments
to
reconcile loss to net cash (used)
|
|
|
|
|
|
|
|
|
|
|
provided
by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
-
|
|
|
188
|
|
|
493
|
|
Amortization
of
other intangibles
|
|
|
-
|
|
|
94
|
|
|
203
|
|
Minority
interest
|
|
|
-
|
|
|
(381
|
)
|
|
(186
|
)
|
Net
cash (used) provided by discontinued operations
|
|
|
-
|
|
|
(752
|
)
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net cash provided by operating activities:
|
|
|
19,985
|
|
|
19,618
|
|
|
15,088
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
134,195
|
|
|
16,169
|
|
|
20,349
|
|
Proceeds
from
maturities, calls, and prepayments
|
|
|
80,816
|
|
|
92,257
|
|
|
163,273
|
|
Purchases
|
|
|
(46,523
|
)
|
|
(127,633
|
)
|
|
(302,014
|
)
|
Securities
held
to maturity:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from
maturities, calls, and prepayments
|
|
|
22,858
|
|
|
27,770
|
|
|
56,071
|
|
Purchases
|
|
|
(22,843
|
)
|
|
(25,049
|
)
|
|
(54,725
|
)
|
Purchase
of
bank owned life insurance
|
|
|
-
|
|
|
(10,000
|
)
|
|
(7,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2005, 2004 and 2003
|
|
2005
|
|
2004
|
|
2003
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in
loans, net
|
|
$
|
(63,458
|
)
|
$ |
(89,458
|
)
|
$
|
(153,674
|
)
|
Proceeds
from
sales of loans
|
|
|
3,635
|
|
|
12,737
|
|
|
63,546
|
|
Additions
to
premises and equipment
|
|
|
(4,133
|
)
|
|
(4,583
|
)
|
|
(1,386
|
)
|
Proceeds
from
sales of foreclosed real estate
|
|
|
-
|
|
|
23
|
|
|
1,456
|
|
Net
cash paid for business acquisitions
|
|
|
(26,640
|
)
|
|
(1,415
|
)
|
|
-
|
|
Net
cash provided (used) by continuing investing activities
|
|
|
77,907
|
|
|
(109,182
|
)
|
|
(214,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Additions
to
premises and equipment
|
|
|
-
|
|
|
(76
|
)
|
|
(80
|
)
|
Proceeds
from
sale of interest in discontinued operations
|
|
|
-
|
|
|
1,966
|
|
|
-
|
|
Proceeds
from sale of equipment
|
|
|
-
|
|
|
621
|
|
|
-
|
|
Net
cash provided (used) by discontinued investing activities
|
|
|
-
|
|
|
2,511
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
net cash provided (used) by investing operations:
|
|
|
77,907
|
|
|
(106,671
|
)
|
|
(214,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
82,755
|
|
|
15,545
|
|
|
47,884
|
|
Net
decrease in short term borrowings
|
|
|
-
|
|
|
-
|
|
|
(700
|
)
|
Proceeds
from
Federal Home Loan Bank advances
|
|
|
889,653
|
|
|
675,500
|
|
|
252,000
|
|
Repayments
of
Federal Home Loan Bank advances
|
|
|
(1,063,248
|
)
|
|
(599,039
|
)
|
|
(133,537
|
)
|
Proceeds
from
junior subordinated debentures
|
|
|
15,464
|
|
|
-
|
|
|
-
|
|
Decrease
in
loans sold with recourse
|
|
|
-
|
|
|
(473
|
)
|
|
(728
|
)
|
Treasury
stock
purchased
|
|
|
(7,953
|
)
|
|
(2,545
|
)
|
|
(7,099
|
)
|
Proceeds
from
reissuance of treasury stock
|
|
|
2,329
|
|
|
1,139
|
|
|
1,191
|
|
Cash
dividends paid
|
|
|
(3,707
|
)
|
|
(2,614
|
)
|
|
(2,628
|
)
|
Net
cash (used) provided by financing activities
|
|
|
(84,707
|
)
|
|
87,513
|
|
|
156,383
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
13,185
|
|
|
460
|
|
|
(43,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
17,902
|
|
|
17,442
|
|
|
60,655
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
31,087
|
|
$
|
17,902
|
|
$
|
17,442
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
on deposits
|
|
$
|
20,356
|
|
$
|
12,386
|
|
$
|
13,887
|
|
Interest
paid
on borrowed funds
|
|
|
14,283
|
|
|
8,073
|
|
|
4,696
|
|
Income
taxes paid, net
|
|
|
3,310
|
|
|
2,440
|
|
|
4,175
|
|
Securitization
of and transfer of loans to securities
|
|
|
-
|
|
|
39,657
|
|
|
16,270
|
|
Non-cash
transfer of treasury shares to pay off ESOP loan
|
|
|
4,897
|
|
|
-
|
|
|
-
|
|
Fair
value of non-cash assets acquired
|
|
|
827,780
|
|
|
-
|
|
|
-
|
|
Fair
value of liabilities assumed
|
|
|
702,622
|
|
|
-
|
|
|
-
|
|
Fair
value of common stock issued
|
|
|
108,318
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
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BERKSHIRE
HILLS BANCORP, INC.
Years
Ended December 31, 2005, 2004 and 2003
Basis
of presentation and consolidation
The
consolidated financial statements of Berkshire Hills Bancorp, Inc. (the
“Company”) have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). The Company is a Delaware
corporation and the holding company for Berkshire Bank (the “Bank”), a
state-chartered savings bank headquartered in Pittsfield, Massachusetts. These
consolidated financial statements include the accounts of Berkshire Hills
Bancorp, Inc. and its wholly-owned subsidiaries Berkshire Bank and Berkshire
Hills Technology, Inc. (inactive). The Bank’s wholly-owned subsidiaries include
North Street Securities Corporation,
Woodland Securities, Inc., and Gold Leaf Securities Corporation which hold
certain investment securities. Other Bank subsidiaries are Berkshire Insurance
Group, Inc., Berkshire Financial Planning, Inc. (inactive), and Berkshire
Municipal Bank, a limited purpose commercial bank in New York. 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
The
Company provides a variety of financial services to individuals, municipalities
and businesses through its offices in Western Massachusetts and Northeastern
New
York. Its primary deposit products are checking accounts, NOW accounts, money
market accounts, savings accounts, and time certificates of deposit accounts
and
its primary lending products are residential and commercial mortgage loans,
commercial loans and automobile loans. The Company offers wealth management
services including trust, financial planning, and investment services as well
as
full service insurance agency products.
Use
of estimates
In
preparing consolidated financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated balance sheets
and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and deferred tax assets and
liabilities.
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, which are carried at
cost.
Securities
Debt
securities that management has the positive intent and ability to hold to
maturity are classified as “held to maturity” and recorded at amortized cost.
Securities not classified as held to maturity, 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.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of held
to
maturity and available for sale securities below their cost that are deemed
to
be other than temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (1)
the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3)
the
intent and ability of the Company to retain its investment in the issuer for
a
period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans
Held for Sale / Gains and Losses on Sales of Mortgage
Loans
Residential
mortgage loans originated and held for sale are classified separately in
the
consolidated balance sheets and 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.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting
for Derivatives
The
Company recognizes all derivatives as either assets or liabilities in the
statement of financial position and to measure those instruments at fair value.
Changes in fair value of a derivative that is highly effective, and that is
designated and qualifies as a fair value hedge, along with changes in fair
value
of the hedged asset or liability that is attributable to the hedged risk
(including losses or gains on firm commitments), are recorded currently in
noninterest income. If a derivative has ceased to be highly effective, hedge
accounting is discontinued prospectively.
Forward
sale commitments related to closed residential mortgage loans are accounted
for
as fair value hedges. Changes in the fair value of such commitments and loans
are both recorded in the consolidated income statements and, accordingly, any
hedge ineffectiveness is included in reported net income. However, because
the
Company's forward sale commitments relate to specific closed loans, changes
in
the fair value of the forward commitments offset changes in the fair value
of
the related loans and, accordingly, there is no hedge ineffectiveness recognized
as a gain or loss in earnings.
The
Company uses interest rate swap agreements to hedge various exposures or to
modify interest rate characteristics of various balance sheet accounts.
Derivatives that are used as part of the asset/liability management process
are
linked to specific assets or liabilities and have high correlation between
the
contract and the underlying item being hedged, both at inception and throughout
the hedge period. Interest rate swaps are contracts in which a series of
interest rate flows are exchanged over a prescribed period. The notional amount
on which the interest rate payments are based is not exchanged. Most interest
rate swaps involve the exchange of fixed and floating interest payments. By
entering into the swap, the principal amount of the debt would remain unchanged
but the interest payment streams would change.
The
Company utilizes interest rate swaps to convert a portion of its fixed-rate
liabilities to a variable rate (fair value hedge) and to convert a portion
of
its variable-rate mortgage loans to a fixed rate (cash flow hedge). The gain
or
loss on a derivative designated and qualifying as a fair value hedging
instrument, as well as the offsetting loss or gain on the hedged item, is
recognized currently in earnings in the same accounting period. The gain or
loss
on a derivative designated and qualifying as a cash flow hedging instrument
is
reported as a component of other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged forecasted
transaction affects earnings. The remaining gain or loss on the derivative
instrument, if any, is recognized currently in earnings.
Loans
The
Bank
grants mortgage, commercial and consumer loans to customers. A substantial
portion of the loan portfolio is represented by mortgage loans in Western
Massachusetts and Northeastern New York. The ability of the Bank’s debtors to
honor their contracts is dependent upon the local economy and the local real
estate market.
Loans
that management has the intent and ability to hold for the foreseeable future
or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses,
and
any deferred fees or costs on originated loans. Interest income is accrued
on
the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, together with premiums and discounts on loans purchased,
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 continue accruing to one hundred
and twenty days delinquent at which time they are charged off, unless the
customer is in bankruptcy proceedings. All interest accrued but not collected
for loans that are placed on non-accrual or charged-off is reversed against
interest income. The interest on these loans is accounted for on the cash-basis
or cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance
for loan losses
The
allowance for loan losses is established through a provision for loan losses
charged to earnings to account for losses that are estimated to occur. 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.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
allowance for loan losses is evaluated on a regular basis by management and
is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the composition and volume of the loan
portfolio, adverse situations that may affect the borrower’s ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value
or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based
on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating allocated and general losses in the portfolio.
A
loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Impairment is measured on a loan by loan basis by either the present
value of expected future cash flows discounted at the loan’s effective interest
rate, or the fair value of the collateral if the loan is collateral dependent.
Substantially all of the Bank’s loans that have been identified as impaired have
been measured by the fair value of existing collateral.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer loans or residential mortgage loans for impairment disclosures.
Foreclosed
and repossessed assets
Assets
acquired through, or in lieu of, loan foreclosure or repossession are held
for
sale and are initially recorded at the lower of the investment in the loan
or
fair value less estimated cost 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 cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from foreclosed real estate and repossessed assets.
Mortgage
servicing rights
Servicing
assets are recognized when rights are acquired through purchase or sale of
residential mortgage loans. Capitalized servicing rights are amortized against
mortgage servicing income in proportion to, and over the period of, the
estimated future net servicing income of the underlying mortgage loans.
Servicing assets are evaluated regularly for impairment based upon the fair
value of the servicing rights as compared to their amortized cost. Fair value
is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based
assumptions.
Premises
and equipment
Land
is
carried at cost. Buildings and improvements and equipment are carried at cost,
less accumulated depreciation and amortization computed on the straight-line
method over the estimated useful lives of the assets or terms of the leases,
if
shorter.
Goodwill
and other intangibles
Goodwill
and other intangibles are described in the notes to the consolidated financial
statements. The
Company records as goodwill the excess of purchase price over the fair value
of
the identifiable net assets acquired. Statements of Financial Accounting
Standards (SFAS ) No. 142, “Goodwill and Other Intangible Assets”, prescribes a
two-step process for impairment testing of goodwill, which is performed
annually, as well as when an event triggering impairment may have occurred.
The
first step tests for impairment, while the second step, if necessary, measures
the impairment. Other identifiable intangible assets are recorded at their
estimated fair market value and are amortized on a straight line basis over
their estimated useful lives. These assets are evaluated for impairment if
circumstances suggest that their value may be impaired.
Transfers
of financial assets
Transfers
of financial assets are accounted for as sales, when control over the assets
has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage
of
that right) to pledge or exchange the transferred assets and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
taxes
Deferred
tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted accordingly through the
provision for income taxes. The Bank’s base amount of its federal income tax
reserve for loan losses is a permanent difference for which there is no
recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if it is deemed
realizable.
Insurance
commissions
Commission
revenue is recognized as of the effective date of the insurance policy or the
date the customer is billed, whichever is later, net of return commissions
related to policy cancellations. In addition, the Company may receive additional
performance commissions based on achieving certain sales and loss experience
measures. Such commissions are recognized when determinable, which is generally
when such commissions are received or when the Company receives data from the
insurance companies that allows the reasonable estimation of these
amounts.
Stock
compensation plans
Statement
of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation,” encourages all entities to adopt a fair value based method of
accounting for employee stock compensation plans, whereby compensation cost
is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
Employees,” whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over
the
amount an employee must pay to acquire the stock. SFAS No. 123 was revised
as
SFAS No. 123R in December 2004, with an effective date for the Company of
January 1, 2006. This revision is discussed further in the “Recent Accounting
Pronouncements” section of this Note.
At
December 31, 2005, the Company maintains stock-based compensation plans,
which are described more fully in Note 15. The Company had elected to apply
the accounting methodology in APB No. 25 and, as a result, has provided pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting had been applied. The following table illustrates
the
effect on net income and earnings per share if the Company had applied the
fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
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(In
thousands, except per share data)
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|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
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|
$
|
8,226
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|
$
|
11,509
|
|
$
|
8,965
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|
Deduct:
Total stock-based employee
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compensation
expense determined under
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fair
value based method for all awards,
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net
of
related tax effects
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(433
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)
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|
(434
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)
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|
(398
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)
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Pro
forma net income
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$
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7,793
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$
|
11,075
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$
|
8,567
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Earnings
per share:
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Basic-as
reported
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$
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1.16
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$
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2.18
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$
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1.70
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Basic-pro
forma
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$
|
1.09
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$
|
2.10
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$
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1.63
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Diluted-as
reported
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$
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1.10
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$
|
2.01
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$
|
1.57
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Diluted-pro
forma
|
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$
|
1.04
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$
|
1.93
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$
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1.50
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Employee
stock ownership plan (“ESOP”)
The
Company’s ESOP was terminated on June 30, 2005. Prior to this, compensation
expense was recognized as ESOP shares were committed to be released. Allocated
and committed to be released ESOP shares were considered outstanding for
earnings per share calculations. Other ESOP shares were excluded from earnings
per share calculations. Dividends declared on allocated ESOP shares were
charged
to retained earnings. Dividends declared on unallocated ESOP shares were
used to
satisfy debt service. The value of unearned shares to be allocated to ESOP
participants for future services not yet performed was reflected as a reduction
of stockholders’ equity.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock
awards
The
fair
market value of the stock awards, based on the market price at date of grant,
is
recorded as unearned compensation. Unearned compensation is amortized over
the
vesting period. Vested stock award shares are considered outstanding for basic
earnings per share. Stock award shares not vested are considered in the
calculation of diluted earnings per share.
Earnings
per common share
Earnings
per common share have been computed based on the following (average diluted
shares outstanding is calculated using the treasury stock method):
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Years
Ended December 31,
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2005
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2004
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2003
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(In
thousands, except per share data)
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Net
income applicable to common stock
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$
|
8,226
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$
|
11,509
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|
$
|
8,965
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Average
number of common shares issued
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9,390
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7,674
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7,674
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Less:
average number of treasury stock shares
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(1,935
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)
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|
(1,779
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)
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|
(1,723
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)
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Less:
average number of unallocated ESOP shares
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(200
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)
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|
(436
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)
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|
(473
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)
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Less:
average number of unvested stock award shares
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(133
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)
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|
(175
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)
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|
(212
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)
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Average
number of basic shares outstanding
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7,122
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|
5,284
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|
5,266
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|
Plus:
average number of unvested stock award shares
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|
133
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|
175
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|
|
212
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|
Plus:
average number of dilutive shares based on stock options
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248
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|
|
272
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|
|
225
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|
Average
number of diluted shares outstanding
|
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|
7,503
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|
|
5,731
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|
5,703
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Earnings
per average basic share
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$
|
1.16
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$
|
2.18
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$
|
1.70
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Earnings
per average diluted share
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|
$
|
1.10
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$
|
2.01
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$
|
1.57
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Trust
assets
Trust
assets held in a fiduciary or agent capacity are not included in the
accompanying consolidated balance sheets because they are not assets of the
Company.
Business
segments
An
operating segment is a component of a business for which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and evaluate performance.
The Company’s operations are limited to financial services provided within the
framework of a community bank, and decisions are based generally on specific
market areas and or product offerings. Accordingly, based on the financial
information which is presently evaluated by the Company’s chief operating
decision-maker, the Company operates in a single business segment.
Off-balance
sheet financial instruments
In
the
ordinary course of business, the Bank enters into off-balance sheet financial
instruments, consisting primarily of credit related financial instruments.
These
financial instruments are recorded in the consolidated financial statements
when
they are funded or related fees are incurred or received.
Recent
accounting pronouncements
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 123R, “Share-Based
Payment (Revised 2004Ó)
(SFAS
123R). SFAS 123R
establishes standards for the accounting for transactions in which an entity
(i) exchanges its equity instruments for goods or services, or
(ii) incurs liabilities in exchange
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
for
goods
or services that are based on the fair value of the entity’s equity instruments
or that may be settled by the issuance of the equity instruments. SFAS 123R
eliminates the ability to account for stock-based compensation using APB 25
and requires that such transactions be recognized as compensation cost in the
income statement based on their fair values on the measurement date, which
is
generally the date of the grant. SFAS 123R is to be effective for the
Company on January 1, 2006. The Company will transition to fair-value based
accounting for stock-based compensation using a modified version of prospective
application. Under modified prospective application, as it is applicable to
the
Company, SFAS 123R applies to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. Additionally, compensation
cost for the portion of awards for which the requisite service has not been
rendered that are outstanding as of January 1, 2006 must be recognized as
the remaining requisite service is rendered during the period of and/or the
periods after the adoption of SFAS 123R. The attribution of compensation
cost for those earlier awards will be based on the same method and on the same
grant-date fair values previously determined for the pro forma disclosures
required for companies that did not adopt the fair value accounting method
for
stock-based employee compensation.
Based
on
the non-vested stock options outstanding as of December 31, 2005 for which
the requisite service is not expected to be fully rendered prior to
January 1, 2006, the Company expects to recognize total pre-tax, quarterly
compensation cost of approximately $40,000 beginning in the first quarter of
2006, in accordance with the accounting requirements of SFAS 123R. Future
levels of compensation cost related to stock-based compensation awards
(including the aforementioned expected costs during the period of adoption)
may
be impacted by new awards and/or modifications, repurchases and cancellations
of
existing awards before and after the adoption SFAS 123R.
In
November 2005, FASB issued FASB Staff Position No. 115-1,
“The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments.”(FSP
115-1) FSP
115-1
provides guidance for determining when an investment is considered impaired,
whether impairment is other than temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment
is less than its cost. If, after consideration of all available evidence to
evaluate the realizable value of its investment, impairment is determined to
be
other than temporary, then an impairment loss should be recognized equal to
the
difference between the investment’s cost and its fair value. FSP 115-1 nullifies
certain provisions of Emerging Issues Task Force (EITF) Issue No. 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,” while retaining the disclosure requirements of EITF 03-1
which were adopted in 2003. FSP 115-1 is effective for reporting periods
beginning after December 15, 2005. The Company does not expect FSP 115-1
will significantly impact its financial statements upon its adoption on
January 1, 2006.
In
December 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, “Accounting
for Certain Loans or Debt Securities Acquired in a Transfer.”
(SOP
03-3).
SOP
03-3
addresses accounting for differences between the contractual cash flows of
certain loans and debt securities and the cash flows expected to be collected
when loans or debt securities are acquired in a transfer and those cash flow
differences are attributable, at least in part, to credit quality. As such,
SOP
03-3 applies to loans and debt securities acquired individually, in pools or
as
part of a business combination and does not apply to originated loans. The
application of SOP 03-3 limits the interest income, including accretion of
purchase price discounts, that may be recognized for certain loans and debt
securities. Additionally, SOP 03-3 does not allow the excess of contractual
cash
flows over cash flows expected to be collected to be recognized as an adjustment
of yield, loss accrual or valuation allowance, such as the allowance for
possible loan losses. SOP 03-3 requires that increases in expected cash flows
subsequent to the initial investment be recognized prospectively through
adjustment of the yield on the loan or debt security over its remaining life.
Decreases in expected cash flows should be recognized as impairment. In the
case
of loans acquired in a business combination where the loans show signs of credit
deterioration, SOP 03-3 represents a significant change from previous purchase
accounting practice whereby the acquiree’s allowance for loan losses is
typically added to the acquirer’s allowance for loan losses. The adoption of SOP
03-3 on January 1, 2005 did not have a material impact on the Company’s
consolidated financial statements.
2. MERGERS
AND
ACQUISITIONS
On
June
1, 2005, the Company acquired all of the outstanding common shares of Woronoco
Bancorp, Inc., (“Woronoco”) and its wholly-owned subsidiary Woronoco Savings
Bank. Headquartered in Westfield, Massachusetts, Woronoco provided banking
and
other financial services through ten banking offices in the Pioneer Valley,
including Hampden and Hampshire Counties in Western Massachusetts. The merger
expanded the Company’s footprint to include new areas and provided new
opportunities to enhance revenues and operating efficiencies. The acquisition
was accounted for under the purchase method of accounting with the results
of
operations for Woronoco included in the Company’s results beginning June 1,
2005. Under the purchase method of accounting, the assets and liabilities of
the
former Woronoco were recorded at their respective fair values as of June 1,
2005.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company purchased 25% of Woronoco’s common shares for cash, at $36.00 per share.
The Company purchased 75% of Woronoco’s common shares for stock, in a
one-for-one exchange valued at $37.01 per share (the share value was based
on
the average closing share price for the five-day period beginning two days
before the date of the announcement of the acquisition). The Company also
converted Woronoco’s outstanding stock options into options to purchase an equal
number of shares of Berkshire stock. The calculation of the purchase price
was
as follows:
(In
thousands, except share data)
|
|
|
|
|
|
Total
shares of Berkshire common stock issued
|
|
|
2,926,711
|
|
|
|
|
Purchase
price per Berkshire common share
|
|
$
|
37.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of Berkshire common stock issued
|
|
|
|
|
$
|
108,318
|
|
Cash
paid for Woronoco stock
|
|
|
|
|
|
35,088
|
|
Estimated
fair value of stock options
|
|
|
|
|
|
3,521
|
|
Total
purchase price
|
|
|
|
|
$
|
146,927
|
|
The
following condensed balance sheet of Woronoco discloses the amounts assigned
to
each major asset and liability caption at the acquisition date of June 1, 2005.
(In
thousands)
|
|
|
|
Assets
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,769
|
|
Securities
available-for-sale
|
|
|
182,196
|
|
Net
loans
|
|
|
525,446
|
|
Goodwill
|
|
|
80,440
|
|
Intangible
assets
|
|
|
11,982
|
|
Other
assets
|
|
|
27,716
|
|
Total
assets
|
|
|
849,549
|
|
Liabilities
|
|
|
|
|
Deposits
|
|
|
442,674
|
|
Borrowings
|
|
|
243,122
|
|
Other
liabilities
|
|
|
16,826
|
|
Total
liabilities acquired
|
|
|
702,622
|
|
Net
assets acquired
|
|
$
|
146,927
|
|
The
core
deposit intangible was estimated at $9.66 million for the non-maturity deposits,
and will be amortized over their estimated useful lives of 8-10 years on a
straight-line basis. An intangible asset of $2.32 million was recorded for
the
value of certain non-competition agreements and will be amortized on a
straight-line basis over the three-year lives of these assets. None of the
goodwill is expected to be deductible for income tax purposes.
The
results of Woronoco are included in the historical results of the Company
beginning on June 1, 2005. The following table presents unaudited pro forma
information as if the acquisition of Woronoco had been consummated as of January
1, 2005. This pro forma information gives effect to certain adjustments,
including purchase accounting fair value adjustments, amortization of core
deposit and other intangibles and related income tax effects. The pro forma
information is theoretical in nature and does not necessarily reflect the
results of operations that would have occurred had the Company acquired Woronoco
at the beginning of these periods. In particular, revenue enhancements, cost
savings and indirect merger and integration costs are not reflected in the
pro
forma amounts.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s unaudited pro forma condensed consolidated statements of income for
the years 2005 and 2004, assuming that Woronoco had been acquired as of the
beginning of the year are as follows:
(In
thousands, except per share data)
|
|
2005
|
2004
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
60,881
|
|
$
|
62,483
|
|
Non-interest
income
|
|
|
17,656
|
|
|
14,047
|
|
Net
income
|
|
|
10,387
|
|
|
13,674
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.25
|
|
$
|
1.66
|
|
Diluted
earnings per share
|
|
$
|
1.19
|
|
$
|
1.57
|
|
During
2005, the Bank acquired the business and assets of each of MacDonald &
Johnson, Inc., a full-service property and casualty insurance agency located
in
East Longmeadow, Massachusetts and Onofrey Insurance and Financial Services,
Inc., an agency specializing in life, disability and health insurance products
located in Springfield, Massachusetts. During 2004, the Company acquired the
business of Berkshire Financial Planning, Ltd. Additionally in 2004, the Bank
acquired Oriskany Falls, New York branch of the National Bank of Vernon,
including approximately $8 million in deposits. These acquisitions, in
aggregate, were not viewed as material to the consolidated financial
statements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES
A
summary
of securities follows:
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
69
|
|
$
|
-
|
|
$
|
(6
|
)
|
$
|
63
|
|
Municipal
bonds
and obligations
|
|
|
63,701
|
|
|
364
|
|
|
(392
|
)
|
|
63,673
|
|
Mortgaged-backed
securities
|
|
|
264,705
|
|
|
59
|
|
|
(6,260
|
)
|
|
258,504
|
|
Other
bonds and obligations
|
|
|
24,356
|
|
|
454
|
|
|
(107
|
)
|
|
24,703
|
|
Total
debt securities
|
|
|
352,831
|
|
|
877
|
|
|
(6,765
|
)
|
|
346,943
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
36,717
|
|
|
-
|
|
|
-
|
|
|
36,717
|
|
Other
equity securities
|
|
|
4,950
|
|
|
2,266
|
|
|
-
|
|
|
7,216
|
|
Total
equity securities
|
|
|
41,667
|
|
|
2,266
|
|
|
-
|
|
|
43,933
|
|
Total
securities available for sale
|
|
|
394,498
|
|
|
3,143
|
|
|
(6,765
|
)
|
|
390,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds
and obligations
|
|
|
23,851
|
|
|
-
|
|
|
-
|
|
|
23,851
|
|
Mortgaged-backed
securities
|
|
|
6,057
|
|
|
-
|
|
|
(145
|
)
|
|
5,912
|
|
Total
securities held to maturity
|
|
|
29,908
|
|
|
-
|
|
|
(145
|
)
|
|
29,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
$
|
424,406
|
|
$
|
3,143
|
|
$
|
(6,910
|
)
|
$
|
420,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
1,106
|
|
$
|
13
|
|
$
|
(6
|
)
|
$
|
1,113
|
|
Municipal
bonds
and obligations
|
|
|
19,169
|
|
|
99
|
|
|
(96
|
)
|
|
19,172
|
|
Mortgaged-backed
securities
|
|
|
323,956
|
|
|
1,857
|
|
|
(3,228
|
)
|
|
322,585
|
|
Other
bonds and obligations
|
|
|
9,418
|
|
|
56
|
|
|
(45
|
)
|
|
9,429
|
|
Total
debt securities
|
|
|
353,649
|
|
|
2,025
|
|
|
(3,375
|
)
|
|
352,299
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
16,974
|
|
|
-
|
|
|
-
|
|
|
16,974
|
|
Other
equity securities
|
|
|
7,236
|
|
|
7,912
|
|
|
-
|
|
|
15,148
|
|
Total
equity securities
|
|
|
24,210
|
|
|
7,912
|
|
|
-
|
|
|
32,122
|
|
Total
securities available for sale
|
|
|
377,859
|
|
|
9,937
|
|
|
(3,375
|
)
|
|
384,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds
and obligations
|
|
|
25,227
|
|
|
-
|
|
|
-
|
|
|
25,227
|
|
Mortgaged-backed
securities
|
|
|
4,715
|
|
|
9
|
|
|
(52
|
)
|
|
4,672
|
|
Total
securities held to maturity
|
|
|
29,942
|
|
|
9
|
|
|
(52
|
)
|
|
29,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
$
|
407,801
|
|
$
|
9,946
|
|
$
|
(3,427
|
)
|
$
|
414,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
amortized cost and estimated fair value of debt securities by contractual final
maturity at year-end 2005 was as follows:
|
|
Available
for Sale
|
|
Held
to Maturity
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Within
1 year
|
|
$
|
152
|
|
$
|
152
|
|
$
|
8,175
|
|
$
|
8,175
|
|
Over
1 year to 5 years
|
|
|
1,050
|
|
|
1,041
|
|
|
4,041
|
|
|
4,041
|
|
Over
5 years to 10 years
|
|
|
4,535
|
|
|
4,465
|
|
|
1,394
|
|
|
1,394
|
|
Over
10 years
|
|
|
82,389
|
|
|
82,781
|
|
|
10,241
|
|
|
10,241
|
|
Total
bonds and obligations
|
|
|
88,126
|
|
|
88,439
|
|
|
23,851
|
|
|
23,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
264,705
|
|
|
258,504
|
|
|
6,057
|
|
|
5,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt securities
|
|
$
|
352,831
|
|
$
|
346,943
|
|
$
|
29,908
|
|
$
|
29,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005 and 2004, the Company had pledged securities with an
amortized cost of $2.52 million and $1.00 million and a fair value of $2.50
million and $1.01 million, respectively, as collateral for its treasury tax
and
loan account. Additionally, there is a blanket lien on certain securities to
collateralize borrowings from the Federal Home Loan Bank of Boston, as discussed
further in the Borrowings note to these consolidated financial
statements.
Sales
of
securities available for sale were as follows:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales
|
|
$
|
134,195
|
|
$
|
16,169
|
|
$
|
20,349
|
|
Gross
realized gains
|
|
|
6,134
|
|
|
1,914
|
|
|
3,371
|
|
Gross
realized losses
|
|
|
1,851
|
|
|
431
|
|
|
294
|
|
Gross
gains included gains on the sale of securitized mortgages totaling $751,000
in
2005 and $81,000 in 2004. There were no such sales in 2003.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Year-end
securities with unrealized losses, segregated by length of impairment, are
summarized as follows:
|
|
Less
Than Twelve Months
|
|
Over
Twelve Months
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
(In
thousands)
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgaged-backed
securities
|
|
$
|
2,576
|
|
$
|
140,291
|
|
$
|
3,684
|
|
$
|
103,147
|
|
Other
bonds and obligations
|
|
|
361
|
|
|
35,133
|
|
|
144
|
|
|
10,019
|
|
Total
available for sale
|
|
|
2,937
|
|
|
175,424
|
|
|
3,828
|
|
|
113,166
|
|
Securities
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgaged-backed
securities
|
|
|
5
|
|
|
261
|
|
|
140
|
|
|
5,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,942
|
|
$
|
175,685
|
|
$
|
3,968
|
|
$
|
118,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgaged-backed
securities
|
|
$
|
1,474
|
|
$
|
138,873
|
|
$
|
1,753
|
|
$
|
87,220
|
|
Other
bonds and obligations
|
|
|
75
|
|
|
9,338
|
|
|
73
|
|
|
5,353
|
|
Total
available for sale
|
|
|
1,549
|
|
|
148,211
|
|
|
1,826
|
|
|
92,573
|
|
Securities
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgaged-backed
securities
|
|
|
13
|
|
|
1,155
|
|
|
39
|
|
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,562
|
|
$
|
149,366
|
|
$
|
1,865
|
|
$
|
95,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
evaluates impaired securities to determine if any impairments are other than
temporary. The determination includes an evaluation of the severity of the
impairment, the duration of the impairment, changes in market conditions,
changes in credit quality, and the performance and prospects for the securities.
Based on management's review, no securities were deemed impaired on an
other-than-temporary basis in 2005, 2004, and 2003, and all securities performed
in accordance with their terms during these periods. The Company did not own
any
equity securities with unrealized losses at year-end 2005. At that date, all
impairments were deemed to be temporary and related to changes in market
interest rates, and not related to the underlying credit quality of the issuers.
The Company expects that these securities will continue to perform in accordance
with their terms. The unrealized losses primarily relate to pass through
mortgage-backed securities issued by Fannie Mae and Freddie Mac. The increase
in
unrealized losses was due to higher interest rates in 2005. The largest number
of impaired securities were either purchased at discount or were adjustable
rate
securities expected to improve to premium pricing at the time of rate
adjustment. The Company has the ability to hold these investments for a time
necessary to recover the amortized cost.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS
Year-end
loans consisted of the following:
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
|
|
|
|
|
|
1-4
family
|
|
$
|
514,423
|
|
$
|
217,159
|
|
Construction
|
|
|
35,368
|
|
|
18,091
|
|
Total
residential mortgages
|
|
|
549,791
|
|
|
235,250
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages
|
|
|
|
|
|
|
|
Construction
|
|
|
58,968
|
|
|
20,611
|
|
Single
and multifamily
|
|
|
68,570
|
|
|
32,344
|
|
Other
|
|
|
283,182
|
|
|
207,619
|
|
Total
commercial mortgages
|
|
|
410,720
|
|
|
260,574
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
158,746
|
|
|
150,879
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
Auto
|
|
|
147,286
|
|
|
122,684
|
|
Home
equity and
other
|
|
|
149,906
|
|
|
58,792
|
|
Total
consumer
|
|
|
297,192
|
|
|
181,476
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$
|
1,416,449
|
|
$
|
828,179
|
|
|
|
|
|
|
|
|
|
Included
in year-end total loans were the following:
Unamortized
net loan origination costs
|
|
$
|
896
|
|
$
|
574
|
|
Unamortized
net premium on purchased loans
|
|
|
173
|
|
|
195
|
|
Total
unamortized net costs and discounts
|
|
$
|
1,069
|
|
$
|
769
|
|
|
|
|
|
|
|
|
|
Activity
in the allowance for loan losses was as follows:
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
9,337
|
|
$
|
8,969
|
|
$
|
10,308
|
|
Provision
for loan losses
|
|
|
1,313
|
|
|
1,565
|
|
|
1,460
|
|
Allowance
attributed to acquired loans
|
|
|
3,321
|
|
|
-
|
|
|
-
|
|
Loans
charged-off
|
|
|
(1,542
|
)
|
|
(2,202
|
)
|
|
(4,364
|
)
|
Recoveries
|
|
|
572
|
|
|
1,005
|
|
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
13,001
|
|
$
|
9,337
|
|
$
|
8,969
|
|
|
|
|
|
|
|
|
|
|
|
|
Most
of
the Company’s lending activity occurs within its primary markets in Western
Massachusetts and Northeastern New York. Most of the loan portfolio is secured
by real estate, including residential mortgages, commercial mortgages, and
home
equity loans. During 2005 and 2004, there were no concentrations of loans
related to any one industry in excess of 10% of total loans.
At
year-end 2005 and 2004, Bank loans outstanding to related parties totaled $4.33
million and $2.45 million. 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 2005 and 2004, all related party loans were performing. Year-end Bank
aggregate extensions of credit to one related party interest totaled $4.70
million in 2005 and $4.15 million in 2004. In these years, aggregate additions
to extensions of credit to this interest totaled $600,000 and $4.08 million,
and
related aggregate reductions of extensions of credit (including loan repayments)
totaled $50,000 and $50,000 in 2005 and 2004, respectively.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a summary of year-end information pertaining to impaired loans,
non-accrual loans, and troubled debt restructurings:
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Investment
in impaired loans
|
|
$
|
1,914
|
|
$
|
1,180
|
|
$
|
2,382
|
|
Impaired
loans with no valuation allowance
|
|
|
1,430
|
|
|
787
|
|
|
388
|
|
Impaired
loans with a valuation allowance
|
|
|
484
|
|
|
393
|
|
|
1,994
|
|
Specific
valuation allowance allocated to impaired loans
|
|
|
257
|
|
|
230
|
|
|
267
|
|
Average
investment in impaired loans during year
|
|
|
3,806
|
|
|
2,412
|
|
|
2,693
|
|
Cash
basis impaired loan income during year
|
|
|
66
|
|
|
18
|
|
|
14
|
|
Non-accrual
loans
|
|
|
1,186
|
|
|
1,152
|
|
|
3,199
|
|
Income
foregone on non-accrual loans during year
|
|
|
82
|
|
|
173
|
|
|
165
|
|
Total
loans past due ninety days or more and still accruing
|
|
|
110
|
|
|
65
|
|
|
306
|
|
Troubled
debt restructurings
|
|
|
1,234
|
|
|
510
|
|
|
214
|
|
Interest
income on troubled debt restructurings
|
|
|
71
|
|
|
14
|
|
|
13
|
|
There
was
no foreclosed real estate at year-end 2005 or 2004. There were no commitments
to
lend additional funds to debtors of troubled debt restructurings.
The
Bank
has sold loans in the secondary market and has retained the servicing
responsibility and receives fees for the services provided. Mortgage loans
sold
and serviced for others amounted to $106.3 million and $47.6 million at year-end
2005 and 2004, respectively.
Included
in other assets are capitalized mortgage servicing rights, which represent
the
capitalized net present value of fee income streams generated from servicing
residential mortgage loans for other financial institutions. The fair value
of
these rights is based on discounted cash flow projections. The fair value
approximated carrying value at year-end 2005 and 2004, and no valuation
allowance was recorded at these dates.
The
components of mortgage servicing rights were as follows:
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
279
|
|
$
|
100
|
|
$
|
-
|
|
Additions
|
|
|
988
|
|
|
233
|
|
|
100
|
|
Amortization
|
|
|
(99
|
)
|
|
(54
|
)
|
|
-
|
|
Balance
at end of year
|
|
$
|
1,168
|
|
$
|
279
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5. PREMISES
AND EQUIPMENT
Year-end
premises and equipment are summarized as follows:
|
|
|
|
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Land
|
|
$
|
3,639
|
|
$
|
1,587
|
|
Buildings
and improvements
|
|
|
27,492
|
|
|
20,232
|
|
Furniture
and equipment
|
|
|
18,100
|
|
|
12,751
|
|
Construction
in process
|
|
|
542
|
|
|
1,491
|
|
|
|
|
49,773
|
|
|
36,061
|
|
Accumulated
depreciation and
|
|
|
|
|
|
|
|
amortization
|
|
|
(23,537
|
)
|
|
(21,281
|
)
|
|
|
|
|
|
|
|
|
Premises
and
equipment, net
|
|
$
|
26,236
|
|
$
|
14,780
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense for the years 2005, 2004 and 2003 amounted to $2.26
million, $1.88 million, and $2.11 million, respectively.
6. OTHER
ASSETS
Year-end
other assets are summarized as follows:
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Prepaid
dealer reserves
|
|
$
|
3,781
|
|
$
|
3,460
|
|
Net
deferred tax asset
|
|
|
4,218
|
|
|
819
|
|
Capitalized
mortgage servicing rights
|
|
|
1,168
|
|
|
279
|
|
Other
|
|
|
4,109
|
|
|
1,829
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
$
|
13,276
|
|
$
|
6,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7. GOODWILL
AND
OTHER INTANGIBLES
Goodwill
totaled $88.1 million and $6.8 million at year-end 2005 and 2004, respectively.
The Company recorded $80.4 million in goodwill in connection with the
acquisition of Woronoco Bancorp, Inc. in June, 2005. The Company recorded $0.9
million in goodwill in connection with insurance agency acquisitions in the
fourth quarter of 2005. See Note 2 - Mergers and Acquisitions for further
information about goodwill and other intangible assets acquired in
2005.
Other
intangible assets were as follows:
(In
thousands)
|
|
Gross
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
Intangible
Assets
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
Core
deposits
|
|
$
|
9,886
|
|
$
|
(622
|
)
|
$
|
9,264
|
|
Non-compete
agreements
|
|
|
2,318
|
|
|
(451
|
)
|
|
1,867
|
|
Other
intangible assets
|
|
|
464
|
|
|
(71
|
)
|
|
393
|
|
Total
|
|
$
|
12,668
|
|
$
|
(1,144
|
)
|
$
|
11,524
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
Core
deposits
|
|
$
|
222
|
|
$
|
-
|
|
$
|
222
|
|
Other
intangible assets
|
|
|
254
|
|
|
(4
|
)
|
|
250
|
|
Total
|
|
$
|
476
|
|
$
|
(4
|
)
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to intangible assets totaled $1,140,000 in 2005, $98,000 in
2004, and $203,000 in 2003. The estimated aggregate future amortization expense
for intangible assets remaining as of December 31, 2005 is as follows: 2006
-
$1.94 million; 2007 - $1.94 million; 2008 - $1.48 million; 2009 - $1.11 million;
2010 - $1.05 million; and thereafter - $4.01 million.
8. DEPOSITS
Year-end
deposits were as follows:
(In
thousands)
|
|
2005
|
|
2004
|
|
Demand
|
|
$
|
180,136
|
|
$
|
110,129
|
|
NOW
|
|
|
148,644
|
|
|
100,709
|
|
Money
market
|
|
|
244,784
|
|
|
156,412
|
|
Savings
|
|
|
222,387
|
|
|
163,264
|
|
Total
non-maturity deposits
|
|
|
795,951
|
|
|
530,514
|
|
Brokered
time
|
|
|
56,933
|
|
|
-
|
|
Other
time
|
|
|
518,334
|
|
|
315,275
|
|
Total
time
|
|
|
575,267
|
|
|
315,275
|
|
Total
deposits
|
|
$
|
1,371,218
|
|
$
|
845,789
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of year-end time deposits is as follows:
|
|
2005
|
|
2004
|
|
(In
thousands)
|
|
Amount
|
|
Amount
|
|
Maturity
date:
|
|
|
|
|
|
|
|
Within
1 year
|
|
$
|
350,385
|
|
$
|
177,265
|
|
Over
1
year to 3 years
|
|
|
152,937
|
|
|
92,231
|
|
Over
3
years
|
|
|
71,945
|
|
|
45,779
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
575,267
|
|
$
|
315,275
|
|
|
|
|
|
|
|
|
|
Account
balance:
|
|
|
|
|
|
|
|
Less
than $100,000
|
|
$
|
308,354
|
|
$
|
175,177
|
|
$100,000
or
more
|
|
|
266,913
|
|
|
140,098
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
575,267
|
|
$
|
315,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. BORROWINGS
Borrowings
outstanding at year-end 2005 and 2004 included various advances from the Federal
Home Loan Bank of Boston (FHLBB). Additionally, borrowings at year-end 2005
included junior subordinated debentures.
FHLBB
borrowings outstanding at year-end 2005 and 2004 consisted of various advances
totaling $397.5 million and $327.9 million, respectively. The year-end weighted
average interest rate on outstanding advances was 3.77% in 2005 and 3.11% in
2004. The contractual maturities of FHLBB advances at year-end 2005 were as
follows: 2006 - $139.7 million; 2007 - $95.4 million; 2008 - $50.9 million;
2009
- $49.5 million; 2010 - $20.0 million; and thereafter - $42.0 million. Year-end
2005 advances outstanding included callable advances totaling $123.5 million
and
amortizing advances totaling $25.7 million.
The
Bank
maintains a line of credit with the FHLBB, which carries interest at a rate
that
adjusts daily. Borrowings under the line are limited to $13.1 million and the
line of credit may be increased to 2% of the Bank’s total assets in accordance
with the FHLBB credit policy. Additionally, the Bank utilizes overnight FHLBB
cash management borrowings. All FHLBB borrowings are secured by a blanket
security agreement on certain qualified collateral, principally all first
mortgage loans, certain securities, and any funds on deposit with the FHLBB.
As
of December 31, 2005 and 2004, there were no outstanding borrowings under the
FHLBB line of credit.
Securities
sold under agreements to repurchase (“repurchase agreements”) are funds borrowed
from customers on an overnight basis that are secured by investment securities.
There were no securities sold under agreements to repurchase at year-end 2005.
During 2005, the average amount outstanding was $986,000; the highest month-end
balance was $4.87 million; and the weighted average interest rate during the
year was 2.79%. There were no securities sold under agreements to repurchase
in
2004. The Bank has a $50.0 million repurchase agreement line of credit with
a
major broker-dealer to be secured by securities or other assets of the Bank.
As
of December 31, 2005 and 2004, there were no outstanding borrowings against
this
agreement.
The
balance of junior subordinated debentures totaled $15.5 million at year-end
2005. In June 2005, the Company formed Berkshire Hills Capital Trust I (the
“Trust”) which issued $15.0 million of trust preferred securities. The Company
invested $464,000 in the common equity of the Trust. The proceeds from the
sale
of the preferred securities and the common equity were used to purchase $15.5
million of junior subordinated debenture issued by the Company to the Trust.
The
debentures are the sole assets of the Trust. Proceeds were used by the Company
to provide additional equity to the Bank. The trust preferred securities and
common stock pay dividends quarterly at a variable rate equal to LIBOR plus
1.85%. The trust preferred securities are mandatorily redeemable on August
23,
2035 and may be redeemed by the Trust at par any time on or after August 23,
2010. The Company has fully and unconditionally guaranteed the trust preferred
securities issued by the Trust. The interest rate and maturity of the junior
subordinated debentures are the same as the trust preferred securities. The
coupon rate at year-end 2005 was 6.23%. The financial statements of Berkshire
Hills Capital Trust I are not included in the consolidated financial statements
of Berkshire Hills Bancorp. The Company has the right to defer payments of
interest on the debentures at any time, or from time to time, with certain
limitations.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME
TAXES
Income
tax expense (benefit) was as follows:
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,501
|
|
$
|
3,632
|
|
$
|
3,210
|
|
State
|
|
|
813
|
|
|
264
|
|
|
766
|
|
Total
current
|
|
|
6,314
|
|
|
3,896
|
|
|
3,976
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,647
|
|
|
875
|
|
|
848
|
|
State
|
|
|
(93
|
)
|
|
188
|
|
|
240
|
|
Total
deferred
|
|
|
1,554
|
|
|
1,063
|
|
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation reserve
|
|
|
135
|
|
|
458
|
|
|
-
|
|
Total
income tax expense
|
|
$
|
8,003
|
|
$
|
5,417
|
|
$
|
5,064
|
|
The
reasons for the differences between the statutory federal income tax rate and
the effective tax rates are summarized as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Statutory
tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
34.0
|
%
|
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
taxes, net of federal tax benefit
|
|
|
3.4
|
|
|
1.7
|
|
|
4.7
|
|
Dividends
received deduction
|
|
|
(0.7
|
)
|
|
(0.9
|
)
|
|
(1.1
|
)
|
Tax
exempt income - investments
|
|
|
(5.6
|
)
|
|
(2.4
|
)
|
|
(0.9
|
)
|
Bank
owned life insurance
|
|
|
(1.9
|
)
|
|
(1.3
|
)
|
|
(0.8
|
)
|
Employee
stock
ownership plan termination
|
|
|
17.7
|
|
|
-
|
|
|
-
|
|
Valuation
reserve
|
|
|
0.8
|
|
|
2.7
|
|
|
-
|
|
Other,
net
|
|
|
0.6
|
|
|
(2.8
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
49.3
|
%
|
|
32.0
|
%
|
|
35.7
|
%
|
Year-end
deferred tax
assets (liabilities) related to the following:
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Allowance
for
loan losses
|
|
$
|
5,438
|
|
$
|
3,906
|
|
Employee
benefit plans
|
|
|
1,132
|
|
|
747
|
|
Charitable
contribution carryover
|
|
|
-
|
|
|
519
|
|
Net
unrealized loss (gain) on securities available for sale
|
|
|
1,436
|
|
|
(2,348
|
)
|
Goodwill
amortization
|
|
|
(1,050
|
)
|
|
(624
|
)
|
Investments
|
|
|
(590
|
)
|
|
(693
|
)
|
Purchase
accounting adjustments
|
|
|
(574
|
)
|
|
-
|
|
Other
|
|
|
(981
|
)
|
|
(230
|
)
|
Valuation
reserve
|
|
|
(593
|
)
|
|
(458
|
)
|
|
|
|
|
|
|
|
|
Deferred
tax asset, net
|
|
$
|
4,218
|
|
$
|
819
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
valuation allowance has been established for the full amount of the
Massachusetts net deferred tax asset, due to uncertainties of realization.
Management believes it is more likely than not that the Company will realize
its
remaining net deferred tax assets, based on its recent historical and
anticipated future levels of pre-tax income. There can be no absolute assurance,
however, that any specific level of future income will be
generated.
The
Bank
does not intend to pay nondividend distributions that would result in a
recapture of any portion of its base year bad debt reserves, and a related
deferred federal income tax liability of $346,000 has not been provided. In
June, 2003, the Company entered into a settlement with the Massachusetts
Department of Revenue related to its Real Estate Investment Trust, and paid
$398,000 to the Department representing 50% of the disputed amount and received
a release from liability for the remainder of the State’s claim.
11. COMMITMENTS,
CONTINGENCIES, AND OFF-BALANCE SHEET ACTIVITIES
Reserve
requirements. The
Federal Reserve system requires nonmember banks to maintain certain reserve
requirements of vault cash and/or deposits. The balance of this reserve,
included in cash and equivalents, was $6.66 million and $2.08 million at
year-end 2005 and 2004, respectively.
Credit
related financial instruments. The
Company is a party to financial instruments with off-balance-sheet risk in
the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Such commitments involve, to varying degrees, elements of credit
and
interest rate risk in excess of the amount recognized in the accompanying
consolidated balance sheets.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument is represented by the contractual amount
of
these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments. A summary of financial
instruments outstanding whose contract amounts represent credit risk is as
follows at year-end:
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Commitments
to grant loans
|
|
$
|
68,555
|
|
$
|
35,587
|
|
Unused
funds on commercial lines of credit
|
|
|
100,937
|
|
|
44,188
|
|
Unadvanced
funds on home equity, reddi-cash and
|
|
|
|
|
|
|
|
other
consumer lines of credit
|
|
|
141,270
|
|
|
58,128
|
|
Unadvanced
funds on construction loans
|
|
|
82,395
|
|
|
27,620
|
|
Standby
letters of credit
|
|
|
12,710
|
|
|
2,075
|
|
Commercial
letters of credit
|
|
|
1,500
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. The commitments for lines of credit may expire without being drawn
upon. Therefore, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. Funds to be disbursed for loans and home equity lines
of credit are collateralized by real estate. Commercial lines of credit are
generally secured by business assets and securities. Reddi-cash lines of credit
are unsecured.
Standby
letters of credit are conditional commitments issued by the Bank 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.
Forward
sale commitments. Forward
commitments are used to sell residential mortgage loans, which are entered
into
for the purpose of reducing the market risk associated with originating loans
held for sale. The types of risk that may arise are from the possible inability
of the Company or the other party to fulfill the contracts. At year-end 2005,
total loans held for sale were $2.09 million consisting entirely of fixed rate
residential mortgage loans. The Company had best efforts forward delivery sales
contracts for all of these loans, with a fair value of $27,000.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Operating
lease commitments.
Future
minimum rental payments required under operating leases that have remaining
noncancellable lease terms of more than one year at December 31, 2005 are as
follows: 2006 - $1.31 million; 2007 - $1.20 million; 2008 - $1.18 million;
2009
- $1.20 million; 2010 - $0.91 million; and all years thereafter - $10.27
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 2005, 2004 and 2003 amounted to $909,000, $401,000 and $371,000,
respectively.
Investment
Commitments. As
of
December 31, 2005, the Company was contractually committed under a limited
partnership agreement to make partnership investments of approximately $7.8
million.
Employment
and change in control agreements. The
Company has entered into an employment agreement with one senior executive
with
a two year term. The Bank also has change in control agreements with several
officers which provide a severance payment in the event employment is terminated
in conjunction with a defined change in control.
Legal
claims. Various
legal claims arise from time to time in the normal course of business. In the
opinion of management, claims outstanding at December 31, 2005 will have no
material effect on the Company’s consolidated financial statements.
12. ON-BALANCE
SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The
Company purchased outstanding interest rate swap agreements with the acquisition
of Woronoco Bancorp, Inc on June 1, 2005. One swap with a notional amount of
$5.0 million was arranged to hedge a portfolio of variable rate home equity
lines of credit. The terms of the swap agreement call for the Company to receive
fixed interest rate payments and remit variable rate interest rate payments.
This interest rate swap is designated as a cash flow hedge. At year-end 2005,
the pay rate on this swap (equal to the prime rate) was 7.00%, and the receive
rate was 7.64%. The remaining term of this swap was 1.3 years, and the
unrealized gain relating to this swap was $5,000.
Also
in
conjunction with the Woronoco acquisition, the Company acquired two existing
swaps with a total notional amount of $20.0 million which were used to hedge
a
portfolio of brokered certificates of deposit. These agreements are designated
as fair value hedges since they are used to convert the cost of the brokered
certificates of deposit from a fixed to a variable rate. Since the hedge
relationship is estimated to be 100% effective (gain or loss on the swap
agreements will completely offset the gain or loss on the certificates of
deposit) there is no impact on the statement of income. The balance sheet
reflects the swap and the certificates of deposit at fair value. At year-end
2005, the average pay rate (based on three or six month LIBOR) was 4.25% and
the
average receive rate was 4.375%. The remaining average term of these swaps
was
8.1 years, and the unrealized loss relating to these swaps was
$699,000.
13. STOCKHOLDERS’
EQUITY
Minimum
regulatory capital requirements
The
Bank
is subject to various regulatory capital requirements administered by the
federal and state banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by
regulators that, if undertaken, could have a direct material effect on the
Company’s consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of its assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject
to
qualitative judgments by the regulators about components, risk weighting and
other factors. Prompt corrective action provisions are not applicable to savings
and loan holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the following table) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier 1 capital to average assets (as defined). As of
December 31, 2005 and 2004, the Bank met the capital adequacy
requirements.
As
of
December 31, 2005, Berkshire Bank met the conditions to be classified as
“well capitalized” under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, an institution must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the following tables.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Bank’s actual and required capital amounts were as follows:
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
|
Minimum
|
|
Capitalized
Under
|
|
|
|
|
|
|
|
Capital
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
Requirement
|
|
Action
Provisions
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
|
$
|
164,642
|
|
|
11.12
|
%
|
$
|
118,461
|
|
|
8.00
|
%
|
$
|
148,076
|
|
|
10.00
|
%
|
Tier
1 capital to risk weighted assets
|
|
|
150,621
|
|
|
10.17
|
|
|
59,230
|
|
|
4.00
|
|
|
88,846
|
|
|
6.00
|
|
Tier
1 capital to average assets
|
|
|
150,621
|
|
|
7.79
|
|
|
77,326
|
|
|
4.00
|
|
|
96,658
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
|
|
118,554
|
|
|
12.69
|
|
|
74,766
|
|
|
8.00
|
|
|
93,457
|
|
|
10.00
|
|
Tier
1 capital to risk weighted assets
|
|
|
105,656
|
|
|
11.31
|
|
|
37,383
|
|
|
4.00
|
|
|
56,074
|
|
|
6.00
|
|
Tier
1 capital to average assets
|
|
|
105,656
|
|
|
8.08
|
|
|
52,324
|
|
|
4.00
|
|
|
65,405
|
|
|
5.00
|
|
A
reconciliation of the Company’s year-end total stockholders’ equity l to the
Bank’s regulatory capital is as follows:
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Total
stockholders' equity per consolidated financial statements
|
|
$
|
246,066
|
|
$
|
131,736
|
|
Adjustments
for Bank Tier 1 Capital:
|
|
|
|
|
|
|
|
Holding
company equity adjustment
|
|
|
2,991
|
|
|
(14,612
|
)
|
Accumulated
other comprehensive loss (income)
|
|
|
2,239
|
|
|
(4,214
|
)
|
Disallowed
goodwill and intangible assets
|
|
|
(100,675
|
)
|
|
(7,254
|
)
|
Total
Bank Tier 1 Capital
|
|
|
150,621
|
|
|
105,656
|
|
Adjustments
for total capital:
|
|
|
|
|
|
|
|
Allowed
unrealized gains on equity securities
|
|
|
1,020
|
|
|
3,560
|
|
Includible
allowance for loan losses
|
|
|
13,001
|
|
|
9,338
|
|
Total
Bank capital per regulatory reporting
|
|
$
|
164,642
|
|
$
|
118,554
|
|
|
|
|
|
|
|
|
|
Common
stock
The
Company and the Bank are 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. The Bank received
approval in 2005 to pay a dividend to the Company in an amount exceeding the
preceding regulatory restriction. At year-end 2005, any additional Bank
dividends would require specific regulatory approval. In addition, the Bank
may
not declare or pay dividends on any of its shares of common stock if the effect
thereof would cause stockholders’ equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration, payment
or
repurchase would otherwise violate regulatory requirements.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
conjunction with Massachusetts conversion regulations, the Bank established
a
liquidation account for eligible account holders, which at the time of
conversion amounted to approximately $70 million. In the event of a liquidation
of the Bank, the eligible account holders will be entitled to receive their
pro-rata share of the net worth of the Bank prior to conversion. However, as
qualifying deposits are reduced, the liquidation account will also be reduced
in
an amount proportionate to the reduction in the qualifying deposit accounts.
Due
to the acquisition of Woronoco Bancorp, Inc. in 2005, the Bank also acquired
the
Woronoco Savings Bank liquidation account, which amounted to approximately
$33
million at the time of the Woronoco conversion.
Other
comprehensive income
Comprehensive
income is the total of net income and all other non-owner changes in equity.
It
is displayed in the Consolidated Statements of Changes in Stockholders’ Equity.
Reclassification detail is shown for the years below.
|
|
2005
|
|
2004
|
|
2003
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized holding gains/losses
|
|
|
|
|
|
|
|
|
|
|
on
available for sale securities
|
|
$
|
(5,901
|
)
|
$
|
(477
|
)
|
$
|
2,297
|
|
Reclassification
adjustment for net gains
|
|
|
|
|
|
|
|
|
|
|
realized
in
income
|
|
|
(4,283
|
)
|
|
(1,483
|
)
|
|
(3,077
|
)
|
Net
change in unrealized gains/losses
|
|
|
(10,184
|
)
|
|
(1,960
|
)
|
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Tax
effects
|
|
|
3,784
|
|
|
615
|
|
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
change in available for sale securities
|
|
|
(6,400
|
)
|
|
(1,345
|
)
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain on derivative instruments
|
|
|
(53
|
)
|
|
-
|
|
|
-
|
|
Total
other comprehensive income
|
|
$
|
(6,453
|
)
|
$
|
(1,345
|
)
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end components
of accumulated other comprehensive (loss) income were as follows:
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
unrealized holding (losses/gains)
|
|
|
|
|
|
|
|
on
available for sale securities
|
|
$
|
(3,622
|
)
|
$
|
6,562
|
|
Net
gain on derivative instruments
|
|
|
(53
|
)
|
|
-
|
|
Tax
effects
|
|
|
1,436
|
|
|
(2,348
|
)
|
Accumulated
other comprehensive (loss) income
|
|
$
|
(2,239
|
)
|
$
|
4,214
|
|
|
|
|
|
|
|
|
|
14. EMPLOYEE
BENEFIT PLANS
The
Company provides a qualified savings plan under Section 401(k) of the Internal
Revenue Code. 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. Expense related to the plan was
$771,000, $624,000 and $603,000, for the years 2005, 2004 and 2003,
respectively.
The
Company maintains a supplemental executive retirement plan (“SERP”) for one
active key executive. Benefits generally commence no earlier than age sixty-two
and are payable at the executive’s option, either as an annuity or as a lump
sum. At year-end 2005 and 2004, the accrued liability for this SERP was $268,000
and $120,000, respectively. SERP expense was $148,000 in 2005, $111,000 in
2004,
and $247,000 in 2003. A SERP for a retired executive was terminated in 2004
and
the related $997,000 liability was paid off.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company has in the past offered its retirees optional medical insurance
coverage. All participating retirees are required to contribute in part to
the
cost of this coverage. No new retirees can participate in this program. The
year-end accrued liability for payment of future premiums was $403,000 in 2005
and $411,000 in 2004. Annual expense of this program was $50,000 in 2005 and
$50,000 in 2004; no program expense was recorded in 2003.
15. STOCK-BASED
COMPENSATION PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN
Stock
options
Under
the
Company’s 2001 Stock-Based Incentive Plan, the Company may grant stock options
and stock awards to its directors, officers and employees for up to 767,366
shares of common stock. Under the Company’s 2003 Equity Compensation Plan, the
Company may grant up to 300,000 options or stock awards to its directors,
officers and employees. For both plans, shares may be issued or transferred
pursuant to the exercise of options to purchase shares of common stock. The
exercise price of each option equals the market price of the Company’s stock on
the date of grant and an option’s maximum term is ten years. Options granted
under the 2001 Plan vest at 20% per year. Option and stock awards under the
2003
Plan vest based on a schedule established at the time of the award. Both
incentive stock options and non-statutory stock options may be granted under
these plans.
In
acquiring Woronoco Bancorp, Inc., the Company assumed the outstanding
unexercised options issued under its three stock compensation plans: the 1999
Stock-Based Incentive, 2001 Stock Option, and 2004 Equity Compensation Plans.
The exercise price of each option equals the market price of Woronoco’s stock on
the date of grant and an option’s maximum term is ten years. All outstanding
unexercised options became fully vested on the acquisition date.
A
summary
of activity in the Company’s stock plans follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at
beginning of year
|
|
|
643,754
|
|
$
|
18.97
|
|
|
649,927
|
|
$
|
17.80
|
|
|
600,848
|
|
$
|
16.75
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
36,450
|
|
|
37.80
|
|
|
120,143
|
|
|
22.44
|
|
Acquired
|
|
|
256,270
|
|
|
20.51
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(103,271
|
)
|
|
17.21
|
|
|
(32,415
|
)
|
|
16.75
|
|
|
(71,064
|
)
|
|
16.75
|
|
Forfeited
|
|
|
(5,769
|
)
|
|
18.23
|
|
|
(10,208
|
)
|
|
18.81
|
|
|
-
|
|
|
-
|
|
Outstanding
at
end of year
|
|
|
790,984
|
|
|
19.79
|
|
|
643,754
|
|
|
18.97
|
|
|
649,927
|
|
|
17.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
|
618,288
|
|
$
|
19.19
|
|
|
316,926
|
|
$
|
17.18
|
|
|
189,081
|
|
$
|
16.75
|
|
Weighted-average
fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
granted during the year
|
|
$
|
-
|
|
|
|
|
$
|
7.98
|
|
|
|
|
$
|
6.15
|
|
|
|
|
The
fair
value of each option grant is estimated on the date of grant using the Black
-
Scholes option-pricing model with the following weighted-average assumptions:
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
1.85
|
%
|
|
1.85
|
%
|
Expected
life
|
|
|
6
years
|
|
|
10
years
|
|
Expected
volatility
|
|
|
21.04
|
%
|
|
20.34
|
%
|
Risk-free
interest rate
|
|
|
3.17
|
%
|
|
3.85
|
%
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Information
pertaining to options outstanding at December 31, 2005 are as
follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Remaining
|
|
|
|
Average
|
|
|
|
Exercise
|
|
Number
|
|
Contractual
|
|
Number
|
|
Exercise
|
|
|
|
Price
|
|
Outstanding
|
|
Life
|
|
Exercisable
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9.69
|
|
|
55,849
|
|
|
3.8
years
|
|
|
55,849
|
|
$
|
9.69
|
|
|
|
|
9.69
|
|
|
13,000
|
|
|
4.3
years
|
|
|
13,000
|
|
|
9.69
|
|
|
|
|
11.88
|
|
|
3,272
|
|
|
4.8
years
|
|
|
3,272
|
|
|
11.88
|
|
|
|
|
13.50
|
|
|
2,725
|
|
|
5.0
years
|
|
|
2,725
|
|
|
13.50
|
|
|
|
|
16.75
|
|
|
395,383
|
|
|
5.1
years
|
|
|
316,306
|
|
|
16.75
|
|
|
|
|
17.90
|
|
|
17,400
|
|
|
6.0
years
|
|
|
17,400
|
|
|
17.90
|
|
|
|
|
18.97
|
|
|
10,000
|
|
|
6.2
years
|
|
|
10,000
|
|
|
18.97
|
|
|
|
|
20.25
|
|
|
8,000
|
|
|
6.3
years
|
|
|
8,000
|
|
|
20.25
|
|
|
|
|
21.10
|
|
|
32,722
|
|
|
6.9
years
|
|
|
32,722
|
|
|
21.10
|
|
|
|
|
22.00
|
|
|
13,800
|
|
|
7.1
years
|
|
|
13,800
|
|
|
22.00
|
|
|
|
|
21.60
|
|
|
32,400
|
|
|
7.1
years
|
|
|
32,400
|
|
|
21.60
|
|
|
|
|
22.44
|
|
|
116,643
|
|
|
7.1
years
|
|
|
46,657
|
|
|
22.44
|
|
|
|
|
37.25
|
|
|
46,000
|
|
|
8.1
years
|
|
|
46,000
|
|
|
37.25
|
|
|
|
|
37.80
|
|
|
35,450
|
|
|
8.1
years
|
|
|
11,817
|
|
|
37.80
|
|
|
|
|
31.20
|
|
|
8,340
|
|
|
8.4
years
|
|
|
8,340
|
|
|
31.20
|
|
Total
|
|
$
|
19.79
|
|
|
790,984
|
|
|
5.9
years
|
|
|
618,288
|
|
$
|
19.19
|
|
Stock
awards
Under
the
Company’s 2001 Stock-Based Incentive Plan, the Company may grant stock awards to
its directors, officers and employees for up to 306,950 shares of common stock.
The stock awards vest at 20% per year. Under the Company’s 2003 Equity
Compensation Plan, the Company may grant up to 300,000 stock options or stock
awards to its directors, officers and employees. The fair market value of the
stock allocations, based on the market price at date of grant, is recorded
as
unearned compensation. Unearned compensation is amortized over the applicable
vesting periods. The Company recorded compensation cost related to the stock
awards of $1.39 million, $1.22 million, and $1.07 million in 2005, 2004 and
2003, respectively.
A
summary
of the year-end status of the Company’s stock awards is presented
below:
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
306,305
|
|
|
290,435
|
|
|
206,269
|
|
Granted
|
|
|
18,190
|
|
|
15,870
|
|
|
84,166
|
|
Cancelled
|
|
|
(3,683
|
)
|
|
-
|
|
|
-
|
|
Balance
at end of year
|
|
|
320,812
|
|
|
306,305
|
|
|
290,435
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of stock awards granted during the year
|
|
$
|
35.10
|
|
$
|
37.80
|
|
$
|
22.30
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Employee
Stock Ownership Plan
The
Bank
had established an Employee Stock Ownership Plan (“ESOP”) for the benefit of
each employee that had reached the age of 21 and had completed at least 1,000
hours of service in the previous twelve-month period. This plan was terminated
by the Bank as of June 30, 2005. A total of 442,286 shares were held in trust
as
of December 31, 2005 pending a favorable determination letter from the Internal
Revenue Service for the distribution of these shares to plan participants in
2006. These shares were treated as allocated as of July 1, 2005 for purposes
of
calculating earnings per share.
Berkshire
Hills Funding Corporation had provided a loan to the Berkshire Bank Employee
Stock Ownership Plan Trust which was originally used to purchase the Company’s
outstanding stock in the open market. The loan bore interest equal to 9.5%,
provided for quarterly payments of interest and principal, and was secured
by
the unallocated shares in the plan through June 30, 2005. The Bank made
contributions to the ESOP sufficient to support the debt service of the loan
and
made a $900,000 prepayment of the loan in June 2005. Following the prepayment,
the Board of Directors terminated the plan. As provided in the plan, the
outstanding loan was repaid through the sale of 146,971 shares by the plan
to
the Company. Those shares were recorded as treasury shares at the June 30,
2005
share closing price of $33.32.
Total
expense applicable to the termination of the plan was recorded in the amount
of
$8.67 million in 2005. The effect on
capital of this expense was offset by credits to unearned
compensation and
additional paid in capital in stockholders’ equity. The Bank recorded an
additional $168,000 in expense related to the termination of the ESOP
supplementary executive retirement plan. Additionally, total compensation
expense applicable to the operation of the ESOP prior to its termination
amounted to $340,000, $1.38 million, and $1.09 million for the years 2005,
2004,
and 2003 respectively.
In
connection with the acquisition of Woronoco, Berkshire Bank assumed the
obligations of the Wornoco Savings Bank Employee Stock Ownership Plan. The
Woronoco Savings Bank Employee Stock Ownership Plan was terminated by Woronoco
Savings Bank as of the effective date of the merger and all outstanding loan
obligations under the plan were repaid. Participant shares in the plan totaled
304,536 shares at year-end 2005 and these shares were being held in trust at
year-end 2005 pending distributions to participants.
16. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is
best
determined based upon quoted market prices. However, in many instances, there
are no quoted market prices for the Company’s various financial instruments. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate
and estimates of future cash flows. Accordingly, the fair value estimates may
not be realized in an immediate settlement of the instrument. SFAS 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. The aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the Company.
The
following methods and assumptions were used by the Company in estimating fair
value disclosures for financial instruments:
Cash
and cash equivalents:
The
carrying amounts of these instruments approximate fair values.
Securities:
Fair
values for securities are based on quoted market prices, where available.
Non-marketable equity securities and certain securities held to maturity are
assumed to have fair values equal to carrying values.
Loans:
For
variable-rate loans that reprice frequently and with no significant change
in
credit risk, fair values are based on carrying values. Fair values for all
other
loans are estimated using discounted cash flow analyses, using interest rates
offered at year-end for loans with similar terms to borrowers of similar credit
quality. Fair values of loans held for sale are based on contracted sale
prices.
Accrued
interest receivable:
The
carrying amount approximates fair-value.
Deposits:
The
fair values for non-maturity accounts are, by definition, equal to the amount
payable on demand at the reporting date which is their carrying amounts. Fair
values for time accounts are estimated using a discounted cash flow calculation
that applies interest rates offered at year-end for deposits of similar
remaining maturities.
Borrowings:
The
fair values of borrowings are estimated using discounted cash flow analyses
using year-end market rates for similar borrowings. Junior subordinated
debentures reprice every ninety days and the carrying amount approximates fair
value.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative
financial instruments:
Fair
values are based on quoted market prices.
Off-balance-sheet
financial instruments:
Fair
values for off-balance-sheet lending commitments are immaterial. In its credit
commitments, the Company does not normally provide interest rate locks exceeding
sixty days, and most credit commitments are for adjustable rate
loans.
The
year-end carrying amounts and estimated fair values of the Company’s financial
instruments are as follows:
|
|
2005
|
|
2004
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(In
thousands)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
31,087
|
|
$
|
31,087
|
|
$
|
17,902
|
|
$
|
17,902
|
|
Securities
available for sale
|
|
|
390,876
|
|
|
390,876
|
|
|
384,421
|
|
|
384,421
|
|
Securities
held
to maturity
|
|
|
29,908
|
|
|
29,763
|
|
|
29,942
|
|
|
29,899
|
|
Loans
held for sale
|
|
|
2,093
|
|
|
2,120
|
|
|
1,053
|
|
|
1,067
|
|
Loans,
net
|
|
|
1,403,448
|
|
|
1,393,591
|
|
|
818,842
|
|
|
814,458
|
|
Accrued
interest receivable
|
|
|
8,508
|
|
|
8,508
|
|
|
5,472
|
|
|
5,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
with
no stated maturity
|
|
|
795,951
|
|
|
795,951
|
|
|
530,514
|
|
|
530,514
|
|
Time
accounts
|
|
|
575,267
|
|
|
573,412
|
|
|
315,275
|
|
|
318,056
|
|
Borrowings
|
|
|
412,917
|
|
|
407,830
|
|
|
327,926
|
|
|
334,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
5
|
|
|
5
|
|
|
-
|
|
|
-
|
|
Liabilities
|
|
|
699
|
|
|
699
|
|
|
-
|
|
|
-
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
17. CONDENSED
FINANCIAL STATEMENTS OF PARENT COMPANY
Condensed
financial information pertaining only to the parent company, Berkshire Hills
Bancorp, Inc., is as follows:
CONDENSED
BALANCE SHEETS
|
|
December
31,
|
|
(
In thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
due from Berkshire Bank
|
|
$
|
10,335
|
|
$
|
6,202
|
|
Investment
in subsidiaries
|
|
|
249,521
|
|
|
123,803
|
|
Other
assets
|
|
|
1,898
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
261,754
|
|
$
|
131,745
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses payable
|
|
$
|
224
|
|
$
|
9
|
|
Junior
subordinated debentures
|
|
|
15,464
|
|
|
-
|
|
Stockholders'
equity
|
|
|
246,066
|
|
|
131,736
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
261,754
|
|
$
|
131,745
|
|
|
|
|
|
|
|
|
|
CONDENSED
STATEMENTS OF INCOME
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
Dividends
from
subsidiaries
|
|
$
|
43,255
|
|
$
|
524
|
|
$
|
8,559
|
|
Other
|
|
|
67
|
|
|
11
|
|
|
71
|
|
Total
income
|
|
|
43,322
|
|
|
535
|
|
|
8,630
|
|
Interest
expense
|
|
|
450
|
|
|
-
|
|
|
-
|
|
Operating
expenses
|
|
|
325
|
|
|
156
|
|
|
361
|
|
Total
expense
|
|
|
775
|
|
|
156
|
|
|
361
|
|
Income
before income taxes and equity in
|
|
|
|
|
|
|
|
|
|
|
undistributed
income of subsidiaries
|
|
|
42,547
|
|
|
379
|
|
|
8,269
|
|
Income
tax benefit
|
|
|
(153
|
)
|
|
(860
|
)
|
|
(99
|
)
|
Income
before equity in undistributed
|
|
|
|
|
|
|
|
|
|
|
income
of subsidiaries
|
|
|
42,700
|
|
|
1,239
|
|
|
8,368
|
|
Equity
in undistributed (loss) income of subsidiaries
|
|
|
(34,474
|
)
|
|
10,270
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,226
|
|
$
|
11,509
|
|
$
|
8,965
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,226
|
|
$
|
11,509
|
|
$
|
8,965
|
|
Adjustments
to
reconcile net income
|
|
|
|
|
|
|
|
|
|
|
to
net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed income of Berkshire Bank
|
|
|
34,474
|
|
|
(10,923
|
)
|
|
(889
|
)
|
Equity
in undistributed loss of
|
|
|
|
|
|
|
|
|
|
|
Berkshire
Hills
Technology, Inc.
|
|
|
-
|
|
|
653
|
|
|
282
|
|
Other,
net
|
|
|
(828
|
)
|
|
91
|
|
|
(55
|
)
|
Net cash provided by operating activities
|
|
|
41,872
|
|
|
1,330
|
|
|
8,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Maturities
of
securities
|
|
|
-
|
|
|
-
|
|
|
3,463
|
|
Investment
in
bank subsidiary
|
|
|
(14,898
|
)
|
|
-
|
|
|
-
|
|
Liquidation
of
Berkshire Hills Funding Corporation
|
|
|
6,680
|
|
|
-
|
|
|
-
|
|
Cash
paid for acquisition
|
|
|
(35,088
|
)
|
|
-
|
|
|
-
|
|
Sale
of
investment in Berkshire Hills Technology, Inc.
|
|
|
-
|
|
|
2,587
|
|
|
-
|
|
Net cash provided by investing activities
|
|
|
(43,306
|
)
|
|
2,587
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from
junior subordinated debentures, net
|
|
|
14,898
|
|
|
-
|
|
|
-
|
|
Proceeds
from
reissuance of treasury stock
|
|
|
2,329
|
|
|
1,139
|
|
|
1,191
|
|
Payments
to
acquire treasury stock
|
|
|
(7,953
|
)
|
|
(2,545
|
)
|
|
(7,099
|
)
|
Dividends
paid
|
|
|
(3,707
|
)
|
|
(2,614
|
)
|
|
(2,628
|
)
|
Net cash used in financing activities
|
|
|
5,567
|
|
|
(4,020
|
)
|
|
(8,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
4,133
|
|
|
(103
|
)
|
|
3,230
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
6,202
|
|
|
6,305
|
|
|
3,075
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
10,335
|
|
$
|
6,202
|
|
$
|
6,305
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
18. DISCONTINUED
OPERATIONS
On
June
18, 2004, the business assets of EastPoint Technologies, LLC were sold to a
subsidiary of Open Solutions Inc. for $7.00 million. The Company owned a 60.3%
interest in EastPoint, with the remaining 39.7% interest recorded as minority
interest. Net of escrows and minority interest, the Company received $2.59
million in net cash proceeds. The Company recorded $61,000 as revenue in 2005
representing its 60.3% share of combined escrow and conditional payments, and
it
may receive additional payments in 2006. Net income and cash flows related
to
EastPoint have been reclassified as related to discontinued operations in the
financial statements. The transaction resulted in a net loss of $75,000 ($49,500
after taxes), which was included in the net loss from discontinued operations
in
2004. Information about discontinued operations follows:
(In
thousands)
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
282
|
|
$
|
696
|
|
Licensing
and other fee revenues
|
|
|
2,695
|
|
|
7,262
|
|
Minority
interest
|
|
|
(381
|
)
|
|
(186
|
)
|
Net
loss before taxes
|
|
|
(653
|
)
|
|
(282
|
)
|
Goodwill
and other intangibles
|
|
|
-
|
|
|
4,470
|
|
Other
assets
|
|
|
-
|
|
|
3,188
|
|
Capital
expenditures
|
|
|
76
|
|
|
80
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY
DATA (UNAUDITED)
Quarterly
results of operations were as follows:
|
|
2005
|
|
2004
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
(In
thousands, except per share data)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$
|
26,512
|
|
$
|
25,839
|
|
$
|
19,348
|
|
$
|
16,037
|
|
$
|
15,807
|
|
$
|
15,546
|
|
$
|
14,737
|
|
$
|
14,990
|
|
Interest
expense
|
|
|
11,475
|
|
|
10,785
|
|
|
7,840
|
|
|
6,010
|
|
|
5,608
|
|
|
5,304
|
|
|
4,985
|
|
|
4,828
|
|
Net
interest income
|
|
|
15,037
|
|
|
15,054
|
|
|
11,508
|
|
|
10,027
|
|
|
10,199
|
|
|
10,242
|
|
|
9,752
|
|
|
10,162
|
|
Provision
for loan losses
|
|
|
315
|
|
|
204
|
|
|
300
|
|
|
493
|
|
|
425
|
|
|
365
|
|
|
425
|
|
|
350
|
|
Non-interest
income
|
|
|
4,297
|
|
|
3,955
|
|
|
3,916
|
|
|
2,744
|
|
|
2,198
|
|
|
1,726
|
|
|
1,965
|
|
|
1,875
|
|
Non-interest
expense
|
|
|
11,801
|
|
|
11,601
|
|
|
18,061
|
|
|
7,536
|
|
|
7,300
|
|
|
7,181
|
|
|
6,933
|
|
|
7,563
|
|
Income
taxes-continuing operations
|
|
|
2,381
|
|
|
2,459
|
|
|
1,671
|
|
|
1,490
|
|
|
1,495
|
|
|
1,415
|
|
|
1,402
|
|
|
1,325
|
|
Income
(loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
4,837
|
|
|
4,745
|
|
|
(4,608
|
)
|
|
3,252
|
|
|
3,177
|
|
|
3,007
|
|
|
2,957
|
|
|
2,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(255
|
)
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
4,837
|
|
$
|
4,745
|
|
$
|
(4,608
|
)
|
$
|
3,252
|
|
$
|
3,177
|
|
$
|
3,007
|
|
$
|
2,702
|
|
$
|
2,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.57
|
|
$
|
0.56
|
|
$
|
(0.74
|
)
|
$
|
0.61
|
|
$
|
0.60
|
|
$
|
0.57
|
|
$
|
0.51
|
|
$
|
0.50
|
|
Diluted
earnings per share
|
|
|
0.55
|
|
|
0.54
|
|
|
(0.74
|
)
|
|
0.57
|
|
|
0.55
|
|
|
0.53
|
|
|
0.47
|
|
|
0.46
|
|
In
June,
2005 the Bank terminated its Employee Stock Ownership Plan. Second quarter
non-interest expense of $18.06 million included a charge of $8.67 million for
this termination resulting in a loss for the quarter. This change was offset
by
credits to additional paid-in capital and unearned compensation, and therefore
stockholders’ equity was not negatively impacted by this event. On June 1, 2005
the Company completed its acquisition of Woronoco Bancorp, Inc., issuing 2.93
million common shares and recording the purchase of approximately $850 million
in assets. All major categories of income and expense increased as a result
of
this acquisition, which was estimated to be slightly accretive to earnings
per
share, excluding merger and conversion expenses which totaled $2.14 million
in
the June-December period. The Company also recorded higher securities gains
totaling $3.10 million in the final nine months of 2005.
During
the second quarter of 2004, heavy loan prepayment activity caused a decrease
in
net interest income. Also in that quarter, the business assets of EastPoint
Technologies, LLC were sold. Current and prior period income and expenses
related to the Company’s 60.3% interest in EastPoint were reclassified as a net
loss from discontinued operations, including a $75,000 pre-tax loss recorded
on
sale.
Quarterly
data may not sum to annual data due to rounding.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Management’s
report on internal control over financial reporting and Wolf & Company,
P.C.’s attestation report on management’s assessment of Berkshire Hills’
internal control on financial reporting are contained in “Item 8 - Financial
Statements and Supplementary Data” in this annual report on Form
10-K.
None.
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
For
information concerning the directors of the Company, the information contained
under the sections captioned “Proposal 1 -- Election of Directors” in Berkshire
Hills’ Proxy Statement for the 2006 Annual Meeting of Stockholders is
incorporated by reference.
The
following table sets forth, as of December 31, 2005, certain information
regarding the executive officers of Berkshire Hills and Berkshire
Bank.
Name
|
Age
|
Position
|
|
|
|
Michael
P. Daly
|
44
|
President
and Chief Executive Officer
|
Wayne
F. Patenaude
|
45
|
Senior
Vice President, Chief Financial Officer and Treasurer
|
Gayle
P. Fawcett
|
53
|
Senior
Vice President of Retail Banking and
Operations
|
The
executive officers are elected annually and hold office until their successors
have been elected and qualified or until they are removed or replaced. The
Chief
Executive Officer is employed pursuant to a three year contract which renews
automatically if not otherwise terminated pursuant to its terms.
BIOGRAPHICAL
INFORMATION
Michael
P. Daly
serves
as President and Chief Executive Officer of the Company and Berkshire Bank.
Prior to this position, Mr. Daly served as Executive Vice President of the
Company and Bank from January 2000 to October 2002 and as Senior Vice President
of Commercial Lending from October 1997 until January 2000.
Wayne
F. Patenaude has served
as
Senior Vice President, Chief Financial Officer and Treasurer of the Company
and
Berkshire Bank since February 2003. Mr. Patenaude served as Executive Vice
President, Chief Financial Officer and Treasurer of American Savings Bank,
located in New Britain, Connecticut, from 1999 until American Savings Bank’s
acquisition by Banknorth, N.A. on February 14, 2003. Mr. Patenaude served as
Chief Financial Officer of Bancorp Connecticut from December 1998 to 1999 when
he joined American Savings Bank.
Gayle
P. Fawcett has
been
Senior Vice President of Retail Banking and Operations of the Company and
Berkshire Bank since October 2002. Prior to this position, Ms. Fawcett served
as
Senior Vice President of Systems and Operations of Berkshire Bank since May
1999.
Reference
is made to the cover page of this report and to the section captioned
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement for information regarding compliance with Section 16(a) of the
Exchange Act. For information concerning the audit committee 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.”
The
information contained under the sections captioned “Executive Compensation” and
“Corporate Governance - Directors’ Compensation” in the Proxy Statement is
incorporated herein by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
(a)
|
Security
Ownership of Certain Beneficial
Owners
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in the Proxy Statement.
|
(b)
|
Security
Ownership of Management
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in the Proxy Statement.
Management of
Berkshire Hills knows of no arrangements, including any pledge by any person
of
securities of Berkshire Hills, the operation of which may at a subsequent date
result in a change in control of the registrant.
|
(d)
|
Equity
Compensation Plan Information
|
The
following table sets forth information, as of December 31, 2005, 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
|
|
790,984
|
|
$19.19
|
|
307,592
|
|
|
|
|
|
|
|
Equity
compensation plans
|
|
|
|
|
|
|
not approved by security holders
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Total
|
|
790,984
|
|
$19.19
|
|
307,592
|
|
|
|
|
|
|
|
The
information required by this item is incorporated herein by reference to the
section captioned “Transactions with Management” in the Proxy
Statement.
The
information required by this item is incorporated herein by reference to the
section captioned “Proposal 3 - Ratification of Independent Registered Public
Accounting Firm” in the Proxy Statement.
(a) |
[1]
|
Financial
Statements
|
|
·
|
Report
of Independent Registered Public Accounting
Firm
|
|
·
|
Consolidated
Balance Sheets as of December 31, 2005 and
2004
|
|
·
|
Consolidated
Statements of Income for the Years Ended December 31, 2005, 2004
and
2003
|
|
·
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended December
31, 2005, 2004 and 2003
|
|
·
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2004
and
2003
|
|
·
|
Notes
to Consolidated Financial
Statements
|
|
[2]
|
Financial
Statement Schedules
|
All
financial statement schedules are omitted because the required information
is
either included or is not applicable.
[3]
Exhibits
|
2.1
|
Agreement
and Plan of Merger, dated as of December 16, 2004, by and between
Berkshire Hills Bancorp, Inc. and Woronoco Bancorp, Inc.
(1)
|
|
3.1
|
Certificate
of Incorporation of Berkshire Hills Bancorp, Inc.(2)
|
|
|
Bylaws
of Berkshire Hills Bancorp, Inc.
|
|
4.1
|
Draft
Stock Certificate of Berkshire Hills Bancorp, Inc.(2)
|
|
4.2
|
No
long-term debt instrument issued by the Registrant exceeds 10% of
consolidated assets or is registered. In accordance with paragraph
4(iii)
of Item 601(b) of Regulation S-K, the Registrant will furnish the
Securities and Exchange Commission copies of long-term debt instruments
and related agreements upon
request.
|
|
10.1
|
Employment
Agreement between Berkshire Bank and Michael P. Daly(4)
|
|
10.2
|
Employment
Agreement between Berkshire Hills Bancorp, Inc. and
Michael P. Daly(4)
|
|
10.3
|
Change
in Control Agreement between Berkshire Bank and Gayle P.
Fawcett(3)
|
|
10.4
|
Change
in Control Agreement between Berkshire Hills Bancorp, Inc. and Gayle
P.
Fawcett(3)
|
|
10.5
|
Change
in Control Agreement between Berkshire Bank and Wayne F.
Patenaude(3)
|
|
10.6
|
Change
in Control Agreement between Berkshire Hills Bancorp, Inc. and Wayne
F.
Patenaude(3)
|
|
10.7
|
Supplemental
Executive Retirement Agreement between Berkshire Bank and Michael
P.
Daly(3)
|
|
10.8
|
Berkshire
Hills Bancorp, Inc. 2003 Equity Compensation Plan(5)
|
|
10.9
|
Letter
Agreement, dated June 26, 2003, by and among Berkshire Hills Bancorp,
Inc., Berkshire Bank and Robert A. Wells(4)
|
|
10.10
|
Form
of Berkshire Bank Employee Severance Compensation Plan(2)
|
|
10.11
|
Form
of Berkshire Bank Supplemental Executive Retirement Plan(2)
|
|
10.12
|
Berkshire
Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(6)
|
|
10.13
|
Retirement
Agreement, dated December 4, 2003, by and among Berkshire Hills
Bancorp,
Inc., Berkshire Bank and Robert A. Wells(3)
|
|
10.14
|
Woronoco
Bancorp, Inc. 1999 Stock-Based Incentive Plan(7)
|
|
10.15
|
Woronoco
Bancorp, Inc. 2001 Stock Option Plan(8)
|
|
10.16
|
Woronoco
Bancorp, Inc. 2004 Equity Compensation Plan(9)
|
|
11.0
|
Statement
re: Computation of Per Share Earnings is incorporated herein by reference
to Part II, Item 8, “Financial Statements and Supplementary
Data”
|
|
21.0
|
Subsidiary
Information is incorporated herein by reference to Part I, Item 1,
“Business - Subsidiary Activities”
|
|
|
Consent
of Wolf & Company, P.C.
|
|
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
|
Section
1350 Certification of Chief Executive
Officer
|
|
|
Section
1350 Certification of Chief Financial Officer
|
_______________________________________________
|
(1)
|
Incorporated
herein by reference from the Exhibits to the Form 8-K, as filed on
December 17, 2004.
|
|
(2)
|
Incorporated
herein by reference from the Exhibits to Form S-1, Registration Statement
and amendments thereto, initially filed on March 10, 2000, Registration
No. 333-32146.
|
|
(3)
|
Incorporated
herein by reference from the Exhibits to the Form 10-K as filed on
March
11, 2004.
|
|
(4)
|
Incorporated
herein by reference from the Exhibits to the Form 10-Q as filed on
August
13, 2003.
|
|
(5)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as filed
on
March 27, 2003.
|
|
(6)
|
Incorporated
herein by reference from the Appendix to the Proxy Statement as filed
on
December 7, 2000.
|
|
(7)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 20,
2000 by
Woronoco Bancorp, Inc.
|
|
(8)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 12,
2001 by
Woronoco Bancorp, Inc.
|
|
(9)
|
Incorporated
herein by reference from the Proxy Statement as filed on March 22,
2004 by
Woronoco Bancorp, Inc.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
Berkshire
Hills
Bancorp, Inc. |
|
|
|
Date:
March 14, 2006
|
By:
|
/s/
Michael P. Daly
|
|
|
Michael
P. Daly
|
|
|
President,
Chief Executive Officer and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/
Michael P. Daly
|
|
President,
Chief Executive Officer
|
|
March
14, 2006
|
Michael
P. Daly
|
|
and
Director
|
|
|
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
/s/
Wayne F. Patenaude
|
|
Senior
Vice President, Treasurer
|
|
March
14, 2006
|
Wayne
F. Patenaude
|
|
and
Chief Financial Officer
|
|
|
|
|
(principal
accounting and financial officer)
|
|
|
|
|
|
|
|
/s/
Lawrence A. Bossidy
|
|
Non-Executive
Chairman
|
|
March
14, 2006
|
Lawrence
A. Bossidy
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Wallace
W. Altes
|
|
|
|
|
|
|
|
|
|
/s/
John B. Davies
|
|
Director
|
|
March
14, 2006
|
John
B. Davies
|
|
|
|
|
|
|
|
|
|
/s/
David B. Farrell
|
|
Director
|
|
March
14, 2006
|
David
B. Farrell
|
|
|
|
|
|
|
|
|
|
/s/
Cornelius D. Mahoney
|
|
Director
|
|
March
14, 2006
|
Cornelius
D. Mahoney
|
|
|
|
|
|
|
|
|
|
/s/
Edward G. McCormick, Esq.
|
|
Director
|
|
March
14, 2006
|
Edward
G. McCormick, Esq.
|
|
|
|
|
|
|
|
|
|
/s/
Catherine B. Miller
|
|
Director
|
|
March
14, 2006
|
Catherine
B. Miller
|
|
|
|
|
|
|
|
|
|
/s/
D. Jeffrey Templeton
|
|
Director
|
|
March
14, 2006
|
D.
Jeffrey Templeton
|
|
|
|
|
|
|
|
|
|
/s/
Corydon L. Thurston
|
|
Director
|
|
March
14, 2006
|
Corydon
L. Thurston
|
|
|
|
|
|
|
|
|
|
/s/
Ann H. Trabulsi
|
|
Director
|
|
March
14, 2006
|
Ann
H. Trabulsi
|
|
|
|
|
|
|
|
|
|
/s/
Robert A. Wells
|
|
Director
|
|
March
14, 2006
|
Robert
A. Wells
|
|
|
|
|
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