-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WTBNcJLSUfbWG8+CBMcrnvKiFAP/CAKeyiz3THa1D/LeJSJ0f/feHJVQWVqlUPAI 0ztR12EVcBi4R+BzjNH00w== 0000914317-04-001129.txt : 20040311 0000914317-04-001129.hdr.sgml : 20040311 20040311120121 ACCESSION NUMBER: 0000914317-04-001129 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKSHIRE HILLS BANCORP INC CENTRAL INDEX KEY: 0001108134 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 043510455 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15781 FILM NUMBER: 04662181 BUSINESS ADDRESS: STREET 1: 24 NORTH ST. CITY: PITTSFIELD STATE: MA ZIP: 01201 BUSINESS PHONE: 4134435601 MAIL ADDRESS: STREET 1: 24 NORTH ST CITY: PITTSFIELD STATE: MA ZIP: 01201 10-K 1 form10k58360.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number: 1-15781 BERKSHIRE HILLS BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 04-3510455 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 24 North Street, Pittsfield, Massachusetts 01201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (413) 443-5601 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class: on which registered: Common Stock, par value $0.01 per share American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 |_| 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. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |X| No |_| The aggregate market value of the voting and non-voting common equity held by non-affiliates was $156.5 million, based upon the closing price of $28.40 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 February 26, 2004, was 5,936,461. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. -13- INDEX - -------------------------------------------------------------------------------- PART I ............................................................................. 15 ITEM 1. BUSINESS ................................................................ 15 ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT ................................... 44 ITEM 2. PROPERTIES .............................................................. 45 ITEM 3. LEGAL PROCEEDINGS ....................................................... 46 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................... 46 PART II ............................................................................ 46 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ... 46 ITEM 6. SELECTED FINANCIAL DATA ................................................. 47 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................... 49 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............. 59 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................. 61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .................................................... 107 ITEM 9a. CONTROLS AND PROCEDURES ................................................ 107 PART III ........................................................................... 107 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..................... 107 ITEM 11. EXECUTIVE COMPENSATION ................................................. 107 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............................................ 107 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................... 108 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ................................. 108 PART IV ............................................................................ 109 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ....... 109
-14- PART I ITEM 1. BUSINESS - -------------------------------------------------------------------------------- General Berkshire Hills Bancorp, Inc. (the "Company" or "Berkshire Hills"), a Delaware corporation, was organized in January 2000 to become the holding company for Berkshire Bank (the "Bank") upon the conversion of the Bank's former parent holding company, Berkshire Bancorp, from the mutual to stock form of organization, which occurred on June 27, 2000. The Company owns all of the outstanding shares of the Bank. The Company has no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank. The Bank is regulated by the Massachusetts Division of Banks and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank's deposits are insured to the maximum allowable amount by the Bank Insurance Fund (the "BIF") of the FDIC and the Depositors Insurance Fund (the "DIF"). Berkshire Bank has been a member of the Federal Home Loan Bank system since 1973. Berkshire Bank is a community bank that accepts retail deposits from the general public in the areas surrounding its 11 full-service banking offices and uses those funds, together with funds generated from operations and borrowings, to originate residential mortgage loans, commercial business and real estate loans and consumer loans, primarily automobile loans and home equity lines of credit. Berkshire Bank primarily holds the loans that it originates for investment, but occasionally sells or securitizes some of its loans, including automobile and fixed-rate residential mortgage loans, in the secondary market. Berkshire Bank also invests in U.S. Government and Agency securities, mortgage- and asset-backed securities, including real estate mortgage investment conduits and collateralized mortgage obligations, debt and equity securities and other permissible investments. Berkshire Bank's revenues are derived principally from the generation of interest and fees on loans originated and, to a lesser extent, interest and dividends on its investment securities. Berkshire Bank's primary sources of funds are deposits, principal and interest payments on loans and securities and advances from the Federal Home Loan Bank of Boston. 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 or furnished 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, or furnishes it to, the Securities and Exchange Commission. Market Area Berkshire Bank is headquartered in Pittsfield, Massachusetts, in Berkshire County. Berkshire Bank's primary deposit gathering and lending areas are concentrated in the communities surrounding its 11 full-service banking offices located in Berkshire County. However, Berkshire Bank also makes loans throughout western Massachusetts, northern Connecticut, eastern New York and southern Vermont and occasionally other geographic areas. Berkshire County, the western-most county in Massachusetts, is approximately two and one-half hours from both Boston and New York City. Berkshire County borders Vermont, Connecticut and New York. Berkshire County has experienced a shift in its economy as manufacturing jobs have been replaced with service-related jobs, primarily in tourism, social service and health care. Other than Berkshire Bank, the major employers in the area include Berkshire Life Insurance Company of America, Crane & Company, GE Plastics, Kay Bee Toys, Berkshire Health Systems, General Dynamics Defense Systems, Mead Corporation and several institutions of higher education. Competition The Bank faces intense competition for the attraction of deposits and origination of loans in its primary market area. As of June 30, 2003, according to information presented on the Federal Deposit Insurance Corporation's website, the Bank held approximately 32% of the deposits in Berkshire County, which was the largest share of deposits out of 12 financial institutions in the county. Berkshire Bank's most direct competition for deposits comes from one large credit union in the area, which has a competitive advantage as credit unions do not have to pay state or federal taxes. The Bank also competes with super-regional banks, such as Banknorth and Citizens Bank. These competitors have substantially greater resources and lending limits than the Bank does and offers services that the Bank does not provide. Additionally, Berkshire Bank faces competition for deposits from several commercial and savings banks operating in its primary market area and, to a lesser extent, from other financial institutions, such as brokerage firms, insurance companies and the mutual fund industry, as customers seek alternative sources of investment for -15- their funds. Berkshire Bank also faces significant competition for investors' funds due to its direct purchase of short-term money market securities and other corporate and government securities. Berkshire Bank faces competition for loans from a significant number of traditional financial institutions, primarily savings banks and commercial banks in its market area, as well as the mortgage companies and mortgage brokers operating in its primary market area. The increase of Internet-accessible financial institutions which solicit deposits and originate loans on a nationwide basis also increases competition for Berkshire Bank's customers. Additionally, competition has increased as a result of regulatory actions and legislative changes, most notably the enactment of the Gramm-Leach-Bliley Act of 1999. These changes have eased restrictions on interstate banking and the entrance into the financial services market by non-depository and non-traditional financial services providers, including insurance companies, securities brokerage and underwriting firms and specialty financial services companies (such as Internet-based providers). Lending Activities General. The types of loans that Berkshire Bank may originate are limited by federal and state laws and regulations. Interest rates charged by Berkshire Bank on loans are affected principally by Berkshire Bank's current asset/liability strategy, the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. 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. Loan Portfolio Analysis. The following table sets forth the composition of Berkshire Bank's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
At December 31, ----------------------------------------------------------------------- 2003 2002 2001 --------------------- --------------------- --------------------- Percent Percent Percent of of of Amount Total Amount Total Amount Total --------- ------- --------- ------- --------- ------- (Dollars in thousands) Real estate loans: One- to four-family $ 266,753 33.70% $ 246,938 34.15% $ 240,852 30.01% Commercial 154,244 19.49 119,198 16.48 84,741 10.56 Multi-family 15,514 1.96 14,920 2.06 13,183 1.64 Construction and land development 34,719 4.39 17,627 2.44 22,936 2.86 --------- ------ --------- ------ --------- ------ Total real estate loans 471,230 59.54 398,683 55.13 361,712 45.07 --------- ------ --------- ------ --------- ------ Consumer loans: Home equity lines of credit 45,783 5.78 40,713 5.63 34,439 4.29 Automobile 103,674 13.10 113,321 15.67 228,412 28.46 Other 4,506 0.57 5,017 0.69 7,792 0.97 --------- ------ --------- ------ --------- ------ Total consumer loans 153,963 19.45 159,051 21.99 270,643 33.72 --------- ------ --------- ------ --------- ------ Commercial loans 166,451 21.01 165,447 22.88 170,230 21.21 --------- ------ --------- ------ --------- ------ Total loans 791,644 100.00% 723,181 100.00% 802,585 100.00% ====== ====== ====== Net deferred loan origination costs 110 41 172 Unamortized discount on purchased loans 473 (200) (203) Allowance for loan losses (8,969) (10,308) (11,034) --------- --------- --------- Total loans, net $ 783,258 $ 712,714 $ 791,520 ========= ========= ========= At December 31, ---------------------------------------------- 2000 1999 --------------------- --------------------- Percent Percent of of Amount Total Amount Total --------- ------- --------- ------- (Dollars in thousands) Real estate loans: One- to four-family $ 249,440 31.44% $ 245,240 36.39% Commercial 63,871 8.05 46,419 6.89 Multi-family 15,699 1.98 14,793 2.20 Construction and land development 14,290 1.80 12,534 1.86 --------- ------ --------- ------ Total real estate loans 343,300 43.27 318,986 47.34 --------- ------ --------- ------ Consumer loans: Home equity lines of credit 34,471 4.34 33,168 4.92 Automobile 241,862 30.48 171,527 24.46 Other 6,800 0.87 4,041 1.59 --------- ------ --------- ------ Total consumer loans 283,133 35.69 208,736 30.97 --------- ------ --------- ------ Commercial loans 166,956 21.04 146,196 21.69 --------- ------ --------- ------ Total loans 793,389 100.00% 673,918 100.00% ====== ====== Net deferred loan origination costs 232 170 Unamortized discount on purchased loans -- -- Allowance for loan losses (10,216) (8,534) --------- --------- Total loans, net $ 783,405 $ 665,554 ========= =========
Real Estate Lending One- to Four-Family Real Estate Loans. One of Berkshire Bank's primary lending activities is to originate loans secured by one- to four-family residences located in its primary market area. At December 31, 2003, $266.8 million, or 33.7%, of Berkshire Bank's total loans consisted of one- to four-family mortgage loans. Of the one- to four-family loans outstanding at that date, 49.0% were fixed-rate mortgage loans and 51.0% were adjustable-rate loans. Berkshire Bank originates fixed-rate fully amortizing loans with maturities of 15, 20 and 30 years. Management establishes the loan interest rates based on market conditions. Berkshire Bank offers mortgage loans that conform to Fannie Mae and Freddie Mac guidelines. In addition, Berkshire Bank offers jumbo loan products, which presently are loans in amounts over -16- $333,700. Berkshire Bank generally originates loans for its own portfolio, but occasionally sells or securitizes some fixed-rate one- to four-family loans in the secondary market. The determination of whether to sell or securitize loans is reviewed periodically by management as a means of managing the Company's interest rate risk profile or providing liquidity. Berkshire Bank also currently offers adjustable-rate mortgage loans, with an interest rate based on the one-year, three- year or five-year Constant Maturity Treasury index, which adjust every one, three or five years from the outset of the loan, with terms of up to 30 years. Interest rate adjustments on such loans range from 2% to 5% during any adjustment period and are limited to no more than 6% over the life of the loan. Adjustable-rate mortgage loans help reduce Berkshire Bank's exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by borrowers. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans increases as a result of repricing and the increased payments required to be made by borrowers. In addition, although adjustable-rate mortgage loans allow Berkshire Bank to increase the sensitivity of its asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, Berkshire Bank has no assurance that yields on adjustable-rate mortgage loans will be sufficient to offset increases in Berkshire Bank's cost of funds during periods of rising interest rates. These risks have not had a material adverse effect on Berkshire Bank to date. Berkshire Bank underwrites one- to four-family residential mortgage loans with loan-to-value ratios of up to 100% on a one- to two-family primary residence, up to 90% on a three- to four-family primary residence or a vacation home, and up to 75% on a condominium. A borrower is required to obtain private mortgage insurance on loans that exceed 80%, or 75% in the case of a condominium, of the appraised value or sales price, whichever is less, of the secured property. Berkshire Bank also generally requires fire, casualty, title, hazard insurance and, if appropriate, flood insurance to be maintained on all properties securing real estate loans made by Berkshire Bank. An independent licensed appraiser generally appraises all properties. To provide financing for low- and moderate-income families, Berkshire Bank offers Federal Housing Authority, Veterans Administration and Massachusetts Housing Finance Agency residential mortgage loans to qualified individuals with adjustable- and fixed-rates of interest and terms of up to 30 years. Such loans may be secured by one- to four-family residential properties and are underwritten using modified underwriting guidelines. Berkshire Bank also participates in the Good Samaritan Home Ownership Program, which is a non-profit venture established to advise and assist low- and middle-income families in the purchase of their first home in Berkshire County. Qualified individuals can obtain a 30-year fixed-rate mortgage loan on a one- to four-family, owner occupied property. Construction and Land Development Loans. At December 31, 2003, construction and land development loans totaled $34.7 million, or 4.4% of Berkshire Bank's total loan portfolio, of which $10.6 million were residential construction loans, $15.4 million were commercial construction loans and $8.7 million were commercial land development loans. At December 31, 2003, the unadvanced portion of construction and land development loans totaled $18.1 million. Berkshire Bank originates construction and land development loans to individuals for the construction and acquisition of personal residences. Berkshire Bank's residential construction and land development loans generally provide for the payment of interest only during the construction phase, which is usually twelve months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Loans can be made with a maximum loan to value ratio of 85%, provided that the borrower obtains private mortgage insurance if the loan balance exceeds 80% of the appraised value or sales price, whichever is less, of the secured property. At December 31, 2003, the largest outstanding residential construction and land development loan commitment was for $2.5 million. Construction and land development loans to individuals are generally made on the same terms as Berkshire Bank's one- to four-family mortgage loans. Before making a commitment to fund a residential construction and land development loan, Berkshire Bank requires an appraisal of the property and planned improvements by an independent licensed appraiser. Berkshire Bank also reviews and inspects each property before disbursement of funds during the term of the construction and land development loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. Berkshire Bank also makes construction and land development loans for commercial development projects, including multi-family commercial properties, single-family subdivisions and condominiums. These loans generally have an interest only phase during construction then convert to permanent financing. Disbursement of funds is at the sole discretion of Berkshire Bank and is based on the progress of construction. The maximum loan to value ratio for these loans depends upon the type of commercial development project being undertaken, but generally will not exceed 80%. At December 31, 2003, the largest commercial construction and land development commitment was $4.5 million, of which $4.5 million was outstanding, to a locally headquartered company that develops residential subdivisions on a national scale, and is a long-time Berkshire Bank borrower. This loan is secured by a 1,075 acre, 892 lot residential subdivision in the Austin-San Antonio, Texas corridor. This loan was performing according to its terms at December 31, 2003. -17- Berkshire Bank also originates land loans to local contractors and developers for the purpose of making improvements thereon, or for the purpose of holding or developing the land for sale. Such loans are secured by a lien on the property, have loan to value ratios that are limited to 75% of the value of the land used for residential development and 80% of the value of the land used for commercial development (based on the lower of the acquisition price or the appraised value of the land). 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 three-year period. Berkshire Bank's land loans are generally secured by property in its primary market area. Berkshire Bank generally requires title insurance and, if applicable, either a hazardous waste survey or environmental insurance coverage. Construction and land development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, Berkshire Bank may be required to advance funds beyond the amount originally committed to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, Berkshire Bank may be confronted with a completed project, having a value insufficient to assure full repayment. Multi-Family and Commercial Real Estate Loans. Berkshire Bank originates multi-family and commercial real estate loans that are generally secured by five or more unit apartment buildings and properties used for business purposes such as small office buildings, industrial, healthcare, lodging or retail facilities predominantly located in Berkshire Bank's primary market area. Berkshire Bank's multi-family and commercial real estate loans may be made in amounts of up to 80% of the appraised value of the property or the selling price, whichever is less. Loans secured by single-family subdivisions and condominium projects may be made in amounts of up to 75% and 70%, respectively, of the appraised value of the property or selling price, whichever is less. Berkshire Bank's multi-family and commercial real estate loans may be made with terms of up to 20 years and substantially all of which are originated with interest rates that adjust periodically and are generally indexed to Berkshire Bank's base rate. In reaching its decision on whether to make a multi-family or commercial real estate loan, Berkshire Bank considers the net operating income and value of the property and the borrower's expertise, credit history and profitability. In addition, with respect to commercial real estate rental properties, Berkshire Bank will also consider the term of the lease and the quality of the tenants. Berkshire Bank generally requires that the properties securing these real estate loans have debt service coverage ratios (the ratio of available cash flows before debt service to debt service) of at least 1.25x. Environmental surveys or environmental insurance coverage are generally required for commercial real estate loans. Additionally, in larger real estate projects, it is recommended that a feasibility study be obtained. A feasibility study is particularly important with respect to multi-family housing projects, hotel/motel construction and health care facilities. Generally, multi-family and commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals. The largest multi-family or commercial real estate loan relationship in Berkshire Bank's portfolio at December 31, 2003 consisted of four loans to related health care facilities in Massachusetts totaling $8.5 million. All loans were performing according to their terms at December 31, 2003. Loans secured by multi-family and commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family and commercial real estate properties 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. Berkshire Bank seeks to minimize these risks through strict adherence to its underwriting standards. Consumer Lending Automobile Lending. At December 31, 2003, automobile loans totaled $103.7 million, or 13.1% of Berkshire Bank's total loans and 67.3% of consumer loans. The Bank offers fixed-rate automobile loans on a direct and indirect basis with terms of up to 72 months for new and recent model used cars and up to 66 months for older model used cars. Berkshire Bank generally will make 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 current interest rates offered by competitors. Berkshire Bank began offering indirect automobile loans through automobile dealers over ten years ago. Currently, Berkshire Bank maintains contractual relationships with over 90 new and used car dealers throughout western Massachusetts, northern Connecticut, eastern New York and southern Vermont. In 2001, management determined to decrease the Bank's emphasis on lower quality or sub-prime automobile loans and attempt to reduce the overall size of the automobile loan portfolio. This process was accelerated through the sale of $69.7 million of sub-prime automobile loans in 2002 and the sale of an additional $9.9 million of sub-prime automobile loans in 2003. At December 31, 2003, $1.4 million of lower quality or sub-prime automobile loans, representing 1.3% of automobile loans, or 0.2% of total loans, remained. Home Equity Lines of Credit and Other Consumer Loans. Berkshire Bank offers home equity lines of credit secured by owner-occupied one- to four-family residences. At December 31, 2003, home equity lines of credit totaled $45.8 million, or 5.8% of Berkshire Bank's total loans and 29.7% of consumer loans. Additionally, at December 31, 2003, the unadvanced amounts of -18- home equity lines of credit totaled $45.5 million. The underwriting standards employed by Berkshire Bank for home equity lines of credit include a determination of the applicant's credit history, an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Home equity loans will not be made if the borrower's first mortgage payment, monthly real estate payment and amortized equity line payment exceed 25% of the borrower's gross monthly income. Additionally, the borrower's monthly debt service cannot exceed 35% of the borrower's gross monthly income. Home equity lines of credit have adjustable rates of interest which are indexed to the prime rate as reported in The Wall Street Journal. Generally, the maximum combined loan-to-value ratio on home equity lines of credit is 80% for loans up to $200,000 and 60% for loans greater than $200,000. A home equity line of credit may be drawn down by the borrower for an initial period of five years from the date of the loan agreement. During this period, the borrower has the option of paying, on a monthly basis, either principal and interest or only interest. If not renewed, the borrower has to pay back the amount outstanding under the line of credit over a term not to exceed ten years, beginning at the end of the five-year period. Other consumer loans at December 31, 2003 amounted to $4.5 million, or 0.6% of Berkshire Bank's total loans and 2.9% of consumer loans. These loans include education, collateral, personal and unsecured loans, and second mortgage loans other than home equity lines of credit. Collateral loans are generally secured by a passbook account, a certificate of deposit or marketable securities. Unsecured loans generally have a maximum borrowing limitation of $10,000 and a maximum term of five years. Second mortgages are offered on owner-occupied primary or secondary residences and are adjustable-rate, either adjusting annually or with a five-year initial fixed period adjusting annually thereafter, with terms up to 30 years. Loans secured by rapidly depreciable assets such as automobiles or that are unsecured entail greater risks than one- to four-family mortgage loans. In such cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. Further, collections on these loans are dependent on the borrower's continuing financial stability and, therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans if a borrower defaults. Commercial Lending Commercial Loans. At December 31, 2003, Berkshire Bank had $166.5 million in commercial loans which amounted to 21.0% of total loans. In addition, at such date, Berkshire Bank had $49.4 million of unadvanced commercial lines of credit. Berkshire Bank makes commercial business loans primarily in its market area to a variety of professionals, sole proprietorships and small businesses. Berkshire Bank's largest commercial loan relationship was a $4.4 million loan to a long time customer secured by various types of business assets located in Berkshire County. This loan was performing according to its terms at December 31, 2003. Berkshire 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, lines of credit, letters of credit, time notes and Small Business Administration guaranteed loans. In addition, Berkshire Bank offers revolving lines of credit called operating loans that are secured by business assets other than real estate, such as business equipment, inventory and accounts receivable. Business lines of credit have adjustable rates of interest and are payable on demand, subject to annual review and renewal. Time notes are short-term loans, generally limited to 90 days which do not require payment of principal or interest until maturity. When making commercial business loans, Berkshire Bank considers the financial statements of the borrower, the borrower's payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the customer operates and the value of the collateral. 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 value of the collateral securing the loan. Berkshire Bank generally does not make unsecured commercial loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. -19- Loans to One Borrower. The maximum amount that Berkshire Bank may lend to one borrower is limited by statute. At December 31, 2003, Berkshire Bank's statutory limit on loans to one borrower was $21.0 million. At that date, Berkshire Bank's largest amount of loans to one borrower, including the borrower's related interests, was approximately $10.3 million and consisted of ten loans secured by various types of business and real estate assets. These loans were performing according to their terms at December 31, 2003. Maturity of Loan Portfolio. The following table shows the remaining contractual maturity of Berkshire Bank's total loans at December 31, 2003, excluding the effect of future principal prepayments, and contractual repricing.
At December 31, 2003 ------------------------------------------------------------------------------------------------------------- Construction Home Equity One- to Four- and Land Commercial and Lines Other Family Development Multi-Family of Credit Automobile Consumer Commercial Total ------------- ------------ -------------- ----------- ---------- -------- ---------- -------- (In thousands) Amounts due in: One year or less $ 620 $25,017 $ 8,373 $ 1,767 $ 2,420 $ 544 $ 49,627 $ 88,368 More than one year to five years 7,781 7,079 10,598 11,823 81,305 1,641 26,296 146,523 More than 5 years 258,352 2,623 150,787 32,193 19,949 2,321 90,528 556,753 -------- ------- -------- ------- -------- ------ -------- -------- Total amount due $266,753 $34,719 $169,758 $45,783 $103,674 $4,506 $166,451 $791,644 ======== ======= ======== ======= ======== ====== ======== ========
The following table sets forth, at December 31, 2003, the dollar amount of loans contractually due after December 31, 2004, and whether such loans have fixed interest rates or adjustable interest rates. Due After December 31, 2004 ---------------------------------------- Fixed Adjustable Total -------- -------- -------- (In thousands) Real estate loans: One- to four-family $130,530 $135,603 $266,133 Construction and land development -- 9,702 9,702 Commercial and multi-family 13,170 148,215 161,385 -------- -------- -------- Total real estate loans 143,700 293,520 437,220 Home equity lines of credit -- 44,016 44,016 Automobile 101,254 -- 101,254 Other consumer 1,938 2,024 3,962 Commercial loans 12,470 104,354 116,824 -------- -------- -------- Total loans $259,362 $443,914 $703,276 ======== ======== ======== Scheduled contractual principal repayments of loans do not reflect the actual life of the loans. The average life of a loan is substantially less than its contractual term because of prepayments. Automobile loans have relatively short average lives since they are fully amortizing with final maturities generally no longer than five years. In addition, due-on-sale clauses on loans generally give Berkshire Bank the right to declare loans immediately due and payable if, among other things, the borrower sells the real property with the mortgage and the loan is not repaid. The average life of a mortgage loan tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, tends to decrease when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. Loan Approval Procedures and Authority. Berkshire Bank's lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by Berkshire Bank's Board of Directors and management. The Board of Directors has authorized the following persons and groups of persons to approve loans up to the amounts indicated: several retail lenders have been delegated authority to approve residential mortgage loans up to $300,000; home equity lines of -20- credit ranging from $50,000 to $300,000; unsecured consumer loans from $5,000 to $30,000; and secured consumer loans from $20,000 to $50,000. One- to four-family mortgage loans and home equity loans up to $300,000, secured consumer loans up to $50,000 and unsecured loans up to $30,000, may be approved by the President and the Senior Vice President-Retail Lending. One- to four-family mortgage loans and home equity loans from $300,000 to $600,000 may be approved by a combination of individual officer authorities, provided that approval must include either the President or Senior Vice President-Retail Lending. Approvals from $600,000 to $1.5 million require approvals of both the President and the Senior Vice President-Retail Lending. All residential loans in excess of $1.5 million require the approval of the Loan and Investment Committee of the Board of Directors or the full Board of Directors. The Board of Directors has delegated the authority to approve loans to the President, the Senior Commercial Lender and several commercial loan officers in amounts ranging up to $300,000 for secured commercial loans and in amounts ranging up to $175,000 for unsecured commercial loans. Loans in excess of these amounts require the approval of a majority of the members of Berkshire Bank's Senior Lending Committee, which consists of the Senior Commercial Lender and all commercial loan officers. The President, the Credit Administration Officer and the Loan Review Officer are non-voting members of the Senior Loan Committee. Delegated approval authorities may be combined. However, individual limits may be combined only up to $500,000 for commercial loan approvals without requiring approval of the Senior Lending Committee, provided that commercial loans approved by a combination of authorities must include the approval of either the President or the Senior Commercial Lender. All commercial loans in excess of $1.5 million require the approval of the Loan and Investment Committee of the Board of Directors or the full Board of Directors. Loan Originations, Purchases and Sales. Berkshire Bank's lending activities are conducted by its salaried and commissioned loan personnel and through its relationships with automobile dealers. Currently, Berkshire Bank has contractual relationships with over 90 automobile dealers who originate automobile loans for Berkshire Bank. Such loans are only made following an underwriting review and acceptance by Berkshire Bank. These loans are closed by the automobile dealer and immediately assigned to Berkshire Bank, who then services the loans. On loans originated by its automobile dealers, Berkshire Bank compensates the originator an amount by which the interest rate paid on the loan exceeds a specified threshold, up to a maximum of four points. The compensation is paid at the time the loan is closed and assigned to Berkshire Bank. For the fiscal years 2003 and 2002, Berkshire Bank originated or purchased $60.2 million and $54.3 million of automobile loans, respectively, of which 90.6% and 87.4%, respectively, were originated indirectly through the automobile dealers. From time to time, Berkshire 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. Berkshire Bank purchased $57.4 million of loans in 2003, of which $53.8 million were secured by first mortgage liens on residential real estate. Amounts outstanding related to loan participation interests purchased by Berkshire Bank totaled $50.9 million and $13.7 million at December 31, 2003 and December 31, 2002, respectively, and consisted primarily of loans secured by real estate. At December 31, 2003, Berkshire Bank was servicing $7.2 million of automobile loans, $8.6 million of one- to four-family mortgage loans and $8.0 million of commercial loans sold to others. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions when there 4are unremedied defaults, making insurance and tax payments on behalf of the borrowers and generally administering the loans. The gross servicing fee income from loans sold is generally 25 basis points for one- to four-family mortgage loans and 100 basis points for automobile loans of the total balance of the loan being serviced. Berkshire Bank generally originates loans for its own portfolio but from time to time will sell or securitize loans 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. Berkshire Bank sold or securitized fixed rate residential one- to four-family mortgages of $69.4 million in 2003 and has contracted to securitize an additional $39.6 million in January 2004. In addition, Berkshire Bank sold $9.9 million of sub-prime automobile loans in 2003. -21- The following table presents total loans originated, purchased, sold and repaid during the years indicated. For the Years Ended December 31, ---------------------------------- 2003 2002 2001 -------- --------- -------- (In thousands) Loans at beginning of year $723,181 $ 802,985 $793,389 -------- --------- -------- Originations: Real estate loans: One-to four-family 113,606 88,770 36,668 Construction and land development 32,246 30,678 22,170 Commercial 48,644 37,564 13,296 Multi-family 2,862 5,242 800 -------- --------- -------- Total real estate loans 197,358 162,254 72,934 -------- --------- -------- Consumer loans: Home equity lines of credit 15,380 16,361 6,887 Automobile 60,174 54,284 105,124 Other 3,466 4,613 4,527 -------- --------- -------- Total consumer loans 79,020 75,258 116,538 Commercial loans: Commercial 44,727 48,343 63,456 -------- --------- -------- Total loans originated 321,105 285,855 252,928 -------- --------- -------- Purchases: Real estate loans: Residential 53,814 -- -- Commercial real estate 3,041 2,724 4,042 -------- --------- -------- Total real estate loans 56,855 2,724 4,042 Consumer loans: Automobile -- -- 7,451 Commercial loans: Commercial 500 -- 2,000 -------- --------- -------- Total loans purchased 57,355 2,724 13,493 -------- --------- -------- Deduct: Principal loan repayments, prepayments and other, net 225,528 285,852 226,179 Loan sales 65,400 73,625 24,263 Securitization of loans 16,270 -- -- Net loan charge-offs 2,799 6,906 6,357 Transfers to real estate owned -- 2,000 26 -------- --------- -------- Total deductions 309,997 368,383 256,825 -------- --------- -------- Net increase (decrease) in loans 68,463 (79,804) 9,596 -------- --------- -------- Loans at end of year $791,644 $ 723,181 $802,985 ======== ========= ======== Loan Commitments. Berkshire 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. At December 31, 2003, Berkshire Bank had loan commitments and unadvanced loans and lines of credit totaling $143.0 million. Loan Fees. In addition to interest earned on loans, Berkshire Bank receives income from fees derived from loan originations, loan modifications, late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period depending upon the volume and type of loans made and competitive conditions. -22- Berkshire Bank charges loan origination fees which are calculated as a percentage of the amount borrowed. As required by applicable accounting principles, loan origination fees, discount points and certain loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis. At December 31, 2003, Berkshire Bank had approximately $110,000 of net deferred loan fees and costs. Berkshire Bank amortized approximately $34,000 of net deferred loan fees and costs during the year ended December 31, 2003. Nonperforming Assets, Delinquencies and Impaired Loans. When a borrower fails to make a required loan payment, Berkshire Bank attempts to cure the deficiency by mailing a past due notice on the 10th day after payment is due. In most cases, delinquencies are cured promptly. If a delinquency continues beyond the 15th day after the payment is due, the loan will appear on a delinquency list and the account officer will contact the borrower. If a delinquency continues beyond the 30th day, the borrower is again contacted and if it is determined that the late payment is not a short-term cash flow problem, the account is reported to the Senior Loan Officer. 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 informs the Board of Directors monthly of 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. Once management determines that interest is uncollectible, the accrual of interest income on a loan is discontinued and all interest previously accrued is reversed against current period interest income. In 2001, to enhance its risk management practices, the Bank initiated a more conservative policy for automobile loans whereby all 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. Berkshire Bank has adopted Statements of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan--an amendment to SFAS No. 114." At December 31, 2003 and December 31, 2002, Berkshire Bank had $388,000 and $727,000, respectively, recorded investment in impaired loans, which had no specific allowances and $2.0 million and $2.1 million in loans with specific valuation allowances of $267,000 and $295,000, respectively. The following table sets forth information regarding nonperforming assets and loans that were 90 days or more past due and still accruing at the dates indicated.
At December 31, -------------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in thousands) Nonaccruing loans: One- to four-family real estate $ 348 $ 230 $ 310 $ 390 $ 450 Commercial real estate 496 -- -- -- -- Commercial 1,887 2,850 2,077 466 1,572 Consumer(1) 468 661 315 2,013 819 ------ ------ ------ ------ ------ Total nonperforming loans 3,199 3,741 2,702 2,869 2,841 Real estate owned -- 1,500 -- 50 220 ------ ------ ------ ------ ------ Total nonperforming assets $3,199 $5,241 $2,702 $2,919 $3,061 ====== ====== ====== ====== ====== Total nonperforming loans as a percentage of total loans 0.40% 0.52% 0.34% 0.36% 0.42% Total nonperforming assets as a percentage of total assets 0.26% 0.50% 0.26% 0.29% 0.36% Loans 90 days or more past due and still accruing(2) $ 306 $ 590 $1,306 $ -- $ --
- ---------- (1) Consists primarily of automobile loans. (2) Reflects Bank's policy on delinquent automobile loans whereby all delinquent automobile loans remain on accrual status until they reach 120 days delinquent, at which time they are charged off. Previous to 2001, automobile loans past due 90 days or more were reported as nonaccrual. -23- Nonaccruing commercial loans and commercial real estate loans decreased to $2.4 million at December 31, 2003 from $2.9 million at December 31, 2002 primarily as the result of the return of two loans to accrual status, payments collected on accounts remaining on nonaccruing status and $157,000 in gross commercial loan charge-offs. The borrowers with loans in Berkshire Bank's nonaccruing commercial loan portfolio have been adversely affected by national and regional economic conditions. Interest income that would have been recorded for the year ended December 31, 2003, had nonaccruing loans been current according to their original terms, amounted to $165,000. A total of $14,000 was included in interest income to reflect payments received on loans that had been paid off or brought up to date but were still classified as nonaccruing. The following table sets forth the delinquencies in Berkshire Bank's loan portfolio as of the dates indicated.
At December 31, 2003 At December 31, 2002 ----------------------------------------- ------------------------------------------ 60-89 Days 90 Days or More 60-89 Days 90 Days or More ------------------- ------------------- ------------------- ------------------- Principal Principal Principal Principal Balance Balance Balance Balance Number of of Number of of Number of of Number of of Loans Loans Loans Loans Loans Loans Loans Loans --------- --------- --------- --------- --------- --------- --------- --------- (Dollars in thousands) Real estate loans: One- to four- family 3 $ 236 3 $ 220 3 $ 207 4 $ 92 Commercial -- -- -- -- -- -- -- -- Multi-family -- -- -- -- -- -- -- -- Consumer loans: Home equity lines of credit -- -- -- -- -- -- -- -- All other(1) 80 460 85 612 120 924 118 893 Commercial loans 1 36 6 215 2 49 4 110 ---- ----- ---- ------ ---- ------ ---- ------ Total 84 $ 732 94 $1,047 125 $1,180 126 $1,095 ==== ===== ==== ====== ==== ====== ==== ====== Delinquent loans to total loans 0.42% 0.09% 0.47% 0.13% 0.57% 0.16% 0.57% 0.15% At December 31, 2001 ------------------------------------------ 60-89 Days 90 Days or More ------------------- ------------------- Principal Principal Balance Balance Number of of Number of of Loans Loans Loans Loans --------- --------- --------- --------- (Dollars in thousands) Real estate loans: One- to four- family 3 $ 144 3 $ 254 Commercial -- -- -- -- Multi-family -- -- -- -- Consumer loans: Home equity lines of credit -- -- -- -- All other(1) 323 2,645 217 1,621 Commercial loans 2 381 7 1,234 ---- ------ ---- ------ Total 328 $3,170 227 $3,109 ==== ====== ==== ====== Delinquent loans to total loans 0.96% 0.39% 0.66% 0.39%
- ---------- (1) Consists primarily of automobile loans. Real Estate Owned. 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 at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition are expensed. At December 31, 2003, Berkshire Bank had no foreclosed property. Asset Classification. Regulators have adopted various regulations and practices regarding problem assets of financial institutions. Under such regulations, federal and state examiners have authority to identify problem assets during examinations and, if appropriate, require them to be classified. Berkshire 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 considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. 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. 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. All or a portion of general loan loss allowances established to cover probable losses related to assets classified as substandard or doubtful can be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. 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." -24- The following table sets forth Berkshire Bank's classified assets at December 31, 2003.
Loss Doubtful Substandard Special Mention ----------------------- ----------------------- ----------------------- ----------------------- Number of Principal Number of Principal Number of Principal Number of Principal Loans Balance Loans Balance Loans Balance Loans Balance --------- --------- --------- --------- --------- --------- --------- --------- (Dollars in thousands) Real estate loans: One- to four-family -- $ -- -- $ -- 9 $ 476 3 $ 236 Commercial -- -- -- -- 7 1,618 2 2,560 Multi-family -- -- -- -- -- -- 1 549 Construction and land development -- -- -- -- -- -- 1 4,106 Consumer loans: Home equity lines of credit -- -- -- -- -- -- -- -- Automobile -- -- -- -- 123 800 77 410 All other -- -- -- -- 3 2 3 50 Commercial loans -- -- 1 194 36 4,146 45 9,423 ------- ------- ------- ------- ------- ------- ------- ------- Total -- $ -- 1 $ 194 178 $ 7,042 132 $17,334 ======= ======= ======= ======= ======= ======= ======= =======
At December 31, 2003, Berkshire Bank had four outstanding commercial loans with one borrower, which were adversely classified or identified as a problem credit, totaling $1.5 million. These loans were classified as substandard and were secured by a lien on the borrower's commercial real estate, accounts receivable, inventory and other commercial business assets. Based on management's collateral value estimates, $459,000 of Berkshire Bank's December 31, 2003 allowance for loan losses have been allocated to this borrowing relationship. Management believes that the current allocation is adequate. The aforementioned loans were not performing according to their terms on December 31, 2003. Berkshire Bank had no other classified loans greater than $500,000 which were not performing according to their terms on December 31, 2003. Allowance for Loan Losses. In originating loans, Berkshire Bank recognizes that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. Berkshire Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management's estimate of probable losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management's evaluation 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 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 $1.0 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 and certain unused commitments. Berkshire Bank segregates the loan portfolio according to risk characteristics (i.e., mortgage loans, home equity, other consumer, commercial). Loss factors are derived using Berkshire Bank's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. All classified loans are reviewed for adequacy of their estimated supporting collateral values and guarantees. If a loan is determined to have a recovery value less than the loan balance after deducting the general reserve assigned to that loan based upon its classification, an additional specific reserve is assigned in an amount equal to the projected shortfall. 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. -25- 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. Furthermore, while Berkshire Bank believes it has established its existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing Berkshire Bank's loan portfolio, will not request Berkshire Bank to increase its allowance for loan losses. In addition, 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 loans 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 Berkshire Bank's allowance for loan losses for the years indicated.
At or For the Years Ended December 31, ------------------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (Dollars in thousands) Allowance for loan losses, beginning of year $10,308 $11,034 $10,216 $ 8,534 $ 7,589 ------- ------- ------- ------- ------- Charged-off loans: One- to four-family real estate -- -- 2 -- 117 Multi-family -- -- 222 -- -- Commercial real estate -- 510 -- 19 297 Consumer(1) 4,175 9,074 5,989 1,422 731 Home equity lines of credit 32 -- 52 -- -- Commercial 157 444 797 469 1,208 ------- ------- ------- ------- ------- Total charged-off loans 4,364 10,028 7,062 1,910 2,353 Recoveries on loans previously charged off 1,565 3,122 705 422 268 ------- ------- ------- ------- ------- Net loans charged off 2,799 6,906 6,357 1,488 2,085 Provision for loan losses 1,460 6,180 7,175 3,170 3,030 ------- ------- ------- ------- ------- Allowance for loan losses, end of year $ 8,969 $10,308 $11,034 $10,216 $ 8,534 ======= ======= ======= ======= ======= Ratios: Net loans charged off to interest-earning loans 0.36% 0.96% 0.79% 0.19% 0.31% Allowance for loan losses to total loans 1.13% 1.43% 1.37% 1.29% 1.27% Allowance for loan losses to nonperforming loans 280.37% 275.54% 408.36% 356.08% 300.39% Net loans charged off to allowance for loan losses 31.21% 67.00% 57.61% 14.57% 24.43% Recoveries to charged-off loans 35.86% 31.13% 9.98% 22.09% 11.39%
- ---------- (1) Consists primarily of automobile loans. -26- The following table presents the approximate allocation of the allowance for loan losses by loan categories at the dates indicated and the percentage of such amounts to the total allowance and to total loans. 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.
At December 31, ------------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------- ------------------------------- ------------------------------- Percent of Percent of Percent of Percent of Percent of Percent of Allowance Loans Allowance Loans Allowance Loans in Each in Each in Each in Each in Each in Each Category Category Category Category Category Category to Total to Total to Total to Total to Total to Total Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans ------- ---------- ---------- ------- ---------- ---------- ------- ---------- ---------- (Dollars in thousands) Real estate loans $ 3,436 38.31% 59.54% $ 2,289 22.21% 55.13% $ 2,347 21.27% 45.07% Consumer loans 2,171 24.21 19.45 4,650 45.11 21.99 4,217 38.22 33.72 Commercial loans 3,362 37.48 21.01 3,369 32.68 22.88 4,470 40.51 21.21 ------- ------ ------ ------- ------ ------ ------- ------ ------ Total allowance for loan losses $ 8,969 100.00% 100.00% $10,308 100.00% 100.00% $11,034 100.00% 100.00% ======= ====== ====== ======= ====== ====== ======= ====== ====== At December 31, ---------------------------------------------------------------- 2000 1999 ------------------------------- ------------------------------- Percent of Percent of Percent of Percent of Allowance Loans Allowance Loans in Each in Each in Each in Each Category Category Category Category to Total to Total to Total to Total Amount Allowance Loans Amount Allowance Loans ------- ---------- ---------- ------- ---------- ---------- (Dollars in thousands) Real estate loans $ 2,337 22.88% 43.27% $ 2,322 27.20% 47.34% Consumer loans 4,528 44.32 35.69 2,867 33.60 30.97 Commercial loans 3,351 32.80 21.04 3,345 39.20 21.69 ------- ------ ------ ------- ------ ------ Total allowance for loan losses $10,216 100.00% 100.00% $ 8,534 100.00% 100.00% ======= ====== ====== ======= ====== ======
Investment Securities Activities General. Under Massachusetts law, Berkshire Bank has authority to purchase a wide range of investment securities. As a result of changes in federal banking laws, however, financial institutions such as Berkshire Bank may not engage as principals in any activities that are not permissible for a national bank, unless the Federal Deposit Insurance Corporation has determined that the investments would pose no significant risk to the Bank Insurance Fund and Berkshire Bank is in compliance with applicable capital standards. In 1993, the Regional Director of the Federal Deposit Insurance Corporation approved a request by Berkshire Bank to acquire and retain certain listed stocks and/or registered stocks subject to certain conditions. The Company makes its investments through Berkshire Bank or one of the Bank's securities corporation subsidiaries and is generally not subject to any such restrictions on its investment authority. See "Regulation and Supervision." Berkshire Bank's main source of income has been and will continue to be derived from its loan portfolio. 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 structure of the investment securities portfolio is based upon the composition and quality of the loan portfolio and Berkshire Bank's liquidity position and deposit structure. Berkshire Bank's investment policy divides investments into two categories, fixed income and equity portfolios. The primary objectives of the fixed income portfolio are to: (1) maintain an adequate source of liquidity sufficient to meet regulatory and operating requirements, including funding for loans; (2) safeguard against deposit outflows, reduced loan amortization and increased loan demand; and (3) manage interest rate risk. The fixed income securities portfolio primarily consists of debt issues, including corporate and municipal bonds, U.S. Government and Agency obligations and mortgage-backed and asset-backed securities, including collateralized mortgage obligations and real estate mortgage investment conduits. A collateralized mortgage obligation is a mortgage-backed bond that separates mortgage pools into different maturities called "tranches." Tranches pay different rates of interest and can mature in a few months, or a few years. In return for a lower yield, collateralized mortgage obligations provide increased security over the life of the investment. However, in a declining interest rate risk environment, collateralized mortgage obligations tend to be repaid before their expected maturities as prepayments increase. This may result in Berkshire Bank having to reinvest the funds at a lower interest rate. Real estate mortgage investment conduits, a type of -27- collateralized mortgage obligation, are similar in that securities representing an undivided interest in such mortgages are issued. However, real estate mortgage investment conduits have more flexibility than other types of collateralized mortgage obligations as issuers can separate mortgage pools not only into different maturity classes but also into different risk classes. At present, 99.8% of Berkshire Bank's mortgage-backed securities are issued or guaranteed by agencies of the U.S. Government, which carry lower credit risk than mortgage-backed securities of a private issuer. Other types of asset-backed securities in which Berkshire Bank invests are typically collateralized by the cash flow from a pool of automobile loans, credit card receivables, consumer loans and other similar obligations. Both mortgage-backed and asset-backed securities carry the risk that changing market interest rates may cause a change in market value. The marketable equity securities portfolio is currently managed to produce capital gains through price appreciation and lowering taxable income through deductions permitted for a portion of dividends received. However, Berkshire Bank continued restructuring its investment portfolio by placing less emphasis on equity securities. The marketable equity securities portfolio consists primarily of bank, utility and industrial stocks and is currently limited by the investment policy to 100% of Tier I capital. Berkshire Bank had $93.8 million of Tier 1 capital at December 31, 2003. Equities totaling $7.0 million were sold in 2003, resulting in a gain of $2.7 million. At December 31, 2003, equities, excluding Federal Home Loan Bank and Savings Bank Life Insurance stock, comprised 4.3% of the investment portfolio compared to 9.0% at December 31, 2002. The gross unrealized gains associated with the marketable equity securities portfolio were $8.4 million at December 31, 2003. At such date, there were no gross unrealized losses. The marketable equity securities portfolio carries equity price risk in that, if equity prices decline due to unfavorable market conditions or other factors, Berkshire Bank's capital would decrease. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires that securities be categorized as "held-to-maturity," "trading securities" or "available-for-sale," based on management's intent as to the ultimate disposition of each security. SFAS No. 115 allows debt securities to be classified as "held-to-maturity" and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, or other similar factors cannot be classified as "held-to-maturity." Debt and equity securities held for current resale are classified as "trading securities." These securities are reported at fair value, and unrealized gains and losses on the securities would be included in earnings. Berkshire Bank does not currently use or maintain a trading account. Debt and equity securities not classified as either "held-to-maturity" or "trading securities" are classified as "available-for-sale." These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and included in accumulated other comprehensive income, net of taxes. The Loan and Investment Committee of the Board of Directors is responsible for developing and reviewing Berkshire Bank's investment policy. Investment decisions are made in accordance with Berkshire Bank's investment policy and are based upon the quality of a particular investment, its inherent risks, Berkshire Bank's liquidity needs, prospects for yield and/or appreciation and the potential tax consequences. While general investment strategies are developed and authorized by the Loan and Investment Committee, the execution of specific investment actions and the day-to-day oversight of Berkshire Bank's investment portfolio rests with the President and the Treasurer. These officers are authorized to execute investment transactions up to specified limits based on the type of security without the prior approval of the Loan and Investment Committee. However, such purchases require a review of the Loan and Investment Committee at their next scheduled meeting. The Board of Directors receives a monthly report of all securities transactions made during the previous month. 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. Berkshire Bank has used covered call option strategies in the past and may continue to do so in the future. Berkshire Bank has not used interest rate futures or options on futures as part of its interest rate hedging strategies. -28- The following table presents the amortized cost and fair value of Berkshire Bank's available-for-sale securities, by type of security, at the dates indicated.
At December 31, -------------------------------------------------------------------------- 2003 2002 2001 ---------------------- ---------------------- ---------------------- Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value --------- ---------- --------- ---------- --------- ---------- (In thousands) Investment securities: Obligations of U.S. Treasury and U.S. Government Agencies $ 20,840 $ 20,969 $ 98,058 $ 98,719 $ 13,876 $ 14,017 Corporate bonds and notes 17,102 17,310 31,284 31,637 31,017 31,251 Municipal notes 12,294 12,282 -- -- -- -- Asset-backed securities 2,566 2,106 6,956 6,772 1,484 1,496 Marketable equity securities(1) 6,515 14,888 11,132 19,581 11,447 39,803 -------- -------- -------- -------- -------- -------- Total investment securities 59,317 67,555 147,430 156,709 57,824 86,567 -------- -------- -------- -------- -------- -------- Mortgage-backed securities: Freddie Mac 53,883 53,638 3,558 3,605 3,292 3,335 Fannie Mae 185,018 185,551 3,066 3,051 2,774 2,845 Private label REMICs 653 648 9,761 9,750 11,555 11,619 Ginnie Mae 32 33 52 54 78 80 -------- -------- -------- -------- -------- -------- Total mortgage-backed securities 239,586 239,870 16,437 16,460 17,699 17,879 -------- -------- -------- -------- -------- -------- Total available for sale securities $298,903 $307,425 $163,867 $173,169 $ 75,523 $104,446 ======== ======== ======== ======== ======== ========
- ---------- (1) Includes mutual funds. The following table presents the amortized cost and fair value of Berkshire Bank's held for maturity securities, by type of security, at the dates indicated.
At December 31, -------------------------------------------------------------------------- 2003 2002 2001 ---------------------- ---------------------- ---------------------- Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value --------- ---------- --------- ---------- --------- ---------- (In thousands) Investment securities: Municipal notes and other obligations $ 20,545 $ 20,545 $ 14,480 $ 14,480 $ 11,241 $ 11,241 -------- -------- -------- -------- -------- -------- Total investment securities 20,545 20,545 14,480 14,480 11,241 11,241 -------- -------- -------- -------- -------- -------- Mortgage-backed securities: Freddie Mac 10,163 10,146 17,120 17,164 9,790 9,851 Fannie Mae 3,743 3,742 11,657 11,688 11,177 11,253 Ginnie Mae 2,452 2,435 1,010 1,016 1,055 1,064 -------- -------- -------- -------- -------- -------- Total mortgage-backed securities 16,358 16,323 29,787 29,868 22,022 22,168 -------- -------- -------- -------- -------- -------- Total held to maturity securities $ 36,903 $ 36,868 $ 44,267 $ 44,348 $ 33,263 $ 33,409 ======== ======== ======== ======== ======== ========
At December 31, 2003, Berkshire Bank did not own any investment or mortgage-backed securities of a single issuer, other than U.S. Treasury and U.S. Government Agency securities, which had an aggregate book value in excess of 10% of Berkshire Bank's capital at that date. -29- The following table presents the activity in the investment securities and mortgage-backed securities portfolios for the years indicated.
For the Years Ended December 31, --------------------------------------- 2003 2002 2001 --------- --------- --------- (In thousands) Investment securities: Investment securities, beginning of year $ 171,189 $ 97,808 $ 97,023 --------- --------- --------- Purchases 83,227 195,005 49,212 Sales (12,133) (13,112) (3,697) Loss on impairment of securities -- (673) -- Maturities and calls (147,286) (84,606) (39,559) Repayments and prepayments (5,140) (3,191) (2,395) Net (premium) (994) (578) (1,225) (Decrease) in unrealized gain (763) (19,464) (1,551) --------- --------- --------- Net increase/(decrease) in investment securities (83,089) 73,381 785 --------- --------- --------- Investment securities, end of year 88,100 171,189 97,808 --------- --------- --------- Mortgage-backed securities: Mortgage-backed securities, beginning of year 46,247 39,901 34,524 --------- --------- --------- Purchases 266,586 63,065 43,853 Securitized mortgages 16,270 -- -- Repayments and prepayments (66,918) (56,037) (39,477) Sales (5,139) -- -- Net (premium) discount (801) (525) 955 Increase /(decrease) in unrealized gain (17) (157) 46 --------- --------- --------- Net increase in mortgage-backed securities 209,981 6,346 5,377 --------- --------- --------- Mortgage-backed securities, end of year 256,228 46,247 39,901 --------- --------- --------- Total securities, end of year $ 344,328 $ 217,436 $ 137,709 ========= ========= =========
The following table presents certain information regarding the amortized cost, weighted average yields and estimated maturities or periods to repricing of Berkshire Bank's debt securities at December 31, 2003.
At December 31, 2003 --------------------------------------------------------------------------- More than One Year More than Five Years One Year or Less to Five Years to Ten Years --------------------- --------------------- --------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Investment securities: Obligations of U.S. Treasury and U.S. Government Agencies $ 15,696 2.73% $ 5,144 3.10% $ -- --% Mortgage-backed securities 2,777 2.11 226,086 3.90 27,080 4.73 Municipal notes 8,088 1.42 5,073 4.13 3,052 4.27 Corporate bonds and notes 10,049 2.63 3,975 2.17 -- -- Asset-backed securities 268 0.21 2,298 6.18 -- -- -------- -------- -------- Total $ 36,878 2.35% $242,576 3.88% $ 30,132 4.68% ======== ======== ======== At December 31, 2003 ------------------------------------------------ More than Ten Years Total --------------------- --------------------- Weighted Weighted Amortized Average Amortized Average Cost Yield Cost Yield --------- -------- --------- -------- (Dollars in thousands) Investment securities: Obligations of U.S. Treasury and U.S. Government Agencies $ -- --% $ 20,840 2.82% Mortgage-backed securities -- -- 255,943 3.97 Municipal notes 16,627 4.90 32,840 3.86 Corporate bonds and notes 3,078 4.36 17,102 2.84 Asset-backed securities -- -- 2,566 5.55 -------- -------- Total $ 19,705 4.82% $329,291 3.84% ======== ========
-30- Deposit Activities and Other Sources of Funds General. Deposits are the major source of funds for Berkshire Bank's lending and other investment activities. In addition, Berkshire Bank also generates funds internally from loan repayments, prepayments and sales and maturing investment securities. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Berkshire Bank uses borrowings from the Federal Home Loan Bank of Boston as an additional source of funding for loan and securities investment activity. Deposit Accounts. Substantially all of Berkshire Bank's deposits are generated from the areas surrounding its branch offices. Berkshire Bank offers a wide variety of deposit accounts with a range of interest rates and terms. Berkshire Bank may periodically offer special 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 certificates of deposit. The initial maturities of Berkshire Bank's certificate of deposit accounts range from three months to ten years. In addition, Berkshire Bank offers retirement accounts, including Traditional IRAs, Roth IRAs, Simple IRAs, Self-Directed IRAs and Keogh accounts, simplified employee pension plan, profit-sharing qualified plan and money purchase pension plan accounts. Berkshire Bank also offers a variety of deposit accounts designed for the businesses operating in its market area. Deposit account terms vary with the principal differences being the minimum balance deposit, early withdrawal penalties, limits on the number of transactions and the interest rate. Berkshire Bank's business banking deposit products include a commercial checking account that provides an earnings credit to offset monthly service charges and a checking account specifically designed for small businesses. Additionally, Berkshire Bank offers sweep accounts and money market accounts for businesses and IOLTA interest checking and escrow accounts. Berkshire Bank has sought to increase its commercial deposits through the offering of these products, particularly to its commercial borrowers and to the municipalities that participate in its government banking program. Berkshire Bank reviews its deposit mix and pricing on a weekly basis and believes it offers competitive interest rates on its deposit products. Berkshire Bank determines the rates paid based on a number of factors, including rates paid by competitors, Berkshire Bank's need for funds and cost of funds, Berkshire Bank's current asset/liability structure, the amount of maturing deposits and movements of market interest rates. Berkshire Bank currently does not utilize brokers to obtain deposits but may choose to do so in the future. In the unlikely event Berkshire Bank is liquidated, depositors will be entitled to full payment of their deposit accounts before any payment is made to Berkshire Hills as the sole stockholder of Berkshire Bank. The following table presents the deposit activity of Berkshire Bank for the years indicated.
For the Years Ended December 31, -------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Increase/(decrease) before interest credited $ 34,022 $ 21,854 $(13,550) Interest credited 13,862 17,777 26,685 -------- -------- -------- Net increase $ 47,884 $ 39,631 $ 13,135 ======== ======== ========
At December 31, 2003, Berkshire Bank had certificate of deposit accounts in amounts of $100,000 or more maturing as follows: Weighted Maturity Average Period Amount Rate ----------------------------------------------------------- (Dollars in thousands) Three months or less $ 30,702 1.90% Over 3 months through 6 months 28,273 2.14 Over 6 months through 12 months 31,730 2.71 Over 12 months 50,388 4.75 -------- Total $141,093 3.14% ======== -31- The following table presents information concerning average balances and weighted average interest rates on Berkshire Bank's deposit accounts for the years indicated.
For the Years Ended December 31, ------------------------------------------------------------------------------- 2003 2002 -------------------------------------- ------------------------------------ Percent of Percent of Total Weighted Total Weighted Average Average Average Average Average Average Balance Deposits Rate Balance Deposits Rate -------- ---------- -------- -------- ---------- -------- (Dollars in thousands) Money market accounts $132,497 16.25% 1.24% $117,950 15.48% 1.69% NOW accounts 90,170 11.06 0.17 83,399 10.95 0.75 Savings(1) 170,749 20.95 1.01 157,444 20.66 1.70 Certificates of deposit 330,116 40.50 3.13 320,418 42.05 3.91 Demand accounts 91,627 11.24 -- 82,752 10.86 -- -------- ------ -------- ------ Total $815,159 100.00% 1.70% $761,963 100.00% 2.33% ======== ====== ======== ====== For the Years Ended December 31, ------------------------------------- 2001 ------------------------------------- Percent of Total Weighted Average Average Average Balance Deposits Rate -------- ---------- -------- (Dollars in thousands) Money market accounts $112,434 15.31% 3.30% NOW accounts 77,276 10.52 1.04 Savings(1) 142,150 19.36 2.88 Certificates of deposit 325,633 44.34 5.55 Demand accounts 76,912 10.47 -- -------- ------ Total $734,405 100.00% 3.63% ======== ======
- ---------- (1) Includes mortgagors' escrow accounts. Certificates of Deposit by Rates and Maturities. The following table presents the amount of certificate accounts categorized by rates and maturities, for the periods and years indicated.
Period to Maturity from December 31, 2003 ------------------------------------------------- Total at December 31, Less than One to Two Two to Three Over Three ---------------------------------- One Year Years Years Years 2003 2002 2001 --------- --------- ------------ ---------- -------- -------- -------- (In thousands) 0.00-4.00% $210,485 $ 24,073 $ 6,817 $ 5,661 $247,036 $236,829 $107,984 4.01-5.00% 2,457 14,629 1,239 21,788 40,113 43,019 79,635 5.01-6.00% 3,967 1,327 1,913 9,740 16,947 20,196 50,726 6.01-7.00% 2,621 2,802 550 9,455 15,428 28,423 70,223 7.01% and above 92 1,734 -- -- 1,826 1,722 8,669 -------- -------- -------- -------- -------- -------- -------- Total $219,622 $ 44,565 $ 10,519 $ 46,644 $321,350 $330,189 $317,237 ======== ======== ======== ======== ======== ======== ========
Borrowings. Berkshire Bank utilizes advances from the Federal Home Loan Bank of Boston to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank of Boston functions as a central reserve bank providing credit for savings banks and certain other member financial institutions. As a member of the Federal Home Loan Bank of Boston, Berkshire Bank is required to own capital stock in the Federal Home Loan Bank of Boston and may apply for advances on the security of the capital stock and certain of its mortgage loans and other assets, principally securities that are obligations of, or guaranteed by, the U.S. Government or its Agencies, 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. At December 31, 2003, Berkshire Bank had the ability to borrow a total of approximately $374.8 million from the Federal Home Loan Bank of Boston. At that date, Berkshire Bank had outstanding advances of $251.5 million. In addition, Berkshire Bank had a $2.0 million repurchase agreement line of credit to be secured by securities or other assets of Berkshire Bank with the Depositors Insurance Fund, and a $50.0 million repurchase agreement line of credit with a nationally recognized broker-dealer. At December 31, 2003, Berkshire Bank had no outstanding borrowings against either of these agreements. -32- The following tables present certain information regarding Berkshire Bank's Federal Home Loan Bank advances during the periods and at the dates indicated. For the Years Ended December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- (Dollars in thousands) Maximum amount of advances outstanding at any month end $251,465 $143,053 $140,115 Average advances outstanding 167,621 140,406 127,990 Weighted average rate paid on advances 2.91% 4.01% 5.17% At December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- (Dollars in thousands) Balance outstanding at end of year $251,465 $133,002 $133,964 Weighted average rate on advances at end of year 2.61% 3.27% 4.26% Berkshire Bank offers retail repurchase agreements to selected higher balance customers and certain municipalities. These agreements are direct obligations of Berkshire Bank to repay at maturity or on demand the purchase price of an undivided interest in a U.S. Government or agency security owned by Berkshire Bank. Since these agreements are not deposits, they are not insured by the Federal Deposit Insurance Corporation. At December 31, 2003, there were no such retail repurchase agreements. The following tables represent certain information regarding Berkshire Bank's retail repurchase agreements during the years and at the dates indicated. For the Years Ended December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- (Dollars in thousands) Maximum amount of retail repurchase agreements outstanding at any month end $ 500 $ 1,830 $ 2,340 Average retail repurchase agreements outstanding 88 1,349 1,584 Weighted average rate paid on retail repurchase agreements 1.24% 1.72% 3.78% At December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- (Dollars in thousands) Balance outstanding at end of year -- $ 700 $ 1,890 Weighted average rate on retail repurchase agreements at end of year --% 1.59% 1.74% Trust Services Berkshire Bank maintains the Asset Management/Trust Group as a department within Berkshire Bank which primarily provides trust and investment services to individuals, partnerships, corporations and institutions and also acts as a fiduciary of estates and conservatorships and as a trustee under various wills, trusts and other plans. The trust department allows Berkshire Bank to provide investment opportunities and fiduciary services to both current and prospective customers. Consistent with Berkshire Bank's operating strategy, Berkshire Bank will continue to emphasize the growth of its trust service operations to grow assets and increase fee-based income. Berkshire Bank has implemented several policies governing the practices and procedures of the trust department, including policies relating to maintaining confidentiality of trust records, investment of trust property, handling conflicts of interest, and maintaining impartiality. At December 31, 2003, the trust department managed 792 accounts with aggregate assets of $287.7 million, of which the largest relationship totaled $20.0 million, or 7.0%, of the trust department's total assets. Trust fees totaled $2.1 million for 2003 and $1.8 million for 2002. -33- Government Banking Berkshire Bank offers full-service government banking for cities, towns and municipal school districts in western Massachusetts and southern Vermont. Berkshire 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, Berkshire Bank offers a wide range of municipal deposit products and checking accounts, as well as the origination of payroll accounts. At December 31, 2003, Berkshire Bank was working with approximately 63 municipal entities. For 2003, government banking generated $56,000 of net fee income compared to $180,000 for 2002. Personnel As of December 31, 2003, Berkshire Bank had 230 full-time employees and 34 part-time 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 The following are descriptions of Berkshire Bank's active subsidiaries, all of which are wholly-owned. All subsidiaries are incorporated in Massachusetts and are indirectly owned by Berkshire Hills. North Street Securities Corporation. North Street Securities Corporation, ("North Street") originally named GBSB Leasing Corporation, was established in January 1984 to acquire and hold investment securities of a type that are permissible for banks to hold under applicable law. North Street is qualified as a "securities corporation" for Massachusetts income tax purposes. Income earned by a qualifying securities corporation is generally entitled to special tax treatment from Massachusetts income tax. As of December 31, 2003, North Street had assets totaling $105.6 million, consisting primarily of municipal bonds, corporate bonds, private label REMICs and common and preferred equity securities. Gold Leaf Investment Services, Inc. Gold Leaf Investment Services, Inc., established in May 2000, began operations during the first quarter of 2001. Gold Leaf Investment Services offers access to a full range of security brokerage services, including financial planning, professional money management, stocks, bonds, mutual funds and annuities. These services are available through a partnership with UVEST Investment Services, a registered securities broker-dealer and member NASD/SIPC and are available in all of the Bank's branches. Gold Leaf Insurance Agency, Inc. Gold Leaf Insurance Agency, Inc., established in May 2000, began operations during the third quarter of 2000. Gold Leaf Insurance Agency offers a full line of products including automobile, home, business and life insurance. Gold Leaf Securities Corporation. Gold Leaf Securities Corporation was established in May 2003 to acquire and hold investment securities of a type that are permissible for banks to hold under applicable law. Gold Leaf Securities Corporation is qualified as a "securities corporation" for Massachusetts income tax purposes. As of December 31, 2003, Gold Leaf Securities Corporation had assets totaling $5.1 million, consisting primarily of Industrial Revenue Bonds. Woodland Securities, Inc. Woodland Securities, Inc. ("Woodland"), originally named Woodland Realty, Inc., was established in April 1995 to purchase, own, sell, develop and lease real property and personal property of all types. Inactive for a number of years, Woodland converted to a Massachusetts "securities corporation" for Massachusetts income tax purposes in 2002. As of December 31, 2003, Woodland had assets of $210.0 million consisting primarily of agency mortgage-backed, callable agency securities and agency REMICs. The Bank has pledged all of its shares of Woodland to the Federal Home Loan Bank of Boston to secure its borrowing facility. Excluding Berkshire Bank, the following are descriptions of Berkshire Hills' wholly-owned active subsidiaries. All of Berkshire Hills' subsidiaries, including Berkshire Bank, are incorporated in Massachusetts. Berkshire Hills Funding Corporation. Berkshire Hills Funding Corporation was established in May 2000 as a general purpose funding vehicle for Berkshire Hills. Outside of cash, its sole asset is a loan to Berkshire Bank's Employee Stock Ownership Plan ("ESOP"). The proceeds of such loan were used to fund the ESOP trustee's purchase of Berkshire Hills common stock. Berkshire Hills Technology, Inc. Berkshire Hills Technology, Inc. was established in May 2001 to invest, own and sell any type of business enterprise including, but not limited to, corporations and limited liability companies. In June 2001, along with a consortium of five other financial institutions, Berkshire Hills Technology, Inc. announced its investment of $4.7 million in EastPoint Technologies, LLC ("EastPoint"). The Company's equity interest in EastPoint equals 60.3%. EastPoint, headquartered in Bedford, New Hampshire, is a software and data processing provider for financial institutions. -34- Segment Reporting Through its wholly-owned subsidiary, Berkshire Hills Technology, Inc., the Company owns a 60.3% equity interest in EastPoint. Prior to the acquisition of EastPoint, management monitored the revenue streams of the various products and services in evaluating the Company's operations and financial performance. Accordingly, all of the Company's operations were considered by management to be aggregated in one reportable operating segment. Subsequent to the acquisition of EastPoint, the Company's operations continue to be aggregated in one reportable segment, the Bank, except Berkshire Hills Technology, Inc., which is evaluated on a stand-alone basis. Information about reportable segments, and the reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, 2003, 2002 and 2001 follows: At December 31, 2003 --------------------------------------------- Berkshire Hills Consolidated Bank Technology, Inc. Totals ----------- ---------------- ------------ (In thousands) Net interest income $ 37,566 $ -- $ 37,566 Depreciation and amortization 1,412 695 2,107 Provision for loan losses 1,460 -- 1,460 License fees -- 7,262 7,262 Minority interest -- (186) (186) Profit (loss) 9,247 (282) 8,965 Assets 1,210,890 7,658 1,218,548 Expenditures for additions to premises and equipment 1,386 80 1,466 At December 31, 2002 --------------------------------------------- Berkshire Hills Consolidated Bank Technology, Inc. Totals ----------- ---------------- ------------ (In thousands) Net interest income $ 40,700 $ -- $ 40,700 Depreciation and amortization 1,813 601 2,414 Provision for loan losses 6,180 -- 6,180 License fees -- 6,991 6,991 Minority interest -- (685) (685) Profit (loss) 3,937 (1,040) 2,097 Assets 1,037,376 8,571 1,045,947 Expenditures for additions to premises and equipment 1,044 424 1,468 At December 31, 2001 --------------------------------------------- Berkshire Hills Consolidated Bank Technology, Inc. Totals ----------- ---------------- ------------ (In thousands) Net interest income $ 42,236 $ -- $ 42,236 Depreciation and amortization 1,769 312 2,081 Provision for loan losses 7,175 -- 7,175 License fees -- 3,465 3,465 Minority interest -- (119) (119) Profit (loss) 8,868 43 8,911 Assets 1,021,623 9,078 1,030,701 Expenditures for additions to premises and equipment 735 1,609 2,344 The Company does not allocate income taxes to its segments, but rather, assigns all taxes to the Bank. -35- REGULATION AND SUPERVISION General As a savings and loan holding company, Berkshire Hills is required 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, as its primary regulator, and the Federal Deposit Insurance Corporation, 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 Federal Deposit Insurance Corporation. Berkshire Bank must file reports with the Commissioner of Banks and the Federal Deposit Insurance Corporation 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 of Banks and /or the Federal Deposit Insurance Corporation conduct periodic examinations to test Berkshire Bank's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also 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 of Banks, the Federal Deposit Insurance Corporation 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. Massachusetts Banking Laws and Supervision Massachusetts savings banks are regulated and supervised by the Massachusetts Commissioner of Banks. The Massachusetts Commissioner of Banks is required to regularly examine each state-chartered bank. The approval of the Massachusetts Commissioner of Banks 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 regulations, policies and directives of the Massachusetts Commissioner of Banks may be sanctioned. The Massachusetts Commissioner of Banks 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 Massachusetts Commissioner of Banks 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 Federal Deposit Insurance Corporation deposit insurance limits. Member banks are required to pay the assessments of the fund. 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. The powers that Massachusetts-chartered savings banks can exercise under these laws are summarized below. Lending Activities. A Massachusetts-chartered savings bank may make a wide variety of mortgage loans including fixed-rate loans, adjustable-rate loans, variable-rate loans, participation loans, graduated payment loans, construction and development loans, condominium and co-operative loans, second mortgage loans and other types of loans that may be made in accordance with applicable regulations. Commercial loans may be made to corporations and other commercial enterprises with or without security. Consumer and personal loans may also be made with or without security. Loans to individual borrowers generally must be limited to 20% of the total of a bank's capital accounts and stockholders' equity. Investments Authorized. Massachusetts-chartered savings banks have broad investment powers under Massachusetts law, including so-called "leeway" authority for investments that are not otherwise specifically authorized. The investment powers authorized under Massachusetts law are restricted by federal law to permit, in general, only investments of the kinds that would be permitted for national banks. Berkshire Bank has authority to invest in all of the classes of loans and investments that are permitted by its existing loan and investment policies. Payment of Dividends. A 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 Massachusetts Commissioner of Banks may restrict the payment of dividends by a bank if it is determined that such payment would result in safety and soundness concerns. -36- Parity Regulation. Effective November 19, 2002, Massachusetts law was amended to increase the powers of Massachusetts banks under certain conditions. As a result of such amendment, a Massachusetts bank may engage in any activity or offer any product or service if the activity, product or service is engaged in or offered in accordance with regulations promulgated by the Massachusetts Commissioner of Banks and has been authorized for national banks, federal thrifts or state banks in a state other than Massachusetts; provided that the activity is permissible under applicable federal and Massachusetts law and subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that had previously been granted the power. Assessments. Savings banks are required to pay assessments to the Commissioner of Banks to fund operations. Assessments paid by Berkshire Bank for the fiscal year ended December 31, 2003 totaled $150,254. Federal Regulations Capital Requirements. Under Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation risk-based capital guidelines. The Federal Deposit Insurance Corporation guidelines require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as Berkshire Bank's "risk-based capital ratio." 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. For example, under the Federal Deposit Insurance Corporation's risk-weighting system, cash and securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight, loans secured by one- to four-family residential properties generally have a 50% risk weight and commercial loans have a risk weighting of 100%. 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. The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The Federal Deposit Insurance Corporation, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank's capital and economic value to changes in interest rate risk in assessing a bank's capital adequacy. As a savings and loan holding company regulated by the Office of Thrift Supervision, Berkshire Hills is not, under current law, subject to any separate regulatory capital requirements. The following is a summary of Berkshire Bank's regulatory capital at December 31, 2003: GAAP Capital to Total Assets 10.11% Total Capital to Risk-Weighted Assets 12.57% Tier I Leverage Ratio 7.87% Tier I to Risk-Weighted Assets 11.07% Standards for Safety and Soundness. The federal banking agencies adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, an internal audit system, credit underwriting, loan documentation, interest rate risk exposure, asset growth, asset quality, earnings and compensation, and fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the -37- guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Investment Activities Under federal law, all state-chartered Federal Deposit Insurance Corporation insured banks, including savings banks, have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The Federal Deposit Insurance Corporation Improvement Act and the Federal Deposit Insurance Corporation permit exceptions to these limitations. For example, state chartered banks, such as Berkshire Bank, may, with Federal Deposit Insurance Corporation approval, continue to exercise grandfathered state authority to invest in common or preferred stocks listed on a national securities exchange or the NASDAQ National Market and in the shares of an investment company registered under federal law. In addition, the Federal Deposit Insurance Corporation is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than non-subsidiary equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Bank Insurance Fund. All non-subsidiary equity investments, unless otherwise authorized or approved by the Federal Deposit Insurance Corporation, must have been divested by December 19, 1996, under a Federal Deposit Insurance Corporation-approved divestiture plan, unless such investments were grandfathered by the Federal Deposit Insurance Corporation. Berkshire Bank received grandfathering authority from the Federal Deposit Insurance Corporation in February 1993 to invest in listed stocks and/or registered shares. The maximum permissible investment is 100% of Tier 1 capital, as specified by the Federal Deposit Insurance Corporation's regulations, or the maximum amount permitted by Massachusetts Banking Law, whichever is less. The Federal Deposit Insurance Corporation also required that Berkshire Bank provide prior notice to the agency if it increases the holdings of listed stock and/or registered shares as a percentage of Tier 1 equity capital by 25%. Such grandfathering authority may be terminated upon the Federal Deposit Insurance Corporation's determination that such investments pose a safety and soundness risk to Berkshire Bank or if Berkshire Bank converts its charter or undergoes a change in control. As of December 31, 2003, Berkshire Bank had marketable equity securities including money market preferred stocks with a market value of $14.9 million which were held under such grandfathering authority. Interstate Banking and Branching Beginning June 1, 1997, the Interstate Banking Act permitted the responsible federal banking agencies to approve merger transactions between banks located in different states, regardless of whether the merger would be prohibited under the law of the two states. The Interstate Banking Act also permitted a state to "opt in" to the provisions of the Interstate Banking Act before June 1, 1997, and permitted a state to "opt out" of the provisions of the Interstate Banking Act by adopting appropriate legislation before that date. Accordingly, beginning June 1, 1997, the Interstate Banking Act permitted a bank, such as Berkshire Bank, to acquire an institution by merger in a state other than Massachusetts unless the other state had opted out of the Interstate Banking Act. The Interstate Banking Act 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. 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 five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Federal Deposit Insurance Corporation 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, 2003, Berkshire Bank met the conditions to be classified 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 plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution's total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. 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 Federal Deposit -38- Insurance Corporation to sell sufficient voting stock to become adequately capitalized, requirements to reduce total 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" 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. The term "covered transaction" includes, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially the same, or 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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation has authority under federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The Federal Deposit Insurance Corporation is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was "critically undercapitalized" on average during the calendar quarter beginning 270 days after the date on which the institution became "critically undercapitalized." See "Prompt Corrective Regulatory Action." The Federal Deposit Insurance Corporation may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution's financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution's capital with no reasonable prospect of replenishment without federal assistance. Insurance of Deposit Accounts The Federal Deposit Insurance Corporation has adopted a risk-based insurance assessment system. The Federal Deposit Insurance Corporation assigns an institution to one of three capital categories based on the institution's financial information consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, 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 Federal Deposit Insurance Corporation by the institution's primary federal regulator and information which the Federal Deposit Insurance Corporation determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Assessment rates for insurance fund deposits currently range from 0 basis points for the strongest institution to 27 basis points for the weakest. Bank Insurance Fund members are also required to assist in the repayment of bonds issued by the Financing Corporation in the late 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. Effective January 1, 2000, full pro rata sharing of the payments between Bank Insurance Fund and Savings Association Insurance Fund members commenced. The Federal Deposit Insurance Corporation is authorized to raise the assessment rates. The Federal Deposit Insurance Corporation has exercised this authority several times in the past and may raise insurance premiums in the future. If the Federal Deposit Insurance Corporation takes such action, it could have an adverse effect on the earnings of Berkshire Bank. -39- The Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Berkshire Bank, as a member of the Depositors Insurance Fund, is also subject to its assessments. See "- Massachusetts Banking Laws and Supervision." Federal Reserve System The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations currently require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $45.4 million less an exemption of $6.6 million (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $45.4 million, the reserve requirement is 10% (which may be adjusted by the Federal Reserve Board between 8% and 14%) of the portion in excess of $45.4 million. Berkshire Bank is in compliance with these requirements. Community Reinvestment Act Under the Community Reinvestment Act, as implemented by Federal Deposit Insurance Corporation regulations, a state non-member bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The Community Reinvestment Act neither establishes specific lending requirements or programs for financial institutions nor limits an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the Federal Deposit Insurance Corporation, in connection with its examination of an institution, to assess the institution's record of meeting the credit needs of its community and to consider such record when it evaluates applications made by such institution. The Community Reinvestment Act requires public disclosure of an institution's Community Reinvestment Act rating. Berkshire Bank's latest Community Reinvestment Act rating received from the Federal Deposit Insurance Corporation was "Outstanding." Berkshire Bank is also subject to similar obligations under Massachusetts Law, which has an additional CRA rating category. The Massachusetts Community Reinvestment Act requires the Massachusetts Banking Commissioner to consider a bank's Massachusetts Community Reinvestment Act rating when reviewing a bank's application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of such application. Berkshire Bank's latest Massachusetts Community Reinvestment Act rating received from the Massachusetts Division of Banks was "Outstanding." 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. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Berkshire Bank, as a member of the Federal Home Loan Bank of Boston, is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Boston in an amount equal to at least 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank of Boston, whichever is greater. Berkshire Bank was in compliance with this requirement with an investment in Federal Home Loan Bank of Boston stock at December 31, 2003 of $12.9 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 ended 2003, 2002, 2001, 2000, and 1999, cash dividends from the Federal Home Loan Bank of Boston to Berkshire Bank amounted to approximately $249,211, $283,300, $303,600, $332,700 and $180,900, respectively. Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the Federal Home Loan Bank stock held by the Bank. 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 Office of Thrift Supervision rather than as a bank holding company by the Federal Reserve Board. Berkshire Bank made such election and the Company is a non- -40- diversified unitary savings and loan holding company within the meaning of federal law. As such, the Company is registered with the Office of Thrift Supervision and has adhered to the Office of Thrift Supervision's regulations and reporting requirements. In addition, the Office of Thrift Supervision may examine and supervise the Company and the Office of Thrift Supervision has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision 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 Office of Thrift Supervision at least 30 days before declaring any dividend to the Company. By regulation, the Office of Thrift Supervision may restrict or prohibit the Bank from paying dividends. As a unitary savings and loan holding company, the Company is generally not restricted under existing laws as to the types of business activities in which it may engage. The Gramm-Leach-Bliley Act of 1999 expanded the authority of bank holding companies to affiliate with other financial services companies such as insurance companies and investment banking companies. The Gramm-Leach-Bliley Act, however, provided that unitary savings and loan holding companies may only engage in activities permitted to a financial holding company under the 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. Upon any non-supervisory acquisition by the Company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company. Federal law limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, provided the prior approval of the Office of Thrift Supervision is obtained, to other activities authorized by Office of Thrift Supervision regulation and to those permitted for financial holding companies. Multiple savings and loan holding companies are generally prohibited from acquiring or retaining more than 5% of a non-subsidiary company engaged in activities other than those permitted by federal law. 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 Office of Thrift Supervision. In evaluating applications by holding companies to acquire savings associations, the Office of Thrift Supervision 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. The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except for (1) interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. To be regulated as a savings and loan holding company by the Office of Thrift Supervision (rather than as a bank holding company by the Federal Reserve Board), the Bank must qualify as a Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, the Bank must maintain compliance with the test for a "domestic building and loan association," as defined in the Internal Revenue Code, or with a Qualified Thrift Lender Test. Under the Qualified Thrift Lender Test, 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. As of December 31, 2003, Berkshire Bank maintained 93.1% 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 Office of Thrift Supervision 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 Office of Thrift Supervision has found that the acquisition will not result in a change of control of the Company. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding 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 any regulation under the Massachusetts law. The term "bank holding company," for the purposes 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 associations and national banks, federal savings banks and federal savings and loan associations. In general, a holding company controlling, directly or indirectly, only one banking institution will not be deemed to be a bank holding company for the purposes of Massachusetts law. Under Massachusetts law, the prior approval of the Board of Bank Incorporation is required before: any -41- 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 merges 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. Federal Securities Laws The Company's common stock is registered with the Securities and Exchange Commission under the Exchange Act. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. The registration under the Securities Act of shares of common stock does not cover the resale of such shares. Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. The resale restrictions of Rule 144 under the Securities Act govern shares purchased by an affiliate of the Company. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (1) 1% of the outstanding shares of the Company or (2) the average weekly volume of trading in such shares during the preceding four calendar weeks. Future provision may be made by the Company to permit affiliates to have their shares registered for sale under the Securities Act under specific circumstances. FEDERAL AND STATE TAXATION ON INCOME Federal Income Taxation General. The Company and Berkshire 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. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to Berkshire Bank or the Company. Berkshire Bank's federal income tax returns have been either audited or closed under the statute of limitations through tax year 1999. For its 2003 tax year, Berkshire Bank's maximum federal income tax rate was 34%. Bad Debt Reserves. For fiscal years beginning before December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986, as amended, were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for non-qualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 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 as described below. Distributions. If the Bank makes "nondividend distributions" to the Company, they will be considered to have been made from the Bank's unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the "nondividend distributions," and then from the Bank's supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank's current or accumulated earnings and profits will not be included in the Bank's taxable income. The amount of additional taxable income triggered by a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if the Bank makes a nondividend distribution to the Company, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. -42- State Taxation Massachusetts Taxation. 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 bonds, notes and evidences of indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except no deduction is allowed for taxes paid to the state which are based on income. Carryforwards and carrybacks of net operating losses are not allowed. A financial institution or business corporation is generally entitled to special tax treatment as a "securities corporation," provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (b) it has applied for, and received, classification as a "securities corporation" by the Commissioner of the Massachusetts Department of Revenue. A securities corporation that is also a bank holding company under the Code must pay a tax equal to 0.33% of its gross income. A securities corporation that is not a bank holding company under the Code must pay a tax equal to 1.32% of its gross income. Three of the Bank's subsidiaries, North Street Securities Corporation, Gold Leaf Securities Corporation and Woodland Securities, Inc., are Massachusetts securities corporations. In June 2003, the Company reached a settlement with the Massachusetts Department of Revenue (the "DOR") with respect to the DOR's tax assessment resulting from the DOR's disallowance of the Company's deduction of certain dividend distributions received by the Bank from Gold Leaf Capital Corporation, its majority-owned real estate investment trust (the "REIT"). As a result, the Company paid approximately $398,000 to the DOR representing one-half of the assessment plus interest and obtained the DOR's release from liability for the remaining half assessed. The Company dissolved the REIT during the third quarter of 2003. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. -43- ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------------- The following table sets forth certain information regarding the executive officers of Berkshire Hills and Berkshire Bank.
Name Age(1) Position ---- ------ -------- Michael P. Daly 42 President and Chief Executive Officer Wayne F. Patenaude 43 Senior Vice President, Chief Financial Officer and Treasurer Gayle P. Fawcett 51 Senior Vice President of Retail Banking and Operations
- -------------------- (1) As of December 31, 2003 The executive officers are elected annually and hold office until their successors have been elected and qualified or until they are removed or replaced. 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. -44- ITEM 2. PROPERTIES - -------------------------------------------------------------------------------- The Company and the Bank currently conduct their business through the main office located in Pittsfield, Massachusetts, and 11 other full service banking offices and one other facility listed below. The Company and the Bank believe their facilities are adequate to meet their present and immediately foreseeable needs.
Net Book Value of Property Lease Original Year Date of or Leasehold Or Leased Lease Improvements at Location Own or Acquired Expiration December 31, 2003 - ------------- --------------- ------------------- --------------- ---------------------------- (In thousands) Main Office 24 North Street Pittsfield, Massachusetts Own 1898 -- $1,637 Banking Offices 244 Main Street Great Barrington, Massachusetts Own 1950 -- 695 103 North Main Street Sheffield, Massachusetts Own 1966 -- 180 Old Town Hall 43 East Street Lease 1969 2030 454 Pittsfield, Massachusetts 2 Depot Street West Stockbridge, Massachusetts Own 1975 -- 318 165 Elm Street Pittsfield, Massachusetts Own 1977 -- 216 255 Stockbridge Road Great Barrington, Massachusetts Own 1985 -- 223 37 Main Street North Adams, Massachusetts Lease 1985 2005(1) 330 1 Park Street Lee, Massachusetts Own 1991 -- 191 32 Main Street Stockbridge, Massachusetts Own 1991 -- 261 66 West Street Pittsfield, Massachusetts Lease 1998 2009(2) 157 Allendale Shopping Center 39 Cheshire Road Lease 2001 2021(3) 1,205 Pittsfield, Massachusetts Other Office 66 Allen Street(4) Own 1999 -- 2,136 Pittsfield, Massachusetts
- -------------- (1) Berkshire Bank has one option to renew for ten years. (2) Berkshire Bank has two options to renew, each for an additional five-year period. (3) Berkshire Bank has four options to renew, each for an additional five-year period. (4) This facility houses Berkshire Bank's Commercial Lending Division, Asset Management/Trust Division and Government Banking Department. -45- ITEM 3. LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- Periodically, there have been various claims and lawsuits involving Berkshire 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 would have a material adverse effect on the financial condition or operations of the Company, taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------------------------- None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------- The common stock is traded on the American Stock Exchange under the symbol "BHL." As of February 26, 2004, the Company had approximately 951 holders of record. The following table sets forth, for the quarters indicated, the daily closing high and low sales price for the common stock and the dividends paid. 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. For the Year Ended December 31, 2003 ----------------------------------------------------- 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter ----------- ----------- ----------- ----------- High $ 37.40 $ 33.90 $ 28.40 $ 24.00 Low $ 33.55 $ 28.10 $ 23.10 $ 21.86 Dividend Paid $ 0.12 $ 0.12 $ 0.12 $ 0.12 For the Year Ended December 31, 2002 ----------------------------------------------------- 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter ----------- ----------- ----------- ----------- High $ 25.25 $ 27.25 $ 26.20 $ 22.08 Low $ 22.94 $ 20.99 $ 21.98 $ 19.65 Dividend Paid $ 0.12 $ 0.12 $ 0.12 $ 0.12 -46- ITEM 6. SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- The Company has derived the following selected consolidated financial and other data of the Company and Berkshire Bank in part from the consolidated financial statements and notes appearing elsewhere in this Form 10-K. The data as of and for the years ended December 31, 2003, 2002, 2001 and 2000 are derived from the audited consolidated financial statements for Berkshire Hills and Berkshire Bank. The data as of and for the year ended December 31, 1999 is derived from the audited consolidated financial statements of Berkshire Bancorp and Berkshire Bank.
At or For the Years Ended December 31, ------------------------------------------------------------------ 2003 2002 2001 2000 1999 ----------- ----------- ---------- ---------- ---------- (In thousands, except per share data) Selected Financial Data: Total assets $ 1,218,548 $ 1,045,947 $1,030,701 $1,011,340 $ 841,651 Loans, net 783,258 712,714 791,920 783,405 665,554 Investment securities: Available-for-sale 307,425 173,169 104,446 99,309 93,084 Held-to-maturity 36,903 44,267 33,263 32,238 17,014 Federal Home Loan Bank stock 12,923 7,440 7,027 5,651 3,843 Savings Bank Life Insurance stock 2,043 2,043 2,043 2,043 2,043 Deposits(1) 830,244 782,360 742,729 729,594 680,767 Federal Home Loan Bank advances 251,465 133,002 133,964 101,386 58,928 Repurchase agreements -- 700 1,890 2,030 1,120 Total stockholders' equity 123,175 120,569 139,323 161,322 88,352 Real estate owned -- 1,500 -- 50 220 Nonperforming loans 3,199 3,741 2,702 2,869 2,841 Selected Operating Data: Total interest and dividend income $ 56,308 $ 64,128 $ 75,796 $ 71,018 $ 58,468 Total interest expense 18,742 23,428 33,560 33,468 26,922 ----------- ----------- ---------- ---------- ---------- Net interest income 37,566 40,700 42,236 37,550 31,546 Provision for loan losses 1,460 6,180 7,175 3,170 3,030 ----------- ----------- ---------- ---------- ---------- Net interest income afer provision for loan losses 36,106 34,520 35,061 34,380 28,516 ----------- ----------- ---------- ---------- ---------- Noninterest income: Service charges and fees 4,776 4,469 4,187 3,743 3,405 Gain on sales and dispositions of securities, net 3,077 14,470 268 423 491 Loss on sale of loans (1,854) (10,702) -- -- -- Other(2) 7,711 5,181 6,093 580 402 ----------- ----------- ---------- ---------- ---------- Total noninterest income 13,710 13,418 10,548 4,746 4,298 ----------- ----------- ---------- ---------- ---------- Total noninterest expense 35,786 45,310 32,349 32,184 25,196 ----------- ----------- ---------- ---------- ---------- Income before income taxes 14,030 2,628 13,260 6,942 7,618 Income taxes 5,065 531 4,349 2,360 1,995 ----------- ----------- ---------- ---------- ---------- Net income $ 8,965 $ 2,097 $ 8,911 $ 4,582 $ 5,623 =========== =========== ========== ========== ========== Dividends per share $ 0.48 $ 0.48 $ 0.43 $ 0.10 N/A Earnings per share Basic $ 1.70 $ 0.39 $ 1.42 N/A N/A Diluted $ 1.57 $ 0.36 $ 1.35 N/A N/A
-47-
At or For the Years Ended December 31, -------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Selected Operating Ratios and Other Data(3): Performance Ratios: Average yield on interest-earning assets 5.35% 6.49% 7.80% 8.04% 7.65% Average rate paid on interest-bearing liabilities 2.10 2.85 4.25 4.64 4.15 Interest rate spread(4) 3.25 3.64 3.55 3.40 3.50 Net interest margin(5) 3.57 4.12 4.35 4.25 4.13 Interest-bearing assets to interest-bearing liabilities 118.01 120.33 123.04 122.53 117.75 Net interest income after provision for loan losses to noninterest expense 100.89 75.36 108.39 106.82 113.18 Noninterest expense as a percent of average assets 3.21 4.31 3.13 3.44 3.09 Return on average assets(6) 0.80 0.20 0.86 0.49 0.69 Return on average equity(7) 7.28 1.54 5.74 3.72 6.51 Average equity to average assets 11.04 12.96 15.00 13.15 10.59 Dividend payout ratio(8) 28.19 145.45 30.28 N/A N/A Efficiency ratio(9) 70.96 77.32 61.60 76.86 71.27 Regulatory Capital Ratios: Tier 1 capital to average assets 8.97 10.04 11.02 14.54 7.91 Total capital to risk-weighted assets 14.10 15.18 15.73 20.15 12.90 Asset Quality Ratios: Nonperforming loans as a percent of total loans(10) 0.40 0.52 0.34 0.36 0.42 Nonperforming assets as a percent of total assets(11) 0.26 0.36 0.26 0.29 0.36 Allowance for loan losses as a percent of total loans 1.13 1.43 1.37 1.29 1.27 Allowance for loan losses as a percent of nonperforming loans 280.37 275.54 408.36 356.08 300.39 Net loans charged-off as a percent of interest-earning loans 0.11 0.09 0.79 0.19 0.31
- ---------------- (1) Includes mortgagors' escrow accounts. (2) Consists primarily of Berkshire Hills Technology's revenues in 2003, 2002 and 2001. Berkshire Hills Technology was formed in May 2001. (3) Regulatory Capital and Asset Quality Ratios are end of period ratios. Performance Ratios are based on daily averages. (4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (5) Net interest income as a percentage of average interest-earning assets. (6) Net income divided by average total assets. (7) Net income divided by average total equity. (8) Dividends per share divided by basic earnings per share. Comparable figures for 2000 and 1999 are not available as the Company began paying dividends in the fourth quarter of 2000. (9) Operating expenses divided by net interest income plus other income, less gain on sale of securities plus losses on sale of sub-prime loans. For purposes of the 2002 computation, severance payments of $6.9 million were deducted from operating expenses. (10) Nonperforming loans consist of nonaccrual loans. (11) Nonperforming assets consist of nonaccrual loans and real estate owned. -48- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- General Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report. Forward-Looking Statements This Annual Report on Form 10-K contains certain forward-looking statements that are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company'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 the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/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 or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake -- and specifically disclaims any obligation -- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Critical Accounting Policies The Company has established various accounting policies, which govern the application of generally accepted accounting principles in the preparation of the financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements. Refer to Footnote 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies" and the allowance for loan loss discussion in Item 1. Business, for a detailed description of the estimation processes and methodology related to the allowance for loan losses. Operating Strategy The Bank is an independent, community-oriented savings bank, delivering quality customer service and offering a wide range of deposit, loan and investment products to its customers. In recent years, the Bank's strategy has been to enhance profitability through controlled balance sheet growth by emphasizing the origination of real estate mortgages, commercial loans and home equity loans, increasing sources of noninterest income and by improving operating efficiencies while managing its capital position and limiting its credit and interest rate risk exposure. The Company has established profitability goals of a return on assets of 1.0%, a return on equity of 10.0% and an efficiency ratio of under 60%, which it expects to achieve by 2005. Earnings growth is always a priority for a public company and good balance of this with community involvement and employee retention is paramount to the Company's management. The Bank is primarily a lending institution, which does a good job of cross-selling products in an effort to "own" the "whole customer." While it does not overpay for deposits, it has still achieved strong growth in its core deposit base. In addition, being vigilant in expense control through efficiency efforts, including the implementation of Six Sigma, is critical and we believe those efforts will help earnings. To accomplish these objectives, the Bank has sought to: o Operate as a full-service community bank by expanding the services and products it offers. o Provide superior customer service through an attention to detail and a focus on building customer relationships. o Provide innovative products by increasing the functionality of its ATM network and expanding the capability of its call center. o Increase fee income by broadening non-depository product offerings and services. -49- o Continue to increase its emphasis on high quality consumer and commercial loans. o Control credit risk by continuing to employ conservative underwriting standards to minimize the level of new problem assets. o Improve asset quality by exiting the indirect sub-prime automobile loan business. o Manage interest rate risk by emphasizing investments in shorter-term loans and investment securities, engaging in the sale, securitization and purchase of loans and by managing the Company's sources of borrowed funds, such as, its ability to borrow from the FHLB of Boston. o Limit equity price risk and reductions to capital with decreases in its equity securities portfolio by selling a portion of its marketable equity securities portfolio. o Operate more efficiently by: (1) increasing core deposits through aggressive cross-selling of products and using a disciplined approach to deposit pricing; and (2) utilizing "Six Sigma" process improvement infrastructure, which is designed to improve the Company's operating efficiencies. o Invest primarily in debt instruments that provide adequate liquidity to meet cash flow needs and to earn a reasonable return on investment. As global and local economies continue to improve, the Company will strive to take advantage of growth opportunities, both organic and through non-dilutive acquisitions. While industry consolidation continues to increase acquisition multiples making them increasingly more difficult to achieve, the Company will prudently continue to explore opportunities that will improve its franchise and be accretive to shareholders. -50- Fourth Quarter Events and Recent Developments In December 2003, as part of the Bank's effort to improve its credit risk profile, the Bank accelerated its strategy to exit the sub-prime automobile loan business by selling $9.9 million of such loans, which resulted in the reversal of approximately $1.0 million of previously provided loan loss provision. At December 31, 2003, the Bank held $1.4 million of sub-prime automobile loans. The Bank will continue to invest in automobile loans, but will no longer originate or acquire sub-prime automobile loans. To prepare for a volatile and potentially rising interest rate environment, $55.0 million of one- to four-family fixed rate residential mortgages were securitized, of which $16.3 million settled in December 2003, and the remaining $38.7 million settled in January 2004. Total commercial loans increased $20.1 million, or at an annualized rate of 22.8%, from September 30, 2003. The majority of this increase was in commercial real estate loans, which increased $22.3 million from September 30, 2003 as several new loans were added to the portfolio, of which the largest loan was $2.5 million, while commercial loans declined $2.2 million for the same period. Core deposits, which the Company considers to be all deposits other than certificates of deposit, increased $8.5 million, or at an annualized rate of 6.8%, from September 30, 2003. The Bank had the largest increase in demand deposits, which increased $6.3 million, or 6.5%. NOW accounts increased $2.9 million, or 3.2%, and money market accounts increased $1.4 million, or 1.0%. The Bank continues to aggressively pursue deposits through customer cross-selling efforts and other marketing campaigns. Comparison of Financial Condition at December 31, 2003 and 2002 Total assets were $1.22 billion at December 31, 2003, an increase of $172.6 million, or 16.5%, from $1.05 billion at December 31, 2002. The Company's investment portfolio, excluding FHLB and SBLI stock, increased 58.4% to $344.3 million at the end of 2003 from $217.4 million at the end of 2002 as the Company purchased securities with attractive yields relative to the rates paid on a corresponding increase in borrowings from the Federal Home Loan Bank of Boston. These purchases were primarily in securities with durations averaging three to five years. Short-term investments totaled $1.9 million at December 31, 2003, a decrease of $41.5 million from December 31, 2002, reflecting the investment of the proceeds from the December 2002 sale of sub-prime automobile loans in purchased one-to four-family residential mortgage loans. Loans totaled $783.2 million at December 31, 2003, an increase of $70.5 million, or 9.9%, from the year ended December 31, 2002. Organic loan growth, which excludes purchases, securitization and sales of loans, increased $88.1 million, or 12.2%, from December 31, 2002. Automobile loans decreased $9.6 million, or 8.5%, to $104.0 million at December 31, 2003 from December 31, 2002 as the Bank sold $9.9 million of its sub-prime automobile loans to a third party. At December 31, 2003, $1.4 million of sub-prime automobile loans remained with an allocated reserve of $623,000, or 44.8%. Construction and land development loans increased $17.1 million, or 97.0%, to $34.7 million at December 31, 2003 from $17.6 million at December 31, 2002. Commercial real estate totaled $154.2 million at December 31, 2003, an increase of $35.0 million, or 29.4%, from December 31, 2002, while residential one- to four-family loans increased $19.8 million, or 8.0%, to $266.8 million at December 31, 2003 from December 31, 2002. The increases reflect the Bank's expansion into new commercial loan markets, primarily in the eastern New York area, and a strong local real estate loan market primarily driven by a low interest rate environment. Commercial loans remained relatively flat with an increase of $1.0 million, or 0.6%, to $166.5 million at December 31, 2003 from $165.4 million at December 31, 2002. Nonperforming loans totaled $3.2 million at December 31, 2003, a decrease of $542,000, or 14.5%, from $3.7 million at December 31, 2002. Commercial and commercial real estate nonaccruing loans totaled $2.4 million at the end of 2003 compared to $2.9 million at the end of 2002, primarily as the result of the return of two loans to accrual status, payments collected on accounts remaining on nonaccruing status and $156,000 in gross commercial loan charge-offs. Nonaccruing consumer loans totaled $468,000 at the end of 2003, down from $661,000 at the end of 2002. Automobile loans of $306,000 were 90 days or more past due and still accruing interest at the end of 2003, compared to $590,000 at the end of 2002. The ratio of nonperforming loans to total loans at December 31, 2003 and 2002 was 0.40% and 0.52%, respectively. The Bank executed a single premium Bank Owned Life Insurance ("BOLI") contract in June of 2003, totaling $7.5 million. This transaction is expected to earn a tax-equivalent return in excess of other earning assets with similar risk characteristics. The income earned on BOLI is recorded as an increase in noninterest income. BOLI totaled $7.7 million at December 31, 2003. Interest-bearing liabilities increased $150.7 million, or 18.2%, to $978.9 million at December 31, 2003 from $828.2 million at December 31, 2002, primarily due to a $118.5 million, or 89.1%, increase in FHLB borrowings. Borrowings totaled $251.5 million at December 31, 2003, increasing from $133.0 million at December 31, 2002, as the Bank utilized lower cost borrowings to fund asset growth. Interest-bearing deposits increased $32.2 million, or 4.6%, to $727.5 million at the end of 2003 from $695.2 million at the end of 2002. Money market and NOW accounts increased $27.9 million and savings accounts -51- increased $13.3 million, while certificates of deposit decreased $8.8 million. Noninterest bearing demand deposits grew $15.6 million to $102.8 million at December 31, 2003 from $87.1 million at December 31, 2002. Stockholders' equity totaled $123.2 million at December 31, 2003, an increase of $2.6 million, or 2.2%, from December 31, 2002. This increase was primarily due to net income of $9.0 million, partially offset by the repurchase of 285,116 shares at a cost of $7.1 million, the exercise of 71,064 shares of stock options and the payment of cash dividends of $0.48 per share amounting to $2.6 million. Comparison of Operating Results for the Years Ended December 31, 2003 and 2002 Net Income. Net income totaled $9.0 million for the year ended December 31, 2003, an increase of $6.9 million, or 327.5%, from $2.1 million for the year ended December 31, 2002. Net income for 2003 includes $437,000 in charges related to a non-recurring retirement benefit while net income for 2002 includes $8.3 million in charges in connection with the restructuring of the Company's senior management and the reorganizing of the Company's long-term business strategy. Basic and diluted earnings per share for the year ended December 31, 2003 were $1.70 and $1.57, respectively, compared to basic and diluted earnings of $0.39 and $0.36 for the year ended December 31, 2002. Net Interest Income. Net interest income is the largest component of the Company's revenue stream and is the difference between the interest and dividends earned on the loan and investment portfolios and the interest paid on the Company's funding sources, primarily customer deposits and advances from the Federal Home Loan Bank of Boston. Net interest income decreased $3.1 million, or 7.7%, to $37.6 million in 2003 from $40.7 million in 2002 as the relatively low market interest rate environment led to a high number of loan prepayments and refinancings, which had a negative impact on earnings, and due to the reinvestment of the proceeds from the December 2002 sale of sub-prime automobile loans in lower yielding loans. Average earning assets increased $63.9 million, or 6.5%, to $1.05 billion in 2003 from $987.9 million in 2002, while the yield on average earnings assets declined to 5.35% from 6.49% for the twelve-month period ended December 31, 2003. Partially offsetting the decline in the yield on average earning assets was a 75 basis point decrease in the rate paid on average interest-bearing liabilities from the same period last year. As a result, the Company's net interest margin for the twelve months ended December 31, 2003 and 2002 were 3.57% and 4.12%, respectively. Interest and dividend income declined $7.8 million, or 12.2%, to $56.3 million for 2003 from $64.1 million for 2002 as interest earned on the Bank's loan portfolio decreased $9.2 million, or 16.2%, from $56.9 million for 2002 due to the sale of $69.7 million of higher rate sub-prime automobile loans in December 2002 and the impact of lower market interest rates resulting from comparatively stronger loan refinance activity. The lower loan interest income also reflects the forfeiture of $65,000 in accrued interest and a write-down of $180,000 of dealer reserve related to the December 2003 sale of $9.9 million of sub-prime automobile loans. Interest and dividend income on the Company's investment portfolio, including FHLB and SBLI stock, equaled $8.5 million in 2003, an increase of $1.8 million, or 25.9%, from $6.8 million earned in 2002 as higher average balances were able to offset lower average yields earned. The decrease in interest and dividend income was partially offset by a decrease in interest expense which decreased $4.7 million, or 20.0%, to $18.7 million for the year ended December 31, 2003 from $23.4 million for the year ended December 31, 2002 due to lower rates paid, particularly on the Bank's deposit accounts. Interest expense on deposits totaled $13.9 million for the twelve months ended December 31, 2003, a decrease of $3.9 million, or 22.0%, from $17.8 million for the twelve months ended December 31, 2002. Average interest-bearing deposit balances increased $44.3 million to $723.5 million in 2003 from $679.2 million in 2002, but were more than offset by a lower average rate of 1.92% paid in 2003 compared to 2.62% in 2002. Interest expense on FHLB advances and other borrowings totaled $4.9 million this year, a decrease of $771,000, or 13.7%, from $5.7 million last year, due to lower rates paid, as new lower-cost borrowings replaced maturing higher cost advances and as a result of the Bank's prepayment of higher cost advances in December 2002. Provision for Loan Losses. The provision for loan losses decreased $4.7 million, or 76.4%, to $1.5 million in 2003 from $6.2 million in 2002. The sale of $9.9 million of sub-prime automobile loans in December 2003 resulted in the reversal of approximately $1.0 million of previously provided loan loss provision. In assessing the provision for the twelve months ended December 31, 2003, management took into consideration an $18.2 million decrease in sub-prime automobile loans from December 31, 2002. The Company also considered net loan charge-offs which decreased $4.1 million, to $2.8 million in 2003, from $6.9 million last year. Foremost in this decrease were gross consumer loan charge-offs which declined $4.9 million in 2003 and consisted mainly of sub-prime automobile loans. Additionally, management considered the level of delinquent loans, which declined from 1.40% of total loans at December 31, 2002, to 0.67% at December 31, 2003. At December 31, 2003, the allowance for loan losses was $9.0 million and represented 1.13% of total loans and 280.37% of nonperforming loans compared to $10.3 million, 1.43% and 275.54%, respectively, at December 31, 2002. The decline in the allowance is consistent with improvement in the Company's credit risk profile, particularly in consideration of the significant reduction in sub-prime automobile loans. -52- Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management as adequate to provide for estimated loan losses based on management's evaluation of the collectibility of the loan portfolio. Management assesses the adequacy of the allowance for loan losses based on known and inherent risks in the loan portfolio and upon management's continuing analysis of the factors underlying the quality of the loan portfolio. While management believes that, based on information currently available, Berkshire Bank's allowance for loan losses is sufficient to cover losses inherent in the Bank's loan portfolio at this time, no assurances can be given that Berkshire Bank's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Bank or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses. Management may increase its level of allowance for loan losses as a percentage of total loans and nonperforming loans if the level of commercial real estate, multi-family, commercial, construction and development or consumer loans as a percentage of its total loan portfolio increases. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Berkshire Bank's allowance for loan losses. These agencies may require Berkshire Bank to provide additions to the allowance based upon judgments different from management. Noninterest Income. Noninterest income totaled $13.7 million for the twelve months ended December 31, 2003, an increase of $292,000, or 2.2%, over $13.4 million for 2002. Noninterest income for 2003 includes a $3.1 million gain on the sale of securities, which was nearly offset by $2.4 million in charges relating to the sale of sub-prime automobile loans and the valuation adjustment in repossessed automobiles. EastPoint license maintenance and processing fees and license sales and other fees increased $271,000, or 3.9%, to $7.3 million for the twelve months ended December 31, 2003 as compared to $7.0 million for the same period last year. Noninterest income for 2002 includes several items related to the reorganizing of the Company's long-term business strategy that took place in the fourth quarter of 2002. A $14.8 million gain on the sale of equity securities was nearly offset by $13.4 million in charges relating to the sale of sub-prime automobile loans, the write-down of one security, the write-down of repossessed automobiles, and the prepayment penalty on FHLB advances. In addition, trust department fees increased $294,000, or 16.4%, in 2003 due to an increase of $42.0 million, or 17.0%, in trust assets under management. Noninterest Expenses. Noninterest (operating) expenses totaled $35.8 million for the year ended December 31, 2003 compared to $45.3 million for the year ended December 31, 2002. Salaries and benefits expense declined $7.3 million for the twelve months ended December 31, 2003 compared to the same period last year, as expenses for 2002 included $6.9 million of severance payments for three executive officers and one senior vice president, and the retirement of seven directors. Expenses for EastPoint, which are recorded in various noninterest expense categories, totaled $7.8 million for the twelve months ended December 31, 2003 as compared to $8.2 million for the same period last year, a decrease of $464,000, or 5.6%. This decrease from 2002 was attributable to a $500,000 increase in EastPoint's allowance for uncollectible debt in December 2002. EastPoint had no such increases in 2003. Expenses pertaining to foreclosed real estate and other loans decreased $2.2 million to $1.0 million for the year ended December 31, 2003 compared to $3.3 million for the year ended December 31, 2002, primarily due to a decrease in the expenses associated with the inventory and sale of repossessed automobiles. Income Taxes. Income taxes for the year ended December 31, 2003 were $5.1 million, an increase of $4.5 million from $531,000 for the year ended December 31, 2002, due to increased income before taxes as well as an increase in the effective tax rate to 36.1% for 2003 from 20.2% for 2002. The increase in the effective tax rate for 2003 was largely due to the disallowance by Massachusetts of the dividend received deduction from the Bank's REIT. The lower rate paid in 2002 was primarily due to a higher level of qualifying dividends received to pretax income in 2002 compared to 2003. Comparison of Operating Results for the Years Ended December 31, 2002 and 2001 Net Income. Net income totaled $2.1 million for the year ended December 31, 2002, a decrease of $6.8 million, or 80.1%, from $8.9 million for the year ended December 31, 2001. Net income for 2002 includes $8.3 million in charges in connection with the restructuring of the Company's senior management and the reorganizing of the Company's long-term business strategy while net income for 2001 includes a one-time gain of $2.2 million from the dissolution of the Bank's defined benefit pension plan. Basic and diluted earnings per share for the year ended December 31, 2002 were $0.39 and $0.36, respectively, compared to basic and diluted earnings of $1.42 and $1.35 for the year ended December 31, 2001. Net Interest Income. Net interest income decreased $1.5 million, or 3.6%, to $40.7 million in 2002 from $42.2 million in 2001 as the relatively low market interest rate environment led to a high number of loan prepayments and refinancings which had a negative impact on earnings. The average yield on interest bearing assets declined 131 basis points to 6.49% for the year ended December 31, 2002 compared to 7.80% for the year ended December 31, 2001 and more than offset a $16.2 million increase in average interest bearing assets to $987.9 million for 2002 compared to $971.7 million for 2001. Average interest bearing liabilities increased $31.3 million to $821.0 million in 2002 from $789.7 million in 2001, but were more than offset by a lower average rate paid of 2.85% in 2002 compared to 4.25% in 2001 reflecting the low market interest rate environment. As a result, the Company's net interest margin for the twelve months ended December 31, 2002 and 2001 were 4.12% and 4.35%, respectively. -53- Interest and dividend income fell $11.7 million, or 15.4%, to $64.1 million for 2002 from $75.8 million for 2001 as interest earned on the Bank's loan portfolio dropped $11.4 million, or 16.7%, from $68.3 million for 2001 as the average balance of the Bank's loans fell to $791.3 in 2002 from $815.1 for last year and the average rate earned equaled 7.19% in 2002 compared to 8.38% for 2001. The lower loan interest income also reflects the forfeiture of $492,000 in accrued interest related to the December sale of sub-prime automobile loans. Interest and dividend income on the Company's investment portfolio, including FHLB and SBLI stock, equaled $6.8 million in 2002, a decrease of $330,000, or 4.7%, from $7.1 million earned in 2001. Higher average balances were not enough to offset the decrease in average rate earned on the investment portfolio. The average balance of the investment portfolio increased $24.0 million to $168.7 million in 2002 while the average rate earned dropped 89 basis points to 4.01% in 2002. The decrease in interest and dividend income was mostly offset by a decrease in interest expense as interest expense dropped $10.1 million, or 30.2%, to $23.4 million for the year ended December 31, 2002 from $33.6 million for the year ended December 31, 2001 due to lower rates paid, particularly on the Bank's deposit accounts. Interest paid on deposits totaled $17.8 million for the twelve months ended December 31, 2002, a decrease of $8.9 million, or 33.4%, from $26.7 million for the twelve months ended December 31, 2001. Average interest bearing deposit balances increased $21.7 million to $679.2 million in 2002 from $657.5 million in 2001, but were more than offset by a lower average rate paid of 2.62% in 2002 compared to 4.06% in 2001. Interest paid on borrowings also decreased due to lower interest rates paid as interest on FHLB advances and securities sold under agreements to repurchase totaled $5.7 million this year, a decrease of $1.2 million, or 17.8%, from $6.9 million last year, even though borrowings only declined $2.2 million, or 1.6%, from last year. Provision for Loan Losses. The provision for loan losses decreased $1.0 million, or 13.9%, to $6.2 million in 2002 from $7.2 million in 2001 as a greater number of charge-offs in 2002 were more than offset by a higher number of recoveries and a decrease in the balance of sub-prime automobile loans. Total charge-offs were $10.0 million in 2002, an increase of $3.0 million, or 42.0%, from $7.1 million last year. This increase was due to the higher consumer loan charge-offs which rose $3.1 million in 2002. However, this increase was somewhat offset by the Bank's strong efforts in 2002 to recover charged-off loans. Recoveries totaled $3.1 million in 2002, an increase of $2.4 million over $705,000 in 2001. Net charge-offs were $6.9 million for the year ended December 31, 2002 compared to $6.4 million last year, an increase of $549,000, or 8.6%. The provision for 2002 also includes $1.5 million added in the fourth quarter of 2002 to cover losses inherent in the remaining sub-prime automobile loan portfolio. At December 31, 2002, the allowance for loan losses was $10.3 million and represented 1.43% of total loans and 275.54% of nonperforming loans compared to $11.0 million at December 31, 2001, which represented 1.37% of total loans and 408.36% of nonperforming loans. Noninterest Income. Noninterest income totaled $13.4 million for the twelve months ended December 31, 2002, an increase of $2.9 million, or 27.2%, over $10.6 million for 2001. Noninterest income for 2002 includes several items related to the reorganizing of the Company's long-term business strategy that took place in the fourth quarter of 2002. A $14.8 million gain on the sale of equity securities was nearly offset by $13.4 million in charges relating to the sale of sub-prime automobile loans, the write-down of one security, the write-down of repossessed automobiles, and the prepayment penalty on FHLB advances. Noninterest income also increased in 2002 due to the recording of a full year's worth of fees earned from the operations of EastPoint Technologies, LLC versus only six months last year, a difference of $3.5 million. In addition, customer service fees increased $423,000, or 23.4%, due to increased ATM and checking account fees. Noninterest income for 2001 includes a one-time gain of $2.2 million on the curtailment of the Bank's defined benefit pension plan. Noninterest Expense. Noninterest (operating) expenses increased $13.0 million, or 40.1%, to $45.3 million for the year ended December 31, 2002 from $32.3 million for the year ended December 31, 2001 as expenses for 2002 included charges related to the restructuring of the Company's senior management and the retirement of several directors. In the fourth quarter of 2002, the Company and the Bank restructured their management team, which resulted in $6.6 million of charges, consisting of the payment to or accrual of severance payments for three executive officers and one senior vice president under existing contractual obligations. Additionally, seven directors retired from the Boards of the Company and the Bank and, as a result, the Company incurred a $300,000 charge in the fourth quarter to fund retirement plan benefits. Expenses pertaining to foreclosed real estate and other loans increased $1.0 million to $3.3 million as the Bank wrote down the value of one commercial property by $500,000. As was the case with noninterest income, noninterest expenses also increased due to the recognition of a full year's worth of expenses of EastPoint compared to only six months last year. The increase attributable to EastPoint totaled $4.8 million. Income Taxes. Income taxes for the year ended December 31, 2002 were $531,000, a decrease of $3.8 million from $4.3 million for the year ended December 31, 2001. The effective tax rate for 2002 and 2001 were 20.2% and 32.8%, respectively. The lower rate paid in 2002 was due to the increase in the ratio of tax exempt income and qualifying dividends received to pretax income. -54- Average Balances, Interest and Average Yields/Cost The following table presents certain information for the years indicated regarding average daily balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the years indicated are derived by dividing income or expense by the average daily balances of assets or liabilities, respectively, for the years presented. The yields and rates include fees which are considered adjustments to yields.
For the Years Ended December 31, ---------------------------------------------------------------------------- 2003 2002 ------------------------------------ ------------------------------------ Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Interest-earning assets: Loans(1) $ 800,133 $ 47,683 5.96% $ 791,328 $ 56,910 7.19% Short-term investments 7,714 109 1.41 27,870 456 1.64 Investment securities 232,998 8,204 3.52 159,318 6,416 4.03 Federal Home Loan Bank stock 8,889 249 2.80 7,303 283 3.88 Savings Bank Life Insurance stock 2,043 63 3.08 2,043 63 3.08 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 1,051,777 56,308 5.35 987,862 64,128 6.49 Noninterest-earning assets 64,056 63,948 ---------- ---------- Total assets $1,115,833 $1,051,810 ========== ========== Interest-bearing liabilities: Deposits: Money market accounts $ 132,497 $ 1,648 1.24% $ 117,950 $ 1,988 1.69% NOW accounts 90,170 155 0.17 83,399 623 0.75 Savings accounts(2) 170,749 1,731 1.01 157,444 2,669 1.70 Certificates of deposit 330,116 10,328 3.13 320,415 12,497 3.90 ---------- ---------- ---------- ---------- Total interest-bearing deposits 723,532 13,862 1.92 679,208 17,777 2.62 Federal Home Loan Bank advances 167,621 4,878 2.91 140,406 5,628 4.01 Repurchase agreements 88 2 1.14 1,349 23 1.72 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 891,241 18,742 2.10 820,963 23,428 2.85 ---------- ---------- Noninterest-bearing demand deposits 91,627 82,751 Other noninterest-bearing liabilities 9,817 11,935 ---------- ---------- Total liabilities 992,685 915,649 Equity 123,148 136,161 ---------- ---------- Total liabilities and equity $1,115,833 $1,051,810 ========== ========== Net interest-earning assets $ 160,536 $ 166,899 ========== ========== Net interest income $ 37,566 $ 40,700 ========== ========== Interest rate spread 3.25% 3.64% Interest margin (net interest income as a percentage of total average interest-earning assets) 3.57% 4.12% Total average interest-earning assets to total average interest-bearing liabilities 118.01% 120.33% For the Years Ended December 31, ------------------------------------ 2001 ------------------------------------ Average Average Balance Interest Yield/Rate ---------- ---------- ---------- (Dollars in thousands) Interest-earning assets: Loans(1) $ 815,078 $ 68,291 8.38% Short-term investments 11,883 413 3.48 Investment securities 136,944 6,725 4.91 Federal Home Loan Bank stock 5,707 304 5.33 Savings Bank Life Insurance stock 2,043 63 3.08 ---------- ---------- ---------- Total interest-earning assets 971,655 75,796 7.80 Noninterest-earning assets 63,207 ---------- Total assets $1,034,862 ========== Interest-bearing liabilities: Deposits: Money market accounts $ 112,434 $ 3,712 3.30% NOW accounts 77,276 806 1.04 Savings accounts(2) 142,150 4,087 2.88 Certificates of deposit 325,639 18,080 5.55 ---------- ---------- Total interest-bearing deposits 657,499 26,685 4.06 Federal Home Loan Bank advances 127,990 6,613 5.17 Repurchase agreements 4,215 262 6.22 ---------- ---------- Total interest-bearing liabilities 789,704 33,560 4.25 ---------- Noninterest-bearing demand deposits 76,912 Other noninterest-bearing liabilities 12,968 ---------- Total liabilities 879,584 Equity 155,278 ---------- Total liabilities and equity $1,034,862 ========== Net interest-earning assets $ 181,951 ========== Net interest income $ 42,236 ========== Interest rate spread 3.55% Interest margin (net interest income as a percentage of total average interest-earning assets) 4.35% Total average interest-earning assets to total average interest-bearing liabilities 123.04%
- ---------------- (1) Average balances include nonaccrual loans. (2) Includes mortgagors' escrow accounts. -55- Rate/Volume Analysis The following table presents the effects of changing rates and volumes on the interest income and interest expense of Berkshire Bank. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume, which cannot be segregated, have been allocated proportionately based on the absolute value of the change due to rate and the change due to volume.
Year Ended December 31, 2003 Year Ended December 31, 2002 Compared to Compared to Year Ended December 31, 2002 Year Ended December 31, 2001 ----------------------------------- ----------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to ----------------------------------- ----------------------------------- Rate Volume Net Rate Volume Net --------- --------- --------- --------- --------- --------- (In thousands) Interest-earning assets: Loans $ (12,205) $ 2,978 $ (9,227) $ (9,440) $ (1,941) $ (11,381) Short-term investments (55) (292) (347) (29) 72 43 Investment securities (45) 1,799 1,754 (3,668) 3,338 (330) --------- --------- --------- --------- --------- --------- Total interest-earning assets (12,305) 4,485 (7,820) (13,137) 1,469 (11,668) --------- --------- --------- --------- --------- --------- Interest-bearing liabilities: Deposits: Money market accounts (642) 302 (340) (1,915) 191 (1,724) NOW accounts (523) 55 (468) (254) 71 (183) Savings accounts (1,188) 250 (938) (1,922) 504 (1,418) Certificates of deposit (2,561) 392 (2,169) (5,297) (286) (5,583) --------- --------- --------- --------- --------- --------- Total deposits (4,914) 999 (3,915) (9,388) 480 (8,908) Federal Home Loan Bank advances (2,564) 1,814 (750) 751 (1,736) (985) Repurchase agreements (6) (15) (21) (123) (116) (239) --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities (7,484) 2,798 (4,686) (8,760) (1,372) (10,132) --------- --------- --------- --------- --------- --------- Increase (decrease) in net interest income $ (4,821) $ 1,687 $ (3,134) $ (4,377) $ 2,841 $ (1,536) ========= ========= ========= ========= ========= =========
Liquidity and Capital Resources Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank further defines liquidity as the ability to respond to the needs of depositors and borrowers, as well as maintaining the flexibility to take advantage of investment opportunities. The Bank's primary sources of funds consist of deposit inflows, loan repayments, maturities, loan sales, paydowns of mortgage-backed securities, sales/calls of investments and borrowings from the Federal Home Loan Bank of Boston. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank's primary investing activities are: (1) originating residential one- to four-family mortgage loans, commercial business and real estate loans, multi-family loans, home equity lines of credit and consumer loans, and (2) investing in mortgage- and asset-backed securities, U.S. Government and agency obligations, and debt securities. These activities are funded primarily by principal and interest payments on loans, proceeds from sales of loans and investment securities, maturities of securities, deposits and Federal Home Loan Bank of Boston advances. During the years ended December 31, 2003 and 2002, Berkshire Bank's loan originations totaled $321.1 million and $285.9 million, respectively. At December 31, 2003 and 2002, the Bank's investments in investment securities totaled $344.3 million and $217.4 million, respectively. The Bank experienced a net increase in total deposits of $47.9 million and $39.6 million for the years ended December 31, 2003 and 2002, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Bank and its local competitors and other factors. The Bank closely monitors its liquidity position on a daily basis. If the Bank should require funds beyond its ability to generate them internally, additional sources of funds are available through advances or a line of credit with the Federal Home Loan Bank and through repurchase agreement lines of credit with the Depositors Insurance Fund and a nationally recognized broker-dealer. -56- Outstanding commitments for all loans and unadvanced construction loans and lines of credit totaled $139.6 million at December 31, 2003. Management of Berkshire Bank anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit that are scheduled to mature in one year or less from December 31, 2003 totaled $219.6 million. The Bank relies primarily on competitive rates, customer service and long-standing relationships with customers to retain deposits. Occasionally, the Bank will also offer special competitive promotions to its customers to increase retention and promote deposit growth. Based upon the Bank's historical experience with deposit retention, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Bank. The Bank must satisfy various regulatory capital requirements administered by the federal and state banking agencies including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2003, Berkshire Bank exceeded all of its regulatory capital requirements with Tier 1 capital to average assets of $93.8 million, or 7.87% of average assets, which is above the required level of $47.7 million, or 4.0%, and total capital to risk-weighted assets of $106.6 million, or 12.57% of risk-weighted assets, which is above the required level of $67.8 million, or 8.0%. The Bank meets the conditions to be considered "well capitalized" under regulatory guidelines. The primary source of funding for Berkshire Hills is dividend payments from Berkshire Bank, and, to a lesser extent, earnings on deposits held by Berkshire Hills. Dividend payments by Berkshire Bank have primarily been used to fund stock repurchase programs and pay dividends to Berkshire Hills' shareholders. The Bank's ability to pay dividends and other capital distributions to Berkshire Hills is generally limited by the Massachusetts banking regulations and regulations of the Federal Deposit Insurance Corporation. See "Regulation and Supervision - Massachusetts Regulation." Additionally, the Massachusetts Commissioner of Banks and Federal Deposit Insurance Corporation may prohibit the payment of dividends which are otherwise permissible by regulation for safety and soundness reasons. Any dividend by the Bank beyond its current year's earnings and prior two years' retained net income would require the approval of the Massachusetts Commissioner of Banks, and notification to or approval of the Federal Deposit Insurance Corporation and the Office of Thrift Supervision. To the extent the Bank were to apply for a dividend distribution to Berkshire Hills in excess of the regulatory permitted dividend amount, no assurances can be made such application would be approved by the regulatory authorities. Berkshire Hills is currently engaged in its sixth stock repurchase program. To date, all purchases have been open market purchases. In the current program, 112,700 shares out of an announced 300,000 have been purchased at a cost of $3.1 million through December 31, 2003. The Company has sufficient funds available to complete the repurchase program without having a material adverse effect on liquidity. Contractual Obligations. The following table sets forth, at December 31, 2003, the dollar amount of the Bank's contractual obligations and their subsequent time period.
Commitments by Period ----------------------------------------------------------------- Less than One One to Three Three to Five After Five Total Year Years Years Years -------- ------------- ------------ ------------- ---------- (In thousands) Contractual Obligations Long-term debt obligations (1) $251,465 $125,000 $ 43,297 $ 39,397 $ 43,771 Operating lease obligations (2) 4,790 474 781 705 2,830 Purchase obligations (3) 1,390 1,390 -- -- -- -------- -------- -------- -------- -------- Total Contractual Obligations $257,645 $126,864 $ 44,078 $ 40,102 $ 46,601 ======== ======== ======== ======== ========
- --------------------- (1) Consists of borrowings from the Federal Home Loan Bank. The maturities extend through 2022 and the rates vary by borrowing. (2) Consists of leases of four Bank offices through 2030. (3) Consists of obligations with multiple vendors to purchase a broad range of services and contractual estimates of capital renovations to Bank buildings. -57- Off-Balance Sheet Arrangements For a discussion of the Company's off-balance sheet arrangements, see Footnote 13, "Off-Balance Sheet Activities" in the Notes to the Consolidated Financial Statements. Impact of Inflation and Changing Prices The consolidated financial statements and related 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. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. Impact of New Accounting Standards Accounting for Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS No. 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS No. 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS No. 142. As required by SFAS No. 142, the Company completed the annual impairment test on goodwill assets and has concluded that the amount of recorded goodwill was not impaired as of December 31, 2003. On October 31, 2002, the Company adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions." This Statement amends (except for transactions between two or more mutual enterprises) previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of SFAS No. 141, "Business Combinations" and SFAS No. 142 to branch acquisitions if such transactions meet the definition of a business combination. This Statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions that are required for other long-lived assets that are held and used. SFAS No. 141 requires that the Company evaluate its intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria for recognition apart from goodwill. No reclassifications or adjustments were made as a result of adopting this statement. Consolidation of Variable Interest Entities. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46) which establishes guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity. FIN 46 requires a variable interest entity to be consolidated by a company if that company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both. Transferors to qualified special-purpose entities ("QSPEs") and certain other interests in a QSPE are not subject to the requirements of FIN 46. On December 17, 2003, the FASB deferred the effective date of FIN 46 to no later than the end of the first reporting period that ends after March 15, 2004, however, for special-purpose entities the Company would be required to apply FIN 46 as of December 31, 2003. The interpretation had no effect on the Company's consolidated financial statements. -58- 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 principal objectives of Berkshire Bank's interest rate risk management are to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given its business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with its established policies. Berkshire Bank maintains an Asset/Liability Committee that is responsible for reviewing its asset/liability policies and interest rate risk position, which meets quarterly and reports trends and interest rate risk position to the Board of Directors on a quarterly basis. The Asset/Liability Committee consists of six senior officers of the Bank and the Senior Financial Analyst. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of Berkshire Bank. In recent years, Berkshire Bank has managed interest rate risk by: o emphasizing the origination and purchase of adjustable-rate loans and, from time to time, selling a portion of its longer term fixed-rate loans as market interest rate conditions dictate; o securitizing a portion of the Bank's long-term, fixed rate mortgages; o originating shorter-term commercial and consumer loans; o investing in high quality liquid investment securities that provide adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market interest rates, the overall maturity and duration of which is monitored in relation to the repricing of its loan and funding portfolios; o promoting lower cost liability accounts such as core deposits; and o using Federal Home Loan Bank advances to better structure maturities of its interest rate sensitive liabilities. Berkshire Bank's market risk also includes equity price risk. Berkshire Bank's marketable equity securities portfolio had gross unrealized gains of $8.4 million at December 31, 2003 and no gross unrealized losses which are included, net of taxes, in accumulated other comprehensive income, a separate component of Berkshire Bank's shareholders' equity. If equity securities prices decline due to unfavorable market conditions or other factors, Berkshire Bank's and Berkshire Hills' capital would decrease. Management decided to decrease the amount of equity securities it holds by selling a portion of its existing portfolio each quarter during 2003. Quantitative Aspects of Market Risk. Berkshire Hills uses a simulation model to measure the potential change in net interest income, incorporating various assumptions regarding the shape of the yield curve, the pricing characteristics of loans, deposits and borrowings, prepayments on loans and securities and changes in the balance sheet mix. The model assumes the yield curve is derived from the interpolated Treasury yield curve and that an instantaneous increase or decrease of market interest rates would cause a simultaneous parallel shift along the entire yield curve. Loans, deposits and borrowings are expected to reprice at the new market rate on the contractual review or maturity date. The Company closely monitors its loan prepayment trends and uses prepayment guidelines set forth by Freddie Mac and Fannie Mae and other market sources, as well as Company generated data where applicable. All prepayments are assumed to roll over into new loans originated in the same loan category at the new market rate. Berkshire Hills further assumes that its securities' cash flows, especially its mortgage-backed securities cash flows, are such that they will generally follow industry standards and that prepayments will be reinvested in the same category at the prevailing market rate. Finally, the model assumes that its balance sheet mix will remain relatively unchanged throughout the next calendar year. -59- The tables below set forth, as of December 31, 2003 and 2002, estimated net interest income and the estimated changes in Berkshire Hills' net interest income for the next twelve-month period which may result given instantaneous increases or decreases in market interest rates of 100 and 200 basis points. Increase/(Decrease) in At December 31, 2003 Market Interest Rates in -------------------------------------- Basis Points (Rate Shock) Amount $ Change % Change - ------------------------- -------- -------- --------- (Dollars in thousands) 200 $ 37,144 $ (1,757) (4.52%) 100 38,162 (739) (1.90) Static 38,901 -- -- (100) 39,478 577 1.48 (200) 37,116 (1,785) (4.59) Increase/(Decrease) in Market At December 31, 2002 Interest Rates in Basis Points -------------------------------------- (Rate Shock) Amount $ Change % Change - ------------------------------ -------- -------- --------- (Dollars in thousands) 200 $ 34,583 $ (1,027) (2.88%) 100 34,741 (869) (2.44) Static 35,610 -- -- (100) 35,162 (448) (1.26) (200) 32,908 (2,702) (7.59) In the event of a sudden and sustained decrease in prevailing market interest rates of 100 and 200 basis points, the December 31, 2003 table indicates that net interest income would be expected to increase $577,000 and decrease $1.8 million, respectively. This result is due to the fact that the Company is slightly liability sensitive and in a 100 basis point decrease many non-maturity deposit account rates would decrease significantly and reach Company determined floors. In a negative 200 basis point scenario, many of these deposit accounts would have reached their floors and the Company would become asset sensitive. These results compare to the December 31, 2002 table, which indicates that in the event of a sudden and sustained decrease of 100 and 200 basis points in prevailing market interest rates, net interest income would be expected to decrease by $448,000 and $2.7 million, respectively. The primary reason for the differences between the models for the two years is that many deposit accounts have lower Company determined floors now than they did one year ago. In the event of a sudden and sustained increase in prevailing market interest rates of 100 and 200 basis points, the December 31, 2003 table indicates that net interest income would be expected to decrease $739,000 and $1.8 million, respectively, compared to the December 31, 2002 table, which indicates that net interest income would decrease by $869,000 and $1.0 million, respectively. The primary reason for the difference in the up 200 basis point scenario was that at December 31, 2002, the Company had a larger amount of securities, including overnight federal funds, repricing or maturing in the next year than it had on December 31, 2003. Partially offsetting this was Management's expectation that the rates paid on the Company's interest-bearing non-maturity deposits were less sensitive to changes in prevailing market interest rates at year-end 2003 than at year-end 2002. After examining the historic rates paid on interest-bearing non-maturity deposits compared to the then prevailing market interest rates, Management determined during 2003 that the rates paid or the cost of these deposits would not have to increase as much in a rising interest rate environment than what was anticipated at year-end 2002. Computation of prospective effects of hypothetical interest rate changes are based on a number of assumptions including the level of market interest rates, the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates, the expected prepayment rates on loans and investments, the degree to which early withdrawals occur on certificates of deposit and other deposit flows. As a result, these computations should not be relied upon as indicative of actual results. Further, the computations do not reflect any actions that management may undertake in response to changes in interest rates. -60- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT 62 CONSOLIDATED BALANCE SHEETS AS OF 63 DECEMBER 31, 2003 AND 2002 CONSOLIDATED STATEMENTS OF INCOME FOR THE 64 YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 CONSOLIDATED STATEMENTS OF CHANGES IN 65 STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 66 THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 68 -61- WOLF Certified Public Accountants & COMPANY, P.C. and Business Consultants - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT 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, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ Wolf & Company, P.C. Boston, Massachusetts January 23, 2004 99 High Street o Boston, Massachusetts o 02110-2320 o Phone 617-439-9700 o Fax 617-542-0400 1500 Main Street o Suite 1908 o Springfield, Massachusetts o 01115 o Phone 413-747-9042 o Fax 413-739-5149 www.wolfandco.com -62- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002
2003 2002 ----------- ----------- (In thousands) Assets Cash and due from banks $ 15,583 $ 17,258 Short-term investments 1,859 43,397 ----------- ----------- Total cash and cash equivalents 17,442 60,655 Securities available for sale, at fair value 307,425 173,169 Securities held to maturity (fair value approximates $36,868,000 and $44,348,000 at December 31, 2003 and 2002, respectively) 36,903 44,267 Federal Home Loan Bank stock, at cost 12,923 7,440 Loans, net of allowance for loan losses of $8,969,000 in 2003 and $10,308,000 in 2002 783,258 712,714 Foreclosed real estate, net -- 1,500 Premises and equipment, net 12,626 13,267 Accrued interest receivable 5,080 5,125 Savings Bank Life Insurance stock 2,043 2,043 Goodwill and other intangibles 10,233 10,436 Net deferred tax asset 1,725 2,016 Bank owned life insurance 7,721 -- Due from broker 7,089 -- Other assets 14,080 13,315 ----------- ----------- $ 1,218,548 $ 1,045,947 =========== =========== Liabilities and Stockholders' Equity Deposits $ 830,244 $ 782,360 Federal Home Loan Bank advances 251,465 133,002 Loans sold with recourse 473 1,201 Securities sold under agreements to repurchase -- 700 Due to broker 5,646 -- Accrued expenses and other liabilities 5,293 5,677 ----------- ----------- Total liabilities 1,093,121 922,940 ----------- ----------- Minority Interests 2,252 2,438 ----------- ----------- Commitments and contingencies (Notes 6, 13 and 14) Stockholders' equity: Preferred stock ($.01 par value; 1,000,000 shares authorized; no shares issued and outstanding) -- -- Common stock ($.01 par value; 26,000,000 shares authorized; and 7,673,761 shares issued at December 31, 2003 and 2002, respectively, shares outstanding 5,903,082 and 6,117,134 at December 31, 2003 and 2002, respectively) 77 77 Additional paid-in capital 75,764 74,632 Unearned compensation (8,507) (9,535) Retained earnings 86,276 80,011 Accumulated other comprehensive income 5,559 5,542 Treasury stock, at cost (1,770,679 and 1,556,627 shares at December 31, 2003 and 2002, respectively) (35,994) (30,158) ----------- ----------- Total stockholders' equity 123,175 120,569 ----------- ----------- Total liabilities and stockholders' equity $ 1,218,548 $ 1,045,947 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -63- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001 -------- -------- -------- (In thousands, except per share data) Interest and dividend income: Loans, including fees $ 47,683 $ 56,910 $ 68,291 Debt securities: Taxable 7,298 5,234 5,233 Tax-exempt 262 173 375 Dividends 956 1,355 1,484 Short-term and other investments 109 456 413 -------- -------- -------- Total interest and dividend income 56,308 64,128 75,796 -------- -------- -------- Interest expense: Deposits 13,862 17,777 26,685 Federal Home Loan Bank advances 4,878 5,628 6,613 Securities sold under agreements to repurchase 2 23 262 -------- -------- -------- Total interest expense 18,742 23,428 33,560 -------- -------- -------- Net interest income 37,566 40,700 42,236 Provision for loan losses 1,460 6,180 7,175 -------- -------- -------- Net interest income, after provision for loan losses 36,106 34,520 35,061 -------- -------- -------- Other income: Customer service fees 2,300 2,140 1,810 Trust department fees 2,090 1,796 1,782 Loan servicing fees 386 533 595 Gain on sales and dispositions of securities, net 3,077 15,143 268 Loss on impairment of securities -- (673) -- Loss on sale of loans, net (1,854) (10,702) -- Loss on impairment of other assets (206) (1,262) -- Penalty on prepayment of FHLB borrowings -- (1,067) -- License maintenance and processing fees 4,443 4,379 1,322 License sales and other fees 2,819 2,612 2,143 Gain on curtailment of defined benefit pension plan, net -- -- 2,173 Miscellaneous 655 519 455 -------- -------- -------- Total other income 13,710 13,418 10,548 -------- -------- -------- Operating expenses: Salaries and employee benefits 21,219 28,488 17,590 Occupancy and equipment 5,045 5,288 4,689 Marketing and advertising 678 648 629 Data processing 989 758 1,065 Professional services 1,379 1,384 1,314 Office supplies 695 769 899 Foreclosed real estate and repossessed assets, net 1,047 3,250 2,238 Amortization of goodwill and other intangibles 203 203 827 Minority interests (186) (685) (119) Other general and administrative expenses 4,717 5,207 3,217 -------- -------- -------- Total operating expenses 35,786 45,310 32,349 -------- -------- -------- Income before income taxes 14,030 2,628 13,260 Provision for income taxes 5,065 531 4,349 -------- -------- -------- Net income $ 8,965 $ 2,097 $ 8,911 ======== ======== ======== Earnings per share: Basic $ 1.70 $ 0.39 $ 1.42 Diluted $ 1.57 $ 0.36 $ 1.35
The accompanying notes are an integral part of these consolidated financial statements. -64- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2003, 2002 and 2001
Accumulated Additional Other Common Paid-in Unearned Retained Comprehensive Treasury Stock Capital Compensation Earnings Income Stock Total --------- ----------- ------------ --------- ------------- --------- --------- (In thousands) Balance at December 31, 2000 $ 77 $ 74,054 $ (7,187) $ 74,555 $ 19,824 $ -- $ 161,323 --------- Comprehensive income: Net income -- -- -- 8,911 -- -- 8,911 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- (988) -- (988) --------- Total comprehensive income 7,923 --------- Cash dividends paid ($0.43 per share) -- -- -- (2,808) -- -- (2,808) Treasury stock purchased -- -- -- -- -- (23,292) (23,292) Purchase of common stock - stock awards -- -- (5,453) -- -- -- (5,453) Change in unearned compensation -- 234 1,539 -- -- -- 1,773 Minority interest adjustment -- (142) -- -- -- -- (142) --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 2001 77 74,146 (11,101) 80,658 18,836 (23,292) 139,324 --------- Comprehensive income (loss): Net income -- -- -- 2,097 -- -- 2,097 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- (13,294) -- (13,294) --------- Total comprehensive loss (11,197) --------- Cash dividends paid ($0.48 per share) -- -- -- (2,737) -- -- (2,737) Treasury stock purchased -- -- -- -- -- (6,989) (6,989) Reissuance of treasury stock under stock option plan (6,907 shares) -- -- -- (7) -- 123 116 Change in unearned compensation -- 486 1,566 -- -- -- 2,052 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 2002 77 74,632 (9,535) 80,011 5,542 (30,158) 120,569 --------- Comprehensive income (loss): Net income -- -- -- 8,965 -- -- 8,965 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects -- -- -- -- 17 -- 17 --------- Total comprehensive income 8,982 --------- Cash dividends paid ($0.48 per share) -- -- -- (2,628) -- -- (2,628) Treasury stock purchased -- -- -- -- -- (7,099) (7,099) Reissuance of treasury stock under stock option plan (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 ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -65- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001 --------- --------- --------- (In thousands) Cash flows from operating activities: Net income $ 8,965 $ 2,097 $ 8,911 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,460 6,180 7,175 Net amortizaton of securities 1,795 1,103 270 Depreciation and amortization expense 2,107 2,414 2,081 Amortization of goodwill and other intangibles 203 203 827 Management awards plan expense 1,066 1,165 1,000 Employee stock ownership plan expense 1,094 887 773 Increase in cash surrender value of Bank Owned Life Insurance (221) -- -- Gain on curtailment of defined benefit pension plan, net -- -- 2,173 Gain on sales and dispositions of securities, net (3,077) (15,143) (268) Loss on impairment of securities -- 673 -- Loss on sale/writedown of foreclosed real estate, net 44 500 -- Loss on impairment of other assets 206 1,262 -- Loss on sale of equipment -- -- 35 Loss on sale of loans, net 1,854 10,702 -- Deferred income tax provision (benefit) 1,088 (262) 608 Net change in loans held for sale -- 2,540 (2,540) Minority Interest (186) (685) (119) Changes in operating assets and liabilities: Accrued interest receivable and other assets (926) 5,157 1,899 Accrued expenses and other liabilities (384) 747 (2,929) --------- --------- --------- Net cash provided by operating activities 15,088 19,540 19,896 --------- --------- --------- Cash flows from investing activities: Activity in available-for-sale securities: Sales 20,349 28,255 3,965 Maturities 130,091 68,232 26,577 Principal payments 33,182 30,096 19,685 Purchases (302,014) (201,258) (56,890) Activity in held-to-maturity securities: Maturities 17,195 16,374 12,982 Principal payments 38,876 29,132 22,187 Purchases (49,242) (56,812) (36,175) Purchase of FHLB stock (5,483) (413) (1,376) Purchase of Bank Owned Life Insurance (7,500) -- -- Loan originations and purchases, net of principal payments (153,674) 8,616 (13,176)
(continued) The accompanying notes are an integral part of these consolidated financial statements. -66- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED) Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001 --------- --------- --------- (In thousands) Proceeds from sales of loans from portfolio 63,546 66,400 -- Additions to premises and equipment (1,466) (1,468) (2,344) Proceeds from sales of foreclosed real estate 1,456 -- 76 Proceeds from sale of equipment -- -- 20 Payment for purchase of EastPoint Technologies, LLC -- -- (4,700) --------- --------- --------- Net cash used in investing activities (214,684) (30,078) (29,169) --------- --------- --------- Cash flows from financing activities: Net increase in deposits 47,884 39,631 14,638 Net decrease in securities sold under agreements to repurchase (700) (1,190) (140) Proceeds from Federal Home Loan Bank advances 252,000 120,172 152,000 Repayments of Federal Home Loan Bank advances (133,537) (121,134) (119,421) Increase (decrease) in loans sold with recourse (728) 1,201 (7,740) Treasury stock purchased (7,099) (6,989) (23,292) Proceeds from reissuance of treasury stock 1,191 116 -- Purchase of common stock in connection with restricted stock awards under stock based incentive plan -- -- (5,453) Cash dividends paid (2,628) (2,737) (2,808) --------- --------- --------- Net cash provided by financing activities 156,383 29,070 7,784 --------- --------- --------- Net change in cash and cash equivalents (43,213) 18,532 (1,489) Cash and cash equivalents at beginning of year 60,655 42,123 43,612 --------- --------- --------- Cash and cash equivalents at end of year $ 17,442 $ 60,655 $ 42,123 ========= ========= ========= Supplemental cash flow information: Interest paid on deposits $ 13,887 $ 17,835 $ 26,746 Interest paid on borrowed funds 4,696 6,856 6,719 Income taxes paid, net 4,175 1,618 2,882 Transfers from loans to foreclosed real estate -- 2,000 26 Securitization of and transfer of loans to securities 16,270 -- -- Due to broker 5,646 -- -- Due from broker 7,089 -- --
The accompanying notes are an integral part of these consolidated financial statements. -67- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003, 2002 and 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- Basis of presentation and consolidation Berkshire Hills Bancorp, Inc. (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, Berkshire Hills Funding Corporation and Berkshire Hills Technology, Inc., which was formed during 2001 for the purpose of acquiring a controlling interest in EastPoint Technologies, LLC. The Bank's wholly-owned subsidiaries are North Street Securities Corporation, Gold Leaf Insurance Company, Gold Leaf Investment Services, Gold Leaf Securities Corporation and Woodland Securities Corporation, Inc. North Street Securities Corporation, Gold Leaf Securities Corporation, and Woodland Securities Corporation, Inc. hold title to certain investment securities. Gold Leaf Insurance Company and Gold Leaf Investment Services were formed in 2000 and offer insurance and investment products to customers. Berkshire Hills Funding Corporation was established and funded to loan funds to the Bank's Employee Stock Ownership Plan. During 2001, the Bank established a majority-owned subsidiary, Gold Leaf Capital Corporation, which held real estate mortgages prior to being dissolved during 2003. All significant intercompany balances and transactions have been eliminated in consolidation. On June 29, 2001, the Company, through its wholly-owned subsidiary, Berkshire Hills Technology, Inc., purchased a controlling interest in EastPoint Technologies, LLC ("EastPoint"), which on the same date acquired all of the domestic operations and service contracts of M&I EastPoint Technology, Inc., Bedford, New Hampshire, a software and data processing provider for financial institutions, as well as substantially all of the operations and service contracts of Preferred Financial Systems, Inc., Arden Hills, Minnesota, a data processing service provider, both of which utilized the EastPoint Technology, Inc. software. The Company's equity interest in EastPoint at December 31, 2003 and 2002 is 60.3% and represents a total investment of $4.7 million. During 2001 the Company's ownership percentage decreased from 93.6% to 60.3% as other investor financial institutions obtained regulatory approval to invest in EastPoint Technologies, LLC. The change in ownership percentage is shown as an adjustment to additional paid-in capital. This acquisition was accounted for under the purchase method of accounting. Business The Company provides a variety of financial services to individuals, municipalities and businesses through its offices in Berkshire County. Its primary deposit products are savings, checking accounts and term certificate accounts and its primary lending products are residential and commercial mortgage loans, commercial loans and automobile loans. In addition, trust services and insurance products are offered to individuals and small businesses in the Berkshire County area. Use of estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, 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 sheet 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 taxes. Reclassifications Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation. Cash and cash equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks and short-term investments, all of which mature within ninety days. -68- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Short-term investments Short-term investments mature within ninety days and are carried at cost, which approximates fair value. 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. Federal Home Loan Bank of Boston ("FHLB") stock is reflected at cost. Savings Bank Life Insurance Company of Massachusetts ("SBLI") stock was recorded at fair value at acquisition as determined by an appraisal performed by independent investment consultants retained by SBLI. Loans The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in Berkshire County. 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, 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. -69- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for loan losses The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the composition and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of 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. Impaired loans are generally maintained on a non-accrual basis. 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. Loans held for sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. 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. 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. -70- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Goodwill and other intangibles Goodwill and other intangibles includes goodwill associated with the acquisition of EastPoint which is evaluated for impairment on an annual basis. Intangible assets refer to customer relationships acquired in association with the EastPoint Technologies purchase, which are being amortized on a straight-line basis over three years, as well as the Company's purchase of two branches from another financial institution in 1991 and three branches in 1998. The branch acquisition costs are evaluated for impairment on an annual basis. Securities sold under agreements to repurchase The Company enters into repurchase agreements with commercial customers. The funds are invested in an overnight sweep account and deposited back in customers' accounts on a daily basis. These agreements are secured by pledged securities in the Bank's investment portfolio. Transfers of financial assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Income taxes 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. 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. Stock options issued under the Company's stock option plans have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. -71- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Stock compensation plans (concluded) At December 31, 2003, the Company maintains stock-based compensation plans, which are described more fully in Note 16. The Company has elected to continue with 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.
Years Ended December 31, ---------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (In thousands, except per share data) Net income, as reported $ 8,965 $ 2,097 $ 8,911 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (398) (324) (355) ---------- ---------- ---------- Pro forma net income $ 8,567 $ 1,773 $ 8,556 ========== ========== ========== Earnings per share: Basic-as reported $ 1.70 $ 0.39 $ 1.42 ========== ========== ========== Basic-pro forma $ 1.63 $ 0.33 $ 1.37 ========== ========== ========== Diluted-as reported $ 1.57 $ 0.36 $ 1.35 ========== ========== ========== Diluted-pro forma $ 1.50 $ 0.30 $ 1.30 ========== ========== ==========
-72- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings per common share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company related to outstanding stock awards and stock options, and are determined using the treasury stock method. Earnings per common share have been computed based upon the following:
2003 2002 2001 ---------- ---------- ---------- (In thousands, except per share data) Net income applicable to common stock $ 8,965 $ 2,097 $ 8,911 ========== ========== ========== Average number of common shares outstanding 5,266 5,435 6,264 Effect of dilutive potential common shares 437 432 340 ---------- ---------- ---------- Average number of common shares outstanding used to calculate diluted earnings per common share 5,703 5,867 6,604 ========== ========== ==========
Employee stock ownership plan ("ESOP") Compensation expense is recognized as ESOP shares are committed to be released. Allocated and committed to be released ESOP shares are considered outstanding for earnings per share calculations. Other ESOP shares are excluded from earnings per share calculations. Dividends declared on allocated ESOP shares are charged to retained earnings. Dividends declared on unallocated ESOP shares are used to satisfy debt service. The value of unearned shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of stockholders' equity. 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. Stock award shares are considered outstanding for basic earnings per share in the period that they vest. Stock award shares not vested are considered in the calculation of diluted earnings per share. Advertising costs Advertising costs are charged to earnings when incurred. 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. Comprehensive income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income. -73- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Comprehensive income (concluded) The components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001 ---------- ---------- ---------- (In thousands) Change in net unrealized holding gains/losses $ 2,297 $ (5,151) $ (1,237) on available-for-sale securities Reclassification adjustment for gains (3,077) (15,143) (268) realized in income Reclassification adjustment for impairment losses recognized in income -- 673 -- ---------- ---------- ---------- Net change in unrealized gains/losses (780) (19,621) (1,505) Tax effects 797 6,327 517 ---------- ---------- ---------- Net-of-tax change $ 17 $ (13,294) $ (988) ========== ========== ==========
Accounting changes The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS No. 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS No. 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS No. 142. On October 31, 2002, the Company adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions." This Statement amends (except for transactions between two or more mutual enterprises) previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of SFAS No. 141, "Business Combinations" and SFAS No. 142 to branch acquisitions if such transactions meet the definition of a business combination. This Statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions that are required for other long-lived assets that are held and used. SFAS No. 141 requires that the Company evaluate its intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria for recognition apart from goodwill. No reclassifications or adjustments were made as a result of adopting this statement. As required by SFAS No. 142 the Company completed the annual impairment test on goodwill assets and has concluded that the amount of recorded goodwill was not impaired as of December 31, 2003. Recent accounting pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which establishes guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity. FIN 46 requires a variable interest entity to be consolidated by a company if that company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both. Transferors to qualified special-purpose entities ("QSPEs") and certain other interests in a QSPE are not subject to the requirements of FIN 46. On December 17, 2003, the FASB deferred the effective date of FIN 46 to no later than the end of the first reporting period that ends after March 15, 2004, however, for special-purpose entities the Company would be required to apply FIN 46 as of December 31, 2003. The interpretation had no effect on the Company's consolidated financial statements. -74- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANK - -------------------------------------------------------------------------------- The Bank is required to maintain cash reserve balances with the Federal Reserve Bank based upon a percentage of certain deposits. At December 31, 2003 and 2002, cash and due from banks included $1,129,000 and $972,000, respectively, to satisfy such reserve requirements. 3. SHORT-TERM INVESTMENTS - -------------------------------------------------------------------------------- Short-term investments consist of the following at December 31, 2003 and 2002: 2003 2002 ------- ------- (In thousands) Federal funds sold $ -- $17,000 FHLB overnight deposits 1,859 1,397 BIF Liquidity Fund -- 25,000 ------- ------- $ 1,859 $43,397 ======= ======= -75- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. SECURITIES - -------------------------------------------------------------------------------- The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, follows:
December 31, 2003 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- (In thousands) Securities Available-for-Sale Debt securities: U.S. Treasury and U.S. Government agencies $ 20,840 $ 135 $ (6) $ 20,969 Municipal bonds and obligations 12,294 42 (54) 12,282 Other bonds and obligations 17,102 242 (34) 17,310 Mortgaged-backed securities: FHLMC/FNMA/GNMA 238,066 1,727 (1,470) 238,323 REMIC's and CMO's 1,520 33 (6) 1,547 Asset-backed securities 2,566 -- (460) 2,106 ----------- ----------- ----------- ----------- Total debt securities 292,388 2,179 (2,030) 292,537 Marketable equity 6,515 8,373 -- 14,888 ----------- ----------- ----------- ----------- Total securities available-for-sale $ 298,903 $ 10,552 $ (2,030) $ 307,425 =========== =========== =========== =========== Securities Held-to-Maturity Debt securities: Municipal bonds and obligations $ 10,590 $ -- $ -- $ 10,590 Mortgaged-backed securities: FHLMC/FNMA 5,319 28 (8) 5,339 REMIC's and CMO's 11,039 2 (57) 10,984 Other bonds and obligations 9,955 -- -- 9,955 ----------- ----------- ----------- ----------- Total securities held-to-maturity $ 36,903 $ 30 $ (65) $ 36,868 =========== =========== =========== ===========
-76- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SECURITIES (continued)
December 31, 2002 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- (In thousands) Securities Available-for-Sale Debt securities: U.S. Treasury and U.S. Government agencies $ 98,058 $ 669 $ (8) $ 98,719 Other bonds and obligations 31,284 564 (211) 31,637 Mortgaged-backed securities: FHLMC/FNMA/GNMA 236 13 -- 249 REMIC's and CMO's 16,201 128 (118) 16,211 Asset-backed securities 6,956 43 (227) 6,772 ----------- ----------- ----------- ----------- Total debt securities 152,735 1,417 (564) 153,588 Marketable equity 11,132 8,526 (77) 19,581 ----------- ----------- ----------- ----------- Total securities available-for-sale $ 163,867 $ 9,943 $ (641) $ 173,169 =========== =========== =========== =========== Securities Held-to-Maturity Debt securities: Municipal bonds and obligations $ 7,633 $ -- $ -- $ 7,633 Mortgaged-backed securities: FHLMC/FNMA 8,648 130 (7) 8,771 REMIC's and CMO's 21,139 46 (88) 21,097 Other bonds and obligations 6,847 -- -- 6,847 ----------- ----------- ----------- ----------- Total securities held-to-maturity $ 44,267 $ 176 $ (95) $ 44,348 =========== =========== =========== ===========
-77- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SECURITIES (continued) The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2003 was as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity ----------------------- ----------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- ---------- ---------- (In thousands) Within 1 year $ 13,193 $ 13,310 $ 8,087 $ 8,087 Over 1 year to 5 years 22,728 22,980 4,016 4,016 Over 5 years to 10 years 1,225 1,235 1,827 1,827 Over 10 years 13,090 13,036 6,615 6,615 ---------- ---------- ---------- ---------- Total bonds and obligations 50,236 50,561 20,545 20,545 Mortgaged-backed and asset-backed securities 242,152 241,976 16,358 16,323 ---------- ---------- ---------- ---------- Total debt securities $ 292,388 $ 292,537 $ 36,903 $ 36,868 ========== ========== ========== ==========
At December 31, 2003 and 2002, the Company has pledged securities with an amortized cost of $1,000,000 and $6,032,000, respectively, and a fair value of $1,021,500 and $6,185,000, respectively, as collateral for repurchase agreements, and for its treasury tax and loan account. For the years ended December 31, 2003, 2002 and 2001, proceeds from the sales of securities available-for-sale amounted to $20,349,000, $28,255,000 and $3,965,000, respectively. Gross realized gains amounted to $3,371,000, $16,111,000 and $440,000, respectively. Gross realized losses amounted to $294,000, $968,000 and $172,000, respectively. -78- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SECURITIES (concluded) Information pertaining to securities with gross unrealized losses at December 31, 2003, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than Twelve Months Over Twelve Months ----------------------- ----------------------- Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value ---------- ---------- ---------- ---------- (In thousands) Securities Available-for-Sale Other bonds and obligations $ 79 $ 8,722 $ 9 $ 402 Mortgaged-backed securities 1,475 113,236 7 144 Asset-backed securities 10 809 450 1,297 ---------- ---------- ---------- ---------- Total securities available-for-sale $ 1,564 $ 122,767 $ 466 $ 1,843 ========== ========== ========== ========== Securities Held-to-Maturity Mortgaged-backed securities $ 61 $ 12,740 $ 4 $ 195 ========== ========== ========== ==========
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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. At December 31, 2003, two debt securities, representing 0.11% of total assets, have unrealized losses with aggregate depreciation of 25.8% from the Company's amortized cost basis. The unrealized losses are in asset-backed securities that derive their payment of principal and interest from mortgages on manufactured housing. At December 31, 2003, these securities had aggregate investment grade ratings of "A" from nationally recognized rating agencies. Additionally, the market value on the securities has improved since mid-2003. -79- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS - -------------------------------------------------------------------------------- A summary of the balances of loans follows at December 31, 2003 and 2002: 2003 2002 --------- --------- (In thousands) One-to four-family mortgage $ 266,753 $ 246,938 Commercial mortgage 154,244 119,198 Multi-family mortgage 15,514 14,920 Construction and land development 34,719 17,627 Home equity lines of credit 45,783 40,713 Consumer 108,180 118,338 Commercial 166,451 165,447 --------- --------- Total loans 791,644 723,181 Allowance for loan losses (8,969) (10,308) Unamortized discount on purchased loans 473 (200) Net deferred loan costs 110 41 --------- --------- Loans, net $ 783,258 $ 712,714 ========= ========= At December 31, 2003 and 2002, there were no loans held for sale. An analysis of the allowance for loan losses for the years ended December 31, 2003, 2002 and 2001 follows: 2003 2002 2001 -------- -------- -------- (In thousands) Balance at beginning of year $ 10,308 $ 11,034 $ 10,216 Provision for loan losses 1,460 6,180 7,175 Loans charged-off (4,364) (10,028) (7,062) Recoveries 1,565 3,122 705 -------- -------- -------- Balance at end of year $ 8,969 $ 10,308 $ 11,034 ======== ======== ======== -80- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) LOANS (concluded) The following is a summary of information pertaining to impaired and non-accrual loans at December 31, 2003 and 2002: 2003 2002 -------- -------- (In thousands) Impaired loans with no valuation allowance $ 388 $ 727 Impaired loans with a valuation allowance 1,994 2,123 -------- -------- Total impaired loans $ 2,382 $ 2,850 ======== ======== Specific valuation allowance allocated to impaired loans $ 267 $ 295 ======== ======== Non-accrual loans $ 3,199 $ 3,741 ======== ======== Total loans past due ninety days or more and still accruing $ 306 $ 590 ======== ======== No additional funds are committed to be advanced in connection with impaired loans. For the years ended December 31, 2003, 2002 and 2001, the average recorded investment in impaired loans amounted to $2,693,000, $2,308,000 and $1,344,000, respectively. The Company recognized $14,000, $85,000 and $14,000, respectively, of interest income on impaired loans, during the period that they were impaired, on the cash basis. 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 $24,878,000 and $3,702,000 at December 31, 2003 and 2002, respectively, which includes $16,270,000 in securitized mortgages. Consumer loans sold and serviced for others amounted to $7,159,000 and $19,476,000 at December 31, 2003 and 2002, respectively. Substantially all loans serviced for others were sold without recourse provisions and are not included in the accompanying consolidated balance sheets. However, one commercial participation loan sale during 2002 included recourse provisions amounting to $473,000 and $1,201,000 at December 31, 2003 and 2002. This loan and the recourse provisions are included in the accompanying consolidated balance sheets. -81- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. PREMISES AND EQUIPMENT - -------------------------------------------------------------------------------- A summary of the cost and accumulated depreciation and amortization of premises and equipment and their estimated useful lives follows at December 31, 2003 and 2002: Estimated 2003 2002 Useful Lives -------- -------- ------------ (In thousands) Banking premises: Land $ 1,558 $ 1,558 Buildings and improvements 18,448 17,848 5-50 years Equipment 11,467 10,948 2-38 years Construction in process 550 203 -------- -------- 32,023 30,557 Accumulated depreciation and amoritization (19,397) (17,290) -------- -------- $ 12,626 $ 13,267 ======== ======== The majority of construction in process in 2003 related to computer conversion costs and renovations to the Great Barrington branch. The Company is expecting additional costs of $262,000 to complete the computer conversion project, of which $155,000 has been committed. Expected and committed costs to complete branch renovations are $958,000. Construction in process in 2002 includes a renovation project at the West Stockbridge branch. During 2003, this project was completed and costs were transferred to the applicable categories. Depreciation and amortization expense for the years ended December 31, 2003, 2002 and 2001 amount to $2,107,000, $2,414,000 and $2,081,000, respectively. 7. OTHER ASSETS - -------------------------------------------------------------------------------- Other assets consist of the following at December 31, 2003 and 2002: 2003 2002 ------- ------- (In thousands) Prepaid dealer reserves $ 3,196 $ 3,517 Repossessed vehicles 352 838 Cash surrender values, life insurance 5,425 4,952 Other 5,107 4,008 ------- ------- Total other assets $14,080 $13,315 ======= ======= -82- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. GOODWILL AND OTHER INTANGIBLES - -------------------------------------------------------------------------------- Goodwill and other intangibles include goodwill associated with the acquisition of EastPoint, which is evaluated for impairment on an annual basis. Intangible assets refer to customer relationships acquired in association with the EastPoint purchase, which are being amortized on a straight-line basis over three years as well as the Company's purchase of two branches from another financial institution in 1991 and three branches in 1998. The branch acquisition costs are being evaluated for impairment on an annual basis. There have been no changes in carrying amounts of goodwill for the years ended December 31, 2003 and 2002. The balance is $4,369,000 for both years. A summary of other intangible assets at December 31 is as follows:
2003 2002 ---------------------------- ---------------------------- Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------------ ------------ ------------ ------------ (In thousands) Branch acquisition $ 5,763 $ (1,700) $ 5,763 $ (1,700) Customer relationships 101 (507) 304 (304) ------------ ------------ ------------ ------------ $ 5,864 $ (2,207) $ 6,067 $ (2,004) ============ ============ ============ ============
The amortization expense on other intangible assets amounted to $203,000, $203,000 and $599,000, respectively, for the years ended December 31, 2003, 2002 and 2001. The remaining amortization of customer relationships will be expensed during 2004. A reconciliation of reported income before income taxes to adjusted income before income taxes excluding the impacts of goodwill amortization for the years ended December 31 are as follows: 2003 2002 2001 -------- -------- -------- (In thousands) Income before income taxes $ 14,030 $ 2,628 $ 13,260 Add: Goodwill amortization -- -- 228 -------- -------- -------- Adjusted income before income taxes $ 14,030 $ 2,628 $ 13,032 ======== ======== ======== The adoption of SFAS 147 in 2002 resulted in increases to goodwill of $497,000, deferred taxes of $169,000 and $328,000 in retained earnings. -83- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. DEPOSITS - -------------------------------------------------------------------------------- A summary of deposit balances, by type, was as follows at December 31, 2003 and 2002: 2003 2002 -------- -------- (In thousands) Demand $102,788 $ 87,149 NOW 94,606 92,245 Savings 171,139 157,852 Money market 139,897 114,309 Other 464 616 -------- -------- Total non-certificate accounts 508,894 452,171 -------- -------- Term certificates less than $100,000 180,257 194,635 Term certificates of $100,000 or more 141,093 135,554 -------- -------- Total certificate accounts 321,350 330,189 -------- -------- Total deposits $830,244 $782,360 ======== ======== A summary of certificate accounts by maturity is as follows at December 31, 2003 and 2002: 2003 2002 --------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate --------- --------- --------- --------- (Dollars in thousands) Within 1 year $ 219,622 2.20% $ 215,199 3.07% Over 1 year to 3 years 55,084 3.61 79,122 4.08 Over 3 years 46,644 5.04 35,868 5.43 --------- --------- $ 321,350 2.85% $ 330,189 3.57% ========= ========= -84- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. FEDERAL HOME LOAN BANK ADVANCES - -------------------------------------------------------------------------------- A summary of outstanding advances from the Federal Home Loan Bank of Boston, by maturity, is as follows at December 31, 2003 and 2002: 2003 2002 ---------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate --------- --------- --------- --------- (Dollars in thousands) Fixed rate advances maturing: 2003 $ -- --% $ 62,000 1.76% 2004 125,000 1.43 10,000 2.83 2005 17,670 2.68 12,597* 3.02 2006 25,627 2.81 627 5.67 2007 34,397* 3.43 9,000 4.74 2008 5,000 1.25 -- -- 2009 7,000 5.40 7,000 5.40 2010 20,000 5.84 20,000 5.84 2011 10,610 4.47 5,610 4.95 2013 6,000 5.18 6,000 5.19 2022 161* 2.00 168* 2.00 --------- --------- Total FHLB advances $ 251,465 2.61% $ 133,002 3.27% ========= ========= * Amortizing advances requiring monthly principal and interest payments. Certain FHLB advances are callable in the amount of $52,000,000 during 2004. The Bank maintains a line-of-credit with the Federal Home Loan Bank of Boston, which carries interest at a rate that adjusts daily. Borrowings under the line are limited to 2% of the Bank's total assets. All borrowings from the Federal Home Loan Bank of Boston are secured by a blanket lien on certain qualified collateral, defined principally as 75% of the carrying value of certain first mortgage loans on owner-occupied residential property and 90% of the market value of U.S. Government and federal agency securities pledged to the Federal Home Loan Bank. No amounts were outstanding under this line during 2003 and 2002. -85- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - -------------------------------------------------------------------------------- Securities sold under agreements to repurchase ("repurchase agreements") are funds borrowed from customers on an overnight basis that are secured by investment securities. A summary of repurchase agreements was as follows for the years ended December 31, 2003 and 2002: 2003 2002 ------ ------ (Dollars in thousands) Balance at year end $ -- $ 700 Fair value of securities underlying the agreements at year end -- 2,542 Interest rate on year end balance -- 1.59% Average amount outstanding during year 88 1,349 Maximum amount outstanding at any month-end 500 1,830 Weighted average interest rate during the year 1.24% 1.72% The Bank also has a repurchase agreement line of credit with the Depositors Insurance Fund of up to $2.0 million and 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, 2003 and 2002, there were no outstanding borrowings against either agreement. 12. INCOME TAXES - -------------------------------------------------------------------------------- Allocation of federal and state income taxes between current and deferred portions is as follows for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 -------- -------- -------- (In thousands) Current tax provision: Federal $ 3,210 $ 644 $ 3,496 State 767 149 245 -------- -------- -------- 3,977 793 3,741 -------- -------- -------- Deferred tax provision (benefit): Federal 848 (171) 531 State 240 (91) 77 -------- -------- -------- 1,088 (262) 608 -------- -------- -------- $ 5,065 $ 531 $ 4,349 ======== ======== ======== -86- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES (continued) The reasons for the differences between the statutory federal income tax rate and the effective tax rates is summarized as follows for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 -------- -------- -------- (In thousands) Statutory tax rate 34.0% 34.0% 34.0% Increase (decrease) resulting from: State taxes, net of federal tax benefit 4.7 1.5 1.6 Dividends received deduction (1.1) (8.1) (1.9) Tax exempt income (0.9) (6.1) (1.0) Other, net (0.6) (1.1) 0.1 -------- -------- -------- Effective tax rate 36.1% 20.2% 32.8% ======== ======== ======== The components of the net deferred tax assets are as follows at December 31, 2003 and 2002: 2003 2002 -------- -------- (In thousands) Deferred tax liability: Federal $ 3,879 $ 3,587 State 419 1,098 -------- -------- 4,298 4,685 -------- -------- Deferred tax asset: Federal (4,789) (5,332) State (1,234) (1,369) -------- -------- (6,023) (6,701) -------- -------- Net deferred tax asset $ (1,725) $ (2,016) ======== ======== -87- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES (concluded) The tax effects of each type of income and expense item that give rise to deferred taxes are as follows at December 31, 2003 and 2002: 2003 2002 -------- -------- (In thousands) Investments: Net unrealized gain on securities available for sale $ 2,963 $ 3,760 Other 350 164 Depreciation 7 (9) Allowance for loan losses (3,671) (3,999) Employee benefit plans (1,000) (732) Charitable contribution carryover (824) (1,219) Other 450 19 -------- -------- Net deferred tax asset $ (1,725) $ (2,016) ======== ======== A summary of the change in the net deferred tax (asset) liability was as follows for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001 -------- -------- -------- (In thousands) Balance at beginning of year $ (2,016) $ 4,573 $ 4,482 Deferred tax (benefit) provision 1,088 (262) 608 Change in deferred tax effects of net unrealized gains/losses on securities available for sale (797) (6,327) (517) -------- -------- -------- Balance at end of year $ (1,725) $ (2,016) $ 4,573 ======== ======== ========
There is a contribution carryover that was generated during the year ended 2000, which expires in 2005. Management believes that the deferred tax assets related to this contribution carryover and other deductible temporary differences will be realized. As a result, no valuation reserve has been established at December 31, 2003, December 31, 2002 or December 31, 2001. The federal income tax reserve for loan losses at the Bank's base year is $844,000. If any portion of the reserve is used for purposes other than to absorb the losses for which established, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Bank intends to use the reserve only to absorb loan losses, a deferred income tax liability of $346,000 has not been provided. In June 2003, the Company reached a settlement with the Massachusetts Department of Revenue ("DOR") with respect to the DOR's tax assessment resulting from the DOR's disallowance of the Company's deduction of certain dividend distributions received by the Bank from its Real Estate Investment Trust majority-owned subsidiary Gold Leaf Capital Corporation (the "REIT"). As a result, the Company paid approximately $398,000 to the DOR representing one-half of the assessment plus interest and obtained the DOR's release from liability for the remaining half assessed. The Company dissolved the REIT during the third quarter of 2003. -88- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. OFF-BALANCE SHEET ACTIVITIES - -------------------------------------------------------------------------------- In the normal course of business, there are outstanding commitments and contingencies that are not reflected in the accompanying consolidated financial statements. 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 was as follows at December 31, 2003 and 2002: 2003 2002 -------- -------- (In thousands) Commitments to grant loans $ 26,854 $ 30,815 Unused funds on commercial lines-of-credit 49,380 47,900 Unadvanced funds on home equity and reddi-cash lines of credit 46,904 42,671 Unadvanced funds on construction loans 18,069 19,161 Standby letters of credit 1,811 1,894 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 credit worthiness 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. -89- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OFF-BALANCE SHEET ACTIVITIES (concluded) Operating lease commitments Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2003, pertaining to premises and equipment, future minimum rent commitments are as follows: Years Ending December 31, (In thousands) ------------ 2004 $ 474 2005 428 2006 353 2007 353 2008 352 Thereafter 2,830 ------- $ 4,790 ======= 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 ended December 31, 2003, 2002 and 2001 amounted to $371,000, $391,000 and $375,000, respectively. Employment and change in control agreements The Company and the Bank have each entered into an employment agreement with one senior executive that generally provides for a specified minimum annual compensation, participation in stock benefit plans and the continuation of benefits currently received. The original terms of the agreements are for three years and automatically extend unless either party gives notice to the contrary. However, such agreements may be terminated for cause, as defined, without incurring any continuing obligations. The Bank has also entered into change in control agreements with certain officers, all of whom are not covered by an employment agreement. The change in control agreements generally provide a severance payment if the officer is terminated following a "change in control," as defined in the agreements. Legal claims Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company's consolidated financial statements. Mortgage securitization On December 2, 2003, the Company entered into an agreement to securitize mortgages with Fannie Mae in the aggregate of $55,900,000, plus or minus 5% of total principal balance, which would be securitized and transferred back to the Company. At December 31, 2003, the Company had an outstanding commitment to securitize mortgage loans under the agreement of $39,600,000. -90- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Minimum regulatory capital requirements The Bank is subject to various regulatory capital requirements administered by the federal 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 and the Bank'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). Management believes, as of December 31, 2003 and 2002, that the Bank met the capital adequacy requirements. As of December 31, 2003, 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. -91- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STOCKHOLDERS' EQUITY (continued) The Company and Bank's actual capital amounts and ratios as of December 31, 2003 and 2002 are presented in the following table.
December 31, 2003 ---------------------------------------------------------------------- Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions --------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- --------- --------- --------- (Dollars in thousands) Total capital to risk weighted assets: Berkshire Hills Bancorp, Inc. $ 120,120 14.10% N/A N/A N/A N/A Berkshire Bank 106,564 12.57 $ 67,827 8.00% $ 84,784 10.00% Tier 1 capital to risk weighted assets: Berkshire Hills Bancorp, Inc. 107,383 12.60 N/A N/A N/A N/A Berkshire Bank 93,827 11.07 33,914 4.00 42,392 6.00 Tier 1 capital to average assets: Berkshire Hills Bancorp, Inc. 107,383 8.97 N/A N/A N/A N/A Berkshire Bank 93,827 7.87 47,664 4.00 59,580 5.00
-92- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STOCKHOLDERS' EQUITY (concluded) Minimum regulatory capital requirements (concluded)
December 31, 2002 ---------------------------------------------------------------------- Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions --------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- --------- --------- --------- (Dollars in thousands) Total capital to risk weighted assets: Berkshire Hills Bancorp, Inc. $ 118,124 15.18% N/A N/A N/A N/A Berkshire Bank 104,087 13.53 $ 61,544 8.00% $ 76,929 10.00% Tier 1 capital to risk weighted assets: Berkshire Hills Bancorp, Inc. 104,591 13.45 N/A N/A N/A N/A Berkshire Bank 90,661 11.78 30,772 4.00 46,158 6.00 Tier 1 capital to average assets: Berkshire Hills Bancorp, Inc. 104,591 10.04 N/A N/A N/A N/A Berkshire Bank 90,661 8.76 41,374 4.00 51,718 5.00
Common stock On March 28, 2001, the Board of Directors approved a dividend reinvestment plan and authorized its implementation. The plan, which is available to all shareholders of record of the Company's common stock, permits the reinvestment of all cash dividends, the deposit of shares for safekeeping and the sale and gifting of shares held under the plan. Common shares purchased pursuant to this plan were 7,504 shares. All shares are purchased in open market transactions. During 2002 and 2001, the Company repurchased approximately 312,516 and 1,249,000 shares of outstanding common stock. The Company announced in July 2003 that its Board of Directors approved a sixth repurchase program for 298,886 shares, or 5%, of its outstanding common stock and at December 31, 2003, the Company had 186,186 shares remaining to be purchased in the latest 5% repurchase. During 2003, a total of 112,700 shares were repurchased relating to the sixth stock repurchase program. -93- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. EMPLOYEE BENEFIT PLANS - -------------------------------------------------------------------------------- Defined benefit pension plan The Company terminated its defined benefit pension plan, effective February 24, 2001. During the second quarter of 2001, the Company recorded a loss of $168,000 from the curtailment of its defined benefit pension plan. The final plan settlement was approved by the IRS in the fourth quarter of 2001. The settlement gain was $2,341,000. Defined contribution pension plan The Company has a qualified savings plan under Section 401(k) of the Internal Revenue Code. Each employee reaching the age of 21 and having completed at least 1,000 hours of service in a twelve-month period, beginning with such employee's date of employment, automatically becomes a participant in the 401(k) Plan. Employees may contribute a portion of their compensation subject to certain limits based on federal tax laws. The Company made matching contributions which amounted to $603,000, $640,000 and $528,000, respectively, for the years ended December 31, 2003, 2002 and 2001. Supplemental executive retirement plan The Company has a nonqualified supplemental executive retirement plan for the benefit of a certain senior executive. Benefits generally commence no earlier than age sixty and continue for the life of the senior executive. As of December 31, 2003 and 2002, the Company has an accrued expense payable in the amount of $1,007,000 and $760,000, respectively, representing the present value of future payments under the supplemental retirement plan. Supplemental retirement expense for this plan for the year ended December 31, 2003, was $247,000. There was no expense for the years ended December 31, 2002 and 2001. In some instances, the Company has also entered into split-dollar life insurance agreements with senior executives to provide supplemental retirement benefits. Incentive plan The Company has an incentive plan (the "Plan") whereby all management and staff members are eligible to receive a bonus, tied to performance. The structure of the Plan is to be reviewed on an annual basis by the Corporate Governance Committee. The Plan year end is December 31. Incentive compensation expense for the years ended December 31, 2003, 2002 and 2001 amounted to $925,000, $620,000 and $600,000, respectively. Other benefits 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. The retiree medical plan was terminated on December 31, 1996. Any retiree participating in the plan at that time will continue to be covered for life, however, no new retirees can participate in this plan. At December 31, 2003 and 2002, the Company had an accrued liability in the amount of $428,000 and $487,000, respectively, for payment of future premiums under this plan. -94- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. STOCK-BASED INCENTIVE PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN - -------------------------------------------------------------------------------- Stock options Under the Company's Stock-Based Incentive Plan, the Company may grant options to its directors, officers and employees for up to 767,366 shares of common stock. Both incentive stock options and non-statutory stock options may be granted under the plan. 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 vest at 20% per year. In 2003, the Company's shareholders approved the 2003 Equity Compensation Plan. Under this Plan the Company may grant up to 300,000 options or stock awards to its directors, officers and employees. No options or awards were granted under this Plan in 2003. A summary of the status of the Company's stock options for the years ended December 31, 2003, 2002 and 2001 are presented below:
2003 2002 2001 ---------------------- ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- --------- --------- --------- --------- --------- Fixed options: Outstanding at beginning of year 600,848 $ 16.75 767,366 $ 16.75 -- $ -- Granted 120,143 22.44 -- -- 767,366 16.75 Exercised (71,064) 16.75 (6,907) 16.75 -- -- Forfeited -- -- (159,611) 16.75 -- -- --------- --------- --------- Outstanding at end of year 649,927 $ 17.80 600,848 $ 16.75 767,366 $ 16.75 ========= ========= ========= Options exercisable at year-end 189,081 $ 16.75 146,573 $ 16.75 -- $ -- Weighted-average fair value of options granted during the year $ 6.15 $ -- $ 3.44
-95- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STOCK-BASED INCENTIVE PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN (continued) Stock options (concluded) The fair value of each option grant is estimated on the date of grant using the Modified Roll Geske option-pricing model with the following weighted-average assumptions: Years Ended December 31, ------------------------- 2003 2001 -------- -------- Dividend yield 1.85% 2.12% Expected life in years 10 years 10 years Expected volatility 20.34% 18.01% Risk-free interest rate 3.85% 5.12% No options were granted during the year ended December 31, 2002. Information pertaining to options outstanding at December 31, 2003 are as follows: Options Outstanding Options Exercisable -------------------------- ------------------------- Weighted Average Weighted Remaining Average Number Contractual Number Exercise Grant Period Outstanding Life Exercisable Price - -------------------------- ----------- ----------- ----------- 2001 529,784 7.08 years 189,081 $ 16.75 2003 120,143 9.10 years -- 22.44 Stock awards Under the Company's 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 Company applies APB Opinion No. 25 and related Interpretations in accounting for stock awards. The stock awards vest at 20% per year. 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 periods to be benefited. The Company recorded compensation cost related to the stock awards of approximately $1,066,000, $1,165,000 and $1,000,000 in 2003, 2002 and 2001, respectively. -96- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STOCK-BASED INCENTIVE PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN (continued) Stock awards (concluded) A summary of the status of the Company's stock awards is presented below:
Years Ended December 31, ------------------------------ 2003 2002 2001 -------- -------- -------- Balance at beginning of year 206,269 306,945 -- Granted 84,166 -- 306,945 Cancelled -- (100,676) -- -------- -------- -------- Balance at end of year 290,435 206,269 306,945 ======== ======== ======== Fair value of stock awards granted during the year $ 22.38 $ -- $ 17.76 ======== ======== ========
Employee Stock Ownership Plan The Bank has established an Employee Stock Ownership Plan (the "ESOP") for the benefit of each employee that has reached the age of 21 and has completed at least 1,000 hours of service in the previous twelve-month period. As part of the conversion, Berkshire Hills Funding Corporation provided a loan to the Berkshire Bank Employee Stock Ownership Plan Trust which was used to purchase 8%, or 613,900 shares, of the Company's outstanding stock in the open market. The loan bears interest equal to 9.5% and provides for quarterly payments of interest and principal. At December 31, 2003, the remaining principal balance is payable as follows: Years Ending December 31, (In thousands) ------------ 2004 $ 294 2005 325 2006 356 2007 392 2008 429 Thereafter 4,458 ------- $ 6,254 ======= -97- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STOCK-BASED INCENTIVE PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN (concluded) Employee Stock Ownership Plan (concluded) The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the shares purchased, which are held in a suspense account for allocation among the participants as the loan is paid. Total compensation expense applicable to the ESOP amounted to $1,094,000, $887,000 and $773,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Shares held by the ESOP include the following at December 31, 2003 and 2002: 2003 2002 ---------- ---------- Allocated 114,188 83,954 Committed to be allocated 37,853 37,853 Unallocated 454,240 492,093 ---------- ---------- 606,281 613,900 ========== ========== Cash dividends received on allocated shares are allocated to participants and cash dividends received on shares held in suspense are applied to repay the outstanding debt of the ESOP. The fair value of these shares was approximately $16,443,000 and $11,589,000 at December 31, 2003 and 2002, respectively. 17. RELATED PARTY TRANSACTIONS - -------------------------------------------------------------------------------- In the ordinary course of business, the Company has granted loans to directors and officers and their affiliates. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. All loans to directors and officers of the Company and their affiliates are performing in accordance with the contractual terms of the loans as of December 31, 2003. An analysis of activity of such loans that aggregate more than $60,000 on an individual basis to directors and executive officers of the Company and their affiliates is as follows: Years Ended December 31, --------------------------- 2003 2002 ---------- ---------- (In thousands) Balance at beginning of year $ 5,740 $ 6,089 Additions 1,127 658 Repayments (4,662) (1,007) ---------- ---------- Balance at end of year $ 2,205 $ 5,740 ========== ========== -98- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES - -------------------------------------------------------------------------------- Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10% of the Bank's capital stock and surplus on a secured basis. At December 31, 2003 and 2002, the Bank's retained earnings available for the payment of dividends was $67,827,000 and $61,544,000, respectively, and funds available for loans or advances amounted to $10,656,000 and $10,426,000, respectively. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum regulatory capital requirements. In conjunction with Massachusetts conversion regulations, the Bank established a liquidation account for eligible account holders, which at the time of conversion amounted to approximately $70 million. In the event of a liquidation of the Bank, the eligible account holders will be entitled to receive their pro-rata share of the net worth of the Bank prior to conversion. However, as qualifying deposits are reduced, the liquidation account will also be reduced in an amount proportionate to the reduction in the qualifying deposit accounts. -99- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. 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. Accordingly, 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, excluding FHLB and SBLI stock, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank and SBLI stock was recorded at fair value at acquisition as determined by an appraisal performed by independent investment consultants retained by SBLI. 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 currently being offered for loans with similar terms to borrowers of similar credit quality. Deposits: The fair values for non-certificate accounts and tax escrow are, by definition, equal to the amount payable on demand at the reporting date which is their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Federal Home Loan Bank advances: The fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Securities sold under agreements to repurchase: The carrying amount of repurchase agreements approximates fair value. Repurchase agreements generally mature or "roll over" on a daily basis. Accrued interest: The carrying amounts of accrued interest approximate fair value. -100- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair values of off-balance sheet instruments are immaterial. The carrying amounts and estimated fair values of the Company's financial instruments are as follows at December 31, 2003 and 2002:
2003 2002 ---------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- (In thousands) Financial assets: Cash and cash equivalents $ 17,442 $ 17,442 $ 60,655 $ 60,655 Securities available for sale 307,425 307,425 173,169 173,169 Securities held to maturity 36,903 36,868 44,267 44,348 Federal Home Loan Bank stock 12,923 12,923 7,440 7,440 Loans, net 783,258 787,490 712,714 725,000 Accrued interest receivable 5,080 5,080 5,125 5,125 Savings Bank Life Insurance stock 2,043 2,043 2,043 2,043 Financial liabilities: Deposits 830,244 796,623 782,360 759,325 Federal Home Loan Bank advances 251,465 263,218 133,002 146,258 Securities sold under agreement to repurchase -- -- 700 700
-101- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. 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, -------------------- 2003 2002 -------- -------- (In thousands) Assets Cash due from Berkshire Bank $ 6,305 $ 3,075 Securities available for sale, at fair value 31 31 Securities held to maturity -- 3,463 Investment in common stock of Berkshire Bank 105,128 101,996 Investment in common stock of Berkshire Hills Funding Corporation 6,680 6,690 Investment in common stock of Berkshire Hills Technology, Inc. 3,421 3,703 Other assets 1,640 1,629 -------- -------- Total assets $123,205 $120,587 ======== ======== Liabilities and Stockholders' Equity Accounts payable $ 30 $ 18 Stockholders' equity 123,175 120,569 -------- -------- Total liabilities and stockholders' equity $123,205 $120,587 ======== ========
-102- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued) CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (In thousands) Income: Dividends from Berkshire Bank $ 8,000 $ 2,375 $ 13,850 Dividends from Berkshire Hills Funding Corporation 559 577 1,700 Interest on securities 17 273 779 Other 54 44 206 ----------- ----------- ----------- Total income 8,630 3,269 16,535 ----------- ----------- ----------- Operating expenses 361 405 459 ----------- ----------- ----------- Income before income taxes and equity in undistributed income (loss) of subsidiaries 8,269 2,864 16,076 Applicable income tax (benefit) provision (99) 80 138 ----------- ----------- ----------- Income before equity in undistributed income (loss) of subsidiaries 8,368 2,784 15,938 Equity in undistributed income (loss) of Berkshire Bank 889 612 (5,999) Equity in undistributed loss of Berkshire Hills Funding Corporation (10) (259) (1,071) Equity in undistributed (loss) income of Berkshire Hills Technology, Inc. (282) (1,040) 43 ----------- ----------- ----------- Net income $ 8,965 $ 2,097 $ 8,911 =========== =========== ===========
-103- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded) CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (In thousands) Cash flows from operating activities: Net income $ 8,965 $ 2,097 $ 8,911 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed (income) loss of Berkshire Bank (889) (612) 5,999 Equity in undistributed loss of Berkshire Hills Funding Corporation 10 259 1,071 Equity in undistributed income of Berkshire Hills Technology, Inc. 282 1,040 (43) Deferred tax benefit -- -- (310) Net (accretion) amortization of securities -- (4) 5 Other, net (65) 499 591 ----------- ----------- ----------- Net cash provided by operating activities 8,303 3,279 16,224 ----------- ----------- ----------- Cash flows from investing activities: Activity in available-for-sale securities: Sales -- -- 5,666 Maturities -- -- 2,920 Principal payments -- 560 -- Purchases -- -- (4,623) Activity in held-to-maturity securities: Maturities 3,463 1,932 12,553 Principal payments -- 169 135 Purchases -- (32) (8,838) Investment in Berkshire Hills Technology, Inc. -- -- (4,700) ----------- ----------- ----------- Net cash provided by investing activities 3,463 2,629 3,113 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of treasury stock 1,191 116 -- Payments to acquire treasury stock (7,099) (6,989) (23,292) Dividends paid (2,628) (2,737) (2,808) ----------- ----------- ----------- Net cash used in investing activities (8,536) (9,610) (26,100) ----------- ----------- ----------- Net change in cash and cash equivalents 3,230 (3,702) (6,763) Cash and cash equivalents at beginning of year 3,075 6,777 13,540 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 6,305 $ 3,075 $ 6,777 =========== =========== ===========
-104- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. SEGMENT REPORTING - -------------------------------------------------------------------------------- The Company has one reportable segment, the Bank, and two operating segments, the Bank and Berkshire Hills Technology, Inc. Each segment is described in Note 1 under business. Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, follows:
Berkshire Hills Technology Consolidated 2003 Bank Inc. Totals - ---- ----------- --------------- ------------ (In thousands) Net interest income $ 37,566 $ -- $ 37,566 Depreciation and amortization 1,412 695 2,107 Provision for loan losses 1,460 -- 1,460 Licensing fees -- 7,262 7,262 Minority interest -- (186) (186) Profit(loss) 9,247 (282) 8,965 Assets 1,210,890 7,658 1,218,548 Expenditures for additions to premises and equipment 1,386 80 1,466 2002 - ---- Net interest income $ 40,700 $ -- $ 40,700 Depreciation and amortization 1,813 601 2,414 Provision for loan losses 6,180 -- 6,180 Licensing fees -- 6,991 6,991 Minority interest -- (685) (685) Profit(loss) 3,137 (1,040) 2,097 Assets 1,037,376 8,571 1,045,947 Expenditures for additions to premises and equipment 1,044 424 1,468 2001 - ---- Net interest income $ 42,236 $ -- $ 42,236 Depreciation and amortization 1,769 312 2,081 Provision for loan losses 7,175 -- 7,175 Licensing fees -- 3,465 3,465 Minority interest -- (119) (119) Profit 8,868 43 8,911 Assets 1,021,623 9,078 1,030,701 Expenditures for additions to premises and equipment 735 1,609 2,344
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains or losses. The Company's operating segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technology and marketing strategies. -105- BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEGMENT REPORTING (concluded) The Company derives a majority of its revenues from interest income and licensing fees and the chief operating decision maker relies primarily on net interest revenue and licensing fees to assess the performance of the segments and make decisions about resources to be allocated to the segment. Therefore, the segments are reported using net interest income and licensing fees for the years ended December 31. The Company does not allocate income taxes to the segments. The Company does not have a single external customer from which it derives 10 percent or more of its revenues and operates in one geographical area. 22. QUARTERLY DATA (UNAUDITED) - -------------------------------------------------------------------------------- Quarterly results of operations for the years ended December 31, 2003 and 2002 are as follows:
2003 2002 ------------------------------------------- ------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter --------- --------- --------- --------- --------- --------- --------- --------- (In thousands, except per share data) Interest and dividend income $ 14,410 $ 13,858 $ 14,139 $ 13,901 $ 14,549 $ 16,451 $ 16,568 $ 16,560 Interest expense 4,666 4,549 4,706 4,821 5,547 5,892 5,903 6,086 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income 9,744 9,309 9,433 9,080 9,002 10,559 10,665 10,474 Provision (credit) for loan losses (225) 575 785 325 2,305 1,050 1,315 1,510 Other income (1) 2,494 3,633 4,022 3,561 4,328 3,260 3,086 2,744 Operating expenses (2) 8,773 8,595 9,767 8,651 17,745 9,320 9,144 9,102 Provision (benefit) for income taxes 1,099 1,358 765 1,843 (2,512) 1,123 1,070 849 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 2,591 $ 2,414 $ 2,138 $ 1,822 $ (4,208) $ 2,326 $ 2,222 $ 1,757 ========= ========= ========= ========= ========= ========= ========= ========= Earnings (loss) per share: Basic $ 0.50 $ 0.46 $ 0.40 $ 0.34 $ (0.79) $ 0.43 $ 0.41 $ 0.32 Diluted 0.45 0.43 0.38 0.32 (0.79) 0.40 0.38 0.29
Note: (1) The decrease in the fourth quarter 2003 other income was due to the loss on the sale of sub-prime automobile loans. (2) The increase in the fourth quarter 2002 operating expenses was primarily due to severance expenses, funding of the retirement plan benefit for directors and the write-down in value of repossessed automobiles. -106- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - -------------------------------------------------------------------------------- None. ITEM 9A. CONTROLS AND PROCEDURES - -------------------------------------------------------------------------------- The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company's internal control over financial reporting occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------------- For information concerning the directors of the Company, the information contained under the sections captioned "Proposal 1 -- Election of Directors" in Berkshire Hills' Proxy Statement for the 2004 Annual Meeting of Stockholders is incorporated by reference. For information concerning officers of the Company, reference is made to Part I, Item 1A, "Business--Executive Officers of the Registrant" in this report. 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." ITEM 11. EXECUTIVE COMPENSATION - -------------------------------------------------------------------------------- The information contained under the sections captioned "Executive Compensation" and "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. (c) 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 -107- The following table sets forth information, as of December 31, 2003, about Company common stock that may be issued upon exercise of options under the Berkshire Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan and the Berkshire Hills Bancorp, Inc. 2003 Equity Compensation Plan. Each of the plans was approved by the Company's stockholders.
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 949,927 $17.80 300,000 Equity compensation plans not approved by security holders -- -- -- Total 949,927 $17.80 300,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Transactions with Management" in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - -------------------------------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal 2 - Ratification of Independent Auditors" in the Proxy Statement. -108- PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - -------------------------------------------------------------------------------- (a) [1] Financial Statements o Independent Auditors' Report o Consolidated Balance Sheets as of December 31, 2003 and 2002 o Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001 o Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001 o Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 o Notes to Consolidated Financial Statements [2] Financial Statement Schedules All financial statement schedules are omitted because they are not required or applicable. The required information is shown in the consolidated financial statements or the notes thereto. -109- [3] Exhibits 3.1 Certificate of Incorporation of Berkshire Hills Bancorp, Inc.(1) 3.2 Bylaws of Berkshire Hills Bancorp, Inc. 4.0 Draft Stock Certificate of Berkshire Hills Bancorp, Inc.(1) 10.1 Employment Agreement between Berkshire Bank and Michael P. Daly (2) 10.2 Employment Agreement between Berkshire Hills Bancorp, Inc. and Michael P. Daly (2) 10.3 Severance Agreement, dated October 16, 2002, by and among James A. Cunningham, Jr., Berkshire Hills Bancorp, Inc. and Berkshire Bank (3) 10.4 Severance Agreement, dated November 13, 2002, by and among Charles F. Plungis, Jr., Berkshire Hills Bancorp, Inc. and Berkshire Bank (4) 10.5 Severance Agreement, dated November 13, 2002, by and among Susan M. Santora, Berkshire Hills Bancorp, Inc. and Berkshire Bank (4) 10.6 Change in Control Agreement between Berkshire Bank and Gayle P. Fawcett 10.7 Change in Control Agreement between Berkshire Hills Bancorp, Inc. and Gayle P. Fawcett 10.8 Change in Control Agreement between Berkshire Bank and Wayne F. Patenaude 10.9 Change in Control Agreement between Berkshire Hills Bancorp, Inc. and Wayne F. Patenaude 10.10 Supplemental Executive Retirement Agreement between Berkshire Bank and Michael P. Daly 10.11 Berkshire Hills Bancorp, Inc. 2003 Equity Compensation Plan(5) 10.12 Letter Agreement, dated June 26, 2003, by and among Berkshire Hills Bancorp, Inc., Berkshire Bank and Robert A. Wells(2) 10.13 Form of Berkshire Bank Employee Severance Compensation Plan(1) 10.14 Form of Berkshire Bank Supplemental Executive Retirement Plan(1) 10.15 Berkshire Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(6) 10.16 Retirement Agreement, dated December 4, 2003, by and among Berkshire Hills Bancorp, Inc., Berkshire Bank and Robert A. Wells 11.0 Statement re: Computation of Per Share Earnings 21.0 Subsidiary Information is incorporated herein by reference to Part I, Item 1, "Business - Subsidiary Activities" 23.0 Consent of Wolf & Company, P.C. 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer -110- - ----------------------------------------------- (1) Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement and amendments thereto, initially filed on March 10, 2000, Registration No. 333-32146. (2) Incorporated herein by reference into this document from the Exhibits to the Form 10-Q as filed on August 13, 2003. (3) Incorporated herein by reference into this document from the Exhibits to the Form 10-K as filed on March 29, 2001. (4) Incorporated herein by reference into this document from the Exhibits to the Form 10-Q as filed on November 14, 2003. (5) Incorporated herein by reference into this document from the Appendix to the Proxy Statement as filed on March 27, 2003. (6) Incorporated herein by reference into this document from the Appendix to the Proxy Statement as filed on December 7, 2000. (b) Reports on Form 8-K On October 15, 2003, the Company filed a Form 8-K in which it announced under Item 5 that it expected to issue its third quarter earnings release on October 22, 2003. The Company announced that it would conduct a conference call at 10:00 a.m. on October 23, 2003 to discuss third quarter results. Instructions on how to access the call and an investor presentation that supplemented the call were contained in the press release. The press release announcing this conference call was attached by exhibit. On October 23, 2003, the Company furnished a Form 8-K in which it announced under Item 12 its financial results for the quarter ended September 30, 2003. The press release announcing financial results for the quarter ended September 30, 2003 was attached by exhibit. -111- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Berkshire Hills Bancorp, Inc. Date: February 26, 2004 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 February 26, 2004 - -------------------------------- and Director Michael P. Daly (principal executive officer) /s/ Wayne F. Patenaude Senior Vice President, Treasurer February 26, 2004 - -------------------------------- and Chief Financial Officer Wayne F. Patenaude (principal accounting and financial officer) /s/ Lawrence A. Bossidy Non-Executive Chairman February 26, 2004 - -------------------------------- Lawrence A. Bossidy /s/ Thomas O. Andrews Director February 26, 2004 - -------------------------------- Thomas O. Andrews /s/ Thomas R. Dawson, CPA Director February 26, 2004 - -------------------------------- Thomas R. Dawson, CPA /s/ A. Allen Gray Director February 26, 2004 - -------------------------------- A. Allen Gray /s/ Peter J. Lafayette Director February 26, 2004 - -------------------------------- Peter J. Lafayette /s/ Edward G. McCormick, Esq. Director February 26, 2004 - -------------------------------- Edward G. McCormick, Esq. /s/ Catherine B. Miller Director February 26, 2004 - -------------------------------- Catherine B. Miller /s/ Corydon L. Thurston Director February 26, 2004 - -------------------------------- Corydon L. Thurston
-112- /s/ Ann H. Trabulsi Director February 26, 2004 - -------------------------------- Ann H. Trabulsi /s/ Robert A. Wells Director February 26, 2004 - -------------------------------- Robert A. Wells
-113- EX-3.2 3 ex3-2.txt Exhibit 3.2 BERKSHIRE HILLS BANCORP, INC. Amended and Restated Bylaws ARTICLE I - STOCKHOLDERS Section 1. Annual Meeting. An annual meeting of the stockholders, for the election of Directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 2. Special Meetings. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of Directors which the Corporation would have if there were no vacancies on the Board of Directors (hereinafter the "Whole Board"). Section 3. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 4. Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy (after giving effect to the provisions of Article IV of the Corporation's Certificate of Incorporation), shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes present in person or represented by proxy (after giving effect to the provisions of Article IV of the Corporation's Certificate of Incorporation) shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present in person or by proxy constituting a quorum, then except as otherwise required by law, those present in person or by proxy at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 5. Organization. Such person as the Board of Directors may have designated or, in his or her absence of such a person, the President and Chief Executive Officer of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman of the meeting appoints. Section 6. Conduct of Business. (a) The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. (b) At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting: (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 6(b). For business to be properly brought before an annual meeting by a stockholder, the business must relate to a proper subject matter for stockholder action and the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed to and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the date of the annual meeting; provided, however, that in the event that less than one hundred (100) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the 2 date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business; (iii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder; and (iv) any material interest of such stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the provisions of this Section 6(b). The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6(b) and, if he or she should so determine, shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. (c) Only persons who are nominated in accordance with the procedures and meet the qualifications set forth in these Bylaws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only: (i) by or at the direction of the Board of Directors; or (ii) by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 6(c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the date of the meeting; provided, however, that in the event that less than one hundred (100) days' notice or prior disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth: (i) as to each person whom such stockholder proposes to nominate for election or re-election as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice (x) the name and address, as they appear on the Corporation's books, of such stockholder and (y) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the provisions of this Section 6(c). The officer of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine that 3 a nomination was not made in accordance with such provisions and, if he or she shall so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. No nomination shall be made or voted upon if the nominee is ineligible for election to the Board of Directors under these Bylaws. (d) No person shall be eligible for election or appointment to the Board of Directors: (i) if such person has, within the previous 10 years, been the subject of supervisory action by a financial regulatory agency that resulted in a cease and desist order or an agreement or other written statement subject to public disclosure under 12 U.S.C. 1818(u), or any successor provision; (ii) if such person has been convicted of a crime involving dishonesty or breach of trust which is punishable by imprisonment for a term exceeding one year under state or federal law; (iii) if such person is currently charged in any information, indictment, or other complaint with the commission of or participation in such a crime; and (iv) except for persons serving as members of the initial Board of Directors or except as otherwise approved by the Board of Directors, unless such person has been, for a period of at least one year immediately prior to his or her nomination or appointment, a resident of a county in which the Corporation or its subsidiaries maintains a banking office or a county contiguous to any such county. No person shall be eligible for election or appointment to the Board of Directors if such person is the nominee or representative of a company, as that term is defined in Section 10 of the Home Owners' Loan Act or any successor provision, of which any director, partner, trustee or shareholder controlling more than 10% of any class of voting stock would not be eligible for election or appointment to the Board of Directors under this Section 6. No person may serve on the Board of Directors and at the same time be a director of more than two other for-profit companies. No person shall be eligible for election to the Board of Directors if such person is the nominee or representative of a person or group, or of a group acting in concert (as defined in 12 C.F.R Section 574 4(d)), that includes a person who is ineligible for election to the Board of Directors under this Section 6. The Board of Directors shall have the power to construe and apply the provisions of this Section 6 and to make all determinations necessary or desirable to implement such provisions, including but not limited to determinations as to whether a person is a nominee or representative of a person, a company or a group, whether a person or company is included in a group, and whether a person is the nominee or representative of a group acting in concert. (e) Notwithstanding any other provision of these Bylaws, in no event shall any person, group or company that would not be eligible for election to the Board of Directors or to have his or its representative or nominee eligible for election to the Board of Directors under Section 6 of this Article I be entitled or permitted to vote his or its shares with respect to any amendment, modification or repeal of Section 6 of this Article I. Section 7. Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting. Any facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or 4 transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of Directors but excepting where otherwise required by law or by the governing documents of the Corporation, may be made by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballot, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedures established for the meeting. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or the Certificate of Incorporation, all other matters shall be determined by a majority of the votes cast. Section 8. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. 5 ARTICLE II - BOARD OF DIRECTORS Section 1. General Powers, Number, Term of Office and Limitations. The business and affairs of the Corporation shall be under the direction of its Board of Directors. The number of Directors who shall constitute the Whole Board shall be such number as the Board of Directors shall from time to time have designated, but shall not exceed twelve (12). The Board of Directors shall annually elect a non-executive Chairman of the Board from among its members who shall, when present, preside at its meetings. No person shall be qualified to continue to serve as a Director after the annual meeting immediately following his or her seventy-second birthday; provided, however, that any Director serving on the date these Bylaws were initially adopted on January 10, 2000 may not be re-elected following his or her seventy-second birthday but shall be qualified to serve as a Director until the expiration of the last term he or she is elected to serve prior to his or her seventy-second birthday. The Directors, other than those who may be elected by the holders of any class or series of Preferred Stock, shall be divided, with respect to the time for which they severally hold office, into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years thereafter, with each Director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, Directors elected to succeed those Directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each Director to hold office until his or her successor shall have been duly elected and qualified. Section 2. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any class or series of Preferred Stock, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the Directors then in office, though less than a quorum, and Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such Director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board shall shorten the term of any incumbent Director. 6 Section 3. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all Directors. A notice of each regular meeting shall not be required. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by one-third (1/3) of the Directors then in office (rounded up to the nearest whole number), or by the Chairman of the Board or the President and Chief Executive Officer or, in the event that the Chairman of the Board or the President and Chief Executive Officer are incapacitated or otherwise unable to call such meeting, by the Secretary, and shall be held at such place, on such date, and at such time as they, or he or she, shall fix. Notice of the place, date, and time of each such special meeting shall be given each Director by whom it is not waived by mailing written notice not less than five (5) days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 5. Quorum. At any meeting of the Board of Directors, a majority of the Whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 6. Participation in Meetings By Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 7. Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the Directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. 7 Section 8. Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for Directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for Directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (8) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation's business and affairs; and (9) To fix the Compensation of officers and employees of the Corporation and its subsidiaries as it may determine. Section 9. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as Directors, including, without limitation, their services as members of committees of the Board of Directors. 8 ARTICLE III - COMMITTEES Section 1. Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the Board of Directors, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for these committees and any others provided for herein, elect a Director or Directors to serve as the member or members, designating, if it desires, other Directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 2. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings. The quorum requirements for each such committee shall be a majority of the members of such committee unless otherwise determined by the Board of Directors by a majority vote of the Board of Directors which such quorum determined by a majority of the Board may be one- third of such members and all matters considered by such committees shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. Section 3. Nominating Committee. The Board of Directors shall appoint a Nominating Committee of the Board, consisting of not less than three (3) members of the Board of Directors. The Nominating Committee shall have authority: (a) to review any nominations for election to the Board of Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of these Bylaws in order to determine compliance with such Bylaw; and (b) to recommend to the Whole Board nominees for election to the Board of Directors to replace those Directors whose terms expire at the annual meeting of stockholders next ensuing. 9 ARTICLE IV - OFFICERS Section 1. Generally. (a) The Board of Directors as soon as may be practicable after the annual meeting of stockholders shall choose a President and Chief Executive Officer, one or more Vice Presidents, a Secretary and a Treasurer and from time to time may choose such other officers as it may deem proper. Any number of offices may be held by the same person. (b) The term of office of the officers shall be until the next annual election of officers and until their respective successors are chosen but any officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of Directors then constituting the Board of Directors or by the President and Chief Executive Officer. (c) All officers chosen by the Board of Directors or by the President and Chief Executive Officer shall have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Section 2. President and Chief Executive Officer. The President and Chief Executive Officer shall have general responsibility for the management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of President and Chief Executive Officer or which are delegated to him or her by the Board of Directors. Subject to the direction of the Board of Directors, the President and Chief Executive Officer shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision of all of the other officers, employees and agents of the Corporation. Section 3. Vice President. The Vice President or Vice Presidents shall perform the duties of the President and Chief Executive Officer in his absence or during his inability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them by the Board of Directors or the President and Chief Executive Officer. A Vice President or Vice Presidents may be designated as Executive Vice President or Senior Vice President. Section 4. Secretary. The Secretary or Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such office and/or such other duties and powers as are properly assigned thereto by the Board of Directors or the President and Chief 10 Executive Officer. Subject to the direction of the Board of Directors, the Secretary shall have the power to sign all stock certificates. Section 5. Treasurer. The Treasurer shall be the Comptroller of the Corporation and shall have the responsibility for maintaining the financial records of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Subject to the direction of the Board of Directors, the Treasurer shall have the power to sign all stock certificates. Section 6. Assistant Secretaries and Other Officers. The Board of Directors or the Chief Executive Officer may appoint one or more Assistant Secretaries and such other officers who shall have such powers and shall perform such duties as are provided in these Bylaws or as may be assigned to them by the Board of Directors or the President and Chief Executive Officer. Section 7. Action with Respect to Securities of Other Corporation. Unless otherwise directed by the Board of Directors, the President and Chief Executive Officer or any officer of the Corporation authorized by the President and Chief Executive Officer shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V - STOCK Section 1. Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the Chairman of the Board or the President and Chief Executive Officer, and by the Secretary or an Assistant Secretary, or any Treasurer or Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. Section 2. Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered 11 for cancellation before a new certificate is issued therefor. Section 3. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the next day preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment or rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. 12 Section 5. Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI - NOTICES Section 1. Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, Director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram or mailgram or other courier. Any such notice shall be addressed to such stockholder, Director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by telegram or mailgram or other courier, shall be the time of the giving of the notice. Section 2. Waivers. A written waiver of any notice, signed by a stockholder, Director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, Director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened. ARTICLE VII - MISCELLANEOUS Section 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 2. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or an assistant to the Treasurer. 13 Section 3. Reliance Upon Books, Reports and Records. Each Director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such Director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 4. Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 5. Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII - AMENDMENTS The Board of Directors may amend, alter or repeal these Bylaws at any meeting of the Board, provided notice of the proposed change was given not less than two (2) days prior to the meeting. The stockholders shall also have power to amend, alter or repeal these Bylaws at any meeting of stockholders provided notice of the proposed change was given in the notice of the meeting; provided, however, that, notwithstanding any other provisions of the Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, the Certificate of Incorporation, any Preferred Stock Designation or these Bylaws, the affirmative votes of the holders of at least 80% of the voting power of all the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal any provisions of these Bylaws. The above Amended and Restated Bylaws are effective as of December 31, 2003. 14 EX-10.6 4 ex10-6.txt Exhibit 10.6 BERKSHIRE BANK THREE YEAR CHANGE IN CONTROL AGREEMENT This AGREEMENT is made effective as of October 22, 2003, by and among Berkshire Bank (the "Institution"), a state chartered savings institution with its principal administrative offices at 24 North Street, Pittsfield, Massachusetts 01201, Berkshire Hills Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the state of Delaware, which is the stock holding company of the Institution, and Gayle P. Fawcett ("Executive"). WHEREAS, the Institution recognizes the substantial contributions Executive has made to the Institution and wishes to protect Executive's position with the Institution for the period provided in this Agreement; and WHEREAS, Executive has agreed to serve in the employ of the Institution. NOW, THEREFORE, in consideration of the contributions and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT. The period of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing on each anniversary thereafter, the Board of Directors (the "Board") may act to extend the term of this Agreement for an additional year, such that the remaining term of this Agreement would be three years, unless Executive elects not to extend the term of this Agreement by giving written notice to the Institution, in which case the term of this Agreement will expire on the third anniversary of this Agreement. 2. CHANGE IN CONTROL. (a) Upon the occurrence of a Change in Control of the Institution or the Holding Company (as herein defined) followed at any time during the term of this Agreement by the involuntary termination of Executive's employment or the voluntary termination of Executive's employment in accordance with the terms of this Agreement, other than for Cause, as defined in Section 2(c) of this Agreement, the provisions of Section 3 of this Agreement shall apply. (i) Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate her employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in annual compensation or benefits, or relocation of her principal place of employment by more than twenty-five (25) miles from its location immediately prior to the Change in Control. (ii) Notwithstanding the foregoing clause (i), in the event, however, that the Chief Executive Officer of the Institution immediately prior to the Change in Control is the Chief Executive Officer of the resulting entity with similar responsibilities and duties and Executive's position with the resulting entity does not result in: (A) a reduction in annual compensation or benefits, (B) a material change in work schedule, or (C) relocation of her principal place of employment by more than fifty (50) miles, then Executive may not voluntarily terminate her employment during the one-year period following the Change in Control and receive any payments or benefits under this Agreement. For the avoidance of doubt, with respect to the immediately foregoing limitation on voluntary termination, Executive may voluntarily terminate employment in accordance with this Section 2(a) effective upon the expiration of said one-year period, and for a period of 30 days thereafter, if one of the events set forth in clause (i) has occurred, either at the time of the Change in Control or during the one-year period following the time of the Change in Control. If one of the events described in clause (i) occurs more than one year following the date of the Change in Control, but during the remaining term of the Agreement, then Executive may terminate her employment in accordance with the provisions of this Agreement, notwithstanding this clause (ii). (iii) Notwithstanding any other provision of this Agreement to the contrary, Executive may consent in writing to any demotion, loss, reduction or relocation and waive her ability to voluntarily terminate her employment under the terms of this Agreement. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Institution or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Institution or the Holding Company within the meaning of the Bank Change in Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company, as in effect on the date hereof; or (iii) results in a transaction requiring prior FRB approval under the Bank Holding Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding Company's acquisition of the Institution; or (iv) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding securities except for any securities of the Institution purchased by the Holding Company in connection with the conversion of the Institution to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Institution; or (B) individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") 2 cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs in which the Institution or Holding Company is not the resulting entity; or (D) solicitations of shareholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Institution or the Institution. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 of this Agreement upon Termination for Cause. The term "Termination for Cause" shall mean termination because of: (i) Executive's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement which results in a material loss to the Institution or the Holding Company, or (ii) Executive's conviction of a crime or act involving moral turpitude or a final judgment rendered against Executive based upon actions of Executive which involve moral turpitude. For the purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interests of the Institution or its affiliates. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to her a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for her, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 4 of this Agreement through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock-based incentive plan of the Institution, the Holding Company or any subsidiary or affiliate thereof vest. At the Date of Termination, such stock options and such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Date of Termination for Cause. 3 3. TERMINATION BENEFITS. (a) Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by the involuntary termination of Executive's employment (other than for Termination for Cause), or voluntary termination during the term of this Agreement as provided by Section 2(a) of this Agreement, the Institution shall be obligated to pay Executive, or in the event of her subsequent death, her beneficiary or beneficiaries, or her estate, as the case may be, a sum equal to three (3) times Executive's average annual compensation for the five most recent taxable years that Executive has been employed by the Institution or such lesser number of years in the event that Executive shall have been employed by the Institution for less than five years. For this purpose, such annual compensation shall include base salary and any other taxable income, including, but not limited to, amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, pension and profit sharing plan contributions or benefits (whether or not taxable), severance payments, retirement benefits, and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year. At the election of Executive, which election is to be made prior to a Change in Control, such payment shall be made in a lump sum or on an annual basis in approximately equal installments over a three (3) year period. (b) Upon the occurrence of a Change in Control of the Institution or the Holding Company followed at any time during the term of this Agreement by Executive's voluntary or involuntary termination of employment in accordance with paragraph (a) of this Section 3, other than for Termination for Cause, the Institution shall cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Institution for Executive prior to her severance, except to the extent such coverage may be changed in its application to all employees on a nondiscriminatory basis. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months from the Date of Termination. (c) Notwithstanding the provisions of this Section 3, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the "Termination Benefits") constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended, or any successor thereto, and in order to avoid such a result, Termination Benefits will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G. The allocation of the reduction required hereby among the Termination Benefits shall be determined by Executive. 4. NOTICE OF TERMINATION. (a) Any purported termination by the Institution or by Executive in connection with a Change in Control shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in 4 reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the instance of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given); provided, however, that if a dispute regarding the Executive's termination exists, the "Date of Termination" shall be determined in accordance with Section 4(c) of this Agreement. (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute in connection with a Change in Control, in the event that the Executive is terminated for reasons other than Termination for Cause, the Institution will continue to pay Executive the payments and benefits due under this Agreement in effect when the notice giving rise to the dispute was given (including, but not limited to, her annual salary) until the earlier of: (i) the resolution of the dispute in accordance with this Agreement; or (ii) the expiration of the remaining term of this Agreement as determined as of the Date of Termination. 5. SOURCE OF PAYMENTS. It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Institution. Further, the Holding Company guarantees such payments and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Institution are not timely paid or provided by the Institution, such amounts and benefits shall be paid or provided by the Holding Company. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Institution and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to her without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Institution or shall impose on the Institution any obligation to employ or retain Executive in its employ for any period. 5 7. NON-COMPETITION AND NON-DISCLOSURE. (a) For a period of one (1) year following the payment of termination benefits to Executive under this agreement, Executive agrees not to compete with the Institution or its affiliates in any city, town or county in which Executive's normal business office is located and the Institution or its affiliates has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such one (1) year period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Institution. The parties hereto, recognizing that irreparable injury will result to the Institution, its business and property in the event of Executive's breach of this Section 7(a), agree that in the event of any such breach by Executive, the Institution will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that, in the event of the termination of her employment following a Change in Control, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Institution, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Institution from pursuing any other remedies available for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Institution, as it may exist from time to time, is a valuable, special and unique asset of the business of the Institution. Executive will not, during or after the term of her employment, disclose any knowledge of the past, present, planned or considered business activities of the Institution or its affiliates to any person, firm, corporation, or other entity for any reason or purpose whatsoever, unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Institution or its affiliates. In the event of a breach or threatened breach by Executive of the provisions of this Section 7, the Institution will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Institution or its affiliates or from rendering any services to any person, firm, corporation or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Institution from pursuing other remedies available for such breach or threatened breach, including the recovery of damages from Executive. 8. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, 6 pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Institution and their respective successors and assigns. 9. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10. REQUIRED REGULATORY PROVISIONS. Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and any rules and regulations promulgated thereunder, including 12 C.F.R. Part 359. 11. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. 12. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 13. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. 7 14. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Institution's main office, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of her right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. PAYMENT OF COSTS AND LEGAL FEES. All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Institution if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 16. INDEMNIFICATION. The Institution shall provide Executive (including her heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and her heirs, executors and administrators) to the fullest extent permitted under Massachusetts law against all expenses and liabilities reasonably incurred by her in connection with or arising out of any action, suit or proceeding in which she may be involved by reason of having been a director or officer of the Institution (whether or not she continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the costs of reasonable settlements. 17. SUCCESSOR TO THE INSTITUTION. The Institution shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Institution, to expressly and unconditionally assume and agree to perform the Institution's obligations under this Agreement in the same manner and to the same extent that the Institution would be required to perform such obligations if no such succession or assignment had taken place. 8 SIGNATURES IN WITNESS WHEREOF, Berkshire Bank and Berkshire Hills Bancorp, Inc. have caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, on the 22nd day of October, 2003. ATTEST: BERKSHIRE BANK /s/ Kathy J. Deman By: /s/ Michael P. Daly - ------------------------------- ---------------------------------- ATTEST: BERKSHIRE HILLS BANCORP, INC. (Guarantor) /s/ Kathy J. Deman By: /s/ Michael P. Daly - ------------------------------- ---------------------------------- SEAL WITNESS: EXECUTIVE /s/ Lisa J. Lescarbeau /s/ Gayle P. Fawcett - ------------------------------- ---------------------------------- Gayle P. Fawcett 9 EX-10.7 5 ex10-7.txt Exhibit 10.7 BERKSHIRE HILLS BANCORP, INC. THREE YEAR CHANGE IN CONTROL AGREEMENT This AGREEMENT is made effective as of October 22, 2003, by and between Berkshire Hills Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the state of Delaware, with its principal administrative offices at 24 North Street, Pittsfield, Massachusetts 01201, and Gayle P. Fawcett ("Executive"). Any reference to the "Institution" herein shall mean Berkshire Bank or any successor to Berkshire Bank. WHEREAS, the Holding Company recognizes the substantial contributions Executive has made to the Holding Company and wishes to protect Executive's position with the Holding Company for the period provided in this Agreement; and WHEREAS, Executive has agreed to serve in the employ of the Holding Company. NOW, THEREFORE, in consideration of the contributions and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT. The period of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing on each anniversary thereafter, the Board of Directors (the "Board") may act to extend the term of this Agreement for an additional year, such that the remaining term of this Agreement would be three years, unless Executive elects not to extend the term of this Agreement by giving written notice to the Holding Company, in which case the term of this Agreement will expire on the third anniversary of this Agreement. 2. CHANGE IN CONTROL. (a) Upon the occurrence of a Change in Control of the Institution or the Holding Company (as herein defined) followed at any time during the term of this Agreement by the involuntary termination of Executive's employment or the voluntary termination of Executive's employment in accordance with the terms of this Agreement, other than for Cause, as defined in Section 2(c) of this Agreement, the provisions of Section 3 of this Agreement shall apply. (i) Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate her employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in annual compensation or benefits, or relocation of her principal place of employment by more than twenty-five (25) miles from its location immediately prior to the Change in Control. (ii) Notwithstanding the foregoing clause (i), in the event, however, that the Chief Executive Officer of the Institution immediately prior to the Change in Control is the Chief Executive Officer of the resulting entity with similar responsibilities and duties and Executive's position with the resulting entity does not result in: (A) a reduction in annual compensation or benefits, (B) a material change in work schedule, or (C) relocation of her principal place of employment by more than fifty (50) miles, then Executive may not voluntarily terminate her employment during the one-year period following the Change in Control and receive any payments or benefits under this Agreement. For the avoidance of doubt, with respect to the immediately foregoing limitation on voluntary termination, Executive may voluntarily terminate employment in accordance with this Section 2(a) effective upon the expiration of said one-year period, and for a period of 30 days thereafter, if one of the events set forth in clause (i) has occurred, either at the time of the Change in Control or during the one-year period following the time of the Change in Control. If one of the events described in clause (i) occurs more than one year following the date of the Change in Control, but during the remaining term of the Agreement, then Executive may terminate her employment in accordance with the provisions of this Agreement, notwithstanding this clause (ii). (iii) Notwithstanding any other provision of this Agreement to the contrary, Executive may consent in writing to any demotion, loss, reduction or relocation and waive her ability to voluntarily terminate his employment under the terms of this Agreement. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Institution or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Institution or the Holding Company within the meaning of the Bank Change in Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company, as in effect on the date hereof; or (iii) results in a transaction requiring prior FRB approval under the Bank Holding Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding Company's acquisition of the Institution; or (iv) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding securities except for any securities of the Institution purchased by the Holding Company in connection with the conversion of the Institution to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Institution; or (B) individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") 2 cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs in which the Institution or Holding Company is not the resulting entity; or (D) solicitations of shareholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Institution or the Holding Company. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 of this Agreement upon Termination for Cause. The term "Termination for Cause" shall mean termination because of: (i) Executive's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement which results in a material loss to the Institution or the Holding Company, or (ii) Executive's conviction of a crime or act involving moral turpitude or a final judgement rendered against Executive based upon actions of Executive which involve moral turpitude. For the purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interests of the Holding Company or its affiliates. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to her a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for her, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 5 of this Agreement through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock-based incentive plan of the Institution, the Holding Company or any subsidiary or affiliate thereof vest. At the Date of Termination, such stock options and such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Date of Termination for Cause. 3 3. TERMINATION BENEFITS. (a) Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by the involuntary termination of Executive's employment (other than for Termination for Cause), or voluntary termination during the term of this Agreement as provided by Section 2(a) of this Agreement, the Holding Company shall be obligated to pay Executive, or in the event of her subsequent death, her beneficiary or beneficiaries, or her estate, as the case may be, a sum equal to three (3) times Executive's average annual compensation for the five most recent taxable years that Executive has been employed by the Holding Company or such lesser number of years in the event that Executive shall have been employed by the Holding Company for less than five years. For this purpose, such annual compensation shall include base salary and any other taxable income, including, but not limited to, amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, pension and profit sharing plan contributions or benefits (whether or not taxable), severance payments, retirement benefits, and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year. At the election of Executive, which election is to be made prior to a Change in Control, such payment shall be made in a lump sum or on an annual basis in approximately equal installments over a three (3) year period. (b) Upon the occurrence of a Change in Control of the Institution or the Holding Company followed at any time during the term of this Agreement by Executive's voluntary or involuntary termination of employment in accordance with paragraph (a) of this Section 3, other than for Termination for Cause, the Holding Company shall cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Institution or Holding Company for Executive prior to her severance, except to the extent such coverage may be changed in its application to all Institution or Holding Company employees on a nondiscriminatory basis. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months from the Date of Termination. 4. CHANGE IN CONTROL-RELATED PROVISIONS. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment, benefit or distribution made or provided by the Holding Company or the Institution to or for the benefit of Executive (whether made or provided pursuant to the terms of this Agreement or otherwise) (each referred to herein as a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by Executive with respect to such excise tax (the excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 4 (b) Determination of Gross-Up Payment. Subject to the provisions of Section 4(c), all determinations required to be made under this Section 4, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm reasonably acceptable to the Holding Company as may be designated by Executive (the "Accounting Firm") which shall provide detailed supporting calculations to the Holding Company and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Holding Company. All fees and expenses of the Accounting Firm shall be borne solely by the Holding Company. Any Gross-Up Payment, as determined pursuant to this Section 4, shall be paid by the Holding Company to Executive within five business days of the later of (i) the due date for the payment of any Excise Tax, or (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Holding Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code, at the time of the initial determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment will not have been made by the Holding Company which should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Holding Company exhausts its remedies pursuant to Section 4(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Holding Company to or for the benefit of Executive. (c) Treatment of Claims. Executive shall notify the Holding Company in writing of any claim by the Internal Revenue Service that, if successful, would require a Gross-Up Payment to be made. Such notification shall be given as soon as practicable, but no later than ten business days, after Executive is informed in writing of such claim and shall apprise the Holding Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Holding Company (or any shorter period ending on the date that payment of taxes with respect to such claim is due). If the Holding Company notifies Executive in writing prior to the expiration of this period that it desires to contest such claim, Executive shall: (i) give the Holding Company any information reasonably requested by the Holding Company relating to such claim; (ii) take such action in connection with contesting such claim as the Holding Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Holding Company; (iii) cooperate with the Holding Company in good faith in order to effectively contest such claim; and (iv) permit the Holding Company to participate in any proceedings relating to such claim; provided, however, that the Holding Company shall bear and pay directly 5 all costs and expenses (including additional interest and penalties) incurred in connection with such contest and indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or related taxes, interest or penalties imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(c), the Holding Company shall control all proceedings taken in connection with such contest and, at its option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority with respect to such claim and may, at its option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. Further, Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Holding Company shall determine; provided, however, that if the Holding Company directs Executive to pay such claim and sue for a refund, the Holding Company shall advance the amount of such payment to Executive, on an interest-free basis (including interest or penalties with respect thereto). Furthermore, the Holding Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority. (d) Adjustments to the Gross-Up Payment. If, after the receipt by Executive of an amount advanced by the Holding Company pursuant to Section 4(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Holding Company's compliance with the requirements of Section 4(c)) promptly pay to the Holding Company the amount of such refund (together with any interest paid or credited thereon after applicable taxes). If, after the receipt by Executive of an amount advanced by the Holding Company pursuant to Section 4(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and such denial of refund occurs prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 5. NOTICE OF TERMINATION. (a) Any purported termination by the Holding Company or by Executive in connection with a Change in Control shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the instance of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given); provided, however, that if a dispute regarding the 6 Executive's termination exists, the "Date of Termination" shall be determined in accordance with Section 5(c) of this Agreement. (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute in connection with a Change in Control, in the event that the Executive is terminated for reasons other than Termination for Cause, the Holding Company will continue to pay Executive the payments and benefits due under this Agreement in effect when the notice giving rise to the dispute was given (including, but not limited to her annual salary) until the earlier of: (i) the resolution of the dispute in accordance with this Agreement; or (ii) the expiration of the remaining term of this Agreement as determined as of the Date of Termination. 6. SOURCE OF PAYMENTS. It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Holding Company. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Holding Company or the Institution and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to her without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Holding Company or shall impose on the Holding Company any obligation to employ or retain Executive in its employ for any period. 8. NON-COMPETITION AND NON-DISCLOSURE. (a) For a period of one (1) year following the payment of termination benefits to Executive under this agreement, Executive agrees not to compete with the Holding Company or its subsidiaries in any city, town or county in which Executive's normal business office is located and the Holding Company or its subsidiaries has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such one (1) year period and within said cities, towns and counties, Executive 7 shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Holding Company or its subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Holding Company, its business and property in the event of Executive's breach of this Section 8(a), agree that in the event of any such breach by Executive, the Holding Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of her employment following a Change in Control, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Holding Company or its subsidiaries, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Holding Company from pursuing any other remedies available for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company or its subsidiaries, as it may exist from time to time, is a valuable, special and unique asset of the business of the Holding Company. Executive will not, during or after the term of her employment, disclose any knowledge of the past, present, planned or considered business activities of the Holding Company or its subsidiaries to any person, firm, corporation, or other entity for any reason or purpose whatsoever, unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company or its subsidiaries. In the event of a breach or threatened breach by Executive of the provisions of this Section 8, the Holding Company will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Holding Company or its subsidiaries or from rendering any services to any person, firm, corporation or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company from pursuing other remedies available for such breach or threatened breach, including the recovery of damages from Executive. 9. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Holding Company and their respective successors and assigns. 8 10. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 11. REQUIRED REGULATORY PROVISIONS. Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and any rules and regulations promulgated thereunder, including 12 C.F.R. Part 359. 12. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. 13. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 14. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the state of Delaware. 15. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Holding Company's main office, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of her right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 9 16. PAYMENT OF COSTS AND LEGAL FEES. All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 17. INDEMNIFICATION. The Holding Company shall provide Executive (including her heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and her heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by her in connection with or arising out of any action, suit or proceeding in which she may be involved by reason of having been a director or officer of the Holding Company (whether or not she continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the costs of reasonable settlements. 18. SUCCESSOR TO THE HOLDING COMPANY. The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Holding Company, to expressly and unconditionally assume and agree to perform the Holding Company's obligations under this Agreement in the same manner and to the same extent that the Holding Company would be required to perform such obligations if no such succession or assignment had taken place. 10 SIGNATURES IN WITNESS WHEREOF, Berkshire Hills Bancorp, Inc. has caused this Agreement to be executed by its duly authorized officer, and Executive has signed this Agreement, on the 22nd day of October, 2003. ATTEST: BERKSHIRE HILLS BANCORP, INC. /s/ Kathy J. Deman By: /s/ Michael P. Daly - ------------------------------- ---------------------------------- SEAL WITNESS: EXECUTIVE /s/ Lisa J. Lescarbeau /s/ Gayle P. Fawcett - ------------------------------- ---------------------------------- Gayle P. Fawcett 11 EX-10.8 6 ex10-8.txt Exhibit 10.8 BERKSHIRE BANK THREE YEAR CHANGE IN CONTROL AGREEMENT This AGREEMENT is made effective as of October 22, 2003, by and among Berkshire Bank (the "Institution"), a state chartered savings institution with its principal administrative offices at 24 North Street, Pittsfield, Massachusetts 01201, Berkshire Hills Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the state of Delaware, which is the stock holding company of the Institution, and Wayne F. Patenaude ("Executive"). WHEREAS, the Institution recognizes the substantial contributions Executive has made to the Institution and wishes to protect Executive's position with the Institution for the period provided in this Agreement; and WHEREAS, Executive has agreed to serve in the employ of the Institution. NOW, THEREFORE, in consideration of the contributions and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT. The period of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing on each anniversary thereafter, the Board of Directors (the "Board") may act to extend the term of this Agreement for an additional year, such that the remaining term of this Agreement would be three years, unless Executive elects not to extend the term of this Agreement by giving written notice to the Institution, in which case the term of this Agreement will expire on the third anniversary of this Agreement. 2. CHANGE IN CONTROL. (a) Upon the occurrence of a Change in Control of the Institution or the Holding Company (as herein defined) followed at any time during the term of this Agreement by the involuntary termination of Executive's employment or the voluntary termination of Executive's employment in accordance with the terms of this Agreement, other than for Cause, as defined in Section 2(c) of this Agreement, the provisions of Section 3 of this Agreement shall apply. (i) Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in annual compensation or benefits, or relocation of his principal place of employment by more than twenty-five (25) miles from its location immediately prior to the Change in Control. (ii) Notwithstanding the foregoing clause (i), in the event, however, that the Chief Executive Officer of the Institution immediately prior to the Change in Control is the Chief Executive Officer of the resulting entity with similar responsibilities and duties and Executive's position with the resulting entity does not result in: (A) a reduction in annual compensation or benefits, (B) a material change in work schedule, or (C) relocation of his principal place of employment by more than fifty (50) miles, then Executive may not voluntarily terminate his employment during the one-year period following the Change in Control and receive any payments or benefits under this Agreement. For the avoidance of doubt, with respect to the immediately foregoing limitation on voluntary termination, Executive may voluntarily terminate employment in accordance with this Section 2(a) effective upon the expiration of said one-year period, and for a period of 30 days thereafter, if one of the events set forth in clause (i) has occurred, either at the time of the Change in Control or during the one-year period following the time of the Change in Control. If one of the events described in clause (i) occurs more than one year following the date of the Change in Control, but during the remaining term of the Agreement, then Executive may terminate his employment in accordance with the provisions of this Agreement, notwithstanding this clause (ii). (iii) Notwithstanding any other provision of this Agreement to the contrary, Executive may consent in writing to any demotion, loss, reduction or relocation and waive his ability to voluntarily terminate his employment under the terms of this Agreement. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Institution or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Institution or the Holding Company within the meaning of the Bank Change in Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company, as in effect on the date hereof; or (iii) results in a transaction requiring prior FRB approval under the Bank Holding Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding Company's acquisition of the Institution; or (iv) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding securities except for any securities of the Institution purchased by the Holding Company in connection with the conversion of the Institution to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Institution; or (B) individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") 2 cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs in which the Institution or Holding Company is not the resulting entity; or (D) solicitations of shareholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Institution or the Institution. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 of this Agreement upon Termination for Cause. The term "Termination for Cause" shall mean termination because of: (i) Executive's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement which results in a material loss to the Institution or the Holding Company, or (ii) Executive's conviction of a crime or act involving moral turpitude or a final judgment rendered against Executive based upon actions of Executive which involve moral turpitude. For the purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interests of the Institution or its affiliates. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 4 of this Agreement through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock-based incentive plan of the Institution, the Holding Company or any subsidiary or affiliate thereof vest. At the Date of Termination, such stock options and such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Date of Termination for Cause. 3 3. TERMINATION BENEFITS. (a) Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by the involuntary termination of Executive's employment (other than for Termination for Cause), or voluntary termination during the term of this Agreement as provided by Section 2(a) of this Agreement, the Institution shall be obligated to pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to three (3) times Executive's average annual compensation for the five most recent taxable years that Executive has been employed by the Institution or such lesser number of years in the event that Executive shall have been employed by the Institution for less than five years. For this purpose, such annual compensation shall include base salary and any other taxable income, including, but not limited to, amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, pension and profit sharing plan contributions or benefits (whether or not taxable), severance payments, retirement benefits, and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year. At the election of Executive, which election is to be made prior to a Change in Control, such payment shall be made in a lump sum or on an annual basis in approximately equal installments over a three (3) year period. (b) Upon the occurrence of a Change in Control of the Institution or the Holding Company followed at any time during the term of this Agreement by Executive's voluntary or involuntary termination of employment in accordance with paragraph (a) of this Section 3, other than for Termination for Cause, the Institution shall cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Institution for Executive prior to his severance, except to the extent such coverage may be changed in its application to all employees on a nondiscriminatory basis. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months from the Date of Termination. (c) Notwithstanding the provisions of this Section 3, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the "Termination Benefits") constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended, or any successor thereto, and in order to avoid such a result, Termination Benefits will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G. The allocation of the reduction required hereby among the Termination Benefits shall be determined by Executive. 4. NOTICE OF TERMINATION. (a) Any purported termination by the Institution or by Executive in connection with a Change in Control shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in 4 reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the instance of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given); provided, however, that if a dispute regarding the Executive's termination exists, the "Date of Termination" shall be determined in accordance with Section 4(c) of this Agreement. (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute in connection with a Change in Control, in the event that the Executive is terminated for reasons other than Termination for Cause, the Institution will continue to pay Executive the payments and benefits due under this Agreement in effect when the notice giving rise to the dispute was given (including, but not limited to, his annual salary) until the earlier of: (i) the resolution of the dispute in accordance with this Agreement; or (ii) the expiration of the remaining term of this Agreement as determined as of the Date of Termination. 5. SOURCE OF PAYMENTS. It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Institution. Further, the Holding Company guarantees such payments and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Institution are not timely paid or provided by the Institution, such amounts and benefits shall be paid or provided by the Holding Company. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Institution and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Institution or shall impose on the Institution any obligation to employ or retain Executive in its employ for any period. 5 7. NON-COMPETITION AND NON-DISCLOSURE. (a) For a period of one (1) year following the payment of termination benefits to Executive under this agreement, Executive agrees not to compete with the Institution or its affiliates in any city, town or county in which Executive's normal business office is located and the Institution or its affiliates has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such one (1) year period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Institution. The parties hereto, recognizing that irreparable injury will result to the Institution, its business and property in the event of Executive's breach of this Section 7(a), agree that in the event of any such breach by Executive, the Institution will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that, in the event of the termination of his employment following a Change in Control, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Institution, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Institution from pursuing any other remedies available for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Institution, as it may exist from time to time, is a valuable, special and unique asset of the business of the Institution. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Institution or its affiliates to any person, firm, corporation, or other entity for any reason or purpose whatsoever, unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Institution or its affiliates. In the event of a breach or threatened breach by Executive of the provisions of this Section 7, the Institution will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Institution or its affiliates or from rendering any services to any person, firm, corporation or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Institution from pursuing other remedies available for such breach or threatened breach, including the recovery of damages from Executive. 8. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, 6 pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Institution and their respective successors and assigns. 9. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10. REQUIRED REGULATORY PROVISIONS. Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and any rules and regulations promulgated thereunder, including 12 C.F.R. Part 359. 11. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. 12. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 13. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. 7 14. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Institution's main office, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. PAYMENT OF COSTS AND LEGAL FEES. All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Institution if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 16. INDEMNIFICATION. The Institution shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under Massachusetts law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Institution (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the costs of reasonable settlements. 17. SUCCESSOR TO THE INSTITUTION. The Institution shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Institution, to expressly and unconditionally assume and agree to perform the Institution's obligations under this Agreement in the same manner and to the same extent that the Institution would be required to perform such obligations if no such succession or assignment had taken place. 8 SIGNATURES IN WITNESS WHEREOF, Berkshire Bank and Berkshire Hills Bancorp, Inc. have caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, on the 22nd day of October, 2003. ATTEST: BERKSHIRE BANK /s/ Kathy J. Deman By: /s/ Michael P. Daly - ------------------------------- ---------------------------------- ATTEST: BERKSHIRE HILLS BANCORP, INC. (Guarantor) /s/ Kathy J. Deman By: /s/ Michael P. Daly - ------------------------------- ---------------------------------- SEAL WITNESS: EXECUTIVE /s/ Susan A. Lawton /s/ Wayne F. Patenaude - ------------------------------- ---------------------------------- Wayne F. Patenaude 9 EX-10.9 7 ex10-9.txt Exhibit 10.9 BERKSHIRE HILLS BANCORP, INC. THREE YEAR CHANGE IN CONTROL AGREEMENT This AGREEMENT is made effective as of October 22, 2003, by and between Berkshire Hills Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the state of Delaware, with its principal administrative offices at 24 North Street, Pittsfield, Massachusetts 01201, and Wayne F. Patenaude ("Executive"). Any reference to the "Institution" herein shall mean Berkshire Bank or any successor to Berkshire Bank. WHEREAS, the Holding Company recognizes the substantial contributions Executive has made to the Holding Company and wishes to protect Executive's position with the Holding Company for the period provided in this Agreement; and WHEREAS, Executive has agreed to serve in the employ of the Holding Company. NOW, THEREFORE, in consideration of the contributions and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT. The period of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing on each anniversary thereafter, the Board of Directors (the "Board") may act to extend the term of this Agreement for an additional year, such that the remaining term of this Agreement would be three years, unless Executive elects not to extend the term of this Agreement by giving written notice to the Holding Company, in which case the term of this Agreement will expire on the third anniversary of this Agreement. 2. CHANGE IN CONTROL. (a) Upon the occurrence of a Change in Control of the Institution or the Holding Company (as herein defined) followed at any time during the term of this Agreement by the involuntary termination of Executive's employment or the voluntary termination of Executive's employment in accordance with the terms of this Agreement, other than for Cause, as defined in Section 2(c) of this Agreement, the provisions of Section 3 of this Agreement shall apply. (i) Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in annual compensation or benefits, or relocation of his principal place of employment by more than twenty-five (25) miles from its location immediately prior to the Change in Control. (ii) Notwithstanding the foregoing clause (i), in the event, however, that the Chief Executive Officer of the Institution immediately prior to the Change in Control is the Chief Executive Officer of the resulting entity with similar responsibilities and duties and Executive's position with the resulting entity does not result in: (A) a reduction in annual compensation or benefits, (B) a material change in work schedule, or (C) relocation of his principal place of employment by more than fifty (50) miles, then Executive may not voluntarily terminate his employment during the one-year period following the Change in Control and receive any payments or benefits under this Agreement. For the avoidance of doubt, with respect to the immediately foregoing limitation on voluntary termination, Executive may voluntarily terminate employment in accordance with this Section 2(a) effective upon the expiration of said one-year period, and for a period of 30 days thereafter, if one of the events set forth in clause (i) has occurred, either at the time of the Change in Control or during the one-year period following the time of the Change in Control. If one of the events described in clause (i) occurs more than one year following the date of the Change in Control, but during the remaining term of the Agreement, then Executive may terminate his employment in accordance with the provisions of this Agreement, notwithstanding this clause (ii). (iii) Notwithstanding any other provision of this Agreement to the contrary, Executive may consent in writing to any demotion, loss, reduction or relocation and waive his ability to voluntarily terminate his employment under the terms of this Agreement. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Institution or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Institution or the Holding Company within the meaning of the Bank Change in Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company, as in effect on the date hereof; or (iii) results in a transaction requiring prior FRB approval under the Bank Holding Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding Company's acquisition of the Institution; or (iv) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding securities except for any securities of the Institution purchased by the Holding Company in connection with the conversion of the Institution to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Institution; or (B) individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") 2 cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs in which the Institution or Holding Company is not the resulting entity; or (D) solicitations of shareholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Institution or the Holding Company. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 of this Agreement upon Termination for Cause. The term "Termination for Cause" shall mean termination because of: (i) Executive's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement which results in a material loss to the Institution or the Holding Company, or (ii) Executive's conviction of a crime or act involving moral turpitude or a final judgment rendered against Executive based upon actions of Executive which involve moral turpitude. For the purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interests of the Holding Company or its affiliates. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 5 of this Agreement through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock-based incentive plan of the Institution, the Holding Company or any subsidiary or affiliate thereof vest. At the Date of Termination, such stock options and such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Date of Termination for Cause. 3 3. TERMINATION BENEFITS. (a) Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by the involuntary termination of Executive's employment (other than for Termination for Cause), or voluntary termination during the term of this Agreement as provided by Section 2(a) of this Agreement, the Holding Company shall be obligated to pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to three (3) times Executive's average annual compensation for the five most recent taxable years that Executive has been employed by the Holding Company or such lesser number of years in the event that Executive shall have been employed by the Holding Company for less than five years. For this purpose, such annual compensation shall include base salary and any other taxable income, including, but not limited to, amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, pension and profit sharing plan contributions or benefits (whether or not taxable), severance payments, retirement benefits, and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year. At the election of Executive, which election is to be made prior to a Change in Control, such payment shall be made in a lump sum or on an annual basis in approximately equal installments over a three (3) year period. (b) Upon the occurrence of a Change in Control of the Institution or the Holding Company followed at any time during the term of this Agreement by Executive's voluntary or involuntary termination of employment in accordance with paragraph (a) of this Section 3, other than for Termination for Cause, the Holding Company shall cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Institution or Holding Company for Executive prior to his severance, except to the extent such coverage may be changed in its application to all Institution or Holding Company employees on a nondiscriminatory basis. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months from the Date of Termination. 4. CHANGE IN CONTROL-RELATED PROVISIONS. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment, benefit or distribution made or provided by the Holding Company or the Institution to or for the benefit of Executive (whether made or provided pursuant to the terms of this Agreement or otherwise) (each referred to herein as a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by Executive with respect to such excise tax (the excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 4 (b) Determination of Gross-Up Payment. Subject to the provisions of Section 4(c), all determinations required to be made under this Section 4, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm reasonably acceptable to the Holding Company as may be designated by Executive (the "Accounting Firm") which shall provide detailed supporting calculations to the Holding Company and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Holding Company. All fees and expenses of the Accounting Firm shall be borne solely by the Holding Company. Any Gross-Up Payment, as determined pursuant to this Section 4, shall be paid by the Holding Company to Executive within five business days of the later of (i) the due date for the payment of any Excise Tax, or (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Holding Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code, at the time of the initial determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment will not have been made by the Holding Company which should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Holding Company exhausts its remedies pursuant to Section 4(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Holding Company to or for the benefit of Executive. (c) Treatment of Claims. Executive shall notify the Holding Company in writing of any claim by the Internal Revenue Service that, if successful, would require a Gross-Up Payment to be made. Such notification shall be given as soon as practicable, but no later than ten business days, after Executive is informed in writing of such claim and shall apprise the Holding Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Holding Company (or any shorter period ending on the date that payment of taxes with respect to such claim is due). If the Holding Company notifies Executive in writing prior to the expiration of this period that it desires to contest such claim, Executive shall: (i) give the Holding Company any information reasonably requested by the Holding Company relating to such claim; (ii) take such action in connection with contesting such claim as the Holding Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Holding Company; (iii) cooperate with the Holding Company in good faith in order to effectively contest such claim; and (iv) permit the Holding Company to participate in any proceedings relating to such claim; provided, however, that the Holding Company shall bear and pay directly 5 all costs and expenses (including additional interest and penalties) incurred in connection with such contest and indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or related taxes, interest or penalties imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(c), the Holding Company shall control all proceedings taken in connection with such contest and, at its option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority with respect to such claim and may, at its option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. Further, Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Holding Company shall determine; provided, however, that if the Holding Company directs Executive to pay such claim and sue for a refund, the Holding Company shall advance the amount of such payment to Executive, on an interest-free basis (including interest or penalties with respect thereto). Furthermore, the Holding Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority. (d) Adjustments to the Gross-Up Payment. If, after the receipt by Executive of an amount advanced by the Holding Company pursuant to Section 4(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Holding Company's compliance with the requirements of Section 4(c)) promptly pay to the Holding Company the amount of such refund (together with any interest paid or credited thereon after applicable taxes). If, after the receipt by Executive of an amount advanced by the Holding Company pursuant to Section 4(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and such denial of refund occurs prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. 5. NOTICE OF TERMINATION. (a) Any purported termination by the Holding Company or by Executive in connection with a Change in Control shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the instance of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given); provided, however, that if a dispute regarding the 6 Executive's termination exists, the "Date of Termination" shall be determined in accordance with Section 5(c) of this Agreement. (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute in connection with a Change in Control, in the event that the Executive is terminated for reasons other than Termination for Cause, the Holding Company will continue to pay Executive the payments and benefits due under this Agreement in effect when the notice giving rise to the dispute was given (including, but not limited to his annual salary) until the earlier of: (i) the resolution of the dispute in accordance with this Agreement; or (ii) the expiration of the remaining term of this Agreement as determined as of the Date of Termination. 6. SOURCE OF PAYMENTS. It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Holding Company. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Holding Company or the Institution and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Holding Company or shall impose on the Holding Company any obligation to employ or retain Executive in its employ for any period. 8. NON-COMPETITION AND NON-DISCLOSURE. (a) For a period of one (1) year following the payment of termination benefits to Executive under this agreement, Executive agrees not to compete with the Holding Company or its subsidiaries in any city, town or county in which Executive's normal business office is located and the Holding Company or its subsidiaries has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such one (1) year period and within said cities, towns and counties, Executive 7 shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Holding Company or its subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Holding Company, its business and property in the event of Executive's breach of this Section 8(a), agree that in the event of any such breach by Executive, the Holding Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment following a Change in Control, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Holding Company or its subsidiaries, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Holding Company from pursuing any other remedies available for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company or its subsidiaries, as it may exist from time to time, is a valuable, special and unique asset of the business of the Holding Company. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Holding Company or its subsidiaries to any person, firm, corporation, or other entity for any reason or purpose whatsoever, unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company or its subsidiaries. In the event of a breach or threatened breach by Executive of the provisions of this Section 8, the Holding Company will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Holding Company or its subsidiaries or from rendering any services to any person, firm, corporation or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company from pursuing other remedies available for such breach or threatened breach, including the recovery of damages from Executive. 9. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Holding Company and their respective successors and assigns. 8 10. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 11. REQUIRED REGULATORY PROVISIONS. Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and any rules and regulations promulgated thereunder, including 12 C.F.R. Part 359. 12. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. 13. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 14. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the state of Delaware. 15. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Holding Company's main office, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 9 16. PAYMENT OF COSTS AND LEGAL FEES. All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 17. INDEMNIFICATION. The Holding Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Holding Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the costs of reasonable settlements. 18. SUCCESSOR TO THE HOLDING COMPANY. The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Holding Company, to expressly and unconditionally assume and agree to perform the Holding Company's obligations under this Agreement in the same manner and to the same extent that the Holding Company would be required to perform such obligations if no such succession or assignment had taken place. 10 SIGNATURES IN WITNESS WHEREOF, Berkshire Hills Bancorp, Inc. has caused this Agreement to be executed by its duly authorized officer, and Executive has signed this Agreement, on the 22nd day of October, 2003. ATTEST: BERKSHIRE HILLS BANCORP, INC. /s/ Kathy J. Deman By: /s/ Michael P. Daly - ------------------------------- ---------------------------------- SEAL WITNESS: EXECUTIVE /s/ Susan A. Lawton /s/ Wayne F. Patenaude - ------------------------------- ---------------------------------- Wayne F. Patenaude 11 EX-10.10 8 exhibit10-10.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR THE CHIEF EXECUTIVE OFFICER OF BERKSHIRE BANK Article 1 Description, Purpose and Definitions 1.1 Name. The name of this Plan is the "Berkshire Bank Supplemental Executive Retirement Plan." 1.2 Purpose. The purpose of the Plan is to promote the retention of Michael P. Daly, the Chief Executive Officer of the Company, by providing an additional source of retirement income to supplement that available to him from other sources. 1.3 Definitions. For purposes of the Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise. "Bank" means Berkshire Bank, Pittsfield, Massachusetts. "Cause" means termination of employment because of Executive's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar infractions) or a final cease-and-desist order. "Change in Control" means an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Bank Change in Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Company, as in effect on the date hereof; or (iii) results in a transaction requiring prior FRB approval under the Bank Holding Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the date hereof except for the Company's acquisition of the Bank; or (iv) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Company representing 20% or more of the Bank's or the Company's outstanding securities except for any securities of the Bank purchased by the Company in connection with the conversion of the Bank to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Bank; or (B) individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction occurs in which the Bank or Company is not the resulting entity; or (D) solicitations of shareholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or Bank or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Bank or the Company. "Company" means Berkshire Hills Bancorp, Inc., a Delaware corporation. "Disability" means Executive suffers a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering Executive, or by the Social Security Administration, to be a disability rendering Executive totally and permanently disabled. Executive must submit proof to the Bank of the carrier's or Social Security Administration's determination at the request of the Bank. "Executive" means Michael P. Daly, Chief Executive Officer of the Bank. "Final Average Earnings" means the highest average of the total salary and bonus paid to executive for any three consecutive completed calendar years preceding termination. "Social Security Benefit" means the amount, as determined by the Administrator in its discretion and based upon Executive's estimated earnings history to the date of his termination of employment with the Bank, to which he will be entitled under the old age provisions of the Social Security Act upon attainment of the normal Social Security retirement age (assuming no changes in compensation between the time of Executive's termination from employment and his normal retirement age for purposes of receiving his receiving his Social Security Benefit). Article 2 Eligibility 2.1 Entitlement to Benefits. Except to the extent provided in Sections 3.3, 3.4 and 3.5, Executive shall become entitled to receive a benefit under the Plan only if his employment with the Bank terminates for reasons other than Cause after he has attained age 62. Notwithstanding anything in this Plan to the contrary, no benefit shall be payable to Executive if his employment is terminated for Cause. 2 Article 3 Supplemental Retirement Benefits 3.1 Basic Benefit. Subject to the succeeding provisions of this Article, Executive shall be entitled to an annual benefit equal to 70% of his Final Average Earnings upon his termination of employment (other than for Cause) at or after attaining age 62. 3.2 Other Retirement Income Reduction. A. Executive's annual benefit determined under Section 3.1 shall be reduced by the sum of the following amounts: (1) 50% of the amount of his annual Social Security Benefit; (2) The amount of his annual benefit under the Pension Plan; and (3) The value of his annual benefit attributable to employer matching and non-elective contributions made by the Bank to the Bank's 401(k) Plan and his employer contributions under the Berkshire Bank Employee Stock Ownership Plan. B. If any benefit described in Subsection A is not payable as a single life annuity or does not commence at the same time as Executive's benefit under this Plan, the Administrator shall, for purposes of this section, convert the value of such benefit into an actuarially equivalent single life annuity benefit commencing at the same time as the benefit under this Plan. C. If Executive would be entitled to a benefit described in Subsection A but for his failure to apply for such benefit, Subsection A will be applied as if he had applied for and received the benefit. D. Changes in a benefit described in Subsection A that occur after commencement of Executive's benefit under this Plan because of changes in the plan or program under which the benefit is provided or because of cost of living adjustments will not change the amount of the reduction under Subsection A. 3.3 Early Retirement Benefit. If Executive's termination of employment occurs prior to the date he attains age 62 but after attaining age 55, other than by reason of his death or Disability or following a Change in Control, he shall be entitled to a percentage of the basic benefit determined under Sections 3.1 and 3.2. The percentage of Executive's benefit under this Section 3.3 shall be determined as follows: 3 (i) If he retires during the calendar year in which he attains age 55, the benefit otherwise determined under Sections 3.1 and 3.2 shall be reduced by 50%. (ii) If he retires during the calendar year in which he attains age 56, the benefit otherwise determined under Sections 3.1 and 3.2 shall be reduced by 40%. (iii) If he retires during the calendar year in which he attains age 57, the benefit otherwise determined under Sections 3.1 and 3.2 shall be reduced by 30%. (iv) If he retires during the calendar year in which he attains age 58, the benefit otherwise determined under Sections 3.1 and 3.2 shall be reduced by 20%. (v) If he retires during the calendar year in which he attains age 59, the benefit otherwise determined under Sections 3.1 and 3.2 shall be reduced by 15%. (vi) If he retires during the calendar year in which he attains age 60, the benefit otherwise determined under Sections 3.1 and 3.2 shall be reduced by 10%. (vii) If he retires during the calendar year in which he attains age 61, the benefit otherwise determined under Sections 3.1 and 3.2 shall be reduced by 5%. Such benefit shall be paid in accordance with Executive's election under Section 3.6 at the time specified in Section 3.7. 3.4 Death and Disability Benefits. A. If Executive dies while employed by the Bank or terminates employment by reason of his Disability, there shall be paid to his or his designated beneficiary an amount equal to the benefit he would have received under Sections 3.1 and 3.2 if he had retired on the date immediately preceding his date of death or termination of employment and, as of such date, was deemed to satisfy the age requirement of Section 3.1. Such benefit shall be paid in accordance with his election under Section 3.6 at the time specified in Section 3.7. B. If Executive dies after his entitlement to a benefit has been established by reason of his termination of employment but prior to the time that benefit payment(s) have commenced, such payment(s) shall be made to his beneficiary in accordance with his election. 4 C. Executive may, on a form prescribed by and filed with the Administrator, designate a beneficiary to receive any death benefit payable under this section. If no effective beneficiary designation is on file at the time of his death, the death benefit under this section shall be paid as follows: (1) To his surviving spouse; or (2) If no spouse survives, to his surviving children in equal shares, with the descendants of a child who has predeceased him taking such child's share by representation; or (3) If none of his spouse and descendants is living, to the representative of his estate. D. The automatic beneficiaries set forth in Subsection C and, except as otherwise provided in Executive's duly filed beneficiary designation, the beneficiaries named in such designation, shall become fixed at his death so that if a beneficiary survives him but dies before final payment of the death benefit, any remaining death benefits shall be paid to the representative of such beneficiary's estate. 3.5 Change in Control Benefit If Executive terminates employment with the Bank following a Change in Control (other than for Cause), there shall be paid to him an amount equal to the benefit he would have received if he had retired on the date immediately preceding his date of termination of employment and, as of such date, was deemed to satisfy the age requirements of Section 3.1. Such benefit shall be paid in accordance with his election under Section 3.6 at the time specified in Section 3.7. The benefit payable under this provision shall be calculated using Executive's Final Average Earnings as of his date of termination. 3.6 Form of Benefit. A. Upon Executive's entitlement to a benefit under this Plan, his benefit shall be paid in the form of (i) a single life annuity with 10 annual payments guaranteed or (ii) a lump sum which is actuarially equivalent to the annuity form of payment in (i), as designated by Executive on an election form designated by the Bank for such purpose. B. Executive may, while employed by the Bank, change the form in which his benefits shall be paid by filing a revised election indicating such change at least one (1) calendar year prior to the date payments are to commence. Such election shall be irrevocable beginning one (1) calendar year prior to the date payments are to commence. No changes in the form 5 of benefit payment shall be permitted following his termination of employment. 3.7 Time of Payment/Calculation of Lump Sum. A. Benefit payments made to Executive or Executive's beneficiary pursuant to Sections 3.1 or 3.4 shall commence in accordance with his election under Section 3.6 not later than 60 days following the his termination of employment. B. Benefit payments made to Executive or Executive's beneficiary pursuant to Sections 3.3 or 3.5 shall commence in accordance with his election under Section 3.6 not later than 60 days following the date he attains age 62. Notwithstanding the foregoing, with respect to a benefit payable pursuant to Section 3.5, Executive may, with the consent of the Bank, elect to receive the lump sum equivalent of the benefit that would have otherwise been paid commencing not later than 60 days following the date he attains age 62. If Executive makes such an election, and the Bank consents, then the lump sum equivalent will be paid no later than the date on which the Change in Control occurs. C. For purposes of this Plan, any lump sum calculation shall be made assuming a mortality age using the 1994 Group Annuity Reserve (GRA) table and a discount rate of six percent (6%). 3.8 Payment in the Event of Incapacity or Minority. If the Administrator, in its discretion, determines that any person entitled to receive any payment under this Plan is physically, mentally or legally incapable of receiving or acknowledging receipt of payment, and no legal representative has been appointed for such person, the Administrator in its discretion may (but shall not be required to) cause any sum otherwise payable to such person to be paid to one or more legal person(s) as may be chosen by the Administrator from among the following: the institution maintaining such person, such person's spouse, children, parents or other relatives by blood or marriage, a custodian under any applicable Uniform Transfers to Minors Act or any other person determined by the Administrator to have incurred expense for such person. The Administrator's payment, based upon its good faith determination of the incapacity of the person otherwise entitled to payments under this Plan and the existence of any other person specified above, shall be conclusive and binding on all persons. Any such payment shall be a complete discharge of the liabilities of the Company under this Plan to the extent of such payment. Article 4 Source of Benefits 4.1 Employer Funds. This Plan is unfunded, and all benefits payable to Executive and his beneficiaries shall be payable solely from the general assets of the Bank. Executive shall be required or permitted to make any contribution to the Plan. 6 4.2 Trust Fund. The Bank may establish a trust from which part or all of the benefits under the Plan are to be paid. If a trust is established, all of the principal and income of such trust shall remain subject to the claims of the Bank's creditors until applied to the payment of benefits. 4.3 Executive's Right to Funds. This Plan constitutes a mere promise by the Bank to make benefit payments in the future. Beneficial ownership of any assets, whether cash or investments, that the Bank may earmark or place in trust to pay Executive's benefits under this Plan shall at all times remain in the Bank, and neither Executive nor his beneficiaries shall have any property interest in any specific assets of the Bank. To the extent Executive or any other person acquires a right to receive payments from the Bank under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Bank. Article 5 Administration 5.1 Administrator. The Board of Directors of the Bank shall be the Administrator of the Plan. The Board may delegate any of its administrative functions to another person, subject to the revocation of such delegation at any time. 5.2 Discretion. The Administrator shall also have the discretionary power and authority, which it shall exercise in good faith, to determine whether Executive is entitled to a benefit under the Plan, the identity of Executive's beneficiaries, and the amount and form of the benefit payable to Executive or his beneficiary. The Administrator shall have the discretion and authority to interpret the Plan and to make such rules and regulations as it deems necessary for the administration of the Plan and to carry out its purposes. The determinations of the Administrator shall be conclusive and binding on all persons. 5.3 Determination of Benefit. The Administrator's good faith determination of the benefits to which Executive or his beneficiaries are entitled under this Plan shall be conclusive and binding on all persons; provided, however, that this provision shall not preclude the Administrator's correcting any error the Administrator determines to have been made in the computation of any benefit. The Administrator shall be entitled to recover from any Participant or beneficiary, or from his estate, the amount of any overpayment of benefits and may reduce the amount of future benefits payable to any individual by the amount of any overpayment made with respect to Executive. 5.4 Benefit Claim Procedure. Within a reasonable period of time following Executive's termination of employment, the Administrator will inform Executive or his beneficiary of the amount of benefits, if any, payable from the Plan. Not later than 30 days after receipt of such notification, Executive or his beneficiary may file with the Administrator a written claim objecting to the amount of benefits payable under the Plan. The Administrator, not later than 90 days after receipt of such claim, will render a written decision to the claimant on the claim. If the claim is denied, in whole or in part, such decision will include the reason or reasons for the denial, a reference to the Plan provision that is the basis for the denial, a description of additional material or information, if any, necessary for the claimant to perfect the claim, an 7 explanation as to why such information or material is necessary and an explanation of the Plan's claim procedure. The claimant may file with the Administrator, not later than 60 days after receiving the Administrator's written decision, a written notice of request for review of the decision, and the claimant or the claimant's representative may review Plan documents which relate to the claim and may submit written comments to the Administrator. Not later than 60 days after receipt of such review request, the Administrator will render a written decision on the claim, which decision will include the specific reasons for the decision, including a reference to the Plan's specific provisions where appropriate. The foregoing 90- and 60-day periods during which the Administrator must respond to the claimant may be extended by up to an additional 90 or 60 days, respectively, if special circumstances beyond the Administrator's control so require. 5.5 Indemnification. The Bank shall indemnify the Administrator and each other person to whom administrative functions are delegated against any and all liabilities that may arise out of their administration of the Plan, except those that are imposed on account of such person's willful misconduct. 5.6 Limitation of Authority. No person performing any administrative functions with respect to the Plan shall exercise, or participate in the exercise of, any discretion with respect to his own benefit under the Plan. This provision shall not preclude such person from exercising discretionary authority with respect to the generally applicable provisions of the Plan, even though such person's benefit may be affected by such exercise. Article 6 Miscellaneous 6.1 Actuarial Equivalency. Except as otherwise provided for in Section 3.7C, whenever an actuarial equivalent must be determined under this Plan, it sshall be determined using reasonable actuarial factors elected by the Administrator. 6.2 Termination of Employment. Executive shall be deemed to have terminated employment for purposes of this Plan when he or she has ceased to provide service to the Bank as an employee. 6.3 Effective Date. This Plan is effective as of December 1, 2003. 6.4 No Employment Rights. Nothing contained in this Plan shall be construed as conferring upon Executive the right to continue in the employ of the Bank. 6.5 No Compensation Guarantees. Nothing contained in this Plan shall be construed as conferring upon Executive the right to receive any specific level of compensation; nor shall the Bank be prevented in any way from modifying the manner or form in which Executive is to be compensated. 6.6 Effect on Benefit Plans. Neither benefits accrued by Executive under this Plan nor amounts paid pursuant to the Plan following his termination of employment shall be deemed to be salary or other compensation to him for the purpose of computing benefits to which he 8 may be entitled under any pension plan or other employee benefit plan or arrangement sponsored by the Bank, except to the extent such other plan expressly provides otherwise. 6.7 Rights and Benefits Not Assignable. The rights and benefits of Executive and any other person or persons to whom payments may be made pursuant to this Plan are personal and, except for payments made to the representative of a person's estate which may be assigned to the persons entitled to such estate, shall not be subject to any voluntary or involuntary anticipation, alienation, sale, assignment, pledge, transfer, encumbrance, attachment, garnishment by creditors of Executive or such person or other disposition. 6.8 Amendment and Termination. A. The Board of Directors of the Bank may amend this Plan in such manner as it deems advisable, provided that no amendment shall reduce the accrued benefit of Executive, determined as of the date of the adoption of such amendment. B. The Bank may terminate this Plan at any time. No person shall accrue any additional benefits under the Plan following the date of its termination. However, the termination of the Plan shall not affect Executive's right to receive payment of his accrued benefit (determined as of the date of the Plan's termination) upon termination of employment; provided Executive would have been entitled to a benefit upon termination of employment if the Plan had not been terminated. 6.9 Governing Law. Except to the extent preempted by federal law, this Plan shall be construed in accordance with, and governed by, the laws of the Commonwealth of Massachusetts without regard to rules relating to choice of law. 6.10 Entire Agreement. This Plan constitutes the entire understanding between the Bank and each Participant as to the subject matter hereof. No rights are granted to Executive by virtue of this Agreement other than those specifically set forth herein. 9 EX-10.16 9 ex10-16.txt Exhibit 10.16 AGREEMENT THIS AGREEMENT is dated as of December 4, 2003, and is by and between Robert A. Wells (herein "Mr. Wells") of Lenox, Massachusetts, and Berkshire Hills Bancorp, Inc. (the "Holding Company") and Berkshire Bank ("Berkshire Bank") (collectively "Berkshire") with a principal place of business in Pittsfield, Massachusetts. WHEREAS, Mr. Wells' employment by Berkshire and his engagement as an independent contractor by the Berkshire Hills Foundation and Greater Berkshire Foundation, Inc. (collectively the "Foundations") shall terminate, effective December 19, 2003 (the "Retirement Date"); WHEREAS, Mr. Wells and Berkshire entered into an agreement regarding the terms and conditions of his separation from Berkshire and the Foundations, a copy of which is attached hereto as Exhibit A (the "Retirement Agreement"). NOW, THEREFORE, in consideration of the foregoing and of the agreements hereinafter set forth, the parties hereto mutually agree as follows: 1. Mr. Wells hereby elects that his retirement date shall be December 19, 2003. On or before December 26, 2003, the Bank will pay to Mr. Wells the $200,000.00 lump sum payment as provided in the Retirement Agreement and Mr. Wells will refund to Berkshire the sum of $20,500.00 for the Royal Macabees (now Reassure America) Policy premium payments made by Berkshire on his behalf. Upon receipt of that $20,500.00, Berkshire acknowledges that all such amounts are paid in full by Mr. Wells. Berkshire and Mr. Wells will fulfill all of their respective obligations under the Retirement Agreement notwithstanding the reciprocal releases set forth below. 2. In consideration of the foregoing, Mr. Wells, for himself, his heirs, administrators, executors and assigns, with full understanding of the content and legal effect of this Release, hereby releases, discharges and covenants not to sue Berkshire or any of its predecessors, subsidiaries or affiliates, and its or their officers, partners, directors, trustees, agents, employees, attorneys, successors and assigns (individually and in their representative capacities all of the foregoing being referred to herein as the "Bank Releasees"), from and with respect to any and all debts, claims, demands, and causes of action of any kind whatsoever, whether known or unknown or unforeseen, which Mr. Wells now has, ever had or may in the future have against the Bank Releasees, arising prior to December 20, 2003, including without limitation on the foregoing those arising out of or in any manner relating to Mr. Wells' employment by Berkshire or the termination thereof. With respect to any rights Mr. Wells may have under the Age Discrimination in Employment Act of 1967 or the Older Worker's Benefit Protection Act, as presently in effect, which rights he is releasing under this Agreement, Mr. Wells acknowledges that he has been given twenty-one (21) days to consider this Agreement; that to the extent he has executed this Agreement prior to the expiration of that period, he has done so knowingly and voluntarily; that for a period of seven (7) days following his execution of this Agreement, he may revoke this Agreement; that this Agreement shall not become effective or enforceable until such seven (7) day revocation period has expired; and that Berkshire has no obligation to pay any sum or perform any act referred to in this Agreement until the release contained in this Paragraph 2 becomes effective and enforceable. Such revocation must be made by delivering a written notice of revocation to Michael P. Daly, President and CEO, Berkshire Hills Bancorp., Inc. and Berkshire Bank, and for such revocation to be effective, notice must be received no later than 5:00 PM (EST) on the seventh (7th) calendar day after Mr. Wells executes this Agreement. 3. In consideration of the foregoing, Berkshire, and any and all of its related or affiliated entities, and their respective officers, directors, trustees, employees, agents, attorneys, predecessors, successors and assigns, individually and in their representative capacities, release and forever discharge, and covenant not to sue or commence or prosecute proceedings against Mr. Wells, or any of his representatives, agents, attorneys, executors, assigns, heirs and administrators (herein collectively the "Wells Releasees"), from and with respect to any and all debts, claims, demands, damages and causes of action of any kind whatsoever, whether known or unknown or unforeseen, which Berkshire now has, ever had or may in the future have against the Wells Releasees, arising prior to December 20, 2003, including without limitation on the foregoing, those arising out of or in any manner relating to Mr. Wells' employment by Berkshire. 4. Mr. Wells and Berkshire agree that they will treat each other respectfully in any public comments and to that end they will not make any negative, embarrassing or disparaging public statements, either verbal or written, about each other. 5. The parties hereto agree that the provisions, terms and conditions of this Agreement and the Retirement Agreement attached hereto as Exhibit A are to be held in strict confidence. Unless required by law or compelled by legal process, Mr. Wells will not disclose or discuss the provisions, terms or conditions of these agreements with any person, except his immediate family, attorneys, accountants or other tax or financial advisors. Unless required by law or compelled by legal or regulatory process, Berkshire agrees not to disclose or discuss the provisions, terms or conditions of these agreements with any person, including without limitation any Berkshire agent, servant or employee; provided, however, that such disclosure may be made to persons, including Berkshire's attorneys, accountants or other tax or financial advisors, on a strict need-to-know basis only to the extent necessary to further a specific and legitimate business interest of Berkshire. 6. Neither anything contained herein, nor the payment of any sum provided for herein, nor the performance of any act pursuant hereto shall be construed as an admission by either party of any liability of any kind to the other party. 7. This Agreement shall be binding upon Mr. Wells, Berkshire and their respective heirs, administrators, representatives, executors, predecessors, successors and assigns, and shall inure to the benefit of Mr. Wells, Berkshire, the Wells Releasees, and the Bank Releasees, and each of them, and to their respective heirs, administrators, representatives, executors, predecessors, successors and assigns. 2 8. This Agreement shall in all respects be interpreted, enforced and governed by and under the laws of the Commonwealth of Massachusetts without reference to its conflict of laws provisions. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as an instrument under seal all as of the day and year first above written. WITNESS: BERKSHIRE BANK /s/ Gerald A. Denmark By /s/ Michael P. Daly - ---------------------------- ------------------------------------ Michael P. Daly, President and CEO BERKSHIRE HILLS BANCORP, INC. /s/ Gerald A. Denmark By /s/ Michael P. Daly - ---------------------------- ------------------------------------ Michael P. Daly, President and CEO /s/ Gerald A. Denmark /s/ Robert A. Wells - ---------------------------- -------------------------------------- Robert A. Wells 3 Exhibit A As of June 26, 2003 Mr. Robert A. Wells 76 Lime Kiln Road Lenox, MA 01240 Dear Bob: As we have discussed, this is to confirm that you have decided to retire as Chairman of the Board of Berkshire Hills Bancorp, Inc. (the "Holding Company") and Berkshire Bank ("Berkshire Bank") (collectively, "Berkshire") and as Chairman and Principal Executive of each of Berkshire Hills Foundation and Greater Berkshire Foundation, Inc. (the "Foundations") effective on the earlier of (a) December 31, 2003 or (b) such other date as you shall elect upon notice to me ("Your Retirement Date"). In recognition of your years of service, Berkshire agrees to the following: 1. You shall be a director of the Holding Company and Berkshire Bank until the expiration of your current term in 2004, and thereafter as you are re-nominated and re-elected. So long as you are a director, you will be a member of various Berkshire committees to which you are appointed and a director of each of the Foundations. 2. After Your Retirement Date, and so long as you are a director of the Holding Company, you will receive stock awards and options, if any, on the same basis that they are granted to all other independent directors. 3. Within 30 days after Your Retirement Date, but in any event no later than December 31, 2003, you will receive a lump sum payment of $200,000.00, less all required and necessary deductions and withholdings. All salary and other payments from Berkshire and the Foundations, other than as set forth in this letter, will cease as of Your Retirement Date. You will retain all of your presently vested and unvested stock options and awards. If you are not re-elected to the Holding Company's Board, you will be appointed to its Advisory Board for a term sufficient to vest all of your unvested stock options and awards. If you are not re-elected to the Holding Company's Board of Directors and if, for any reason, the Advisory Board does not exist at that time, then all of your unvested stock options and awards will immediately vest. 4. You are entitled to certain benefits under the executive supplemental compensation agreement with Berkshire Bank dated November 7, 1995 and a trust agreement dated May 31, 1996 between Berkshire Bank and State Street Bank and Trust Company. Berkshire Bank will hire, at its expense, a mutually agreeable, independent pension actuarial firm (the "Actuary") to calculate, within 30 days of Your Retirement Date, all benefits due to you under the agreements. If appropriate, the amounts heretofore funded by Berkshire Bank and held under said agreements at State Street Bank and Trust Company will be further funded to satisfy Mr. Robert A. Wells As of June 26, 2003 Page 2 Berkshire Bank's obligations to you thereunder, or, if overfunded, the amount by which it is overfunded will be retained by Berkshire Bank. Said calculation by the Actuary will be final and binding on the parties, but each party will have the right to review all assumptions and methods of calculation prior to said calculation becoming final. 5. Until November 22, 2005, you shall have: A. Use of your automobile, with Berkshire Bank paying all automobile expenses on the same basis that it presently does; and on or about that date, Berkshire Bank will transfer title of that vehicle to you. B. Use of your current office until December 31, 2003; and thereafter, use of either your existing office or the second floor Board Room. C. Continued coverage under Berkshire Bank's existing regular, or upon you and/or your spouse attaining age 65, MEDEX group medical and dental insurance plans, as those plans shall hereafter be modified for all eligible employees. You will continue to be responsible for your premium co-payments, the amount of which will be billed by Berkshire to you periodically. 6. Your employment by Berkshire and your engagement as an independent contractor by the Foundations shall be deemed terminated as of Your Retirement Date. 7. You will continue to own the Royal Macabees (now Reassure America) Policy (No. 4052-202). You will refund payments made by Berkshire on your behalf by making a payment to Berkshire of $20,500.00 on or before Your Retirement Date. 2 Mr. Robert A. Wells As of June 26, 2003 Page 3 Please sign below to signify your agreement with the foregoing, and I will then ask the Boards of Directors of Berkshire to affirm this agreement. Very truly yours, BERKSHIRE HILLS BANCORP, INC. and BERKSHIRE BANK By: /s/ Michael P. Daly -------------------------------------- Michael P. Daly, President and CEO AGREED TO: /s/ Robert A. Wells -------------------------------------- Robert A. Wells THIS LETTER AGREEMENT IS AFFIRMED: BERKSHIRE HILLS BANCORP, INC. By: /s/ Catherine B. Miller -------------------------------------- On behalf of its Board of Directors BERKSHIRE BANK By: /s/ Catherine B. Miller -------------------------------------- On behalf of its Board of Directors 3 EX-11 10 ex-11.txt Exhibit 11.0 Statement Re: Computation of Per Share Earnings Basic Basic earnings per share is determined by dividing net income by the average number of net outstanding common shares for the period. The net outstanding common shares equals the gross number of common shares issued less Treasury Stock repurchased, unallocated shares of the Employee Stock Ownership Plan, and unallocated shares of stock awards granted under the Company's Stock-Based Incentive Plan. This number is computed daily and averaged for the period.
For the Year Ended December 31, 2003 ------------------ o Average number of net common shares outstanding for 2003 .................. 5,266,008 o Net income ................................................................ $8,965,463 o Basic earnings per share .................................................. $ 1.70
Diluted Diluted earnings per share is determined by dividing net income by the average number of net outstanding common shares computed as if all options granted under the Company's Stock- Based Incentive Plan were exercised. The average number of net outstanding common shares used for the basic computation is increased by the unallocated shares of stock awards under the Company's Stock-Based Incentive Plan and by the additional diluted shares calculated by the Treasury Stock method.
For the Year Ended December 31, 2003 ------------------ o Average number of net common shares used for basic computation ............. 5,266,008 o Average unallocated stock awards ........................................... 212,349 o Additional diluted shares: 649,927 option shares at an exercise price of $17.80, and an average market price of $29.81 .................................... 224,199 ---------- o Total average number of common shares outstanding used for calculation of diluted earnings per share ................................ 5,702,556 ========== o Net income ................................................................. $8,965,463 o Diluted earnings per share ................................................. $ 1.57
EX-23 11 exhibit23.txt Exhibit 23.0 [Letterhead of Wolf & Company, P.C.] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Registration Statement of our report dated January 23, 2004, on the consolidated financial statements of Berkshire Hills Bancorp, Inc. and subsidiaries, appearing in the Annual Report on Form 10-K of Berkshire Hills Bancorp, Inc. for the year ended December 31, 2003. /s/ Wolf & Company, P.C. - ------------------------ Boston, Massachusetts March 8, 2004 EX-31.1 12 exhibit31-1.txt Exhibit 31.1 CERTIFICATION I, Michael P. Daly, certify that: 1. I have reviewed this report on Form 10-K of Berkshire Hills Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2004 /s/Michael P. Daly ------------------------------------- Michael P. Daly President and Chief Executive Officer EX-31.2 13 exhibit31-2.txt Exhibit 31.2 CERTIFICATION I, Wayne F. Patenaude, certify that: 1. I have reviewed this report on Form 10-K of Berkshire Hills Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 26, 2004 /s/Wayne F. Patenaude ------------------------------- Wayne F. Patenaude Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 14 exhibit32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Berkshire Hills Bancorp, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, Michael P. Daly, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. February 26, 2004 /s/ Michael P. Daly ----------------------- Michael P. Daly Chief Executive Officer EX-32.2 15 exhibit32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Berkshire Hills Bancorp, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, Wayne F. Patenaude, Senior Vice President, Chief Financial Officer and Treausrer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. February 26, 2004 /s/ Wayne F. Patenaude ------------------------------- Wayne F. Patenaude Senior Vice President, Chief Executive Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----