Residential Mortgages. The Bank offers fixed-rate and adjustable-rate residential
mortgage loans with maturities of up to 30 years that are fully amortizing with
monthly loan payments. Berkshire’s loan products are available through FNMA,
FHLMC, government insured, and state programs. In addition, the Bank offers a
suite of portfolio products through Berkshire Bank. Berkshire Bank is an in-house
Direct Endorsed Lender for FHA. It also offers VA, USDA, FHA Reverse, State Housing,
Home Path, HARP, and other government sponsored mortgage programs. The Company
targets that its programs and pricing are highly competitive in the marketplace
as it pursues opportunities to expand market share in its footprint.
Residential mortgages are generally underwritten according to the Federal National
Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage
Association (“Freddie Mac”) guidelines for loans they designate as
“A” or “A-” (these are referred to as “conforming
loans”). Private mortgage insurance is generally required for loans with
loan-to-value ratios in excess of 80%. The Bank also originates loans above conforming
loan amount limits, referred to as “jumbo loans,” which are generally
conforming to secondary market guidelines for these loans. The Bank does not offer
subprime mortgage lending programs.
The Bank generally sells most of its newly originated conforming fixed rate mortgages.
It also purchases or sells seasoned mortgage loans in the secondary mortgage market
when opportunities become available. The Bank is approved as a direct seller to
Fannie Mae, retaining the servicing rights. The majority of the Bank’s secondary
marketing is to national institutional secondary market investors on a servicing-released
basis. Sales of mortgages generally involve customary representations and warranties
and are nonrecourse in the event of borrower default. The Bank is also an approved
originator of loans for sale to the Federal Housing Administration (“FHA”),
U.S. Department of Veteran Affairs (“VA”), and state housing agency
programs.
The Bank offers adjustable rate (“ARM”) mortgages which do not contain
interest-only or negative amortization features. After an initial term of six
months to 10 years, the rates on these loans generally reset every year based
upon a contractual spread or margin above the average yield on U.S. Treasury securities.
ARM loan interest rates may rise as interest rates rise, thereby increasing the
potential for default. At year-end 2015, the Bank’s adjustable rate mortgage
portfolio totaled $544 million. The Bank also originates loans to individuals
for the construction and acquisition of personal residences. These loans generally
provide 15-month construction periods followed by a permanent mortgage loan, and
follow the Bank’s normal mortgage underwriting guidelines.
Following its purchase of a mortgage banking company in 2012, the Bank has expanded
its residential mortgage program and in 2014 rebranded the program as Berkshire
Home Lending. Berkshire Bank is the preferred mortgage lender for the Massachusetts
Teachers Association, and has been among the top ten banks in Massachusetts and
Rhode Island for residential mortgage volume in certain periods in recent years.
Commercial Real Estate. The Bank originates commercial real estate loans on
properties used for business purposes such as small office buildings, industrial,
healthcare, lodging, recreation, or retail facilities. This portfolio also includes
commercial 1-4 family and multifamily properties. Loans may generally be made
with amortizations of up to 25 years and with interest rates that adjust periodically
(primarily from short-term to five years). Most commercial real estate loans
are originated with final maturities of 10 years or less. As part of its business
activities, the Bank also enters into commercial loan participations with regional
and national banks and purchases and sells commercial loans in its footprint.
Commercial real estate loans are among the largest of the bank’s loans,
and may have higher credit risk and lending spreads.The Company believed that
its competitive advantage for new originations was strongest in the $5-10 million
size range. Because repayment is often dependent on the successful operation
or management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. The Bank seeks
to minimize these risks through strict adherence to its underwriting standards
and portfolio management processes. The Bank generally requires that borrowers
have debt service coverage ratios (the ratio of available cash flows before
debt service to debt service) of at least 1.25 times based on stabilized cash
flows of leases in place, with some exceptions for national credit tenants.
For variable rate loans, the Bank underwrites debt service coverage to interest
rate shocks of 300 basis points or higher based on a minimum of 1.0 times coverage
and it uses loan maturities to manage risk based on the lease base and interest
sensitivity. Loans at origination may be made up to 80% of appraised value based
on property type and risk, with sublimits of 75% or less for designated specialty
property types. Generally, commercial real estate loans require personal guarantees
by the principals. Credit enhancements in the form of additional collateral
or guarantees are normally considered for start-up businesses without a qualifying
cash flow history.
The Bank offers interest rate swaps to certain larger commercial mortgage borrowers.
These swaps allow the Bank to originate a mortgage based on short-term LIBOR
rates and allow the borrower to swap into a longer-term fixed rate. The Bank
simultaneously sells an offsetting back-to-back swap to an investment grade
national bank so that it does not retain this fixed-rate risk. The Bank also
records fee income on these interest rate swaps based on the terms of the offsetting
swaps with the bank counterparties.
The Bank originates construction loans to developers and commercial borrowers
in and around its markets. The maximum loan to value limits for construction
loans follow FDIC supervisory limits, up to a maximum of 80 percent. The Bank
commits to provide the permanent mortgage financing on most of its construction
loans on income-producing property. Advances on construction loans are made
in accordance with a schedule reflecting the cost of the improvements. Construction
loans include land acquisition loans up to a maximum 50 percent loan to value
on raw land. Construction loans may have greater credit risk due to the dependence
on completion of construction and other real estate improvements, as well as
the sale or rental of the improved property. The Bank generally mitigates these
risks with presale or preleasing requirements and phasing of construction.
Commercial and Industrial Loans. The Bank offers secured commercial term loans
with repayment terms which are normally limited to the expected useful life
of the asset being financed, and generally not exceeding ten years. The Bank
also offers revolving loans, lines of credit, letters of credit, time notes
and Small Business Administration guaranteed loans. Business lines of credit
have adjustable rates of interest and are payable on demand, subject to annual
review and renewal. Commercial and industrial loans are generally secured by
a variety of collateral such as accounts receivable, inventory and equipment,
and are generally supported by personal guarantees. Loan-to-value ratios depend
on the collateral type and generally do not exceed 80 percent of orderly liquidation
value. Some commercial loans may also be secured by liens on real estate. The
Bank generally does not make unsecured commercial loans. Commercial loans are
of higher risk and are made primarily on the basis of the borrower’s ability
to make repayment from the cash flows of its business. Further, any collateral
securing such loans may depreciate over time, may be difficult to monitor and
appraise and may fluctuate in value. The Bank gives additional consideration
to the borrower’s credit history and the guarantor’s capacity to
help mitigate these risks. Additionally, the Bank uses loan structures including
shorter terms, amortizations, and advance rate limitations to additionally mitigate
credit risk.
The Asset Based Lending Group serves the commercial middle market in New England,
as well as the Bank’s market in northeastern New York. This group expands
the Bank’s business lending offerings to include revolving lines of credit
and term loans secured by accounts receivable, inventory, and other assets to
manufacturers, distributors and select service companies experiencing seasonal
working capital needs, rapid sales growth, a turnaround, buyout or recapitalization
with credit needs ranging from $2 to $25 million. Asset based lending involves
monitoring loan collateral so that outstanding balances are always properly
secured by business assets, which reduces the risks associated with these loans.
The acquisition of Firestone Financial in the third quarter of 2015 allowed
the Company to expand its specialty commercial and industrial lending. Firestone
originates loans secured by business-essential equipment through over 160 equipment
distributors and manufacturers and directly via the end borrower in all fifty
states. Key customer segments include the fitness, carnival, gaming, and entertainment
industries. These loans function similarly to the Bank’s commercial and
industrial portfolio. However, some credits have payment schedules tailored
to the meet the needs of the seasonality of these borrowers’ businesses.
These loans generally have higher interest rates than the Bank's other commercial
loans, reflecting the niche expertise required in servicing these industries.
The Bank also reorganized its small business lending function to include the
retail division in the origination of conforming small business loans in order
to provide the best service to community businesses. The program also handles
an exception managed loan portfolio for loans and loan relationships under $250
thousand which require limited documentation to provide timely credit to small
businesses.
With the acquisition of 44 Business Capital, which is expected to close in
the first six months of 2016, the Company intends to expand its small business
lending operations to a national customer footprint. With increased originations,
the Company expects to actively sell many of these credits in the secondary
market.
Consumer Loans. The Bank’s consumer loans consist principally of home
equity lines of credit and indirect automobile loans, together with second mortgage
loans and other consumer loans. The Bank’s home equity lines of credit
are typically secured by first or second mortgages on borrowers’ residences.
Home equity lines have an initial revolving period up to 15 years, followed
by an amortizing term up to 20 years. These loans are normally indexed to the
prime rate. Home equity loans also include amortizing fixed-rate second mortgages
with terms up to 15 years. Lending policies for combined debt service and collateral
coverage are similar to those used for residential first mortgages, although
underwriting verifications are more streamlined. The maximum combined loan-to-value
is 85 percent. Home equity line credit risks include the risk that higher interest
rates will affect repayment and possible compression of collateral coverage
on second lien home equity lines. Acquired operations of Beacon Federal in 2012
included a significant consumer lending function focused on indirect originations
of automobile loans, primarily in central New York. For new automobiles, the
amount financed could be up to 100 percent of the value of the vehicle, plus
applicable taxes and dealer charges (i.e., warranty and insurance charges).
For used automobiles, the amount of the loan was limited to the “loan
value” of the vehicle, as established by industry guides. Beginning in
the latter part of 2013, the Bank decided to de-emphasize originations of super-prime
loans, and as a result, the indirect portfolio has been declining. In the third
quarter of 2015, the Bank recruited a senior leader for this business line to
develop an indirect program in New England and New York for prime auto loans
with a goal of later developing a secondary marketing program to further support
this activity.