3. MERGERS & ACQUISITIONS

Beacon Federal Bancorp, Inc.

On October 19, 2012, the Company acquired all of the outstanding common shares of Beacon Federal Bancorp, Inc. (BFED). BFED, as a Holding company, had one Banking subsidiary (Beacon Bank) that had seven branches primarily serving eastern New York State, but also including two branches in Tennessee. As a result of the transaction, BFED merged into Berkshire Hills Bancorp, and Beacon Bank merged into Berkshire Bank. This business combination is an extension of the Berkshire franchise and goodwill results from the expected synergies and earnings accretion from this combination, including future cost savings related to BFED’s operations.

On the acquisition date, BFED had 5.871 million outstanding common shares, net of 1.727 million shares held by Berkshire. BFED shareholders received 2.701 million Berkshire common shares based on an exchange ratio of 0.5590 shares of Berkshire common stock for each BFED share. BFED shareholders also received a total of $60.2 million in cash representing a payment $20.50 per BFED share. The 2.701 million shares of Berkshire common stock issued in this exchange were valued at $23.06 per share based on the closing price of Berkshire posted on October 18, 2012 resulting in a consideration value of $62.3 million. The BFED shares held by Berkshire were valued at $5.2 million, and the value in excess of the carrying value was recorded as a $1.1 million non-recurring gain in the statement of income. BFED had a stock option plan, and as part of the acquisition agreement, Berkshire agreed to continue the vesting schedules of option holders of BFED stock with corresponding BHLB stock with a share conversion ratio of 92%. The fair value of the vested portion of the options was $5.7 million, and was included as part of consideration paid for BFED.

The results of BFED’s operations will be included in the Company’s Consolidated Statement of Income from the date of acquisition.

The assets and liabilities in the BFED acquisition were recorded at their fair value based on management’s best estimate using information available at the date of acquisition. Consideration paid, and fair values of BFED’s assets acquired and liabilities assumed are summarized in the following tables:

Consideration Paid: (In thousands)	Amount
Berkshire Hills Bancorp common stock issued to BFED common stockholders	$	62,273
Cash consideration paid to BFED common shareholders	60,183
Fair value of BFED stock options converted to Berkshire options	5,732
Fair value of BFED shares previously purchased by Berkshire	5,194
Total consideration paid	$	133,382

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value:	As Acquired			Fair Value Adjustment			As Recorded at Acquisition
Cash and short term investments	$	7,005		$	—		$	7,005
Investment securities	81,428			(1,346		)(a)	80,082
Loans	697,797			(32,060		)(b)	665,737
Premises and equipment	11,897			2,855		(c)	14,752
Core deposit intangibles	—			1,840		(d)	1,840
Other intangibles	—			324		(e)	324
Deferred tax assets, net	6,481			12,596		(f)	19,077
Other assets	27,391			(841		)(g)	26,550
Deposits	(622,246		)	(1,482		)(h)	(623,728		)
Borrowings	(78,000		)	(10		)(i)	(78,010		)
Other liabilities	(12,661		)	(2,097		)(j)	(14,758		)
Total identifiable net assets	$	119,092		$	(20,221	)	$	98,871

Goodwill							$	34,511

Explanation of Certain Fair Value Adjustments

(a) The adjustment represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition.

(b) The adjustment represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. Loans that met the criteria and are being accounted for in accordance with ASC 310-30 had a carrying amount of $78.3 million. Non-impaired loans not accounted for under 310-30 had a carrying value of $619.5 million.

(c) The amount represents the adjustment of the book value of buildings, and furniture and equipment, to their estimated fair value based on appraisals and other methods. The adjustment includes a $2.4 million fair value write-up of a building under a capital lease arrangement. The adjustments will be depreciated over the estimated economic lives of the assets.

(d) The adjustment represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized over the average life of the deposit base.

(e) Represents identified intangibles related to assumed leases and acquired wealth management and insurance customer lists, which will be amortized over the remaining useful lives.

(f) Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.

(g) The amount primarily consists of a $0.5 million fair value adjustment to write-down other real estate owned, and a $0.4 million write-down of mortgage servicing assets acquired, which were based on appraisals, and valuation reports, respectively. These adjustments are not accretable into earnings in the statement of income.

(h) The adjustment is necessary because the weighted average interest rate of deposits exceeded the cost of similar funding at the time of acquisition.

(i) Adjusts borrowings to their estimated fair value based on interest rates of similar borrowings available on the date of acquisition.

(j) Adjusts the book value of other liabilities to their estimated fair value at the acquisition date. The adjustment primarily consists of a $4.1 million increase to an acquired capital lease obligation, and a $2.3 write-off of deferred revenue.

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from BFED were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, to estimate the fair value, the Company analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of BFED’s allowance for credit losses associated with the loans that were acquired as the loans were initially recorded at fair value.

Information about the acquired loan portfolio subject to purchased credit impaired accounting guidance (ASC 310-30) as of October 19, 2012 is, as follows:

(In thousands)	ASC 310-30 Loans
Contractually required principal and interest at acquisition	$	78,325
Contractual cash flows not expected to be collected (nonaccretable discount)	(25,853		)
Expected cash flows at acquisition	52,472
Interest component of expected cash flows (accretable discount)	(8,998		)
Fair value of acquired loans	$	43,474

The core deposit intangible asset recognized as part of the BFED merger is being amortized over its estimated useful life of approximately ten years utilizing an accelerated method. Other intangibles consist of leasehold intangible liabilities and customer list intangible assets, which are amortized over the estimated useful life using a straight-line method, and an accelerated method, respectively.

The goodwill, which is not amortized for book purposes, was assigned to the banking segment and is not deductible for tax purposes.

The fair value of savings and transaction deposit accounts acquired from BFED was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.

Direct merger, acquisition and integration costs of the BFED acquisition were expensed as incurred, and totaled $5.0 million during 2012.

The Connecticut Bank and Trust Company

On April 20, 2012, the Company acquired all of the outstanding common shares of The Connecticut Bank and Trust Company (“CBT”). CBT operated eight banking offices serving the Greater Hartford area and was merged with and into Berkshire Bank. This business combination is an extension of the Berkshire franchise and the goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to CBT’s operations. The combination was negotiated between the companies and was approved unanimously by their boards of directors.

CBT shareholders received 965 thousand shares of the Company common stock and $9.0 million in cash. On the acquisition date, CBT had 3.6 million outstanding common shares. Through a cash/share election procedure, the Company paid $8.25 per share for 30% of the outstanding common shares and for 70% of the outstanding shares, the Company exchanged its stock in a ratio of 0.381 shares of the Company’s common stock for each share of CBT stock. The 965 thousand shares of Company common stock issued in this exchange were valued at $22.80 per share based on the closing price of Berkshire posted on April 19, 2012 resulting in consideration paid of $22 million. Berkshire paid $0.2 million in cash consideration to settle all outstanding CBT options. The Company issued no new Berkshire options in connection with the merger.

As part of the acquisition, the Company repurchased and retired from the United States Department of Treasury (“Treasury”) each share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, of CBT issued and outstanding for $5.4 million and the outstanding warrant issued to the Treasury to purchase CBT common stock for $0.8 million.

The results of CBT’s operations will be included in our Consolidated Statement of Income from the date of acquisition.

The assets and liabilities in the CBT acquisition were recorded at their fair value based on management’s best estimate using information available at the date of acquisition. Consideration paid, and fair values of CBT’s assets acquired and liabilities assumed are summarized in the following tables:

Consideration Paid: (In thousands)	Amount
Berkshire Hills Bancorp common stock issued to CBT common stockholders	$	21,992
Cash consideration paid to CBT common shareholders	8,952
Repurchase of CBT’s preferred stock warrant	6,290
Cash consideration paid for CBT employee stock options	150
Total consideration paid	$	37,384

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value:	As Acquired			Fair Value Adjustment			As Recorded at Acquisition
Cash and short term investments	$	10,567		$	—		$	10,567
Investment securities	41,428			(46		)(a)	41,382
Loans	215,773			(6,181		)(b)	209,592
Premises and equipment	1,393			—			1,393
Core deposit intangibles	—			1,000		(c)	1,000
Other intangibles	—			(238		)(d)	(238		)
Other assets	3,081			7,668		(e)	10,749
Deposits	(209,707		)	(428		)(f)	(210,135		)
Borrowings	(35,865		)	(3,020		)(g)	(38,885		)
Other liabilities	(1,978		)	(209		)(h)	(2,187		)
Total identifiable net assets	$	24,692		$	(1,454	)	$	23,238

Goodwill							$	14,146

Explanation of Certain Fair Value Adjustments

(a) The adjustment represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition.

(b) The adjustment represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. Loans that met the criteria and are being accounted for in accordance with ASC 310-30 had a carrying amount of $23.7 million. Non-impaired loans not accounted for under 310-30 had a carrying value of $192.1 million.

(c) The adjustment represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized over the average life of the deposit base.

(d) Represents an intangible liability related to assumed leases, which was recorded as an identifiable intangible and will be amortized over the remaining life of the leases.

(e) This amount primarily consists of adjustments in the net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other deferred tax items including recognition of a $4.8 million deferred tax asset related to operating losses, which CBT had a full valuation allowance against.

(f) The adjustment is necessary because the weighted average interest rate of deposits exceeded the cost of similar funding at the time of acquisition.

(g) Adjusts borrowings to their estimated fair value calculated based on interest rates of similar borrowings available on the date of acquisition.

(h) Adjusts the book value of other liabilities to their estimated fair value at the acquisition date.

The method to determine the fair value of the loans acquired from CBT was consistent with the method used in the BFED acquisition. Accordingly, there was no carryover of CBT’s allowance for credit losses associated with the loans that were acquired as the loans were initially recorded at fair value.

Information about the acquired loan portfolio subject to purchased credit impaired accounting guidance (ASC 310-30) as of April 20, 2012 is, as follows (in thousands):

(In thousands)	ASC 310-30 Loans
Contractually required principal and interest at acquisition	$	23,726
Contractual cash flows not expected to be collected (nonaccretable discount)	(5,563		)
Expected cash flows at acquisition	18,163
Interest component of expected cash flows (accretable discount)	(2,816		)
Fair value of acquired loans	$	15,347

The core deposit intangible asset recognized as part of the CBT merger is being amortized over its estimated useful life of approximately eight years utilizing an accelerated method. Other intangibles consist of leasehold intangible liabilities, which are amortized over the life of each respective lease using a straight-line method.

The goodwill, which is not amortized for book purposes, was assigned to the banking segment and is not deductible for tax purposes.

The fair value of savings and transaction deposit accounts acquired from CBT was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.

Direct merger, acquisition and integration costs of the CBT acquisition were expensed as incurred, and totaled $4.7 million in 2012 and $0.6 million in 2011.

Greenpark Mortgage Corporation

On April 30, 2012, Berkshire Bank acquired the operations, and purchased certain assets and assumed certain limited liabilities of Greenpark Mortgage Corporation (“Greenpark”), as contemplated by the Asset Purchase Agreement dated February 2, 2012, by and between Berkshire Bank and Greenpark. The purchase of Greenpark’s operations increases the Company’s consumer lending capabilities, and expands the Company’s geographical footprint into eastern Massachusetts along with broadening its sources of fee-based income.

The purchase price for Greenpark’s operations was $4.0 million, but additional consideration of $0.1 million was paid for certain prepaid assets, and $46.5 million was paid to retire outstanding bank loans financing recently originated loans along with $2.8 million in premiums on those loans representing the sellers’ income on those loans had they been sold prior to April 30, 2012. Additionally, a $1.1 million liability was recorded for contingent consideration representing the fair value of earn-out payments to the sellers of Greenpark over a five year period of time after the purchase date. While the earn-out payments are based on production of loan originations, which can vary from year to year, management calculated an expected range of $0.2 million to $0.3 million in annual payments using the Black Scholes model to estimate the fair value of the contingent liability. Direct acquisition and integration costs of Greenpark’s operations were expensed as incurred, and totaled $0.6 million in 2012.

The results of Greenpark’s operations are included in the Consolidated Statements of Income from the date of acquisition.

The assets and liabilities in the Greenpark transaction were recorded at their fair value based on management’s best estimate using information available at the date of purchase. The Greenpark transaction is an asset purchase for legal purposes, which limits the Company’s exposure to the assumption of liabilities as defined in the purchase agreement, and to any potential unknown liabilities that result from operations that occur subsequent to the purchase date. The transaction is also considered an asset purchase for tax purposes, which results in a step-up in tax basis of assets acquired and liabilities assumed along with tax deductible goodwill. For book purposes, the Company will account for the transaction as a business combination in accordance with applicable accounting guidance, as it represents an acquisition of a business with a distinct set of inputs and processes to produce outputs.

The goodwill, representing the excess of consideration paid over the net fair value of assets and liabilities acquired, is not amortized for book purposes, and is assigned to our banking segment.

Consideration paid, and fair values of Greenpark’s assets acquired and liabilities assumed are summarized in the following tables:

Consideration Paid: (In thousands)	Amount
Cash purchase price	$	4,000
Cash paid for certain prepaid assets	58
Payoff of Greenpark’s lines of credit	46,496
Premiums paid for loans and loan commitments	2,770
Contingent purchase price	1,087
Total consideration paid	$	54,411

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value:	Amount
Loans held for sale	$	48,408	(a)
Other assets	2,621		(b)
Premises and equipment	98		(c)
Other Liabilities	(862		)(d)
Total identifiable net assets	$	50,265

Goodwill	$	4,145

Explanation of Certain Fair Values

(a) Includes a portion of the cash consideration paid for premiums as described above, which adjusts the loans to fair value.

(b) Represents the fair value of the acquired derivative associated with commitments to originate loans at a specified locked-rate (“interest rate lock commitments”).

(d) Consists of forward contracts acquired at fair value, which serves to hedge the movements in fair value of the interest rate lock commitments.

Financial Information

The following table discloses unaudited pro forma supplemental information from the combined results of operations of 2012 and 2011 assuming the acquisitions of BFED, CBT, and Greenpark had been completed as of January 1, 2011:

	Pro Forma (unaudited)
	Twelve months ended December 31,
	2012		2011

Net interest income	$	157,343	$	146,682
Non-interest income	67,437		64,170
Net income from continuing operations	33,442		21,251

Pro forma earnings per share from continuing operations:
Basic	$	1.36	$	0.99
Diluted	$	1.35	$	0.98

The unaudited pro forma supplemental information combines the historical results of Berkshire, BFED, CBT, and management’s estimate of the results of Greenpark’s operations under the Company’s management. The unaudited pro forma information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the time of the merger. These adjustments would have been different if they had been recorded on January 1, 2011, and they do not include the impact of prepayments. The unaudited pro forma information is also adjusted for the impacts of the actual merger financing on revenue and expense. The pro forma income does not indicate what would have occurred had the acquisitions taken place on January 1, 2011 and does not indicate expected future results. No adjustments were made to eliminate BFED and CBT’s credit losses that may not have been necessary had the acquired loans been recorded at fair value as of the beginning of 2011. Adjustments were also not made to reflect any changes to the asset and liability positions in the balance sheets of the acquired companies during 2011 or 2012 that may have resulted in changes to net interest income had the acquisitions occurred as of beginning of 2011. Additionally, operating cost savings and other business synergies expected as a result of the acquisition are not reflected in the pro forma amounts. Non-recurring expenses and income related to the acquisitions including professional fees, system conversion and integration costs, and the gains recorded in connection with the acquisitions are excluded in the 2012 and 2011 periods in which the amounts were recognized. In 2012 non-recurring expenses excluded from the unaudited pro forma supplemental information were $6.7 million, $5.2 million, and $555 thousand for BFED, CBT, and Greenpark, respectively. Also excluded during 2012, was a $1.1 million non-recurring gain on BFED stock that was held by the Company at the time of acquisition. In 2011 non-recurring expenses excluded from the unaudited pro forma supplemental information were $910 thousand for CBT and none for BFED and Greenpark. Furthermore, the unaudited pro forma supplemental information is adjusted for income tax expense related to the pre-tax adjustments.

The Company has determined that it is impractical to report the amounts of revenue and earnings of the acquired entities since the acquisition dates. Due to the integration of their operations with those of the Company, the Company does not record revenue and earnings separately for these operations. The revenue and earnings of these operations are included in the consolidated statement of income.