<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
or
[_] 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
incorporation or organization) Identification No.)
24 North Street, Pittsfield, Massachusetts 01201
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 443-5601
--------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes since last
report)
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. (1) Yes [X] No [_]
(2) Yes [_] No [X]
The Issuer had 7,673,761 shares of common stock, par value $0.01 per
share, outstanding as of August 10, 2000.
<PAGE>
BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999.................................................................. 1
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999.................................................................. 2
Consolidated Statements of Changes in Stockholder's Equity
for the Six Months Ended June 30, 2000 and 1999...................................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999.............................................................. 4
Notes to Consolidated Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 18
Item 2. Changes in Securities and Use of Proceeds............................................................ 18
Item 3. Defaults Upon Senior Securities...................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 18
Item 5. Other Information.................................................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................................................... 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
2000 1999
------------ --------------
(In thousands)
<S> <C> <C>
Assets:
Cash and due from banks.................................................. $26,307 $23,301
Interest-bearing balances................................................ 22,696 1,341
---------- -----------
Total cash and cash equivalents....................................... 49,003 24,642
Securities available for sale at fair value.............................. 119,210 93,084
Securities held to maturity, at amortized cost........................... 28,090 17,014
Federal Home Loan Bank Stock, at cost.................................... 5,297 3,843
Savings Bank Life Insurance Stock, at cost............................... 2,043 2,043
Loans.................................................................... 753,109 674,088
Allowance for loan losses................................................ (9,727) (8,534)
---------- -----------
Net loans............................................................. 743,382 665,554
Banking premises and equipment, net...................................... 12,248 11,531
Foreclosed real estate................................................... 20 220
Accrued interest receivable.............................................. 5,663 4,910
Goodwill................................................................. 6,534 6,809
Other assets............................................................. 14,308 12,001
---------- -----------
Total assets.......................................................... $985,798 $841,651
========== ===========
Liabilities and Stockholders' Equity:
Deposits................................................................. $730,706 $680,767
Federal Home Loan Bank advances.......................................... 94,754 58,928
Securities sold under agreements to repurchase........................... 1,440 1,120
Net deferred tax liability............................................... 565 6,073
Accrued expenses and other liabilities................................... 6,534 6,411
---------- -----------
Total liabilities..................................................... 834,090 753,299
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized;
none issued or outstanding)........................................ -- --
Common stock ($.01 par value: 26,000,000 shares authorized;
7,673,761 shares issued and outstanding in 2000.................... 77 --
Additional paid-in capital............................................ 74,057 --
Unearned compensation - ESOP.......................................... (6,139) --
Retained earnings..................................................... 70,305 70,679
Accumulated other comprehensive income................................ 13,408 17,673
---------- -----------
Total stockholders' equity......................................... 151,708 88,352
---------- -----------
Total liabilities and stockholders' equity.................................. $985,798 $841,651
========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ --------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Interest and Dividend Income:
Bond interest......................................... $ 2,467 $ 2,107 $ 1,305 $ 1,006
Stock dividends....................................... 688 539 370 255
Short term investment interest........................ 182 146 130 55
Loan interest......................................... 29,352 25,339 15,338 12,897
---------- --------- ---------- ----------
Total interest and dividend income....................... 32,689 28,131 17,143 14,213
---------- --------- ---------- ----------
Interest expense:
Interest on deposits.................................. 13,052 11,629 6,732 5,819
Interest on FHLB advances............................. 2,512 967 1,502 587
Interest on securities sold under agreements
to repurchase...................................... 30 186 16 80
---------- --------- ---------- ----------
Total interest expense................................... 15,594 12,782 8,250 6,486
---------- --------- ---------- ----------
Net interest income...................................... 17,095 15,349 8,893 7,727
Provision for loan losses................................ 1,620 1,350 810 675
---------- --------- ---------- ----------
Net interest income, after provision for loan losses..... 15,475 13,999 8,083 7,052
---------- --------- ---------- ----------
Non-interest income:
Customer service fees................................. 795 676 459 429
Trust department fees................................. 826 718 287 344
Loan fees............................................. 405 88 187 40
Gain or (loss) on sale of securities.................. 221 559 (12) 36
Other income.......................................... 96 169 44 36
---------- --------- ---------- ----------
Total non-interest income.......................... 2,343 2,210 965 885
---------- --------- ---------- ----------
Operating expenses:
Salaries and benefits................................. 6,798 6,466 3,363 3,290
Occupancy and equipment............................... 2,181 2,060 1,083 1,031
Marketing and advertising............................. 199 251 120 135
Data processing....................................... 694 755 350 281
Professional services................................. 242 408 96 308
Office supplies....................................... 433 362 159 152
OREO expenses......................................... 95 8 37 5
Loan expenses......................................... 407 223 200 124
Amortization of goodwill.............................. 274 274 137 137
Contributions......................................... 5,684 -- 5,684 --
Other expenses........................................ 1,378 1,249 725 667
---------- --------- ---------- ----------
Total operating expenses........................... 18,385 12,056 11,954 6,130
---------- --------- ---------- ----------
Income (loss) before taxes............................... (567) 4,153 (2,906) 1,807
Income tax expense (benefit).......................... (193) 1,088 (975) 473
---------- --------- ---------- ----------
Net income (loss)........................................ $ (374) $3,065 $(1,931) $1,334
========== ======== ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive
Stock Capital Compensation Earnings Income Total
-------- ---------- ------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999............................. $ -- $ -- $ -- $70,679 $ 17,673 $ 88,352
Comprehensive income (loss):
Net loss.............................................. -- -- -- (374) -- (374)
Change in net unrealized gain on
securities available for sale, net of --
reclassification adjustment and
tax effects........................................ -- -- -- -- (4,265) (4,265)
------- --------- -------- ------- ------- ---------
Total comprehensive (loss)...................... -- -- -- -- -- (4,639)
Issuance of common stock in
connection with conversion from
mutual to stock-owned bank
holding company....................................... 77 74,057 -- -- -- 74,134
Change in unearned compensation.......................... -- -- (6,139) -- -- (6,139)
------- --------- -------- ------- ------- ---------
Balance at June 30, 2000................................. $ 77 $74,057 $ (6,139) $70,305 $13,408 $ 151,708
======= ========= ======== ======= ======= =========
Balance at December 31, 1998............................. $ -- $ -- $ -- $65,056 $19,145 $84,201
Comprehensive income:
Net income............................................ -- -- -- 3,065 -- 3,065
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and
tax effects........................................ -- -- -- -- (341) (341)
------- --------- -------- ------- ------- ---------
Total comprehensive income...................... -- -- -- -- -- 2,724
------- --------- -------- ------- ------- ---------
Balance at June 30, 1999................................. $ -- $ -- $ -- $68,121 $18,804 $ 86,925
======= ========= ======== ======= ======= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
Six Months Ended June 30,
--------------------------------
2000 1999
------------ --------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................................... $ (374) $ 3,065
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for loan losses.......................................................... 1,620 1,350
Net amortization of securities..................................................... 136 155
Charitable contribution in the form of equity securities........................... 5,684 --
Depreciation and amortization expense.............................................. 892 870
Amortization of goodwill........................................................... 274 274
Gain on sales of securities, net................................................... (221) (559)
Losses (gains) on foreclosed real estate, net...................................... 36 (1)
Loss on sale of equipment.......................................................... 18 --
Deferred tax provision (benefit)................................................... (3,125) (233)
Loans originated for sale.......................................................... (8,250) (6,157)
Principal balance of loans sold.................................................... 8,250 6,157
Changes in operating assets and liabilities:
Accrued interest receivable and other assets.................................... (3,059) (38)
Accrued expenses and other liabilities.......................................... 123 1,124
--------- ---------
Net cash provided by operating activities.................................... 2,004 6,007
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales.............................................................................. $ 10,443 $ 1,094
Maturities......................................................................... 22,041 8,077
Principal payments................................................................. 4,213 15,522
Purchases.......................................................................... (69,288) (26,484)
Activity in held-to-maturity securities:
Maturities......................................................................... 4,480 3,440
Principal payments................................................................. 3,937 12,187
Purchases.......................................................................... (19,500) (5,063)
Purchase of Federal Home Loan Bank stock.............................................. (1,454) (566)
Loan originations, net of principal payments.......................................... (79,448) (50,681)
Additions to banking premises and equipment........................................... (1,630) (1,971)
Proceeds from sales of foreclosed real estate......................................... 164 169
Proceeds from sale of equipment....................................................... 3 --
Loan to fund employee stock plan...................................................... (6,139) --
--------- ---------
Net cash used in investing activities........................................... $(132,178) $ (44,276)
(Continued)
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
Six Months Ended June 30,
------------------------------
2000 1999
------------ -----------
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits......................................................... $ 49,939 $ 4,234
Net increase (decrease) in securities sold under agreements to purchase.......... 320 (1,140)
Proceeds from Federal Home Loan Bank advances with maturities in excess of
three months.................................................................. 74,000 21,000
Repayments of Federal Home Loan Bank advances with maturities in excess of
three months.................................................................. (38,174) (3,264)
Proceeds of borrowings with maturities of three months or less................... -- 11,104
Net proceeds from initial public offering........................................ 68,450 --
--------- --------
Net cash provided by financing activities.................................. $ 154,535 $ 31,934
--------- --------
Net change in cash and cash equivalents............................................. 24,361 (6,335)
Cash and cash equivalents at beginning of period.................................... 24,642 26,675
--------- ---------
Cash and cash equivalents at end of period.......................................... $ 49,003 $ 20,340
========= =========
Supplemental cash flow information:
Interest paid on deposits........................................................ $ 13,022 $ 11,590
Interest paid on borrowed funds.................................................. 2,353 1,153
Income taxes paid................................................................ 3,177 992
Transfers from loans to foreclosed real estate................................... -- 106
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
-------------------------------
The consolidated interim financial statements of Berkshire Hills Bancorp, Inc.
(the "Company") and its wholly-owned subsidiaries, Berkshire Bank (the "Bank")
and Berkshire Hills Funding Corporation herein presented are intended to be read
in conjunction with the consolidated financial statements presented in the
Company's initial public offering prospectus dated May 12, 2000. The
consolidated financial information at June 30, 2000 and for the three and six
month periods ended June 30, 2000 and 1999 are derived from unaudited
consolidated financial statements but, in the opinion of management, reflect all
adjustments necessary to present fairly the results for these interim periods
according to generally accepted accounting principles. These adjustments consist
only of normal recurring adjustments. The interim results are not necessarily
indicative of the results of operations that may be expected for the entire
year.
NOTE 2. COMMITMENTS
---------------------
At June 30, 2000, the Company had outstanding commitments to originate new
residential and commercial loans totaling $33.9 million which are not reflected
on the consolidated balance sheet. In addition, unadvanced funds on home equity
lines totaled $37.2 million while unadvanced commercial lines, including
unadvanced construction loan funds, totaled $63.9 million.
NOTE 3. EARNINGS PER SHARE
----------------------------
Basic earnings per share represents net income 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
potential diluted shares, such as stock options or restricted stock, had been
issued. At June 30, 2000, the Company had no outstanding diluted securities.
Earnings per share data is not presented in these financial statements for the
three and six months ended June 30, 2000 and June 30, 1999, since shares of
common stock were not issued until June 27, 2000.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations.
----------------------
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended June 30, 2000
and 1999, and should be read in conjunction with Berkshire Hills Bancorp, Inc.'s
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Forward Looking Statements
This report contains forward looking statements that are based on
assumptions and describe future plans, strategies, and expectations of Berkshire
Hills. These forward looking statements are generally identified by use of the
words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. Berkshire Hills' ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of Berkshire Hills and
the 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 and composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in Berkshire Hills' market area and changes in relevant
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. Berkshire Hills 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 the statements or to reflect the occurrence
of anticipated or unanticipated events.
General
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. Established in 1846,
Berkshire Bank is one of Massachusetts' oldest and largest independent banks.
With eleven branch offices serving communities throughout Berkshire County,
Berkshire Bank is the largest banking institution based in Western
Massachusetts.
On June 27, 2000, Berkshire Hills Bancorp, Inc. sold 7,105,334 shares
of common stock for $71,053,340. At that time, 568,427 shares of stock were
donated to Berkshire Hills Foundation. This is the Company's first quarterly
report of operations since converting to a stock form of ownership. The
following is management's discussion of the financial condition and results of
operations on a consolidated basis for Berkshire Hills Bancorp, Inc. at June 30,
2000 and for the three and six month periods ending June 30, 2000 and 1999. Due
to the timing of the conversion, earnings per share figures are not presented.
The Company has $985.8 million in assets at June 30, 2000 and has grown
$144.1 million since December 31, 1999. Berkshire Bank has always been a leading
lender in the communities it serves and, as a result, loans predominate the
balance sheet. Berkshire Bank makes not only residential mortgage loans, but
also, various types of commercial loans, and consumer loans including indirect
auto loans. The loan portfolio comprises 76.4 percent of the Company's assets at
June 30, 2000.
In conjunction with the stock conversion, the Company established
Berkshire Hills Foundation, a charitable foundation and funded it with a $5.7
million donation of the Company's common stock. As a
7
<PAGE>
result of this donation, the Company experienced a net loss of $1.9 million and
$374,000 for the three and six months ending June 30, 2000, respectively. For
the same time periods in 1999, the Company had net income of $1.3 million and
$3.1 million, respectively.
A more detailed discussion of the Company's results follows.
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets at June 30, 2000 were $985.8 million, an increase of
$144.1 million, or 17.1 percent, from $841.7 million at December 31, 1999. Loans
increased $79.0 million, or 11.7 percent, to $753.1 million from $674.1 million
six months ago. The Company also completed its initial public offering at the
end of June and received approximately $68 million in new capital after funding
the Company's Employee Stock Ownership Plan in the amount of $6.1 million.
Investment securities and interest bearing balances increased to $177.3 million
on June 30, 2000 from $117.3 million on December 31, 1999 as proceeds from the
offering were initially invested in short term obligations.
Loans
The first six months of 2000 has been a period of robust lending
activity for the Company. Total loans outstanding increased $79.0 million, or
11.7 percent, from year end levels with the automobile portfolio growing $49.5
million, or 30.0 percent, over the first six months of the year. In spite of
this year's rise in interest rates, consumer demand for auto loans did not
slacken.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------------ ------------------------------
Percent Percent
Balance of Total Balance of Total
-------------- ------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans on real estate:
Residential one- to four-family.................. $254,563 33.81% $245,315 36.39%
Commercial....................................... 59,093 7.85 46,514 6.89
Construction..................................... 7,988 1.06 12,534 1.86
Multi-family..................................... 15,454 2.05 14,793 2.20
---------- --------- ---------- -----------
Total real estate loans....................... 337,188 44.77 319,156 47.34
Commercial loans.................................... 154,026 20.44 146,196 21.69
Consumer loans:
Automobile....................................... 214,357 28.47 164,862 24.46
Home Equity Loans................................ 34,015 4.52 33,168 4.92
Other............................................ 13,523 1.80 10,706 1.59
---------- --------- ---------- -----------
Total consumer loans.......................... 261,895 34.79 208,736 30.97
---------- --------- ---------- -----------
Total loans......................................... 753,109 100.00% 674,088 100.00%
========= ===========
Less: Allowance for loan losses.................... (9,727) (8,534)
--------- ----------
Loans, net.................................... $743,382 $665,554
========= ==========
</TABLE>
8
<PAGE>
Commercial loans, including multi-family, construction, and other
commercial mortgages, rose $16.5 million, or 7.5 percent, to $236.6 million over
the first six months of 2000. Commercial mortgages and commercial loans showed
the greatest gains and are reflective of a favorable local economy. Residential
mortgage originations typically slow during the winter months and pick up during
the summer months. This year was somewhat of an exception as mortgage activity
was quite strong at the end of the first quarter, possibly because borrowers may
have been trying to lock in favorable rates in anticipation of future rate
increases. Residential mortgages grew by $9.3 million, or 3.8 percent, to $254.7
million at June 30, 2000 despite a very competitive lending environment.
Allowance for Loan Losses
All banks that manage loan portfolios will experience losses to varying
degrees. The allowance for loan losses is the amount available to absorb these
losses and represents management's evaluation of the risks inherent in the
portfolio including the collectibility of the loans, changing collateral values,
past loan loss history, specific borrower situations, and general economic
conditions. Management continually assesses the adequacy of the allowance for
loan losses and makes monthly provisions in an amount considered adequate to
cover losses in the loan portfolio. Because future events affecting the loan
portfolio cannot be predicted with complete accuracy, there can be no assurances
that management's estimates are correct and that the existing allowance for loan
losses is adequate. However, management believes that based on the information
available to it on June 30, 2000, the Company's allowance for loan losses is
sufficient to cover losses inherent in the Company's current loan portfolio.
On June 30, 2000, the allowance for loan losses totaled $9.7 million,
or 1.29 percent, of total loans as compared to $8.5 million, or 1.27 percent, of
total loans on December 31, 1999. Even though the overall loan portfolio is much
larger, because of a strong local economy, charged-off loans totaled $630,000
through June 30, 2000 and represented a decline of 44.4 percent from last year's
$1.1 million. Continued diligent collection efforts have led to $203,000 of
recoveries this year as compared to $234,000 last year. On June 30, 2000, the
allowance expressed as a percent of nonperforming loans was 461.7 percent while
on December 31, 1999, it was 300.4 percent.
9
<PAGE>
<TABLE>
<CAPTION>
At and for the
Six Months Ended
----------------------------
June 30, June 30,
2000 1999
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Allowance for loan losses, beginning of period...................................... $8,534 $7,589
Charged-off loans:
Real estate...................................................................... -- 81
Consumer......................................................................... 504 247
Commercial....................................................................... 126 806
-------- --------
Total charged-off loans....................................................... 630 1,134
Recoveries:
Real estate...................................................................... 46 16
Consumer......................................................................... 119 75
Commercial....................................................................... 38 143
-------- --------
Total recoveries.............................................................. 203 234
Provision........................................................................... 1,620 1,350
-------- --------
Allowance for loan losses, end of period............................................ $9,727 $8,039
======= =======
Net loans charged-off to average interest-earning loans............................. 0.06% 0.14%
Allowance of loan losses to total loans............................................. 1.29% 1.22%
Allowance for loan losses to nonperforming loans.................................... 461.65% 202.60%
Recoveries to charge-offs........................................................... 32.22% 20.63%
</TABLE>
Nonperforming Assets
The following table sets forth information regarding nonperforming
assets as of June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ---------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans:
Real estate:
One- to four-family............................................................ $ 329 $ 450
Commercial..................................................................... -- --
Home equity....................................................................... -- --
Consumer.......................................................................... 795 819
Commercial........................................................................ 983 1,527
--------- ---------
Total.......................................................................... 2,107 2,841
Other real estate owned.............................................................. 20 220
--------- ---------
Total nonperforming assets........................................................... $2,127 $3,061
========= ========
Total nonperforming loans to total loans............................................ 0.28% 0.42%
Total nonperforming assets to total assets........................................... 0.22% 0.36%
</TABLE>
10
<PAGE>
Generally, the Company ceases accruing interest on all loans when
principal or interest payments are 90 days or more past due unless management
determines the principal and interest to be fully secured and in the process of
collection. Once management determines that interest is uncollectible and ceases
accruing interest on a loan, all previously accrued interest is reversed against
current interest income.
As has been the case with charged-off loans, the amount of nonaccruing
loans has declined since December 31, 1999. As of June 30, 2000, total
nonaccruing loans amounted to $2.1 million, a decline of 25.8 percent from $2.8
million at December 31, 1999. The bulk of the decrease has occurred in the
commercial area as balances now total $983,000 against $1.6 million at December
31, 1999. The foreclosure and sale of a large, substandard business and property
accounted for the decline. Residential one-to-four family real estate loans,
consumer loans, and commercial loans are all below year end levels at June 30,
2000 aided by strong local economic conditions and are responsible for
nonaccruing loans dropping to .28 percent of total loans on June 30, 2000, from
.42 percent on December 31, 1999.
In addition, only one property remains as real estate owned as balances
dropped to $20,000 from $220,000 at the end of last year.
As a result of the improvement in the nonperforming and OREO numbers,
the ratio of nonperforming assets to total assets has fallen to .22 percent on
June 30, 2000, from .36 percent six months ago.
Investments
Investment securities, increased to $154.6 million at the end of June
from $116.0 million at the end of last year due to the investment of the
proceeds from the conversion being invested in shorter term obligations such as
agency discount notes, money market preferred stocks, and money market mutual
funds. Since the first of the year, the net unrealized appreciation in the
Company's marketable equities portfolio has dropped $4.2 million net of tax
effects to $14.0 million on June 30, 2000 due principally to a decline in the
market value of the portfolio's financial and technology stocks. The change in
net unrealized gain in the equity portfolio accounted for almost all of the
change in comprehensive income on the consolidated statement of changes in
stockholders' equity.
Deposits
Customers' deposits are the primary funding vehicle for the Company's
asset base. The following table sets forth the Company's deposit stratification
as of June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------------- ----------------------------------
% of % of
Balance Deposits Balance Deposits
-------------- ------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits......................... $108,665 14.87% $ 69,034 10.14%
NOW accounts............................ 77,604 10.62 78,223 11.49
Savings accounts........................ 142,957 19.56 145,486 21.37
Money Market accounts................... 102,403 14.01 92,721 13.62
Term certificates....................... 299,077 40.94 295,303 43.38
-------- ------ -------- -------
Total............................. $730,706 100.00% $680,767 $ 100.00%
======== ====== ======== =======
</TABLE>
11
<PAGE>
Included in demand deposits on June 30, 2000 is $32.2 million of funds
to be disbursed to parties whose stock orders were not filled in the initial
public offering. Excluding these funds, total deposits would be $698.5 million
on June 30, 2000 an increase of 2.6 percent of the year end figure. Core
deposits, which the Company considers to be all but term certificates and the
subscription rights funds, were 57.2 percent of total deposits on June 30, 2000
as compared to 56.6 percent on December 31, 1999. The Company continues to focus
its efforts on its demand deposit and money market accounts especially with
commercial and governmental customers.
Borrowings
Since deposit growth has been insufficient to keep up with loan growth,
the Company has found it necessary to supplement its funding of the loan
portfolio with borrowings from the Federal Home Loan Bank of Boston. The amount
of these borrowings has increased $35.8 million to $94.8 million since the end
of last year. The Company's borrowing capacity at the Federal Home Loan Bank of
Boston is in excess of $200 million.
Regulatory Capital
At June 30, 2000, the Company had $151.7 million in stockholders'
equity compared to $88.4 million at December 31, 1999. The increase was
primarily due to the net proceeds of the conversion of the Bank. The Company's
capital to assets ratio for the two periods was 15.4 percent and 10.5 percent,
respectively. The various regulatory capital ratios on June 30, 2000, and
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- -------------
<S> <C> <C>
Total capital to risk weighted assets........ 19.89% 12.90%
Tier 1 capital to risk weighted assets....... 17.36% 9.73%
Tier 1 capital to average assets............. 15.33% 7.91%
</TABLE>
Regulations have been established that require the Company and the bank
to maintain minimum amounts and ratios of Tier 1 and total capital to average
assets to ensure capital adequacy. Failure to meet these requirements can
initiate regulatory actions that could have a material effect on the Company's
financial statements. As of December 31, 1999, the Company was in compliance
with all capital adequacy requirements to be categorized as well capitalized.
Management knows of no events that have since occurred that would jeopardize
this rating and believes that the Company would continue to be considered well
capitalized on June 30, 2000.
The capital from the conversion has significantly increased liquidity
and capital resources. This initial level of liquidity will be reduced over time
as the net proceeds are used for general corporate purposes, including the
funding of lending activities. If the capital is invested successfully in good
quality loans, Berkshire Bank's financial condition and net income will be
enhanced.
Comparison of Operating Results For the Three Months Ended June 30, 2000 and
1999
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.
Total interest and dividend income increased $2.9 million, or 20.6
percent, to $17.1 million for the second quarter of 2000 as compared to the same
period last year as strong loan growth contributed to a higher level of interest
earnings. Loan interest grew to $15.3 million in the current quarter, an
increase of $2.4 million, or 18.9 percent, from last year. Increased assets and
higher market interest rates also led to higher loan yields. Similarly,
investment income rose to $1.8 million in 2000 from $1.3 million in 1999, an
increase of $489,000, or 37.2 percent, as the Company also benefitted from the
initial investment of its conversion proceeds during the latter half of June
2000.
Interest expense rose $1.8 million, or 27.2 percent, to $8.3 million
this year due to higher market interest rates, increased deposits, and more FHLB
advances. Deposit growth has been unable to fully fund the growth in the
Company's asset base and has been supplemented by borrowings from the Federal
Home Loan Bank of Boston. The rise in expense in each category was virtually
identical in the second quarter as each rose just over $900,000. Borrowings from
the Federal Home Loan Bank of Boston increased to $94.8 million on June 30, 2000
from $58.4 million on June 30, 1999.
12
<PAGE>
Net interest income has increased $1.2 million or 15.1 percent to $8.9
million in the second quarter of 2000 (before the provision for loan losses.)
Expressed as a percent of earning assets, the Company's margin increased to 4.13
percent this quarter from 4.08 percent for the same quarter last year.
Competition for commercial and residential loans in the area remains very keen
and has had an adverse effect on loan spreads, but has been partially offset by
rate sensitive loans repricing in a higher interest rate environment along with
the ability to increase originations of higher yielding commercial and auto
loans.
Since these loans are subject to lesser competition than residential
real estate mortgages, it had been anticipated that most of the new originations
would be commercial or automobile loans. The Company has altered its monthly
loan loss provision accordingly, with $810,000 being provided in the second
quarter this year while $675,000 was provided in the same quarter last year, due
to the higher risk associated with commercial and automobile loans.
After provision, net interest income was $8.1 million for the quarter
ending June 30, 2000 as compared to $7.1 million for the same period last year,
an increase of $1.0 million or 14.6 percent.
Non-interest Income. Non-interest income earned by the Company comes
primarily from three recurring sources: Trust department fees, customer service
fees, and servicing fees on loans sold to others. For the past three months,
non-interest income totaled $965,000 up $80,000, or 9.0 percent, from the same
quarter last year. Because of a recent shift in accounting methods, Trust
department fees declined $57,000 in the quarter. Offsetting this decline were an
increase of $30,000 in customer service fees due to increased activity and an
increase of $147,000 in loan fees. The Company is servicing more loans for
others this year as a $20 million package of auto loans was sold to a New
England bank in the second half of 1999 and monthly sales of $1 million to $3
million were made to the same bank through April of this year.
Non-interest Expense. Non-interest (operating) expense amounted to
$12.0 million for the three months ending June 30, 2000 as compared to $6.1
million for the same three months last year. Included in the 2000 figures is a
one-time donation of $5.7 million of Berkshire Hills Bancorp common stock to
Berkshire Hills Foundation, a charitable foundation created in connection with
the Bank's conversion. Expenses of a recurring nature totaled $6.3 million, an
increase of $140,000 or 2.3 percent over last year and is reflective of
management making a conscious effort to control operating expenses. Increases in
salary and benefit expense, data processing, and in general, the servicing of a
larger loan portfolio are being somewhat offset by a decrease in expense for
professional services such as consultants and in other expenses such as
marketing and advertising.
Income Taxes. Because of the contribution to Berkshire Hills Foundation
and the resulting net loss for the second quarter of 2000, the Company recorded
an income tax benefit of $975,000 for this quarter as compared to $473,000 of
income tax expense for the same quarter last year.
Comparison of Operating Results For the Six Months Ended June 30, 2000 and 1999
Net Interest Income. Interest income from the loan and investment
portfolios increased $4.6 million, or 16.2 percent, to $32.7 million over the
first half of 2000 as compared to the first half of 1999. Rising interest rates
have not dampened local loan demand as total loans outstanding have risen to
$753.1 million on June 30, 2000 from $656.4 million on June 30, 1999. In
addition, higher market interest rates have led to higher loan yields and as a
result, loan interest rose to almost $29.4 million in 2000 from $25.3 million in
1999.
Interest expense rose $2.8 million or 22.0 percent to $15.6 million in
the first six months of 2000. Borrowings from the Federal Home Loan Bank of
Boston have increased significantly over the past twelve months reaching $94.8
million on June 30, 2000 from $58.4 million on June 30, 1999. Interest paid on
the borrowings have increased correspondingly, rising to $2.5 million this year
from $1.0 million last year. Rising interest costs on a larger deposit base
accounted for the rest of the increase.
Net interest income has risen $1.7 million or 11.4 percent to $17.1
million over this same time period last year. The Company's margin was 4.09
percent for the first six months of 2000 versus 4.10 percent for the first six
months of 1999. Even though rates have been increasing for the better part of a
year, the net interest margin declined one basis point in the first half of this
year compared to the first half of last year as first quarter comparisons were
difficult and have affected first half results. However, the net interest margin
has shown some improvement in the second quarter of this year.
The Company's provision for loan losses amounted to $1.6 million
through the first six months of 2000 compared to $1.4 million in 1999. The
additional provision is a reflection of the Company's increased emphasis on
higher risk commercial and auto loans.
13
<PAGE>
After provision, the Company's net interest income for the first half
of 2000 was $15.5 million up from $14.0 million for the same time period in
1999, an increase of 10.5 percent.
Non-interest Income. Through the first six months of this year,
non-interest income has risen $133,000, or 6.0 percent, over the comparable
period last year. Included in last year's figure of $2.2 million was $559,000 of
gains realized on the sale of securities. Only $221,000 is included in this
year's figure of $2.3 million. Loan servicing fees jumped to $405,000 in 2000
from $88,000 in 1999, as the Company serviced more loans for others in 2000 than
in 1999. In addition, as the Company has grown larger and added more transaction
accounts, customer service fees have increased. These fees grew 17.6 percent to
$795,000 through June 30, 2000 from $676,000 through June 30, 1999. Finally,
Trust department fees reached $826,000 this year, up 15.0 percent from last
year's $718,000. Assets in the department totaled $251.9 million on June 30,
2000 as compared to $228.2 million on June 30, 1999.
Non-interest Expense. Operating expenses totaled $18.4 million in
2000's first half, an increase of $6.3 million, or 52.5 percent, over 1999's
$12.1 million. Included in 2000's figure is a one-time $5.7 million donation to
Berkshire Hills Foundation made in the second quarter. No similar donation was
made in 1999. Excluding this expense, operating expenses rose $645,000, or 5.4
percent, to $12.7 million in the half from $12.1 million last year. A normal
increase in salary and benefit expense of $332,000 was the greatest component of
the rise. In addition, loan expenses, especially those pertaining to nonaccruing
loans and the repossession and sale of automobiles rose $184,000 to $407,000
this year from $223,000 last year. The Company's loan portfolio, and in
particular the automobile portfolio, has grown significantly in the past year,
and expenses related to the administration of the portfolio have increased. The
Company also disposed of all but one of its OREO properties in the second
quarter of 2000. Expenses related to these properties totaled $95,000 in 2000
but only $8,000 in 1999.
Income Taxes. As with the quarterly results reported previously,
because of the contribution to Berkshire Hills Foundation and the resulting net
loss for the second quarter and first half of 2000, the Company has booked an
income tax benefit of $193,000 for the first six months of this year against
$1.1 million of income tax expense for the first six months of 1999. Included in
last year's totals is $150,000 of an estimated tax credit relating to the
rehabilitation of an historic fire station in Pittsfield, Massachusetts. The
Commonwealth of Massachusetts has forwarded the Company's application for the
tax credit along with a favorable recommendation to the appropriate federal
authorities. However, the Company is not guaranteed a favorable outcome and is
awaiting the final determination.
14
<PAGE>
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Berkshire 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.
Primary sources of funds consist of deposit inflows, loan repayments,
maturities, paydowns, and sales of investment and mortgage-backed securities 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 interest
rates, economic conditions, and competition.
Berkshire 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 loans and lines of credit and
consumer loans, and (2) investing in mortgage-and asset-backed securities, U.S.
Government and agency obligations and corporate equity securities and debt
obligations. These activities are funded primarily by principal and interest
payments on loans, maturities of securities, deposits and Federal Home Loan Bank
of Boston advances. Deposit flows are affected by the overall level of interest
rates, the interest rates and products offered by Berkshire Bank and its local
competitors and other factors. Berkshire Bank closely monitors its liquidity
position on a daily basis. If Berkshire 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
a repurchase agreement with the Depositors Insurance Fund.
Berkshire Bank relies primarily on competitive rates, customer service,
and long-standing relationships with customers to retain deposits. Occasionally,
Berkshire Bank will also offer special competitive promotions to its customers
to increase retention and promote deposit growth. Based upon Berkshire 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 Berkshire Bank.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
Berkshire 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
Executive Committee of the Board of Directors and the Board of Directors on a
quarterly basis. The Asset/Liability Committee consists of Berkshire Bank's
President and Chief Executive Officer, Senior Vice President, Treasurer and
Chief Financial Officer, Executive Vice President-Senior Loan Officer and
Executive Vice President-Retail Banking. 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:
. emphasizing the origination 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;
. originating shorter-term commercial and consumer loans, with an
emphasis on automobile loans;
. investing in a high quality liquid securities portfolio that provides
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 portfolio;
. promoting lower cost liability accounts such as core deposits; and
. using Federal Home Loan Bank advances to better structure maturities
of its interest rate sensitive liabilities.
For Berkshire Bank, market risk also includes equity price risk. The
marketable equities portfolio had unrealized gains before taxes of $21.5 million
at June 30, 2000. Changes in this figure are reflected, net of taxes, in
accumulated other comprehensive income as a separate component of Berkshire
Bank's equity. Since December 31, 1999, this component has declined $4.2
million. It is not possible to predict with complete accuracy the direction and
magnitude of equity price changes. Unfavorable market conditions or other
factors could cause further price declines in the marketable equities portfolio.
Berkshire Bank 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 balance sheet mix. The table
below sets forth, as of June 30, 2000, estimated net interest income and the
estimated changes in Berkshire Bank's 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.
16
<PAGE>
Increase/
(Decrease)
in Market At June 30, 2000
Interest Rates --------------------------------------------
in Basis Points
(Rate Shock) Amount $ Change % Change
-------------------- ------------ -------------- -------------
(Dollars in thousands)
200 $42,538 $ 714 1.71%
100 42,183 359 0.86
Static 41,824 -- --
(100) 41,363 (461) (1.10)
(200) 40,794 (1,030) (2.46)
The above table indicates that in the event of a sudden and sustained
decline in prevailing market interest rates of 100 basis points and 200 basis
points, Berkshire Bank's net interest income would be expected to decrease by
$461,000 and $1.0 million respectively.
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.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented have been
prepared in conformity with generally accepted accounting principles, 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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 Berkshire Bank holds security interests,
claims involving the making and servicing of real property loans and other
issues incident to Berkshire Bank's business. Berkshire Hills is not a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of Berkshire Hills.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
The following information is provided with the Berkshire Hills sale of
its common stock as part of the Conversion.
a. The effective date of the Registration Statement on Form S-1
(File No. 333-32146) was May 12, 2000.
b. The offering was consummated on June 12, 2000 with the sale of
all securities registered pursuant to the Registration Statement.
Sandler O'Neill & Partners, L.P. acted as marketing agent for the
offering.
c. The class of securities registered was common stock, par value
$0.01 per share. The aggregate amount of such securities
registered was 10,326,609 shares which represented an aggregate
amount of $103.3 million. The amount included 7,105,334 shares
(or $71.1 million) sold in the offering and 568,427 shares (or
$5.7 million) issued to Berkshire Hills Foundation.
d. A reasonable estimate of the expenses incurred in connection with
the conversion and offering was $2.6 million, including expenses
paid to and for underwriters of $1.1 million, attorney and
accounting fees of $819,173 and other expenses of $696,047. The
net proceeds resulting from the offering after deducting expenses
was $68.4 million.
e. The net proceeds are invested in overnight and other short-term
investments.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K ((S)249.308 of this Chapter).
-------------------------------------------------------------
(a) Exhibits
2.1 Amended Plan of Conversion for Berkshire Bancorp and Berkshire
Bank (including the Amended and Restated Articles of Organization
and Stock Bylaws of Berkshire Bank) (1)
3.1 Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (1)
3.2 Bylaws of Berkshire Hills Bancorp, Inc. (1)
4.0 Form of Stock Certificate for Berkshire Hills Bancorp, Inc. (1)
10.1 Form of Employment Agreement between Berkshire Bank and certain
executive officers (1)
10.2 Form of Employment Agreement between Berkshire Hills Bancorp,
Inc. and certain executive officers (1)
10.3 Form of Berkshire Bank Employee Severance Compensation Plan (1)
10.4 Form of Berkshire Bank Supplemental Executive Retirement Plan (1)
27.0 Financial Data Schedule
-----------------------------
(1) Incorporated by reference into this document from the Exhibits
filed with the Registration Statement on Form S-1, and any
amendments thereto, Registration No. 333-32146.
(b) Reports on Form 8-K
None.
19
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities and 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.
Dated: August 10, 2000 By: /s/ James A. Cunningham, Jr.
----------------------------
James A. Cunningham, Jr.
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: August 10, 2000 By: /s/ Charles F. Plungis, Jr.
---------------------------
Charles F. Plungis, Jr.
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
