<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 September 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
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(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 November 6, 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
September 30, 2000 and December 31, 1999............................ 1
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999............................ 2
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000 and 1999............... 3
Consolidated Statements of Cash Flows for the
Nine 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................................. 6
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.................................... 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
September 30, December 31,
2000 1999
------------------ ----------------
(In thousands)
<S> <C> <C>
Assets:
Cash and due from banks................................................. $ 22,031 $ 23,301
Interest-bearing balances............................................... 1,230 1,341
-------- --------
Total cash and cash equivalents...................................... 23,261 24,642
Securities available for sale at fair value............................. 95,498 93,084
Securities held to maturity, at amortized cost.......................... 31,828 17,014
Federal Home Loan Bank Stock, at cost................................... 5,651 3,843
Savings Bank Life Insurance Stock, at cost.............................. 2,043 2,043
Loans................................................................... 793,661 674,088
Allowance for loan losses............................................... (10,249) (8,534)
-------- --------
Net loans............................................................ 783,412 665,554
Banking premises and equipment, net..................................... 12,255 11,531
Foreclosed real estate.................................................. 100 220
Accrued interest receivable............................................. 6,024 4,910
Goodwill................................................................ 6,397 6,809
Other assets............................................................ 16,691 12,001
-------- --------
Total assets......................................................... $983,160 $841,651
======== ========
Liabilities and Stockholders' Equity:
Deposits................................................................ $702,251 $680,767
Federal Home Loan Bank advances......................................... 112,158 58,928
Securities sold under agreements to repurchase.......................... 2,921 1,120
Net deferred tax liability.............................................. 2,685 6,073
Accrued expenses and other liabilities.................................. 7,353 6,411
-------- --------
Total liabilities.................................................... 827,368 753,299
Stockholders' equity:
Preferred stock ($.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........................................... 74,035 --
Unearned compensation................................................ (7,572) --
Retained earnings.................................................... 72,097 70,679
Accumulated other comprehensive income............................... 17,155 17,673
-------- --------
Total stockholders' equity........................................ 155,792 88,352
-------- --------
Total liabilities and stockholders' equity................................. $983,160 $841,651
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- ------------ ------------- ------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Interest and Dividend Income:
Bond interest.............................................. $ 1,444 $ 1,070 $ 3,911 $ 3,177
Stock dividends............................................ 491 361 1,179 900
Short term investment interest............................. 118 47 300 193
Loan interest.............................................. 16,773 13,544 46,125 38,883
------- ------- ------- -------
Total interest and dividend income............................ 18,826 15,022 51,515 43,153
------- ------- ------- -------
Interest expense:
Interest on deposits....................................... 7,059 5,954 20,111 17,583
Interest on FHLB advances.................................. 1,550 733 4,062 1,700
Interest on securities sold under agreements
to repurchase........................................... 30 79 60 265
------- ------- ------- -------
Total interest expense........................................ 8,639 6,766 24,233 19,548
------- ------- ------- -------
Net interest income........................................... 10,187 8,256 27,282 23,605
Provision for loan losses..................................... 810 675 2,430 2,025
------- ------- ------- -------
Net interest income, after provision for loan losses.......... 9,377 7,581 24,852 21,580
------- ------- ------- -------
Non-interest income:
Customer service fees...................................... 399 366 1,194 1,042
Trust department fees...................................... 408 365 1,234 1,083
Loan fees.................................................. 164 62 569 150
Gain on sale of securities, net............................ 72 -- 293 559
Other income............................................... 118 37 214 206
------- ------- ------- -------
Total non-interest income............................... 1,161 830 3,504 3,040
------- ------- ------- -------
Operating expenses:
Salaries and benefits...................................... 3,583 3,431 10,381 9,897
Occupancy and equipment.................................... 1,069 800 3,250 2,860
Marketing and advertising.................................. 132 138 331 389
Data processing............................................ 435 465 1,129 1,220
Professional services...................................... 149 236 327 644
Office supplies............................................ 126 152 559 514
OREO & Loan expenses....................................... 321 161 821 509
Amortization of goodwill................................... 137 138 412 412
Contributions.............................................. -- -- 5,684 --
Other expenses............................................. 790 626 2,233 1,758
------- ------- ------- -------
Total operating expenses................................ 6,742 6,147 25,127 18,203
------- ------- ------- -------
Income before taxes........................................... 3,796 2,264 3,229 6,417
Provision for income taxes................................. 1,297 593 1,104 1,681
------- ------- ------- -------
Net income.................................................... $ 2,499 $ 1,671 $ 2,125 $ 4,736
======= ======= ======= =======
Earnings per share:
Basic...................................................... $0.35 NA NA NA
Diluted.................................................... 0.35 NA NA NA
Weighted average shares outstanding:
Basic...................................................... 7,065 NA NA NA
Diluted.................................................... 7,065 NA NA NA
</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 NINE MONTHS ENDED SEPTEMBER 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:
Net income ............................... -- -- -- 2,125 -- 2,125
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustments and tax
effects ................................. -- -- -- -- (518) (518)
------- --------- ----------- ------- ------------ --------
Total comprehensive income ......... -- -- -- -- -- 1,607
Issuance of common stock in
connection with conversion from
mutual to stock-owned bank
holding company........................... 77 74,023 -- -- -- 74,100
Cash dividends declared ..................... -- -- -- (707) -- (707)
Change in unearned compensation ............. -- 12 (7,572) -- -- (7,560)
------- --------- ----------- ------- ------------ --------
Balance at September 30, 2000 ............... $ 77 $ 74,035 $ (7,572) $72,097 $ 17,155 $155,792
======= ========= =========== ======= ============ ========
Balance at December 31, 1998 ................ $ -- $ -- $ -- $65,056 $ 19,145 $ 84,201
Comprehensive income:
Net income ............................... -- -- -- 4,736 -- 4,736
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustments and
tax effects ........................... -- -- -- -- (2,753) (2,753)
------- --------- ----------- ------- ------------ --------
Total comprehensive income ......... -- -- -- -- -- 1,983
Balance at September 30, 1999 ............... $ -- $ -- $ -- $69,792 $ 16,392 $ 86,184
======= ========= =========== ======= ============ ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
September 30
-------------------------------------
<S> <C> <C>
2000 1999
-------------- ----------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 2,125 $ 4,736
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses...................................................... 2,430 2,025
Net amortization of securities................................................. 157 243
Charitable contribution in the form of equity securities....................... 5,684 --
Depreciation and amortization expense.......................................... 1,283 1,253
Employee stock ownership plan expense.......................................... 141 --
Amortization of goodwill....................................................... 412 412
Gain on sales of securities, net............................................... (293) (559)
Losses on foreclosed real estate, net.......................................... 36 9
Loss on sale of equipment...................................................... 18 --
Deferred tax provision (benefit)............................................... (3,125) (469)
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.................................. (5,804) (950)
Accrued expenses and other liabilities........................................ 235 164
--------- --------
Net cash provided by operating activities.................................... 3,299 6,864
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales.......................................................................... 32,520 2,394
Maturities..................................................................... 36,412 8,077
Principal payments............................................................. 7,976 19,127
Purchases...................................................................... (79,967) (33,204)
Activity in held-to-maturity securities:
Maturities..................................................................... 9,041 7,388
Principal payments............................................................. 7,516 14,630
Purchases...................................................................... (31,371) (13,492)
Purchase of Federal Home Loan Bank stock........................................ (1,808) (1,213)
Loan originations, net of principal payments.................................... (120,368) (75,119)
Additions to banking premises and equipment..................................... (2,028) (3,068)
Proceeds from sales of foreclosed real estate................................... 164 265
Proceeds from sale of equipment................................................. 3 --
Loan to fund employee stock ownership plan...................................... (7,701) --
--------- --------
Net cash used in investing activities......................................... (149,611) (74,215)
</TABLE>
(Continued)
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
September 30
-------------------------------------
2000 1999
-------------- -------------
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits......................................................... 21,484 15,605
Net increase (decrease) in securities sold under agreements to purchase.......... 1,801 1,040
Proceeds from Federal Home Loan Bank advances with maturities
in excess of three months..................................................... 107,000 81,000
Repayments of Federal Home Loan Bank advances with maturities
in excess of three months..................................................... (58,796) (36,333)
Net proceeds of Federal Home Loan Bank advances with maturities of
three months or less.......................................................... 5,026 2,605
Net proceeds from initial public offering........................................ 68,416 --
-------- --------
Net cash provided by financing activities.................................. 144,931 63,917
-------- --------
Net change in cash and cash equivalents............................................. (1,381) (3,434)
Cash and cash equivalents at beginning of period.................................... 24,642 26,675
-------- --------
Cash and cash equivalents at end of period.......................................... $ 23,261 $ 23,241
======== ========
Supplemental cash flow information:
Interest paid on deposits........................................................ $ 20,080 $ 17,510
Interest paid on borrowed funds.................................................. 3,884 1,965
Income taxes paid................................................................ 4,787 1,847
Transfers from loans to foreclosed real estate................................... 80 106
</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. ("Berkshire Hills" or the "Company") and its wholly-owned subsidiaries,
Berkshire Bank (the "Bank") and Berkshire Hills Funding Corp. 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 September 30, 2000 and
for the three and nine month periods ended September 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 September 30, 2000, the Company had outstanding commitments to originate
new residential and commercial loans totaling $18.0 million which are not
reflected on the consolidated balance sheet. In addition, unadvanced funds on
home equity lines totaled $35.3 million while unadvanced commercial lines,
including unadvanced construction loan funds, totaled $68.9 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 September 30, 2000, the Company had no outstanding diluted
securities. Earnings per share data is presented for the three months ended
September 30, 2000, but not for the nine months ended September 30, 2000 nor for
the three or nine months ended September 30, 1999, since shares of common stock
were not issued until June 27, 2000.
Earnings per share equaled $0.35 for the quarter ending September 30,
2000, based on 7,065,032 average shares outstanding.
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 nine months ended September 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.
6
<PAGE>
Forward Looking Statements
This report contains forward looking statements that are based on
assumptions and may describe future plans, strategies, and expectations of
Berkshire Hills. 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 its subsidiaries include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality 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 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. The Bank is a community
based financial institution that originates a variety of loan products including
real estate loans, and commercial and consumer loans primarily in Berkshire
County, Massachusetts and its surrounding areas. The bank offers a wide variety
of deposit products and other investment products and financial services to its
customers, including asset management and trust services.
In connection with the mutual to stock conversion of Berkshire Bancorp, a
mutual holding company, on June 27, 2000, Berkshire Hills sold 7,105,334 shares
of common stock raising net proceeds of $68,415,488. As part of the conversion,
568,427 shares of Berkshire Hills common stock were donated to the Berkshire
Hills Foundation, a charitable foundation sponsored by Berkshire Hills.
On September 27, 2000, our Board of Directors approved the payment of an
initial dividend of $0.10 per share, payable on November 20, 2000, to
stockholders on record on November 3, 2000.
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets at September 30, 2000 were $983.2 million, an increase of
$141.5 million, or 16.8 percent, from $841.7 million at December 31, 1999. The
$68.4 million in net proceeds from the initial public offering, $53.2 million of
additional Federal Home Loan Bank advances, and $21.5 million of additional
deposits, have supported an increase of $119.6 million in loans and $19.0
million in investment securities. At the beginning of the quarter, 613,900
shares of the Company's stock were purchased by the Company's ESOP.
7
<PAGE>
Loans
Loans outstanding have increased markedly over the first nine months of
2000. Total loans outstanding increased $119.6 million, or 17.7 percent, from
year end levels with strong demand for automobile loans fueling a $73.0 million,
or 44.3 percent increase in the automobile portfolio.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------- --------------------------------
Percent Percent
Balance of Total Balance of Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage loans on real estate:
Residential one- to four-family.............. $254,677 32.09% $245,315 36.39%
Commercial Real Estate....................... 64,966 8.19 46,514 6.90
Commercial Construction...................... 6,176 0.78 12,534 1.86
Multi-family................................. 15,780 1.99 14,793 2.19
-------- ------ -------- ------
Total real estate loans................... 341,599 43.04 319,156 47.34
Commercial loans................................ 161,470 20.34 146,196 21.69
Consumer loans:
Automobile................................... 237,839 29.97 164,862 24.46
Home Equity Loans............................ 34,302 4.32 33,168 4.92
Other........................................ 18,451 2.32 10,706 1.59
-------- ------ -------- ------
Total consumer loans...................... 290,592 36.61 208,736 30.97
-------- ------ -------- ------
Total loans..................................... 793,661 100.00% 674,088 100.00%
====== ======
Less: Allowance for loan losses................ (10,249) (8,534)
-------- --------
Loans, net................................ $783,412 $665,554
======== ========
</TABLE>
Commercial real estate loans and commercial loan balances accounted for the
bulk of the remainder of the increase rising $18.5 million and $15.3 million,
respectively, since December 1999. Residential one- to four-family loans totaled
$254.7 million at September 30, 2000 as compared to $245.3 million at December
31, 1999, an increase of $9.4 million or 3.8 percent. Mortgage activity was
unusually strong at the end of the first quarter, and not as robust during the
summer months possibly because borrowers may have been trying to lock in
favorable rates in a lower interest rate 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
8
<PAGE>
believes that based on the information available to it on September 30, 2000,
the Company's allowance for loan losses is sufficient to cover losses inherent
in the Company's current loan portfolio.
On September 30, 2000, the allowance for loan losses totaled $10.2 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 Company has noticed an
increase in 30 day delinquencies in the loan portfolio, particularly the
automobile portfolio, nonaccruing loans decreased from $2.8 million at the end
of December to $1.6 million on September 30, 2000. In addition, aided by a good
local economy, charged-off loans totaled $1.0 million through September 30, 2000
and represented a decline of 31.1 percent from last year's $1.5 million. Strong
collection efforts to recover previously charged-off loans have led to $310,000
of recoveries this year as compared to $148,000 last year. On September 30,
2000, the allowance expressed as a percent of nonperforming loans was 621.5
percent while on December 31, 1999, it was 300.4 percent.
<TABLE>
<CAPTION>
At and for the
Nine Months Ended
------------------------------------------
September 30, September 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................................................................. 19 381
Consumer.................................................................... 780 413
Commercial.................................................................. 226 694
------- -------
Total charged-off loans.................................................. 1,025 1,488
Recoveries:
Real estate................................................................. 46 16
Consumer.................................................................... 158 99
Commercial.................................................................. 106 33
------- -------
Total recoveries......................................................... 310 148
Provision...................................................................... 2,430 2,025
------- -------
Allowance for loan losses, end of period....................................... $10,249 $ 8,274
======= =======
Net loans charged-off to total loans........................................... 0.09% 0.20%
Allowance of loan losses to total loans........................................ 1.29% 1.22%
Allowance for loan losses to nonperforming loans............................... 621.53% 249.07%
Recoveries to charge-offs...................................................... 30.24% 9.95%
</TABLE>
9
<PAGE>
Nonperforming Assets
The following table sets forth information regarding nonperforming assets
as of September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans:
Real estate:
One- to four-family......................................... $ 301 $ 450
Commercial.................................................. -- --
Home equity.................................................... -- --
Consumer....................................................... 710 819
Commercial..................................................... 638 1,572
------ ------
Total....................................................... 1,649 2,841
Foreclosed real estate............................................ 100 220
------ ------
Total nonperforming assets........................................ $1,749 $3,051
====== ======
Total nonaccruing loans to total loans............................ 0.21% 0.42%
Total nonperforming assets to total assets........................ 0.18% 0.36%
</TABLE>
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. At September 30, 2000, the Company had $775,000 of loans that
were 90 days or more past due but which were still accruing interest. Management
is confident these loans will be collected in full.
As has been the case with charged-off loans, the amount of nonaccruing
loans has declined since December 31, 1999. As of September 30, 2000, total
nonaccruing loans amounted to $1.6 million, a decline of 42.0 percent from $2.8
million at December 31, 1999. The bulk of the decrease has occurred in the
commercial area as balances now total $638,000 against $1.6 million at December
31, 1999. The foreclosure and sale of a large business property accounted for
much of the decline. Residential one-to-four family real estate loans, consumer
loans, and commercial loans are all below year end levels at September 30, 2000.
The Company has attempted to resolve problems as quickly as they have been
identified which has led to nonaccruing loans dropping to 0.21 percent of total
loans on September 30, 2000, from 0.42 percent on December 31, 1999.
As a result of the improvement in the nonperforming and foreclosed real
estate categories, the ratio of nonperforming assets to total assets has fallen
to 0.18 percent on September 30, 2000, from 0.36 percent nine months ago.
Investment Securities
Securities totaled $135.0 million at the end of September as compared to
$154.6 million on June 30, 2000, and $116.0 million at the end of last year.
Proceeds from the conversion, which had been
10
<PAGE>
initially invested in shorter term obligations at the end of June, were used to
help fund the growth in the loan portfolio during the third quarter of 2000.
Since the first of the year, the Company's marketable equities portfolio, which
is included in the category `securities available for sale', has had net
unrealized appreciation in the portfolio decrease by $0.6 million net of tax
effects to $17.6 million on September 30, 2000 from $18.2 million on December
31, 1999. Declines in equity values sustained during the first half of the year,
have been largely offset by a rebound in the Company's portfolio during the
third quarter. The change in net unrealized gain in the equity portfolio
accounted for almost all of the change in accumulated other 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
September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------------------- -----------------------------------
% of % of
Balance Deposits Balance Deposits
--------------- --------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits........................... $ 73,555 10.47% $ 69,034 10.14%
NOW accounts.............................. 76,439 10.88 78,223 11.49
Savings accounts.......................... 141,719 20.18 145,486 21.37
Money Market accounts..................... 106,763 15.20 92,721 13.62
Term certificates......................... 303,775 43.26 295,303 43.38
-------- ------ -------- ------
Total............................... $702,251 100.00% $680,767 100.00%
======== ====== ======== ======
</TABLE>
Total deposits were $702.3 million on September 30, 2000 an increase of 3.2
percent for the year. Core deposits, which the Company considers to be all but
term certificates, were 56.7 percent of total deposits on September 30, 2000 as
compared to 56.6 percent on December 31, 1999. The Company has had success in
increasing its core deposits, especially with commercial and government
customers, and will continue to focus its efforts on attracting demand deposit
and money market accounts from these 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 $53.2 million to $112.2 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.
Stockholders' Equity and Regulatory Capital
At September 30, 2000, the Company had $155.8 million in stockholders'
equity compared to $88.4 million at December 31, 1999. The increase was
primarily due to the receipt of $68.4 million net proceeds of the conversion of
the Bank and net income of $2.1 million. Partially offsetting these increases
were expenditures for ESOP common stock purchases of $7.6 million and reserving
$705,986 for the
11
<PAGE>
payment on November 20, 2000, of the Company's initial cash dividend. The
Company's capital to assets ratio for the two periods was 15.85 percent and
10.50 percent, respectively. The various regulatory capital ratios on September
30, 2000, and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Total capital to risk weighted assets ........... 19.97% 12.90%
Tier 1 capital to risk weighted assets .......... 17.17% 9.73%
Tier 1 capital to average assets ................ 14.57% 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 September 30, 2000.
The capital from the conversion significantly increased liquidity and
capital resources. The liquidity is being reduced over time as the net proceeds
are used for general corporate purposes, including the funding of lending
activities.
Comparison of Operating Results for the Three Months Ended September 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 $3.8 million, or 25.3 percent,
to $18.8 million for the third quarter of 2000 as compared to the same period
last year as strong commercial real estate and automobile loan growth
contributed to a higher level of interest earnings. Loan interest grew to $16.8
million in the current quarter, an increase of $3.2 million, or 23.8 percent,
from the same period last year. Increasing emphasis on commercial and automobile
loans along with higher market interest rates led to higher loan yields.
Investment income rose to $2.1 million in 2000 from $1.5 million in 1999, an
increase of $575,000, or 38.9 percent, as the Company's investment securities
also benefited from the higher level of market interest rates and investment of
a portion of the net conversion proceeds for the third quarter.
Interest expense rose $1.9 million, or 27.7 percent, to $8.6 million this
year due to higher market interest rates, increased deposits, and additional
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. Deposit expense grew by $1.1 million this year to $7.1
million while interest on FHLB advances more than doubled to $1.5 million from
$0.7 million last year.
Net interest income, before the provision for loan losses, increased $1.9
million or 23.4 percent to $10.2 million in the third quarter of 2000. Expressed
as a percent of earning assets, the Company's
12
<PAGE>
margin increased to 4.45 percent this quarter from 4.21 percent for the same
quarter last year. Increased originations of higher yielding commercial and
automobile loans, along with the favorable repricing of renewing loans,
contributed to the increase in net interest margin.
The Company's provision for loan losses was $810,000 in the third quarter
of this year as compared to $675,000 in the same quarter last year. As has been
the case throughout 2000, the Company had anticipated that most of the new loan
originations would be commercial or automobile loans. These loans generally bear
a greater degree of risk than one to four family real estate loans, and the
increase in the loan loss provision reflects this change in composition in the
loan portfolio. As of September 30, 2000, commercial, including multi-family
loans, and automobile loans represented 61.3 percent of the loan portfolio as
compared to 57.1 percent at December 31, 1999.
After the provision, net interest income was $9.4 million for the quarter
ending September 30, 2000 as compared to $7.6 million for the same period last
year, an increase of $1.8 million or 23.7 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 $1.2 million, an increase of $331,000 or 39.9
percent, from the same quarter last year. With more loans being serviced for
others this year as compared to last year, servicing fees jumped $102,000 to
$164,000. Other income, including municipal advisory fees, rose to $118,000 from
$37,000 last year. In addition, $72,000 in gains on the sale of securities, were
realized in the third quarter this year versus none in the same quarter last
year. Lastly, Trust department fees rose to $408,000 in the quarter from
$365,000 in 1999 as assets in the Trust department climbed to $271.0 million on
September 30, 2000 from $233.1 million twelve months ago.
Non-interest Expense. Non-interest (operating) expense amounted to $6.7
million for the three months ending September 30, 2000 as compared to $6.1
million for the same three months last year. Included in this year's $0.6
million increase was a one-time charge of $125,000 related to the closing of a
branch office in North Adams. Also, start-up costs of $74,000 associated with
the establishment of Gold Leaf Insurance Agency, Inc., and $120,000 related to
the conversion of the Company's check imaging system from a service bureau to an
in-house system contributed to the total. Additional expenses of approximately
$130,000 related to the check imaging system conversion are expected in the
fourth quarter. Other increases in salary and benefit expense, including
$141,000 of ESOP related expenses, occupancy and equipment expense, and expenses
pertaining to the handling of repossessed automobiles were largely offset by the
diminished use of consultants which resulted in a decline in professional
service expense.
Income Taxes. Income taxes were $704,000 higher in this year's third
quarter as the Company's effective tax rate was 34.2 percent in 2000 compared to
26.2 percent in 1999 as contribution carry forwards, state tax net operating
loss carry forwards, and estimated federal tax credits contributed to 1999's
lower effective tax rate.
Comparison of Operating Results For the Nine Months Ended September 30, 2000 and
1999
Net Interest Income. Interest income from the loan and investment
portfolios increased $8.4 million, or 19.4 percent, to $51.5 million over the
first nine months of 2000 as compared to the first nine months of 1999. Higher
market interest rates along with strong automobile and commercial loan
originations have led to higher loan yields and as a result, loan interest rose
to $46.1 million in 2000 from
13
<PAGE>
$38.9 million in 1999. In addition, bond interest rose $0.7 million to $3.9
million this year as the Company benefitted from a higher level of investment in
fixed income securities and the continuing reinvestment of the short term bond
portfolio at higher rates.
Interest expense rose $4.7 million or 24.0 percent to $24.2 million in the
first nine months of 2000. Borrowings from the Federal Home Loan Bank of Boston
have been used to support loan growth and increased significantly over the past
twelve months. Interest paid on the borrowings has increased correspondingly,
rising to $4.1 million this year from $1.7 million last year. Rising interest
costs on a larger deposit base accounted for the rest of the increase.
Net interest income rose $3.7 million or 15.6 percent to $27.3 million over
this same time period last year. The Company's net interest margin was 4.22
percent for the first nine months of 2000 versus 4.14 percent for the first nine
months of 1999. Rising interest rates along with high levels of loan
originations at current market rates, funded primarily with the proceeds of the
Company's initial public offering, contributed to the increase.
The Company's provision for loan losses amounted to $2.4 million through
the first nine months of 2000 compared to $2.0 million in 1999. The additional
provision was a reflection of the Company's increased emphasis on higher risk
commercial and auto loans which comprise 61.3 percent of the loan portfolio at
September 30, 2000 as compared to 57.1 percent at December 31, 1999.
After the provision, the Company's net interest income for the first nine
months of 2000 was $24.9 million up from $21.6 million for the same time period
in 1999, an increase of 15.2 percent.
Non-interest Income. Through the first nine months of this year, non-
interest income has risen $0.5 million, or 15.3 percent, over the comparable
period last year. Last year's figure included $559,000 of gains realized on the
sale of securities. Only $293,000 is included in this year's number. Loan
servicing fees jumped to $569,000 in 2000 from $150,000 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 rising to $1.2 million through September 30, 2000, as compared to $1.0
million for the same period last year. Similarly, with more assets under
management, Trust department fees increased to just over $1.2 million through
September 30, 2000, versus just under $1.1 million for the first nine months of
1999.
Non-interest Expense. Non-interest (operating) expenses totaled $25.1
million over 2000's first nine months, an increase of $6.9 million, or 38.0
percent, over 1999's $18.2 million. Included in 2000's figure is a one-time
$5.7 million donation to Berkshire Hills Foundation made in the second quarter.
Excluding this expense, operating expenses rose $1.2 million, or 6.8 percent, to
$19.4 million this year from $18.2 million last year. OREO and loan expenses,
especially those pertaining to nonaccruing loans and the repossession and sale
of automobiles, rose $312,000 to $821,000 this year from $509,000 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. Salary and benefit expense, including $141,000
of ESOP related expenses, increased $484,000 to $10.4 million year over year.
Occupancy and equipment expense increased $390,000 to $3.3 million, primarily
due to a one-time expense of $125,000 related to the closing of a branch in
North Adams. Partially offsetting these increases were declines of $317,000 in
professional service fees as fewer consultants have been used this year, and
14
<PAGE>
$91,000 in lower data processing expenses as maintenance costs have declined and
fewer customized computer programs have been needed.
Income Taxes. Primarily due to a $5.7 million contribution made to
Berkshire Hills Foundation in the second quarter of 2000, the Company has booked
$1.1 million in income tax expense so far this year for an effective tax rate of
34.2 percent as compared to $1.7 million last year and an effective tax rate of
26.2 percent. Contribution carry forwards, state tax net operating loss carry
forwards, and estimated federal tax credits contributed to 1999's lower
effective tax rate.
In August 2000, Federal authorities denied the Company's application for
tax credits relating to the rehabilitation of an historic fire station in
Pittsfield, Massachusetts. Estimated tax credits of $300,000 were booked for the
twelve months of 1999. However, the Company has qualified for state tax credits
of approximately $137,000 and an additional deduction which could result in a
further $26,000 in tax savings.
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, 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 to the Executive Committee of the Bank and the Board
of Directors. 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 $27.1 million
at September 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 $0.6
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 September 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>
<TABLE>
<CAPTION>
At September 30, 2000
--------------------------------------------------------------
Increase/
(Decrease)
in Market
Interest Rates
in Basis Points
(Rate Shock) Amount $ Change % Change
--------------------- --------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
200 $44,306 $ 585 1.34%
100 44,027 306 0.70
Static 43,721 -- --
(100) 43,235 (486) (1.11)
(200) 42,631 (1,090) (2.49)
</TABLE>
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
$486,000 and $1.1 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.
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
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)
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.
18
<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: November 13, 2000 By: /s/ James A. Cunningham, Jr.
-----------------------------------
James A. Cunningham, Jr.
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: November 13, 2000 By: /s/ Charles F. Plungis, Jr.
-----------------------------------
Charles F. Plungis, Jr.
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
