<PAGE>
As filed with the Securities and Exchange Commission on April 25, 2000
Registration No. 333-32146
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
BERKSHIRE HILLS BANCORP, INC.
BERKSHIRE BANK
401(k) Plan
(Exact name of registrant as specified in its charter)
DELAWARE 6036 Being applied for
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code Number)
Organization)
24 North Street
Pittsfield, Massachusetts 01201
(413) 443-5601
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
James A. Cunningham, Jr.
President and Chief Executive Officer
Berkshire Bank
24 North Street
Pittsfield, Massachusetts 01201
(413) 443-5601
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas P. Faucette, Esquire
Lawrence M. F. Spaccasi, Esquire
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
===============================================================================================================
Calculation of Registration Fee
- ---------------------------------------------------------------------------------------------------------------
Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Offering Registration
Per Unit Price (2) Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 10,326,609
$.01 par value Shares(1) $10.00 $103,266,090 (3)
- ---------------------------------------------------------------------------------------------------------------
Participation (4) _______ $ 5,929,249 (5)
Interests
===============================================================================================================
</TABLE>
(1) Includes shares of Common Stock to be issued to Berkshire Hills Foundation,
Inc., a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The registration fee of $27,263 was previously paid upon the initial filing
of the Form S-1 on March 10, 2000.
(4) In addition, pursuant to Rule 416(c) under the Securities Act, this
registration statement also covers an indeterminate amount of interests to
be offered or sold pursuant to the employee benefit plan described herein.
(5) The securities of Berkshire Hills Bancorp, Inc. to be purchased by Berkshire
Bank 401(k) Plan are included in the amount shown for Common Stock.
Accordingly, no separate fee is required for the participation interests. In
accordance with Rule 457(h) of the Securities Act, as amended, the
registration fee has been calculated on the basis of the number of shares of
Common Stock that may be purchased with the current assets of such
Plan.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
INTERESTS IN
BERKSHIRE BANK
401(k) Plan
and
Offering of 592,924 Shares of
Berkshire Hills Bancorp, Inc.
Common Stock ($.01 Par Value)
________________________
This prospectus supplement relates to the offer and sale to participants in
the Berkshire Bank 401(k) Plan of participation interests and shares of common
stock of Berkshire Hills.
The Board of Directors of Berkshire Bank has adopted a plan to convert
Berkshire Bancorp, the mutual holding company for Berkshire Bank, to a stock
holding company. As part of the conversion, Berkshire Hills has been
established to acquire all of the stock of Berkshire Bank and simultaneously
offer Berkshire Hills common stock to the public under certain purchase
priorities in the plan of conversion. After the conversion, Berkshire Bancorp
will cease to exist.
In connection with the offering of Berkshire Hills common stock, 401(k)
Plan participants are now permitted to direct the trustee of the 401(k) Plan to
use their current account balances to subscribe for and purchase shares of
Berkshire Hills common stock through the Berkshire Hills Stock Fund. Based
upon the value of the 401(k) Plan assets at December 31, 1999, the trustee of
the 401(k) Plan could purchase up to 592,924 shares of Berkshire Hills common
stock assuming a purchase price of $10.00 per share. This prospectus supplement
relates to the election of 401(k) Plan participants to direct the trustee of the
401(k) Plan to invest all or a portion of their 401(k) Plan accounts in
Berkshire Hills common stock.
The prospectus dated _______________________________, 2000, of Berkshire
Hills, which we have attached to this prospectus supplement, includes detailed
information regarding the conversion, the common stock and the financial
condition, results of operations and business of Berkshire Bank. This
prospectus supplement provides information regarding the 401(k) Plan. You
should read this prospectus supplement together with the prospectus and keep
both for future reference.
Please refer to "Risk Factors" beginning on page __ of the prospectus.
The date of this Prospectus Supplement is ____________________, 2000.
Neither the Securities and Exchange Commission, the Massachusetts Division
of Banks, the Federal Deposit Insurance Corporation, nor any other state or
federal agency or any state securities commission, has approved or disapproved
these securities. Any representation to the contrary is unlawful.
This prospectus supplement may be used only in connection with offers and
sales by Berkshire Hills of interests or shares of common stock pursuant to the
401(k) Plan. No one may use this prospectus supplement to reoffer or resell
interests or shares of common stock acquired through the 401(k) Plan.
Berkshire Bank has not authorized any person to give any information or to
make any representations other than those contained in the prospectus or this
prospectus supplement, and, if given or made, no one may rely on such
information or representations as having been authorized by Berkshire Bank or
the 401(k) Plan. This prospectus supplement does not constitute an offer to
sell or solicitation of an offer to buy any securities in any jurisdiction to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
THE OFFERING.................................................... 1
Securities Offered............................................ 1
Election to Purchase the Common Stock in the Conversion....... 1
Value of Participation Interests.............................. 1
Method of Directing Transfer.................................. 1
Time for Directing Transfer................................... 2
Irrevocability of Transfer Direction.......................... 2
Direction to Purchase the Common Stock After the Conversion... 2
Common Stock in the Conversion will be Purchased at
$10.00 Per Share............................................ 2
Nature of a Participant's Interest in the Common Stock........ 2
Voting and Tender Rights of the Common Stock.................. 3
DESCRIPTION OF THE PLAN......................................... 3
Introduction.................................................. 3
Eligibility and Participation................................. 4
Contributions Under the Plan.................................. 4
Limitations on Contributions.................................. 4
Investment of Contributions................................... 5
Benefits Under the Plan....................................... 7
Withdrawals and Distributions from the 401(k) Plan............ 7
Administration of the Plan.................................... 8
Reports to Plan Participants.................................. 8
Plan Administrator............................................ 8
Amendment and Termination..................................... 8
Merger, Consolidation or Transfer............................. 9
Federal Income Tax Consequences............................... 9
ERISA and Other Qualification................................. 10
Restrictions on Resale........................................ 10
SEC Reporting and Short-Swing Profit Liability................ 10
LEGAL OPINION................................................... 11
</TABLE>
<PAGE>
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are
participation interests in the 401(k) Plan. Assuming a purchase price of $10.00
per share, the trustee may acquire up to 592,924 shares of common stock for the
Berkshire Hills Stock Fund. Berkshire Hills, the proposed holding company for
Berkshire Bank, is the issuer of the common stock. Only employees of Berkshire
Bank may participate in the 401(k) Plan. The interests offered under this
prospectus supplement are conditioned on the consummation of the conversion.
Your investment in the Berkshire Hills Stock Fund in connection with the
conversion is subject to priorities set forth in the plan of conversion of
Berkshire Bank.
This prospectus supplement contains information regarding the 401(k) Plan.
The attached prospectus contains information regarding the conversion and the
financial condition, results of operations and business of Berkshire Bank. The
address of the principal executive office of Berkshire Bank is 24 North Street,
Pittsfield, MA 01201. The telephone number of Berkshire Bank is (413) 443-5601.
Election to Purchase the Common Stock in the Conversion
In connection with the conversion, Berkshire Bank has amended the 401(k)
Plan to permit you to direct the trustee to transfer all or part of the funds
which represent your beneficial interest in the assets of the 401(k) Plan to the
Berkshire Hills Stock Fund. The trustee of the 401(k) Plan will subscribe for
common stock offered for sale in connection with the conversion in accordance
with each participant's direction. In the event the conversion offering is
oversubscribed and some or all of your funds cannot be used to purchase common
stock in the conversion offering, the trustee will reallocate the amount not
invested in common stock on a proportionate basis to the other investment
options you have selected.
All plan participants are eligible to direct a transfer of funds to the
Berkshire Hills Stock Fund. However, such directions are subject to the
purchase priorities in the plan of conversion of Berkshire Bancorp.
Participants who had a savings account of $50.00 or more on September 30, 1998,
at Berkshire Bank have first priority. No 401(k) Plan participants may purchase
in the subscription offering more than $250,000 of the common stock.
Value of Participation Interests
As of December 31, 1999, the market value of the assets of the 401(k) Plan
totaled $5,929,249. The plan administrator informed each participant of the
value of his or her beneficial interest in the 401(k) Plan as of December 31,
1999. The value of plan assets represents the past contributions to the 401(k)
Plan by or on behalf of the participants of the 401(k) Plan, plus or minus
earnings or losses on the contributions, less previous withdrawals.
Method of Directing Transfer
If you want to use your 401(k) Plan funds to purchase common stock in the
Berkshire Hills initial public offering, you must make a transfer of funds into
the Berkshire Hills Stock Fund from the other investment funds in which your
funds are invested. You must do this by completing the attached form and
submitting it to Human Resources. The trustee will submit an order form on your
behalf to purchase the maximum number of shares in the initial public offering
that can be purchased with the funds you transferred to the Berkshire Hills
Stock Fund. If you do not wish to make such an election at this time, you do
not need to take any action.
1
<PAGE>
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the
Berkshire Hills Stock Fund in connection with the conversion is ten (10) days
prior to ____________________, the Expiration Date of the offering. You should
return the Contribution and Investment Form attached to this prospectus
supplement to the Human Resources Department of Berkshire Bank by __:__ p.m. on
__________.
Irrevocability of Transfer Direction
Your direction to transfer amounts credited to your account in the 401(k)
Plan to the Berkshire Hills Stock Fund in connection with the conversion cannot
be changed. Pending completion of the initial public offering, the funds you
transfer to the Berkshire Hills Stock Fund will be held in an interest-bearing
account at Berkshire Bank on the same terms as other subscribers in the initial
public offering, as described in the attached prospectus.
Direction to Purchase the Common Stock After the Conversion
After the conversion, you may direct the trustee of the 401(k) Plan to
transfer a certain percentage (in multiples of not less than 1%) of the net
value of your interests in the trust fund to the Berkshire Hills Stock Fund or
to the other investment funds available under the 401(k) Plan. Alternatively,
you may direct the trustee of the 401(k) Plan to transfer a certain percentage
of your interest in the Berkshire Hills Stock Fund to the trust fund and
invested in accordance with the terms of the 401(k) Plan. You may direct the
trustee to invest future contributions made to the 401(k) Plan on your behalf in
the Berkshire Hills Stock Fund or any of the other funds available under the
401(k) Plan. Following your initial election, you may change the allocation of
your interest in the Berkshire Hills Stock Fund on the first day of any calendar
quarter by submitting an appropriate form to the plan administrator. You may
obtain a form from the Human Resources Department of Berkshire Bank. Special
restrictions may apply to transfers directed by those participants who are
officers, directors and principal shareholders of Berkshire Bank who are subject
to the provisions of Section 16(b) of the Securities Exchange Act of 1934.
Common Stock in the Conversion will be Purchased at $10.00 Per Share
The trustee will use the funds transferred to the Berkshire Hills Stock
Fund to purchase shares of common stock in the conversion. The trustee will pay
the same price for shares of common stock as all other persons who purchase
shares of the common stock in the conversion. Post-conversion purchases of
common stock in the Berkshire Hills Stock Fund will be made at prevailing market
prices. These prices may be higher or lower than the conversion price of $10.00
per share of common stock.
Nature of a Participant's Interest in the Berkshire Hills Stock Fund
With the other investment funds in the 401(k) Plan, the funds purchase
their underlying investment every pay period. Each investment fund's unit value
is updated every day based on the total value of its underlying investments and
the number of units held in the fund. Distributions, withdrawals, loans and
investment transfers occur without having to wait until the end of the calendar
quarter. Loan and transfer requests are made through the Voice Response System
("VRS"). However, the Berkshire Hills Stock Fund differs from the other
investment options in the 401(k) Plan in the following ways:
. Any of your elective deferrals that you direct into the Berkshire Hills
Stock Fund are invested in the fund every pay period (as your deferrals are
withheld from each paycheck). However, your money is invested in a money
market fund and earns interest until the end of the calendar quarter, at
which time the cash is used to buy Berkshire Hills common stock.
. The Berkshire Hills Stock Fund's unit values are determined only at the
end of a calendar quarter, based on the market value of all Berkshire Hills
common stock the fund holds. The units you hold do not represent an
equivalent number of Berkshire Hills common stock, but instead reflect your
portion of the fund's holdings.
2
<PAGE>
. The value of your investment in the Berkshire Hills Stock Fund that you
can obtain from the VRS will be its value based on the Berkshire Hills
Stock Fund unit value at the close of the prior calendar quarter plus your
deferrals, which are being held in money market fund until the end of the
calendar quarter.
. If you invest in the Berkshire Hills Stock Fund, all distributions and
investment transfers you make involving that fund are done only at the end
of the applicable calendar quarter using the appropriate administrative
form, which must reach Human Resources at least two weeks before the end of
the calendar quarter. Transfers into or out of the Berkshire Hills Stock
Fund cannot be initiated in the VRS.
. Withdrawals can only be drawn from your Berkshire Hills Stock Fund at the
end of a calendar quarter, unlike the other funds, which can be drawn
against on any day. Therefore, withdrawals will be drawn first from the
other funds, not your interest in the Berkshire Hills Stock Fund. Only if
there is not enough money in your other funds to meet your withdrawal
amount will the remainder be drawn from your interest in the Berkshire
Hills Stock Fund at the end of the calendar quarter. In that event, the
entire amount of your withdrawal will not be made until after the end of
the calendar quarter.
. When you request from the VRS the amount available for loan, the amount
will not include your interest in the Berkshire Hills Stock Fund. If you
wish to borrow from your interest in the Berkshire Hills Stock Fund, you
must first transfer an amount out of the Berkshire Hills Stock Fund, equal
to twice the amount you wish to borrow, into one of the other investment
funds. Then you can follow the usual procedures to request a loan from
that investment fund.
Voting and Tender Rights of the Common Stock
The plan administrator generally will exercise voting rights attributable
to all of the common stock held by the Berkshire Hills Stock Fund. However, in
the event that a significant corporate transaction is proposed to the
shareholders of Berkshire Hills, such as a tender offer, the trustees of the
401(k) Plan may pass-through to you the voting or tender rights of shares in the
Berkshire Hills Stock Fund that represent your interest in the fund. The number
of shares of the common stock held in the Berkshire Hills Stock Fund that the
trustee votes in the affirmative and negative on each matter shall be
proportionate to the number of voting instruction rights exercised by
participants in the affirmative and negative, respectively. For matters not
involving a tender offer, the plan administrator will direct the vote of
allocated shares and participants will not have an opportunity to direct the
voting of shares.
DESCRIPTION OF THE PLAN
Introduction
Effective February 1, 2000, Berkshire Bank adopted the Berkshire Bank
401(k) Plan in the SBERA Common and Collective Trust. Berkshire Bank intends
for the 401(k) Plan to comply, in form and in operation, with all applicable
provisions of the Internal Revenue Code and the Employee Retirement Income
Security Act, most commonly referred to as "ERISA." Berkshire Bank may amend
the 401(k) Plan from time to time in the future to ensure continued compliance
with these laws. Berkshire Bank may also amend the 401(k) Plan from time to
time in the future to add, modify, or eliminate certain features of the plan, as
it sees fit. As a plan subject to ERISA, federal law provides you with various
rights and protections as a plan participant. Although the 401(k) Plan is
subject to many of the provisions of ERISA, your benefits under the plan are not
guaranteed by the Pension Benefit Guaranty Corporation.
Applicable federal tax law requires the 401(k) plan to impose substantial
restrictions on your right to withdraw amounts held under the plan prior to your
termination of employment with berkshire bank. Federal law may also impose an
excise tax on withdrawals made from the 401(k) plan prior to your attainment of
age 59-1/2, regardless of whether the withdrawal occurs during your employment
with berkshire bank or after termination of employment.
3
<PAGE>
Reference to Full Text of Plan. The following portions of this prospectus
------------------------------
supplement summarize certain provisions of the 401(k) Plan. Berkshire Bank
qualifies these summaries in their entirety by the full text of the 401(k) Plan.
You may obtain copies of the 401(k) Plan document by sending a request to: Plan
Administrator, Thomas Forese, Jr., Savings Banks Employees Retirement
Association, 69 Cummings Park, Woburn, Massachusetts 01801. You should
carefully read the full text of the 401(k) Plan document to understand your
rights and obligations under the plan.
Eligibility and Participation
Any employee of Berkshire Bank may participate in the 401(k) Plan as of the
first day of the month following completion of a "year of service" and
attainment of age twenty-one. For purposes of the 401(k) Plan, you generally
complete a "year of service" when you complete 1,000 hours of service with
Berkshire Bank within a twelve-consecutive-month period measured from your date
of hire.
As of October 31, 1999, approximately 239 out of 254 then eligible
employees had elected to participate in the 401(k) Plan.
Contributions Under the Plan
401(k) Plan Participant Contributions. The 401(k) Plan permits each
-------------------------------------
participant to make pre-tax salary deferrals to the 401(k) Plan in amounts
ranging from 1% to 15% of compensation. Participants in the 401(k) Plan may
modify the amount contributed to the 401(k) Plan, effective on the first day of
the month, by filing a new deferral agreement with the plan administrator at
least 15 days prior to the effective date of the modification.
Berkshire Bank Contributions. Berkshire Bank has discretion under the
----------------------------
401(k) Plan to make matching contributions. Berkshire Bank currently makes
matching contributions to the 401(k) Plan equal to 100% of the first 3% of each
participant's deferred compensation for the plan year. Amounts deferred in
excess of 3% of a participant's compensation are not subject to matching
contributions.
Limitations on Contributions
Limitation on Employee Salary Deferral. Although the 401(k) Plan permits
--------------------------------------
you to defer up to 15% of your compensation, by law, your total pre-tax
deferrals under the 401(k) Plan, together with similar plans, may not exceed
$10,500 for 2000. The IRS will periodically increase this annual limitation.
Contributions in excess of this limitation ("excess deferrals") will be included
in an affected participant's gross income for federal income tax purposes in the
year they are made. In addition, any such excess deferral will again be subject
to federal income tax when distributed by the 401(k) Plan to the participant,
unless the excess deferral (together with any income allocable thereto) is
distributed to the participant not later than the first April 15th following the
close of the taxable year in which the excess deferral is made. Any income on
the excess deferral that is distributed not later than such date shall be
treated, for federal income tax purposes, as earned and received by the
participant in the taxable year in which the distribution is made.
Limitations on Annual Additions and Benefits. Under the requirements of
--------------------------------------------
the Internal Revenue Code, the 401(k) Plan provides that the total amount of
contributions and forfeitures (annual additions) allocated to participants under
the 401(k) Plan and other defined contribution plans during any plan year may
not exceed the lesser of 25% of the participant's compensation for the plan
year, or $30,000, for 2000. The 401(k) Plan will also limit annual additions to
the extent necessary to prevent the limitations set forth in the Internal
Revenue Code for all of the qualified defined benefit plans and defined
contribution plans maintained by Berkshire Bank from being exceeded.
4
<PAGE>
Limitation on Plan Contributions for Highly Compensated Employees. Special
-----------------------------------------------------------------
provisions of the Code limit the amount of salary deferrals and matching
contributions that may be made to the 401(k) Plan in any year on behalf of
highly compensated employees in relation to the amount of deferrals and matching
contributions made by or on behalf of all other employees eligible to
participate in the 401(k) Plan. If these limitations are exceeded, the level of
deferrals by highly compensated employees must be adjusted.
In general, a Highly Compensated Employee includes any employee who (1) was
a five percent owner of the employer at any time during the year or preceding
year; or (2) had compensation for the preceding year in excess of $85,000 and,
if the employer so elects, was in the top 20% of employees by compensation for
the year. The dollar amounts in the foregoing sentence are for 2000. Such
amounts are adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the 401(k) Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any plan year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following plan year. Berkshire Bank will be subject to
a 10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the plan year
to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any plan year the 401(k) Plan is a
---------------------------
Top-Heavy Plan (as defined below), then (i) Berkshire Bank may be required to
make certain minimum contributions to the 401(k) Plan on behalf of non-key
employees (as defined below), and (ii) certain additional restrictions would
apply with respect to the combination of annual additions to the 401(k) Plan and
projected annual benefits under any defined benefit plan maintained by Berkshire
Bank.
In general, the 401(k) Plan will be regarded as a "Top-Heavy Plan" for any
plan year if, as of the last day of the preceding plan year, the aggregate
balance of the accounts of participants who are Key Employees (as defined below)
exceeds 60% of the aggregate balance of the accounts of all participants. Key
Employees generally include any employee who, at any time during the plan year
or any of the four preceding plan years, is (1) an officer of the Bank having
annual compensation in excess of $60,000 who is in an administrative or policy-
making capacity, (2) one of the ten employees having annual compensation in
excess of $30,000 and owning, directly or indirectly, the largest interests in
Berkshire Bank, (3) a 5% owner of Berkshire Bank, (i.e., owns directly or
indirectly more than 5% of the stock of Berkshire Bank, or stock possessing more
than 5% of the total combined voting power of all stock of Berkshire Bank) or
(4) a 1% owner of Berkshire Bank having annual compensation in excess of
$150,000. The dollar amounts in the foregoing sentence are for 2000.
Investment of Contributions
All amounts credited to participants' accounts under the 401(k) Plan are
held in trust. A trustee appointed by the Board of Directors of Berkshire Bank
administers the trust.
Immediately prior to [insert date of Prospectus here], the 401(k) Plan
offered the following investment choices:
Money Market Account: The money market account seeks to maximize current
income while preserving capital and liquidity. The money market account intends
to maintain a consistent net cash value of $1.00 per share. The objective of
the money market account is to consistently out-perform the Donoghue Money Fund
Average. The Savings Bank Employees Retirement Association manages the money
market account.
Asset Allocation Account: The asset allocation account seeks to offer a
competitive long-term total return and below-average volatility through a
balanced and diversified investment approach. The asset allocation account
invests in a carefully selected portfolio of mutual funds that emphasize either
equity, fixed income, or money market securities, both foreign and domestic.
Putnam Investments manages the asset allocation account.
5
<PAGE>
Equity Account: The equity account seeks long-term growth of capital and
income by investing in common stocks of domestic and foreign companies. Five
investment advisors selected by the Board of Trustees of the Savings Bank
Employees Retirement Association manage the equity account.
Bond Account: The bond account seeks to produce a positive real rate of
return after inflation with a high degree of stability and limited volatility.
The entire portfolio of the bond account consists of United States Treasury
obligations, Government National Mortgage Association mortgage-backed
certificates, other United States Agency obligations and cash equivalents. The
bond account seeks to exceed the returns of the Lehman Brothers Mortgage Backed
securities Index. Putnam Investment Management manages the bond account.
Enhanced Index Account: The enhanced index account is a domestic common
stock portfolio. The enhanced index account seeks to consistently provide
excess returns over the Standard & Poor's 500 Index. The enhanced index account
controls risk by maintaining portfolio characteristics and industry weights
similar to those of the S&P 500 Index. Fidelity Management Trust Company
manages the enhanced index account.
Index 500 Account: The Index 500 account attempts to provide investment
results that parallel the performance of the Standard & Poor's 500 Composite
Stock Price Index. The portfolio holds all of the 500 underlying securities in
proportion to their weighting in the index. The Index 500 account expects to
provide investors with long-term growth of capital and income. The Vanguard
Group manages the Index 500 account.
International Equity Account: The international equity account seeks to
obtain long-term growth through a diversified portfolio of marketable equity
securities of foreign companies. The international equity account looks to
outperform the Morgan Stanley Capital International EAFE (Europe, Australia, Far
East) Index in U.S. dollars over a market cycle. Putnam International Equity
Management manages the international equity account.
Small Cap Equity Account: The small cap equity account seeks capital
appreciation. The small cap equity account is designed for investors willing to
assume above-average risk in exchange for above-average capital potential. The
account invests primarily in common stocks of small to medium-sized companies
that the account's investment advisor believes have potential for capital
appreciation significantly greater than the market average. Putnam Investment
Management manages the small cap equity account.
In connection with the Conversion, the 401(k) Plan now provides the
Berkshire Hills Stock Fund as an additional choice to these investment
alternatives. The Berkshire Hills Stock Fund will invest primarily in the
common stock of Berkshire Hills. Participants in the 401(k) Plan may direct the
trustee to invest all or a portion of their 401(k) Plan account balance in the
Berkshire Hills Stock Fund.
On the first day of any calendar quarter you may elect (in increments of
1%), to have both past and future contributions and additions to your accounts
invested in the Berkshire Hills Stock Fund. Your election becomes effective as
of the last day of the calendar quarter for which you make the election,
provided you file written notice with the plan administrator at least 15 days
before it is to become effective.
6
<PAGE>
A. Previous Funds.
--------------
Prior to the Conversion and implementation of the Berkshire Hills Stock
Fund, contributions under the 401(k) Plan were invested in the funds specified
below. The annual percentage return on these funds for the prior three years
was:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------
<S> <C> <C> <C>
a. Money Market Account 5.05% 5.40% 5.45%
b. Asset Allocation Account 31.73 13.68 14.57
c. Equity Account 37.16 13.98 21.99
d. Bond Account 1.19 7.41 8.79
e. Enhanced Index Account 19.47 28.87 29.03
f. Index 500 Account 21.28 28.79 33.28
g. International Equity Account 59.79 12.91 12.61
h.Small Cap Equity Account 85.11 7.11 17.20
</TABLE>
B. Berkshire Hills Stock Fund.
--------------------------
The Berkshire Hills Stock Fund will consist of investments primarily in the
common stock of Berkshire Hills made on and after the effective date of the
Conversion. After the conversion, the trustee of the 401(k) Plan will, to the
extent practicable, use all amounts held by it in the Berkshire Hills Stock
Fund, including cash dividends paid on the common stock held in the fund, to
purchase shares of common stock of Berkshire Hills. Berkshire Bank expects that
the trustee will make all purchases of common stock at prevailing market prices.
As of the date of this prospectus supplement, none of the shares of common
stock have been issued or are outstanding and there is no established market for
the common stock of Berkshire Bank. Accordingly, there is no record of the
historical performance of the Berkshire Hills Stock Fund. Performance of the
Berkshire Hills Stock Fund depends on a number of factors, including the
financial condition and profitability of Berkshire Hills and Berkshire Bank and
market conditions for the common stock generally.
Investments in the Berkshire Hills Stock Fund may involve certain special
risks in investments in the common stock of Berkshire Hills. For a discussion
of these risk factors, see "Risk Factors" in the prospectus.
Benefits Under the Plan
Vesting. At all times, you have a fully vested, nonforfeitable interest in
-------
your accounts under the 401(k) Plan.
Withdrawals and Distributions From the 401(k) Plan
Withdrawals Prior to Termination of Employment. You may receive in-service
----------------------------------------------
distributions from the 401(k) Plan under limited circumstances in the form of
hardship distributions and loans. You can apply for a loan from the 401(k) Plan
by contacting the Human Resources Department of Berkshire Bank. You cannot have
more than one loan outstanding at a time. You can apply for a minimum loan of
$1,000 (in multiples of $500) and a maximum loan of the lesser of $50,000 or 50%
of your total vested account balance. You may also be eligible for hardship
withdrawals. In order to qualify for a hardship withdrawal, you must have an
immediate and substantial need to meet certain expenses and have no other
reasonably available resources to meet the financial need. If you qualify for a
7
<PAGE>
hardship distribution, the trustee will make the distribution pro rata from the
investment funds in which you have invested your account balances. You may not
receive more than one hardship withdrawal in any calendar year. Hardship
withdrawals may not be paid back to the 401(k) Plan.
Distribution Upon Retirement or Disability. Participants shall receive
------------------------------------------
benefits as soon as administratively feasible following the close of a valuation
period during which the distribution is requested. Distributions are payable to
participants in installments.
Distribution Upon Death. If you die prior to your benefits being paid from
-----------------------
the 401(k) Plan, your benefits will be paid to your surviving spouse or
beneficiary under one or more of the forms available under the 401(k) Plan.
Distribution Upon Termination for Any Other Reason. If you terminate
--------------------------------------------------
employment for any reason other than retirement, disability or death and your
account balance exceeds $5,000, the trustee will make your distribution on your
normal retirement date, unless you request otherwise. If your account balances
does not exceed $5,000, the trustee will generally distribute your benefits to
you as soon as administratively practicable following your termination of
employment.
Nonalienation of Benefits. Except with respect to federal income tax
-------------------------
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the 401(k) Plan shall not be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, and any attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber, charge or otherwise dispose of any rights to benefits payable
under the Plan shall be void.
Administration of the Plan
Trustees. The board of directors of Berkshire Bank has appointed Savings
--------
Bank Employees Retirement Association as trustee of the Berkshire Hills Stock
Fund. The trustee with respect to the 401(k) Plan is the named fiduciary of the
401(k) Plan for purposes of ERISA.
The trustee receives, holds and invests the contributions to the 401(k)
Plan in trust and distributes them to participants and beneficiaries in
accordance with the terms of the plan and the directions of the plan
administrator. The trustee is responsible for investment of the assets of the
trust.
Reports to Plan Participants
The plan administrator will furnish you a statement at least quarterly
showing (i) the balance in your account as of the end of that period, (ii) the
amount of contributions allocated to your account for that period, and (iii) the
adjustments to your account to reflect earnings or losses (if any).
Plan Administrator
Currently, the plan administrator of the 401(k) Plan is Thomas Forese, Jr.,
SBERA, 69 Cummings Park, Woburn, Massachusetts 01801, (781) 938-3500. The plan
administrator is responsible for the administration of the 401(k) Plan,
interpretation of the provisions of the plan, prescribing procedures for filing
applications for benefits, preparation and distribution of information
explaining the plan, maintenance of plan records, books of account and all other
data necessary for the proper administration of the plan, and preparation and
filing of all returns and reports relating to the plan which are required to be
filed with the U.S. Department of Labor and the Internal Revenue Service, and
for all disclosures required to be made to participants, beneficiaries and
others under ERISA.
Amendment and Termination
Berkshire Bank intends to continue the 401(k) Plan indefinitely.
Nevertheless, Berkshire Bank may terminate the 401(k) Plan at any time. If
Berkshire Bank terminates the 401(k) Plan in whole or in part, then regardless
of other provisions in the plan, all participants affected by such termination
8
<PAGE>
shall become fully vested in their accounts. Berkshire Bank reserves the right
to make, from time to time, any amendment or amendments to the 401(k) Plan which
do not cause any part of the trust to be used for, or diverted to, any purpose
other than the exclusive benefit of participants or their beneficiaries;
provided, however, that Berkshire Bank may amend the plan as it determines
necessary or desirable, with or without retroactive effect, to comply with ERISA
or the Internal Revenue Code.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the 401(k) Plan with another
plan, or the transfer of the trust assets to another plan, the plan requires
that you would (if either the plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit you would have been entitled to receive
immediately before the merger, consolidation or transfer (if the plan had then
terminated).
Federal Income Tax Consequences
The following is only a brief summary of the material federal income tax
aspects of the 401(k) Plan. You should not rely on this summary as a complete
or definitive description of the material federal income tax consequences
relating to the 401(k) Plan. Statutory provisions change, as do their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. You are urged to consult
your tax advisor with respect to any distribution from the 401(k) Plan and
transactions involving the 401(k) Plan.
As a "qualified retirement plan," the Internal Revenue Code affords the
401(k) Plan special tax treatment, including:
(1) the sponsoring employer is allowed an immediate tax deduction for the
amount contributed to the plan each year;
(2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and
(3) earnings of the plan are tax-deferred thereby permitting the tax-
deferred accumulation of income and gains on investments.
Berkshire Bank will administer the 401(k) Plan to comply in operation with
the requirements of the Internal Revenue Code as of the applicable effective
date of any change in the law. If Berkshire Bank receives an adverse
determination letter regarding its tax-exempt status from the Internal Revenue
Service, all participants would generally recognize income equal to their vested
interest in the 401(k) Plan, the participants would not be permitted to transfer
amounts distributed from the 401(k) Plan to an Individual Retirement Account or
to another qualified retirement plan, and Berkshire Bank may be denied certain
deductions taken with respect to the 401(k) Plan.
Lump Sum Distribution. A distribution from the 401(k) Plan to a
participant or the beneficiary of a participant will qualify as a lump sum
distribution if it is made within one taxable year, on account of the
participant's death, disability or separation from service, or after the
participant attains age 59 1/2; and consists of the balance to the credit of the
participant under this plan and all other profit sharing plans, if any,
maintained by Berkshire Bank. The portion of any lump sum distribution required
to be included in your taxable income for federal income tax purposes consists
of the entire amount of the lump sum distribution less the amount of after-tax
contributions, if any, you have made to this plan and any other profit sharing
plans maintained by Berkshire Bank which is included in the distribution.
9
<PAGE>
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. You may roll over virtually all distributions from the 401(k) Plan
to another qualified plan or to an individual retirement account generally in
accordance with the terms of the other plan or account.
We have provided you with a brief description of the material federal
income tax aspects of the 401(k) Plan which are of general application under the
Code. It is not intended to be a complete or definitive description of the
federal income tax consequences of participating in or receiving distributions
from the 401(k) Plan. Accordingly, you are urged to consult a tax advisor
concerning the federal, state and local tax consequences of participating in and
receiving distributions from the 401(k) Plan.
ERISA and Other Qualification
As noted above, the 401(k) Plan is subject to certain provisions of ERISA
and is intended to be a qualified retirement plan under the Internal Revenue
Code.
Restrictions on Resale
Any person receiving a distribution of shares of common stock under the
401(k) Plan who is an "affiliate" of Berkshire Hills under Rules 144 and 405
under the Securities Act of 1933, as amended (the "Securities Act") (e.g.,
directors, officers and substantial shareholders of the Bank) may reoffer or
resell such shares only pursuant to a registration statement filed under the
Securities Act assuming the availability of a registration statement, pursuant
to Rule 144 or some other exemption of the registration requirements of the
Securities Act. Any person who may be an "affiliate" of Berkshire Bank may wish
to consult with counsel before transferring any common stock they own. In
addition, participants are advised to consult with counsel as to the
applicability of Section 16 of the 1934 Act which may restrict the sale of
common stock acquired under the 401(k) Plan, or other sales of common stock.
Persons who are not deemed to be "affiliates" of Berkshire Bank at the time
---
of resale will be free to resell any shares of common stock distributed to them
under the 401(k) Plan, either publicly or privately, without regard to the
registration and prospectus delivery requirements of the Securities Act or
compliance with the restrictions and conditions contained in the exemptive rules
under federal law. An "affiliate" of Berkshire Bank is someone who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control, with Berkshire Bank. Normally, a director, principal
officer or major shareholder of a corporation may be deemed to be an "affiliate"
of that corporation. A person who may be deemed an "affiliate" of Berkshire
Bank at the time of a proposed resale will be permitted to make public resales
of the common stock only pursuant to a "reoffer" prospectus or in accordance
with the restrictions and conditions contained in Rule 144 under the Securities
Act or some other exemption from registration, and will not be permitted to use
this prospectus in connection with any such resale. In general, the amount of
the common stock which any such affiliate may publicly resell pursuant to Rule
144 in any three-month period may not exceed the greater of one percent of the
common stock then outstanding or the average weekly trading volume reported on
the National Association of Securities Dealers Automated Quotation System during
the four calendar weeks prior to the sale. Such sales may be made only through
brokers without solicitation and only at a time when Berkshire Hills is current
in filing the reports required of it under the 1934 Act.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors and persons beneficially owning more than ten percent of
public companies such as Berkshire Hills. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a Form
3 reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission. Certain changes in beneficial ownership, such as
purchases, sales, gifts and participation in savings and retirement plans must
be reported periodically, either on a Form 4 within ten days after the end of
the month in which a change occurs, or annually on a Form 5 within 45 days after
the close of Berkshire Bank' fiscal year. Participation in the Berkshire Hills
Stock Fund of the 401(k) Plan by officers, directors and persons beneficially
10
<PAGE>
owning more than ten percent of common stock of Berkshire Hills must be reported
to the SEC annually on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the 1934 Act provides for the recovery by Berkshire Hills of profits realized by
any officer, director or any person beneficially owning more than ten percent of
the common stock ("Section 16(b) Persons") resulting from the purchase and sale
or sale and purchase of the common stock within any six-month period.
The SEC has adopted rules that exempt many transactions involving the
401(k) Plan from the "short-swing" profit recovery provisions of Section
16(b).The exemptions generally involve restrictions upon the timing of elections
to buy or sell employer securities for the accounts of Section 16(b) Persons.
Except for distributions of the common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons may, under limited circumstances involving the
purchase of common stock within six months of the distribution, be required to
hold shares of the common stock distributed from the 401(k) Plan for six months
following such distribution.
LEGAL OPINION
The validity of the issuance of the common stock will be passed upon by
Muldoon, Murphy & Faucette LLP, Washington, D.C. Muldoon, Murphy & Faucette
LLP, who acted as special counsel for Berkshire Bank in connection with the
conversion.
11
<PAGE>
Berkshire Bank
401(k) Plan
Contribution and Investment Form
--------------------------------
Name of Plan participant: ________________________________
Social Security Number: ________________________________
1. Instructions. In connection with the proposed Conversion,
------------
participants in the Berkshire Bank 401(k) Plan may direct their current account
balances into a new fund: the Employer Stock Fund. The percentage of a
Participant's account transferred at the direction of the Participant into the
Employer Stock Fund will be used to purchase shares of common stock of Berkshire
Hills Bancorp, Inc. (the "Common Stock").
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this form with
the Human Resources Department by ____________, 2000. A representative for the
Plan Administrator will retain a copy of this form and return a copy to you. If
you need any assistance in completing this form, please contact the Human
Resource Department. If you do not complete and return this form to the Plan
Administrator by ____________, 2000, the funds credited to your accounts under
the 401(k) Plan will continue to be invested in accordance with your prior
investment direction, or in accordance with the terms of the 401(k) Plan if no
investment direction has been provided.
2. Investment Directions. I hereby authorize the Plan Administrator to direct
the Trustee to invest the following percentage (in multiples of not less than
1%) of my accounts in the Employer Stock Fund:
<TABLE>
<CAPTION>
<S> <C> <C>
a. Money Market Account _______%
b. Equity Account _______%
c. Bond Account _______%
d. Asset Allocation Account _______%
e. Index 500 Account _______%
f. Enhanced Index Account _______%
g. Small Cap Equity Account _______%
h. International Equity Account _______%
</TABLE>
3. Acknowledgment of Participant. I understand that this Contribution and
Investment Form shall be subject to all of the terms and conditions of the Plan.
I acknowledge that I have received a copy of the Prospectus and the Prospectus
Supplement. I understand that by signing this Contribution and Investment Form,
I am not waiving any rights under the federal securities laws, including the
Securities Act of 1933 and the Securities Exchange Act of 1934.
- ------------------------------------- -------------------------------------
Signature of Participant Date
- ------------------------------------------------------------------------------
Acknowledgment of Receipt by Administrator. This Contribution and Investment
Form was received by the Plan Administrator and will become effective on the
date noted below.
- ---------------------------- ----------------
By:______________ Date
The participation interests represented by common stock offered hereby are
not deposit accounts and are not insured by the bank insurance fund or the
savings association insurance fund of the federal deposit insurance corporation
or any other government agency and are not guaranteed by the company or bank.
The common stock is subject to investment risk, including the possible loss of
the principal invested.
12
<PAGE>
[To be used in connection with Syndicated Community Offering only]
PROSPECTUS SUPPLEMENT FOR SYNDICATED COMMUNITY OFFERING
[LOGO] BERKSHIRE HILLS BANCORP, INC.
(Proposed Holding Company for Berkshire Bank)
24 North Street
Pittsfield, Massachusetts 01201
(413) 443-5601
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Berkshire Bancorp, the mutual holding company for Berkshire Bank, is
converting to a stock holding company. After the conversion, Berkshire Hills
will own all of Berkshire Bank's stock. Berkshire Hills has already received
subscriptions for _________ shares. Up to ________ shares will be sold in the
conversion. The conversion will not be completed and no common stock will be
sold unless additional subscriptions are received for at least the minimum
number of shares in the offering. Berkshire Hills will hold all funds of
subscribers in an interest-bearing savings account at Berkshire Bank until the
conversion is completed or terminated. Funds will be returned promptly with
interest if the conversion is terminated.
Sandler O'Neill & Partners, L.P. will use its best efforts to assist
Berkshire Hills in selling at least the minimum number of shares but does not
guarantee that this number will be sold. Neither Sandler O'Neill nor any
selected broker-dealer is obligated to purchase any shares of common stock in
the syndicated community offering. Sandler O'Neill intends to make a market in
the common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRICE PER SHARE: $10.00
MINIMUM SUBSCRIPTION REQUIREMENT: 25 shares or $250
EXPECTED TRADING MARKET AND SYMBOL: American Stock Exchange "___________"
This offering will expire no later than 12:00 noon, Eastern time, on
____________, 2000, unless extended.
. Number of Shares
Minimum/Maximum
. Estimated Underwriting Commissions and Other Expenses
Minimum/Maximum
. Estimated Net Offering Proceeds to Berkshire Hills
Minimum/Maximum
. Estimated Net Offering Proceeds per Share to Berkshire Hills
Minimum/Maximum
Please refer to "Risk Factors" beginning on page __ of the attached Prospectus
dated ________ __, 2000.
These securities are not deposits or accounts and are not insured or guaranteed
by Berkshire Hills, Berkshire Bank, the Federal Deposit Insurance Corporation,
the Mutual Savings Central Fund, Inc. or any other federal or state government
agency. The common stock is subject to investment risk, including the possible
loss of money invested.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Massachusetts Division of Banks, nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement is truthful or complete. Any representations to the
contrary is a criminal offense.
Sandler O'Neill & Partners, L.P.
The date of this Prospectus Supplement is _______________, 2000
1
<PAGE>
THE SYNDICATED COMMUNITY OFFERING
Berkshire Hills is offering for sale between ___________ and __________
shares of common stock at price of $10.00 per share in a syndicated community
offering. These shares are to be sold in connection with the conversion of
Berkshire Bancorp to a stock holding company and the issuance of Berkshire
Bank's outstanding capital stock to Berkshire Hills. The remaining __________
shares of common stock to be sold in connection with the conversion have been
subscribed for in subscription and direct community offerings. The prospectus in
the form used in the subscription and direct community offerings is attached to
this prospectus supplement. The purchase price for all shares sold in the
syndicated community offering will be the same as the price paid by subscribers
in the subscription and direct community offerings.
Funds sent with purchase orders will earn interest at the Berkshire Bank's
passbook rate from the date Berkshire Bank receives them until the completion or
termination of the conversion. If the syndicated community offering is not
completed by _________________, 2000, and the Massachusetts Banking Commissioner
allows more time to complete the conversion, Berkshire Bank will contact
everyone who subscribed for shares to see if they still want to purchase stock.
Subscribers will be able to confirm, modify or cancel their subscriptions. A
failure to respond will be treated as a cancellation of the purchase order. If
payment for the stock was made by check or money order, subscription funds will
be returned with accrued interest. If payment was authorized by withdrawal of
funds on deposit at Berkshire Bank, that authorization would terminate. The
conversion must be completed by October 22, 2001.
The minimum number of shares which may be purchased is 25 shares. Except
for the Berkshire Bank employee stock ownership plan, which intends to purchase
up to 8% of the total number of shares of common stock sold in the conversion,
no person, together with related persons and persons acting together, may
purchase more than $250,000 of common stock (25,000 shares) in the syndicated
community offering. However, the maximum amount of shares of common stock that
may be subscribed for or purchased in all categories of the conversion by any
person, related persons or persons acting together is 1.0% of the shares of
common stock sold in the conversion. Berkshire Hills reserves the right, in its
absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the syndicated community offering. If a subscription is
rejected in part, you cannot cancel the remainder of your order.
Berkshire Hills, Berkshire Bancorp and Berkshire Bank have engaged Sandler
O'Neill & Partners, L.P. as their financial advisor to assist them in the sale
of the common stock in the syndicated community offering. Sandler O'Neill
expects to use the services of other registered broker-dealers and that fees to
Sandler O'Neill and other selected broker-dealers will not exceed 6% of the
aggregate purchase price of the shares sold in the syndicated community
offering.
Before this offering, there has not been a public market for the common
stock, and there can be no assurance that an active and liquid trading market
for the common stock will develop. The absence or discontinuance of an active
and liquid trading market may hurt the market price of the common stock. See
"Risk Factors--Berkshire Hills cannot assure or guarantee an active trading
market for the common stock." in the attached prospectus.
2
<PAGE>
PROSPECTUS
[LOGO]
BERKSHIRE HILLS BANCORP, INC.
(Proposed Holding Company for Berkshire Bank)
8,314,500 Shares of Common Stock
Berkshire Bancorp, the mutual holding company for Berkshire Bank, is converting
to a stock holding company. After the conversion, Berkshire Hills Bancorp, Inc.
will own all of Berkshire Bank's common stock.
Price Per Share: $10.00
Minimum Subscription Requirement: 25 shares or $250
Expected Trading Market and Symbol: American Stock Exchange "BHL"
<TABLE>
<CAPTION>
Minimum Maximum
----------- -----------
<S> <C> <C>
Number of shares: 6,145,500 8,314,500
Gross offering proceeds: $61,455,000 $83,145,000
Estimated underwriting commissions
and other offering expenses: $ 2,361,000 $ 2,658,000
Estimated net proceeds: $59,094,000 $80,487,000
Estimated net proceeds per share: $ 9.62 $ 9.68
</TABLE>
If the appraiser increases the estimated value, Berkshire Hills may increase the
maximum number of shares by up to 15%, to 9,561,675 shares.
Sandler O'Neill & Partners, L.P. will use its best efforts to assist Berkshire
Hills in selling at least the minimum number of shares but does not guarantee
that this number will be sold. Sandler O'Neill is not obligated to purchase any
shares of common stock in the offering. Sandler O'Neill intends to make a
market in the common stock.
The offering to depositors, officers, directors, trustees and employees of
Berkshire Bank and Berkshire Bancorp will end at 4:00 p.m., Eastern Time, on
________, 2000, unless extended. An offering to the general public may also be
held and may end as early as 4:00 p.m., Eastern Time, on _________ __, 2000.
If the conversion is not completed by _________ __, 2000, and the Massachusetts
Banking Commissioner allows more time to complete the conversion, all
subscribers will be able to increase, decrease or cancel their orders. All
extensions may not go beyond October 22, 2001. Funds will be returned promptly
with interest if the conversion is terminated.
- --------------------------------------------------------------------------------
These securities are not deposits or accounts and are not insured or guaranteed
by Berkshire Bank, Berkshire Hills, the Federal Deposit Insurance Corporation,
the Depositors Insurance Fund or any other federal or state government agency.
The common stock is subject to investment risk, including the possible loss of
money invested.
For a discussion of the material risks that you should consider, see "Risk
Factors" beginning on page __.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Massachusetts Division of Banks, nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
For assistance, please contact the conversion center at (800) 220-6956.
SANDLER O'NEILL & PARTNERS, L.P.
The date of this prospectus is ________, 2000.
<PAGE>
[MAP PAGE]
[Map of Massachusetts with enlarged inset of Berkshire County. The insert
denotes the location of Berkshire Bank's executive offices and banking
locations. The map also lists the names and addresses of the executive offices
and each banking location. The banking locations are located in North Adams,
Pittsfield, West Stockbridge, Lee, Great Barrington and Sheffield,
Massachusetts.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.....................................................................................
Risk Factors................................................................................
Recent Developments.........................................................................
Selected Consolidated Financial Information.................................................
Use of Proceeds.............................................................................
Dividend Policy.............................................................................
Market for Common Stock.....................................................................
Capitalization..............................................................................
Historical and Pro Forma Regulatory Capital Compliance......................................
Pro Forma Data..............................................................................
Comparison of Independent Valuation and Pro Forma Financial Information With and
Without the Foundation....................................................................
Berkshire Bancorp and Subsidiary Consolidated Statements of Income..........................
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................
Business of Berkshire Bancorp...............................................................
Business of Berkshire Hills.................................................................
Business of Berkshire Bank..................................................................
Management of Berkshire Hills...............................................................
Management of Berkshire Bank................................................................
Regulation and Supervision..................................................................
Federal and State Taxation of Income........................................................
Shares to Be Purchased by Management with Subscription Rights...............................
The Conversion..............................................................................
Restrictions on Acquisition of Berkshire Hills and Berkshire Bank...........................
Description of Berkshire Hills Stock........................................................
Description of Berkshire Bank Stock.........................................................
Transfer Agent and Registrar................................................................
Registration Requirements...................................................................
Legal and Tax Opinions......................................................................
Experts.....................................................................................
Where You Can Find More Information.........................................................
Index to Consolidated Financial Statements--Berkshire Bancorp and Subsidiary................
</TABLE>
<PAGE>
SUMMARY
You should read the entire prospectus carefully before you decide to invest.
For assistance, please contact the conversion center at (800) 220-6956.
THE COMPANIES
<TABLE>
<S> <C>
Berkshire Bancorp (page __) Berkshire Bancorp was formed in 1996 as the mutual
24 North Street holding company for Berkshire County Savings Bank.
Pittsfield, Massachusetts 01201 In the mutual holding company reorganization,
(413) 443-5601 Berkshire County Savings Bank converted from
mutual to stock form and issued all of its
outstanding stock to Berkshire Bancorp. Berkshire
Bancorp is governed by a Board of Trustees. All
voting control of Berkshire Bancorp lies in its
governing body of corporators. To date, Berkshire
Bancorp's business activities have been limited to
directing, planning and coordinating Berkshire
Bank's business activities. After the conversion,
Berkshire Bancorp will no longer exist.
Berkshire Hills Bancorp, Inc. (page __) Berkshire Bank recently formed Berkshire Hills to
24 North Street be its new stock holding company. To date,
Pittsfield, Massachusetts 01201 Berkshire Hills has only conducted organizational
(413) 443-5601 activities. After the conversion, it will own all
of Berkshire Bank's capital stock and will direct,
plan and coordinate Berkshire Bank's business
activities. After the conversion, Berkshire Hills
might become an operating company or acquire or
organize other operating subsidiaries, including
other financial institutions or financial services
companies. Berkshire Hills intends to retain 50%
of the net conversion proceeds.
Berkshire Bank (page __) Berkshire Bank is a Massachusetts-chartered stock
24 North Street savings bank that operates as a community bank
Pittsfield, Massachusetts 01201 dedicated to serving the financial service needs
(413) 443-5601 of consumers and small businesses within its
primary market area. Berkshire Bank is the
product of the 1997 merger of Berkshire County
Savings Bank and Great Barrington Savings Bank.
Currently, Berkshire Bank operates out of its main
office in Pittsfield, Massachusetts and its 12
full-service banking offices in Berkshire County,
Massachusetts, which Berkshire Bank considers its
primary market area for making loans and
attracting deposits. Berkshire Bank also makes
loans outside its primary market area, primarily
in eastern New York, northern Connecticut,
southern Vermont and western Massachusetts.
Historically, Berkshire Bank's principal business
has been attracting deposits from the general
public and using those funds to make one- to
four-family real estate, multi-family real estate,
commercial real estate, commercial and consumer
loans, which accounted for 36.4%, 2.2%, 6.9%,
21.7% and 31.0%, respectively, of Berkshire Bank's
total loan portfolio
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
at December 31, 1999. Berkshire Bank also invests in U.S. government and agency
securities, mortgage- and asset-backed securities, including real estate mortgage
investment conduits and collateralized mortgage obligations, corporate bonds and
marketable equity securities. At December 31, 1999, Berkshire Bank had total assets of
$841.7 million, deposits of $680.8 million and total capital of $88.4 million.
Berkshire Bank also offers trust services and savings bank life insurance. See "Business
of Berkshire Bank--Trust Services." Going forward, Berkshire Bank intends to expand the
offering of other insurance products to its customers and is currently in the process of
establishing an insurance agency.
For a discussion of Berkshire Bank's business strategy and recent results of operations,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations." For a discussion of Berkshire Bank's business activities, see "Business of
Berkshire Bank."
THE CONVERSION
What is the Conversion (page __) The conversion is a change in Berkshire Bancorp's legal form of organization. Currently,
Berkshire Bancorp owns all of the outstanding capital stock of Berkshire Bank. Berkshire
Bancorp is a mutual holding company and has no stock or stockholders. Instead, Berkshire
Bancorp operates for the mutual benefit of Berkshire Bank's depositors. Berkshire
Bancorp's corporators elect directors and vote on other important matters. After the
conversion, Berkshire Bancorp and its governing body of corporators will cease to exist
and Berkshire Bank will continue as a stock savings bank but will be owned and controlled
by the new holder of all its stock, Berkshire Hills. Voting rights in Berkshire Bank will
belong to Berkshire Hills. Voting rights in Berkshire Hills will belong to its
stockholders.
Berkshire Bancorp is conducting the conversion under the terms of its plan of conversion.
The corporators of Berkshire Bancorp approved the plan of conversion at a meeting
of corporators called for that purpose on April 19, 2000. The Massachusetts Banking
Commissioner approved the plan of conversion on April 4, 2000. In addition, the
Federal Deposit Insurance Corporation and the Federal Reserve Board have reviewed the
application for conversion. Berkshire Hills expects to receive approval from the Office
of Thrift Supervision to acquire all of the stock of Berkshire Bank. Before the offering
can close and the conversion can be completed, Berkshire Bank and Berkshire Hills must
obtain all required regulatory approvals, including that of the Office of Thrift
Supervision, and satisfy all of the conditions of those approvals that must be
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
completed before the completion of the conversion. See "The Conversion--General."
Reasons for the Conversion (page __) By converting Berkshire Bancorp to the stock form of organization, Berkshire Bank will be
structured in the form used by commercial banks, most business entities and a large
number of savings institutions. The conversion will be important to Berkshire Bank's
future growth and performance because it will:
. enhance its ability to diversify into other financial
services related activities;
. enhance its ability to expand through the acquisition of other
financial institutions or their assets;
. enhance its ability to attract and retain qualified management through stock-
based compensation plans;
. provide a larger capital base from which to operate and expand its
ability to serve the public; and
. enhance its ability to access the capital markets.
With the exception of the current plan to establish an insurance agency, currently
neither Berkshire Hills nor Berkshire Bank has any specific contracts, understandings, or
arrangements for the acquisition of other financial service companies or their assets.
In this regard, in February 2000, Berkshire Bank entered into a contract with a third
party to assist it in establishing and operating such agency.
Berkshire Hills Foundation (page _______) To continue its long-standing commitment to its local communities, Berkshire Bank intends
to establish a charitable foundation, Berkshire Hills Foundation, as part of the
conversion. The foundation will be funded with Berkshire Hills common stock equal to 8%
of the shares sold in the conversion. This would range from 491,640 shares, assuming
6,145,500 shares are sold in the conversion, to 578,400 shares, assuming 7,230,000 shares
are sold in the conversion, or 665,160 shares if the number of shares sold in the
conversion is increased to 8,314,500 shares. Based on the purchase price of $10.00 per
share, the foundation would be funded with between $4.9 million and $6.7 million of
common stock, or $7.6 million, if the number of shares sold in the conversion is
increased to 9,561,675 shares. Berkshire Hills Foundation will make grants and donations
to non-profit and community groups and projects located within Berkshire County,
Massachusetts. If Berkshire Hills Foundation was not established as part of the
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
conversion, then the amount of common stock sold would be greater than if the
conversion was completed with the foundation. For a further discussion of the financial
impact of the foundation, including its dilutive effect on those who purchase shares in
the conversion, see "Risk Factors--The contribution to Berkshire Hills Foundation means
that a stockholder's total ownership interest will be 7.4% less after the contribution,"
"Pro Forma Data" and "Comparison of Independent Valuation and Pro Forma Financial
Information With and Without the Foundation."
Berkshire Hills Foundation will complement the activities of Greater Berkshire
Foundation, Inc., a private foundation established by Berkshire Bank in 1997, which was
funded with marketable equity securities with a fair market value of $2.5 million.
Greater Berkshire Foundation, Inc., which had assets of $2.1 million at December 31,
1999, provides grants within the communities that Berkshire Bank serves, to public
charities that are operated for charitable, scientific, literary or educational purposes.
Berkshire Bank does not expect to make any further contributions to Greater Berkshire
Foundation, Inc. after the conversion.
Benefits of the Conversion to Management Berkshire Hills and Berkshire Bank intend to adopt certain benefit plans and employment
(page __) and change in control agreements.
The following table summarizes the total number and dollar value of the shares of common
stock which the employee stock ownership plan, to be formed by Berkshire Hills as part of
the Conversion, expects to acquire and the total value of all stock awards that are
expected to be available under the stock-based incentive plan, assuming 8,979,660 shares
are issued in the conversion. The table assumes the value of the shares is $10.00 per
share, the purchase price in the offering. The table does not include a value for stock
options because the price paid for the option shares would be equal to the fair market
value of the common stock on the day that the options are granted. As a result, financial
gains can be realized on an option only if the market price of common stock increases
above the price at which the options are granted.
<CAPTION>
Percentage
of Shares
Number Estimated Issued
of Value in the
Shares of Shares Conversion
----------- -------------- ------------
<S> <C> <C> <C>
Employee stock ownership plan..... 718,372 $ 7,183,720 8.0%
Stock awards...................... 359,186 3,591,860 4.0
Stock options..................... 897,966 -- 10.0
--------- ----------- ----
Total......................... 1,975,524 $10,775,580 22.0%
========= =========== ====
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
The following table summarizes the estimated value of the benefits payable under the
employment agreements, change in control agreements, supplemental executive retirement
plan and the employee severance compensation plan assuming a change in control of
Berkshire Hills and Berkshire Bank had occurred as of December 31, 1999 based on 1999
compensation data. The estimated value of the benefit payable under the employee
severance compensation plan assumes that all employees are terminated.
</TABLE>
<TABLE>
<CAPTION>
Estimated
Value
of Benefit
-------------------
<S> <C>
Employment agreements..................................... $ 3,000,000
Change in control agreements.............................. 2,100,000
Supplemental executive retirement plan.................... 450,000
Employee severance compensation plan...................... 12,000,000
</TABLE>
<TABLE>
<S> <C>
The following is a description of these benefit plans, employment agreements and change
in control agreements:
. Employee Stock Ownership Plan. This plan intends to acquire an amount of shares equal
to 8% of the shares issued in the conversion. This would range from 530,971 shares,
assuming 6,637,140 shares are issued in the conversion, to 718,372 shares, assuming
8,979,660 shares are issued in the conversion, or 826,128 shares if the number of
shares issued in the conversion is increased to 10,326,609 shares. Berkshire Bank will
allocate these shares to employees over a period of years in proportion to their
compensation.
. Stock-Based Incentive Plan. Under this plan, which will be adopted after the conversion
and will be submitted to stockholders for their approval, Berkshire Hills may award
stock options to key employees and directors of Berkshire Hills and its affiliates. No
decisions have been made as to who will be awarded options or the amounts that will be
awarded. The number of options available under this plan will equal 10% of the number
of shares issued in the conversion. This would range from 663,714 shares, assuming
6,637,140 shares are issued in the conversion, to 897,966 shares, assuming 8,979,660
shares are issued in the conversion, or 1,032,660 shares if the number of shares issued
in the conversion is increased to 10,326,609 shares.
In addition to awarding options, this plan may also award shares of stock to key
employees and directors at no cost to the recipient. No decisions have been made as to
who will be awarded shares of stock or
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
the amounts that will be awarded. The number of shares available for stock awards will
equal an additional 4% of the number of shares issued in the conversion. This would
range from 265,485 shares, assuming 6,637,140 shares are issued in the conversion, to
359,186 shares, assuming 8,979,660 shares are issued in the conversion, or 413,064
shares if the number of shares issued in the conversion is increased to 10,326,609
shares.
. Employment Agreements. Berkshire Hills and Berkshire Bank intend to enter into
employment agreements with five officers of Berkshire Bank. These agreements will
provide for severance benefits if the executive is terminated following a change in
control of Berkshire Hills or Berkshire Bank.
. Change in Control Agreements. Berkshire Bank intends to enter into change in control
agreements with six officers of Berkshire Bank who will not be covered by an employment
agreement. These agreements will provide for the payment of severance compensation in
the event of a change in control of Berkshire Bank or Berkshire Hills.
. Supplemental Executive Retirement Plan. This plan will provide benefits to eligible
employees if their retirement benefits under the employee stock ownership plan, pension
plan or 401(k) plan are reduced because of federal tax law limitations. The plan will
also provide benefits to eligible employees at the time of a change in control of
Berkshire Hills or Berkshire Bank but before the complete allocation of shares under
the employee stock ownership plan.
. Employee Severance Compensation Plan. This plan will provide severance benefits to
eligible employees if there is a change in control of Berkshire Hills or Berkshire
Bank.
For a discussion of risks associated with these plans and agreements, see "Risk Factors--
Implementation of additional benefit plans will increase future compensation expense and
lower Berkshire Bank's profits," "Risk Factors--Issuance of shares for benefit program
may lower your ownership interest" and "Risk Factors--Employment and change in control
agreements, the employee stock ownership plan, supplemental executive retirement plan and
the severance plan could make takeover attempts more difficult to achieve." For a further
discussion of these plans and agreements, see "Management of Berkshire Bank--Executive
Compensation."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
THE OFFERING
Subscription Offering (page __) Berkshire Bancorp has granted subscription rights in the following order of priority to:
Note: Subscription rights are not 1. Persons with $50 or more on deposit at Berkshire Bank as of September 30, 1998.
transferable, and persons with
subscription rights may not subscribe 2. Persons with $50 or more on deposit at Berkshire Bank as of September 30, 1999,
for shares for the benefit of any other other than the officers, directors, trustees or corporators of Berkshire Bank or
person. If you violate this prohibition, Berkshire Bancorp and their associates.
you may lose your rights to purchase
shares and may face criminal prosecution 3. Berkshire Bank employee stock ownership plan.
and/or other sanctions.
4. Directors, trustees, officers and employees of Berkshire Bank and Berkshire
Bancorp who do not have a higher priority right.
To ensure that Berkshire Hills properly identifies your subscription rights, you must
list all of your deposit accounts as of the eligibility dates on the stock order form.
Failure to do so may result in reduction or rejection of your order.
The subscription offering will end at 4:00 p.m., Eastern time, on _________ __, 2000,
unless extended. If the offering is oversubscribed, shares will be allocated in order of
the priorities described above under a formula outlined in the plan of conversion.
Direct Community Offering (page __) Berkshire Hills may offer shares not sold in the subscription offering to the general
public in a direct community offering. Residents of Berkshire County, Massachusetts, will
have first preference to purchase shares in a direct community offering. If shares are
available, Berkshire Hills expects to offer them to the general public immediately after
the end of the subscription offering, but may begin a direct community offering at any
time during the subscription offering.
Berkshire Hills and Berkshire Bank may reject orders received in the direct community
offering either in whole or in part. If your order is rejected in part, you cannot
cancel the remainder of your order.
Syndicated Community Offering (page __) Berkshire Hills may also offer shares not sold in the subscription offering in a
syndicated community offering through a syndicate of registered broker-dealers to be
formed and managed by Sandler O'Neill. Berkshire Hills will have the right to reject
orders, in whole or in part, at their sole discretion in the syndicated community
offering. The syndicated community offering may begin at any time during or after the
subscription offering.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Time Period for Completing the Conversion If the conversion is not completed by _________ __, 2000, and the Massachusetts Banking
Commissioner allows more time to complete the conversion, everyone who subscribed for
shares will be contacted to see if they still want to purchase stock. This is known as a
"resolicitation offering." A material change in the independent appraisal of Berkshire
Hills and Berkshire Bank would be the most likely, but not necessarily the only, reason
for a delay in completing the conversion. The conversion must be completed by
October 22, 2001.
In the resolicitation offering, if you previously subscribed for stock, you will receive
a supplement to this prospectus which will instruct you how to confirm, modify or cancel
your subscription. If you fail to respond to the resolicitation offering, it would be as
if you had canceled your order. If you paid for stock by check or money order, your
subscription funds would be returned to you, together with accrued interest. If you
authorized payment by withdrawal of funds on deposit at Berkshire Bank, that
authorization would terminate.
If you affirmatively confirm your subscription order during the resolicitation offering,
your subscription funds will be held until the end of the resolicitation offering. You
would be unable to cancel your resolicitation order without the approval of Berkshire
Hills and Berkshire Bank until the conversion is completed or terminated.
Purchase Price The purchase price is $10.00 per share. The Boards of Directors of Berkshire Hills and
Berkshire Bank consulted with Sandler O'Neill in determining it. You will not pay a
commission to buy any shares in the conversion.
Number of Shares to be Sold (page __) Berkshire Hills will sell between 6,145,500 and 8,314,500 shares of its common stock in
this offering. With regulatory approval, Berkshire Hills may increase the number of
shares to be sold to 9,561,675 shares without giving you further notice.
Estimated Market Value of The amount of common stock that Berkshire Hills will offer in the conversion is based on
Berkshire Hills Common Stock an independent appraisal of the estimated market value of the common stock of Berkshire
Hills to be sold in the conversion as if the conversion had occurred as of the date of
the appraisal. FinPro, Inc., an independent appraiser, has estimated that, in its
opinion, as of March 8, 2000, the estimated market value ranged between $61.5 million and
$83.1 million, with a midpoint of $72.3 million. The appraisal was based in part on
Berkshire Bank's financial condition and results of operations and the effect on
Berkshire Bank of the additional capital raised by the sale of common stock in this
offering. The independent appraisal will be updated before the conversion is completed.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Comparable Thrift Stock Pricing Ratios In preparing its independent appraisal, FinPro focused primarily on the price/core
earnings for the past 12 months and price/book valuation methodologies, both of which are
discussed in the appraisal report. See "Where You Can Find More Information" for how you
may obtain a copy of the appraisal report. The following table, which is derived from
data contained in the independent appraisal report, compares Berkshire Bank's pro forma
core price/core earnings for the past 12 months and price/book ratios at the minimum and
maximum of the offering range to the medians for all publicly traded thrift institutions,
all publicly traded Massachusetts thrift institutions and a comparable group of 12
publicly traded thrift institutions identified in the appraisal report, based on the
closing prices as of March 2, 2000. Thrift institutions in the mutual holding company
structure that have publicly issued stock are excluded from each comparison group.
<CAPTION>
Price/Core Price/
Earnings Book
Ratio Ratio
-------------- -------------
<S> <C> <C>
Berkshire Bank:
Minimum.................................. 8.77x 46.99%
Maximum.................................. 11.11 55.96
Median for all publicly traded thrifts...... 11.15 87.84
Median for all publicly traded
Massachusetts thrifts.................... 9.48 99.38
Median for the comparable group............. 9.70 122.34
</TABLE>
<TABLE>
<S> <C>
The independent appraisal does not necessarily indicate market value. Do not assume or
expect that the valuation as shown in the above table means that the common stock will
trade above the $10.00 purchase price after the conversion. Berkshire Hills cannot
guarantee that anyone who purchases shares in the conversion will be able to sell their
shares at or above the $10.00 purchase price.
Purchase Limitations (page __) The minimum purchase is 25 shares.
The maximum purchase in the subscription offering by any person or group of persons
through a single deposit account or similarly titled deposit accounts is $250,000 of
common stock, which equals 25,000 shares.
The maximum purchase by any person, related persons or persons acting together in the
direct community offering is $250,000 of common stock, which equals 25,000 shares.
The maximum purchase in the subscription offering, direct community offering and
syndicated community offering combined by any person, related persons or persons acting
together is 1% of the common stock offered for sale in the offering. This maximum
purchase limit ranges from $614,550, if 6,145,500 shares are offered for sale in the
offering, to
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
$831,450, if 8,314,500 shares are offered for sale in the offering or $956,168 if the
number of shares offered for sale in the offering is increased to 9,561,675 shares.
How to Purchase Common Stock (page __) If you want to subscribe for shares in the direct subscription offering or place a
purchase order for shares in the community offering, you must complete an original stock
Note: Once Berkshire Hills receives your order form and send it together with full payment to Berkshire Hills in the postage-paid
order, you cannot cancel or change it envelope provided. You must sign the certification that is part of the stock order form.
without Berkshire Hills' consent. If Berkshire Hills must receive your stock order form before the end of the subscription
Berkshire Hills sells fewer than offering or the end of the direct community offering, as appropriate.
6,145,500 shares or more than 9,561,675
shares, all subscribers will be notified You may pay for shares in the subscription offering or the direct community offering in
and given the opportunity to change or any of the following ways:
cancel their orders. If you do not
respond to such notice, Berkshire . By cash, if delivered in person to a full-service banking office of Berkshire Bank.
Hills will return your funds promptly
with interest. . By check or money order made payable to Berkshire Hills Bancorp, Inc.
. By withdrawal from an account at Berkshire Bank. To use funds in an Individual
Retirement Account at Berkshire Bank, you must transfer your account to an unaffiliated
institution or broker-dealer. Please contact the conversion center as soon as possible
for assistance.
You will be paid interest on your subscription funds at the rate Berkshire Bank pays on
passbook accounts from the date it receives your funds until the conversion is completed
or terminated. All funds authorized for withdrawal from deposit accounts with Berkshire
Bank will earn interest at the applicable account rate until the conversion is completed.
There will be no early withdrawal penalty for withdrawals from certificates of deposit
used to pay for stock.
No prospectus will be mailed later than five days before the end of the offering or hand-
delivered less than 48 hours before the end of the offering.
Use of Proceeds (page __) Berkshire Hills will use 50% of the net offering proceeds to buy all of the common stock
of Berkshire Bank and will retain the remaining net proceeds for general business
purposes. These purposes may include investment in securities, paying cash dividends or
repurchasing shares of its common stock, although Berkshire Hills has no specific plans
to pay dividends or repurchase its common stock at this time. Berkshire Bank will use the
funds it receives for general business purposes, including originating loans and
purchasing securities.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Berkshire Hills will also capitalize a subsidiary it intends to establish with an amount
equal to 8% of the total dollar value of the stock to be issued in the conversion. That
subsidiary will then lend those funds to the employee stock ownership plan to fund its
purchase of common stock in the conversion. Berkshire Hills and Berkshire Bank may also
use the proceeds of the offering to expand and diversify their businesses although, with
the exception of an insurance agency which it is currently in the process of
establishing, they do not have any specific contracts, understandings or arrangements to
acquire other financial service companies or their assets.
Purchases by Directors and Berkshire Bank's and Berkshire Bancorp's directors, trustees and executive officers
Executive Officers (page __) intend to subscribe for 208,500 shares, which equals 2.51% of the 8,314,500 shares that
would be sold at the maximum of the offering range. If fewer shares are sold in the
conversion, then directors and executive officers will own a greater percentage of
Berkshire Hills. Directors and executive officers will pay the $10.00 per share price as
will everyone else who purchases shares in the conversion. For a further discussion of
the impact of management's ownership interests in Berkshire Hills, see "Risk Factors--
Expected voting control by management and employees may make takeover attempts more
difficult to achieve" and "Restrictions on Acquisition of Berkshire Hills and Berkshire
Bank. "
Market for Common Stock (page __) Berkshire Hills intends to have its common stock listed on the American Stock Exchange
under the trading symbol "BHL." After shares of the common stock begin trading, you
may contact a stock broker to buy or sell shares. Berkshire Hills cannot assure you that
there will be an active trading market for the common stock.
Dividend Policy (page __) Berkshire Hills intends to adopt a policy of paying regular cash dividends, but has not
yet decided on the exact amount or range of amounts, or the frequency of payments. For a
further discussion of Berkshire Bank's and Berkshire Hills' dividend policies, see
"Dividend Policy."
</TABLE>
11
<PAGE>
RISK FACTORS
Before investing in Berkshire Hills common stock please carefully consider the
matters discussed below.
Berkshire Bank's lower than average return on equity may decrease the market
price of the common stock
Return on equity, which equals net income divided by average equity, is a
ratio used by many investors to compare the performance of a particular company
with other companies. For the year ended December 31, 1999, Berkshire Bank's
return on average equity was 6.51%. As a result of the additional capital that
will be raised in this offering, Berkshire Bank's return on average equity will
decrease substantially. Assuming the conversion was completed as of December 31,
1999, Berkshire Bank's return on average equity would have been 4.97% if
6,145,500 shares had been sold in the conversion, 4.69% if 8,314,500 shares had
been in the conversion, and 4.56% if 9,561,675 shares had been sold in the
conversion. Berkshire Bank and Berkshire Hills will not be able to immediately
deploy the increased capital from the offering into higher-yielding loans.
Berkshire Bank's and Berkshire Hills' ability to invest in loans will depend on
market interest rates, demand in their market area and their ability to compete
successfully for loans. Unless and until the capital can be deployed in higher-
yielding assets, Berkshire Bank and Berkshire Hills expect that their return on
equity will continue to be below average. In addition, compensation expense will
increase as a result of the new benefit plans. Over time, Berkshire Hills and
Berkshire Bank intend to use the net proceeds from this offering to increase
earnings per share and book value per share, without assuming undue risk, with
the goal of achieving a return on average equity competitive with other publicly
traded financial institutions. This goal could take a number of years to
achieve, and Berkshire Hills and Berkshire Bank cannot assure you that they can
reach this goal. Consequently, you should not expect a return on average equity
that is average or better than average in the near future. See "Pro Forma Data"
for an illustration of the financial effects of this stock offering.
Berkshire Bank's increased emphasis on commercial and consumer lending may hurt
both asset quality and profits
At December 31, 1999, commercial business, commercial real estate and consumer
loans aggregated 59.6% of Berkshire Bank's total loan portfolio. Berkshire
Bank's portfolio will continue to emphasize these types of lending. Berkshire
Bank's commercial loans are generally secured by business assets other than real
estate, such as equipment, inventory and accounts receivable. Consumer loans
are secured by rapidly depreciating assets such as automobiles, or to a lesser
extent, are unsecured. The substantial majority of Berkshire Bank's commercial
business, commercial real estate and consumer loans generally offer higher rates
of return but also possess a greater risk of loss than loans secured by
residential real estate. Additionally, the level of risk in the loan portfolio
may be higher than other peer institutions as a result of its higher
concentration of automobile loans which at December 31, 1999 totalled $164.9
million, or 24.5% of total loans. Automobile loans generally offer higher rates
but also possess greater risk due to generally higher default rates than loans
secured by real estate. For 1999, 1998 and 1997, charge-offs for commercial
business, commercial real estate and consumer loans totalled $2.2 million (or
95.0% of total charge-offs), $798,000 (or 98.3% of total charge-offs) and $2.1
million (or 93.6% of total charge-offs), respectively. Berkshire Bank cannot
assure that its level of charge-offs of commercial business loans, commercial
real estate and consumer loans, as well as other types of loans, will not be
higher in future periods which would reduce net interest income, or that it will
not have to charge-off material amounts of commercial business, commercial real
estate or consumer loans or other types of loans in future periods, which could
lead to a material increase in the provision for loan losses in future periods
which would also reduce net income. See "Business of Berkshire Bank--Lending
Activities--Nonperforming Assets, Delinquencies and Impaired Loans," "Business
of Berkshire Bank--Lending Activities--Real Estate Lending--Commercial and
Multi-Family Real Estate Loans," "Business of Berkshire Bank--Lending
Activities--Commercial Lending" and "Business of Berkshire Bank--Lending
Activities--Consumer Lending" for additional information.
12
<PAGE>
A decline in the stock market may hurt Berkshire Bank's profits and negatively
impact its net worth
The profitability of Berkshire Hills and Berkshire Bank and their net worth is
tied, in part, to the market value of the securities it holds. All of Berkshire
Bank's debt and mortgage-backed securities carry market risk insofar as
increases in market rates of interest may cause a decrease in their market
value. They also carry prepayment risk insofar as they may be called or repaid
before maturity in times of low market interest rates, so that Berkshire Bank
may have to invest the funds at a lower rate. The marketable equity securities
portfolio also carries market risk as such investments are not insured or
guaranteed and are subject to market fluctuations. As marketable equity
securities are carried at their fair value, any decline in their value due to
unfavorable market conditions or other factors will negatively impact Berkshire
Bank's equity. Additionally, sales of securities at prices below their purchase
price due to unfavorable market conditions may also negatively impact Berkshire
Bank's net income. At December 31, 1999, Berkshire Bank's net unrealized gain on
securities available for sale, net of income taxes, totaled $17.7 million, or
20.0%, of total net worth.
Recent market conditions may effect the market price of the common stock
Recently, the stock markets have experienced volatility and the market values
of the stock of certain industry sectors has declined dramatically.
Additionally, the market value of the stock of financial institutions, similar
to Berkshire Hills, has declined from the higher levels experienced in mid-1998
and continue to remain at trading levels below the levels experienced in the mid
and late 1990s. While such decline is not attributable to any one specific
identifiable factor, such decline may be attributable to factors such as the
rising interest rate environment, the slowdown in the consolidation in the
industry, increased competition, the market performance of other industry
sectors, such as technology stocks, and attempts to rebound from the downturn
due to Year 2000 concerns. Continued volatility or a continued decline in the
stock market in general or in the financial institution sector may negatively
affect the market price of the common stock immediately after the conversion and
in future periods.
Competition has hurt Berkshire Bank's net interest income
Berkshire Bank faces intense competition both in making high yield and quality
loans and in attracting deposits. This competition has forced Berkshire Bank to
offer higher deposit rates in its market area. This competition from other
providers of financial services for loans and deposits has contributed to a
recent narrowing of its average interest rate spread, from 3.65% for the year
ended December 31, 1997 to 3.50% for the year ended December 31, 1999, which has
hurt net interest income. Berkshire Bank expects that the competition for loans
and deposits will continue to be intense and is likely to increase in the
future. For more information about Berkshire Bank's market area and the
competition it faces, see "Business of Berkshire Bank--Market Area" and
"Business of Berkshire Bank--Competition."
Declining interest rates could hurt Berkshire Bank's profits
Like most financial institutions, Berkshire Bank's ability to make a profit
depends largely on its net interest income, which is the difference between the
interest income it receives from its loans and securities and the interest it
pays on deposits and borrowings. A large percentage of Berkshire Bank's
interest-earning assets have shorter maturities. Therefore, if interest rates
decline, Berkshire Bank anticipates that its net interest income would decline
because interest earned on its assets would decrease more quickly than the
interest paid on deposits. For further discussion of how changes in interest
rates could impact Berkshire Bank, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Management of Interest Rate Risk
and Market Risk Analysis."
13
<PAGE>
Banking reform legislation restricts the activities in which Berkshire Hills may
engage compared to existing unitary holding companies
Legislation intended to modernize the financial services industry has been
enacted which provides for greater affiliations by commercial bank holding
companies with financial companies such as securities and insurance companies.
Under the legislation, newly formed savings and loan holding companies will not
have the broad powers formerly available to unitary savings and loan holding
companies. Berkshire Hills will be a savings and loan holding company after the
conversion. Certain unitary savings and loan holding companies would be
grandfathered under the proposed legislation; however, Berkshire Hills will not
qualify for the grandfathering. Consequently, Berkshire Hills will be
restricted in terms of activities in which it may engage to a greater extent
than previously existing unitary savings and loan holding companies.
Management will have substantial discretion over investment of the offering
proceeds and may make investments with which you may disagree
The net offering proceeds to Berkshire Bank are estimated to range from $29.5
million to $40.2 million. The net offering proceeds to Berkshire Hills are
estimated to range from $24.2 million to $33.1 million after it uses a portion
of its proceeds to capitalize a subsidiary it intends to create which will lend
funds to Berkshire Bank's employee stock ownership plan to purchase shares of
common stock. Berkshire Hills and Berkshire Bank intend to use these funds for
general business purposes, giving management substantial discretion over their
investment. You may disagree with investments that management makes. See "Use
of Proceeds" for further discussion.
Implementation of additional benefit plans will increase future compensation
expense and lower Berkshire Bank's profits
Berkshire Bank will recognize additional material employee compensation and
benefit expenses stemming from the shares purchased by or granted to employees
and executives under new benefit plans. Berkshire Bank cannot predict the
actual amount of these new expenses because applicable accounting practices
require that they be based on the fair market value of the shares of common
stock at specific points in the future. Berkshire Bank would recognize expenses
for its employee stock ownership plan when shares are committed to be released
to participants' accounts and would recognize expenses for the stock-based
incentive plan over the vesting period of awards made to recipients. These
expenses have been estimated in the pro forma financial information under "Pro
Forma Data" assuming the $10.00 per share purchase price as fair market value.
Actual expenses, however, may be higher or lower. For further discussion of
these plans, see "Management of Berkshire Bank--Benefits."
14
<PAGE>
A downturn in the local economy or the economy in western Massachusetts in
general could hurt Berkshire Bank's profits
The vast majority of Berkshire Bank's loans are made to borrowers who live and
work in Berkshire County, Massachusetts. A prolonged economic recession in
Berkshire County or western Massachusetts in general would likely cause
significant increases in nonperforming loans and assets, which would create
operating losses for Berkshire Bank and would hurt its profits. For a further
discussion of Berkshire Bank's market area and competition, see "Business of
Berkshire Bank--Market Area" and "Business of Berkshire Bank--Competition."
Issuance of shares for benefit program may lower your ownership interest
If stockholders approve the new stock-based incentive plan, Berkshire Hills
intends to issue shares to its officers and directors through this plan. If the
restricted stock awards under the stock-based incentive plan are granted from
authorized but unissued stock, your ownership interest could be reduced by up to
approximately 3.85%. If the options under the stock-based incentive plan are
granted from authorized but unissued stock, your ownership interest could be
further reduced by up to approximately 9.09%. See "Pro Forma Data" and
"Management of Berkshire Bank--Benefits."
The contribution to Berkshire Hills Foundation means that a stockholder's total
ownership interest will be 7.4% less after the contribution
Purchasers of shares will have their ownership and voting interests in
Berkshire Hills diluted by 7.4% at the close of the conversion when Berkshire
Hills issues an additional 8% of its shares and contributes those shares to the
foundation. For a further discussion regarding the effect of the contribution
to the foundation, see "Pro Forma Data" and "Comparison of Independent Valuation
and Pro Forma Financial Information With and Without the Foundation."
Contribution to Berkshire Hills Foundation may not be tax deductible which could
hurt Berkshire Hills' profits
Berkshire Hills believes that its contribution to the Berkshire Hills
Foundation should be deductible for federal income tax purposes. However,
Berkshire Hills does not have any assurance that the Internal Revenue Service
will grant tax-exempt status to the foundation. If the contribution is not
deductible, Berkshire Hills would not receive any tax benefit from the
contribution. In addition, even if the contribution is tax deductible,
Berkshire
15
<PAGE>
Hills may not have sufficient profits to be able to fully use the
deduction. For a further discussion of the contribution to the charitable
foundation, see "The Conversion--Establishment of the Charitable Foundation--Tax
Considerations."
Establishment of Berkshire Hills Foundation will hurt Berkshire Hills' profits
for the year 2000
Berkshire Hills intends to contribute to Berkshire Hills Foundation shares of
its common stock equal to 8% of the shares sold in the conversion. This
contribution will hurt net income during the fiscal year in which the foundation
is established, which is expected to be 2000, possibly resulting in an operating
loss for that year. For a further discussion regarding the effect of the
contribution to the foundation, see "The Conversion--Establishment of the
Charitable Foundation."
Various factors could make takeover attempts that you want to occur more
difficult to achieve
Provisions of Berkshire Hills' Certificate of Incorporation and Bylaws,
federal and state regulations and various other factors may make it more
difficult for companies or persons to acquire control of Berkshire Hills without
the consent of Berkshire Hills' Board of Directors. It is possible, however,
that you might like to see a takeover attempt succeed because, for example, the
potential acquiror could be offering a premium over the then prevailing price of
Berkshire Hills common stock. The factors that may discourage takeover attempts
or make them more difficult include:
. Expected voting control by management and employees. The shares of common
stock that Berkshire Bank's directors and executive officers intend to
purchase in the conversion, when combined with the shares that may be
awarded to participants under Berkshire Bank's employee stock ownership
plan and Berkshire Hills's stock-based incentive plan, could result in
management and employees controlling a significant percentage of
Berkshire Hills' common stock. If these individuals were to act together,
they could have significant influence over the outcome of any stockholder
vote. In addition, the total voting power of management and employees,
could exceed 20% of Berkshire Hills' outstanding stock, which would
enable management and employees as a group to defeat any stockholder
matter that requires an 80% vote. For information about management's
intended stock purchases and the number of shares that may be awarded
under new benefit plans, see "Management of Berkshire Bank--Executive
Compensation." "Shares to Be Purchased by Management with Subscription
Rights" and "Restrictions on Acquisition of Berkshire Hills and Berkshire
Bank."
. Anti-takeover provisions and statutory provisions. Provisions in
Berkshire Hills' Certificate of Incorporation and Bylaws, the corporate
law of the State of Delaware, Massachusetts banking law, and federal
banking regulations may make it difficult and expensive to pursue a
takeover attempt that management opposes. These provisions will also make
the removal of the current board of directors or management of Berkshire
Hills, or the appointment of new directors, more difficult. These
provisions include: limitations on voting rights of beneficial owners of
more than 10% of Berkshire Hills' common stock; supermajority voting
requirements for certain business combinations; the election of directors
to staggered terms of three years; certain qualifications to stand for
election to and serve on the board of directors; and the elimination of
cumulative voting for directors. The Certificate of Incorporation of
Berkshire Hills also contains provisions regarding the timing and content
of stockholder proposals and nominations and limiting the calling of
special meetings. Similar provisions in the Amended and Restated Articles
of Organization and Bylaws of Berkshire Bank
16
<PAGE>
would also discourage takeover attempts and make takeovers less likely to
succeed without the support of management. For further information about
these provisions, see "Restrictions on Acquisitions of Berkshire Hills
and Berkshire Bank."
. Payments under certain agreements and benefit plans, the estimated value
of which, in the aggregate, totals $17.6 million, could make takeover
attempts more difficult. The employment and change in control agreements
to be entered into with officers of Berkshire Hills and Berkshire Bank
provide for cash severance payments and/or the continuation of health,
life and disability benefits if the officers are terminated following a
change in control of Berkshire Hills or Berkshire Bank. If a change in
control had occurred at December 31, 1999, the aggregate value of the
severance benefits available to these officers under the agreements
would, based on 1999 compensation data, have been approximately $5.1
million. In addition, if a change in control had occurred at December 31,
1999 and all eligible employees had been terminated, the aggregate
payment due under the supplemental executive retirement plan would have
been approximately $450,000 and the aggregate payment due under the
severance plan would have been approximately $12.0 million. These
estimates do not take into account future salary adjustments or bonus
payments or the value of the continuation of other employee benefits. All
of these arrangements may have the effect of increasing the costs of
acquiring Berkshire Hills, thereby discouraging future attempts to take
over Berkshire Hills or Berkshire Bank. For information about the
proposed employment, change in control and severance agreements and the
severance plan, see "Management of Berkshire Bank--Executive
Compensation."
Berkshire Hills cannot assure or guarantee an active trading market for the
common stock
Because Berkshire Hills has never issued stock, there is no current trading
market for the common stock. Consequently, Berkshire Hills cannot assure or
guarantee that an active trading market for the common stock will develop or
that an active trading market, if developed, will continue. An active and
orderly trading market will depend on the existence and individual decisions of
willing buyers and sellers at any given time over which neither Berkshire Hills
nor any market maker will have any control. If an active trading market does not
develop or is sporadic, this may hurt the market value of the common stock.
Furthermore, Berkshire Hills cannot assure or guarantee that purchasers of
common stock in the offering will be able to sell their shares after the
conversion at or above the $10.00 per share purchase price. For further
information, see "Market for Common Stock."
17
<PAGE>
RECENT DEVELOPMENTS
The following tables contain certain information concerning the financial
position and results of operations of Berkshire Bancorp and Berkshire Bank at
and for the dates indicated. The data presented at March 31, 2000 and 1999 and
for the three month periods then ended are derived from unaudited condensed
consolidated financial statements but, in the opinion of management, reflect all
adjustments necessary to present fairly the results for these interim periods.
These adjustments consist only of normal recurring adjustments. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results of operations that may be expected for the year ended
December 31, 2000. This information should be read in conjunction with the
Consolidated Financial Statements included in this prospectus.
<TABLE>
<CAPTION>
At At
March 31, December 31,
2000 1999
-------- -----------
(In thousands)
<S> <C> <C>
Selected Financial Data:
Total assets............................. $875,453 $841,651
Loans, net............................... 695,815 665,554
Investment securities:
Available for sale.................... 91,753 93,084
Held to maturity...................... 21,444 17,014
Federal Home Loan Bank stock.......... 4,217 3,843
Savings Bank Life Insurance stock..... 2,043 2,043
Deposits (1)............................. 688,033 680,767
Federal Home Loan Bank advances.......... 86,347 58,928
Repurchase agreements.................... 870 1,120
Total retained earnings............... 88,611 88,352
Real estate owned........................ 220 220
Nonperforming loans...................... 2,547 2,841
</TABLE>
<TABLE>
<CAPTION>
At or For the
Three Months
Ended March 31,
--------------------
2000 1999
-------- ---------
(In thousands)
<S> <C> <C>
Selected Operating Data:
Total interest and dividend income.................... $15,546 $13,918
Total interest expense................................ 7,343 6,296
------- ---------
Net interest income................................. 8,203 7,622
Provision for loan losses............................. 810 675
------- ---------
Net interest income after provision for
loan losses........................................ 7,393 6,947
Noninterest income:
Service charges and fees............................ 1,093 670
Gain on sales and dispositions, net................. 232 523
Other............................................... 53 132
------- ---------
Total noninterest income.......................... 1,378 1,325
------- ---------
Total noninterest expense......................... 6,432 5,926
------- ---------
Income before income taxes.......................... 2,339 2,346
Income taxes........................................ 782 615
------- ---------
Net income........................................ $ 1,557 $ 1,731
======= =========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
At or For the
Three Months
Ended March 31,
---------------------
2000 1999
--------- ----------
<S> <C> <C>
Selected Operating Ratios and Other Data:
Performance Ratios (2):
Average yield on interest-earning assets.......... 7.69% 7.54%
Average rate paid on interest-bearing
liabilities..................................... 4.30 4.07
Interest rate spread (3).......................... 3.39 3.47
Net interest margin (4)........................... 4.06 4.13
Ratio of interest-bearing assets to
interest-bearing liabilities.................... 118.46 119.37
Ratio of net interest income after provision
for loan losses to noninterest expense.......... 114.93 117.22
Noninterest expense as a percent of average
assets.......................................... 3.00 3.03
Return on average assets (5)...................... 0.73 0.89
Return on average equity (6)...................... 6.94 8.11
Average equity to average assets.................. 10.47 10.93
<CAPTION>
At At
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Regulatory Capital Ratios:
Tier 1 capital to average assets.................. 7.96% 7.91%
Total capital to risk-weighted assets............. 12.56 12.90
Asset Quality Ratios:
Nonperforming loans as a percent of total
loans (7)....................................... 0.36 0.42
Nonperforming assets as a percent of total
assets (8)...................................... 0.32 0.36
Allowance for loan losses as a percent of
total loans..................................... 1.30 1.27
Allowance for loan losses as a percent of
nonperforming loans............................. 359.95 300.39
Net loans charged-off as a percent of
interest-earning loans.......................... 0.03 0.31
</TABLE>
_______________________________
(1) Includes mortgagor's escrow accounts.
(2) Performance Ratios are based on average daily balances during the indicated
periods and are annualized for interim periods.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Net income divided by average total assets.
(6) Net income divided by average total equity.
(7) Nonperforming loans consist of nonaccrual loans.
(8) Nonperforming assets consist of nonaccrual loans and real estate owned.
19
<PAGE>
Comparison of Financial Condition at March 31, 2000 and December 31, 1999
Total assets increased $33.8 million, or 4.0%, from $841.7 million at
December 31, 1999 to $875.5 million at March 31, 2000, primarily a result of a
$30.3 million, or 4.5%, increase in net loans. The increase in loans was mainly
due to a $22.7 million increase in automobile loans as Berkshire Bank began to
expand its presence into eastern New York through the establishment of
additional relationships with car dealers in late 1999 and early 2000 and
increased originations by existing dealers. The increase in loans was also due
to a $10.1 million increase in commercial loans. A $3.5 million increase in the
investment securities portfolio also contributed to the growth in assets.
Nonperforming assets decreased $294,000, or 9.6%, from $3.1 million at
December 31, 1999 to $2.8 million at March 31, 2000, due primarily to a decrease
in nonaccruing automobile loans. The decrease in nonaccrual loans was due to
the improved financial condition of borrowers, which management attributes to
the strong economy.
Advances from the Federal Home Loan Bank of Boston increased $27.4 million,
or 46.5%, from $58.9 million at December 31, 1999 to $86.3 million at March 20,
2000. Management determined to fund asset growth through such additional
borrowings instead of through the sale of assets or more aggressive pricing of
deposits. Additionally, asset growth was funded by a $7.3 million, or 1.1%,
increase in deposits from $680.8 million at December 31, 19999 to $688.0 million
at March 31, 2000. This increase was primarily due to a $6.6 million, or 16.5%,
increase in commercial checking accounts due to increased marketing efforts and
product offerings.
Total retained earnings were $88.6 million at March 31, 2000 compared to
$88.4 million at December 31, 1999. The increase in retained earnings was due
to net income of $1.6 million, offset by a decline in net accumulated unrealized
gains on available for sale securities of $1.3 million. The decrease in the
unrealized gains on securities occurred due to market declines in Berkshire
Bank's debt securities portfolios due primarily to the rising interest rate
environment. The decrease in unrealized gains on securities was also caused by
a decline in the market value of the equity securities portfolio, consisting
primarily of bank, financial and industrial stocks, which experienced general
market declines during the first quarter of 2000.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
March 31, 1999
Net Income. Net income decreased $174,000, or 10.1%, from $1.7 million for
the three months ended March 31, 1999 to $1.6 million for the three months ended
March 31, 2000. The decrease was primarily attributable to a $506,000 increase
in non-interest expense, and a $135,000 increase in the provision for loan
losses due to loan growth, particularly automobile and commercial loans. These
decreases were partially offset by a $581,000 increase in net interest income
due to the growth in the loan portfolio. The efficiency ratio at March 31, 2000
was 68.8% compared to 70.3% at March 31, 1999.
Net Interest Income. Net interest income increased $581,000, or 7.6%, to
$8.2 million for the three months ended March 31, 2000 compared to $7.6 million
for the three months ended March 31, 1999, primarily due to an increase in the
average balance of interest earning assets due to loan growth.
Interest and dividend income increased $1.6 million, or 11.7%, from $13.9
million for the three months ended March 31, 1999 to $15.5 million for the three
months ended March 31, 2000. The yield on interest-earning assets was 7.69% and
7.54% for the three-month periods ended March 31, 2000 and 1999, respectively.
Interest income on loans increased by $1.6 million, or 12.6%, to $14.0 million
for the three months ended March 31, 2000 from $12.4 million for the same
period in 1999, primarily due to an $69.2 million increase in the average
balance of loans, primarily automobile loans. To a lesser extent, the increase
in interest income was also attributable to a 10 basis point increase in the
average yield on loans from 8.10% for the three months ended March 31, 1999 to
8.20% for the three months ended March 31, 2000. Even though interest rates
rose sharply in the first quarter of 2000, strong competition in Berkshire
Bank's market area limited Berkshire Bank from correspondingly raising the rates
charged on its loans.
20
<PAGE>
Interest expense increased $1.0 million, or 16.7%, from $6.3 million for
the three months ended March 31, 1999 to $7.3 million for the three months ended
March 31, 2000. The increase in interest expense was primarily due to a $36.2
million, or 107.1%, increase in average borrowings to $69.9 million for the
three months ended March 31, 2000 from $33.8 million for the three months ended
March 31, 1999 due to an increase in Federal Home Loan Bank borrowings which
were primarily used to fund loan growth. The increase in interest expenses was
also attributable to a rise in market interest rates, including an 128 basis
points increase in the average rate paid on Federal Home Loan Bank borrowings
from 4.50% to 5.78%. Also contributing to the increase in interest expense was
an increase in the average balance of interest bearing deposits to $611.5
million for the first quarter of 2000 from $576.0 million for the previous
year's quarter due to increased deposit inflows resulting from increased
promotional activity and more aggressive deposit pricing which began in late
1999 and continued through the first quarter of 2000. A 9 basis point increase
in the average rate paid on interest-bearing deposit accounts for the three
months ended March 31, 2000 to 4.13% from 4.04% for the three months ended March
31, 1999 also contributed to the increase in interest expense.
Provision for loan losses. The provision for loan losses increased
$135,000, or 20.0%, for the three months ended March 31, 2000 to $810,000 from
$675,000 to reflect the growth in the loan portfolio and, in particular, the
increase in the average balance of commercial and automobile loans, which
generally bear a greater degree of risk than one- to four-family mortgage loans
or loans secured by real estate and due to management's consideration of the
growth of such loans as a percentage of the total loan portfolio. As of March
31, 2000, commercial loans and consumer loans, excluding home equity loans,
totaled $355.3 million or 50.4% of total loans as compared to $227.9 million and
36.2% as of March 31, 1999. Management determined to increase the provision
notwithstanding the fact that nonperforming loans decreased in the first quarter
of 2000 compared to the first quarter of 1999. At March 31, 2000 and 1999, the
allowance for loan losses was $9.2 million and $7.8 million, respectively, which
represented 359.95% of nonperforming loans and 1.30% of total loans at March 31,
2000 compared to 261.52% of nonperforming loans and 1.23% of total loans at
March 31, 1999. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Comparison of Operating Results for the Years Ended
December 31, 1999 and 1998" and "Business of Berkshire Bank -Lending
Activities- Allowance for Loan Losses."
Noninterest Income. Non-interest income totaled $1.4 million for the three
months ended Mach 31, 2000 and $1.3 million for the three months ended March 31,
1999, an increase of $53,000, or 4.0%, due primarily to a $423,000, or 63.1%,
increase in service fees and charges to $1.1 million for the three months ended
March 31, 2000 from $670,000 for the three months ended March 31, 1999. This
increase was primarily due to a $170,000 increase in loan servicing fees due to
a higher volume of loans being serviced, primarily automobile loans, and a
$165,000 increase in trust fees, due to an increase in trust department assets.
Also contributing to the increase in noninterest income was a $20,000 increase
in ATM fees and a $15,000 increase in checking account fees due to increased
volume. Offsetting these increases was a $291,000, or 55.6%, decrease in gains
on the sale of securities from $523,000 for the three months ended March 31,
1999 to $232,000 for the three months ended March 31, 2000.
Noninterest Expense. Noninterest expense increased $506,000, or 8.5%, to
$6.4 million for the three months ended March 31, 2000, compared to $5.9 million
for the three months ended March 31, 1999. The increase was primarily due to a
$259,000, or 8.2%, increase in salaries and benefits from $3.2 million for the
three months ended March 31, 1999 to $3.4 million for the three months ended
March 31, 2000 due to normal salary increases. Also contributing to the increase
in noninterest expense was $156,000 in costs associated with repossession and
related liquidation costs, $70,000 in occupancy and equipment expenses, $65,000
in office supplies and $48,000 in costs associated with the establishment of the
new insurance company. These costs were offset by decreases of $130,000 in data
processing costs and $37,000 in marketing expenses.
Income Taxes. Income taxes for the three months ended March 31, 2000 were
$782,000, an increase of $167,000, or 27.2%, from $615,000 for the three months
ended March 31, 1999. The effective tax rates for the three months ended March
31, 2000 and the three months ended March 31, 1999 were 33.4% and 26.2%,
respectively. The lower effective tax rate for 1999 was attributable to state
tax loss carryforwards and a larger deduction in 1999 in connection with the
establishment of Greater Berkshire Foundation, Inc. in 1997. In connection with
Berkshire Bank's application for rehabilitating a historic firehouse in
Pittsfield, Massachusetts it booked tax credits in 1999. These tax credits will
not be available in 2000.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables contain certain information concerning the
consolidated financial position and results of operations of Berkshire Bancorp
and Berkshire Bank at and for the dates indicated. The data as of December 31,
1996 and 1995 and for the years then ended represents the combined financial
position and results of operations of Great Barrington Savings Bank and
Berkshire County Savings Bank and is derived from unaudited consolidated
financial statements. These two banks were merged to form Berkshire Bank on May
1, 1997. The data as of December 31, 1999, 1998 and 1997 and for the years then
ended are derived from the audited consolidated financial statements of
Berkshire Bancorp and Berkshire Bank. This information should be read in
conjunction with the Consolidated Financial Statements included in this
prospectus.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- --------
(In thousands )
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets .......................................... $841,651 $780,289 $637,346 $627,453 $602,679
Loans, net ............................................ 665,554 599,171 491,743 459,059 440,761
Investment securities:
Available for sale .............................. 93,084 93,774 71,778 82,888 81,865
Held to maturity ................................ 17,014 23,780 34,675 33,243 17,456
Federal Home Loan Bank stock .................... 3,843 2,547 2,547 2,509 2,399
Savings Bank Life Insurance stock ............... 2,043 2,043 2,043 2,043 2,043
Deposits (1) .......................................... 680,767 647,122 539,061 535,505 524,327
Federal Home Loan Bank advances ....................... 58,928 29,590 6,880 7,732 6,357
Repurchase agreements ................................. 1,120 7,000 5,070 6,340 2,843
Total retained earnings ......................... 88,352 84,201 75,317 68,713 61,458
Real estate owned ..................................... 220 398 364 2,888 219
Nonperforming loans ................................... 2,841 3,490 2,156 4,845 3,912
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest and dividend income .................... $58,468 $52,495 $48,423 $46,890 $44,761
Total interest expense ................................ 26,922 24,182 22,290 22,032 19,422
------ ------- ------- ------- -------
Net interest income ................................ 31,546 28,313 26,133 24,858 25,339
Provision for loan losses ............................. 3,030 2,055 1,477 1,980 2,509
------ ------- ------- ------- -------
Net interest income after provision
for loan losses ................................. 28,516 26,258 24,656 22,878 22,830
------ ------- ------- ------- -------
Noninterest income:
Service charges and fees ........................... 3,405 2,568 2,440 2,801 2,609
Gain on sales and dispositions, net................. 491 425 2,653 1,364 244
Other .............................................. 402 300 512 653 708
------ ------- ------- ------- -------
Total noninterest income ........................ 4,298 3,293 5,605 4,818 3,561
------ ------- ------- ------- -------
Total noninterest expense ....................... 25,196 22,359 26,066 19,257 17,805
------ ------- ------- ------- -------
Income before income taxes ......................... 7,618 7,192 4,195 8,439 8,586
Income taxes ....................................... 1,995 2,768 1,692 3,039 2,066
------ ------- ------- ------- -------
Net income ...................................... $ 5,623 $ 4,424 $ 2,503 $ 5,400 $ 6,520
======= ======= ======= ======= =======
</TABLE>
(footnotes on following page)
22
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Selected Other Data:
Number of:
Mortgage loans outstanding ..................................... 3,667 2,961 2,879 2,967 3,127
Deposit accounts ............................................... 76,493 75,648 65,012 65,142 64,760
Banking offices ................................................ 14 14 11 11 11
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data:
Performance Ratios (2):
Average yield on interest-earning assets ...................... 7.65% 7.83% 8.10% 8.07% 8.26%
Average rate paid on interest-bearing liabilities ............. 4.15 4.36 4.45 4.42 4.14
Interest rate spread (3) ...................................... 3.50 3.47 3.65 3.65 4.12
Net interest margin (4) ....................................... 4.13 4.22 4.37 4.28 4.67
Interest-bearing assets to interest-bearing liabilities ....... 117.75 120.94 119.44 116.46 115.55
Net interest income after provision for loan losses
to noninterest expense ..................................... 113.18 117.44 94.59 118.80 128.22
Non-interest expense as a percent of average assets ........... 3.09 3.19 4.16 3.13 3.11
Return on average assets (5) .................................. 0.69 0.63 0.40 0.88 1.14
Return on average equity (6) .................................. 6.51 5.56 3.54 8.55 11.77
Average equity to average assets .............................. 10.59 11.34 11.30 10.25 9.68
Regulatory Capital Ratios:
Tier 1 capital to average assets .............................. 7.91 7.79 9.80 9.46 9.18
Total capital to risk-weighted assets ......................... 12.90 13.04 13.46 14.52 13.73
Asset Quality Ratios:
Nonperforming loans as a percent of total loans (7) ............ 0.42 0.58 0.43 1.04 0.87
Nonperforming assets as a percent of total assets (8) .......... 0.36 0.50 0.40 1.23 0.69
Allowance for loan losses as a percent of total loans .......... 1.27 1.25 1.22 1.35 1.45
Allowance for loan losses as a percent of nonperforming loans .. 300.39 217.45 281.91 130.09 165.75
Net loans charged-off as a percent of interest-earning loans ... 0.31 0.09 0.34 0.47 0.25
</TABLE>
- ------------------------------
(1) Includes mortgagors' escrow accounts.
(2) Regulatory Capital and Asset Quality Ratios are end of period ratios.
Performance Ratios for 1999 and 1998 are based on daily averages.
Performance Ratios for 1997, 1996 and 1995 are based on monthly averages.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Net income divided by average total assets.
(6) Net income divided by average total equity.
(7) Nonperforming loans consist of nonaccrual loans. See "Business of Berkshire
Bank--Lending Activities--Nonperforming Assets and Delinquencies."
(8) Nonperforming assets consist of nonaccrual loans and real estate owned. See
"Business of Berkshire Bank--Lending Activities--Nonperforming Assets and
Delinquencies."
23
<PAGE>
USE OF PROCEEDS
The following table presents the estimated net proceeds of the offering,
the amount to be retained by Berkshire Hills, the amount to be contributed to
Berkshire Bank, and the amount of Berkshire Hills' capitalization of a
subsidiary to be created which will lend funds to the employee stock ownership
plan. See "Pro Forma Data" for the assumptions used to arrive at these amounts.
<TABLE>
<CAPTION>
6,145,500 8,314,500 9,561,675
Shares at Shares at Shares at
$10.00 $10.00 $10.00
Per Share Per Share Per Share
------------ -------------- --------------
(In thousands)
<S> <C> <C> <C>
Gross proceeds ....................................... $61,455 $83,145 $95,617
Less: estimated underwriting commissions and
other offering expenses ....................... 2,361 2,658 2,829
------- ------- -------
Net proceeds ......................................... $59,094 $80,487 $92,788
======= ======= =======
Net proceeds to be retained by Berkshire Hills ....... $29,547 $40,244 $46,394
Net proceeds to be contributed to Berkshire Bank ..... $29,547 $40,244 $46,394
Amount of loan by Berkshire Hills to employee
stock ownership plan .............................. $ 5,310 $ 7,184 $ 8,261
</TABLE>
Berkshire Hills will purchase all of the capital stock of Berkshire Bank to
be issued in the conversion in exchange for 50% of the net proceeds of the stock
offering. Receipt of the 50% of the net proceeds of the sale of the common
stock will increase Berkshire Bank's capital and will support the expansion of
Berkshire Bank's existing business activities. Berkshire Bank will use the
funds contributed to it for general business purposes, including, loan
originations and investment in short- to intermediate-term investment grade
securities.
Berkshire Hills intends to capitalize a subsidiary it intends to create
which will lend funds to the employee stock ownership plan in an amount
necessary for the plan to acquire an amount of shares equal to 8% of the shares
issued in the conversion, including shares issued to Berkshire Hills Foundation.
Accordingly, acquisitions by the employee stock ownership plan would range
between 530,971 shares, assuming 6,637,140 shares are issued in the conversion,
to 826,128 shares, if 10,326,609 shares are issued in the conversion. Berkshire
Hills and Berkshire Bank may alternatively choose to fund the employee stock
ownership plan's stock purchases through a loan by a third party financial
institution. For purposes of the above table, it is assumed that any shares of
common stock to be purchased by the employee stock ownership plan in the open
market will be purchased at $10.00 per share. If there are not enough shares to
satisfy the employee stock ownership plan's subscription for shares sold in the
conversion, the plan may purchase such shares in the open market after
conversion. It is anticipated that the employee stock ownership plan loan will
have a 15-year term with a fixed rate of interest equal to the prime rate
published in The Wall Street Journal on the closing date of the conversion. The
loan will be repaid primarily from Berkshire Bank's contributions to the
employee stock ownership plan and from any dividends paid on shares of common
stock held by the employee stock ownership plan.
The remaining net proceeds retained by Berkshire Hills will initially be
invested primarily in short- to intermediate-term investment grade securities.
Berkshire Hills may also use the funds it retains to support future expansion of
operations or diversification into other banking or financial services related
businesses and for other business or investment purposes. However, with the
exception of the current plan to establish an insurance agency, there are no
specific plans, arrangements, agreements or understandings, written or oral,
regarding any expansion activities. In this regard, in February 2000, Berkshire
Bank entered into a contract with a third party to assist it in establishing and
operating such agency. See "Business of Berkshire Bank--General."
24
<PAGE>
Berkshire Hills may also use available funds to repurchase shares of common
stock and for the payment of dividends, subject to any limitations set forth in
applicable laws and regulations. Following the conversion, the Board of
Directors will have the authority to adopt plans that meet statutory and
regulatory requirements for repurchases of common stock. Since Berkshire Hills
has not yet issued stock, there currently is insufficient information upon which
an intention to repurchase stock could be based and consequently, no such
intention currently exists. The Board of Directors will consider many facts and
circumstances in determining whether to repurchase stock in the future. These
factors include market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the ability to improve Berkshire Hills'
return on equity. The avoidance of dilution to stockholders by not having to
issue additional shares to cover the exercise of stock options or to fund
employee stock benefit plans is another factor that will be considered. The
Board of Directors will also consider any other circumstances in which
repurchases would be in the best interests of Berkshire Hills and its
stockholders.
Before undertaking any stock repurchases, the Board of Directors must
determine that both Berkshire Hills and Berkshire Bank will be capitalized in
excess of all applicable regulatory requirements after any repurchases and that
capital will be adequate, taking into account, among other things, Berkshire
Bank's level of nonperforming and classified assets, Berkshire Hills' and
Berkshire Bank's current and projected results of operations and asset/liability
structure, the economic environment and tax and other regulatory considerations.
For a discussion of the regulatory limitations applicable to stock repurchases,
see "The Conversion--Restrictions on Repurchase of Stock."
Except as described above, neither Berkshire Hills nor Berkshire Bank has
specific plans for the investment of the proceeds of this offering. For a
discussion of management's business reasons for undertaking the conversion, see
"The Conversion--Reasons for the Conversion."
DIVIDEND POLICY
General
Berkshire Hills' Board of Directors intends to adopt a policy of paying
regular cash dividends after the conversion, but has not decided the exact
amount or range of amounts that may be paid, when the payments may begin or the
frequency of any payments. In addition, the Board of Directors may declare and
pay periodic special cash dividends in addition to, or in lieu of, regular cash
dividends. When deciding whether to declare or pay any dividends, whether
regular or special, the Board of Directors will take into account the amount of
the net proceeds retained by Berkshire Hills, Berkshire Hills' financial
condition, results of operations, tax considerations, capital requirements,
industry standards, and economic conditions. The Board of Directors will also
consider the regulatory restrictions discussed below that affect the payment of
dividends by Berkshire Bank to Berkshire Hills. Berkshire Hills is also subject
to Delaware law, which generally limits dividends to an amount equal to an
excess of the net assets of a company (the amount by which total assets exceed
total liabilities) over statutory capital, or if there is no excess, to the
company's net profits for the current and/or immediately preceding fiscal year.
In order to pay cash dividends, however, Berkshire Hills must have available
cash either from the net proceeds raised in the conversion and retained by
Berkshire Hills, borrowings by Berkshire Hills, dividends received from
Berkshire Bank or earnings on Berkshire Hills' assets. No assurances can be
given that any dividends, either regular or special, will be declared or paid,
or if declared and paid, what the amount of dividends will be or whether they
will continue uninterrupted.
Regulatory Restrictions
Dividends from Berkshire Hills may depend, in part, upon receipt of
dividends from Berkshire Bank because Berkshire Hills will initially have no
source of income other than dividends from Berkshire Bank and earnings from the
investment of the net proceeds from the offering retained by Berkshire Hills.
Berkshire Bank, as a Massachusetts-chartered savings bank, must also comply with
Massachusetts law when considering paying a dividend. A Massachusetts savings
bank may only pay dividends on its stock if such payment would not impair the
25
<PAGE>
bank's stock and surplus account. In addition, Berkshire Bank may not declare
or pay a cash dividend on its stock if the effect would be to reduce its
regulatory capital below the amount required for the liquidation account to be
established under the plan of conversion and below amounts required to be
maintained by the Federal Deposit Insurance Corporation. See "The Conversion--
Effects of Conversion to Stock Form--Liquidation Account."
Tax Considerations
In addition to the foregoing, retained earnings of Berkshire Bank
appropriated to bad debt reserves and previously deducted for federal income tax
purposes cannot be used to pay cash dividends to Berkshire Hills without the
payment of federal income taxes by Berkshire Bank at the then current income tax
rate on the amount deemed distributed, which would include the amounts of any
federal income taxes relating to the distribution. See "Federal and State
Taxation of Income--Federal Income Taxation." Berkshire Hills does not
contemplate any distribution by Berkshire Bank that would result in a recapture
of its bad debt reserve or create the above-mentioned federal tax liabilities.
MARKET FOR COMMON STOCK
Because Berkshire Hills and Berkshire Bank have not issued capital stock to
the public, no established market for the common stock exists. Berkshire Hills
expects to receive approval to have its common stock listed on the American
Stock Exchange under the symbol "BHL" upon completion of the conversion. To
receive that approval, Berkshire Hills must satisfy various conditions,
including selling the stock and meeting certain listing criteria. There can be
no assurance that the common stock will be able to meet the applicable listing
criteria to maintain its quotation on the American Stock Exchange or that an
active and liquid trading market will develop or, if developed, will be
maintained. No assurance can be given that an investor will be able to resell
the common stock at or above the purchase price of the common stock after the
conversion.
26
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of Berkshire
Bancorp at December 31, 1999, and the pro forma capitalization of Berkshire
Hills after giving effect to the assumptions listed under "Pro Forma Data,"
based on the sale of the number of shares of common stock indicated in the
table. Pro forma capitalization does not reflect the issuance of additional
shares under the proposed stock-based incentive plan. A change in the number of
shares to be issued in the conversion may materially affect pro forma
capitalization.
<TABLE>
<CAPTION>
Berkshire Hills Pro Forma
Capitalization Based Upon the Sale of $10.00 Per Share
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
-------------- -------------- --------------
6,145,500 8,314,500 9,561,675
Berkshire Bancorp Shares at Shares at Shares at
as of $10.00 $10.00 $10.00
December 31, 1999 Per Share Per Share Per Share
------------------ -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Deposits(1) .......................................... $680,767 $680,767 $680,767 $680,767
Short-term borrowed funds ............................ 1,120 1,120 1,120 1,120
Advances from Federal Home Loan Bank ................. 58,928 58,928 58,928 58,928
-------- -------- -------- --------
Total deposits and borrowed funds..................... $740,815 $740,815 $740,815 $740,815
======== ======== ======== ========
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01 par value per share,
authorized; none issued or outstanding ...... $ -- $ -- $ -- $ --
Common stock:
26,000,000 shares, $.01 par value per share,
authorized; specified number of shares
assumed to be issued and outstanding(2) ..... -- 66 90 103
Additional paid-in capital ........................... -- 59,028 80,397 92,685
Undivided profits (3) ................................ 70,679 70,679 70,679 70,679
Accumulated other comprehensive income (4) ........... 17,673 17,673 17,673 17,673
Plus:
Contribution to foundation ........................ -- 4,916 6,652 7,649
Less:
Expense of contribution to foundation, net of
taxes (5)....................................... -- (3,146) (4,257) (4,896)
Less:
Common stock acquired by employee stock ownership
plan (6)........................................ -- (5,310) (7,184) (8,261)
Common stock to be acquired by stock-based
incentive plan (7) ............................. -- (2,655) (3,592) (4,131)
-------- -------- -------- --------
Total stockholders' equity ........................... $ 88,352 $141,251 $160,458 $171,501
======== ======== ======== ========
</TABLE>
____________________________________
(1) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Withdrawals to purchase common stock will reduce pro forma
deposits by the amounts of the withdrawals.
(2) After conversion, Berkshire Bank's authorized capital will consist solely
of 10,000,000 shares of common stock, $1.00 par value, 1,000 shares of
which will be issued to Berkshire Hills, and 10,000,000 shares of preferred
stock, $1.00 par value, none of which will be issued in connection with the
conversion.
(3) Undivided profits are restricted by applicable regulatory capital
requirements. Additionally, Berkshire Bank will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of its
eligible depositors as of September 30, 1998 and September 30, 1999 at the
time of the conversion and decreased subsequently as these account holders
reduce their balances or cease to be depositors. See "The Conversion--
Effects of Conversion to Stock Form--Liquidation Account."
(4) Represents the net unrealized gain on securities classified as available
for sale, net of related taxes.
(5) Represents the expense, net of tax, of the contribution of common stock to
Berkshire Hills Foundation based on an estimated tax rate of 36%. The
realization of the tax benefit is limited annually to 10% of Berkshire
Hills' annual taxable income. However, for federal tax and state purposes,
Berkshire Hills can carry forward any unused portion of the deduction for
five years following the year in which the contribution is made.
(6) Assumes that 8% of the common stock issued in the conversion will be
acquired by the employee stock ownership plan in the conversion at $10.00
per share with funds borrowed from a subsidiary established and capitalized
by Berkshire Hills for that purpose. Under generally accepted accounting
principles, the amount of common stock to be purchased by the employee
stock ownership plan represents unearned compensation and is, accordingly,
reflected as a reduction of capital. As shares are released to employee
stock ownership plan participants' accounts, a corresponding reduction in
the charge against capital will occur. See "Management of Berkshire Bank--
Benefits--Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at $10.00 per share, under the
proposed stock-based incentive plan, of a number of shares equal to 4% of
the shares of common stock issued in the conversion. The shares are
reflected as a reduction of stockholders' equity. See "Risk Factors--
Issuance of shares for benefit program may lower your ownership interest,"
"Pro Forma Data" and "Management of Berkshire Bank--Benefits--Stock-Based
Incentive Plan." The stock-based incentive plan will be submitted to
stockholders for approval at a meeting following the conversion.
27
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents Berkshire Bank's historical and pro forma capital
position relative to its regulatory capital requirements at December 31, 1999.
The table amounts include $15,631 in cash held by Berkshire Bancorp that will be
added to Berkshire Bank's capital upon conversion. The amount of capital
infused into Berkshire Bank for purposes of the following table is 50% of the
net proceeds of the offering. For purposes of the table, the amount expected to
be borrowed by the employee stock ownership plan and the cost of the shares
expected to be awarded under the stock-based incentive plan as restricted stock
are deducted from pro forma regulatory capital. For a discussion of the
assumptions underlying the pro forma capital calculations presented below, see
"Use of Proceeds," "Capitalization" and "Pro Forma Data." The definitions of
the terms used in the table are those provided in the capital regulations issued
by the Federal Deposit Insurance Corporation. For a discussion of the capital
standards applicable to Berkshire Bank, see "Regulation and Supervision--Federal
Regulations--Capital Requirements."
<TABLE>
<CAPTION>
Berkshire Bank Pro Forma Regulatory Capital Compliance at
December 31, 1999, Based Upon the Sale of
---------------------------------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range
Berkshire Bank -------------------- ---------------------- -----------------------
Historical at 6,145,500 Shares 8,314,500 Shares 9,561,675 Shares
December 31, 1999 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
--------------------- -------------------- ---------------------- -----------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets(1) Amount Assets Amount Assets Amount Assets
--------- --------- -------- ----------- --------- ---------- --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Generally accepted accounting
principles capital ............. $88,352 10.50% $109,934 12.74% $117,820 13.53% $122,354 13.98%
======= ===== ======== ===== ======== ===== ======== =====
Tier 1 capital to average
assets (2) ..................... $63,870 7.91% $ 85,452 10.31% $ 93,338 11.15% $ 97,872 11.63%
Requirement ....................... 32,305 4.00 33,168 4.00 33,484 4.00 33,665 4.00
------- ----- -------- ----- -------- ----- -------- -----
Excess ............................ $31,565 3.91% $ 52,284 6.31% $ 59,854 7.15% $ 64,207 7.63%
======= ===== ======== ===== ======== ===== ======== =====
Total capital to risk-weighted
assets (3) ..................... $84,652 12.90% $106,234 15.92% $114,120 17.00% $118,654 17.62%
Requirement ....................... 52,516 8.00 53,379 8.00 53,694 8.00 53,876 8.00
------- ----- -------- ----- -------- ----- -------- -----
Excess ............................ $32,136 4.90% $ 52,855 7.92% $ 60,426 9.00% $ 64,778 9.62%
======= ===== ======== ===== ======== ===== ======== =====
</TABLE>
- -------------------------
(1) Tier 1 capital levels are shown as a percentage of adjusted total assets of
$807.6 million. Total capital to risk-weighted assets are shown as a
percentage of risk-weighted assets of $656.4 million.
(2) A portion of the net unrealized gains on available-for-sale investment
securities and goodwill accounts for the difference between generally
accepted accounting principles capital and Tier 1 capital.
(3) Percentage represents total core and supplementary capital divided by total
capital to risk-weighted assets. Assumes net proceeds are invested in
assets that carry a 50% risk-weighting.
28
<PAGE>
PRO FORMA DATA
The plan of conversion requires that the common stock must be sold at a
price equal to the estimated market value of Berkshire Hills and Berkshire Bank,
as converted, based upon an independent appraisal by FinPro. The estimated
valuation range as of March 8, 2000 is from a minimum of $61.5 million to a
maximum of $83.1 million with a midpoint of $72.3 million. At a price per share
of $10.00, this results in a minimum number of shares of 6,145,500, a maximum
number of shares of 8,314,500 and a midpoint number of shares of 7,230,000.
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds indicated in
the following tables are based upon the following assumptions:
. All shares of common stock will be sold in the subscription and direct
community offerings;
. Sandler O'Neill will receive a fee equal to 1.50% of the aggregate
purchase price of the shares sold in the subscription and direct
community offerings, except that no fee will be paid with respect to
shares purchased by the employee benefit plans, shares purchased by
officers, employees or directors of Berkshire Bank or Berkshire Hills,
or their immediate families. See "The Conversion--Plan of
Distribution for the Subscription, Direct Community and Syndicated
Community Offerings"; and
. Conversion expenses, excluding the 1.50% fee paid to Sandler O'Neill,
will total approximately $1,550,000 regardless of the number of shares
sold in the conversion.
Actual expenses may vary from this estimate, and the fees paid will depend
upon whether a syndicate of broker-dealers or other means is necessary to sell
the shares, and other factors.
Berkshire Hills and Berkshire Bank prepared the following pro forma data
with the assistance of FinPro. The following tables summarize the historical
consolidated net income and capital of Berkshire Bancorp and Berkshire Bank and
the pro forma consolidated net income and stockholders' equity of Berkshire
Hills and Berkshire Bank at and for the year ended December 31, 1999. Pro forma
net income for the year ended December 31, 1999 has been calculated as if the
conversion was completed on January 1, 1999 and the estimated net proceeds had
been invested at 5.98% beginning on that date, which represents the one-year
U.S. Treasury Bill yield as of December 31, 1999.
A pro forma after-tax return of 3.83% is used for the year ended December
31, 1999, after giving effect to a combined federal and state income tax rate of
36%. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the number of shares of common
stock indicated in the table.
When reviewing the following tables you should consider the following:
. The final column gives effect to the sale of an additional 1,247,175
shares in the conversion, which may be issued without any further
notice if FinPro increases its appraisal to reflect the results of
this offering or changes in the financial condition or results of
operations of Berkshire Bank or changes in market conditions after the
date of the appraisal. See "The Conversion--Stock Pricing and Number
of Shares to be Issued."
. Since funds on deposit at Berkshire Bank may be withdrawn to purchase
shares of common stock, the amount of funds available for investment
will be reduced by the amount of withdrawals for stock purchases. The
pro forma tables do not reflect withdrawals from deposit accounts.
29
<PAGE>
. Historical per share amounts have been computed as if the shares of
common stock expected to be issued in the conversion had been
outstanding at January 1, 1999. However, neither historical nor pro
forma stockholders' equity has been adjusted to reflect the investment
of the estimated net proceeds from the sale of the shares in the
conversion, the additional employee stock ownership plan expense or
the proposed stock-based incentive plan.
. Pro forma stockholders' equity ("book value") represents the
difference between the stated amounts of Berkshire Bank's assets and
liabilities. The amounts shown do not reflect the liquidation
account, which will be established for the benefit of eligible
depositors as of September 30, 1999 and September 30, 1998, or the
federal income tax consequences of the restoration to income of
Berkshire Bank's special bad debt reserves for income tax purposes,
which would be required in the unlikely event of liquidation. See
"Federal and State Taxation of Income" and "The Conversion--Effects of
Conversion to Stock Form." The amounts shown for book value do not
represent fair market values or amounts available for distribution to
stockholders in the unlikely event of liquidation.
. The amounts shown as pro forma stockholders' equity per share do not
represent possible future price appreciation or depreciation of
Berkshire Hills' common stock.
. The amounts shown do not account for the shares to be reserved for
issuance upon the exercise of stock options that may be granted under
the proposed stock-based incentive plan, which requires stockholder
approval at a meeting following the conversion.
The following pro forma data, which are based on Berkshire Bancorp's and
Berkshire Bank's capital at December 31, 1999 and net income for the year ended
December 31, 1999 on a consolidated basis, may not represent the actual
financial effects of the conversion or the operating results of Berkshire Hills
after the conversion. The pro forma data rely exclusively on the assumptions
outlined above. The pro forma data does not represent the fair market value of
Berkshire Hills' common stock, the current fair market value of Berkshire Bank's
or Berkshire Bancorp's assets or liabilities, or the amount of money that would
be available for distribution to stockholders if Berkshire Hills is liquidated
after the conversion.
The following tables assume that Berkshire Hills Foundation is funded as
part of the conversion and therefore gives effect to the issuance of authorized
but unissued shares of Berkshire Hills common stock to Berkshire Hills
Foundation. The valuation range accounts for the dilutive impact of the
issuance of shares to Berkshire Hills Foundation.
30
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1999
-----------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
------------- --------------- --------------
6,145,500 8,314,500 9,561,675
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
------------- --------------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Gross proceeds ................................................................ $ 61,455 $ 83,145 $ 95,617
Plus: shares issued to the foundation (equal to 8% of the shares
sold in the conversion) .................................................... 4,916 6,652 7,649
-------- -------- --------
Pro forma market capitalization ............................................... $ 66,371 $ 89,797 $103,266
======== ======== ========
Gross proceeds ................................................................ $ 61,455 $ 83,145 $ 95,617
Less: estimated expenses ..................................................... (2,361) (2,658) (2,829)
-------- -------- --------
Estimated net proceeds ........................................................ 59,094 80,487 92,788
Less: common stock acquired by employee stock ownership plan ................. (5,310) (7,184) (8,261)
Less: common stock to be acquired by stock-based incentive plan .............. (2,655) (3,592) (4,131)
-------- -------- --------
Net investable proceeds .................................................... $ 51,129 $ 69,711 $ 80,396
======== ======== ========
Pro Forma Net Income:
Number of shares used to calculate pro forma net income per share (1) ......... 6,141,567 8,309,179 9,555,555
========= ========= =========
Pro forma net income (2):
Historical ................................................................. $ 5,623 $ 5,623 $ 5,623
Pro forma income on net investable proceeds ................................ 1,958 2,670 3,079
Less: pro forma employee stock ownership plan adjustments (3) ............. (227) (307) (352)
Less: pro forma stock-based incentive plan adjustments (4) ................ (340) (460) (529)
-------- -------- --------
Pro forma net income .................................................... $ 7,014 $ 7,526 $ 7,821
======== ======== ========
Pro forma net income per share (2):
Historical ................................................................. $ 0.92 $ 0.68 $ 0.59
Pro forma income on net investable proceeds ................................ 0.32 0.32 0.32
Less: pro forma employee stock ownership plan adjustments (3) ............. (0.04) (0.04) (0.04)
Less: pro forma stock-based incentive plan adjustments (4) ................ (0.06) (0.06) (0.06)
-------- -------- --------
Pro forma net income per share (5) ...................................... $ 1.14 $ 0.90 $ 0.81
======== ======== ========
Pro Forma Stockholders' Equity:
Number of shares used to calculate pro forma stockholders' equity
per share .................................................................. 6,637,140 8,979,660 10,326,611
========= ========= ==========
Pro forma stockholders' equity (book value) (2):
Historical ................................................................. $ 88,352 $ 88,352 $ 88,352
Estimated net proceeds ..................................................... 59,094 80,487 92,788
Plus: tax benefit of the contribution to the foundation .................... 1,770 2,395 2,753
Less: common stock acquired by the employee stock ownership plan ........... (5,310) (7,184) (8,261)
Less: common stock acquired by stock-based incentive plan (4) .............. (2,655) (3,592) (4,131)
-------- -------- --------
Pro forma stockholders' equity (5) ...................................... $141,251 $160,458 $171,501
======== ======== ========
Pro forma stockholders' equity per share (2):
Historical ................................................................. $13.31 $9.84 $ 8.56
Estimated net proceeds ..................................................... 8.90 8.96 8.99
Plus: tax benefit of the contribution to the foundation .................... 0.27 0.27 0.27
Less: common stock acquired by the employee stock ownership plan ........... (0.80) (0.80) (0.80)
Less: common stock acquired by stock-based incentive plan (4) .............. (0.40) (0.40) (0.40)
-------- -------- --------
Pro forma stockholders' equity per share ................................ $21.28 $17.87 $16.62
======== ======== ========
Offering price as a percentage of pro forma stockholders' equity
per share .................................................................. 46.99% 55.96% 60.17%
======== ======== ========
Offering price as a multiple of pro forma net income per share ................ 8.77x 11.11x 12.35x
======== ======== ========
</TABLE>
31
<PAGE>
- ---------------------------------
(1) The following table shows the calculations used to arrive at the number of
shares used to calculate pro forma net income per share.
<TABLE>
<CAPTION>
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
------------ ------------ ------------
<S> <C> <C> <C>
Shares sold in the conversion............ 6,145,500 8,314,500 9,561,675
Shares issued to the foundation.......... 491,640 665,160 764,934
---------- ---------- ----------
Total shares outstanding................. 6,637,140 8,979,660 10,326,609
Less: Full employee stock ownership
plan adjustment....................... (530,971) (718,373) (826,129)
Plus: Employee stock ownership shares
committed to be declared.............. 35,398 47,892 55,075
---------- ---------- ----------
Number of shares used to calculated
pro forma net income per share........ 6,141,567 8,309,179 9,555,555
</TABLE>
(2) Does not give effect to the non-recurring expense that will be recognized in
2000 as a result of the contribution of common stock to Berkshire Hills
Foundation. The following table shows the estimated after-tax expense
associated with the contribution to the foundation, as well as pro forma net
income and pro forma net income per share assuming the contribution to the
foundation was expensed during the periods presented. The pro forma data
assumes that Berkshire Hills will realize 100% of the income tax benefit as
a result of the contribution to the foundation based on a 36% tax rate. The
realization of the tax benefit is limited annually to 10% of Berkshire
Hills' annual taxable income. However, for federal and state tax purposes,
Berkshire Hills can carry forward any unused portion of the deduction for
five years following the year in which the contribution is made.
<TABLE>
<CAPTION>
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
-------------- -------------- --------------
6,145,500 8,314,500 9,561,675
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
-------------- -------------- --------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
After-tax expense of contribution to foundation:
Year ended December 31, 1999 ......................................... $3,146 $4,257 $4,896
Pro forma net income:
Year ended December 31, 1999 ......................................... 3,868 3,269 2,925
Pro forma net income per share:
Year ended December 31, 1999 ......................................... 0.63 0.39 0.31
</TABLE>
(3) Assumes that the employee stock ownership plan will acquire an amount of
stock equal to 8% of the shares of common stock issued in the conversion.
Shares purchased are assumed to be purchased at $10.00 per share. The
employee stock ownership plan will borrow the funds used to acquire these
shares from a subsidiary to be established by Berkshire Hills. The
subsidiary will receive these funds from the net proceeds from the
conversion retained by Berkshire Hills. The amount of this borrowing, which
will have an interest rate equal to the prime rate as published in The Wall
Street Journal, which was 8.5% at December 31, 1999, has been reflected as a
reduction from gross proceeds to determine estimated net investable
proceeds. Berkshire Bank intends to make contributions to the employee
stock ownership plan in amounts at least equal to the principal and interest
requirement of the debt. As the debt is paid down, stockholders' equity
will be increased. Berkshire Bank's payment of the employee stock ownership
plan debt is based upon equal installments of
32
<PAGE>
principal over a 15-year period, assuming a combined federal and state
income tax rate of 36%. Interest income earned by Berkshire Hills on the
loan to the employee stock ownership plan offsets the interest paid on the
loan by Berkshire Bank. No reinvestment is assumed on proceeds contributed
to fund the employee stock ownership plan. Applicable accounting principles
require that compensation expense for the employee stock ownership plan be
based upon shares committed to be released and that unallocated shares be
excluded from earnings per share computations. The valuation of shares
committed to be released would be based upon the average market value of the
shares during the year, which, for purposes of this calculation, was assumed
to be equal to the $10.00 per share purchase price. See "Management of
Berkshire Bank--Benefits--Employee Stock Ownership Plan."
(4) Assumes that the stock-based incentive plan will acquire an amount of stock
equal to 4% of the common stock issued in the conversion for award to key
employees and directors. In calculating the pro forma effect of the stock-
based incentive plan, it is assumed that the required stockholder approval
has been received, that the shares were acquired by the stock-based
incentive plan at the beginning of the respective period in open market
purchases at the $10.00 per share purchase price, that 20% of the amount
contributed was an amortized expense during the period, that the combined
federal and state income tax rate is 36%, and that stock options which may
be issued under the stock-based incentive plan are not granted or exercised.
The issuance of authorized but unissued shares of the common stock instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 3.85%.
For purposes of this table, shares issued under the stock-based incentive
plan vest 20% per year and compensation expense is recognized on a straight-
line basis over each vesting period. If the fair market value per share is
greater than $10.00 per share on the date shares are awarded under the
stock-based incentive plan, total stock-based incentive plan expense would
be greater. The total estimated stock-based incentive plan expense was
multiplied by 20%, which is the total percent of shares for which expense is
recognized in the first year.
The following table shows the estimated pro forma net income and
stockholders' equity per share if shares for the stock-based incentive plan
were authorized but unissued shares instead of repurchased shares. The table
also shows the estimated pre-tax stock-based incentive plan expense.
<TABLE>
<CAPTION>
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
--------------- --------------- ---------------
6,145,500 8,314,500 9,561,675
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
--------------- --------------- ---------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income per share:
Year ended December 31, 1999 ...................................... $ 1.11 $ 0.88 $ 0.80
Pro forma stockholders' equity per share:
At December 31, 1999 .............................................. 20.46 17.18 15.97
Pre-tax stock-based incentive plan expense:
Year ended December 31, 1999 ...................................... 2,655 3,592 4,131
</TABLE>
(5) In calculating the pro forma effect of the stock-based incentive plan, no
effect has been given for any shares that may be reserved for issuance upon
the exercise of stock options that may be granted under the stock-based
incentive plan. The number of options available under the stock-based
incentive plan will be equal to 10% of the number of shares issued in the
conversion. The issuance of authorized but unissued shares of common stock
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 9.09%.
33
<PAGE>
The following table shows the estimated pro forma net income and
stockholders' equity per share if shares for stock issued as a result of the
exercise of stock options were authorized but unissued shares instead of
repurchased shares.
<TABLE>
<CAPTION>
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
-------------- -------------- --------------
6,145,500 8,314,500 9,561,675
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
-------------- -------------- --------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income per share:
Year ended December 31, 1999 ..................... $ 1.03 $ 0.82 $ 0.74
Pro forma stockholders' equity per share:
At December 31, 1999 ............................. 20.26 17.15 16.01
</TABLE>
34
<PAGE>
COMPARISON OF INDEPENDENT VALUATION AND
PRO FORMA FINANCIAL INFORMATION WITH AND WITHOUT THE FOUNDATION
As set forth in the following table, if Berkshire Hills Foundation is not
established and funded as part of the conversion, FinPro estimates that the pro
forma valuation of Berkshire Hills and Berkshire Bank would be greater than if
the foundation is included, and would result in an increase in the amount of
common stock offered for sale in the conversion. If the foundation is not
established, there is no assurance that the appraisal prepared at that time of
conversion would conclude that the pro forma market value of Berkshire Hills and
Berkshire Bank would be the same as the estimate set forth in the table below.
Any appraisal prepared at the time of conversion would be based on the facts and
circumstances existing at that time, including, among other things, market and
economic conditions.
The information presented in the following table is for comparative purposes
only. It assumes that the conversion was completed at December 31, 1999, based
on the assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
At the Maximum,
At the Minimum of At the Maximum of as Adjusted, of
Estimated Valuation Estimated Valuation Estimated Valuation
Range Range Range
------------------------ --------------------------- -----------------------
With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ------------- ------------ ----------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Estimated pro forma valuation (1) .............. $ 61,455 $ 69,275 $ 83,145 $ 93,725 $ 95,617 $107,784
Pro forma market capitalization ................ 66,371 69,275 89,797 93,725 103,266 107,784
Total assets ................................... 894,550 900,138 913,757 921,317 924,800 933,495
Total liabilities .............................. 756,360 756,360 756,360 756,360 756,360 756,360
Pro forma stockholders' equity ................. 141,251 146,839 160,458 168,018 171,501 180,196
Pro forma net income ........................... 7,014 7,272 7,526 7,874 7,821 8,221
Pro forma stockholders' equity per share ....... 21.28 21.19 17.87 17.93 16.62 16.72
Pro forma net income per share ................. 1.14 1.13 0.90 0.90 0.81 0.81
Pro Forma Pricing Ratios:
Offering price as a percentage of
pro forma stockholders' equity ........... 46.99% 47.19% 55.96% 55.77% 60.17% 59.81
Offering price as a multiple of pro
forma net income per share ............... 8.77 8.85 11.11 11.11 12.35 12.35
Offering price to assets ................. 7.42 7.70 9.83 10.17 11.17 11.55
Pro Forma Financial Ratios:
Return on assets (annualized) ............ 0.78 0.81 0.82 0.85 0.85 0.88
Return on stockholders' equity
(annualized) ............................. 4.97 4.95 4.69 4.69 4.56 4.56
Stockholders' equity to total assets ..... 15.79 16.31 17.56 18.24 18.54 19.30
</TABLE>
- -------------------------
(1) Based on independent valuation prepared by FinPro as of March 8, 2000.
35
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income for each of the years in the
three year period ended December 31, 1999 have been audited by Wolf & Company,
P.C., independent public accountants. The report of Wolf & Company, P.C. on
these Consolidated Statements of Income appears on page F-2 of this prospectus.
These statements should be read in conjunction with the Consolidated Financial
Statements and Notes and with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ----------- -------------
(In thousands)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans............................................ $52,522 $46,449 $41,514
Interest and dividends on securities.................................. 5,595 5,392 6,387
Interest on short-term investments and other investments.............. 351 654 522
------- ------ ------
Total interest and dividend income.............................. 58,468 52,495 48,423
------- ------ ------
Interest expense:
Interest on deposits.................................................. 23,848 22,601 21,564
Interest on Federal Home Loan Bank advances........................... 2,796 1,214 394
Interest on securities sold under agreements to repurchase............ 278 367 332
------- ------ ------
Total interest expense ......................................... 26,922 24,182 22,290
------- ------ ------
Net interest income...................................................... 31,546 28,313 26,133
Provision for loan losses................................................ 3,030 2,055 1,477
------- ------ ------
Net interest income, after provision for loan losses..................... 28,516 26,258 24,656
------- ------ ------
Other income:
Customer service fees................................................. 1,333 1,180 1,089
Trust department fees................................................. 1,730 1,154 1,006
Loan servicing fees................................................... 342 234 345
Gain on sales and dispositions of securities, net..................... 491 425 2,653
Gain on sale of other real estate..................................... -- 119 --
Loss on sale of equipment............................................. (30) -- --
Miscellaneous......................................................... 432 181 512
------- ------ ------
Total other income.............................................. 4,298 3,293 5,605
------- ------ ------
Operating expenses:
Salaries and employee benefits........................................ 13,767 11,842 12,305
Occupancy and equipment............................................... 4,152 3,591 3,483
Data processing....................................................... 1,493 1,204 1,298
Charitable contributions.............................................. -- 200 2,488
Foreclosed real estate, net........................................... (8) 54 766
Office supplies....................................................... 687 930 1,006
Professional fees..................................................... 869 895 1,007
Advertising........................................................... 599 792 921
Amortization of goodwill.............................................. 549 259 286
Other general and administrative expenses............................. 3,088 2,592 2,506
------- ------ ------
Total operating expenses........................................ 25,196 22,359 26,066
------- ------ ------
Income before income taxes............................................... 7,618 7,192 4,195
Provision for income taxes............................................... 1,995 2,768 1,692
------- ------ ------
Net income...................................................... $5,623 $4,424 $2,503
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Information" and the Consolidated Financial Statements
and Notes appearing elsewhere in the prospectus. In addition to historical
information, the following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward looking statements as a
result of certain factors, including those discussed in "Risk Factors,"
contained elsewhere in this prospectus.
General
Berkshire Bancorp owns all of the outstanding common stock of Berkshire Bank.
Berkshire Bancorp does not transact any business other than through Berkshire
Bank. Berkshire Bank's results of operations depend primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits and borrowings. Berkshire
Bank also generates non-interest income primarily from fees charged on
customers' accounts and fees earned on its trust services. Gains on the sales
of securities is another source of non-interest income. Berkshire Bank's non-
interest expenses primarily consist of employee compensation and benefits,
occupancy expense, advertising and other operating expenses. Berkshire Bank's
results of operations are also affected by general economic and competitive
conditions, notably changes in market interest rates, government policies and
regulations. Berkshire Bank exceeded all of its regulatory capital requirements
at December 31, 1999.
Forward Looking Statements
This prospectus contains forward looking statements that are based on
assumptions and describe future plans, strategies, and expectations of Berkshire
Bank and Berkshire Hills. These forward looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. Berkshire Bank's and 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 Bank and Berkshire Hills and their
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 Bank's and Berkshire Hills' market area and
changes in relevant accounting principles. These risks and uncertainties should
be considered in evaluating forward looking statements and undue reliance should
not be placed on such statements. Berkshire Bank and Berkshire Hills do not
undertake--and specifically disclaim 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.
Operating Strategy
Berkshire Bank is an independent, community-oriented savings bank, delivering
quality customer service and offering a wide range of deposit, loan and
investment products to its customers. In recent years, Berkshire Bank's
strategy has been to enhance profitability through controlled balance sheet
growth by emphasizing the origination of real estate mortgages, commercial
loans, home equity loans and automobile loans, increasing sources of noninterest
income and by improving operating efficiencies while managing its capital
position and limiting its credit and interest rate risk exposure. To accomplish
these objectives, Berkshire Bank has sought to:
. Operate as a full service community bank by expanding the services and
products it offers.
. Provide superior customer service and innovative products by expanding
delivery systems through the opening of new branch offices, increasing
the functionality of its ATM network and expanding the capability of
its call center.
37
<PAGE>
. Increase fee income by broadening non-depository product offerings and
services, including expansion of its trust services, and expanding the
offering of insurance products through the insurance agency it is
currently in the process of establishing.
. Increase fee income through the sale of a portion of its indirect
automobile loan portfolio, while retaining the servicing rights.
. Continue to increase its emphasis on high quality commercial and
consumer loans to increase the yields earned on its overall loan
portfolio, without incurring unacceptable credit risk.
. Control credit risk by continuing to employ conservative underwriting
standards to minimize the level of new problem assets.
. Manage interest rate risk by emphasizing investments in shorter-term
loans and investment securities.
. Invest primarily in debt instruments and money market type equity
investments to provide adequate liquidity, to meet cash flow needs and
to earn a reasonable return on investment.
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets increased $61.4 million, or 7.9%, to $841.7 million at
December 31, 1999 from $780.3 million at December 31, 1998, primarily due to
growth in loans. Net loans increased $66.4 million, or 11.1%, to $665.6 million
from $599.2 million, primarily due to a $36.6 million, or 21.2%, increase in
consumer loans, primarily automobile loans, to $208.7 million at December 31,
1999 from $172.2 million at December 31, 1998, due to increased originations.
The growth in the automobile portfolio was offset by sales of $37.3 million of
automobile loans in the second half of fiscal 1999 to bolster Berkshire Bank's
liquidity position. Loan growth was also due to an increase in one- to four-
family real estate loans of $24.6 million, or 11.2%, to $245.2 million from
$220.6 million, due primarily to increased refinancing activity due to a lower
interest rate environment in 1999. Commercial loans also increased $12.1
million, or 9.0%, to $146.2 million at December 31, 1999 from $134.1 million at
December 31, 1998, due to aggressive marketing efforts. These increases were
offset by a $6.1 million, or 7.6%, decrease in commercial real estate, multi-
family real estate and construction loans from a total of $79.8 million at
December 31, 1998 to $73.7 million at December 31, 1999.
The growth in loans was offset, in part, by a decrease in the securities
portfolio of $6.2 million, or 5.0%, to $116.0 million from $122.1 million at
December 31, 1998, as the funds which had been received from the purchase of the
three Fleet branch offices in August 1998 and which were temporarily invested in
short-term securities, were used to support loan growth. Berkshire Bank's net
loans to assets ratio at December 31, 1999 was 79.08% compared to 76.79% at
December 31, 1998.
Nonperforming assets totaled $3.1 million at December 31, 1999 compared to
$3.9 million at December 31, 1998, a decrease of $827,000, or 21.3%. This
decrease was primarily due to a $1.1 million decrease in nonaccruing commercial
real estate loans and an $822,000 decrease in nonaccruing one- to four-family
real estate loans, offset by a $960,000 increase in nonaccruing commercial loans
and a $277,000 increase in consumer loans.
Total interest-bearing liabilities increased $57.9 million, or 9.4%, due to
increased deposits and Federal Home Loan Bank advances. Total deposits increased
$33.6 million, or 5.2%, to $680.8 million at December 31, 1999 from $647.1
million at December 31, 1998, due primarily to an increase in money market
deposits, particularly from commercial entities and municipalities. Their
balances increased $23.0 million, or 32.9%, to $92.7 million at December 31,
1999 from $69.8 million at December 31, 1998 due to increased marketing efforts
and continuing growth of the government banking program established during 1998.
Certificates of deposit increased $4.6 million, or 1.6%, to $295.3 million from
$290.7 million, due primarily to increased marketing activities in the fourth
quarter of 1999. Regular savings accounts, including escrow accounts, also
increased by $6.8 million, or 4.9%, to $145.5 million from $138.7 million.
Slightly offsetting these increases was a decline in
38
<PAGE>
non-interest bearing checking accounts of $762,000. Federal Home Loan Bank
advances increased $29.3 million, or 99.2%, to $58.9 million from $29.6 million
at December 31, 1998, and were used primarily to fund loan growth. Retail
repurchase agreements decreased $5.9 million, or 84.0%, to $1.1 million at
December 31, 1999 from $7.0 million at December 31, 1998 due to Berkshire Bank's
efforts to encourage its retail repurchase agreement customers to switch to
money market accounts.
Total retained earnings was $88.4 million at December 31, 1999 compared to
$84.2 million at December 31, 1998, an increase of $4.2 million, or 4.9%,
primarily due to net income of $5.6 million, offset by a decline in net
accumulated unrealized gains on available for sale securities of $1.5 million.
The decrease in the unrealized gains on securities occurred due to market
declines in Berkshire Bank's equity portfolio consisting primarily of bank,
financial and industrial stocks, which experienced greater market declines than
other sectors of the overall market.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased $142.9 million, or 22.4%, to $780.3 million at
December 31, 1998 from $637.3 million at December 31, 1997. This increase was
primarily attributable to an increase in Berkshire Bank's net loan portfolio of
$107.4 million, or 21.9%, to $599.2 million at December 31, 1998 from $491.7
million at December 31, 1997, primarily due to the addition of three new
automobile dealers to Berkshire Bank's indirect automobile loan program whose
originations significantly contributed to an increase in consumer loans of $55.5
million, or 47.6%, to $172.2 million at December 31, 1998 from $116.7 million at
December 31, 1997. The increase in loan growth was also due to the purchase of
three local branch offices from Fleet Bank in August 1998 which resulted in the
acquisition of $16.8 million in loans, primarily commercial and commercial real
estate loans. Increased marketing efforts also contributed to the $22.7
million, or 20.4%, increase in commercial loans from $111.4 million at December
31, 1997 to $134.1 million at December 31, 1998. Commercial real estate loans
increased $10.3 million, or 25.0%, from $41.3 million at December 31, 1997 to
$51.6 million at December 31, 1998. Residential real estate loans also
increased by $18.3 million, or 9.1%, in 1998 to $220.6 million from $202.3
million in 1997, due to increased refinancings due to a lower interest rate
environment. Loan growth was primarily funded by deposits purchased in
connection with the acquisition of the three branches from Fleet Bank, Federal
Home Loan Bank advances and deposit growth.
The securities portfolio also increased by $11.1 million, or 10.0%, to
$122.1 million at December 31, 1998 from $111.0 million at December 31, 1997,
primarily due to the purchase of short-term securities, primarily collateralized
mortgage obligations (both agency and private label) and corporate bonds and
notes. Security purchases were funded by deposits acquired from the purchase of
the Fleet branches.
Nonperforming assets totaled $3.9 million at December 31, 1998 compared to
$2.5 million at December 31, 1997, an increase of $1.4 million, or 54.3%. This
increase was primarily due to a $728,000, or 216.7%, increase in nonaccruing
commercial real estate loans and a $649,000, or 104.2%, increase in nonaccruing
one- to four-family real estate loans from December 31, 1997 to December 31,
1998.
Total interest-bearing liabilities increased $112.7 million, or 22.5%, due
to increased deposits and Federal Home Loan Bank advances. Total deposits
increased $108.1 million, or 20.1%, to $647.1 million at December 31, 1998 from
$539.1 million at December 31, 1997. This growth was primarily due to the
assumption of $69.7 million in deposits through the acquisition of the three
branches in 1998. The increased emphasis on commercial deposits, generally due
to additional relationships generated with Berkshire Bank's commercial lending
borrowers, and the establishment of government banking in 1998 contributed to
the increase in deposits. Deposit growth was spread relatively evenly among the
various deposit categories as demand deposit accounts grew by $20.0 million, or
40.2%, NOW checking accounts grew by $26.7 million, or 51.8%, money market
accounts increased by $17.6 million, or 33.7%, savings accounts rose by $13.7
million, or 11.0% and certificates of deposit grew by $30.1 million, or 11.5%.
Advances from the Federal Home Loan Bank of Boston increased $22.7 million, or
330.1%, to $29.6 million at December 31, 1998 from $6.9 million at December 31,
1997 and were used to fund the loan growth.
39
<PAGE>
Total retained earnings was $84.2 million at December 31, 1998 compared to
$75.3 million at December 31, 1997, an increase of $8.9 million, or 11.8%. The
increase in equity was primarily attributable to net accumulated unrealized
gains on available for sale securities of $4.5 million and net income of $4.4
million.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Net Income. Net income increased $1.2 million, or 27.1%, to $5.6 million
for 1999 from $4.4 million for the previous year, primarily due to an increase
in net interest income of $3.2 million, or 11.4%, an increase in non-interest
income, of $1.0 million, and a decrease in income taxes of $773,000, or 27.9%,
to $2.0 million for 1999 from $2.8 million for the previous year. Also, non-
interest expense increased $2.8 million, or 12.7%, to $25.2 million for 1999
from $22.4 million for 1998, due to additional accruals for certain items, and
an increase in the provision for loan losses of $975,000 million, or 47.5%, to
$3.0 million due to loan growth, in particular, growth in consumer loans.
Berkshire Bancorp's efficiency ratio was 71.27% for 1999 compared to 71.71% for
1998.
Net Interest Income. Net interest income increased by $3.2 million, or
11.4%, to $31.5 million for 1999 from $28.3 million for 1998. Total interest
and dividend income rose $6.0 million, or 11.4%, to $58.5 million for 1999 from
$52.5 million for 1998, offset in part by a $2.7 million, or 11.3%, increase in
interest expense to $26.9 million for 1999 from $24.2 million for 1998.
The increase in interest income was due to a $93.6 million, or 14.0%,
increase in average interest earning assets to $764.2 million from $670.6
million, partially offset by an 18 basis point decrease in the average yield on
interest earning assets to 7.65% for 1999 from 7.83% for 1998 due to increased
competition and a lower interest rate environment. Interest and fees on loans
rose $6.1 million, or 13.1%, to $52.5 million for 1999 from $46.4 million in
1998, primarily due to increases in one- to four-family real estate loans and
consumer loans, partially offset by a competitive pricing environment which
caused management to more aggressively price such loans and resulted in the
average yield on the loan portfolio decreasing to 8.21% for 1999 from 8.49% for
1998. Investment security income, including dividends on Federal Home Loan Bank
stock and Savings Bank Life Insurance stock rose $203,000, or 3.8%, to $5.6
million from $5.4 million for 1998 as average balances increased $6.8 million,
or 6.1%, to $119.2 million from $112.3 million for 1998. The higher balances
were offset by a 8 basis point decline on the average rate earned on investments
to 4.70% for 1999 from 4.78% for 1998, due to investment securities in lower-
yielding, higher liquidity securities in preparation for the Year 2000
transition.
Interest expense increased $2.7 million, or 11.3%, to $26.9 million for
1999 from $24.2 million for 1998, due to a $1.2 million, or 5.5%, increase in
interest expense on deposits and a $1.6 million, or 130.3%, increase in interest
expense on Federal Home Loan Bank advances. The Federal Home Loan Bank interest
expense includes an additional $277,000, which resulted from additional Federal
Home Loan Bank interest accruals. The increase in interest expense was due to a
$69.1 million, or 13.2%, increase in average interest bearing deposit balances
to $592.1 million for the year from $523.1 million for the previous year. The
increased deposit balances for 1999 are due to the assumption of $69.7 million
of deposits associated with the purchase of three Fleet branches in August 1998,
an increased emphasis on attracting commercial and governmental deposit accounts
and increased marketing efforts in late 1999. The increase in the average
balance on interest-bearing deposits was offset by a 29 basis point decrease in
the average rate paid on interest-bearing deposit accounts for 1999 to 4.03%,
from 4.32% for 1998. Average Federal Home Loan Bank borrowings increased $27.0
million, or 112.8%, to $51.0 million for 1999 from $23.9 million for 1998. Also,
a number of lower cost borrowings repriced into higher cost obligations
throughout the year from the increase in market interest rates resulting in a
higher effective cost of borrowings and an additional $100,000 in interest
expense. The average rate paid for 1999 was 5.49%, compared to 5.07% for 1998.
The additional advances primarily were used to fund loan growth.
Provision for Loan Losses. The provision for loan losses increased
$975,000, or 47.4%, for 1999 to $3.0 million from $2.1 million to reflect the
growth in the loan portfolio and, in particular, the increase in the average
balance of commercial and consumer loans, which generally bear a greater degree
of risk than one- to four-family mortgage loans. The increase in the provision
also reflects management assessment of increased charge-offs
40
<PAGE>
which increased to $2.4 million for 1999 from $812,000 the previous year due
primarily to increased charge-offs of commercial loans which increased by
$974,000, or 416.2%, and increases in consumer loan charge-offs of $420,000, or
135.1%. The ratio of net charge-offs to interest earning loans was 0.31% for
1999 and 0.09% for 1998. At December 31, 1999 and December 31, 1998, the
allowance for loan losses was $8.5 million and $7.6 million, respectively, which
represented 300.39% of nonperforming loans and 1.27% of total loans at December
31, 1999, compared to 217.45% of nonperforming loans and 1.25% of total loans at
December 31, 1998.
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for estimated loan losses based on management's evaluation of the
collectibility of the loan portfolio. Management assesses the adequacy of the
allowance for loan losses based on known and inherent risks in the loan
portfolio and upon management's continuing analysis of the factors underlying
the quality of the loan portfolio. While management believes that, based on
information currently available, Berkshire Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that Berkshire Bank's level of allowance for loan losses
will be sufficient to cover future loan losses incurred by Berkshire Bank or
that future adjustments to the allowance for loan losses will not be necessary
if economic and other conditions differ substantially from the economic and
other conditions used by management to determine the current level of the
allowance for loan losses. Management may increase its level of allowance for
loan losses as a percentage of total loans and non-performing loans if the level
of commercial real estate, multi-family, commercial, construction and
development or consumer lending as a percentage of its total loan portfolio
increases. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Berkshire Bank's allowance for
loan losses. These agencies may require Berkshire Bank to provide additions to
the allowance based upon judgments different from management. See "Business of
Berkshire Bank--Lending Activities--Allowance for Loan Losses."
Noninterest Income. Non-interest income totaled $4.3 million for 1999 and
$3.3 million for 1998, an increase of $1.0 million, or 30.5%, due primarily to a
$576,000, or 49.9%, increase in trust fees to $1.7 million for 1999 from $1.2
million for 1998 of which $245,000 resulted from a one-time adjustment made in
connection with accounting for trust fees during 1999. The remainder of the
increase in trust fees primarily resulted from increased trust account activity
and revisions to the fee structure. Also contributing to the increase in non-
interest income was a $251,000 increase in other fee income, including ATM fees
and government banking advisory fees, an $89,000 increase in service charges on
checking accounts due to increased volume, and a $66,000 increase in gains on
the sale of securities.
Noninterest Expense. Noninterest expense increased $2.8 million, or 12.7%,
to $25.2 million for 1999, compared to $22.4 million for 1998, primarily due to
the increased expenses associated with the purchase of three branches in August
1998. The additional personnel required to staff the branches contributed to an
increase in other salary and benefit costs of $1.9 million. Additionally,
expense for the amortization of goodwill rose $290,000, or 112.0%, in 1999 due
to the purchase of the three branches. Also contributing to the increase in
noninterest expense was $285,000 in consulting expenses incurred in streamlining
Berkshire Bank's management information system and Year 2000 preparedness. Audit
and examination fees increased by $131,000 and salary expense increased
$170,000. In addition, severance costs were $189,000 for 1999 while there were
none for 1998. The increase in noninterest expense also reflects a $194,000
expense relating to the acceleration of depreciation on a branch office which
closed in April 2000.
Income Taxes. Income taxes for the year ending December 31, 1999 were $2.0
million, a decrease of $773,000, or 27.9%, from $2.8 million for the year ended
December 31, 1998. The effective tax rates for 1999 and 1998 were 26.2% and
38.5%, respectively. The lower effective tax rate for 1999 was attributable to
a projected $850,000 carryforward of the deduction in connection with the
establishment of Greater Berkshire Foundation, Inc. in 1997. Under the Internal
Revenue Code, Berkshire Bank may only deduct up to 10% of its consolidated
taxable income before the charitable contribution to any one year. The excess
of the deductible amount will be deductible over each of the five succeeding
taxable years, subject to a 10% limitation each year. In 1998, $381,000 of the
carryforward was utilized and approximately $545,000 of such carryforward
remains to be utilized. Additionally, Berkshire Bank booked approximately
$300,000 in federal tax credits in 1999, in connection with its application for
rehabilitating a historic firehouse in Pittsfield,
41
<PAGE>
Massachusetts, which contributed to lowering taxes. At the state level,
Greenland Development Corporation and Forward Development Corporation, two
wholly owned bank subsidiaries, utilized the remaining $1.5 million and $1.8
million, respectively, of their unused state net operating loss carryforwards
available at December 31, 1998.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income increased by $1.9 million, or 76.8%, from $2.5
million for 1997 to $4.4 million for 1998. The increase was primarily due to a
$2.2 million, or 8.3%, increase in net interest income and a decrease in
noninterest expense of $3.7 million, or 14.2%, partially offset by a decrease in
noninterest income of $2.3 million. The decrease in non-interest income was due
to a decrease in the gains on the sale or contribution of securities from $2.7
million for 1997 to $425,000 for 1998 due to the recognition of a $2.4 million
gain in 1997 resulting from the funding of Greater Berkshire Foundation, Inc. in
May 1997 with appreciated securities. The gain represents the excess of the
market value of the contributed securities over the cost basis of the securities
at the date of transfer. Greater Berkshire Foundation, Inc. was created in
connection with the merger of Berkshire County Savings Bank and Great Barrington
Savings Bank which were merged to form Berkshire Bank. Berkshire Bancorp's
efficiency ratio was 71.71% for 1998 compared to 89.62% for 1997.
Net Interest Income. Net interest income increased $2.2 million, or 8.3%,
to $28.3 million for 1998 from $26.1 million for 1997. This increase was
primarily due to a $72.5 million, or 12.1%, increase in the average balance of
interest-earning assets to $670.6 million for the year ended December 31, 1998
from $598.1 million for the year ended December 31, 1997. The increase in
interest income due to the higher average balance of interest-earning assets was
offset in part by a decline in the average yield on interest-earning assets of
27 basis points to 7.83% for 1998 from 8.10% for 1997 due primarily to a lower
interest rate environment. Total interest and dividend income increased $4.1
million, or 8.4%, to $52.5 million for the year ended December 31, 1998 from
$48.4 million for the year ended December 31, 1997. The increase in interest and
dividend income was due to a $4.9 million, or 11.9%, increase in interest and
fee income on loans to $46.4 million for the year ended December 31, 1998 from
$41.5 million for the prior year. The increase in interest income on loans was
due to an increase in the average balance of loans of $70.5 million, or 14.8%,
to $546.8 million for 1998 from $476.3 million for 1997 due to: (1) a higher
level of one- to four-family refinancings; (2) the addition of new automobile
dealers as indirect automobile lenders; and (3) the purchase of $16.8 million of
loans in connection with the branch purchases in 1998. The increase in interest
income from loans was partially offset by a 23 basis point decline in the
average yield to 8.49% from 8.72% due to a lower interest environment. Interest
and dividend on investment securities, including dividends on Federal Home Loan
Bank stock and Savings Bank Life Insurance stock, decreased $995,000, or 15.6%,
to $5.4 million for 1998 from $6.4 million for 1997 due to a 94 basis point
decrease in the average rate earned from 5.72% for 1997 to 4.78% for 1998 due to
the lower interest rate environment. The decrease in interest income and
dividends was offset, in part, by an increase in the average balance of
investment securities to $112.6 million for 1998 from $112.3 million for the
previous year due in part to additional investments with funds acquired in the
three branch purchases in 1998.
Interest expense increased $1.9 million, or 8.5%, to $24.2 million for 1998
from $22.3 million for 1997. The increase in interest expense was attributable
to a $1.0 million, or 4.8%, increase in interest on deposits and a $820,000
increase in interest on Federal Home Loan Bank advances. The increase in
interest expense on deposits was due to a higher average balance of interest-
bearing deposits of $35.8 million, or 7.4%, to $523.1 million for the year ended
December 31, 1998 from $487.3 million for the year ended December 31, 1997,
predominately in money market interest expense which increased $536,000. The
increase in interest expense due to the increase in deposits was partially
offset by an 11 basis point decrease in the average rate paid on deposits from
4.43% for 1997 to 4.32% for 1998 due, again, to the lower interest rate
environment. The increase in the interest expense of Federal Home Loan Bank
advances was due to a $16.9 million increase in the average balance to $23.9
million for 1998 from $7.0 million for 1997, offset by a 56 basis point decrease
in the average rate paid from 5.63% for 1997 to 5.07% for 1997. The additional
Federal Home Loan Bank advances were used primarily to fund loan growth.
Provision for Loan Losses. The provision for loan losses increased
$578,000, or 39.1%, to $2.1 million for 1998 from $1.5 million for 1997 as
Berkshire Bank recognized the need to increase its provision in response to the
42
<PAGE>
strong growth in loan balances. In determining the provision for 1998,
management considered the decrease in charge-offs from $2.3 million for 1997 to
$812,000 for 1998 and recoveries of previously charged-off loans, which amounted
to $268,000 for 1998 versus $594,000 for 1997. At December 31, 1998 and 1997,
the allowance for loan losses was $7.6 million and $6.1 million, respectively,
which represented 217.45% of non-performing loans and 1.25% of total loans at
December 31, 1998 compared to 281.91% of non-performing loans and 1.22% of total
loans at December 31, 1997.
Noninterest Income. Noninterest income totaled $3.3 million and $5.6
million for the years ended December 31, 1998 and 1997, respectively. The $2.3
decrease in noninterest income was attributable to the one-time gain of $2.4
million recognized on the donation of appreciated marketable equity securities
to Greater Berkshire Foundation, Inc. in May 1997. A decrease of $158,000 in
service fees on checking accounts contributed to this decrease as Berkshire
Bank's fee structure was realigned to the lower of the two merged institutions.
These decreases were partially offset by trust department fees, which rose
$148,000, or 14.7%, in 1998 over 1997 levels.
Noninterest Expense. Noninterest expense totaled $22.4 million for 1998, a
decrease of $3.7 million, or 14.2%, from $26.1 million for 1997. This decrease
was primarily attributable to higher expenses in 1997 due to merger-related
activities and to a decrease in charitable contributions of $2.3 million to
$200,000 in 1998 from $2.5 million in 1997. A donation of $2.5 million of
appreciated securities was made to Greater Berkshire Foundation, Inc. in 1997
while no contribution was made in 1998. Also contributing to the decrease in
noninterest expense was a $129,000, or 14.0%, decrease in advertising expense
to $792,000 for 1998 from $921,000 for 1997. Net foreclosed real estate
expenses declined $712,000 to $54,000 for 1998 from $766,000 for 1997 due to a
decrease in the amount of real estate owned. Additionally, the consolidation of
accounts resulted in an $83,000 decline in service charges paid from $265,000
for the year ended December 31, 1997 to $182,000 for the year ended December
31, 1998. Offsetting these decreases in noninterest expense were acquisition
expenses related to the August 1998 purchase of three local branch offices from
Fleet Bank totaling $585,000, including goodwill from the purchases, which is
being amortized over 15 years and amounted to $207,000 in 1998 and other items
relating to the purchase such as legal fees, equipment purchases, and system
conversion costs, which totaled $380,000.
Income Taxes. Income taxes increased $1.1 million, or 63.6%, to $2.8
million for 1998 from $1.7 million for 1997 resulting in effective tax rates of
38.5% and 40.3% for 1998 and 1997, respectively. The lower effective tax rate in
1998 was attributable to the utilization of $1.5 million, $498,000 and $14,000
of state net operating loss carryforwards at Greenland Development Corporation,
Forward Development Corporation and Woodland Realty, Inc., respectively, three
wholly owned subsidiaries of Berkshire Bank. The lower tax amount in 1997 was
partially attributable to the contribution of appreciated securities to Greater
Berkshire Foundation, Inc. Although common stock with a market value of $2.5
million was donated to Greater Berkshire Foundation, Inc. in 1997, only $682,000
was allowable as a deduction for tax purposes. In 1998, $381,000 of the carry
forward was utilized. Berkshire Bank anticipates that it will be able to fully
use the contribution carryover for the six-year period.
43
<PAGE>
Average Balances, Interest and Average Yields/Cost
The following table presents certain information for the years indicated
regarding average balances of assets and liabilities, as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the years indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the years presented. Average balances for the
1999 and 1998 years were derived from average daily balances. Average balances
for 1997 were derived from average monthly balances. The yields and rates
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
At For the Year Ended December 31,
December 31, -------------------------------
1999 1999
---------- -------------------------------
Average
Average Yield/
Balance Balance Interest Rate
---------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans (1).................................... $665,554 $639,517 $52,522 8.21%
Federal funds sold........................... 1,000 4,042 215 5.32
Investment securities........................ 110,098 113,929 5,351 4.70
Federal Home Loan Bank stock................. 3,843 3,193 181 5.67
Savings Bank Life Insurance stock............ 2,043 2,043 63 3.08
Interest-earning deposits.................... 341 1,470 136 9.25
-------- -------- ------- ----
Total interest-earning assets............. 782,879 764,194 58,468 7.65
Non-interest earning assets.................. 58,772 51,111
-------- --------
Total assets.............................. $841,651 $815,305
======== ========
Interest-bearing liabilities:
Deposits:
Money market accounts .................... $92,721 $84,971 3,169 3.73
NOW accounts.............................. 78,223 73,615 830 1.13
Savings accounts (2)...................... 145,486 142,193 4,366 3.07
Certificates of deposit................... 295,303 291,344 15,483 5.31
-------- -------- ------- ----
Total interest-bearing deposits..... 611,733 592,123 23,848 4.03
Federal Home Loan Bank advances........... 58,928 50,951 2,796 5.49
Repurchase agreements..................... 1,120 5,923 278 4.69
-------- -------- ------- ----
Total interest-bearing liabilities.. 671,781 648,997 26,922 4.15
Non-interest-bearing demand deposits...... 69,034 67,563
Other noninterest-bearing liabilities..... 12,484 12,396
-------- --------
Total liabilities................... 753,299 728,956
Equity.................................... 88,352 86,349
-------- --------
Total liabilities and equity........ $841,651 $815,305
======== ========
Net interest-earning assets............... $111,098 $115,197
======== ========
Net interest income....................... $31,546
=======
Interest rate spread...................... 3.50%
Interest margin (net interest income as a
percentage of total average interest-
earning assets)....................... 4.13%
Total average interest-earning assets to
total average interest-bearing
liabilities........................... 117.75%
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------
1998 1997
------------------------------ ---------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1).................................... $546,845 $46,449 8.49% $476,335 $41,514 8.72%
Federal funds sold........................... 9,336 498 5.33 6,450 324 5.02
Investment securities........................ 108,048 5,165 4.78 107,763 6,169 5.72
Federal Home Loan Bank stock................. 2,546 164 6.44 2,527 155 6.13
Savings Bank Life Insurance stock............ 2,043 63 3.08 2,043 63 3.08
Interest-earning deposits.................... 1,754 156 8.89 2,984 198 6.64
-------- ------- ---- -------- ------- ----
Total interest-earning assets............. 670,572 52,495 7.83 598,102 48,423 8.10
Non-interest earning assets.................. 30,933 27,977
-------- --------
Total assets.............................. $701,505 $626,079
======== ========
Interest-bearing liabilities:
Deposits:
Money market accounts .................... $62,043 2,173 3.50 $49,159 1,637 3.33
NOW accounts.............................. 60,039 1,165 1.94 50,696 998 1.97
Savings accounts (2)...................... 129,020 3,925 3.04 125,020 3,752 3.00
Certificates of deposit................... 271,959 15,338 5.64 262,379 15,177 5.78
-------- ------- ---- -------- ------- ----
Total interest-bearing deposits..... 523,061 22,601 4.32 487,254 21,564 4.43
Federal Home Loan Bank advances........... 23,941 1,214 5.07 7,001 394 5.63
Repurchase agreements..................... 7,446 367 4.93 6,498 332 5.11
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities.. 554,448 24,182 4.36 500,753 22,290 4.45
Non-interest-bearing demand deposits...... 55,585 45,218
Other noninterest-bearing liabilities..... 11,940 9,384
-------- --------
Total liabilities................... 621,973 555,355
Equity.................................... 79,532 70,724
-------- --------
Total liabilities and equity........ $701,505 $626,079
======== ========
Net interest-earning assets............... $116,124 $ 97,349
======== ========
Net interest income....................... $28,313 $26,133
======= =======
Interest rate spread...................... 3.47% 3.65%
Interest margin (net interest income as a
percentage of total average interest-
earning assets)...................... 4.22% 4.37%
Total average interest-earning assets to
total average interest-bearing
liabilities............................ 120.94% 119.44%
</TABLE>
- -----------------------------
(1) Average balances include nonaccrual loans.
(2) Includes mortgagors' escrow accounts.
44
<PAGE>
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the
interest income and interest expense of Berkshire Bank. The rate column shows
the effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes attributable to
changes in both rate and volume, which cannot be segregated, have been allocated
proportionately based on the absolute value of the change due to rate and the
change due to volume.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Compared to
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------- -------------------------
Rate Volume Net Rate Volume Net
------------- ----------- ---------- ------------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans....................................... $(1,581) $7,654 $6,073 $(1,077) $6,012 $4,935
Federal funds sold.......................... (1) (282) (283) 21 153 174
Investment securities....................... (103) 306 203 (1,012) 17 (995)
Interest-bearing deposits................... 6 (26) (20) 55 (97) (42)
------- ------ ------ ------- ------ ------
Total interest-earning assets............ (1,679) 7,652 5,973 (2,013) 6,085 4,072
------- ------ ------ ------- ------ ------
Interest-bearing liabilities:
Deposits:
Money market accounts.................... 149 847 996 88 448 536
NOW accounts............................. (560) 225 (335) (14) 181 167
Savings accounts......................... 37 404 441 52 121 173
Certificates of deposit ................. (913) 1,058 145 (385) 546 161
------- ------ ------ ------- ------ ------
Total deposits........................ (1,287) 2,534 1,247 (259) 1,296 1,037
Federal Home Loan Bank advances............. 107 1,475 1,582 (43) 863 820
Repurchase agreements....................... (16) (73) (89) (12) 47 35
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities.... (1,196) 3,936 2,740 (314) 2,206 1,892
------- ------ ------ ------- ------ ------
Increase (decrease) in net interest income..... $ (483) $3,716 $3,233 $(1,699) $3,879 $2,180
======= ====== ====== ======= ====== ======
</TABLE>
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Aspects of 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-
Chief Financial Officer, Executive Vice President-Senior Loan Officer, Executive
Vice President-Retail Banking and Executive Vice President-Commercial Lending.
The extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of Berkshire Bank.
45
<PAGE>
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.
Berkshire Bank's market risk also includes equity price risk. Berkshire
Bank's mutual fund and marketable equity securities portfolio had gross
unrealized gains of $28.4 million at December 31, 1999 and gross unrealized
losses of $501,000 which are included, net of taxes, in accumulated other
comprehensive income, a separate component of Berkshire Bank's equity. If equity
security prices decline due to unfavorable market conditions or other factors,
Berkshire Bank's equity would decrease.
Quantitative Aspects of Market Risk. 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
December 31, 1999, 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.
<TABLE>
<CAPTION>
Increase/
(Decrease) -----------------------------------------------
in Market At December 31, 1999
Interest Rates -----------------------------------------------
in Basis Points $ %
(Rate Shock) Amount Change Change
-------------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
200 $31,624 $ 78 0.24%
100 31,596 50 0.15
Static 31,546 -- --
(100) 31,318 (228) (0.72)
(200) 31,031 (515) (1.65)
</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
$228,000 and $515,000, 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
46
<PAGE>
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.
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 general 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. During years ended December 31, 1999 and 1998, Berkshire
Bank's loan originations totaled $280.4 million, and $277.7 million,
respectively. At December 31, 1999 and 1998, Berkshire Bank's investments in
mortgage- and asset-backed securities, U.S. Government and agency obligations
and corporate equity securities and debt obligations totaled $116.0 million and
$122.1 million, respectively. Berkshire Bank experienced a net increase in total
deposits of $33.6 million and $108.1 million for the years ended December 31,
1999 and 1998, respectively, primarily as a result of: (1) the assumption of
$69.7 million in deposits in connection with the acquisition of three branches
in 1998; (2) the increase in governmental and commercial deposits, in part due
to the establishment of the government banking program in 1998; and (3)
increased marketing efforts and special promotions. 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.
Outstanding commitments for all loans and unadvanced construction loans and
lines of credit totaled $117.4 million at December 31, 1999. Management of
Berkshire Bank anticipates that it will have sufficient funds available to meet
its current loan commitments. Certificates of deposit that are scheduled to
mature in one year or less from December 31, 1999 totaled $206.6 million.
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.
Berkshire Bank must satisfy various regulatory capital requirements
administered by the federal and state banking agencies including a risk-based
capital measure. The risk-based capital guidelines include both a definition of
capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories. At
December 31, 1999, Berkshire Bank exceeded all of its regulatory capital
requirements with Tier 1 capital to total assets of $63.9 million, or 7.91% of
average assets, which is above the required level of $32.3 million, or 4.0%, and
total capital to risk-weighted assets of $84.7 million, or 12.90% of risk-
weighted assets, which is above the required level of $52.5 million, or 8.0%.
Berkshire Bank is considered "well capitalized" under regulatory guidelines.
The capital from the conversion will significantly increase liquidity and
capital resources. Over time, the initial level of liquidity will be reduced as
net proceeds are used for general corporate purposes, including the
47
<PAGE>
funding of lending activities. Berkshire Bank's financial condition and results
of operations will be enhanced by the capital from the conversion, resulting in
increased net interest-earning assets and net income. However, due to the large
increase in equity resulting from the capital injection, return on equity will
be adversely impacted following the conversion. See "Risk Factors--Berkshire
Bank's lower than average return on equity may decrease the market price of the
common stock."
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this
prospectus 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.
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations and requires that an entity formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. This statement was amended by SFAS No. 137, "Accounting for
Derivatives and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." As a result, SFAS No. 133 will be effective on June 15,
2001 for Berkshire Hills. Management does not expect that the adoption of this
statement will have a material impact on Berkshire Hills' financial position or
results of operations.
BUSINESS OF BERKSHIRE BANCORP
Berkshire Bancorp is a mutual holding company that was created when
Berkshire County Savings Bank reorganized into the mutual holding company form
of organization in 1996. Berkshire Bancorp is registered with the Federal
Reserve Board as a bank holding company under the Bank Holding Company Act of
1956, as amended. Since its formation, Berkshire Bancorp has owned 100% of
Berkshire Bank's outstanding capital stock. After consummation of the
conversion, Berkshire Bancorp will cease to exist.
In addition to the capital stock of Berkshire Bank, Berkshire Bancorp's
assets consist of approximately $16,000 in cash and $80,000 in securities as of
December 31, 1999. Berkshire Bancorp is subject to regulation and supervision
by the Federal Reserve Bank and the Massachusetts Division of Banks. At the
present time, Berkshire Bancorp does not employ any persons other than certain
officers who are also officers of Berkshire Bank but uses the support staff of
Berkshire Bank from time to time.
48
<PAGE>
BUSINESS OF BERKSHIRE HILLS
General
Berkshire Hills was organized as a Delaware business corporation at the
direction of Berkshire Bank in January 2000 to become the holding company for
Berkshire Bank upon completion of the conversion. As a result of the conversion,
Berkshire Bank will be a wholly owned subsidiary of Berkshire Hills, which will
own all of the issued and outstanding capital stock of Berkshire Bank.
Business
Before the completion of the conversion, Berkshire Hills will not engage in
any significant activities other than of an organizational nature. Upon
completion of the conversion, Berkshire Hills' business activity will be the
ownership of the outstanding capital stock of Berkshire Bank and management of
the investment of offering proceeds retained from the conversion. In the
future, Berkshire Hills may acquire or organize other operating subsidiaries;
however, there are no current plans, arrangements, agreements or understandings,
written or oral, to do so.
Initially, Berkshire Hills will neither own nor lease any property but will
instead use the premises, equipment and other property of Berkshire Bank with
the payment of appropriate rental fees, as required by applicable law and
regulations.
Since Berkshire Hills will hold the outstanding capital stock of Berkshire
Bank after the conversion, the competitive conditions applicable to Berkshire
Hills will be the same as those confronting Berkshire Bank. See "Business of
Berkshire Bank--Competition."
BUSINESS OF BERKSHIRE BANK
General
Berkshire Bank is the product of the May 1, 1997 merger of Berkshire County
Savings Bank and Great Barrington Savings Bank, which at the time of the merger
were the two largest banks headquartered in Berkshire County, with assets of
$335.9 million and $282.9 million, respectively. Berkshire County Savings Bank
was incorporated in 1846 as a Massachusetts-chartered mutual savings bank. In
1996, Berkshire County Savings Bank converted to stock form as part of the
Berkshire Bancorp mutual holding company formation. Berkshire County Savings
Bank had six full-service banking offices at the time of the merger. Great
Barrington Savings Bank was incorporated in 1869 as a Massachusetts-chartered
mutual savings bank. While it offered commercial and trust services, its
business was primarily dependent on residential mortgage lending, primarily in
the southern portion of Berkshire County. It had five full-service banking
offices at the time of the merger.
Berkshire Bank is regulated by the Massachusetts Division of Banks and the
Federal Deposit Insurance Corporation. Berkshire Bank's deposits are insured to
the maximum allowable amount by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation and the Depositors Insurance Fund. Berkshire Bank has been
a member of the Federal Home Loan Bank System since 1973.
Berkshire Bank is a community bank that accepts retail deposits from the
general public in the areas surrounding its 14 banking offices and uses those
funds, together with funds generated from operations and borrowings, to
originate residential mortgage loans, commercial business and real estate loans
and consumer loans, primarily indirect automobile loans. Berkshire Bank
primarily holds the loans that it originates for investment, but sells some of
its loans, including automobile and fixed-rate mortgage loans, in the secondary
market, while generally retaining the servicing. See "--Lending Activities."
Berkshire Bank also invests in U.S. Government and agency securities, mortgage-
and asset-backed securities, including real estate mortgage investment conduits
and
49
<PAGE>
collateralized mortgage obligations, debt and equity securities and other
permissible investments. Berkshire Bank's revenues are derived principally from
the generation of interest and fees on loans originated and, to a lesser extent,
interest and dividends on its investment securities. Berkshire Bank's primary
sources of funds are deposits, principal and interest payments on loans and
investments and advances from the Federal Home Loan Bank of Boston.
Berkshire Bank currently offers savings bank life insurance. Berkshire
Bank intends to expand the offering of insurance products to its customers
and is currently in the process of establishing an insurance agency. On February
24, 2000, Berkshire Bank entered into an agreement with a third party vendor
whereby such vendor will assist Berkshire Bank in establishing its own insurance
agency and provide ongoing operational consulting and management services with
respect to the offering of insurance services. The agreement has an initial term
of four years with a total management fee of $325,000 and servicing fees based
upon a percentage of gross revenues.
Market Area
Berkshire Bank is headquartered in Pittsfield, Massachusetts, in Berkshire
County. Berkshire Bank's primary deposit gathering and lending areas are
concentrated in the communities surrounding its 14 banking offices located in
Berkshire County. However, Berkshire Bank also makes loans throughout western
Massachusetts, northern Connecticut, eastern New York and southern Vermont.
Berkshire County, the western-most county in Massachusetts, is
approximately two and one-half hours from both Boston and New York City.
Berkshire County borders Vermont, Connecticut and New York. Berkshire County
has experienced a shift in its economy as manufacturing jobs have been replaced
with service-related jobs, primarily in tourism, social service and health care.
Other than Berkshire Bank, the major employers in the area include Berkshire
Life Insurance Company, Crane & Company, GE Plastics, Kay Bee Toys, Berkshire
Health Systems, General Dynamics Defense Systems and Mead Corporation and
several institutions of higher education. The Berkshire Regional Planning
Commission identified economic development as a critical issue to aid the region
in accommodating this shift away from manufacturing jobs. The goal is to find
land suitable for modern industry, technology based businesses and corporate
offices. According to published statistics, Berkshire County's 1998 population
was approximately 134,100 and consisted of approximately 36,100 households. The
population decreased approximately 3.8% from 1990. Per capita income in 1998
for Berkshire County was approximately $19,300, which was less than the
Massachusetts average of approximately $22,500 but higher than the national
average of $18,000. 1998 median household income for Berkshire County was
$36,006 compared to approximately $45,250 for Massachusetts and $38,100 for the
U.S.
Massachusetts is in the midst of a broad-based recovery from the severe
recession experienced in the New England region in the late 1980s and early
1990s. This is evidenced by the state's 3.3% unemployment rate. While the
western Massachusetts economy has improved from that experienced in the late
1980s and early 1990s, as illustrated by higher property values, increased
income levels and lower unemployment, it continues to lag behind the improved
economy of eastern Massachusetts, particularly the Boston metropolitan area
which has occurred over the past few years.
Competition
Berkshire Bank faces intense competition for the attraction of deposits and
origination of loans in its primary market area. Berkshire Bank's most direct
competition for deposits has historically come from credit unions in the area,
which have a competitive advantage as they do not have to pay state or federal
taxes. Additionally, Berkshire Bank faces competition for deposits from the
several commercial and savings banks operating in its primary market area and,
to a lesser extent, from other financial institutions, such as brokerage firms
and insurance companies. While these entities continue to provide a source of
competition for deposits, Berkshire Bank increasingly faces significant
competition for deposits from the mutual fund industry as customers seek
alternative sources of investment for their funds. Berkshire Bank also faces
significant competition for investors' funds from
50
<PAGE>
their direct purchase of short-term money market securities and other corporate
and government securities. Berkshire Bank faces competition for loans from the
significant number of traditional financial institutions, primarily savings
banks and commercial banks in its market area, as well as the mortgage companies
and mortgage brokers operating in its primary market area. The increase of
internet accessible financial institutions which solicit deposits and originate
loans on a nationwide basis may also increase competition for Berkshire Bank's
customers and have an adverse impact on its future operations. Additionally,
competition is likely to increase as a result of recent regulatory actions and
legislative changes, most notably the recent enactment of the Gramm-Leach-Bliley
Act of 1999. These changes have eased and likely will continue to ease
restrictions on interstate banking and the entrance into the financial services
market by non-depository and non-traditional financial services providers,
including insurance companies, securities brokerage and underwriting firms and
specialty financial services companies (such as internet-based providers).
Competition for deposits, for the origination of loans and the provision of
other financial services may limit Berkshire Bank's growth in the future. See
"Risk Factors--Competition has hurt Berkshire Bank's net interest income."
Lending Activities
General. The types of loans that Berkshire Bank may originate are limited
by federal and state laws and regulations. Interest rates charged by Berkshire
Bank on loans are affected principally by Berkshire Bank's current
asset/liability strategy, the demand for such loans, the supply of money
available for lending purposes and the rates offered by competitors. These
factors, in turn, are affected by general and economic conditions, monetary
policies of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
51
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition of
Berkshire Bank's loan portfolio in dollar amounts and as a percentage of the
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
--------- ---------- --------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family.......... $245,240 36.39% $220,612 36.36% $202,305 40.64%
Commercial................... 46,419 6.89 51,598 8.50 41,267 8.29
Multi-family................. 14,793 2.20 15,393 2.54 14,740 2.96
Construction ................ 12,534 1.86 12,821 2.11 11,531 2.32
-------- ----- -------- ----- -------- -----
Total real estate loans.... 318,986 47.34 300,424 49.51 269,843 54.21
-------- ----- -------- ----- -------- -----
Consumer loans:
Home equity lines of credit.. 33,168 4.92 31,628 5.21 25,801 5.18
Automobiles.................. 164,862 24.46 134,616 22.19 84,979 17.07
Other........................ 10,706 1.59 5,933 0.98 5,889 1.18
-------- ----- -------- ----- -------- -----
Total consumer loans...... 208,736 30.97 172,177 28.38 116,669 23.43
-------- ----- -------- ----- -------- -----
Commercial loans................ 146,196 21.69 134,115 22.11 111,372 22.36
-------- ----- -------- ----- -------- -----
Total loans............... 673,918 100.00% 606,716 100.00% 497,884 100.00%
====== ====== ======
Net deferred loan
origination costs (fees)..... 170 44 (63)
Allowance for loan losses.... (8,534) (7,589) (6,078)
-------- -------- --------
Total loans, net.......... $665,554 $599,171 $491,743
======== ======== ========
<CAPTION>
At December 31,
---------------------------------------------------
1996 1995
-------------------------- -----------------------
Percent of Percent of
Amount Total Amount Total
--------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family.......... $196,712 42.26% $195,786 43.76%
Commercial................... 50,824 10.92 55,507 12.41
Multi-family................. 12,451 2.67 11,591 2.59
Construction ................ 6,229 1.34 8,324 1.86
-------- ----- -------- -----
Total real estate loans.... 266,216 57.19 271,208 60.62
-------- ----- -------- -----
Consumer loans:
Home equity lines of credit.. 24,945 5.36 22,417 5.01
Automobiles.................. 67,006 14.39 47,031 10.51
Other........................ 3,446 0.74 5,710 1.28
-------- ----- -------- -----
Total consumer loans...... 95,397 20.49 75,158 16.80
-------- ----- -------- -----
Commercial loans................ 103,884 22.32 101,061 22.58
-------- ----- -------- -----
Total loans............... 465,497 100.00% 447,427 100.00%
====== ======
Net deferred loan
origination costs (fees)..... (135) (182)
Allowance for loan losses.... (6,303) (6,484)
-------- --------
Total loans, net.......... $459,059 $440,761
======== ========
</TABLE>
52
<PAGE>
Real Estate Lending
One- to Four-Family Real Estate Loans. One of Berkshire Bank's primary
lending activities is to originate loans secured by one- to four-family
residences located in its primary market area. At December 31, 1999, $245.2
million, or 36.4%, of Berkshire Bank's total loans consisted of one- to four-
family mortgage loans. Of the one- to four-family loans outstanding at that
date, approximately 40.2% were fixed-rate mortgage loans and approximately 59.8%
were adjustable-rate loans.
Berkshire Bank originates fixed-rate fully amortizing loans with maturities
of 15, 20 and 30 years. Management establishes the loan interest rates based on
market conditions. Berkshire Bank offers mortgage loans that conform to Fannie
Mae and Freddie Mac guidelines, as well as jumbo loans, which presently are
loans in amounts over $250,000. Fixed-rate conforming loans are generally
originated for portfolio. However, such loans may be sold by Berkshire Bank
from time to time. The determination of whether to sell loans is determined
periodically by management in response to changes in prevailing market interest
rates and liquidity needs. Loans that are sold are generally sold to a local
financial institution, with the servicing rights retained.
Berkshire Bank also currently offers adjustable-rate mortgage loans, with
an interest rate based on the one year, three year or five year Constant
Maturity Treasury index, which adjust every one, three or five years from the
outset of the loan or which adjust annually after a seven or ten year initial
fixed period and with terms of up to 30 years. Interest rate adjustments on
such loans range from 2% to 5% during any adjustment period and are limited to
no more than 6% over the life of the loan. All of Berkshire Bank's adjustable-
rate mortgages are originated at an interest rate below the fully indexed rate
on adjustable-rate mortgages. At December 31, 1999, the initial discounted rate
on these loans was 200 to 300 basis points below the current fully indexed rate.
Generally, these loans will begin to reprice towards their fully indexed rate in
their second year. However, Berkshire Bank's experience, which cannot be
guaranteed in future periods, is that discounted adjustable-rate loans tend to
be more stable and less susceptible to prepayment activity in a falling interest
rate environment.
Adjustable-rate mortgage loans help reduce Berkshire Bank's exposure to
changes in interest rates. There are, however, unquantifiable credit risks
resulting from the potential of increased costs due to changed rates to be paid
by borrowers. It is possible that during periods of rising interest rates the
risk of default on adjustable-rate mortgage loans may increase as a result of
repricing and the increased payments required to be made by borrowers. In
addition, although adjustable-rate mortgage loans allow Berkshire Bank to
increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the annual and lifetime
interest rate adjustment limits. Because of these considerations Berkshire Bank
has no assurance that yields on adjustable-rate mortgage loans will be
sufficient to offset increases in Berkshire Bank's cost of funds during periods
of rising interest rates. Berkshire Bank believes these risks, which have not
had a material adverse effect on Berkshire Bank to date, generally are less than
the risks associated with holding fixed-rate loans in its portfolio in a rising
interest rate environment.
Berkshire Bank underwrites fixed- and variable-rate one- to four-family
residential mortgage loans with loan-to-value ratios of up to 100% on a one- to
two-family primary residence; up to 90% on a three- to four-family primary
residence or a vacation home; and up to 75% on a condominium. A borrower is
required to obtain private mortgage insurance on loans that exceed 80%, or 75%
in the case of a condominium, of the appraised value or sales price, whichever
is less, of the secured property. Berkshire Bank also generally requires fire,
casualty, title, hazard insurance and, if appropriate, flood insurance be
maintained on all properties securing real estate loans made by Berkshire Bank.
An independent licensed appraiser generally appraises all properties.
Berkshire Bank also offers adjustable-rate home equity loans with an
interest rate based on the prime rate as reported in The Wall Street Journal,
which adjusts monthly. The combined loan-to-value ratio of home equity loans is
generally limited to 80%. Second mortgages are also offered on owner-occupied
primary or secondary residences and are adjustable-rate, either adjusting
annually or with a five-year initial fixed period which adjusts annually
thereafter, with terms up to 30 years.
53
<PAGE>
In an effort to provide financing for low- and moderate-income families,
Berkshire Bank offers Federal Housing Authority, Veterans Administration and
Massachusetts Housing Finance Agency residential mortgage loans to qualified
individuals with adjustable- and fixed-rates of interest and terms of up to 30
years. Such loans may be secured by one- to four-family residential property
and are underwritten using modified underwriting guidelines. Berkshire Bank
also participates in the Good Samaritan Home Ownership Program, which is a non-
profit venture established to advise and assist low- and middle-income families
in the purchase of their first home in Berkshire County. Qualified individuals
can obtain a 30 year fixed-rate mortgage loan on a one- to four-family, owner
occupied property. Additionally, Berkshire Bank maintains its own First-Time
Home Buyer loan program. This program offers one- and two-family residential
mortgage loans to first-time home buyers. These loans are offered with initial
five-year fixed-rates of interest which adjust annually thereafter with terms of
up to 30 years.
Construction Loans. At December 31, 1999, construction loans totaled $12.5
million, or 1.9% of Berkshire Bank's total loan portfolio, of which $5.6 million
were residential construction loans and $6.9 million were commercial
construction loans. At December 31, 1999, the unadvanced portion of
construction loans totaled $4.7 million.
Berkshire Bank originates construction loans to individuals for the
construction and acquisition of personal residences. Berkshire Bank's
residential construction loans generally provide for the payment of interest
only during the construction phase, which is usually twelve months. At the end
of the construction phase, the loan converts to a permanent mortgage loan. Loans
can be made with a maximum loan to value ratio of 90%, provided that the
borrower obtains private mortgage insurance on the loan if the loan balance
exceeds 80% of the appraised value or sales price, whichever is less, of the
secured property. At December 31, 1999, the largest outstanding residential
construction loan commitment was for $775,000, $501,000 of which was
outstanding. This loan was performing according to its terms at December 31,
1999. Construction loans to individuals are generally made on the same terms as
Berkshire Bank's one- to four-family mortgage loans.
Before making a commitment to fund a residential construction loan,
Berkshire Bank requires an appraisal of the property by an independent licensed
appraiser. Berkshire Bank also reviews and inspects each property before
disbursement of funds during the term of the construction loan. Loan proceeds
are disbursed after inspection based on the percentage of completion method.
Berkshire Bank also makes construction loans for commercial development
projects, including multi-family, commercial properties, single-family
subdivisions and condominiums. These loans generally have an interest-only
phase during construction then convert to permanent financing. Disbursement of
funds are at the sole discretion of Berkshire Bank and are based on the progress
of construction. The maximum loan to value ratio for these loans depends upon
the type of commercial development project being undertaken, but generally will
not exceed 80%. At December 31, 1999, the largest outstanding commercial
construction loan commitment was $5.2 million, of which $5.2 million was
outstanding.
Berkshire Bank also originates land loans to local contractors and
developers for the purpose of making improvements thereon, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on
the property; have loan to value ratios that are limited to 70% of the value of
the land used for residential development and 65% of the value of the land used
for commercial development (based on the lower of the acquisition price or the
appraised value of the land) and are written with a fixed interest rate based on
a margin over the prime rate as reported in The Wall Street Journal. Land loans
are offered with a term of three years in which only interest is required to be
paid each month. A balloon payment for the principal plus any accrued interest
is due at the end of the three year period. Additionally, Berkshire Bank offers
fully-amortized land loans with a term of 15 years. Berkshire Bank's land loans
are generally secured by property in its primary market area. Berkshire Bank
requires title insurance and, if applicable, a hazardous waste survey reporting
that the land is free of hazardous or toxic waste.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent
54
<PAGE>
largely upon the accuracy of the initial estimate of the property's value at
completion of construction compared to the estimated cost (including interest)
of construction and other assumptions. If the estimate of construction cost
proves to be inaccurate, Berkshire Bank may be required to advance funds beyond
the amount originally committed in order to protect the value of the property.
Additionally, if the estimate of value proves to be inaccurate, Berkshire Bank
may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.
Commercial and Multi-Family Real Estate Loans. Berkshire Bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings, industrial facilities or retail facilities primarily
located in Berkshire Bank's primary market area. At December 31, 1999,
Berkshire Bank had $61.2 million in commercial and multi-family real estate
loans which amounted to 9.1% of total loans. Berkshire Bank's multi-family and
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the appraised value of the property or
the selling price, whichever is less. Loans secured by single-family
subdivisions and condominium projects may be made in amounts of up to 75% and
70%, respectively, of the appraised value of the property or selling price,
whichever is less. All loans must comply with Berkshire Bank's current in-house
loans-to-one-borrower limit, which at December 31, 1999 was $8.8 million.
Berkshire Bank's multi-family and commercial real estate loans may be made with
terms of up to 20 years and substantially all of which are originated with
interest rates that adjust periodically and are generally indexed to the prime
rate as reported in The Wall Street Journal. In reaching its decision on whether
to make a multi-family or commercial real estate loan, Berkshire Bank considers
the net operating income of the property, the borrower's expertise, credit
history and profitability and the value of the underlying property. In addition,
with respect to commercial real estate rental properties, Berkshire Bank will
also consider the term of the lease and the quality of the tenants. Berkshire
Bank has generally required that the properties securing these real estate loans
have debt service coverage ratios (the ratio of earnings before debt service to
debt service) of at least 1.25x. Environmental surveys are generally required
for commercial real estate loans. Additionally, in larger real estate projects,
it is recommended that a feasibility study be obtained to determine the
viability of the project. A feasibility study is particularly important with
respect to multi-family housing projects, hotel/motel construction and health
care facilities. Generally, multi-family and commercial real estate loans made
to corporations, partnerships and other business entities require personal
guarantees by the principals. The largest multi-family or commercial real estate
loan in Berkshire Bank's portfolio at December 31, 1999 was a performing $5.3
million real estate loan secured by a motel located in Lenox, Massachusetts.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be affected by adverse conditions in the real estate market or
the economy. Berkshire Bank seeks to minimize these risks through strict
adherence to its underwriting standards. See "Risk Factors--Berkshire Bank's
increased emphasis on commercial lending may hurt both asset quality and
profits."
Commercial Lending
Commercial Loans. At December 31, 1999, Berkshire Bank had $146.2 million
in commercial loans which amounted to 21.7% of total loans. In addition, at such
date, Berkshire Bank had $49.1 million of unadvanced commercial lines of credit.
Berkshire Bank makes commercial business loans primarily in its market area to a
variety of professionals, sole proprietorships and small businesses. Berkshire
Bank offers a variety of commercial lending products, the maximum amount of
which is limited by Berkshire Bank's in-house loans-to-one-borrower limit.
Berkshire Bank's largest commercial loan relationship was a $6.0 million loan
secured by various types of business assets located in Hillsdale and Millerton,
New York and Lakeville, Connecticut. This loan was performing according to its
original terms at December 31, 1999.
55
<PAGE>
Berkshire Bank offers secured commercial term loans, which have a maturity
of greater than one year and the payment of which is dependent on future
earnings. The term for repayment of the loan will normally be limited to the
lesser of the expected useful life of the asset being financed or a fixed amount
of time, generally less than seven years. Berkshire Bank also offers loans
originated in order to finance a business' operating facility, revolving lines
of credit secured by business assets other than real estate, such as business
equipment, inventory and accounts receivable, letters of credit, time notes and
Small Business Administration guaranteed loans. Business lines of credit have
adjustable rates of interest and are payable on demand, subject to annual review
and renewal. Time notes are short-term loans, generally limited to 90 days which
do not require payment of principal or interest until maturity.
Berkshire Bank also offers a Business Manager Line of Credit. Unlike a
traditional line of credit, the Business Manager Line is a program whereby
Berkshire Bank purchases a customer's accounts receivable on a recourse basis.
Berkshire Bank's income from the program arises primarily from: (1) service
charges, which range from two to five percent, which are discounted from each
receivable purchased, and (2) the interest, if any, charged to account debtors
on unpaid balances. At December 31, 1999, Business Manager Lines of Credit
totaled $1.6 million, or 1.1% of commercial loans. Additionally, the unadvanced
amounts of Business Manager Lines of Credit totaled approximately $1.0 million.
When making commercial business loans, Berkshire Bank considers the
financial statements of the borrower, the borrower's payment history of both
corporate and personal debt, the debt service capabilities of the borrower, the
projected cash flows of the business, and viability of the industry in which the
customer operates and the value of the collateral. Commercial business loans
are generally secured by a variety of collateral, primarily accounts receivable,
inventory and equipment, and are generally supported by personal guarantees.
Depending on the collateral used to secure the loans, commercial loans are made
in amounts of up to 95% of the value of the collateral securing the loan.
Berkshire Bank generally does not make unsecured commercial loans.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value. See "Risk
Factors--Berkshire Bank's increased emphasis on commercial lending may hurt both
asset quality and profits."
Consumer Lending
Automobile Lending. At December 31, 1999, automobile loans totaled $164.9
million, or 24.5% of Berkshire Bank's total loans and 79.0% of consumer loans.
The Bank offers fixed-rate automobile loans on a direct and indirect basis with
terms of up to 72 months for new and recent model used cars and up to 60 months
for older model used cars. Berkshire Bank generally will make such loans up to
100% of the retail value shown in the NADA Used Car Guide. The interest rates
offered differ depending on the age of the automobile and current interest rates
offered by competitors.
Berkshire Bank began offering indirect automobile loans through automobile
dealers approximately seven years ago. Currently, Berkshire Bank maintains
contractual relationships with over 100 new and used car dealers throughout
western Massachusetts, northern Connecticut, eastern New York and southern
Vermont. Such loans are only made following an underwriting review and
acceptance by Berkshire Bank. These loans are closed by the automobile dealer
and immediately assigned to Berkshire Bank, who then services the loans. On
loans originated by its automobile dealers, Berkshire Bank compensates the
originator based upon the higher rate paid on the loan, up to a maximum of four
percent. For the fiscal years 1999 and 1998, Berkshire Bank originated
$129.4 million and $97.2 million of automobile loans, respectively, of
which 97.5% and 91.6% were originated indirectly through the automobile dealers
in fiscal years 1999 and 1998, respectively. The substantial majority of such
loans are secured by used automobiles. The large growth in the automobile
portfolio in the past few years is primarily
56
<PAGE>
attributable to the addition of one automobile dealer in 1997 and two automobile
dealers in 1998. These three dealers, located in eastern New York, northern
Connecticut and western Massachusetts, accounted for approximately 30% of the
loans originated in 1999. Berkshire Bank has been selling automobile loans since
1998. Berkshire Bank anticipates that it will continue to sell a portion of its
automobile loans in the secondary market for liquidity purposes and to manage
the credit risk of the loan portfolio.
Home Equity Lines of Credit and Other Consumer Loans. Berkshire Bank
offers home equity lines of credit secured by owner-occupied one- to four-family
residences. At December 31, 1999, home equity lines of credit totaled $33.2
million, or 4.9% of Berkshire Bank's total loans and 15.9% of consumer loans.
Additionally, at December 31, 1999, the unadvanced amounts of home equity lines
of credit totaled $35.2 million. The underwriting standards employed by
Berkshire Bank for home equity lines of credit include a determination of the
applicant's credit history, an assessment of the applicant's ability to meet
existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. Home equity loans will not be made if the
borrower's first mortgage payment, monthly real estate payment and amortized
equity line payment exceeds 25% of the borrower's gross monthly income.
Additionally, the borrower's monthly debt cannot exceed 35% of the borrower's
gross monthly income. Home equity lines of credit have adjustable rates of
interest which are indexed to the prime rate as reported in The Wall Street
Journal. Generally, the maximum combined loan-to-value ratio on home equity
lines of credit is 80% for loans less than $200,000 and 60% for loans greater
than $200,000. A home equity line of credit may be drawn down by the borrower
for an initial period of five years from the date of the loan agreement. During
this period, the borrower has the option of paying, on a monthly basis, either
principal and interest or only the interest. If not renewed, the borrower has
to pay back the amount outstanding under the line of credit over a term not to
exceed ten years, beginning at the end of the five year period.
Other consumer loans at December 31, 1999 amounted to $10.7 million, or
1.6% of Berkshire Bank's total loans and 5.1% of consumer loans. These loans
include education, collateral, personal and unsecured loans. Collateral loans
are generally secured by a passbook account, a certificate of deposit or
marketable securities. Unsecured loans generally have a maximum borrowing
limitation of $10,000 and a maximum term of five years.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family mortgage loans. In such
cases, repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. Further,
collections on these loans are dependent on the borrower's continuing financial
stability and, therefore, are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Repossed collateral relating to
consumer loans at December 31, 1999 approximated $996,000. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans if a borrower defaults.
Loans to One Borrower. The maximum amount that Berkshire Bank may lend to
one borrower is limited by statute. At December 31, 1999, Berkshire Bank's
statutory limit on loans to one borrower was $17.6 million. At that date,
Berkshire Bank's largest amount of loans to one borrower, including the
borrower's related interests, was approximately $7.3 million and consisted of
six loans secured by residential and commercial real estate and marketable
equity securities. These loans were performing according to their original
terms at December 31, 1999.
57
<PAGE>
Maturity of Loan Portfolio. The following table shows the remaining
contractual maturity of Berkshire Bank's total loans at December 31, 1999,
excluding the effect of future principal prepayments.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------------------------------------------------
Commercial Home
One- to and Equity
four- Multi-Family Lines of Other
family (1) Construction (2) Real Estate Commercial Credit Automobile Consumer Total
------------ ---------------- ------------- ---------- ---------- ------------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less ......... $ 869 $12,369 $ 1,440 $ 38,458 $ 1,980 $ 1,674 $ 2,133 $ 58,923
After one year:
More than one year
to three years ...... 1,432 54 1,027 11,011 -- 24,030 3,128 40,682
More than three years
to five years ....... 2,835 83 3,142 14,830 -- 104,271 4,356 129,517
More than five years
to 15 years ......... 68,686 28 33,457 33,794 14,278 34,887 950 186,080
More than 15 years ..... 171,418 -- 22,146 48,103 16,910 -- 139 258,716
-------- ------- -------- -------- ------- -------- ------- --------
Total amount due..... $245,240 $12,534 $61,212 $146,196 $33,168 $164,862 $10,706 $673,918
======== ======= ======== ======== ======= ======== ======= ========
</TABLE>
- ---------------------------------
(1) Includes second mortgages on one- to four-family residences.
(2) Includes residential and commercial construction loans.
The following table sets forth, at December 31, 1999, the dollar amount of
loans contractually due after December 31, 2000, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 2000
-----------------------------------------------
Fixed Adjustable Total
------------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family (1) ................. $ 97,651 $146,720 $244,371
Construction ............................ 165 -- 165
Commercial and multi-family ............. 6,348 53,424 59,772
-------- -------- --------
Total real estate loans .............. 104,164 200,144 304,308
Home equity loans ......................... -- 31,188 31,188
Commercial loans .......................... 10,959 96,779 107,738
Automobile ................................ 163,188 -- 163,188
Other ..................................... 8,406 167 8,573
--------- -------- --------
Total loans.......................... $286,717 $328,278 $614,995
========= ======== ========
</TABLE>
- ---------------------------------
(1) Includes second mortgages on one- to four-family residences.
Scheduled contractual principal repayments of loans do not reflect the
actual life of the loans. The average life of a loan is substantially less than
its contractual term because of prepayments. In addition, due-on-sale clauses on
loans generally give Berkshire Bank the right to declare loans immediately due
and payable if, among other things, the borrower sells the real property with
the mortgage and the loan is not repaid. The average life of a mortgage loan
tends to increase, however, when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
tends to decrease when rates on existing mortgage loans are substantially higher
than current mortgage loan market rates.
58
<PAGE>
Loan Approval Procedures and Authority. Berkshire Bank's lending
activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by Berkshire Bank's Board of Directors and
management. The Board of Directors has designated certain individuals of
Berkshire Bank and certain branch managers to consider and approve loans within
their designated authority.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: several residential
mortgage lenders have been delegated authority to approve residential mortgage
loans ranging from $240,000 to $300,000; home equity lines of credit ranging
from $50,000 to $100,000; unsecured consumer loans from $10,000 to $30,000; and
secured consumer loans from $30,000 to $50,000. All one- to four-family
mortgage loans and home equity lines of credit in amounts of up to $300,000, all
secured consumer loans up to $50,000 and all unsecured installment loans up to
$30,000, may be approved by the Chairman of the Board, the President, the
Executive Vice President-Senior Loan Officer, the Senior Vice President-Retail
Lending and the Vice President-Residential Mortgage. All such loans in excess
of these amounts require the approval of a majority of the members and the
signature of two of the members of Berkshire Bank's Residential Mortgage Lending
Committee, which consists of the President, the Executive Vice President-Senior
Loan Officer, the Senior Vice President-Retail Lending, the Vice President-
Residential Mortgage, the Retail Loan Administration Officer and the residential
mortgage lenders. Combining any delegated approval authorities is permitted
provided that individual limits may be combined only up to $600,000 for
residential mortgage loan approvals without requiring the approval of the
Residential Mortgage Lending Committee provided that residential mortgage loans
approved by a combination of authorities must include the signature of either
the Executive Vice President-Senior Loan Officer, the Senior Vice President-
Retail Lending or the Senior Vice President-Commercial Lending. All residential
loans in excess of $1.0 million require the approval of the Executive Committee
of the Board of Directors or the full Board of Directors.
The Board of Directors has delegated the authority to approve loans to
several commercial loan officers in amounts ranging from $20,000 to $150,000 for
secured commercial loans and in amounts ranging from $20,000 to $75,000 for
unsecured commercial loans. All secured commercial loans in amounts up to
$300,000 and unsecured commercial loans in amounts up to $175,000 may be
approved by the Chairman of the Board, the President, the Executive Vice
President-Senior Loan Officer, the Senior Vice Presidents of Lending and certain
commercial loan managers. Such loans in excess of these amounts require the
approval of a majority of the members of Berkshire Bank's Senior Lending
Committee, which consists of the Executive Vice President, Senior Loan Officer,
the Senior Vice Presidents of Lending and all commercial loan officers. The
President and the Credit Administration Officer are non-voting members of the
Senior Loan Committee. Delegated approval authorities may be combined.
However, individual limits may be combined only up to $500,000 for commercial
loan approvals without requiring approval of the Senior Lending Committee
provided that commercial loans approved by a combination of authorities must
include the signature of either the Executive Vice President-Senior Loan
Officer, Senior Vice President-Commercial Lending or the Senior Commercial
Lender. All commercial loans in excess of $1.0 million require the approval of
the Executive Committee of the Board of Directors or the full Board of
Directors.
Loan Originations, Purchases and Sales. Berkshire Bank lending activities
are conducted by its salaried and commissioned loan personnel and through its
relationship with automobile dealers. Currently, Berkshire Bank has contractual
relationships with approximately 100 automobile dealers who originate automobile
loans for Berkshire Bank. Berkshire Bank underwrites such loans. The
automobile dealers close the loans and immediately assign them to Berkshire
Bank. These automobile dealers accounted for approximately 43.0% of the loans
originated by Berkshire Bank in 1999. The automobile dealers are compensated
based on the difference between the interest rate on the loan offered in excess
of the interest rate prescribed by Berkshire Bank, up to a maximum of 4 points.
The compensation is paid at the time the loan is closed and assigned to
Berkshire Bank. Additionally, Berkshire Bank utilizes third parties, including
finance companies to originate loans.
From time to time, Berkshire Bank will purchase whole loans or
participations in loans. Historically, Berkshire Bank generally purchased
consumer loans from a third party which originates loans through smaller
automobile dealers and has participated in loans secured by commercial real
estate. The consumer loans purchased from the third party are underwritten and
closed by that third party. Berkshire Bank, however, will also perform its
59
<PAGE>
own credit analysis before purchasing the loan. Berkshire Bank purchased $11.9
million of these consumer loans in 1999. The commercial real estate loans
participated in by Berkshire Bank are underwritten according to Berkshire Bank's
own underwriting criteria and procedures and are generally purchased with the
accompanying servicing rights. Berkshire Bank purchased $2.2 million of such
loans in 1999. Amounts outstanding related to loan participation interests
purchased by Berkshire Bank totaled $2.9 million and $6.3 million at December
31, 1999 and December 31, 1998, respectively, and consisted primarily of loans
secured by commercial real estate.
At December 31, 1999, Berkshire Bank was servicing $63.3 million of loans
for others, consisting primarily of automobile and one-to four-family mortgage
loans sold by Berkshire Bank. Loan servicing includes collecting and remitting
loan payments, accounting for principal and interest, contacting delinquent
borrowers, supervising foreclosures and property dispositions when there are
unremedied defaults, making insurance and tax payments on behalf of the
borrowers and generally administering the loans. The gross servicing fee income
from loans sold is generally between 25 basis points for one- to four-family
mortgage loans and 100 basis points for automobile loans of the total balance of
the loan being serviced.
Berkshire Bank generally originates loans for portfolio but from time to
time will sell loans in the secondary market based on prevailing market interest
rate conditions and an analysis of the composition and risk of the loan
portfolio and liquidity needs. Historically, Berkshire Bank, from time to time,
sold one-to four-family mortgage loans in the secondary market while retaining
the servicing. However, in recent years Berkshire Bank has begun to primarily
sell a portion of its automobile loans in the secondary market to a financial
institution in Vermont. In 1999, Berkshire Bank sold $44.3 million of loans,
which consisted primarily of automobile loans. The determination of which loans
to sell depends upon liquidity needs, the loan mix of the portfolio and interest
rate risk management. Berkshire Bank currently anticipates that future loan
sales will consist predominately of automobile loans. Generally, loans are sold
without recourse.
60
<PAGE>
The following table presents total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Loans at beginning of period................................... $606,716 $497,884 $465,497
-------- -------- --------
Originations:
Real estate loans:
One-to four-family.................................... 49,207 66,410 34,203
Construction.......................................... 7,199 10,978 4,736
Multifamily........................................... 3,620 926 4,036
Commercial real estate................................ 9,478 24,454 9,224
-------- -------- ---------
Total real estate loans......................... 69,504 102,768 52,199
-------- -------- ---------
Consumer loans:
Home equity lines of credit........................... 10,796 21,942 6,252
Other................................................. 135,574 101,035 75,778
-------- -------- ---------
Total consumer loans............................ 146,370 122,977 82,030
Commercial loans........................................ 64,542 51,989 42,019
-------- -------- ---------
Total loans originated.......................... 280,416 277,734 176,248
-------- -------- ---------
Purchases:
Real estate loans:
Multi-family.......................................... 566 2,080 --
Commercial real estate................................ 2,228 -- --
-------- -------- ---------
Total real estate loans......................... 2,794 2,080 --
Consumer loans:
Other................................................. 11,877 6,006 --
Commercial loans......................................... 1,088 15,567 1,160
-------- -------- --------
Total loans purchased........................... 15,759 23,653 1,160
-------- -------- --------
Deduct:
Principal loan repayments, repayments and other, net..... 182,429 186,199 133,119
Loan sales............................................... 44,308 5,590 9,643
Net loan charge-offs..................................... 2,085 544 1,702
Transfers to real estate owned........................... 151 222 557
-------- -------- --------
Total deductions................................... 228,973 192,555 145,021
-------- -------- --------
Net increase in loans.......................................... 67,202 108,832 32,387
-------- -------- --------
Loans at end of period......................................... $673,918 $606,716 $497,884
======== ======== ========
</TABLE>
Loan Commitments. Berkshire Bank issues loan commitments to its
prospective borrowers conditioned on the occurrence of certain events.
Commitments are made in writing on specified terms and conditions and are
generally honored for up to 60 days from approval. At December 31, 1999,
Berkshire Bank had loan commitments and unadvanced loans and lines of credit
totaling $117.4 million. See Note 10 of the Notes to Consolidated Financial
Statements included in this prospectus.
Loan Fees. In addition to interest earned on loans, Berkshire Bank
receives income from fees derived from loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period depending upon the volume and type
of loans made and competitive conditions.
61
<PAGE>
Berkshire Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. As required by applicable accounting
principles, loan origination fees, discount points and certain loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. At December 31, 1999, Berkshire Bank had
approximately $170,000 of net deferred loan fees and costs. Berkshire Bank
amortized $44,000 of net deferred loan fees and costs during the year ended
December 31, 1999.
Nonperforming Assets, Delinquencies and Impaired Loans. When a borrower
fails to make a required loan payment, Berkshire Bank attempts to cure the
deficiency by mailing a past due notice on the 10th day of the month. In most
cases, delinquencies are cured promptly. If a delinquency continues beyond the
15th day, the loan will appear on a delinquency list and the account officer
will contact the borrower. If a delinquency continues beyond the 30th day of
the month, the borrower is again contacted and if it is determined that the late
payment is not a short-term cash flow problem, the account is reported to the
Senior Workout Officer. While Berkshire Bank generally prefers to work with
borrowers to resolve problems, Berkshire Bank generally will initiate
foreclosure or other proceedings no later than the 90th day of a delinquency, as
necessary, to minimize any potential loss.
Management informs the Board of Directors monthly of the amount of loans
delinquent more than 30 days, all loans in foreclosure, and all foreclosed and
repossessed property that Berkshire Bank owns. Berkshire Bank generally ceases
accruing interest on all loans when principal or interest payments are
delinquent 90 days or more unless management determines the loan principal and
interest to be fully-secured and in the process of collection. Once the accrual
of interest on a loan is discontinued, all interest previously accrued is
reversed against current period interest income once management determines that
interest is uncollectible.
On January 1, 1995, Berkshire Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan--an amendment to SFAS No. 114." At December
31, 1999 and December 31, 1998, Berkshire Bank had a $1.5 million and $938,000,
respectively, recorded investment in impaired loans, which had no specific
allowances and $50,000 and $1.5 million in loans with valuation allowances of
$14,000 and $304,000, respectively.
The following table sets forth information regarding nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- --------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
One- to four-family real estate...................................... $ 450 $1,272 $ 623 $ 766 $1,411
Commercial real estate............................................... -- 1,064 336 1,421 966
Commercial........................................................... 1,572 612 613 2,619 1,393
Consumer............................................................. 819 542 584 39 142
------- ------- ------- ------- -------
Total nonperforming loans........................................ 2,841 3,490 2,156 4,845 3,912
Real estate owned....................................................... 220 398 364 2,888 219
------- ------- ------- ------- -------
Total nonperforming assets....................................... $3,061 $3,888 $2,520 $7,733 $4,131
======= ======= ======= ======= =======
Total nonperforming loans as a percentage of total loans................ 0.42% 0.58% 0.43% 1.04% 0.87%
Total nonperforming assets as a percentage of total assets.............. 0.36% 0.50% 0.40% 1.23% 0.69%
</TABLE>
Interest income that would have been recorded for the year ended December
31, 1999 had nonaccruing loans been current according to their original terms
amounted to approximately $362,000, $209,000 of which was included in interest
income related to these loans.
62
<PAGE>
The following tables set forth the delinquencies in Berkshire Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------
60-89 Days 90 Days or More
----------------------------- ---------------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
------------ -------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family................................... 6 $ 384 1 $ 106
Commercial real estate................................ -- -- -- --
Multi-family.......................................... -- -- -- --
Consumer loans:
Equity lines of credit................................ -- -- -- --
All other............................................. 95 831 121 776
Commercial loans......................................... 6 335 11 1,168
----- ------ ---- ------
Total.............................................. 107 $1,550 133 $2,050
===== ====== ==== ======
Delinquent loans to total loans.......................... 0.34% 0.23% 0.43% 0.31%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------
60-89 Days 90 Days or More
----------------------------- ----------------------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
---------- --------------- -------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family..................................... 2 $ 169 4 $ 375
Commercial real estate.................................. -- -- -- --
Multi-family........................................... -- -- 1 79
Consumer loans:
Equity lines of credit.................................. -- -- 1 50
All other............................................... 68 607 65 492
Commercial loans......................................... 2 150 19 1,397
-- ----- -- ------
Total.................................................. 72 $ 926 90 $2,393
== ===== == ======
Delinquent loans to
total loans........................................... 0.29% 0.15% 0.36% 0.39%
<CAPTION>
At December 31, 1997
-------------------------------------------------------------------
60-89 Days 90 Days or More
---------------------------- ----------------------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
------------ ------------- ------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family..................................... 10 $ 719 4 $ 988
Commercial real estate.................................. -- -- -- --
Multi-family........................................... -- -- -- --
Consumer loans:
Equity lines of credit.................................. -- -- 1 115
All other............................................... 59 414 52 469
Commercial loans......................................... 3 311 9 556
-- ------ -- ------
Total.................................................. 72 $1,444 66 $2,128
== ====== == ======
Delinquent loans to
total loans........................................... 0.35% 0.29% 0.32% 0.43%
</TABLE>
Real Estate Owned. Real estate acquired by Berkshire Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value at the
date of foreclosure, establishing a new cost basis. Holding costs and declines
in fair value after acquisition are expensed. At December 31, 1999, Berkshire
Bank had $220,000 of real estate owned, net, consisting primarily of three
commercial properties.
Asset Classification. Regulators have adopted various regulations and
practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require them to be classified.
There are three classifications for problem assets: substandard, doubtful
and loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
63
<PAGE>
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover probable losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention." Berkshire Bank performs an internal analysis
of its loan portfolio and assets to classify such loans and assets similar to
the manner in which such loans and assets are classified by the federal banking
regulators. In addition, Berkshire Bank regularly analyzes the losses inherent
in its loan portfolio and its nonperforming loans in determining the appropriate
level of the allowance for loan losses.
The following table sets forth Berkshire Bank's classified assets at
December 31, 1999.
<TABLE>
<CAPTION>
Loss Doubtful Substandard Special Mention
-------------------------- ------------------------ --------------------------- -----------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
------------ ----------- ---------- ----------- ------------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family... -- $ -- -- $ -- 7 $ 450 11 $1,477
Commercial
real estate....... -- -- -- -- 21 6,003 19 2,198
Multi-family......... -- -- -- -- 10 1,550 -- --
Consumer loans:
Equity lines of
credit.............. -- -- -- -- -- -- -- --
All other............ -- -- -- -- 181 776 109 831
Commercial loans........ -- -- -- -- 30 1,344 20 1,761
------- -------- ------- ------- ------- ------- ------ -------
Total............. -- $ -- -- $ -- 249 $10,123 159 $ 6,267
======= ======== ======= ======= ======= ======= ===== =======
</TABLE>
At December 31, 1999, Berkshire Bank had six outstanding loans with one
borrower, which were adversely classified or identified as a problem credit,
totalling $1.2 million. These loans, all of which were delinquent and
classified as Substandard, were secured by commercial real estate, commercial
business assets and accounts receivable. Berkshire Bank charged-off
approximately $600,000 in fiscal 1999 in connection with these loans and
anticipates that it will incur additional charge-offs in the future. Berkshire
Bank had no other classified loans greater than $500,000 which were not
performing according to their terms on December 31, 1999.
Allowance for Loan Losses. In originating loans, Berkshire Bank recognizes
that losses will be experienced on loans and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. Berkshire
Bank maintains an allowance for loan losses to absorb losses inherent in the
loan portfolio. The allowance for loan losses represents management's estimate
of probable losses based on information available as of the date of the
financial statements. The allowance for loan losses is based on management's
evaluation of the collectibility of the loan portfolio, including past loan loss
experience, known and inherent risks in the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, peer group comparisons, industry data and economic
conditions. In addition, management employs an independent third party to
perform a review of all of Berkshire Bank's commercial loan
64
<PAGE>
relationships exceeding $1.0 million, all material credits on Berkshire Bank's
watch list or classified as Substandard and a random sampling of new loans. The
regulatory agencies, as an integral part of their examination process, also
periodically review Berkshire Bank's allowance for loan losses. Such agencies
may require Berkshire Bank to make additional provisions for estimated losses
based upon judgments different from those of management.
In assessing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans and certain unused commitments. Berkshire
Bank segregates the loan portfolio according to risk characteristics (i.e.,
mortgage loans, home equity, consumer, commercial). Loss factors are derived
using Berkshire Bank's historical loss experience and may be adjusted for
significant factors that, in management's judgment, affect the collectibility of
the portfolio as of the evaluation date.
In addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management's subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of the
loan portfolio. The allowance methodology reflects management's objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
At December 31, 1999, Berkshire Bank had an allowance for loan losses of
$8.5 million which represented 1.27% of total loans and 300.39% of nonperforming
loans at that date. Although management believes that it uses the best
information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations. Furthermore, while
Berkshire Bank believes it has established its existing allowance for loan
losses in conformity with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing Berkshire Bank's loan portfolio, will
not request Berkshire Bank to increase its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above.
Any material increase in the allowance for loan losses may adversely affect
Berkshire Bank's financial condition and results of operations.
65
<PAGE>
The following table presents an analysis of Berkshire Bank's allowance for
loan losses for the years indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year........ $ 7,589 $ 6,078 $ 6,303 $ 6,484 $ 5,079
------- ------- ------- ------- -------
Charged-off loans:
One- to four-family real estate.................. 117 14 66 188 395
Multi-family..................................... -- -- 82 -- --
Commercial real estate........................... 297 253 959 103 64
Consumer (1)..................................... 731 311 699 363 257
Commercial....................................... 1,208 234 490 1,754 748
------- ------- ------- ------- -------
Total charged-off loans....................... 2,353 812 2,296 2,408 1,464
Recoveries on loans previously charged off.......... 268 268 594 247 360
------- ------- ------- ------- -------
Net loans charged off............................... 2,085 544 1,702 2,161 1,104
------- ------- ------- ------- -------
Provision for loan losses........................... 3,030 2,055 1,477 1,980 2,509
------- ------- ------- ------- -------
Allowance for loan losses, end of year.............. $ 8,534 $ 7,589 $ 6,078 $ 6,303 $ 6,484
======= ======= ======= ======= =======
Ratios:
Net loans charged-off to interest-earning loans..... 0.31% 0.09% 0.34% 0.47% 0.25%
Allowance for loan losses to total loans............ 1.27% 1.25% 1.22% 1.35% 1.45%
Allowance for loan losses to nonperforming loans.... 300.39% 217.45% 281.91% 130.09% 165.75%
Net loans charged-off to allowance
for loan losses.................................. 24.43 7.17 28.00 34.29 17.03
Recoveries to charge-offs........................... 11.39 33.00 25.87 10.26 24.59
</TABLE>
- -----------------------------------
(1) Consists primarily of indirect automobile loans.
For additional discussion regarding the provision for loan losses in recent
periods, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the year ended
December 31, 1999 and 1998--Provision for Loan Losses."
66
<PAGE>
The following table presents the approximate allocation of the allowance
for loan losses by loan categories at the dates indicated and the percentage of
such amounts to the total allowance and to total loans. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not indicative of future losses
and does not restrict the use of any of the allowance to absorb losses in any
category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------- --------------------------------- --------------------------------
Percent of Percent of Percent of
Allowance Percent Allowance Percent Allowance Percent of
in Each of Loans in Each of Loans in Each of Loans
Category in Each Category in Each Category in Each
to Total Category to to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans......... $2,322 27.20% 47.34% $2,262 29.81% 49.51% $1,938 31.88% 54.21
Consumer loans............ 2,867 33.60 30.97 2,339 30.82 28.38 1,590 26.16 23.43
Commercial................ 3,345 39.20 21.69 2,988 39.37 22.11 2,550 41.96 22.36
------ ------ ------ ------- ------ ------ ------ ------ ------
Total allowance
for loan losses..... $8,534 100.00% 100.00% $7,589 100.00% 100.00% $6,078 100.00% 100.00
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1996 1995
------------------------------------- ----------------------------------
Percent of Percent of
Allowance Percent Allowance Percent
in Each of Loans in Each of Loans
Category in Each Category in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
-------- ------------ ------------- ------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans......... $1,866 29.60% 57.19% $1,973 30.43% 60.62%
Consumer loans............ 1,901 30.15 20.49 1,883 29.04 16.80
Commercial................ 2,536 40.25 22.32 2,628 40.53 22.58
------ ------ ------ ------ ------ ------
Total allowance
for loan losses..... $6,303 100.00% 100.00% $6,484 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
67
<PAGE>
Investment Securities Activities
General. Under Massachusetts law, Berkshire Bank has authority to purchase
a wide range of investment securities. As a result of recent changes in federal
banking laws, however, financial institutions such as Berkshire Bank may not
engage as principals in any activities that are not permissible for a national
bank, unless the Federal Deposit Insurance Corporation has determined that the
investments would pose no significant risk to the Bank Insurance Fund and
Berkshire Bank is in compliance with applicable capital standards. In 1993, the
Regional Director of the Federal Deposit Insurance Corporation approved a
request by Berkshire Bank to acquire and retain certain listed stocks and/or
registered stocks subject to certain conditions. See "Regulation and
Supervision."
Berkshire Bank's main source of income has been and will continue to be
derived from its loan portfolio. The investment securities portfolio is
primarily used to provide for Berkshire Bank's cash flow needs, to provide
adequate liquidity to protect the safety of customer deposits and to earn a
reasonable return on investment. The structure of the investment securities
portfolio is based upon the composition and quality of the loan portfolio and
Berkshire Bank's liquidity position and deposit structure. Berkshire Bank
currently utilizes its fixed income investment securities portfolio as a source
of liquidity to its loan portfolio and to manage its interest rate risk profile.
As such, higher priority has generally been given to investments in money market
and shorter-term readily marketable securities.
Berkshire Bank's investment securities policy divides investments into two
categories, fixed income and equity portfolios. The primary objectives of the
fixed income portfolio are to: (1) maintain an adequate source of liquidity
sufficient to meet regulatory and operating requirements, including funding for
loans; (2) safeguard against deposit outflows, reduced loan amortization and
increased loan demand; and (3) manage interest rate risk. The fixed income
securities portfolio primarily consists of debt issues, including corporate and
municipal bonds, U.S. government and agency obligations and mortgage-backed and
asset-backed securities, including collateralized mortgage obligations and real
estate mortgage investments conduits. A collateralized mortgage obligation is a
mortgage-backed bond that separates mortgage pools into different maturities
called "tranches." Tranches pay different rates of interest and can mature in a
few months, or a few years. In return for a lower yield, collateralized
mortgage obligations provide increased security about the life of the
investment. However, in a lowering interest rate risk environment,
collateralized mortgage obligations tend to be repaid before their expected
maturities as prepayments increase. This may result in Berkshire Bank having to
reinvest the funds at a lower interest rate. Real estate mortgage investments
conduits, a type of collateralized mortgage obligation, are similar in that
securities representing an undivided interest in such mortgages are issued.
However, real estate mortgage investments conduits have more flexibility than
other types of collateralized mortgage obligations as issuers can separate
mortgage pools not only into different maturity classes but also into different
risk classes. Approximately 71.2% of Berkshire Bank's mortgage-backed
securities are issued or guaranteed by agencies of the U.S. Government, which
carry lower credit risk than mortgage-backed securities of a private issuer.
Other types of asset-backed securities in which Berkshire Bank invests are
typically collateralized by the cash flow from a pool of auto loans, credit card
receivables, consumer loans and other similar obligations. Both mortgage-backed
and asset-backed securities carry market risk, the risk that increases in market
interest rates may cause a decrease in market value.
The marketable equity securities portfolio is currently managed to produce
capital gains through price appreciation and lowering taxable income through
deductions permitted for a portion of dividends received. The total book value
of the marketable equity securities portfolio is currently limited by the
investment policy to 100% of total capital. At December 31, 1999, the cost of
the marketable equity securities portfolio, including restricted equity
securities, totaled $16.3 million or 18.5% of its authorized limit and consisted
primarily of bank, utility and industrial stocks. At December 31, 1999, the
gross unrealized gains associated with the marketable equity securities
portfolio were $28.4 million and the gross unrealized losses were $501,000. The
market equity securities portfolio carries equity price risk in that, if equity
prices decline due to unfavorable market conditions or other factors, Berkshire
Bank's capital would decrease.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's
68
<PAGE>
intent as to the ultimate disposition of each security. SFAS No. 115 allows debt
securities to be classified as "held to maturity" and reported in financial
statements at amortized cost only if the reporting entity has the positive
intent and ability to hold those securities to maturity. Securities that might
be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, or other similar factors
cannot be classified as "held to maturity." Debt and equity securities held for
current resale are classified as "trading securities." These securities are
reported at fair value, and unrealized gains and losses on the securities would
be included in earnings. Berkshire Bank does not currently use or maintain a
trading account. Debt and equity securities not classified as either "held to
maturity" or "trading securities" are classified as "available for sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and included in accumulated other
comprehensive income, net of taxes.
The Executive Committee of the Board of Directors is responsible for
developing and reviewing Berkshire Bank's investment policy, which is designed
to complement Berkshire Bank's lending activities, improve liquidity and earn a
reasonable return through interest, dividend and capital gain income while
minimizing Berkshire Bank's federal tax liability through deductions available
on corporate dividends. Investment decisions are made in accordance with
Berkshire Bank's investment policy and are based upon the quality of a
particular investment, its inherent risks, Berkshire Bank's liquidity needs,
prospects for yield and/or appreciation and the potential tax consequences.
While general investment strategies are developed and authorized by the
Executive Committee, the execution of specific investment actions and the day-
to-day oversight of Berkshire Bank's investment portfolio rests with the
Chairman, President and Treasurer. These officers are authorized to execute
investment transactions up to specified limits based on the type of security
without the prior approval of the Executive Committee. However, such purchases
require the ratification of the Executive Committee at their next scheduled
meeting. The Board of Directors receives a monthly report of all securities
transactions made during the previous month.
Berkshire Bank's investment policy allows the use of certain hedging
strategies, including the purchase of options in an effort to increase the
return and decrease the risk on the securities portfolio. However, Berkshire
Bank has not engaged in such practices to date and does not currently intend to
do so in the future. If circumstances warrant the use of such derivative
instruments in the future, Berkshire Bank's current investment securities policy
would be amended to specifically authorize such transactions and provide
limitations on such investments.
69
<PAGE>
The following table presents the amortized cost and fair value of
Berkshire Bank's available for sale securities, by type of security, at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ---------- ----------- ---------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Obligations of U.S. Treasury
and U.S. Government agencies....... $10,986 $10,711 $12,243 $12,286 $21,310 $21,257
Corporate bonds and notes........... 31,177 30,634 18,054 18,073 1,078 1,083
Asset-backed securities............. 3,253 3,207 2,639 2,604 2,191 2,209
Marketable equity securities........ 10,454 38,399 10,538 39,786 11,096 33,526
------- ------ ------ ------ ------ ------
Total investment securities....... 55,870 82,951 43,474 72,749 35,675 58,075
Mortgage-backed securities:
Freddie Mac......................... $ 2,469 $ 2,493 $ 3,591 $ 3,654 $ 3,448 $ 3,539
Fannie Mae.......................... 1,604 1,618 2,124 2,188 3,951 4,020
Private label REMICs................ 5,878 5,841 14,877 14,886 5,651 5,648
Ginnie Mae.......................... 180 181 293 297 487 496
------- ------ ------ ------ ------ ------
Total mortgage-backed securities.. 10,131 10,133 20,885 21,025 13,537 13,703
------- ------ ------ ------ ------ ------
Total available-for-sale
securities...................... $66,001 $93,084 $64,359 $93,774 $49,212 $71,778
======= ======= ======= ======= ======= =======
</TABLE>
The following table presents the amortized cost and fair value of Berkshire
Bank's held for maturity securities, by type of security, at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ----------------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------ -------------- ------------ -------------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Obligations of U.S. Treasury
and U.S. Government agencies ... $ -- $ -- $ -- $ -- $ 2,000 $ 2,001
Municipal notes.................. 6,720 6,720 6,997 6,997 3,464 3,464
Other bonds and notes............ -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total investment securities..... 6,720 6,720 6,997 6,997 5,464 5,465
------ ------ ------ ------ ------ ------
Mortgage-backed securities:
Freddie Mac ..................... 5,368 5,334 8,642 8,643 11,679 11,668
Fannie Mae....................... 4,352 4,303 7,306 7,288 15,962 15,940
Ginnie Mae....................... 574 565 835 828 1,570 1,566
------ ------ ------ ------ ------ ------
Total mortgage-backed
securities................ 10,294 10,202 16,783 16,759 29,211 29,174
------ ------ ------ ------ ------ ------
Total held-to-maturity
securities................ $17,014 $16,922 $23,780 $23,756 $34,675 $34,639
======= ======= ======= ======= ======= =======
</TABLE>
At December 31, 1999, Berkshire Bank did not own any investment or
mortgage-backed securities of a single issuer, other than U.S. Government and
agency securities, which had an aggregate book value in excess of 10% of
Berkshire Bank's capital at that date.
70
<PAGE>
The following presents the activity in the investment securities and
mortgage-backed securities portfolios for the years indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ---------- --------------
(In thousands)
<S> <C> <C> <C>
Investment securities:
Investment securities, beginning of year................. $ 79,746 $ 63,539 $ 79,256
Purchases................................................... 34,636 56,472 13,566
Sales....................................................... (2,440) (16,554) (11,219)
Maturities and calls........................................ (16,646) (27,220) (26,568)
Net (premium)/discount...................................... (3,426) (3,373) 2,297
(Decrease)/increase in unrealized gain...................... (2,199) 6,882 6,207
-------- -------- --------
Net (decrease)/increase in investment securities......... 9,925 16,207 (15,717)
Investment securities, end of year....................... 89,671 79,746 63,539
-------- -------- --------
Mortgage-backed securities:
Mortgage-backed securities, beginning of year............ 37,808 42,914 36,809
Purchases................................................ 18,256 58,638 42,045
Sales.................................................... -- -- (346)
Repayments and prepayments............................... (36,246) (62,592) (30,559)
Net (premium)/discount...................................... 742 (1,122) (5,140)
(Decrease)/increase in unrealized gain...................... (133) (30) 105
-------- -------- --------
Net (decrease)/increase in mortgage-backed securities.... (17,381) (5,106) 6,105
Mortgage-backed securities, end of year.................. 20,427 37,808 42,914
-------- -------- --------
Total securities, end of year............................... $110,098 $117,554 $106,453
======== ======== ========
</TABLE>
71
<PAGE>
The following table presents certain information regarding the amortized
cost, weighted average yields and estimated maturities or periods to repricing
of Berkshire Bank's debt securities at December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years
--------------------------- --------- ---------- ---------- -----------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
-------------- ---------- --------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Obligations of U.S. Treasury and
U.S. Government agencies......... $ 2,349 5.15% $ 7,639 5.81% $ 998 5.82%
Mortgage-backed securities.......... 13,073 6.37 6,957 6.47 334 6.76
Municipals.......................... 5,888 3.85 221 5.62 -- --
Corporate bonds and notes........... 8,590 6.30 20,742 6.40 1,002 6.35
Asset-backed securities (1)......... 2,599 6.45 623 6.60 31 8.27
------- ------- ------
Total......................... $32,499 5.81% $36,182 6.29% $2,365 6.25%
======= ======= ======
<CAPTION>
At December 31, 1999
------------------------------------------------
More than Ten Years Total
----------------------- ----------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
Obligations of U.S. Treasury and
U.S. Government agencies..................... $ -- --% $10,986 5.69%
Mortgage-backed securities...................... 61 6.29 20,425 6.41
Municipals...................................... 611 4.99 6,720 4.01
Corporate bonds and notes....................... 843 7.99 31,177 6.41
Asset-backed securities (1)..................... -- -- 3,253 6.50
------ -------
Total..................................... $1,515 6.68% $72,561 6.09%
====== =======
</TABLE>
___________________________
(1) Includes small business administration securities with a fair value of
$800,000 at December 31, 1999.
72
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for Berkshire
Bank's lending and other investment activities. In addition, Berkshire Bank also
generates funds internally from loan principal repayments and prepayments and
maturing investment securities. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and money market
conditions. Berkshire Bank may use borrowings from the Federal Home Loan Bank of
Boston as a source of funding for loan and securities investment activity. To a
lesser extent, Berkshire Bank also utilizes retail repurchase agreements as a
source of funds.
Deposit Accounts. Substantially all of Berkshire Bank's deposits are
generated from the areas surrounding its branch offices. Berkshire Bank offers a
wide variety of deposit accounts with a range of interest rates and terms.
Berkshire Bank's deposit accounts consist of interest-bearing checking,
noninterest-bearing checking, regular savings, money market savings and
certificates of deposit. The maturities of Berkshire Bank's certificate of
deposit accounts range from three months to ten years. In addition, Berkshire
Bank offers retirement accounts, including Traditional IRAs, Roth IRAs, Simple
IRAs, Self-Directed IRAs and Keogh accounts, simplified employee pension plan,
profit-sharing qualified plan and money purchase pension plan accounts.
Berkshire Bank also offers commercial business products to small businesses
operating within its primary market area. Deposit account terms vary with the
principal differences being the minimum balance deposit, early withdrawal
penalties, limits on the number of transactions and the interest rate.
Berkshire Bank reviews its deposit mix and pricing on a weekly basis.
Berkshire Bank also offers a variety of deposit accounts designed for the
businesses operating in its market area. Berkshire Bank's business banking
deposit products include a commercial checking account which provides an
earnings credit to offset monthly service charges and a checking account
specifically designed for small business. Additionally, Berkshire Bank offers
sweep accounts and money market accounts for businesses and IOLTA interest
checking and escrow accounts. Berkshire Bank has sought to increase its
commercial deposits through the offering of these products, particularly to its
commercial borrowers and to the municipalities that participate in its
government banking program.
Berkshire Bank believes it offers competitive interest rates on its deposit
products. Berkshire Bank determines the rates paid based on a number of
factors, including rates paid by competitors, Berkshire Bank's need for funds
and cost of funds, borrowing costs, Berkshire Bank's current asset/liability
structure, the amount of maturing deposits and movements of market interest
rates. Berkshire Bank currently does not utilize brokers to obtain deposits but
may choose to do so in the future. At December 31, 1999, Berkshire Bank had no
brokered deposits. All Massachusetts savings banks are required to be members
of the Depositors Insurance Fund and as such must pay its assessments. The
Depositors Insurance Fund is a private deposit insurer which insures all
deposits in member banks in excess of Federal Deposit Insurance Corporation
deposit insurance limits. See "Regulation and Supervision--Massachusetts Banking
Laws and Supervision."
In the unlikely event Berkshire Bank is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to Berkshire Hills as the sole stockholder of Berkshire Bank.
The following table presents the deposit activity of Berkshire Bank for the
years indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------
1999 1998 1997
------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Increase/(Decrease) before interest credited............ $ 9,797 $ 85,460 $(18,008)
Interest credited....................................... 23,848 22,601 21,564
-------- --------- ---------
Net increase............................................ $33,645 $108,061 $ 3,556
======== ========= =========
</TABLE>
73
<PAGE>
At December 31, 1999, Berkshire Bank had certificate of deposit accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
--------------- ------------ -------------
(In thousands)
<S> <C> <C>
Three months or less................... $16,550 5.11%
Over 3 months through 6 months......... 15,645 5.22
Over 6 months through 12 months........ 18,947 5.54
Over 12 months......................... 31,623 6.10
--------
Total............................. $82,765 5.61%
========
</TABLE>
The following table presents information concerning average balances and
weighted average interest rates on Berkshire Bank's deposit accounts for the
years indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------ ----------------------------------- --------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
----------- --------- --------- ---------- ---------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market accounts.... $ 84,971 12.88% 3.73% $ 62,043 10.72% 3.50% $ 49,159 9.23% 3.33%
NOW accounts............. 73,615 11.16 1.13 60,039 10.37 1.94 50,696 9.52 1.97
Savings (1).............. 142,193 21.55 3.07 129,020 22.30 3.04 125,020 23.48 3.00
Certificates of deposit.. 291,344 44.16 5.31 271,959 47.00 5.64 262,379 49.28 5.78
Demand accounts.......... 67,563 10.25 -- 55,585 9.61 -- 45,218 8.49 --
-------- ------ -------- ------ -------- ------
Total.............. $659,686 100.00% 3.62% $578,646 100.00% 3.91% $532,472 100.00% 4.05%
======== ====== ======== ====== ======== ======
</TABLE>
_______________________________________
(1) Includes mortgagors' escrow accounts.
Certificates of Deposit by Rates and Maturities. The following table
presents the amount of certificate accounts categorized by rates and maturities,
for the periods and years indicated.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1999
-------------------------------------------------------------------------
Less than One to Two Two to Three Over Three
One Year Years Years Years
-------------- ---------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
0.00-4.00%....................... $ 851 $ -- $ -- $ --
4.01-5.00%....................... 103,577 4,093 184 183
5.01-6.00%....................... 90,224 46,615 8,253 9,769
6.01-7.00%....................... 11,163 2,709 932 7,438
7.01% and above.................. 741 14 7,206 1,351
--------- -------- -------- -------
Total................... $206,556 $53,431 $16,575 $18,741
========= ======== ======== =======
<CAPTION>
Total at December 31,
---------------------------------------------------------
1999 1998 1997
---------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
0.00-4.00%........................ $ 851 $ 1,095 $ 698
4.01-5.00%........................ 108,037 61,510 6,110
5.01-6.00%........................ 154,861 188,280 195,356
6.01-7.00%........................ 22,242 27,626 41,413
7.01% and above................... 9,312 12,146 17,016
-------- -------- --------
Total.................... $295,303 $290,657 $260,593
======== ======== ========
</TABLE>
Borrowings. Berkshire Bank utilizes advances from the Federal Home Loan
Bank of Boston to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The Federal Home Loan Bank of Boston functions as a
central reserve bank providing credit for savings banks and certain other member
financial institutions. As a member of the Federal Home Loan Bank of Boston,
Berkshire Bank is required to own capital stock in the Federal Home Loan Bank of
Boston and is authorized to apply for advances on the security of
74
<PAGE>
the capital stock and certain of its mortgage loans and other assets,
principally securities that are obligations of, or guaranteed by, the U.S.
Government or its agencies, provided certain creditworthiness standards have
been met. Advances are made under several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. At December 31, 1999, Berkshire Bank had the ability to
borrow a total of approximately $209.2 million from the Federal Home Loan Bank
of Boston. At that date, Berkshire Bank had outstanding advances of $58.9
million. In addition, Berkshire Bank had a $2.0 million repurchase agreement
line of credit to be secured by securities or other assets of Berkshire Bank
with the Depositors Insurance Fund. Berkshire Bank only intends to use this line
of credit on an emergency basis to solve a funding problem. At December 31, 1999
Berkshire Bank had no outstanding borrowings against this agreement.
Berkshire Bank offers retail repurchase agreements to selected higher
balance customers and certain municipalities. These agreements are direct
obligations of Berkshire Bank, which are then transferred to the customer, to
repay at maturity or on demand the purchase price of an undivided interest in a
U.S. Government or agency security owned by Berkshire Bank. Since these
agreements are not deposits, they are not insured by the Federal Deposit
Insurance Corporation. At December 31, 1999, such retail repurchase agreement
borrowings totaled $1.1 million.
The following tables presents certain information regarding Berkshire
Bank's Federal Home Loan Bank advances during the periods and at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Maximum amount of advances
outstanding at any month end....... $76,861 $42,892 $9,972
Approximate average advances
outstanding........................ 50,951 23,941 7,001
Approximate weighted average rate
paid on advances................... 5.49% 5.07% 5.63%
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -------
<S> <C> <C> <C>
Balance outstanding at end of year........ $58,928 $29,590 $6,880
Weighted average rate paid on advances.... 5.64% 4.52% 6.20%
</TABLE>
Trust Services
Berkshire Bank maintains the Asset Management/Trust Department Group as a
department within Berkshire Bank which primarily provides trust and investment
services to individuals, partnerships, corporations and institutions and also
acts as a fiduciary of estates and conservatorships as a trustee under various
wills, trusts and other plans. Berkshire Bank believes that the trust
department allows it to provide investment opportunities and fiduciary services
to both current and prospective customers. Consistent with Berkshire Bank's
operating strategy, Berkshire Bank will continue to emphasize the growth of its
trust service operations to grow assets and increase fee-based income.
Berkshire Bank has implemented several policies governing the practices and
procedures of the trust department, including policies relating to maintaining
confidentiality of trust records, investment of trust property, handling
conflicts of interest, and maintaining impartiality. At December 31, 1999, the
trust department managed
75
<PAGE>
622 accounts with aggregate assets of $242.8 million,
of which the largest relationship totaled $4.5 million, or 1.9% of the trust
department's total assets, at December 31, 1999. For 1999, trust services
generated $1.7 million of fees and service income compared to $1.2 million for
1998, an increase of 49.9%.
Government Banking
In 1998, Berkshire Bank began offering full-service government banking for
cities, towns and municipal school districts in western Massachusetts, eastern
New York, northern Connecticut and southern Vermont. Berkshire Bank offers
municipalities all aspects of financial advisory services for the sale of notes
and bonds, actively working with bond counsel, rating agencies, consulting
agencies and bond buyers. Additionally, Berkshire Bank offers a wide range of
commercial deposit products and checking accounts, as well as the origination of
payroll accounts. At December 31, 1999, Berkshire Bank was working with
approximately 25 municipalities. For 1999, government banking generated $94,500
of net fee income compared to $53,900 for 1998.
Subsidiary Activities
The following are descriptions of Berkshire Bank's wholly owned active
subsidiaries, which will be indirectly owned by Berkshire Hills following the
conversion.
G.B.S.B., Inc. G.B.S.B., Inc. was established in August 1990 to acquire
and hold investment securities of a type that are permissible for banks to hold
under applicable law. G.B.S.B. was qualified as a "securities corporation" for
Massachusetts income tax purposes. Income earned by a qualifying securities
corporation is generally entitled to special tax treatment from Massachusetts
income tax. As of December 31, 1999, G.B.S.B., Inc. had assets totaling $44.9
million, consisting primarily of state and municipal bonds and bank, utility and
industrial stocks.
North Street Securities Corporation. North Street, originally named GBSB
Leasing Corporation, was established in January 1984 to acquire and hold
investment securities of a type that are permissible for banks to hold under
applicable law. North Street was qualified as a "securities corporation" for
Massachusetts income tax purposes. Income earned by a qualifying securities
corporation is generally entitled to special tax treatment from Massachusetts
income tax. As of December 31, 1999, North Street had assets totaling $31.6
million, consisting primarily of corporate and private label REMICs.
Greater Berkshire Foundation, Inc.
In 1997, Berkshire Bank established a private charitable foundation,
Greater Berkshire Foundation, Inc. This foundation, which is not a subsidiary
of Berkshire Bank, provides grants to public charities that are operated for
charitable, scientific, literary or educational purposes, within the communities
that Berkshire Bank serves. In 1997, Berkshire Bank contributed marketable
equity securities with a cost basis and fair market value of $97,000 and $2.5
million, respectively, at the date of contribution and transfer. At December
31, 1999, the foundation had assets of approximately $2.1 million. The
foundation's current six member Board of Directors consists of current directors
of Berkshire Bank. After the conversion, Berkshire Bank will continue to
maintain the foundation. However, Berkshire Bank does not expect to make any
further contributions to the foundation. The existence of Berkshire Bank's
current foundation is not expected to impact the business and affairs of
Berkshire Hills Foundation which is being established in connection with
Berkshire Bank's conversion. See "The Conversion--Establishment of the
Charitable Foundation."
76
<PAGE>
Properties
Berkshire Bank currently conducts its business through its main office
located in Pittsfield, Massachusetts, and 12 other full-service banking offices
and other facilities listed below. Berkshire Hills believes that Berkshire
Bank's facilities will be adequate to meet the then present and immediately
foreseeable needs of Berkshire Bank and Berkshire Hills.
<TABLE>
<CAPTION>
Net Book Value
of Property
Original or Leasehold
Lease Year Improvements
or Leased Date of Lease at December 31,
Location Own or Acquired Expiration 1999
- --------------------------------------- ----------- -------------- ------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
24 North Street
Pittsfield, Massachusetts.............. Own 1898 -- $1,184
Banking Offices:
244 Main St.
Great Barrington, Massachusetts........ Own 1950 -- 1,347
Main Street
Sheffield, Massachusetts............... Own 1966 -- 240
Old Town Hall
Pittsfield, Massachusetts.............. Lease 1969 2030 50
Allendale Shopping Center
Pittsfield, Massachusetts.............. Lease 1970 2001 66
2 Depot Street
W. Stockbridge, Massachusetts.......... Own 1975 -- 123
165 Elm Street
Pittsfield, Massachusetts.............. Own 1977 -- 329
255 Stockbridge Road
Great Barrington, Massachusetts........ Own 1985 -- 296
37 Main Street
North Adams, Massachusetts............. Lease 1985 2005(1) 95
1 Park Street
Lee, Massachusetts..................... Own 1991 -- 261
32 Main Street
Stockbridge, Massachusetts............. Own 1991 -- 297
39 Cheshire Road
Pittsfield, Massachusetts.............. Lease 1998 2002(2) 5
66 West Street
Pittsfield, Massachusetts.............. Lease 1998 2015(1) 71
Other Office:
66 Allen Street (3)
Pittsfield, Massachusetts.............. Own 1999 -- 2,421
</TABLE>
- ----------------------------
(1) Berkshire Bank has two options to renew this lease, each for an additional
five-year period.
(2) Berkshire Bank has an option to renew this lease for an additional ten-year
period.
(3) This facility houses Berkshire Bank's Commercial Lending Division, Asset
Management/Trust Department and Government Banking Program.
77
<PAGE>
Personnel
As of December 31, 1999, Berkshire Bank had 255 full-time employees and 32
part-time employees, none of whom is represented by a collective bargaining
unit. Berkshire Bank believes its relationship with its employees is good.
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 Bank 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 Bank.
MANAGEMENT OF BERKSHIRE HILLS
Directors are elected by the stockholders of Berkshire Hills for staggered
three-year terms, or until their successors are elected and qualified. Berkshire
Hills' Board of Directors consists of 18 persons divided into three classes,
each of which contains approximately one-third of the Board. One class,
consisting of Messrs. Henry D. Granger, Edward G. McCormick, Raymond B. Murray,
III, Robert A. Wells, Ms. Ann H. Trabulsi and Ms. Anne Everest Wojtkowski, has a
term of office expiring at the first annual meeting of stockholders; a second
class, consisting of Messrs. Thomas O. Andrews, A. Allen Gray, Michael G.
Miller, Louis J. Oggiani, William E. Williams and Ms. Catherine B. Miller, has a
term of office expiring at the second annual meeting of stockholders; and a
third class, consisting of Messrs. James A. Cunningham, Jr., Thomas R. Dawson,
John Kittredge, Peter J. Lafayette, Robert S. Raser and Corydon L. Thurston, has
a term of office expiring at the third annual meeting of stockholders. Berkshire
Hills anticipates that its first annual meeting of stockholders will be held in
December 2000.
The executive officers of Berkshire Hills are elected annually and serve at
the Board's discretion. The executive officers of Berkshire Hills are:
Name Position
---- --------
Robert A. Wells Chairman of the Board
James A. Cunningham, Jr. President and Chief Executive Officer
Michael P. Daly Executive Vice President
Charles F. Plungis, Jr. Senior Vice President, Treasurer
and Chief Financial Officer
Susan M. Santora Executive Vice President
78
<PAGE>
MANAGEMENT OF BERKSHIRE BANK
Directors and Executive Officers
The Board of Directors of Berkshire Bank is presently composed of 18
members who are elected annually as required by the Bylaws of Berkshire Bank.
The executive officers of Berkshire Bank are appointed annually by the Board of
Directors and hold office until their respective successors are chosen and
qualified, or until their death, earlier resignation or removal from office. The
following table presents information with respect to the directors and executive
officers of Berkshire Bank.
Directors
<TABLE>
<CAPTION> Director Term
Name Age(1) Position Held With Berkshire Bank(2) Since (3) Expires
- ---- ----------- ------------------------------------ --------- -----------
<S> <C> <C> <C> <C>
Thomas O. Andrews 61 Director 1980 2000
James A. Cunningham, Jr. 49 President, Chief Executive Officer 1990 2000
and Director
Thomas R. Dawson 52 Director 1993 2000
Henry D. Granger 63 Director 1985 2000
A. Allen Gray 55 Director 1996 2000
John Kittredge 71 Director 1974 2000
Peter J. Lafayette 52 Director 1996 2000
Edward G. McCormick 52 Director 1994 2000
Catherine B. Miller 58 Director 1983 2000
Michael G. Miller 57 Director 1989 2000
Raymond B. Murray, III 53 Director 1991 2000
Louis J. Oggiani 48 Director 1995 2000
Robert S. Raser 43 Director 1996 2000
Corydon L. Thurston 47 Director 1988 2000
Ann H. Trabulsi 64 Director 1976 2000
Robert A. Wells 60 Chairman of the Board 1976 2000
William E. Williams 48 Director 1992 2000
Anne Everest Wojtkowski 64 Director 1973 2000
</TABLE>
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
Name Age(1) Position Held With Berkshire Bank
- ---- ----------- ---------------------------------
<S> <C> <C>
Michael P. Daly 38 Executive Vice President - Senior Loan Officer
Charles F. Plungis, Jr. 48 Senior Vice President, Treasurer and
Chief Financial Officer
Susan M. Santora 46 Executive Vice President - Retail Banking
</TABLE>
- ---------------------
(1) As of December 31, 1999.
(2) All of the directors are also trustees of Berkshire Bancorp.
(3) Includes term of service as a trustee of either Great Barrington Savings
Bank or Berkshire County Savings Bank.
79
<PAGE>
Biographical Information
Below is certain information regarding the directors and executive officers of
Berkshire Bank. Unless otherwise stated, each director and executive officer has
held his or her current occupation for the last five years. There are no family
relationships among or between the directors or executive officers except as set
forth below.
Thomas O. Andrews is the President and Chief Executive Officer of H.S. Andrews
Insurance Agency in Great Barrington, Massachusetts.
James A. Cunningham, Jr. serves as President and Chief Executive Officer of
Berkshire Bank and President and Chief Operating Officer of Berkshire Bancorp.
Mr. Cunningham was President and Chief Executive Officer of Great Barrington
Savings Bank prior to its merger with Berkshire County Savings Bank in May 1997.
Thomas R. Dawson is a self-employed certified public accountant.
Henry D. Granger is the owner of Northeast Technical Associates, Inc., a real
estate appraisal firm, located in Great Barrington, Massachusetts.
A. Allen Gray is a vice president and general counsel of General Dynamics
Defense Systems, Inc., a government contractor located in Pittsfield,
Massachusetts.
John Kittredge is a former vice president of Crane and Company, Inc., a paper
manufacturer located in Dalton, Massachusetts. Mr. Kittredge serves as the
clerk of Berkshire Bank.
Peter J. Lafayette is President of Berkshire Housing Development Corporation,
a non-profit housing organization located in Pittsfield, Massachusetts.
Edward G. McCormick is a partner in the law firm of McCormick, Murtagh, Marcus
& Smith, located in Great Barrington, Massachusetts.
Catherine B. Miller is a former partner and vice-president of Wheeler &
Taylor, Inc., an insurance agency with offices in Stockbridge, Great Barrington
and Sheffield, Massachusetts.
Michael G. Miller has served as the President of South Mountain Products, a
food importer located in Pittsfield, Massachusetts since 1997. Mr. Miller was
retired from 1995 until 1997. Mr. Miller served as President and Chief
Executive Officer of EPC Holding, a newspaper publishing company located in
Pittsfield, Massachusetts prior to his two-year retirement.
Raymond B. Murray, III is vice president and co-owner of Ray Murray, Inc., a
regional wholesale equipment distributor for propane, natural and industrial gas
markets located in Lee, Massachusetts.
Louis J. Oggiani is an attorney with a private office in Great Barrington,
Massachusetts.
Robert S. Raser is the President of Carr Brothers Hardware Co, Inc. located in
Great Barrington, Massachusetts.
Corydon L. Thurston serves as executive vice president of Berkshire
Broadcasting, Inc., which owns and operates three radio stations in North Adams
and Great Barrington, Massachusetts.
Ann H. Trabulsi is a community volunteer serving on various not-for-profit
boards, including Berkshire Medical Center and Berkshire Health Systems.
80
<PAGE>
Robert A. Wells is Chairman of the Board of Berkshire Bank and Chairman of the
Board and Chief Executive Officer of Berkshire Bancorp. Mr. Wells served as
President and Chief Executive Officer of Berkshire County Savings Bank prior to
its merger with Great Barrington Savings Bank in May 1997.
William E. Williams is the President of W.E. Williams Paving, Inc., a company
located in West Stockbridge, Massachusetts, providing all types of excavating
and paving services throughout Berkshire County and surrounding areas.
Anne Everest Wojtkowski is a professor of engineering at Berkshire Community
College.
Executive Officers Who Are Not Directors
Michael P. Daly was named Executive Vice President and Senior Loan Officer in
December 1999. Before being named to these positions, Mr. Daly served as Senior
Vice President of Commercial Banking. Prior to the merger of Berkshire County
Savings Bank and Great Barrington Savings Bank, Mr. Daly was in charge of
commercial lending, consumer lending and operations.
Charles F. Plungis, Jr. has served as Senior Vice President and Treasurer with
both Great Barrington Savings Bank and Berkshire Bank. Mr. Plungis was
additionally named Chief Financial Officer in December 1999.
Susan M. Santora served as Senior Vice President in charge of branch
administration before being named Executive Vice President of Retail Banking in
December 1999. Prior to the merger, Ms. Santora was a vice president of Great
Barrington Savings Bank.
Meetings and Committees of the Board of Directors of Berkshire Bank and
Berkshire Hills
The business of Berkshire Bank is conducted through meetings and activities of
the Board of Directors and its committees. During the year ended December 31,
1999 the Board of Directors held 12 regular meetings and three special meetings.
The Board of Directors has established the following committees:
The Auditing Committee consists of Messrs. Gray, Raser and Williams. This
committee reviews Berkshire Bancorp's consolidated financial statements,
supervises the internal auditor and engages the external auditors. The
committee meets quarterly and met four times in 1999.
The Compensation Committee, which consists of Ms. Miller, Ms. Trabulsi and
Messrs. Murray and Thurston, is responsible for all matters regarding
compensation and fringe benefits for executive officers. This committee meets
as needed. The Committee was established by the Board of Directors in December
1999.
The CRA Committee, which consists of Messrs. Lafayette, McCormick and Ms.
Wojtkowski, monitors Berkshire Bank's compliance with both the state and federal
Community Reinvestment Acts, ensures that Berkshire Bank serves the various
credit needs of individuals and businesses in its delineated market area and
reviews Berkshire Bank's CRA examinations. The Committee meets quarterly and met
four times in 1999.
The Executive Committee, which consists of Messrs. Cunningham, Murray,
Thurston, Wells, Ms. Miller and Ms. Trabulsi, reviews and approves certain loans
and evaluates issues of major importance between regularly scheduled board
meetings. The Committee meets bi-monthly and as necessary, and met 24 times in
1999.
The Trust Committee, which consists of Messrs. Andrews, Kittredge and Wells,
oversees Berkshire Bank's Asset Management/Trust Department activities. Such
oversight includes the review and approval of the department's policies, the
coordination of the annual audit and review of the department's examination
reports. The Committee meets monthly and met 12 times in 1999.
81
<PAGE>
The Board of Directors of Berkshire Hills has established the following
committees: the Audit Committee consisting of Messrs. Gray, Raser, Miller and
Williams; the Pricing Committee consisting of the entire Board of Directors of
Berkshire Hills; the Compensation Committee consisting of Messrs. Murray and
Thurston, Ms. Miller and Ms. Trabulsi; the Nominating Committee and the
Executive Committee, both consisting of Messrs. Cunningham, Murray, Thurston,
Wells, Ms. Miller and Ms. Trabulsi.
Directors' Compensation
Fees. Non-employee directors of Berkshire Bank currently receive an annual
retainer of $3,000 for membership on the Board of Directors and $5,000 for
membership on the Executive Committee of the Board of Directors. The Clerk of
Berkshire Bank receives an annual retainer of $500. In addition, non-employee
directors each receive $500 for each board meeting attended, $250 for each
Trust, Audit or CRA Committee meeting attended, and $500 for each Executive
Committee meeting attended. The meeting fee for attendance at Executive
Committee meetings is $250 if it immediately precedes a Board of Directors'
meeting. Following the conversion, non-employee directors of Berkshire Bank
will each receive an annual retainer of $7,500, and members of the Executive
Committee will receive an additional $1,500. In addition, non-employee
directors will receive $500 for each board meeting attended, $750 for each
Executive Committee meeting attended, $500 for each CRA or Audit Committee
meeting attended and $250 for each Trust Committee meeting attended.
Executive Compensation
Summary Compensation Table. The following information is furnished for the
President and Chief Executive Officer and the four other highest paid executive
officers of Berkshire Bank who received a salary and bonus of $100,000 or more
during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Annual Compensation(1)
-------------------------------------------------
Name and All Other
Position Year (2) Salary (3) Bonus Compensation
- --------------------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
James A. Cunningham, Jr. 1999 $260,400 $52,080 $266,699(4)
President and Chief Executive Officer
Robert A. Wells 1999 248,750 45,000 81,674(4)
Chairman of the Board
Susan M. Santora 1999 109,140 32,742 15,543(5)
Executive Vice President-Retail
Banking
Michael P. Daly 1999 116,601 23,320 12,582(5)
Executive Vice President-Senior
Loan Officer
Charles F. Plungis, Jr. 1999 110,775 22,155 16,197(5)
Senior Vice President, Treasurer
and Chief Financial Officer
</TABLE>
- -------------------------------------------
(1) Does not include the aggregate amount of perquisites and other benefits,
which was less than $50,000 or 10% of the total annual salary and bonus
reported.
(2) Compensation information for the 1998 and 1997 fiscal years has been omitted
because Berkshire Bank was neither a public company nor a subsidiary of a
public company at that time.
(3) Includes $23,750 of directors' fees for Mr. Wells.
(4) Consists of employer contributions to Berkshire Bank's 401(k) plan of
$4,800. Also consists of employer contributions of $261,899 and $76,874 to
Berkshire Bank's supplemental executive retirement plan for Messrs.
Cunningham and Wells, respectively.
(5) Consists of employer contributions of $3,274, $3,498 and $3,323 to Berkshire
Bank's 401(k) plan and employer service costs of $12,269, $9,084 and $12,874
to Berkshire Bank's defined benefit plan for Ms. Santora, Mr. Daly and Mr.
Plungis, respectively.
82
<PAGE>
Employment Agreements. Berkshire Bank currently has employment agreements
with Messrs. Wells and Cunningham. However, upon the completion of the
conversion, Berkshire Bank and Berkshire Hills each intend to enter into new
employment agreements with Messrs. Wells and Cunningham, as well as with Messrs.
Daly, Plungis and Ms. Santora. The employment agreements are intended to ensure
that Berkshire Bank and Berkshire Hills will be able to maintain a stable and
competent management base after the conversion. The continued success of
Berkshire Bank and Berkshire Hills depends to a significant degree on the skills
and competence of officers.
The employment agreements will provide for a three-year term. The term of
the employment agreements will automatically extend on a daily basis unless
written notice of non-renewal is given by the Board of Directors of Berkshire
Hills or Berkshire Bank or by the executive. The employment agreements provide
that each executive's base salary will be reviewed annually. The base salaries
which will be effective for such employment agreements for Messrs. Cunningham,
Wells, Daly, and Plungis and Ms. Santora will be $320,000, $250,000, $139,250,
$140,750 and $125,510, respectively. In addition to the base salary, the
employment agreements provide for, among other things, participation in stock
and employee benefits plans and fringe benefits applicable to executive
personnel. The employment agreements provide for termination by Berkshire Bank
or Berkshire Hills for cause, as defined in the employment agreements, at any
time. If Berkshire Bank or Berkshire Hills chooses to terminate an
executive's employment for reasons other than for cause, or if an executive
resigns from Berkshire Bank or Berkshire Hills after specified circumstances
that would constitute constructive termination, the executive or, if the
executive dies, his/her beneficiary, would be entitled to receive an amount
equal to the remaining base salary and incentive compensation payments due to
the executive for the remaining term of the employment agreement and the
contributions that would have been made on the executive's behalf to any
employee benefit plans of Berkshire Bank and Berkshire Hills during the
remaining term of the employment agreement. Berkshire Bank and Berkshire Hills
would also continue and/or pay for the executive's life, health, dental and
disability coverage for the remaining term of the employment agreement. Upon
termination of the executive for reasons other than a change in control, the
executive must adhere to a one year non-competition restriction.
Under the employment agreements, if voluntary (upon circumstances discussed
in the agreements) or involuntary termination follows a change in control of
Berkshire Bank or Berkshire Hills, the executive or, if the executive dies,
his/her beneficiary, would be entitled to a severance payment equal to the
greater of: (1) the payments due for the remaining terms of the agreement; or
(2) three times the average of the executive's compensation (as described in the
agreements) for the five preceding taxable years. Berkshire Bank and Berkshire
Hills would also continue the executive's life, health, and disability coverage
for thirty-six months. Even though both Berkshire Bank and Berkshire Hills
employment agreements provide for a severance payment if a change in control
occurs, the executive would not receive duplicative payments or benefits under
the agreements. The executive would also be entitled to receive an additional
tax indemnification payment if payments under the employment agreements or any
other payments constituting "excess parachute payments" trigger liability under
the Internal Revenue Code of an excise tax. Under applicable law, the excise tax
is triggered by change in control-related payments which equal or exceed three
times the executive's average annual compensation over the five taxable years
preceding the change in control. The excise tax equals 20% of the amount of the
payment in excess of one times the executive's average compensation over that
preceding five-year period. If a change in control of Berkshire Bank and
Berkshire Hills occurred, the total amount of payments due under the Agreements,
based solely on the 1999 cash compensation (and without regard to future base
salary adjustments or bonuses and excluding any benefits under any employee
benefit plan which may be payable) would be approximately $3.0 million.
Payments to the executive under Berkshire Bank's employment agreement will be
guaranteed by Berkshire Hills if payments or benefits are not paid by Berkshire
Bank. Payment under Berkshire Hills' employment agreement would be made by
Berkshire Hills. All reasonable costs and legal fees paid or incurred by the
executive
83
<PAGE>
in any dispute or question of interpretation relating to the employment
agreements will be paid by Berkshire Bank or Berkshire Hills, respectively, if
the executive is successful on the merits in a legal judgment, arbitration or
settlement. The employment agreements also provide that Berkshire Bank and
Berkshire Hills will indemnify the executive to the fullest extent legally
allowable.
Change in Control Agreements. Upon conversion, Berkshire Bank and Berkshire
Hills intend to enter into change in control agreements with six senior officers
who will not be covered by an employment agreement. Each change in control
agreement will be renewable on an annual basis. The change in control
agreements will have terms of three years. The change in control agreements
will provide that if voluntary (upon the occurrence of circumstances discussed
in the agreements) or involuntary termination follows a change in control of
Berkshire Bank or Berkshire Hills, the officers would be entitled to receive a
severance payment equal three times their average annual compensation (as
described in the agreements) for the five most recent taxable years. Berkshire
Bank would also continue to pay for the officers' life, health and disability
coverage for 36 months following termination. If a change in control of
Berkshire Bank and Berkshire Hills occurred, the total payments that would be
due under the change in control agreements, based solely on the current annual
compensation paid to the officers covered by the change in control agreements
and excluding any benefits under any employee benefit plan which may be payable,
would equal approximately $2.1 million.
Benefits
General. Berkshire Bank currently pays 75% of the total costs of the medical
and health benefits for newly eligible employees and former employees of
Berkshire County Savings Bank. A greater portion is paid for grand-fathered
employees of Great Barrington Savings Bank. Berkshire Bank also pays 100% of
the total costs of dental insurance plans and 100% of premiums for life and
disability benefits for full-time employees.
Pension Plan. Berkshire Bank maintains a pension plan for its eligible
employees. Generally, employees of Berkshire Bank begin participation in the
pension plan once they reach age 21 and complete 1,000 hours of service in a
consecutive 12-month period. Participants in the pension plan becomes vested in
their accrued benefit under the pension plan upon the earlier of the: (1)
attainment of their "normal retirement age" (as described in the pension plan)
while employed at Berkshire Bank; (2) completion of three vesting years of
service with Berkshire Bank; or (3) death or disability of the participant.
Participants are generally credited with a vesting year of service for each year
in which they complete at least 1,000 hours of service.
A participant's normal benefit under the pension plan equals the sum of (1)
1.35% of the participant's average compensation (generally defined as the
average taxable compensation for the three consecutive limitation years that
produce the highest average) by the number of years of service the participant
has under the plan up to 25 years of service, plus (2) .6% of the excess of the
participant's average compensation over the participant's covered compensation
(the social security taxable wage base for the 35 years ending in the year the
participant becomes eligible for non-reduced social security benefits) for each
year of service under the plan up to 25 years of service. Participants may
retire at or after age 65 and receive their full benefit under the plan.
Participants may also retire early at age 62 or at age 55 with ten years of
service or at age 50 with 15 years of service under the plan and receive a
reduced retirement benefit. Pension benefits are payable in equal monthly
installments for life, or for married persons, as a joint survivor annuity over
the lives of the participant and spouse. Participants may also elect a lump sum
payment with the consent of their spouse. If a participant dies while employed
by Berkshire Bank, a death benefit will be payable to either his or her spouse
or estate, or named beneficiary, equal to the entire amount of the participant's
accrued benefit in the plan.
84
<PAGE>
The following table indicates the annual employer-provided retirement
benefits that would be payable under the pension plan upon retirement at age 65
to a participant electing to receive his pension benefit in the standard form of
benefit, assuming various specified levels of plan compensation and various
specified years of credited service. Under the Internal Revenue Code, maximum
annual benefits under the pension plan are limited to $135,000 per year and
annual compensation for benefit calculation purposes is limited to $170,000 per
year for the 2000 calendar year.
<TABLE>
<CAPTION>
Years of Service
Average Annual --------------------------------------------------------------------------------
Compensation 10 15 20 25 30 35
- --------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 25,000 $ 3,375 $ 5,063 $ 6,750 $ 8,438 $ 8,438 $ 8,438
50,000 7,766 11,649 15,532 19,415 19,415 19,415
75,000 12,641 18,962 25,282 31,603 31,603 31,603
100,000 17,516 26,274 35,032 43,790 43,790 43,790
125,000 22,391 33,587 44,782 55,978 55,978 55,978
150,000 27,266 40,899 54,532 68,165 68,165 68,165
175,000 29,216 43,824 58,432 73,040 73,040 73,040
200,000 29,216 43,824 58,432 73,040 73,040 73,040
250,000 29,216 43,824 58,432 73,040 73,040 73,040
300,000 29,216 43,824 58,432 73,040 73,040 73,040
350,000 29,216 43,824 58,432 73,040 73,040 73,040
</TABLE>
At October 31, 1999, which is the date of the most recent pension plan
statement, the pension plan's assets exceeded the benefit obligation by
approximately $1.6 million. The benefits listed on the table above, for the
pension plan are not subject to a deduction for Social Security benefits or any
other offset amount. As of January 1, 2000, Messrs. Cunningham, Wells, Daly,
Plungis and Ms. Santora had 27, 39, 14, 25 and 14 years of service,
respectively, for purposes of the pension plan.
Other Retirement Arrangements. Berkshire Bank has entered into a split-
dollar life insurance arrangement with Mr. Cunningham primarily to provide a
specified level of benefits upon Mr. Cunningham's retirement from Berkshire
Bank. Berkshire Bank has also entered into a separate agreement with Mr. Wells
to provide similar benefits. The arrangements were designed to provide Messrs.
Wells and Cunningham with an annual retirement benefit at age 60 equal to 70% of
the average of the three consecutive years during which each of the executive's
compensation is the highest. The determination of the total expected retirement
benefit consideration of the benefits the executives would receive under the
pension plan, the 401(k) plan, social security and certain life insurance
arrangements. Upon the executive's death, Berkshire Bank expects to recover all
of the premium payments it made with respect to the life insurance policies
purchased in connection with such arrangements.
Supplemental Executive Retirement Plan. Upon conversion, Berkshire Bank
intends to implement a supplemental executive retirement plan to provide for
supplemental retirement benefits with respect to the 401(k) plan and the
employee stock ownership plan; specifically benefits otherwise limited by other
provisions of the Internal Revenue Code or the terms of the employee stock
ownership plan loan (see below). Specifically, the plan will provide benefits
to eligible individuals (those designated by the Board of Directors of Berkshire
Bank or its affiliates) that cannot be provided under the 401(k) Plan and/or the
employee stock ownership plan as a result of the limitations imposed by the
Internal Revenue Code, but that would have been provided under the 401(k) Plan
and/or the employee stock ownership plan but for such limitations. In addition
to providing for benefits lost under tax-qualified plans as a result of
limitations imposed by the Internal Revenue Code, the new plan will also provide
supplemental benefits to designated individuals upon a change of control before
the complete scheduled repayment of the employee stock ownership plan loan.
Generally, upon such an event, the supplemental executive retirement plan will
provide the individual with a benefit equal to what the individual would have
received under the employee stock ownership plan had he remained employed
throughout the term of the employee stock ownership plan loan
85
<PAGE>
less the benefits actually provided under the employee stock ownership plan on
behalf of such individual. An individual's benefits under the supplemental
executive retirement plan will generally become payable upon the change in
control of Berkshire Bank or Berkshire Hills. The Board of Directors intends to
designate Messrs. Cunningham and Wells as participants in the supplemental
executive retirement plan.
Berkshire Bank may utilize a grantor trust in connection with the
supplemental executive retirement plan in order to set funds aside with which to
ultimately pay benefits under the plan. The assets of the grantor trust would
be subject to the claims of Berkshire Bank's general creditors in the event of
Berkshire Bank's insolvency until paid to the individual according to the terms
of the supplemental executive retirement plans.
401(k) Plan. Berkshire Bank has implemented a 401(k) plan (the "401(k)
Plan"), a tax-qualified profit sharing plan with a qualified cash or deferred
arrangement under Section 401(k) of the Internal Revenue Code for the benefit of
its eligible employees. The 401(k) Plan currently provides participants with
savings and retirement benefits based on employee deferrals of compensation, as
well as matching contributions made by Berkshire Bank. Eligible employees may
begin participating in the 401(k) Plan upon the completion of one year of
service (generally the completion of 1,000 hours of service during a twelve
consecutive month period) and attainment of age 21. Participants currently may
make pre-tax salary deferrals to the 401(k) Plan in amounts from 1% to 15% of
their total compensation, within a legally permissible limit ($10,500 for 2000).
Berkshire Bank makes a regular matching contribution equal to 100% of the
elective deferrals made by each participant up to 3% of a participant's eligible
compensation. This match is discretionary and may increase or decrease as
determined by Berkshire Bank. A participant is always 100% vested in his or her
account under the 401(k) Plan.
Currently, participants may invest their accounts under the 401(k) Plan in
eight investment vehicles with varying investment characteristics. Berkshire
Bank intends to add, as an investment option, an employer stock fund in which
participants may invest a portion of their account balances primarily in
Berkshire Hills common stock within the limitations set forth in the 401(k) Plan
document. However, a participant's ability to acquire common stock in the
conversion will be based on his or her status as an eligible account holder.
Regardless of the source of funds, no eligible account holders may elect to
invest more than $250,000 in common stock.
Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service for any reason. However, participants may
request in-service distributions from the 401(k) Plan in the form of hardship
withdrawals and loans. Distributions from the 401(k) Plan generally must comply
with federal and state income taxes and distributions made before a participant
attains the required minimum age also may be subject to a federal excise tax.
Incentive Compensation Programs. The Board of Directors of Berkshire Bank
has approved an incentive compensation program for employees of Berkshire Bank
based on the Board's evaluation of the fiscal year's operating results. The
size of the available incentive compensation pool may not exceed 10% of the
monthly net operating income of Berkshire Bank. The maximum bonus under the
program is generally limited to either 10%, 15%, or 20% of a participant's base
salary, depending on the individual's job classifications; however, greater
bonuses may be paid under special circumstances.
Employee Stock Ownership Plan. Berkshire Bank's Board of Directors has
authorized the adoption of an employee stock ownership plan for employees of
Berkshire Bank to be effective upon the completion of the conversion. Eligible
employees who are age 21 and employed by Berkshire Bank on the conversion
effective date participate in the plan immediately. Thereafter, new employees
of Berkshire Hills and Berkshire Bank who have been credited with at least one
year of service and attain age 21 will be eligible to participate in the
employee stock ownership plan.
The employee stock ownership plan expects to acquire 8% of the shares issued
in the conversion or between 530,971 shares, assuming 6,637,140 shares are
issued in the conversion, and 718,372 shares assuming 8,979,660 shares are
issued in the conversion. If the number of shares to be issued in the conversion
is increased to 10,326,609 shares, the employee stock ownership plan expects to
acquire 826,128 shares. It is anticipated that the
86
<PAGE>
employee stock ownership plan will borrow funds from a subsidiary to be
established in connection with the conversion or from a third-party lender to
purchase the stock. The loan will equal 100% of the aggregate purchase price of
the common stock. The loan to the employee stock ownership plan will be repaid
from Berkshire Bank's contributions to the employee stock ownership plan and, to
a lesser extent, from dividends payable on Berkshire Hills common stock held by
the employee stock ownership plan over the anticipated 15-year term of the loan.
The interest rate for the employee stock ownership plan loan is expected to be
the prime rate as published in The Wall Street Journal on the closing date of
the conversion. See "Pro Forma Data." If the employee stock ownership plan is
unable to acquire 8% of the common stock issued in the conversion through the
offering, it is anticipated that these additional shares will be acquired
following the conversion through open market purchases.
In any plan year, Berkshire Bank may make additional discretionary
contributions to the employee stock ownership plan for the benefit of plan
participants in either cash or shares of Berkshire Hills common stock, which may
be acquired through the purchase of outstanding shares in the market or from
individual stockholders or which constitute authorized but unissued shares or
shares held in treasury by Berkshire Hills. The timing, amount, and manner of
discretionary contributions will be affected by several factors, including
applicable regulatory policies, the requirements of applicable laws and
regulations, and market conditions.
Shares purchased by the employee stock ownership plan with the proceeds of
the loan will be held in a suspense account and released on a pro rata basis as
the loan is repaid. Discretionary contributions to the employee stock ownership
plan and shares released from the suspense account will be allocated among
participants on the basis of each participant's proportional share of total
compensation. Any forfeitures will be reallocated among the remaining plan
participants.
Participants will vest in their accrued benefits under the employee stock
ownership plan upon the completion of five years of service with credit given
for prior service with Berkshire Bank. A participant is fully vested at
retirement, upon death or disability or upon termination of the employee stock
ownership plan. Benefits are distributable upon a participant's retirement,
death, disability, or termination of employment. Berkshire Bank's contributions
to the employee stock ownership plan are not fixed, so benefits payable under
the employee stock ownership plan cannot be estimated.
The Board of Directors of Berkshire Bank expects to appoint an independent
trustee for the employee stock ownership plan. The trustee votes all allocated
shares held in the employee stock ownership plan as instructed by the plan
participants and unallocated shares and allocated shares for which no
instructions are received are generally voted by the trustee in the same ratio
on any matter as those shares for which instructions are given.
Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
The employee stock ownership plan must meet the requirements of the Employee
Retirement Income Security Act of 1974, as amended, and the regulations of the
Internal Revenue Service and the Department of Labor. Berkshire Bank intends to
request a determination letter from the Internal Revenue Service regarding the
tax-qualified status of the employee stock ownership plan. Berkshire Bank
expects to receive a favorable determination letter, but cannot guarantee it.
Employee Severance Compensation Plan. Berkshire Bank's Board of Directors
intends to adopt the Berkshire Bank Employee Severance Compensation Plan to
provide benefits to eligible employees upon a change in control of Berkshire
Hills or Berkshire Bank. Eligible employees are those with a minimum of one year
of service with Berkshire Bank. Generally, all eligible employees, other than
officers who will enter into separate employment or change in control agreements
with Berkshire Hills and Berkshire Bank, will be eligible to participate in the
severance plan. Under the severance plan, if a change in control of Berkshire
Hills or Berkshire Bank occurs, eligible employees who are terminated or who
terminate employment, but only upon the occurrence of events specified in the
severance plan, within 24 months of the effective date of a change in control
will be entitled to a
87
<PAGE>
payment equal to one month's compensation for each year of service with
Berkshire Bank with a maximum payment equal to 24 months of compensation.
Assuming that a change in control had occurred at December 31, 1999, and all
eligible employees were terminated, the maximum aggregate payment due under the
severance plan would be approximately $12.0 million.
Stock-Based Incentive Plan. Following the conversion, the Board of Directors
of Berkshire Hills intends to adopt a stock-based incentive plan which will
provide for the granting of options to purchase common stock and restricted
stock awards, to eligible officers, employees, and directors of Berkshire Hills
and Berkshire Bank. If the stock-based incentive plan is adopted within one
year after conversion, applicable regulations require such plan to be approved
by a majority of Berkshire Hills' stockholders at a meeting of stockholders to
be held no earlier than six months after the completion of the conversion.
Under the stock-based incentive plan, Berkshire Hills intends to grant stock
options in an amount equal to 10% of the shares of common stock issued in the
conversion. The amount granted would range from 663,714 shares, assuming
6,637,140 shares are issued in the conversion to 897,966 shares, assuming
8,979,660 shares are issued in the conversion. If the number of shares to be
issued in the conversion is increased to 10,326,609, shares, the amount of
options granted would equal 1,032,660 shares. Additionally, Berkshire Hills
intends to grant stock awards in an amount equal to 4% of the shares of common
stock issued in the conversion. The amount granted would range from 265,485
shares, assuming 6,637,140 shares are issued in the conversion to 359,186
shares, assuming 8,979,660 shares are issued in the conversion. If the number
of shares to be issued in the conversion is increased to 10,326,609 shares, the
amount of awards granted would equal 413,064 shares. Any common stock awarded
under the stock-based incentive plan will be awarded at no cost to the
recipients. The plan may be funded through the purchase of common stock by a
trust established in connection with the stock-based incentive plan or
from authorized but unissued shares. Berkshire Hills intends to appoint an
independent fiduciary to serve as trustee of a trust to be established in
connection with the stock-based incentive plan. If additional authorized but
unissued shares are acquired by the stock-based incentive plan after the
conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
The grants of stock options and stock awards will be designed to attract and
retain qualified personnel in key positions, provide officers and key employees
with a proprietary interest in Berkshire Hills as an incentive to contribute to
the success of Berkshire Hills and reward key employees for outstanding
performance. All employees of Berkshire Hills and its subsidiaries, including
Berkshire Bank, will be eligible to participate in the stock-based incentive
plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether stock options will be incentive or non-statutory stock
options, as defined below, the number of shares available for each stock option
and stock award, the exercise price of each non-statutory stock option, whether
stock options may be exercised by delivering other shares of common stock, and
when stock options become exercisable or stock awards vest. Only employees may
receive grants of incentive stock options. Therefore, under the stock-based
incentive plan, directors may receive only grants of non-statutory stock
options. If such plan is adopted within one year after conversion, applicable
regulations provide that no individual officer or employee of Berkshire Bank may
receive more than 25% of the stock options available under the stock-based
incentive plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the stock-based incentive plan
(or any separate plan for directors). Federal regulations also provide that no
individual officer or employee of Berkshire Bank may receive more than 25% of
the restricted stock awards available under the stock-based incentive plan (or
any separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the stock-based incentive plan (or any separate
plan for directors).
The stock-based incentive plan will provide for the grant of: (1) stock
options intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code ("Incentive Stock Options"); and (2) stock options that do
not so qualify ("Non-Statutory Stock Options"). It is anticipated that all
stock options granted contemporaneously with stockholder approval of the stock-
based incentive plan will qualify as Incentive Stock Options to the extent
permitted under Section 422 of the Internal Revenue Code. Unless sooner
terminated, the
88
<PAGE>
stock-based incentive plan will be in effect for a period of ten years from the
earlier of adoption by the Berkshire Hills Board of Directors or approval by
Berkshire Hills stockholders. If the stockholders approve the Plan, Berkshire
Hills intends to grant stock options under the plan at an exercise price equal
to at least the fair market value of the underlying common stock on the date of
grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to Berkshire Hills as a result of the grant or exercise of Incentive
Stock Options unless there has been a disqualifying disposition. In the case of
a Non-Statutory Stock Option and in the case of a disqualifying disposition of
an Incentive Stock Option, an individual will realize ordinary income upon
exercise of the stock option (or upon the disqualifying disposition) in an
amount equal to the amount by which the fair market value on the date of
exercise exceeds the exercise price of the option. The amount of any ordinary
income realized by an optionee upon the exercise of a Non-Statutory Stock Option
or due to a disqualifying disposition of an Incentive Stock Option will be a
deductible expense to Berkshire Hills for income tax purposes.
The stock-based incentive plan will provide for the granting of stock awards.
Grants of stock awards to officers and employees may be made in the form of base
grants and/or performance grants (the vesting of which would be contingent upon
performance goals established by the committee administering the plan). In
establishing any performance goals, the committee may utilize the annual
financial results of Berkshire Bank, actual performance of Berkshire Bank as
compared to targeted goals such as the ratio of Berkshire Bank's net worth to
total assets, Berkshire Bank's return on average assets, or such other
performance standards as determined by the committee with the approval of the
Berkshire Hills Board of Directors.
When a participant becomes vested with respect to stock awards, the
participant will realize ordinary income equal to the fair market value of the
common stock at the time of vesting (unless the participant made an election
under Section 83(b) of the Internal Revenue Code). The amount of income
recognized by the participants will be a deductible expense for tax purposes for
Berkshire Hills. When restricted stock awards become vested and shares of
common stock are actually distributed to participants, the participants would
receive amounts equal to any accrued dividends with respect thereto. Before
vesting, recipients of stock awards may direct the voting of the shares awarded
to them. Shares not subject to grants and shares allocated subject to the
achievement of performance goals will be voted by the trustee in proportion to
the directions provided with respect to shares subject to grants. Vested shares
will be distributed to recipients as soon as practicable following the day on
which they vest.
The vesting periods for awards under the stock-based incentive plan will be
determined by the committee administering the plan. If the stock-based
incentive plan is adopted within one year after conversion, awards would become
vested and exercisable within the limits of applicable regulations, which such
regulations require that any awards begin vesting no earlier than one year from
the date of shareholder approval of the plan and, thereafter, vest at a rate of
no more than 20% per year and may not be accelerated except in the case of death
or disability. Stock options could be exercisable for three months following
the date on which the employee or director ceases to perform services for
Berkshire Bank or Berkshire Hills, except that if an employee or director dies
or becomes disabled, stock options accelerate and become fully vested and could
be exercisable for up to one year thereafter or such longer period as determined
by Berkshire Hills. In the case of death or disability, stock options may be
exercised for a period of 12 months. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option. If the optionee continues to perform services as a director or
consultant on behalf of Berkshire Bank, Berkshire Hills or an affiliate after
retirement, unvested stock options would continue to vest in accordance with
their original vesting schedule until the optionee ceases to serve as a
consultant or director. If a participant dies, is disabled or retires,
Berkshire Hills, if requested by the optionee, or the optionee's beneficiary,
could elect, in exchange for vested options, to pay the optionee, or the
optionee's beneficiary if the optionee dies, the amount by which the fair market
value of the common stock exceeds the exercise price of the stock options on the
date of the employee's termination of employment.
89
<PAGE>
Within the limits of any applicable regulatory requirements, the stock-based
incentive plan may be amended after the first anniversary date of the conversion
to provide for accelerated vesting of previously granted stock options or stock
awards if a change in control of Berkshire Hills or Berkshire Bank occurs. A
change in control would generally be considered to occur when a person or group
of persons acting in concert acquires beneficial ownership of 20% or more of any
class of equity security of Berkshire Hills or Berkshire Bank or if a tender or
exchange offer, merger or other form of business combination, sale of all or
substantially all of the assets of Berkshire Hills or Berkshire Bank or similar
transaction occurs or a contested election of directors which resulted in the
replacement of a majority of the Berkshire Hills Board of Directors by persons
not nominated by the directors in office before the contested election occurs.
Transactions with Related Persons
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. Loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
Berkshire Bank's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors. In addition, Massachusetts law regulates the granting of loans to
officers and directors of Berkshire Bank.
Berkshire Bank offers full-time non-officer employees who have completed
three months of employment and who satisfy the general underwriting standards of
Berkshire Bank, personal loans with interest rates of 1% below the current
interest rates in effect. If the individual leaves the employ of Berkshire
Bank, the loan rate increases to Berkshire Bank's current rate then in effect.
All other loans and all loans made to Berkshire Bank's officers and directors
are made on the same terms and conditions offered to the general public.
Berkshire Bank's policy provides that all loans made by Berkshire Bank to its
executive officers and directors be made in the ordinary course of business, on
substantially the same terms, including collateral, as those prevailing at the
time for comparable transactions with other persons and may not involve more
than the normal risk of collectibility or present other unfavorable features. As
of December 31, 1999, Berkshire Bank's executive officers and directors had
loans with outstanding balances totalling $3.9 million in the aggregate. All
such loans were made by Berkshire Bank in the ordinary course of business, with
no favorable terms and such loans do not involve more than the normal risk of
collectibility or present unfavorable features.
Berkshire Hills intends that all transactions in the future between it and
its executive officers, directors, holders of 10% or more of the shares of any
class of its common stock and affiliates thereof, will contain terms no less
favorable to Berkshire Hills than could have been obtained by it in arm's length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of Berkshire Hills not having any interest in the
transactions.
REGULATION AND SUPERVISION
General
As a savings bank chartered by the Commonwealth of Massachusetts, Berkshire
Bank is extensively regulated under state law with respect to many aspects of
its banking activities; this state regulation is administered by the
Massachusetts Banking Commissioner. In addition, as a bank whose deposits are
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund, Berkshire Bank must pay deposit insurance assessments and is examined and
supervised by the Federal Deposit Insurance Corporation. These laws and
regulations have been established primarily for the protection of depositors,
customers and borrowers of Berkshire Bank, not bank stockholders.
90
<PAGE>
Berkshire Hills will also be required to file reports with, and otherwise
comply with the rules and regulations of, the Office of Thrift Supervision, the
Massachusetts Banking Commissioner and the Securities and Exchange Commission
under the federal securities laws. The following discussion of the laws and
regulations material to the operations of Berkshire Hills and Berkshire Bank is
a summary and is qualified in its entirety by reference to such laws and
regulations.
Berkshire Bank is and Berkshire Hills, as a savings and loan holding company,
will be extensively regulated and supervised. Regulations, which affect
Berkshire Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations may also change because of
new interpretations by the authorities who interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Massachusetts Banking Commissioner, the State of
Massachusetts, the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation or the Congress, could have a material impact on Berkshire Hills,
Berkshire Bank, its operations or the conversion.
Massachusetts Banking Laws and Supervision
Massachusetts savings banks are regulated and supervised by the Massachusetts
Banking Commissioner. The Massachusetts Banking Commissioner is required to
regularly examine each state-chartered bank. The approval of the Massachusetts
Banking Commissioner is required to establish or close branches, to merge with
another bank, to form a holding company, to issue stock or to undertake many
other activities. Any Massachusetts bank that does not operate in accordance
with the regulations, policies and directives of the Massachusetts Banking
Commissioner may be sanctioned. The Massachusetts Banking Commissioner may
suspend or remove directors, trustees or officers of a bank who have violated
the law, conducted a bank's business in a manner which is unsafe, unsound or
contrary to the depositors' interests, or been negligent in the performance of
their duties.
All Massachusetts-chartered savings banks are required to be members of the
Depositors Insurance Fund and as such must pay its assessments. The Deposit
Insurance Fund is a private deposit insurer which insures all deposits in
member banks in excess of FDIC deposit insurance limits. In addition, the Mutual
Savings Central Fund, Inc. acts as a source of liquidity to its members in
supplying them with low-cost funds, and purchasing qualifying obligations from
them.
The powers which Massachusetts-chartered savings banks can exercise under
these laws are summarized below.
Lending Activities. A Massachusetts-chartered savings bank may make a wide
variety of mortgage loans. Fixed-rate loans, adjustable-rate loans, variable-
rate loans, participation loans, graduated payment loans, construction and
development loans, condominium and co-operative loans, second mortgage loans and
other types of loans may be made in accordance with applicable regulations.
Commercial loans may be made to corporations and other commercial enterprises
with or without security. Consumer and personal loans may also be made with or
without security. Loans to individual borrowers generally must be limited to 20%
of the total of a bank's capital accounts and stockholders' equity.
Investments Authorized. Massachusetts-chartered savings banks have broad
investment powers under Massachusetts law, including so-called "leeway"
authority for investments that are not otherwise specifically authorized. The
investment powers authorized under Massachusetts law are restricted by federal
law to permit, in general, only investments of the kinds that would be permitted
for national banks. Berkshire Bank has authority to invest in all of the classes
of loans and investments that are permitted by its existing loan and investment
policies.
Payment of Dividends. A savings bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account. No dividends may be paid to stockholders of a bank if such dividends
would reduce stockholders' equity of the bank below the amount of the
liquidation account required by Massachusetts conversion regulations.
91
<PAGE>
Parity Regulation. The Massachusetts regulation on parity with national banks
establishes procedures allowing state-chartered banks to exercise additional or
more flexible parallel powers granted to national banks under federal law which
are not otherwise permitted under state law. The procedures and requirements for
engaging in such activities range from an application process, expedited review
and notice process to activities requiring no application or notice whatsoever.
The applicable procedures and requirements vary according to the nature of the
activity to be engaged in and the capitalization of the bank. As of the date of
this prospectus, Berkshire Bank was eligible to engage in certain of the above-
referenced activities, within the limits of the applicable procedure and
requirements of Massachusetts regulation.
Federal Regulations
Capital Requirements. Under Federal Deposit Insurance Corporation
regulations, federally insured state-chartered banks that are not members of the
Federal Reserve System ("state non-member banks"), such as Berkshire Bank, are
required to comply with minimum leverage capital requirements. For an
institution determined by the Federal Deposit Insurance Corporation to not be
anticipating or experiencing significant growth and to be in general a strong
banking organization, rated composite 1 under the Uniform Financial Institutions
Ranking System (the rating system) established by the Federal Financial
Institutions Examination Council, the minimum capital leverage requirement is a
ratio of Tier 1 capital to total assets of 3%. For all other institutions, the
minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of
common stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus) and minority investments in certain subsidiaries, less
intangible assets (except for certain servicing rights and credit card
relationships).
Berkshire Bank must also comply with the Federal Deposit Insurance
Corporation risk-based capital guidelines. The Federal Deposit Insurance
Corporation guidelines require state non-member banks to maintain certain levels
of regulatory capital in relation to regulatory risk-weighted assets. The ratio
of regulatory capital to regulatory risk-weighted assets is referred to as
Berkshire Bank's "risk-based capital ratio." Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk. For
example, under the Federal Deposit Insurance Corporation's risk-weighting
system, cash and securities backed by the full faith and credit of the U.S.
Government are given a 0% risk weight, loans secured by one- to four-family
residential properties generally have a 50% risk weight and commercial loans
have a risk weighting of 100%.
State non-member banks must maintain a minimum ratio of total capital to
risk-weighted assets of at least 8%, of which at least one-half must be Tier 1
capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items, which include allowances for loan losses in an amount of up to
1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net
unrealized gain on equity securities and other capital instruments. The
includable amount of Tier 2 capital cannot exceed the amount of the
institution's Tier 1 capital.
The Federal Deposit Insurance Corporation Improvement Act required each
federal banking agency to revise its risk-based capital standards for insured
institutions to ensure that those standards take adequate account of interest-
rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as to reflect the actual performance and expected risk of
loss on multi-family residential loans. The Federal Deposit Insurance
Corporation, along with the other federal banking agencies, has adopted a
regulation providing that the agencies will take into account the exposure of a
bank's capital and economic value to changes in interest rate risk in assessing
a bank's capital adequacy. See "Historical and Pro Forma Regulatory Capital
Compliance."
As a savings and loan holding company regulated by the Office of Thrift
Supervision, Berkshire Hills will not, under current law, be subject to any
separate regulatory capital requirements.
Standards for Safety and Soundness. As required by statute, the federal
banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness to implement safety and
soundness standards. The guidelines set forth the safety and soundness
standards that the federal banking agencies
92
<PAGE>
use to identify and address problems at insured depository institutions before
capital becomes impaired. The guidelines address internal controls and
information systems, internal audit system, credit underwriting, loan
documentation, interest rate risk exposure, asset growth, asset quality,
earnings and compensation, and fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard.
Investment Activities
Since the enactment of the Federal Deposit Insurance Corporation
Improvement Act, all state-chartered Federal Deposit Insurance Corporation
insured banks, including savings banks, have generally been limited to
activities as principal and equity investments of the type and in the amount
authorized for national banks, notwithstanding state law. The Federal Deposit
Insurance Corporation Improvement Act and the Federal Deposit Insurance
Corporation permit exceptions to these limitations. For example, state chartered
banks, such as Berkshire Bank, may, with Federal Deposit Insurance Corporation
approval, continue to exercise state authority to invest in common or preferred
stocks listed on a national securities exchange or the Nasdaq National Market
and in the shares of an investment company registered under the Investment
Company Act of 1940, as amended. In addition, the Federal Deposit Insurance
Corporation is authorized to permit such institutions to engage in state
authorized activities or investments that do not meet this standard (other than
non-subsidiary equity investments) for institutions that meet all applicable
capital requirements if it is determined that such activities or investments do
not pose a significant risk to the Bank Insurance Fund. The Federal Deposit
Insurance Corporation has recently adopted revisions to its regulations
governing the procedures for institutions seeking approval to engage in such
activities or investments. These revisions, among other things, streamline the
application procedures for healthy banks and impose quantitative and qualitative
restrictions on a bank's dealings with its subsidiaries engaged in activities
not permitted for national bank subsidiaries. All non-subsidiary equity
investments, unless otherwise authorized or approved by the Federal Deposit
Insurance Corporation, must have been divested by December 19, 1996, under a
Federal Deposit Insurance Corporation-approved divestiture plan, unless such
investments were grandfathered by the Federal Deposit Insurance Corporation.
Berkshire Bank received grandfathered authority from the Federal Deposit
Insurance Corporation in February 1993 to invest in listed stocks and/or
registered shares. However, the maximum permissible investment is 100% of Tier 1
capital, as specified by the Federal Deposit Insurance Corporation's
regulations, or the maximum amount permitted by Massachusetts law, whichever is
less. The Federal Deposit Insurance Corporation also required that Berkshire
Bank provide prior notice to the agency if it increases the holdings of listed
stock and/or registered shares as a percentage of Tier 1 equity capital by 25%.
Such grandfathered authority may be terminated upon the Federal Deposit
Insurance Corporation's determination that such investments pose a safety and
soundness risk to Berkshire Bank or if Berkshire Bank converts its charter,
other than a mutual to stock conversion, or undergoes a change in control. As of
December 31, 1999, Berkshire Bank had securities with a market value of $44.3
million which were held under such grandfathering authority. See "Business of
Berkshire Bank--Investment Activities."
Interstate Banking and Branching
As a savings and loan holding company, Berkshire Hills will be limited
under the Home Owners' Loan Act with respect to its acquisition of a savings
association located in a state other than Massachusetts. In general, a savings
and loan holding company may not acquire an additional savings association
subsidiary that is located in a state other than the home state of its first
savings association subsidiary unless such an interstate acquisition is
permitted by the statutes of such other state. Many states permit such
interstate acquisitions if the statutes of the home state of the acquiring
savings and loan holding company satisfy various reciprocity conditions.
Massachusetts is one of a number of states that permit, subject to the
reciprocity conditions of the Massachusetts Banking Law, out-of-state bank and
savings and loan holding companies to acquire Massachusetts savings
associations.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state irrespective of any state law
restrictions on such acquisitions. The Interstate Banking Act, which was enacted
on September 29, 1994, permits approval under the Bank Holding Company Act of
the acquisition of a
93
<PAGE>
bank located outside of the holding company's home state regardless of whether
the acquisition is permitted under the law of the state of the acquired bank.
The Federal Reserve Board may not approve an acquisition under the Bank Holding
Company Act that would result in the acquiring holding company controlling more
than 10% of the deposits in the United States or more than 30% of the deposits
in any particular state.
Until recently, branching across state lines was generally not available to
a state bank such as Berkshire Bank. Out-of-state branches of banking
institutions are authorized under the Massachusetts Banking Law, but similar
authority did not exist generally under the laws of most other states.
Beginning June 1, 1997, the Interstate Banking Act permitted the responsible
federal banking agencies to approve merger transactions between banks located in
different states, regardless of whether the merger would be prohibited under the
law of the two states. The Interstate Banking Act also permitted a state to
"opt in" to the provisions of the Interstate Banking Act before June 1, 1997,
and permitted a state to "opt out" of the provisions of the Interstate Banking
Act by adopting appropriate legislation before that date. Accordingly,
beginning June 1, 1997, the Interstate Banking Act permitted a bank, such as
Berkshire Bank, to acquire an institution by merger in a state other than
Massachusetts unless the other state had opted out of the Interstate Banking
Act. The Interstate Banking Act also authorizes de novo branching into another
state if the host state enacts a law expressly permitting out of state banks to
establish such branches within its borders.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The Federal Deposit Insurance Corporation has adopted regulations to
implement the prompt corrective action legislation. An institution is deemed to
be "well capitalized" if it has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater. An institution is "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is "undercapitalized" if it has a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage
ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is considered to be "critically undercapitalized" if it
has a ratio of tangible equity (as defined in the regulations) to total assets
that is equal to or less than 2%. As of December 31, 1999, Berkshire Bank was a
"well capitalized" institution and immediately upon completion of the Conversion
expects to remain a "well capitalized" institution.
"Undercapitalized" banks must adhere to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5% of the institution's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks must comply with one or more of a number of additional
restrictions, including but not limited to an order by the Federal Deposit
Insurance Corporation to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or dismiss directors or officers, and restrictions on
interest rates paid on deposits, compensation of executive officers and capital
distributions by the parent holding company. "Critically undercapitalized"
institutions must comply with additional sanctions including, subject to a
narrow exception, the appointment of a receiver or conservator within 270 days
after it obtains such status.
94
<PAGE>
Transactions with Affiliates
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. In a holding company context, at a minimum, the parent holding company of
a savings bank and any companies which are controlled by such parent holding
company are affiliates of the savings bank. Generally, Section 23A limits the
extent to which the savings bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to 10% of such savings bank's capital stock
and surplus, and contains an aggregate limit on all such transactions with all
affiliates to 20% of capital stock and surplus. The term "covered transaction"
includes, among other things, the making of loans or other extensions of credit
to an affiliate and the purchase of assets from an affiliate. Section 23A also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts an institution
with respect to loans to directors, executive officers, and principal
stockholders ("insiders"). Under Section 22(h), loans to insiders and their
related interests may not exceed, together with all other outstanding loans to
such persons and affiliated entities, the institution's total capital and
surplus. Loans to insiders above specified amounts must receive the prior
approval of the board of directors. Further, under Section 22(h), loans to
directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons,
except that such insiders may receive preferential loans made under a benefit or
compensation program that is widely available to Berkshire Bank's employees and
does not give preference to the insider over the employees. Section 22(g) of
the Federal Reserve Act places additional limitations on loans to executive
officers.
Enforcement
The Federal Deposit Insurance Corporation has extensive enforcement
authority over insured savings banks, including Berkshire Bank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and unsafe or unsound practices.
The Federal Deposit Insurance Corporation has authority under Federal law
to appoint a conservator or receiver for an insured bank under limited
circumstances. The Federal Deposit Insurance Corporation is required, with
certain exceptions, to appoint a receiver or conservator for an insured state
non-member bank if that bank was "critically undercapitalized" on average during
the calendar quarter beginning 270 days after the date on which the institution
became "critically undercapitalized." See "--Prompt Corrective Regulatory
Action." The Federal Deposit Insurance Corporation may also appoint itself as
conservator or receiver for an insured state non-member institution under
specific circumstances on the basis of the institution's financial condition or
upon the occurrence of other events, including: (1) insolvency; (2) substantial
dissipation of assets or earnings through violations of law or unsafe or unsound
practices; (3) existence of an unsafe or unsound condition to transact business;
and (4) insufficient capital, or the incurring of losses that will deplete
substantially all of the institution's capital with no reasonable prospect of
replenishment without federal assistance.
Insurance of Deposit Accounts
The Federal Deposit Insurance Corporation has adopted a risk-based
insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories based on the institution's
financial information consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the Federal Deposit
Insurance Corporation by the institution's primary federal regulator and
information which the Federal Deposit Insurance Corporation determines to be
relevant to the institution's financial condition and the risk posed to the
95
<PAGE>
deposit insurance funds. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Assessment
rates for insurance fund deposits currently range from 0 basis points for the
strongest institution to 27 basis points for the weakest. Bank Insurance Fund
members are also required to assist in the repayment of bonds issued by the
Financing Corporation in the late 1980's to recapitalize the Federal Savings and
Loan Insurance Corporation. Bank Insurance Fund members had been assessed about
1.2 basis points, which is generally 20% of the amount charged Savings
Association Insurance Fund members. Effective January 1, 2000, full pro rata
sharing of the payments between Bank Insurance Fund and Savings Association
Insurance Fund members commenced. The Federal Deposit Insurance Corporation is
authorized to raise the assessment rates. The Federal Deposit Insurance
Corporation has exercised this authority several times in the past and may raise
insurance premiums in the future. If such action is taken by the Federal
Deposit Insurance Corporation, it could have an adverse effect on the earnings
of Berkshire Bank.
The Federal Deposit Insurance Corporation may terminate insurance of
deposits if it finds that the institution is in an unsafe or unsound condition
to continue operations, has engaged in unsafe or unsound practices, or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation. The management of Berkshire Bank does
not know of any practice, condition or violation that might lead to termination
of deposit insurance.
Berkshire Bank, as a member of the Depositor Insurance Fund, is also
subject to its assessments. As such, Berkshire Bank is required each year to
pay an annual assessment equal to one sixteenth of one percent of its deposits,
exclusive of its club deposits, as shown by the last annual report submitted to
the Massachusetts Banking Commissioner. The annual assessment may be reduced or
waived with the approval of the Massachusetts Banking Commissioner. In
addition to the annual assessment, the Depositors Insurance Fund may, with the
approval and direction of the Massachusetts Banking Commissioner, require each
member to pay a total of not more than one percent of the deposits of the member
bank, exclusive of its club deposits, as of the date of the last annual report
submitted to the Massachusetts Banking Commissioner.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations currently require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $44.3 million or less (which may be adjusted by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $44.3
million, the reserve requirement is $1.33 million plus 10% (which may be
adjusted by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $44.3 million. The first $5.0
million of otherwise reservable balances (which may be adjusted by the Federal
Reserve Board) are exempted from the reserve requirements. Berkshire Bank is in
compliance with these requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Federal Deposit
Insurance Corporation regulations, a state non-member bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act neither establishes specific
lending requirements or programs for financial institutions nor limits an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The Community
Reinvestment Act requires the Federal Deposit Insurance Corporation, in
connection with its examination of an institution, to assess the institution's
record of meeting the credit needs of its community and to consider such record
when it evaluates applications made by such institution. The Community
Reinvestment Act requires public disclosure of an institution's Community
Reinvestment Act rating. Berkshire Bank's latest Community Reinvestment Act
rating, received from the Federal Deposit Insurance Corporation was
"Outstanding."
96
<PAGE>
Berkshire Bank is also subject to obligations under Massachusetts law.
Massachusetts Community Reinvestment Act requires the Massachusetts Banking
Commissioner to consider a bank's Massachusetts Community Reinvestment Act
rating when reviewing a bank's application to engage in certain transactions,
including mergers, asset purchases and the establishment of branch offices or
automated teller machines, and provides that such assessment may serve as a
basis for the denial of such application. Berkshire Bank's latest Massachusetts
Community Reinvestment Act received from the Massachusetts Division of Banks was
"Outstanding."
Federal Home Loan Bank System
Berkshire Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. Berkshire
Bank, as a member of the Federal Home Loan Bank of Boston, is required to
acquire and hold shares of capital stock in the Federal Home Loan Bank of Boston
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank
of Boston, whichever is greater. Berkshire Bank was in compliance with this
requirement with an investment in Federal Home Loan Bank of Boston stock at
December 31, 1999 of $3.8 million. At December 31, 1999, Berkshire Bank had
$58.9 million in Federal Home Loan Bank of Boston advances.
The Federal Home Loan Banks are required to provide funds for certain
purposes including contributing funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan
Banks pay to their members and result in the Federal Home Loan Banks imposing a
higher rate of interest on advances to their members. For the years ended 1999,
1998, 1997, 1996 and 1995, cash dividends from the Federal Home Loan Bank of
Boston to Berkshire Bank amounted to approximately $180,900, $163,600, $155,000,
$155,600 and $180,100, respectively. Further, there can be no assurance that
the impact of recent or future legislation on the Federal Home Loan Banks will
not also cause a decrease in the value of the Federal Home Loan Bank stock held
by Berkshire Bank.
Holding Company Regulation
Federal law allows a state savings bank that qualifies as a "Qualified
Thrift Lender," discussed below, to elect to be treated as a savings association
for purposes of the savings and loan holding company provisions of the Home
Owners' Loan Act. Such election allows its holding company to be regulated as a
savings and loan holding company by the Office of Thrift Supervision rather than
as a bank holding company by the Federal Reserve Board. Berkshire Bank has made
such election and expects Berkshire Hills to receive approval from the Office of
Thrift Supervision to become a savings and loan holding company. Berkshire
Hills will be regulated as a savings and loan holding company within the meaning
of the Home Owners' Loan Act. As such, Berkshire Hills will be required to
register with the Office of Thrift Supervision and will have to adhere to the
Office of Thrift Supervision's regulations and reporting requirements. In
addition, the Office of Thrift Supervision may examine and supervise Berkshire
Hills and the Office of Thrift Supervision has enforcement authority over
Berkshire Hills and its non-savings institution subsidiaries. Among other
things, this authority permits the Office of Thrift Supervision to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. Additionally, Berkshire Bank will be required to notify
the Office of Thrift Supervision at least 30 days before declaring any dividend
to Berkshire Hills. By regulation, the Office of Thrift Supervision may
restrict or prohibit Berkshire Bank from paying dividends.
Berkshire Hills will be a unitary savings and loan holding company under
federal law because Berkshire Bank will be its only insured subsidiary
immediately after the conversion. Formerly, a unitary savings and loan holding
company was not restricted as to the types of business activities in which it
could engage, provided that its subsidiary savings association continued to be a
qualified thrift lender. The Gramm-Leach-Bliley Act of 1999, however, restricts
unitary savings and loan holding companies not existing or applied for before
May 4, 1999 to activities permissible for a financial holding company as defined
under the legislation, including insurance and
97
<PAGE>
securities activities, and those permitted for a multiple savings and loan
holding company as described below. Berkshire Hills will be subject to these
activities restrictions. Upon any non-supervisory acquisition by Berkshire Hills
of another savings association as a separate subsidiary, Berkshire Hills would
become a multiple savings and loan holding company. The Home Owners' Loan Act
limits the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
provided the prior approval of the Office of Thrift Supervision is obtained, and
to other activities authorized by Office of Thrift Supervision regulation.
Multiple savings and loan holding companies are generally prohibited from
acquiring or retaining more than 5% of a non-subsidiary company engaged in
activities other than those permitted by the Home Owners' Loan Act. See "Risk
Factors--Banking reform legislation restricts the activities in which Berkshire
Hills may engage compared to existing unitary holding companies."
The Home Owners' Loan Act prohibits a savings and loan holding company
from, directly or indirectly, acquiring more than 5% of the voting stock of
another savings association or savings and loan holding company or from
acquiring such an institution or company by merger, consolidation or purchase of
its assets, without prior written approval of the Office of Thrift Supervision.
In evaluating applications by holding companies to acquire savings associations,
the Office of Thrift Supervision considers the financial and managerial
resources and future prospects of Berkshire Hills and the institution involved,
the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, except: (1) interstate
supervisory acquisitions by savings and loan holding companies; and (2) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
To be regulated as a savings and loan holding company by the Office of
Thrift Supervision (rather than as a bank holding company by the Federal Reserve
Board), Berkshire Bank must qualify as a Qualified Thrift Lender. To qualify as
a Qualified Thrift Lender, Berkshire Bank must maintain compliance with the test
for a "domestic building and loan association," as defined in the Internal
Revenue Code, or with a Qualified Thrift Lender Test. Under the Qualified
Thrift Lender Test, a savings institution is required to maintain at least 65%
of its "portfolio assets" (total assets less: (1) specified liquid assets up to
20% of total assets; (2) intangibles, including goodwill; and (3) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. As of December 31, 1999 Berkshire Bank maintained in excess of
75% of its portfolio assets in qualified thrift investments.
Massachusetts Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in Massachusetts must comply with any regulation under the Massachusetts law.
The term "bank holding company," for the purposes of Massachusetts law, is
defined generally to include any company which, directly or indirectly, owns,
controls or holds with power to vote more than 25% of the voting stock of each
of two or more banking institutions, including commercial banks and state co-
operative banks, savings banks and savings and loan associations and national
banks, federal savings banks and federal savings and loan associations. In
general, a holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
Massachusetts law. Under Massachusetts law, the prior approval of the Board of
Bank Incorporation is required before: any company may become a bank holding
company; any bank holding company acquires direct or indirect ownership or
control of more than 5% of the voting stock of, or all or substantially all of
the assets of, a banking institution; or any bank holding company merges with
another bank holding company. Although Berkshire Hills will not be a bank
holding company for purposes of Massachusetts law upon the Effective Date of the
Conversion, any future acquisition of ownership, control, or the power to vote
25% or more of the voting stock of another banking institution or bank holding
company would cause it to become such. Berkshire Hills has no current plan or
arrangement to acquire ownership or control, directly or indirectly, of 25% or
more of the voting stock of another banking institution.
98
<PAGE>
Federal Securities Laws
Berkshire Hills has filed with the Securities and Exchange Commission a
registration statement under the Securities Act for the registration of the
common stock to be issued in the conversion. Upon completion of the conversion,
Berkshire Hills' common stock will be registered with the Securities and
Exchange Commission under the Exchange Act. Berkshire Hills will then have to
observe the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the common stock to
be issued in the conversion does not cover the resale of such shares. Shares of
the common stock purchased by persons who are not affiliates of Berkshire Hills
may be resold without registration. The resale restrictions of Rule 144 under
the Securities Act govern shares purchased by an affiliate of Berkshire Hills.
If Berkshire Hills meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of Berkshire Hills who complies with
the other conditions of Rule 144 (including those that require the affiliate's
sale to be aggregated with those of other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (1) 1% of the outstanding shares of Berkshire
Hills or (2) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by Berkshire
Hills to permit affiliates to have their shares registered for sale under the
Securities Act under specific circumstances.
FEDERAL AND STATE TAXATION ON INCOME
Federal Income Taxation
General. Berkshire Hills and Berkshire Bank intend to report their income
on a calendar year basis using the accrual method of accounting. The federal
income tax laws apply to Berkshire Hills and Berkshire Bank in the same manner
as to other corporations with some exceptions, including particularly Berkshire
Bank's reserve for bad debts discussed below. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to Berkshire Bank or Berkshire Hills.
Berkshire Bank's federal income tax returns have been either audited or closed
under the statute of limitations through tax year 1995. For its 1998 tax year,
Berkshire Bank's maximum federal income tax rate was 35%.
Bad Debt Reserves. For fiscal years beginning before December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986, as amended, were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans, generally secured
by interests in real property improved or to be improved, under the percentage
of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method.
Federal legislation enacted in 1996 repealed the reserve method of
accounting for bad debts and the percentage of taxable income method for tax
years beginning after 1995 and require savings institutions to recapture or take
into income certain portions of their accumulated bad debt reserves.
Approximately $844,000 of Berkshire Bank accumulated bad debt reserves would not
be recaptured into taxable income unless Berkshire Bank makes a "non-dividend
distribution" to Berkshire Hills as described below.
Distributions. If Berkshire Bank makes "non-dividend distributions" to
Berkshire Hills, they will be considered to have been made from Berkshire Bank's
unrecaptured tax bad debt reserves, including the balance of its reserves as of
December 31, 1987, to the extent of the "non-dividend distributions," and then
from Berkshire Bank's supplemental reserve for losses on loans, to the extent of
those reserves, and an amount based on the amount distributed, but not more than
the amount of those reserves, will be included in Berkshire Bank's taxable
income. Non-dividend distributions include distributions in excess of Berkshire
Bank's current and accumulated earnings and profits, as calculated for federal
income tax purposes, distributions in redemption of stock, and distributions in
99
<PAGE>
partial or complete liquidation. Dividends paid out of Berkshire Bank's current
or accumulated earnings and profits will not be so included in Berkshire Bank's
taxable income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Therefore, if Berkshire Bank makes a non-dividend
distribution to Berkshire Hills, approximately one and one-half times the amount
of the distribution not in excess of the amount of the reserves would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. Berkshire Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
State Taxation
Massachusetts Taxation. Before July 1995, Massachusetts savings banks had
to pay an annual Massachusetts excise (income) tax equal to 12.54% of its pre-
tax income. In 1995, legislation was enacted to reduce the Massachusetts bank
excise (income) tax rate and to allow Massachusetts-based financial institutions
to apportion income earned in other states. Further, this legislation expands
the applicability of the tax to non-bank entities and out-of-state financial
institutions. The Massachusetts excise tax rate for savings banks is currently
10.5% of federal taxable income, adjusted for certain items. Taxable income
includes gross income as defined under the Internal Revenue Code, plus interest
from bonds, notes and evidences of indebtedness of any state, including
Massachusetts, less deductions, but not the credits, allowable under the
provisions of the Internal Revenue Code. Carryforwards and carrybacks of net
operating losses are not allowed.
A financial institution or business corporation is generally entitled to
special tax treatment as a "security corporation," provided that: (a) its
activities are limited to buying, selling, dealing in or holding securities on
its own behalf and not as a broker; and (b) it has applied for, and received,
classification as a "security corporation" by the Commissioner of the
Massachusetts Department of Revenue. A security corporation that is also a bank
holding company under the Code must pay a tax equal to 0.33% of its gross
income. A security corporation that is not a bank holding company under the
Code must pay a tax equal to 1.32% of its gross income. Berkshire Bank has
received an opinion from Wolf & Company, P.C. that Berkshire Hills' ownership of
100% of the stock the subsidiary established to lend funds to the employee stock
ownership plan by Berkshire Hills will not prevent Berkshire Hills from
qualifying as a security corporation, provided that Berkshire Hills: (a) applies
for, and receives, security corporation classification by the Massachusetts
Department of Revenue; and (b) does not conduct any activities deemed
impermissible under the governing statutes and the various regulations,
directives, letter rulings and administrative pronouncements issued by the
Massachusetts Department of Revenue.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, Berkshire Hills is exempted from Delaware Corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
100
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT WITH SUBSCRIPTION RIGHTS
The following table presents certain information as to the approximate
purchases of common stock by each director and executive officer of Berkshire
Bank, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement to purchase these shares and,
therefore, actual purchases could be more or less than indicated. Directors and
executive officers and their associates may not purchase more than 30% of the
shares sold in the conversion. For purposes of the following table, sufficient
shares are assumed to be available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Percent of Percent of
Anticipated Anticipated Shares at Shares at
Number of Dollar Minimum Maximum
Shares to be Amount to be of Estimated of Estimated
Name Purchased (1) Purchased (1) Valuation Range Valuation Range
- ---- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Thomas O. Andrews........................ 25,000 $ 250,000(2) 0.41% 0.30%
James A. Cunningham, Jr.................. 25,000 250,000(2) 0.41 0.30
Thomas R. Dawson......................... 6,500 65,000 0.11 0.08
Henry D. Granger......................... 5,000 50,000 0.08 0.06
A. Allen Gray............................ 15,000 150,000 0.24 0.18
John Kittredge........................... 2,000 20,000 0.03 0.02
Peter J. Lafayette....................... 6,000 60,000 0.10 0.07
Edward G. McCormick...................... 10,000 100,000 0.16 0.12
Catherine B. Miller...................... 10,000 100,000 0.16 0.12
Michael G. Miller........................ 25,000 250,000(2) 0.41 0.30
Raymond B. Murray, III................... 12,500 125,000 0.20 0.15
Louis J. Oggiani......................... 2,500 25,000 0.04 0.03
Robert S. Raser.......................... 1,500 15,000 0.02 0.02
Corydon L. Thurston...................... 5,000 50,000 0.08 0.06
Ann H. Trabulsi.......................... 10,000 100,000 0.16 0.12
Robert A. Wells.......................... 25,000 250,000(2) 0.41 0.30
William E. Williams...................... 7,000 70,000 0.11 0.08
Anne Everest Wojtkowski.................. 2,000 20,000 0.03 0.02
Michael P. Daly.......................... 10,000 100,000 0.16 0.12
Charles F. Plungis, Jr................... 2,000 20,000 0.03 0.02
Susan M. Santora......................... 1,500 15,000 0.02 0.02
------- ---------- ---- ----
All Directors and Executive Officers
as a group (21 persons) (3)........... 208,500 $2,085,000 3.37% 2.49%
======= ========== ==== ====
</TABLE>
_____________________________
(1) Includes proposed purchases with funds contained in the individual's 401(k)
plan account. Does not include shares to be awarded under the employee
stock ownership plan and stock-based incentive plan or options to acquire
shares under the stock-based incentive plan.
(2) Such amount represents the maximum allowable purchase for such individual.
(3) Including the effect of shares issued to Berkshire Hills Foundation, the
aggregate beneficial ownership of all directors and executive officers as a
group would be 3.14% and 2.32% at the minimum and maximum of the estimated
valuation range, respectively.
101
<PAGE>
THE CONVERSION
The Board of Trustees of Berkshire Bancorp, the Board of Directors of
Berkshire Bank, the Massachusetts Banking Commissioner and Berkshire Bancorp's
corporators have approved the Plan of Conversion subject to the satisfaction of
certain other conditions. However, any approvals by the Massachusetts Banking
Commissioner are not a recommendation or endorsement of the plan of conversion.
General
On October 22, 1999, the Board of Trustees of Berkshire Bancorp and the Board
of Directors of Berkshire Bank unanimously adopted the plan of conversion under
which Berkshire Bancorp will convert from the mutual holding company to the
stock holding company form. Following the conversion, Berkshire Bank will be
held as a wholly owned subsidiary of Berkshire Hills, a recently formed Delaware
corporation. The following discussion of the plan of conversion contains all
material terms about the conversion. Nevertheless, readers are urged to read
carefully the plan of conversion, which is available upon request. The plan of
conversion is also filed as an exhibit to the registration statement that
Berkshire Hills has filed with the Securities and Exchange Commission. See
"Where You Can Find More Information." The Massachusetts Banking Commissioner
has approved the plan of conversion, subject to certain conditions.
Additionally, Berkshire Hills' corporators approved the plan of conversion at a
meeting called for that purpose on April 19, 2000.
In connection with the conversion, Berkshire Bancorp will adopt Amended and
Restated Articles of Organization and Bylaws. As part of the conversion,
Berkshire Bank will issue all of its newly issued capital stock to Berkshire
Hills in exchange for 50% of the net proceeds from the sale of common stock by
Berkshire Hills in connection with the conversion. Berkshire Hills expects to
receive approval from the Office of Thrift Supervision to become a savings and
loan holding company and to acquire all of Berkshire Bank's capital stock issued
in the conversion.
The plan of conversion provides that the Board of Trustees of Berkshire
Bancorp and the Board of Directors of Berkshire Bank, at any time before the
completion of the conversion, may decide not to use the holding company form of
organization in implementing the conversion. This decision may be made to avoid
possible delays resulting from overlapping regulatory processing, or policies or
conditions, which could hurt the ability of Berkshire Bank's, Berkshire
Bancorp's or Berkshire Hills' ability to complete the conversion and transact
its business after the conversion as is contemplated and in accordance with
Berkshire Bank's operating policies. If such a decision is made, Berkshire
Hills will withdraw its registration statement from the Securities and Exchange
Commission and Berkshire Bank will take all steps necessary to complete the
conversion without Berkshire Hills, including filing any necessary documents.
In such event, if Berkshire Bank determines to complete the conversion, if
permitted by the Massachusetts Banking Commissioner, Berkshire Bank will issue
and sell its common stock and subscribers will be notified of the elimination of
Berkshire Hills and be permitted to affirm, modify or rescind their orders.
Subscribers will need to reconfirm their subscriptions before the end of the
resolicitation offering or their funds will be refunded with interest. The
following description of the plan of conversion assumes that a holding company
form of organization will be used in the conversion. If a holding company form
of organization is not used, all other pertinent terms of the plan of conversion
as described below will apply to the sale of Berkshire Bank's common stock.
The plan of conversion provides generally that: Berkshire Bancorp will
merge with and into Berkshire Bank, with Berkshire Bank being the surviving
entity. The shares of Berkshire Bank's common stock currently held by Berkshire
Bancorp will be extinguished. Berkshire Hills has been organized for the purpose
of acquiring all of the outstanding shares of Berkshire Bank. The common stock
of Berkshire Hills will be offered in the subscription offering to persons
having subscription rights; if necessary, shares of common stock not subscribed
for in the subscription offering will be offered in a direct community offering
to certain members of the general public, with preference given to natural
persons residing in Berkshire County, Massachusetts, and then to certain members
of the general public in a syndicated community offering through a syndicate of
registered broker-
102
<PAGE>
dealers under selected dealer agreements. Berkshire Hills will purchase all of
the capital stock of Berkshire Bank to be issued in the conversion.
As part of the conversion, Berkshire Hills is offering its common stock in a
subscription offering to holders of subscription rights in the following order
of priority to: (1) holders of deposit accounts with $50 or more on deposit as
of September 30, 1998; (2) holders of deposit accounts of Berkshire Bank with
$50 or more on deposit as of September 30, 1999, except officers, directors,
trustees and corporators of Berkshire Bank and Berkshire Bancorp; (3) Berkshire
Bank's employee stock ownership plan; and (4) directors, trustees, officers and
employees of Berkshire Bank and Berkshire Bancorp without a higher subscription
priority.
Shares of common stock not subscribed for in the subscription offering are
expected to be offered for sale in a direct community offering. A direct
community offering, if one is held, may begin either at the same time as, during
or after the subscription offering. Shares of common stock not sold in the
subscription and direct community offerings may be offered in the syndicated
community offering which may occur either at the same time as, during or after
the subscription offering or direct community offering. Regulations require
that the direct community and syndicated community offerings be completed within
45 days after completion of the fully extended subscription offering unless
extended by Berkshire Bank or Berkshire Hills with the approval of all
applicable regulatory authorities. If the syndicated community offering is not
feasible, the Board of Directors of Berkshire Bank will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of common stock, which may include a firm
commitment public offering. The plan of conversion provides that the conversion
must be completed within 24 months after the date of the approval of the plan of
conversion by the Board of Trustees of Berkshire Bancorp and the Board of
Directors of Berkshire Bank.
The completion of the offering, however, depends on market conditions and
other factors beyond Berkshire Bank's control. No assurance can be given as to
the length of time that will be required to complete the sale of the common
stock. If delays are experienced, significant changes may occur in the estimated
pro forma market value of Berkshire Hills and Berkshire Bank as converted,
together with corresponding changes in the net proceeds realized by Berkshire
Hills from the sale of the common stock. If the conversion is terminated,
Berkshire Bank would be required to charge all conversion expenses against
current income.
Orders for shares of common stock will not be filled until at least 6,145,500
shares of common stock have been subscribed for, the Massachusetts Banking
Commissioner and any other applicable bank regulatory authority approves the
final valuation and the conversion closes. Furthermore, the closing of the stock
offering and the completion of the conversion is subject to the receipt by
Berkshire Bank of approval from the Federal Deposit Insurance Corporation of its
merger with Berkshire Bancorp and to the receipt by Berkshire Hills of approval
from the Office of Thrift Supervision to acquire all of the stock of Berkshire
Bank. If the conversion is not completed within 45 days after the last day of
the fully extended subscription offering and the Massachusetts Banking
Commissioner and any other applicable bank regulatory authority consents to an
extension of time to complete the conversion, subscribers will be given the
right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at Berkshire Bank's passbook rate from the date payment is
received until the funds are returned to the subscriber. If the period is not
extended, or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at Berkshire Bank's passbook rate from the date
payment is received until the conversion is terminated.
Establishment of the Charitable Foundation
General. In furtherance of Berkshire Bank's commitment to its local
community, the plan of conversion provides for the establishment of a charitable
foundation in connection with the conversion. The plan of conversion provides
that Berkshire Bank and Berkshire Hills will establish Berkshire Hills
Foundation, and will fund it with Berkshire Hills common stock, as further
described below. Berkshire Hills and Berkshire Bank believe that the funding of
Berkshire Hills Foundation with Berkshire Hills common stock is a means of
establishing a common
103
<PAGE>
bond between Berkshire Bank and its community and thereby enables Berkshire
Bank's community to share in the potential growth and success of Berkshire Hills
over the long-term. By further enhancing Berkshire Bank's visibility and
reputation in its local community, Berkshire Bank believes that the foundation
will enhance the long-term value of Berkshire Bank's community banking
franchise.
Purpose of Berkshire Hills Foundation. Berkshire Bank emphasizes community
lending and community activities. In 1997, Berkshire Bank formed Greater
Berkshire Foundation, Inc., a foundation that provides grants to public
charities that are operated for charitable, scientific, literary or educational
purposes, within the communities in which Berkshire Bank serves. See "Business
of Berkshire Bank--Greater Berkshire Foundation, Inc."
Berkshire Hills Foundation is being formed to complement, not to replace
Berkshire Bank's existing community activities and its existing foundation's
activities. Berkshire Bank intends to continue to emphasize community lending
and community activities following the conversion. However, such activities are
not Berkshire Bank's sole corporate purpose. Berkshire Hills Foundation,
conversely, will be completely dedicated to community activities and the
promotion of charitable causes, and may be able to support such activities in
manners that are not presently available to Berkshire Bank. Berkshire Bank
believes that Berkshire Hills Foundation will enable Berkshire Hills and
Berkshire Bank to assist the communities within Berkshire County, Massachusetts,
in areas beyond community development and lending and will enhance its current
activities under the CRA. Berkshire Bank received a "Outstanding" CRA rating in
its last CRA examination by the Federal Deposit Insurance Corporation. and the
Massachusetts Division of Banks.
The Board of Directors believes the establishment of Berkshire Hills
Foundation is consistent with Berkshire Bank's commitment to community service.
The Board further believes that the funding of Berkshire Hills Foundation with
Berkshire Hills common stock will allow Berkshire Bank's community to share in
the potential growth and success of Berkshire Hills long after the conversion.
Berkshire Hills Foundation will accomplish that goal by providing for continued
ties between it and Berkshire Bank, thereby forming a partnership within the
communities in Berkshire County, Massachusetts.
Berkshire Bank, however, does not expect the contribution to Berkshire Hills
Foundation to take the place of Berkshire Bank's traditional community lending
and charitable activities. For the year ended 1999, Berkshire Bank and Greater
Berkshire Foundation, Inc. contributed $310,000 to community organizations.
Berkshire Bank and Greater Berkshire Foundation, Inc. expect to continue making
charitable contributions within its communities. Upon conversion, Berkshire
Hills intends to contribute to Berkshire Hills Foundation shares of its common
stock equal to 8% of the common stock sold in the conversion, or stock valued at
between approximately $4.9 million based on the purchase price of $10.00 per
share, if 6,145,500 shares are sold in the conversion and approximately $6.7
million, based on the purchase price of $10.00 per share if 8,314,500 shares are
sold in the conversion. If the number of shares sold in the conversion is
increased to 9,561,675 shares, the foundation would be funded with common stock
valued at $7.6 million. The conversion presents Berkshire Bank and Berkshire
Hills with a unique opportunity to provide a substantial and continuing benefit
to the communities in Berkshire County, Massachusetts, and to receive the
associated tax benefits, without any significant cash outlay by Berkshire Bank,
and without any significant adverse impact to the depositors of Berkshire Bank.
Structure of Berkshire Hills Foundation. Berkshire Hills Foundation will be
incorporated under Delaware law as a non-stock corporation. Under its Bylaws,
Berkshire Hills Foundation's Board of Directors will be comprised of individuals
that are existing or former directors or officers of Berkshire Hills or
Berkshire Bank. The Certificate of Incorporation of Berkshire Hills Foundation
will provide that the corporation is organized exclusively for charitable
purposes as set forth in Section 501(c)(3) of the Internal Revenue Code.
Berkshire Hills Foundation's Certificate of Incorporation will further provide
that no part of the net earnings of the foundation will inure to the benefit of,
or be distributable to, its directors, officers or members.
The Board of Directors of Berkshire Hills Foundation will be responsible for
establishing its grant and donation policies, consistent with the purposes for
which it was established. As directors of a nonprofit corporation, directors of
Berkshire Hills Foundation will at all times be bound by their fiduciary duty to
advance Berkshire Hills
104
<PAGE>
Foundation's charitable goals, to protect its assets and to act in a manner
consistent with the charitable purposes for which Berkshire Hills Foundation is
established. The directors of Berkshire Hills Foundation will also be
responsible for directing the activities of the foundation, including the
management and voting of the common stock of Berkshire Hills held by Berkshire
Hills Foundation. However, all shares of common stock held by Berkshire Hills
Foundation must be voted in the same ratio as all other shares of the common
stock on all proposals considered by stockholders of Berkshire Hills.
Berkshire Hills Foundation's place of business will be located at Berkshire
Hills' administrative offices. The Board of Directors of Berkshire Hills
Foundation will appoint such officers and employees as may be necessary to
manage its operations.
Berkshire Hills Foundation will receive working capital from: (1) any
dividends that may be paid on Berkshire Hills' common stock in the future; (2)
within the limits of applicable federal and state laws, loans collateralized by
the common stock; or (3) from the proceeds of the sale of any of the common
stock in the open market from time to time. As a private foundation under
Section 501(c)(3) of the Internal Revenue Code, Berkshire Hills Foundation will
be required to distribute annually in grants or donations, a minimum of 5% of
the average fair market value of its net investment assets. One of the
conditions imposed on the gift of common stock by Berkshire Hills is that the
amount of common stock that may be sold by Berkshire Hills Foundation in any one
year shall not exceed 5% of the average market value of the assets held by
Berkshire Hills Foundation, except where the Board of Directors of Berkshire
Hills Foundation determines that the failure to sell an amount of common stock
greater than such amount would result in a long-term reduction of the value of
its assets and/or would otherwise jeopardize its capacity to carry out its
charitable purposes. Upon completion of the conversion and the contribution of
shares to Berkshire Hills Foundation immediately following the conversion,
Berkshire Hills would have 6,637,140 and 8,979,660 shares issued and outstanding
at the minimum and maximum of the estimated valuation range. Because of the
gift of common stock to Berkshire Hills Foundation, Berkshire Hills will have an
increased number of shares outstanding and, therefore, the voting and ownership
interests of stockholders in Berkshire Hills will be diluted by 7.4%, compared
to their interests in Berkshire Hills if Berkshire Hills Foundation were not
established. For additional discussion of the dilutive effect, see "Pro Forma
Data."
Tax Considerations. Berkshire Hills and Berkshire Bank have been advised
by their independent tax advisors that an organization created for the above
purposes should qualify as a Section 501(c)(3) exempt organization under the
Internal Revenue Code and should be classified as a private foundation.
Berkshire Hills Foundation will submit a request to the Internal Revenue Service
to be recognized as an exempt organization. As long as Berkshire Hills
Foundation files its application for tax-exempt status within 15 months from the
date of its organization, and provided the Internal Revenue Service approves the
application, its effective date as a Section 501(c)(3) organization will be the
date of its organization. Berkshire Hills' independent tax advisors, however,
have not rendered any advice on whether Berkshire Hills Foundation's tax exempt
status will be affected by the requirement of the regulatory authorities that
all shares of common stock of Berkshire Hills held by Berkshire Hills Foundation
must be voted in the same ratio as all other outstanding shares of common stock
of Berkshire Hills on all proposals considered by stockholders of Berkshire
Hills. See "--Regulatory Conditions Imposed on Berkshire Hills Foundation."
Under Delaware law, Berkshire Hills is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to be
valid. Berkshire Hills and Berkshire Bank believe that the conversion presents
a unique opportunity to establish and fund a charitable foundation given the
substantial amount of additional capital being raised. In making such a
determination, Berkshire Hills and Berkshire Bank considered the dilutive impact
of the contribution of common stock to Berkshire Hills Foundation on the amount
of common stock to be sold in the conversion. Berkshire Hills and Berkshire
Bank believe that the contribution to Berkshire Hills Foundation in excess of
the 10% annual limitation on charitable deductions described below is justified
given Berkshire Bank's capital position and its earnings, the substantial
additional capital being raised in the conversion and the potential benefits of
Berkshire Hills Foundation within Berkshire County, Massachusetts. See
"Historical
105
<PAGE>
and Pro Forma Regulatory Capital Compliance," "Capitalization," and
"Comparison of Independent Valuation and Pro Forma Financial Information With
and Without the Foundation." The amount of the contribution will not adversely
impact the financial condition of Berkshire Hills and Berkshire Bank. Berkshire
Hills and Berkshire Bank therefore believe that the amount of the charitable
contribution is reasonable given Berkshire Hills' and Berkshire Bank's pro forma
capital positions and does not raise safety and soundness concerns.
Berkshire Hills and Berkshire Bank have received an opinion of their
independent tax advisors that Berkshire Hills' contribution of its stock to
Berkshire Hills Foundation should not constitute an act of self-dealing, and
that Berkshire Hills should be entitled to a deduction in the amount of the fair
market value of the stock at the time of the contribution less the nominal
amount that Berkshire Hills Foundation is required to pay Berkshire Hills for
such stock. Berkshire Hills is only permitted to deduct an amount equal to 10%
of its annual taxable income. Berkshire Hills is permitted under the Internal
Revenue Code to carry the excess contribution over the five year period
following the contribution to Berkshire Hills Foundation. Berkshire Hills
estimates that substantially all of the contribution should be deductible over
the six-year period. However, Berkshire Hills does not have any assurance that
the Internal Revenue Service will grant tax-exempt status to the foundation.
Furthermore, even if the contribution is deductible, Berkshire Hills may not
have sufficient earnings to be able to use the deduction in full. Neither
Berkshire Hills nor Berkshire Bank expect to make any further contributions to
Berkshire Hills Foundation or to Greater Berkshire Foundation, Inc. within the
first five years following the initial contribution, unless such contributions
would be deductible under the Internal Revenue Code. Any such decisions would
be based on an assessment of, among other factors, the financial condition of
Berkshire Hills and Berkshire Bank at that time, the interests of stockholders
and depositors of Berkshire Hills and Berkshire Bank, and the financial
condition and operations of Berkshire Hills Foundation.
Although Berkshire Hills and Berkshire Bank have received an opinion of
their independent tax advisors that Berkshire Hills should be entitled to a
deduction for the charitable contribution, there can be no assurances that the
Internal Revenue Service will recognize Berkshire Hills Foundation as a Section
501(c)(3) exempt organization or that the deduction will be permitted. In such
event, Berkshire Hills' contribution to Berkshire Hills Foundation would be
expensed without tax benefit, resulting in a reduction in earnings in the year
in which the Internal Revenue Service makes such a determination. See "Risk
Factors--Contribution to the Berkshire Hills Foundation may not be tax
deductible which could hurt Berkshire Hills' profits."
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state income taxation.
However, investment income, such as interest, dividends and capital gains, is
generally taxed at a rate of 2.0%. Berkshire Hills Foundation will be required
to file an information return with the Internal Revenue Service within four and
one-half months after the close of its fiscal year. Berkshire Hills Foundation
will be required to make its annual information return available for public
inspection for a three-year period. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Conditions Imposed on Berkshire Hills Foundation. Establishment
of Berkshire Hills Foundation is expected to be subject to the following
conditions to be agreed to by Berkshire Hills Foundation as a condition to
receiving the Massachusetts Banking Commissioner's approval to the conversion:
1. the Massachusetts Division of Banks can examine the foundation;
2. the foundation must comply with all supervisory directives or
regulatory bulletins imposed by the Massachusetts Division of Banks;
3. the foundation will operate according to written policies adopted by
its board of directors, including a business plan and a conflict of
interest policy;
106
<PAGE>
4. the foundation will give a proposed operating plan to the
Massachusetts Division of Banks before the completion of the
conversion;
5. the foundation will provide annual reports to the Massachusetts
Division of Banks describing the grants made and the grant recipients;
6. the foundation shall not engage in self-dealing and shall comply with
all laws necessary to maintain its tax-exempt status under the
Internal Revenue Code; and
7. the foundation must vote its shares in the same ratio as all other
holders of shares.
Berkshire Hills Foundation will also need to comply with the requirement
that the establishment and funding of Berkshire Hills Foundation be approved by:
(1) a majority vote of Berkshire Bancorp's corporators present and voting at a
special meeting called for such purpose; and (2) the majority vote of all
"independent" corporators (who shall not constitute less than sixty percent
(60%) of all corporators eligible to vote) present and voting at a special
meeting called for such purpose.
Reasons for the Conversion
The Board of Directors and management believe that the conversion is in the
best interests of Berkshire Bank, its customers, employees and the communities
it serves. By converting to the stock holding company form of organization,
Berkshire Hills and Berkshire Bank will be structured in the form used by
holding companies of commercial banks, most business entities and by a growing
number of savings institutions. Management of Berkshire Bank believes that the
conversion offers a number of advantages which will be important to the future
growth and performance of Berkshire Bank. The capital raised in the conversion
is intended to support Berkshire Bank's future lending, operational growth and
to increase its ability to render services to the communities it serves. The
capital raised may also support possible future branching activities and the
acquisition of other financial institutions or financial service companies or
their assets. With the exception of an insurance agency which Berkshire Bank is
currently in the process of establishing, there are no current specific plans,
arrangements or understandings, written or oral, regarding these activities. The
conversion is also expected to afford Berkshire Bank's management, depositors
and others the opportunity to become stockholders of Berkshire Hills and
participate more directly in, and contribute to, any future growth of Berkshire
Hills and Berkshire Bank. The conversion will also enable Berkshire Hills and
Berkshire Bank to raise additional capital in the public equity or debt markets
should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, to do so.
Effects of Conversion to Stock Form
General. Each depositor in Berkshire Bank has both a deposit account in
the institution and a pro rata ownership interest in the net worth of the
institution through Berkshire Bancorp, based upon the balance in his or her
account, which interest may only be realized if the institution is liquidated.
However, this ownership interest is tied to the depositor's account and has no
value separate from such deposit account. Any depositor who opens a deposit
account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced.
Consequently, Berkshire Bank's depositors would realize the value of their
ownership interest only in the unlikely event that the bank is liquidated. In
such event, the depositors of record at that time, as owners, would be able to
share in any residual surplus and reserves after the payment of creditors'
claims, including claims of depositors to the amounts of their deposits, are
paid.
107
<PAGE>
When a mutual holding company converts to stock form, depositors lose all
rights to the net worth of the bank, except that eligible and supplemental
eligible account holders at the time of conversion obtain the right to claim a
pro rata share of funds representing the liquidation account established in
connection with the conversion. Additionally, nonwithdrawable common stock is
created and offered to depositors which represents the ownership of the
institution's net worth. The common stock is separate and apart from deposit
accounts and cannot be and is not insured by the Federal Deposit Insurance
Corporation, the Depositors Insurance Fund or any other governmental agency.
Certificates are issued to evidence ownership of the common stock. The stock
certificates are transferable, and therefore the stock may be sold or traded if
a purchaser is available with no effect on any deposit account the seller may
hold in the institution.
No assets of Berkshire Hills or Berkshire Bank will be distributed in
connection with the conversion other than the payment of those expenses incurred
in connection with the conversion.
Continuity. While the conversion is being accomplished, the normal
business of Berkshire Bank will continue without interruption, including being
regulated by the Massachusetts Banking Commissioner and the Federal Deposit
Insurance Corporation. After conversion, Berkshire Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Directors of Berkshire Bank at the time of conversion will serve as
Directors of Berkshire Bank after the conversion. The Directors of Berkshire
Hills will be solely composed of individuals who served on the Board of
Directors of Berkshire Bank. All officers of Berkshire Bank at the time of
conversion will retain their positions after the conversion.
Savings Accounts and Loans. Berkshire Bank's savings accounts, account
balances and existing Federal Deposit Insurance Corporation and Depositors
Insurance Fund insurance coverage of savings accounts will not be affected
by the conversion. Furthermore, the conversion will not affect the loan
accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with Berkshire Bank.
Effect on Voting Rights of Corporators. Berkshire Bancorp presently
maintains a governing board of 74 corporators. Generally, corporators consist
of depositors of Berkshire Bank who are residents of the communities served by
Berkshire Bank. Corporators are nominated by Berkshire Bancorp nominating
committee and elected by ballot at corporators' meetings. Generally,
corporators promote the goodwill of Berkshire Bank and, therefore, are
individuals who are successful in their occupations and respected in their
communities. Corporators also possess certain voting rights in Berkshire
Bancorp. Upon conversion, Berkshire Bancorp and its governing body of
corporators will no longer exist. Instead, Berkshire Hills, as the sole
stockholder of Berkshire Bank, will possess all voting rights in Berkshire Bank.
The holders of the common stock of Berkshire Hills will possess all voting
rights in Berkshire Hills.
Tax Effects. The conversion will be effected through a series of
contemporaneous transactions which result in Berkshire Bank becoming a wholly
owned subsidiary of Berkshire Hills. To facilitate the conversion, Berkshire
Bancorp will merge with and into Berkshire Bank. In connection with the merger,
shares of Berkshire Bank common stock previously held by Berkshire Bancorp will
be canceled. Berkshire Hills will then contribute 50% of the net offering
proceeds to Berkshire Bank in exchange for 100% of its common stock.
Berkshire Bank has received an opinion from Muldoon, Murphy & Faucette LLP,
Washington, D.C., that addresses the material federal income tax consequences of
the conversion. The opinion, which relies upon standard factual representations
given by Berkshire Bank, concludes, as follows:
108
<PAGE>
1. The merger of Berkshire Bancorp and Berkshire Bank will constitute a
tax-free reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code.
2. The exchange, as a result of the merger, of the equity interests of the
eligible and supplemental eligible account holders in Berkshire Bancorp for
interests in the liquidation account established by Berkshire Bank in the merger
will satisfy the continuity of interest requirement of Section 1.308-1(b) of the
Treasury Regulations.
3. Berkshire Bancorp will not recognize any gain or loss on the transfer
of its assets to Berkshire Bank as a consequence of its merger with Berkshire
Bank in exchange for an interest in a liquidation account established in
Berkshire Bank for the benefit of eligible and supplemental eligible account
holders who hold a liquidation interest in Berkshire Bancorp and who remain
depositors of Berkshire Bank.
4. No gain or loss will be recognized by Berkshire Bank upon the receipt
of the assets of Berkshire Bancorp as a consequence of its merger with
Berkshire Bank in exchange for the transfer to the eligible and supplemental
eligible account holders who hold a liquidation interest in Berkshire Bancorp of
an interest in the liquidation account.
5. The basis of the assets of Berkshire Bancorp to be received by
Berkshire Bank as a consequence of its merger with Berkshire Bank will be the
same as the basis of such assets in the hands of Berkshire Bancorp immediately
prior to the transfer.
6. The holding period of the assets of Berkshire Bancorp to be received
by Berkshire Bank in connection with its merger with Berkshire Bank will
include the holding period of those assets in the hands of Berkshire Bancorp.
7. An eligible or supplemental eligible account holder will recognize no
gain or loss upon the receipt of an interest in the liquidation account in
Berkshire Bank in exchange for the eligible and supplemental eligible account
holder's liquidation interest in Berkshire Bancorp.
8. Berkshire Hills will recognize no gain or loss upon the receipt of
cash in exchange for shares of common stock of Berkshire Hills issued in the
conversion offering.
9. Berkshire Hills will recognize no gain or loss upon the transfer of a
portion of the net offering proceeds to Berkshire Bank in exchange for common
stock of Berkshire Bank.
10. Berkshire Bank will recognize no gain or loss upon the receipt of a
portion of the net offering proceeds from Berkshire Hills in exchange for common
stock of Berkshire Bank.
11. Assuming that the subscription rights have no value, no gain or loss
will be recognized by Berkshire Hills or by eligible or supplemental eligible
account holders or other persons described in the plan of conversion who will
receive subscription rights as a result of the distribution of subscription
rights to purchase shares of common stock. Additionally, eligible or
supplemental eligible account holders or other persons shall not recognize gain
or loss upon the exercise of subscription rights to purchase shares of common
stock, provided that the amount to be paid for the common stock is equal to the
fair market value of the common stock on the date of purchase.
Unlike a private letter ruling issued by the Internal Revenue Service, an
opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached in the
opinion. If there is a disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the Internal Revenue Service.
109
<PAGE>
The opinions regarding the tax consequences of the receipt of subscription
rights are based upon past rulings of the Internal Revenue Service and the
conclusion of FinPro that such subscription rights have no fair market value.
FinPro, whose findings are not binding on the Internal Revenue Service, has
issued a letter indicating that the subscription rights do not have any value,
based on the fact that the rights are acquired by the recipients without cost,
are nontransferable and of short duration and afford the recipients the right
only to purchase shares of the common stock at a price equal to its estimated
fair market value, which will be the same price paid by purchasers in the direct
community offering for unsubscribed shares of common stock. If the subscription
rights are determined to have value, the receipt of the rights may only be
taxable to those persons who exercise their subscription rights. In such event,
Berkshire Hills or Berkshire Bank could also recognize a gain on the
distribution of subscription rights. Holders of subscription rights are
encouraged to consult with their own tax advisors as to the tax consequences if
the subscription rights are deemed to have any value.
Berkshire Bank has also received an opinion from Wolf & Company, P.C.,
Boston, Massachusetts, that, assuming the conversion does not result in any
federal income tax liability to Berkshire Bank, its account holders, Berkshire
Bancorp or Berkshire Hills, implementation of the plan of conversion will not
result in any Massachusetts income tax liability to those entities or persons.
The opinions of Muldoon, Murphy & Faucette LLP and Wolf & Company, P.C.,
and the opinion from FinPro relating to the value of the subscription rights,
are filed as exhibits to the registration statement that Berkshire Hills has
filed with the Securities and Exchange Commission. See "Where You Can Find More
Information."
Prospective investors are urged to consult with their own tax advisors
regarding the tax consequences of the conversion particular to them.
Liquidation Account. In the unlikely event of a complete liquidation of
Berkshire Bank before the conversion, each depositor in Berkshire Bank would
receive a pro rata share of any assets of Berkshire Bank remaining after payment
of claims of all creditors, including the claims of all depositors up to the
withdrawal value of their accounts. Each depositor's pro rata share of the
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in Berkshire Bank at
the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in Berkshire Bank,
including certificates of deposit, will not be entitled to share in any residual
assets upon liquidation of Berkshire Bank. However, under the Massachusetts
conversion regulations, Berkshire Bank will, at the time of the conversion
establish a liquidation account in an amount equal to the amount of its net
worth as set forth in its latest statement of financial condition contained in
its final prospectus.
The liquidation account will be maintained by Berkshire Bank for the
benefit of eligible account holders and supplemental eligible account holders
who retain their deposit accounts in Berkshire Bank. Each eligible account
holder and supplemental eligible account holder will, with respect to each
deposit account held, have a related inchoate interest in a sub-account portion
of the liquidation account balance.
The initial subaccount balance for a deposit account held by an eligible
account holder or a supplemental eligible account holder will be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the holder's "qualifying deposit" in the
deposit account and the denominator is the total amount of the "qualifying
deposits" of all eligible or supplemental eligible account holders. The initial
subaccount balance shall not be increased, and it will be decreased as provided
below.
If the deposit balance in any deposit account of an eligible account holder
or supplemental eligible account holder at the close of business on any annual
closing day of Berkshire Bank after September 30, 1998 or September 30, 1999, is
less than the lesser of the deposit balance in such deposit account at the close
of business on any other annual fiscal year closing date after September 30,
1998 or September 30, 1999 or the amount of the
110
<PAGE>
"qualifying deposit" in such deposit account on September 30, 1998 or September
30, 1999, then the subaccount balance for such deposit account shall be adjusted
by reducing the subaccount balance in an amount proportionate to the reduction
in the deposit balance. Once reduced, the subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance of
the related deposit account. If any deposit account is closed, the related
subaccount balance shall be reduced to zero.
Only upon a complete liquidation of Berkshire Bank, each eligible account
holder and supplemental eligible account holder will be entitled to receive a
liquidation distribution from the liquidation account in the amount of the then
current adjusted subaccount balance(s) for deposit account(s) held by the holder
before any liquidation distribution may be made to stockholders. No merger,
consolidation, bulk purchase of assets with assumptions of deposit account and
other liabilities or similar transactions in which Berkshire Bank is not the
surviving institution will be considered to be a complete liquidation. In any of
these transactions, the liquidation account will be assumed by the surviving
institution.
In the unlikely event Berkshire Bank is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to Berkshire Hills as the sole stockholder of Berkshire Bank.
The liquidation account will be a memorandum account on the books of
Berkshire Bank and will not be reflected in the audited or unaudited
consolidated financial statements of Berkshire Hills or in Berkshire Bank's
regulatory reports.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock in a subscription offering have
been issued to certain persons and entities. The amount of the common stock
which these parties may purchase will depend on the availability of the common
stock. Subscription priorities have been established for the allocation of stock
that may be available. These priorities are as follows:
Priority 1: Eligible Account Holders. Each depositor with a deposit
account of $50 or more on deposit at Berkshire Bank as of September 30, 1998
will receive nontransferable subscription rights to subscribe for up to the
greater of: (1) $250,000 of common stock (such amount may be increased to 5.0%
of the common stock offered or decreased to 0.10% of the common stock offered
without the further approval of the corporators or resolicitation of
subscribers); (2) one-tenth of one percent (0.10%) of the total offering of
shares of common stock; or (3) fifteen times the product (rounded down to the
next whole number) obtained by multiplying the total number of shares of common
stock to be issued by a fraction of which the numerator is the amount of the
holder's "qualifying deposit" and the denominator is the total amount of
"qualifying deposits" of all eligible account holders. Nontransferable
subscription rights received by directors, trustees, corporators or officers of
Berkshire Bank and Berkshire Bancorp and their associates in this priority based
on any increased deposits in Berkshire Bank in the one-year period preceding
September 30, 1998 will be subordinated to all other subscription rights of
eligible account holders.
If the exercise of subscription rights in this priority results in an
oversubscription, shares of common stock will be allocated among subscribing
eligible account holders so as to permit each one, if possible, to purchase a
number of shares sufficient to make the person's total allocation equal 100
shares or the number of shares actually subscribed for, whichever is less.
After that, unallocated shares will be allocated proportionately, based on the
amount of the eligible account holder's qualifying deposits compared to total
qualifying deposits of all subscribing eligible account holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more eligible account holders, the excess shall be
reallocated, one or more times as necessary, among those eligible account
holders whose subscriptions are still not fully satisfied on the same principle
until all shares have been allocated or all subscriptions satisfied.
111
<PAGE>
Priority 2: Supplemental Eligible Account Holders. To the extent there
are sufficient shares of common stock remaining after satisfying the
subscriptions of eligible account holders, each depositor with a deposit account
of $50 or more on deposit at Berkshire Bank as of September 30, 1999, will
receive nontransferable subscription rights to subscribe for up to the greater
of: (1) $250,000 of common stock (such amount may be increased to 5.0% of the
common stock offered or decreased to 0.10% of the common stock offered without
the further approval of the corporators or resolicitation of subscribers); (2)
one tenth of one percent (0.10%) of the total offering of shares of common
stock; or (3) fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock to be issued
by a fraction of which the numerator is the amount of the holder's "qualifying
deposit" and the denominator is the total amount of "qualifying deposits" of all
supplemental eligible account holders.
If the exercise of subscription rights in this priority results in an
oversubscription, shares of common stock will be allocated among subscribing
supplemental eligible account holders so as to permit each supplemental eligible
account holder, if possible, to purchase a number of shares sufficient to make
his or her total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. After that, unallocated shares will be
allocated among subscribing supplemental eligible account holders
proportionately, based on the amount of their respective qualifying deposits
compared to total qualifying deposits of all subscribing supplemental eligible
account holders whose subscriptions remain unsatisfied. If the amount so
allocated exceeds the amount subscribed for by any one or more supplemental
eligible account holders, the excess shall be reallocated, one or more times as
necessary, among those supplemental eligible account holders whose subscriptions
are still not fully satisfied on the same principle until all shares have been
allocated or all subscriptions satisfied.
Priority 3: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfying the subscriptions of eligible and
supplemental eligible account holders, the employee stock ownership plan will
receive nontransferable subscription rights to purchase up to 8% of common stock
issued in the conversion, or 530,971 and 718,372 shares at the minimum and
maximum of the estimated valuation range. If the plan's subscription is not
filled in its entirety, the employee stock ownership plan may purchase shares in
the open market or may purchase shares directly from Berkshire Hills. The
employee stock ownership plan shall not be deemed to be an associate or
affiliate of, or a person acting in concert with, any trustee, corporator,
director or officer of Berkshire Bancorp, Berkshire Bank or Berkshire Hills.
Subscriptions by the employee stock ownership plan will not be combined with any
other participants in the subscription and direct community offerings, including
purchases made by any of the trustees, directors, corporators, officers,
employees or associates of Berkshire Bancorp, Berkshire Bank or Berkshire Hills.
Priority 4: Directors, Trustees, Officers and Employees. To the extent
that shares are available after satisfying the subscriptions of eligible account
holders, supplemental eligible account holders and the employee stock ownership
plan, directors, trustees, officers and employees of Berkshire Bank and
Berkshire Bancorp shall be entitled to purchase up to 30% of the total offering
of shares of common stock. The shares shall be allocated among directors,
trustees, officers and employees on a fair basis such as by giving weight to the
period of service, compensation and position of the individual. Directors,
trustees, officers and employees of Berkshire Bank and Berkshire Bancorp shall
not be deemed to be associates or persons acting in concert solely as a result
of their board membership or employment.
Subscription rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for common stock in the subscription
offering or subscribing for common stock on behalf of another person may forfeit
those rights and may face possible further sanctions and penalties imposed by
the Massachusetts Division of Banks, the Federal Deposit Insurance Corporation
or another agency of the U.S. Government. Stock purchased in the subscription
offering must be registered in the name(s) of the registered account holder(s)
and failure to do so will result in the rejection of the order. Joint
registrations will be allowed only if the qualifying account is so registered.
Each person exercising subscription rights will be required to certify that he
or she is purchasing shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of the shares. Once tendered, subscription orders cannot be revoked without the
consent of Berkshire Bank and Berkshire Hills.
112
<PAGE>
Berkshire Hills and Berkshire Bank will make reasonable attempts to provide
a prospectus and related offering materials to holders of subscription rights.
However, the subscription offering and all subscription rights under the plan of
conversion will expire at 4:00 p.m. Eastern time, on ___________, 2000,
whether or not Berkshire Bank has been able to locate each person entitled to
subscription rights. Orders for common stock in the subscription offering
received in hand by Berkshire Bank after that time will not be accepted. The
subscription offering may be extended by Berkshire Hills and Berkshire Bank up
to ________________, 2000 without regulatory approval. The Massachusetts
conversion regulations require that Berkshire Hills complete the sale of common
stock within 45 days after the close of the subscription offering, unless
extended by Berkshire Bank with the approval of the Massachusetts Commissioner
of Banks and any other applicable bank regulatory authority. If the direct
community offering and the syndicated community offerings are not completed
within that period all funds received will be promptly returned with interest at
Berkshire Bank's passbook rate and all withdrawal authorizations will be
canceled. If regulatory approval of an extension of the time period has been
granted, all subscribers will be notified of the extension and of the duration
of any extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by Berkshire Hills from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest, or withdrawal authorizations will be canceled. No
extensions may be granted beyond October 22, 2001.
Direct Community Offering. Any shares of common stock which remain
unsubscribed for in the subscription offering will be offered by Berkshire Hills
to certain members of the general public in a direct community offering, with
preference given to natural persons residing in Berkshire County, Massachusetts.
Purchasers in the direct community offering are eligible to purchase up to
$250,000 of common stock, which equals 25,000 shares. This amount may be
increased up to 5% of the total offering of shares without further approval of
Berkshire Bancorp's corporators or a resolicitation of subscribers unless
required by the Massachusetts Banking Commissioner and any other applicable bank
regulatory authority. If the purchase limit is increased to 5% of the total
offering of shares, orders accepted in the direct community offering shall be
filled up to a maximum of 2% of the total offering and thereafter shall be
allocated on a pro rata basis per order until all orders have been filled or all
of the remaining shares have been allocated. The direct community offering, if
held, may commence concurrently with during or promptly after the subscription
offering. The direct community offering may terminate on or at any time after
4:00 p.m., Eastern time, on ______________, 2000, but no later than 45 days
after the close of the subscription offering, unless extended by Berkshire Hills
and Berkshire Bank, with the approval of the Massachusetts Banking Commissioner
and any other applicable bank regulatory authority. If regulatory approval of an
extension of the time period has been granted, all subscribers will be notified
of the extension and of the duration of any extension that has been granted, and
will be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by Berkshire Hills
from a subscriber, the subscriber's order will be rescinded and all funds
received will be promptly returned with interest. Berkshire Hills and Berkshire
Bank have the absolute right to accept or reject in whole or in part any orders
to purchase shares in the direct community offering. If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. Berkshire Hills presently intends to terminate the direct community
offering as soon as it has received orders for all shares available for purchase
in the conversion.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the direct
community offering.
Syndicated Community Offering. The plan of conversion provides that, if
necessary, all shares of common stock not purchased in the subscription offering
and direct community offering, if any, may be offered for sale to certain
members of the general public in a syndicated community offering through a
syndicate of registered broker-dealers to be formed and managed by Sandler
O'Neill acting as agent of Berkshire Hills. Berkshire Hills and Berkshire Bank
have the right to reject orders, in whole or part, in their sole discretion in
the syndicated community offering. Neither Sandler O'Neill nor any registered
broker-dealer have any obligation to take or purchase any shares of the common
stock in the syndicated community offering; however, Sandler O'Neill has agreed
to use its best efforts in the sale of shares in the syndicated community
offering.
113
<PAGE>
Stock sold in the syndicated community offering also will be sold at the
$10.00 purchase price. See "--Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the syndicated community offering
for more than $250,000 of common stock, which equals 25,000 shares. This amount
may be increased up to 5% of the total offering of shares without further
approval of Berkshire Bancorp's corporators or a resolicitation of subscribers
unless required by the Massachusetts Banking Commissioner and any other
applicable bank regulatory authority. If the purchase limit is increased to 5%
of the total offering of shares, orders accepted in the syndicated community
offering shall be filed up to a maximum of 2% of the total offering and
thereafter shall be allocated on a pro rata basis per order until all orders
have been filled or all of the remaining shares have been allocated. See "--
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings" for a description of the commission to be paid to the
selected dealers and to Sandler O'Neill.
Sandler O'Neill may enter into agreements with selected dealers to assist
in the sale of shares in the syndicated community offering. During the
syndicated community offering, selected dealers may only solicit indications of
interest from their customers to place orders with Berkshire Hills as of a
certain date for the purchase of shares. When and if Sandler O'Neill and
Berkshire Hills believe that enough indications of interest and orders have been
received in the subscription offering, the direct community offering and the
syndicated community offering to consummate the conversion, Sandler O'Neill will
request, as of that certain date, selected dealers to submit orders to purchase
shares for which they have received indications of interest from their
customers. Selected dealers will send confirmations to customers on the next
business day after that certain date. Selected dealers may settle the trade by
debiting the accounts of their customers on a date which will be three business
days from that certain date. Customers who authorize selected dealers to debit
their brokerage accounts are required to have the funds for payment in their
account on but not before the settlement date. On the settlement date, selected
dealers will remit funds to the account that Berkshire Hills established for
each selected dealer. Each customer's funds so forwarded to Berkshire Hills,
along with all other accounts held in the same title, will be insured by the
Federal Deposit Insurance Corporation up to the applicable $100,000 legal limit.
After payment has been received by Berkshire Hills from selected dealers, funds
will earn interest at Berkshire Bank's passbook rate until the completion of the
offering. At the completion of the conversion, the funds received will be used
to purchase the shares of common stock ordered. The shares issued in the
conversion cannot and will not be insured by the Federal Deposit Insurance
Corporation, the Depositors Insurance Fund or any other government agency. If
the conversion is not completed, funds with interest will be returned promptly
to the selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The syndicated community offering may terminate no more than 45 days after
the expiration of the subscription offering, unless extended by Berkshire Hills
and Berkshire Bank, with approval of the Massachusetts Banking Commissioner and
any other applicable bank regulatory authority.
If Berkshire Bank is unable to find purchasers from the general public for
all unsubscribed shares, other purchase arrangements will be made by the Board
of Directors of Berkshire Bank, if feasible. Any other arrangements must be
approved by the Massachusetts Banking Commissioner and any other applicable bank
regulatory authority.
Persons in Non-Qualified States. Berkshire Hills and Berkshire Bank will
make reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock under the plan of
conversion reside. However, Berkshire Hills and Berkshire Bank are not required
to offer stock in the subscription offering to any person who resides in a
foreign country or who resides in a state of the United States to which both of
the following apply: (a) less than 100 persons eligible to subscribe for shares
reside; and (b) the granting of subscription rights or the offer or sale of
shares to these persons would require Berkshire Hills or its employees under the
securities laws of the state to register as a broker, dealer or agent, or to
register or otherwise qualify the shares for sale in the state and registering
or qualifying would be impractical for reasons of cost or otherwise. Neither
Berkshire Hills nor Berkshire Bank will make any payments to persons residing in
these states in lieu of granting subscription rights to them.
114
<PAGE>
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
Berkshire Bank has retained Sandler O'Neill to consult with and advise
Berkshire Bank and to assist Berkshire Bank and Berkshire Hills, on a best
efforts basis, in the distribution of shares in the offering. Sandler O'Neill is
a broker-dealer registered with the Securities and Exchange Commission and a
member of the National Association of Securities Dealers, Inc. Sandler O'Neill
will: (1) consult as to the securities marketing implications of the
conversion; (2) review with the Board of Directors the independent appraisal of
the common stock; (3) review all offering documents; (4) assist in the design
and implementation of a marketing strategy; (5) assist in obtaining all
requisite regulatory approvals; (6) assist Berkshire Bank management in
scheduling and preparing for meetings with potential investors and broker-
dealers; and (7) provide such other general advice and assistance as may be
requested to promote the successful completion of the conversion.
Based on negotiations between Sandler O'Neill and Berkshire Bank concerning
the fee structure, Sandler O'Neill will receive a fee equal to 1.50% of the
aggregate dollar amount of all common stock sold in the offerings. Such amount
does not include any shares sold to the employee stock ownership plan,
directors, officers and employees of Berkshire Bank or Berkshire Hills or
members of their immediate families or any shares contributed to Berkshire Hills
Foundation. Such fee will be paid upon completion of the conversion. Sandler
O'Neill shall be reimbursed for its reasonable out-of-pocket expenses, including
legal fees. In addition, Sandler O'Neill will perform conversion agent services
and records management services for Berkshire Bank in the conversion and will
receive a fee for these services of $45,000.
Sandler O'Neill has not prepared any report or opinion constituting a
recommendation or advice to Berkshire Hills or Berkshire Bank or to persons who
subscribe for stock, nor has it prepared an opinion as to the fairness to
Berkshire Hills or Berkshire Bank of the purchase price or the terms of the
common stock to be sold. Sandler O'Neill expresses no opinion as to the prices
at which the common stock to be issued may trade. Total marketing fees to
Sandler O'Neill are expected to be $811,000 to $1.1 million at the minimum and
maximum of the estimated valuation range, respectively. See "Pro Forma Data"
for the assumptions used to arrive at these estimates. Sandler O'Neill and
selected dealers participating in the syndicated community offering will receive
a commission for any common stock sold in the syndicated community offering in a
maximum amount to be agreed upon by Berkshire Hills and Berkshire Bank to
reflect market requirements at the time of the allocation of shares in the
syndicated community offering but in no event will such amount exceed 6% of the
aggregate dollar amount of any common stock sold in the syndicated community
offering. In addition, Sandler O'Neill will be paid a management fee of 1.50%
of the aggregate dollar amount of any common stock sold in the syndicated
community offering.
With certain limitations, Berkshire Bank has also agreed to indemnify
Sandler O'Neill against liabilities and expenses, including legal fees, incurred
in connection with certain claims or litigation arising out of or based upon
untrue statements or omissions contained in the offering material for the common
stock or with regard to allocations of shares if there is an oversubscription,
or determinations of eligibility to purchase shares.
Description of Sales Activities
The common stock will be offered in the subscription offering and direct
community offering principally by the distribution of this prospectus and
through activities conducted at Berkshire Bank's conversion center at its
administrative office. The conversion center is expected to operate during
normal business hours throughout the subscription offering and direct community
offering. It is expected that at any particular time one or more Sandler
O'Neill employees will be working at the conversion center. Employees of
Sandler O'Neill will be responsible for mailing materials relating to the
offering, responding to questions regarding the conversion and the offering and
processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Sandler O'Neill or by the selected dealers managed by Sandler O'Neill. The
management and employees of Berkshire Bank may participate in the offering in
clerical capacities, providing administrative support in effecting sales
transactions or, when
115
<PAGE>
permitted by state securities laws, answering questions of a mechanical nature
relating to the proper execution of the order form. Management of Berkshire Bank
may answer questions regarding the business of Berkshire Bank when permitted by
state securities laws. Other questions of prospective purchasers, including
questions as to the advisability or nature of the investment, will be directed
to registered representatives. The management and employees of Berkshire Hills
and Berkshire Bank have been instructed not to solicit offers to purchase common
stock or provide advice regarding the purchase of common stock.
No officer, director, trustee or employee of Berkshire Bancorp, Berkshire
Bank or Berkshire Hills will be compensated, directly or indirectly, for any
activities in connection with the offer or sale of securities issued in the
conversion.
None of Berkshire Bank's personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
Berkshire Bank's personnel will assist in the above-described sales activities
under an exemption from registration as a broker or dealer provided by Rule 3a4-
1 promulgated under the Securities Exchange Act of 1934, as amended. Rule 3a4-1
generally provides that an "associated person of an issuer" of securities shall
not be deemed a broker solely by reason of participation in the sale of
securities of the issuer if the associated person meets certain conditions.
These conditions include, but are not limited to, that the associated person
participating in the sale of an issuer's securities not be compensated in
connection therewith at the time of participation, that the person not be
associated with a broker or dealer and that the person observe certain
limitations on his or her participation in the sale of securities. For purposes
of this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
Procedure for Purchasing Shares in the Subscription and Direct
Community Offerings
To purchase shares in the subscription offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization indicated on the stock order form for withdrawal of
full payment from the subscriber's deposit account with Berkshire Bank, must be
received by Berkshire Bank by 4:00 p.m., Eastern time, on _________ __, 2000.
Berkshire Bank and Berkshire Hills are not required to accept order forms that
are not received by that time or are executed defectively, or are received
without full payment or without appropriate withdrawal instructions. In
addition, Berkshire Bank and Berkshire Hills are not obligated to accept orders
submitted on photocopied or telecopied stock order forms and will not accept
stock order forms without an accompanying executed certification form.
Nevertheless, Berkshire Bank and Berkshire Hills shall have the right, each in
their sole discretion, to permit institutional investors to submit irrevocable
orders together with a legally binding commitment for payment and to pay for the
shares of common stock for which they subscribe at any time up to 48 hours
before the completion of the conversion. Berkshire Hills and Berkshire Bank
have the right to waive or permit a subscriber to correct an incomplete or
improperly executed order form, but do not represent that they will do so. Under
the plan of conversion, the interpretation of the terms and conditions of the
plan of conversion and of the order form by the Board of Trustees of Berkshire
Bancorp and the Board of Directors of Berkshire Bank will be final subject to
the authority of the Massachusetts Banking Commissioner and any other applicable
bank regulatory authority.
In order to purchase shares in the direct community offering, the order
form, accompanied by the required payment for each share subscribed for, must be
received by Berkshire Bank before the direct community offering terminates,
which may be concurrently with or after the end of the subscription offering.
Once received, an executed order form may not be modified, amended or rescinded
without the consent of Berkshire Bank, unless the conversion has not been
completed within 45 days after the end of the subscription offering.
In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, all accounts must be listed on
the order form giving all names on each account and the account number. Failure
to list an account could result in no shares or fewer shares being allocated to
a subscribing member.
116
<PAGE>
Full payment for subscriptions may be made by check, bank draft or money
order, or by authorization of withdrawal from deposit accounts maintained with
Berkshire Bank. Appropriate means by which withdrawals may be authorized are
provided on the order form. No wire transfers will be accepted. Interest will be
paid on payments made by cash, check, bank draft or money order at Berkshire
Bank's passbook rate from the date payment is received until the completion or
termination of the conversion. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates until
completion or termination of the conversion, unless the certificate matures
after the date of receipt of the order form but before closing, in which case
funds will earn interest at the passbook rate from the date of maturity until
the conversion is completed or terminated, but a hold will be placed on the
funds, making them unavailable to the depositor until completion or termination
of the conversion. When the conversion is completed, the funds received in the
offering will be used to purchase the shares of common stock ordered. The shares
of common stock issued in the conversion cannot and will not be insured by the
Federal Deposit Insurance Corporation, the Depositors Insurance Fund or any
other government agency. If the conversion is not consummated for any reason,
all funds submitted will be promptly refunded with interest as described
above.
If a subscriber authorizes Berkshire Bank to withdraw the amount of the
purchase price from his or her deposit account, Berkshire Bank will do so as of
the effective date of conversion, though the account must contain the full
amount necessary for payment at the time the subscription order is received.
Berkshire Bank will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time funds are
actually transferred under the authorization the certificate will be canceled at
the time of the withdrawal, without penalty, and the remaining balance will earn
interest at the rate provided for in the certificates in the event of
cancellation.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for at the $10.00 purchase price upon the completion
of the subscription and direct community offerings, if all shares are sold, or
upon the completion of the syndicated community offering; provided that there is
in force from the time of its subscription until that time, a loan commitment
from an unrelated financial institution, Berkshire Hills or a subsidiary
established to lend to the employee stock ownership plan, at that time, the
aggregate purchase price of the shares for which it subscribed.
Individual retirement accounts maintained in Berkshire Bank do not permit
investment in the common stock. A depositor interested in using his or her
individual retirement account funds to purchase common stock must do so through
a self-directed individual retirement account. Depositors interested in using
funds in an individual retirement account at Berkshire Bank to purchase common
stock should contact the conversion center as soon as possible for assistance.
In addition, federal laws and regulations require that officers, directors and
10% shareholders who use self-directed individual retirement account funds to
purchase shares of common stock in the subscription offering, make purchases for
the exclusive benefit of individual retirement accounts.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at the address specified on the order form or
to the last address of the persons appearing on the records of Berkshire Bank as
soon as practicable following the sale of all shares of common stock. Any
certificates returned as undeliverable will be disposed of as required by
applicable law. Purchasers may not be able to sell the shares of common stock
which they purchased until certificates for the common stock are available and
delivered to them, even though trading of the common stock may have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
before the end of the offering as required by Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended, no prospectus will be mailed any later than
five days before that date or hand delivered any later than two days before that
date. Execution of the order form will confirm receipt or delivery under
Rule 15c2-8. Order forms will only be distributed with a prospectus. By
executing and returning the regulatory mandated certification form, you will be
certifying that you received this prospectus and acknowledging that the common
stock is not a deposit account and is not insured or guaranteed by any federal
or state governmental agency. You will also be acknowledging that you received
117
<PAGE>
disclosure concerning the risks involved in this stock offering. The
certification form could be used as support to show that you understand the
nature of your investment.
Stock Pricing and Number of Shares to be Issued
The plan of conversion requires that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of Berkshire Hills and Berkshire Bank as converted, as determined by
an independent appraisal. Berkshire Bank and Berkshire Hills have retained
FinPro, which is experienced in the evaluation and appraisal of business
entities, to prepare an appraisal of the pro forma market value of Berkshire
Hills and Berkshire Bank as converted, as well as a business plan. FinPro will
receive a fee expected to total approximately $39,500 for its appraisal services
and assistance in the preparation of a business plan, plus reasonable out-of-
pocket expenses incurred in connection with the appraisal. Berkshire Bank has
agreed to indemnify FinPro, its directors, officers, agents and employees under
certain circumstances against liabilities and expenses, including legal fees,
arising out of, related to, or based upon the conversion, except where FinPro's
liability results from its own negligence or willful misconduct.
FinPro has prepared an appraisal of the estimated pro forma market value of
Berkshire Hills and Berkshire Bank as converted. For its analysis, FinPro
undertook substantial investigations to learn about Berkshire Bank's business
and operations. Management supplied financial information, including annual
financial statements and information on the composition of assets and
liabilities. In addition to this information, FinPro reviewed Berkshire Bank's
conversion application as filed with the Massachusetts Division of Banks and
Berkshire Hills' registration statement as filed with the Securities and
Exchange Commission. Furthermore, FinPro visited Berkshire Bank's facilities and
had discussions with Berkshire Bank's management and its special conversion
legal counsel, Muldoon, Murphy & Faucette LLP.
FinPro's analysis utilized three selected valuation procedures, the
Price/Book method, the Price/Earnings method, and Price/Assets method, all of
which are described in its report. FinPro placed the greatest emphasis on the
Price/Earnings and Price/Book methods in estimating pro forma market value. In
applying these procedures, FinPro reviewed, among other factors, the economic
make-up of Berkshire Bank's primary market area, Berkshire Bank's financial
performance and condition in relation to publicly traded institutions that
FinPro deemed comparable to Berkshire Bank, the specific terms of the offering
of Berkshire Hills' common stock, the pro forma impact of the additional capital
raised in the conversion, the conditions of securities markets in general and
for thrift institution common stock in particular. FinPro's analysis provides
an approximation of the pro forma market value of Berkshire Hills and Berkshire
Bank as converted based on the valuation methods applied and certain assumptions
as to the pro forma earnings of Berkshire Hills after the conversion, including
estimated expenses and an assumed after-tax rate of return on the net conversion
proceeds as described under "Pro Forma Data," purchases by the employee stock
ownership plan of an amount equal to 8% of the common stock issued in the
conversion and purchases in the open market by the stock-based incentive plan of
a number of shares equal to 4% of the common stock issued in the conversion at
the $10.00 purchase price. See "Pro Forma Data" for additional information
concerning these assumptions. The use of different assumptions may yield
different results.
On the basis of the foregoing, FinPro has advised Berkshire Hills and
Berkshire Bank that, in its opinion, as of March 8, 2000, the estimated pro
forma market value of the common stock to be sold in connection with the
conversion is within the valuation range of $61.5 million to $83.1 million with
a midpoint of $72.3 million. After reviewing the methodology and the
assumptions used by FinPro in the preparation of the appraisal, the Board of
Directors established an estimated valuation range of $61.5 million to $83.1
million with a midpoint of $72.3 million. Assuming that the shares are sold at
$10.00 per share in the conversion, the estimated number of shares sold would be
between 6,145,500 and 8,314,500 with a midpoint of 7,230,000. The purchase price
of $10.00 was determined after discussion among the Boards of Directors of
Berkshire Bank and Berkshire Hills and Sandler O'Neill, taking into account,
among other factors, the desire that the common stock be offered in a manner
that will achieve the widest distribution of the stock, and the desired
liquidity in the common stock after the conversion. Since the outcome of the
offering relates in large measure to market conditions at the time of sale, it
is not possible to determine the exact number of shares that will be issued by
Berkshire Hills at this time. The estimated valuation
118
<PAGE>
range may be amended, with the approval of the Massachusetts Banking
Commissioner and any other applicable bank regulatory authority, if necessitated
by developments following the date of the appraisal, such as changes in market
conditions, the financial condition or operating results of Berkshire Bank,
regulatory guidelines or national or local economic conditions. FinPro's
appraisal report was filed as an exhibit to the registration statement that
Berkshire Hills filed with the Securities and Exchange Commission. See "Where
You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, FinPro, after taking into account factors
similar to those involved in its prior appraisal, will determine its estimate of
the pro forma market value of Berkshire Hills and Berkshire Bank as converted,
as of the close of the subscription offering. No shares will be sold unless
FinPro confirms that, to the best of its knowledge and judgment, nothing of a
material nature has occurred that would cause it to conclude that the actual
total purchase price on an aggregate basis was materially incompatible with its
estimate of the total pro forma market value of Berkshire Hills and Berkshire
Bank as converted at the time of the sale. If, however, the facts do not
justify that statement, the offering may be canceled, a new estimated valuation
range and price per share set and new subscription, direct community and
syndicated community offerings held. Under those circumstances, subscribers
would have the right to modify or rescind their subscriptions and to have their
subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.
Depending upon market or financial conditions following the commencement of
the subscription and direct community offerings, the total number of shares to
be sold in the conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the estimated valuation range or
more than 15% above the maximum of the estimated valuation range. Based on a
purchase price of $10.00 per share and FinPro's estimate of the pro forma market
value of the common stock ranging from a minimum of $61.5 million to a maximum,
as increased by 15%, of $95.6 million, the number of shares of common stock
expected to be sold is between a minimum of 6,145,500 shares and a maximum, as
adjusted by 15%, of 9,561,675 shares. The actual number of shares issued
between this range will depend on a number of factors and shall be determined by
Berkshire Bank and Berkshire Hills.
If market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the estimated valuation
range or more than 15% above the maximum of the estimated valuation range, if
the plan of conversion is not terminated by Berkshire Hills and Berkshire Bank
after consultation with the Massachusetts Banking Commissioner and any other
applicable bank regulatory authority, purchasers will be resolicited, in which
case they will need to reconfirm, rescind, or modify their subscriptions. Any
change of more than 15% above the estimated valuation range must be approved by
the Massachusetts Banking Commissioner and any other applicable bank regulatory
authority. If the number of shares issued in the conversion is increased to 15%
above the maximum of the estimated valuation range to reflect changes in market
or financial conditions, persons who subscribed for the maximum number of shares
will not be given the opportunity to subscribe for an adjusted maximum number of
shares. See "--Limitations on Purchases of Shares."
An increase in the number of shares to be issued in the conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and Berkshire Hills' pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the conversion would increase both a
subscriber's ownership interest and Berkshire Hills' pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale
of common stock in the conversion will be increased by the number of shares
contributed to Berkshire Hills Foundation, which is expected to be 8% of the
common stock sold in the conversion. Assuming the sale of shares at the maximum
of the estimated valuation range, Berkshire Hills will issue 665,160 shares of
its common stock from authorized but unissued shares to Berkshire Hills
Foundation immediately following the completion of the conversion. In that
event, Berkshire Hills will have total shares of common stock outstanding of
8,979,660 shares. Of that amount, Berkshire Hills Foundation will own 7.4%.
Funding Berkshire Hills Foundation with authorized but unissued shares will have
the
119
<PAGE>
effect of diluting the ownership and voting interests of persons purchasing
shares in the conversion by 7.4% since a greater number of shares will be
outstanding upon completion of the conversion than would be if Berkshire Hills
Foundation were not established. See "Pro Forma Data."
In formulating its appraisal, FinPro relied upon the truthfulness, accuracy
and completeness of all documents Berkshire Bank furnished to it. FinPro also
considered financial and other information from regulatory agencies, other
financial institutions, and other public sources, as appropriate. While FinPro
believes this information to be reliable, FinPro does not guarantee the accuracy
or completeness of the information and did not independently verify the
financial statements and other data provided by Berkshire Bank and Berkshire
Hills or independently value the assets or liabilities of Berkshire Hills and
Berkshire Bank. The appraisal is not intended to be, and must not be interpreted
as, a recommendation of any kind as to the advisability of purchasing shares of
common stock. Moreover, because the appraisal must be based on many factors
which change periodically, there is no assurance that purchasers of shares in
the conversion will be able to sell shares after the conversion at prices at or
above the purchase price.
Copies of the appraisal report of FinPro including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of Berkshire Bank and the other locations specified under "Where You Can Find
More Information."
Limitations on Purchases of Shares
The plan of conversion provides for certain limitations to be placed upon
the purchase of common stock in the conversion. Each subscriber must subscribe
for a minimum of 25 shares. The plan of conversion provides for the following
purchase limitations:
1. The maximum purchase in the subscription offering by any person or
group of persons through a single deposit account or similarly titled
deposit accounts is $250,000, which equals 25,000 shares;
2. No person, related persons or persons acting together may purchase
more than $250,000, which equals 25,000 shares, in the direct
community offering;
3. The employee stock ownership plan may purchase, in the aggregate, up
to 8% of the shares of common stock issued in the conversion;
4. Directors, trustees, corporators and employees of Berkshire Bank,
Berkshire Bancorp and Berkshire Hills and their associates may not
purchase more than 30% of the total number of shares offered in the
aggregate;
5. Persons purchasing shares of common stock in the syndicated community
offering, together with associates of and persons acting in concert
with such persons, may purchase up to $250,000 of common stock; and
6. The maximum number of shares of common stock which may be subscribed
for or purchased in all categories of the conversion by any person,
together with associates of and groups of persons acting in concert
with such persons, except for the employee stock ownership plan, shall
not exceed 1.0% of the shares of common stock offered for sale in the
conversion.
For purposes of the plan of conversion, directors, trustees, corporators,
officers and employees are not deemed to be associates or a group affiliated
with each other or acting in concert solely by reason of their being directors,
trustees, corporators, officers or employees of Berkshire Bank, Berkshire
Bancorp or Berkshire Hills. Pro rata reductions within each subscription rights
category will be made in accordance with the procedures outlined in the plan of
conversion.
120
<PAGE>
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the corporators
or subscribers for common stock, unless required by the Massachusetts Banking
Commissioner or any applicable bank regulatory authority, both the individual
amount permitted to be subscribed for and the overall maximum purchase
limitation may be increased to up to a maximum of 5% of the common stock to be
issued at the sole discretion of Berkshire Hills and Berkshire Bank. If such
amount is increased, subscribers for the maximum amount will be, and certain
other large subscribers in the sole discretion of Berkshire Bank may be, given
the opportunity to increase their subscriptions up to the then applicable limit.
Berkshire Bank and Berkshire Hills do not intend to increase the maximum
purchase limitation unless market conditions warrant that an increase in the
maximum purchase limitation is necessary to sell a number of shares in excess of
the minimum of the estimated valuation range.
The plan of conversion defines "acting in concert" to include: (1) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (2) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose under any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise. In general, a
person who acts in concert with another party shall also be deemed to be acting
in concert with any person who is also acting in concert with that other party.
Berkshire Hills and Berkshire Bank may presume that certain persons are acting
in concert based upon, among other things, joint account relationships and the
fact that persons have filed joint Schedules 13D with the Securities and
Exchange Commission with respect to other companies.
The plan of conversion defines "associate," when used to indicate a
relationship with any person, to mean: (1) any corporation or organization
(other than Berkshire Bancorp, Berkshire Hills, Berkshire Bank or a majority-
owned subsidiary of Berkshire Bancorp, Berkshire Hills or Berkshire Bank) of
which a person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; (2) any trust
or other estate in which a person has a substantial beneficial interest or as to
which a person serves as trustee or in a similar fiduciary capacity; and (3) any
relative or spouse of a person, or any relative of a spouse, who either has the
same home as a person or who is a director, trustee or officer of Berkshire
Bancorp, Berkshire Hills or Berkshire Bank or any of its parents or
subsidiaries. The term "associate," however, does not include, for purposes of
the stock purchase limitations in the conversion, any stock benefit plan of
Berkshire Bank in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and, for purposes of
determining the total shares that may be held by officers and directors of
Berkshire Hills and Berkshire Bank, does
121
<PAGE>
not include any tax-qualified employee stock benefit plan of Berkshire Bank. For
example, a corporation of which a person serves as an officer would be an
associate of a person and, therefore, all shares purchased by such corporation
would be included with the number of shares which such person could purchase
individually under the above limitations.
The plan of conversion defines "officer" to mean the Chairman of the Board,
President, any officer of the level of Vice President or above, Clerk, Treasurer
and any other person performing similar functions of Berkshire Bancorp,
Berkshire Bank or Berkshire Hills.
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors, trustees and officers of Berkshire
Bancorp, Berkshire Bank and Berkshire Hills and by NASD members. See
"--Restrictions on Transferability by Directors and Officers and NASD Members."
Restrictions on Transferability by Corporators, Directors, Trustees, Officers
and NASD Members
Shares of common stock purchased by directors, trustees, corporators and
officers of Berkshire Bancorp, Berkshire Hills and Berkshire Bank, and their
associates, either directly from Berkshire Hills or from an underwriter, may not
be sold for a period of one year following the conversion, except upon the death
or substantial disability of the director, trustee, corporator or officer, or
unless approved by the Massachusetts Banking Commissioner. Any stock purchased
after the conversion is free of this restriction. Accordingly, shares of common
stock issued by Berkshire Hills to directors, trustees, corporators and officers
of Berkshire Bancorp, Berkshire Hills and Berkshire Bank, and their associates,
shall bear a legend giving appropriate notice of the restriction and, in
addition, Berkshire Hills will give appropriate instructions to the transfer
agent for Berkshire Hills' common stock with respect to the restriction on
transfers. Any shares issued to directors, trustees, corporators and officers of
Berkshire Bancorp, Berkshire Hills and Berkshire Bank, and their associates, as
a stock dividend, stock split or otherwise with respect to restricted common
stock shall also be restricted.
Purchases of outstanding shares of common stock of Berkshire Hills by
directors, trustees, corporators and officers of Berkshire Bancorp, Berkshire
Hills and Berkshire Bank, or any person who was an executive officer or director
of Berkshire Hills and Berkshire Bank after adoption of the plan of conversion,
and their associates during the three-year period following the conversion may
be made only through a broker or dealer registered with the Securities and
Exchange Commission, except with the prior written approval of the Massachusetts
Banking Commissioner. This restriction does not apply, however, to negotiated
transactions involving more than 1% of Berkshire Hills' outstanding common stock
or to the purchase of stock under the stock-based incentive plan.
Berkshire Hills has filed a registration statement with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, for the
registration of the common stock to be issued in the conversion. This
registration does not cover the resale of the shares. Shares of common stock
purchased by persons who are not affiliates of Berkshire Hills may be resold
without registration. Shares purchased by an affiliate of Berkshire Hills will
have resale restrictions under Rule 144 of the Securities Act, as amended. If
Berkshire Hills meets the current public information requirements of Rule 144,
each affiliate of Berkshire Hills who complies with the other conditions of
Rule 144, including those that require the affiliate's sale to be aggregated
with those of certain other persons, would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of 1% of the outstanding shares of Berkshire Hills or the
average weekly volume of trading in the shares during the preceding four
calendar weeks. Provisions may be made in the future by Berkshire Hills to
permit affiliates to have their shares registered for sale under the Securities
Act of 1933, as amended, under certain circumstances.
Under the guidelines of the National Association of Securities Dealers,
members of that organization and their associates face certain restrictions on
the transfer of securities purchased with subscription rights and to certain
reporting requirements upon purchase of the securities.
122
<PAGE>
Interpretation, Amendment and Termination
To the extent permitted by law, all interpretations of the plan of
conversion by Berkshire Bancorp and Berkshire Bank will be final; however, such
interpretations have no binding effect on the Massachusetts Banking Commissioner
and any other applicable bank regulatory authority. The plan of conversion
provides that, if deemed necessary or desirable by the Board of Trustees of
Berkshire Bancorp and the Board of Directors of Berkshire Bank, the plan of
conversion may be substantively amended by the Board of Trustees of Berkshire
Bancorp and the Board of Directors of Berkshire Bank as a result of comments
from regulatory authorities or otherwise, without the further approval of
Berkshire Bank's corporators unless required by the Massachusetts Banking
Commissioner.
Completion of the conversion requires the sale of all shares of the common
stock within 24 months following approval of the plan of conversion by Berkshire
Bancorp's Board of Trustees and Berkshire Bank's Board of Directors. If this
condition is not satisfied, the plan of conversion will be terminated and
Berkshire Bank and Berkshire Bancorp will continue their business in their
current forms of organization. The plan of conversion may be terminated by the
Board of Trustees of Berkshire Bancorp and the Board of Directors of Berkshire
Bank at any time prior to the approval of the plan by the Massachusetts Banking
Commissioner and any time thereafter with the concurrence of the Commissioner.
RESTRICTIONS ON ACQUISITION OF BERKSHIRE HILLS
AND BERKSHIRE BANK
General
The plan of conversion provides for the conversion of Berkshire Bancorp's
legal form of organization from a mutual holding company to a stock holding
company and, in connection with the conversion, the adoption by Berkshire
Bancorp's corporators of Amended and Restated Articles of Organization and
Bylaws of Berkshire Bank. See "The Conversion--General." As described below
and elsewhere in this prospectus, certain provisions in Berkshire Hills'
Certificate of Incorporation and Bylaws and in its management compensation plans
adopted in connection with the conversion, together with provisions of Delaware
corporate law, may have anti-takeover effects. In addition, Berkshire Bank's
Amended and Restated Articles of Organization and Bylaws and management
compensation plans adopted in connection with the conversion may also have anti-
takeover effects. Finally, regulatory restrictions may make it difficult for
persons or companies to acquire control of Berkshire Hills and Berkshire Bank.
Restrictions in Berkshire Hills' Certificate of Incorporation and Bylaws
General. The following discussion is a general summary of the material
provisions of Berkshire Hills' Certificate of Incorporation and Bylaws and other
statutory and regulatory provisions relating to stock ownership and transfers,
the Board of Directors and business combinations, which might be deemed to have
a potential anti-takeover effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual stockholders may deem to be in their best
interests. As a result, stockholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current Board of Directors or management of Berkshire
Hills more difficult. The following summary is general and reference should be
made to the Certificate of Incorporation and Bylaws. See "Where You Can Find
More Information" as to how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of Berkshire
Hills provides that in no event shall any record owner of any outstanding common
stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of common
stock be entitled or permitted to any vote in respect of the shares held in
excess of such limit. Beneficial ownership is determined by Rule 13d-3 of the
General Rules and Regulations of the Securities Exchange Act of 1934, as
amended, and includes shares beneficially owned by that person or any of his
affiliates, shares which that person or his affiliates have the
123
<PAGE>
right to acquire under any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options or otherwise
and shares as to which that person and his affiliates have sole or shared voting
or investment power. Beneficial ownership does not include shares under a
publicly solicited revocable proxy or shares that are not otherwise deemed to be
beneficially owned by such person and his affiliates. No director or officer (or
any affiliate thereof) of Berkshire Hills shall, solely by reason of any or all
of such directors or officers acting in their capacities as such, be deemed to
beneficially own any shares beneficially owned by any other director or officer
(or affiliate thereof) nor will the employee stock ownership plan or any similar
plan of Berkshire Hills or Berkshire Bank or any director with respect thereto
(solely by reason of such director's capacity) be deemed to beneficially own any
shares held under any such plan. The Certificate of Incorporation of Berkshire
Hills further provides that the provisions limiting voting rights may only be
amended upon the vote of the holders of at least 80% of the voting power of all
then outstanding shares of capital stock entitled to vote thereon after giving
effect to the provision limiting voting rights.
Board of Directors. The Board of Directors of Berkshire Hills is divided
into three classes, each of which contains approximately one-third of the whole
number of the members of the Board. Each class serves a staggered term, with
approximately one-third of the total number of Directors being elected each
year. Berkshire Hills' Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the whole Board of
Directors. The Certificate of Incorporation and the Bylaws provide that any
vacancy occurring in the Board, including a vacancy created by an increase in
the number of Directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, shall be filled for the
remainder of the unexpired term only by a majority vote of the Directors then in
office. The classified Board is intended to provide for continuity of the Board
of Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of Berkshire Hills.
Directors may be removed by the stockholders only for cause by the affirmative
vote of the holders of at least 80% of the voting power of all then outstanding
shares of capital stock entitled to vote after giving effect to the voting
limitation applicable to stockholders owning more than 10% of the outstanding
shares.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove any director or the entire Board, with or without
cause and replace it with persons of such holders choice.
Director Qualifications. Berkshire Hills' Bylaws contain qualifications
for individuals to be eligible for election or appointment to the Board of
Directors. These qualifications include the requirement that an individual: (1)
not have been the subject of certain enumerated regulatory actions by a
financial regulatory agency within the last ten years; (2) not have been
convicted of or be currently charged in any crime involving dishonesty or breach
of trust which is punishable for a term exceeding one year; (3) be a resident
for at least one year of a county in which Berkshire Bank maintains a banking
office, or of a county contiguous to such county or have significant ties to
such communities; and (4) not be a director or officer of another state or
federally chartered financial institution that engages in business activities in
the same market area as Berkshire Hills or any of its subsidiaries.
Additionally, no person shall be eligible for election to the Board of Directors
if such person is the representative or nominee of a person or acting in concert
with a person who is ineligible for election to the Board of Directors. This
provision will limit the individuals that can be nominated for election or serve
on the Board of Directors.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of Berkshire Hills may be
called only by a resolution adopted by a majority of the whole Board of
Directors of Berkshire Hills. The Certificate of Incorporation also provides
that any action required or permitted to be taken by the stockholders of
Berkshire Hills may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 26,000,000 shares of common stock and 1,000,000 shares of preferred
stock. The shares of common stock and preferred stock were authorized in an
amount greater than that to be issued in the conversion to provide Berkshire
Hills' Board of Directors with as much flexibility as possible to effect, among
other transactions, financings, acquisitions, stock
124
<PAGE>
dividends, stock splits and employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with its
fiduciary duty to deter future attempts to gain control of Berkshire Hills. The
Board of Directors also has sole authority to determine the terms of any one or
more series of preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board has the power to the extent consistent with
its fiduciary duty to issue a series of preferred stock to persons friendly to
management to attempt to block a post-tender offer merger or other transaction
by which a third party seeks control, and thereby assist management to retain
its position. Berkshire Hills' Board currently has no plans for the issuance of
additional shares, other than the issuance of shares in the conversion,
including shares contributed to Berkshire Hills Foundation, and the potential
issuance of additional shares upon exercise of stock options.
Stockholder Vote Required to Approve Business Combinations with Interested
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of Berkshire Hills' outstanding shares of voting stock
entitled to vote to approve certain "Business Combinations" with an "Interested
Stockholder," and related transactions (subject to the limitations on voting).
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must be approved by a majority of the outstanding shares of common
stock of Berkshire Hills and any other affected class of stock. Under Berkshire
Hills' Certificate of Incorporation, the approval of at least 80% of the shares
of capital stock entitled to vote is required for any business combination
involving an Interested Stockholder (as defined below) except: (1) in cases
where the proposed transaction has been approved by a majority of those members
of Berkshire Hills' Board of Directors who are unaffiliated with the Interested
Stockholder and were directors before the time when the Interested Stockholder
became an Interested Stockholder; or (2) if the proposed transaction meets
certain conditions which are designed to afford the stockholders a fair price in
consideration for their shares. Under each exception, the approval of only a
majority of the outstanding shares of voting stock is sufficient. The term
"Interested Stockholder" is defined to include, among others, any individual, a
group acting in concert, corporation, partnership, association or other entity
(other than Berkshire Hills or its subsidiary) who or which is the beneficial
owner, directly or indirectly, of 10% or more of the outstanding shares of
voting stock of Berkshire Hills.
This provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include:
1. any merger or consolidation of Berkshire Hills or any of its
subsidiaries with any Interested Stockholder or affiliate of an
Interested Stockholder or any corporation which is, or after such
merger or consolidation would be, an affiliate of an Interested
Stockholder;
2. any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition to or with any Interested Stockholder or affiliate of
assets of Berkshire Hills or its subsidiaries the value of which
equals or exceeds 25% of the combined assets of Berkshire Hills and
its subsidiaries;
3. the issuance or transfer to any Interested Stockholder or its
affiliate by Berkshire Hills (or any subsidiary) of any securities of
Berkshire Hills (or any subsidiary) in exchange for any cash,
securities or other property the value of which equals or exceeds 25%
of the fair market value of the common stock of Berkshire Hills;
4. the adoption of any plan for the liquidation or dissolution of
Berkshire Hills proposed by or on behalf of any Interested Stockholder
or affiliate thereof; and
5. any reclassification of securities, recapitalization, merger or
consolidation of Berkshire Hills with any of its subsidiaries which
has the effect of increasing the proportionate share of common stock
or any class of equity or convertible securities of Berkshire Hills or
subsidiary owned directly or indirectly, by an Interested Stockholder
or affiliate thereof.
125
<PAGE>
The directors and executive officers of Berkshire Bank are purchasing
approximately 2.51% of the shares of the common stock to be sold in the
conversion based on the maximum of the estimated valuation range. In addition,
the employee stock ownership plan intends to purchase 8% of the common stock
issued in connection with the conversion, including shares issued to Berkshire
Hills Foundation. Additionally, if stockholders approve the proposed stock-
based incentive plan, Berkshire Hills expects to acquire 4% of the common stock
issued in connection with the conversion, including shares issued to Berkshire
Hills Foundation, and expects to issue options to purchase up to 10% of the
common stock issued in connection with the conversion, including shares issued
to Berkshire Hills Foundation, to directors and executive officers. As a
result, directors, executive officers and employees may control the voting of
approximately 21.3% of Berkshire Hills' common stock on a diluted basis at the
maximum of the estimated valuation range, thereby enabling them to prevent the
approval of the transactions requiring the approval of at least 80% of Berkshire
Hills' outstanding shares of voting stock described above. Furthermore, the
ability of directors, executive officers and employees to prevent the approval
of transactions requiring the approval of at least 80% of the outstanding shares
of voting stock of Berkshire Hills will be enhanced by the regulatory condition
imposed on Berkshire Hills Foundation that any shares held by it must be voted
in the same ratio as all other shares of Berkshire Hills common stock voted on
each and every proposal considered by stockholders.
Evaluation of Offers. The Certificate of Incorporation of Berkshire Hills
further provides that the Board of Directors of Berkshire Hills, when evaluating
an offer, to (1) make a tender or exchange offer for any equity security of
Berkshire Hills, (2) merge or consolidate Berkshire Hills with another
corporation or entity or (3) purchase or otherwise acquire all or substantially
all of the properties and assets of Berkshire Hills, may, in connection with the
exercise of its judgment in determining what is in the best interest of
Berkshire Hills and its stockholders, give consideration to all relevant
factors, including those factors that directors of any subsidiary (including
Berkshire Bank) may consider in evaluating any action that may result in a
change or potential change of control of such subsidiary, and the social and
economic effects of acceptance of such offer on: Berkshire Hills' present and
future customers and employees and those of its subsidiaries (including
Berkshire Bank); the communities in which Berkshire Hills and Berkshire Bank
operate or are located; the ability of Berkshire Hills to fulfill its corporate
objectives as a savings and loan holding company; and the ability of Berkshire
Bank to fulfill the objectives of a stock savings bank under applicable statutes
and regulations. By having these standards in the Certificate of Incorporation
of Berkshire Hills, the Board of Directors may be in a stronger position to
oppose such a transaction if the Board concludes that the transaction would not
be in the best interest of Berkshire Hills, even if the price offered is
significantly greater than the then market price of any equity security of
Berkshire Hills.
Amendment of Certificate of Incorporation and Bylaws. Amendments to
Berkshire Hills' Certificate of Incorporation must be approved by a majority of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of the holders of at
least 80% of the outstanding voting stock entitled to vote (after giving effect
to the provision limiting voting rights) is required to amend or repeal specific
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by Berkshire Hills and the
provisions allowing for the amendment of Berkshire Hills' Bylaws and Certificate
of Incorporation.
Berkshire Hills' Bylaws may be amended by a majority of the whole Board of
Directors, or by a vote of the holders of at least 80% (after giving effect to
the provision limiting voting rights) of the total votes eligible to be voted at
a duly constituted meeting of stockholders.
Advance Notice Provisions. The Bylaws of Berkshire Hills also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give at
least 90 days' advance notice to the Secretary of Berkshire Hills, provided
Berkshire Hills gives at least 100 days' notice of the meeting. The notice
provision requires a stockholder who desires to raise new business to provide
information to Berkshire Hills concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide Berkshire Hills with information concerning the nominee and the
proposing stockholder.
126
<PAGE>
Anti-Takeover Effects of Berkshire Hills' Certificate of Incorporation and
Bylaws and Management Remuneration Adopted in Conversion
The provisions described above are intended to reduce Berkshire Hills'
vulnerability to takeover attempts and other transactions which have not been
negotiated with and approved by members of its Board of Directors. Additionally,
provisions of the stock-based incentive plan may provide for accelerated
benefits to participants if a change in control of Berkshire Hills or Berkshire
Bank occurs or a tender or exchange offer for their stock is made. See
"Management of Berkshire Bank--Benefits--Stock-Based Incentive Plan." Berkshire
Hills and Berkshire Bank have also entered into agreements with key officers and
intends to establish the Employee Severance Compensation Plan which will provide
such officers and eligible employees with additional payments and benefits on
the officer's termination in connection with a change in control of Berkshire
Hills or Berkshire Bank. See "Management of Berkshire Bank--Executive
Compensation--Employment Agreements," and "--Benefits--Employee Severance
Compensation Plan." The foregoing provisions and limitations may make it more
difficult for companies or persons to acquire control of Berkshire Hills.
Additionally, the provisions could deter offers to acquire the outstanding
shares of Berkshire Hills which might be viewed by stockholders to be in their
best interests.
Berkshire Hills' Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of Berkshire
Hills and its stockholders. An unsolicited non-negotiated takeover proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of Berkshire Hills and its stockholders to encourage potential
acquirors to negotiate directly with management and that these provisions will
encourage such negotiations and discourage non-negotiated takeover attempts.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The Delaware
takeover statute is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, the statute provides that a "Person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation (an "Interested
Stockholder") may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such "Person" became an Interested Stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of the
statute:
1. any business combination if, before the date a person became an
Interested Stockholder, the board of directors approved either
the business combination or the transaction which resulted in the
stockholder becoming an Interested Stockholder;
2. any business combination involving a person who acquired at least
85% of the outstanding voting stock in the transaction in which
he became an Interested Stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the
corporation's directors who are also officers and specific
employee stock plans;
3. any business combination with an Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of
the outstanding voting stock not owned by the Interested
Stockholder; and
127
<PAGE>
4. certain business combinations that are proposed after the
corporation had received other acquisition proposals and which
are approved or not opposed by a majority of certain continuing
members of the board of directors.
A corporation may exempt itself from the requirements of the statute by
adopting an amendment to its certificate of incorporation or bylaws electing not
to be governed by Section 203. Berkshire Hills' Certificate of Incorporation
and Bylaws do not currently contain such provision and, at the present time, the
Board of Directors does not intend to propose any such amendment.
Restrictions in Berkshire Bank's Amended and Restated Articles of Organization
and Bylaws
Although the Board of Directors of Berkshire Bank is not aware of any
effort that might be made to obtain control of Berkshire Bank after the
conversion, the Board of Directors believes that it is appropriate to adopt
provisions permitted by Massachusetts law to protect the interests of the
converted bank and its stockholders from any hostile takeover. Such provisions
may, indirectly, inhibit a change in control of Berkshire Hills, as Berkshire
Bank's sole stockholder. See "Risk Factors--Anti-takeover provisions and
statutory provisions could make takeover attempts more difficult to achieve and
may decrease the market price of common stock."
Berkshire Bank's stock Articles of Organization will contain a provision
whereby the acquisition of beneficial ownership of more than 10% of the issued
and outstanding shares of any class of equity securities of Berkshire Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of three years
following the date of completion of the conversion without the prior written
notice to Berkshire Bank and the prior written approval of the Massachusetts
Banking Commissioner. If shares are acquired in violation of this provision,
all shares beneficially owned by any person in excess of the 10% limit shall be
considered "excess shares" and shall not be counted as shares entitled to vote
and shall not be voted by any person or counted as voting shares in connection
with any matters submitted to the stockholders for a vote. These limitations
shall not apply to any transaction in which Berkshire Bank forms a holding
company without a change in the respective beneficial ownership interests of its
stockholders other than by the exercise of any dissenter or appraisal rights.
If holders of revocable proxies for more than 10% of the shares of the common
stock of Berkshire Hills seek, among other things, to elect one-third or more of
Berkshire Hills' Board of Directors, to cause Berkshire Hills' stockholders to
approve the acquisition or corporate reorganization of Berkshire Hills or to
exert a continuing influence on a material aspect of the business operations of
Berkshire Hills, which actions could indirectly result in a change in control of
Berkshire Bank, the Board of Directors of Berkshire Bank will be able to assert
this provision of Berkshire Bank's stock Articles of Organization against such
holders. Although the Board of Directors of Berkshire Bank is not currently
able to determine when and if it would assert this provision, the Board, in
exercising its fiduciary duty, may assert this provision if it were deemed to be
in the best interests of Berkshire Bank, Berkshire Hills and its stockholders.
It is unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of Berkshire Bank indirectly through a change in control of Berkshire
Hills. In addition, stockholders are not be permitted to cumulate their votes
in the election of Directors.
Finally, the Amended and Restated Articles of Organization provides for the
issuance of shares of preferred stock on such terms, including conversion and
voting rights, as may be determined by Berkshire Bank's Board of Directors
without stockholder approval. Although Berkshire Bank has no arrangements,
understandings or plans at the present time for the issuance or use of
undesignated preferred stock, the Board believes that the availability of such
shares will provide Berkshire Bank with increased flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs
which may arise. If a proposed merger, tender offer or other attempt to gain
control of Berkshire Bank occurs of which management does not approve, the Board
can authorize the issuance of one or more series of preferred stock with rights
and preferences which could impede the completion of such a transaction. An
effect of the possible issuance of such preferred stock, therefore, may be to
deter a future takeover attempt. The Board does not intend to issue any
preferred stock except on terms which the Board deems to be in the best interest
of Berkshire Bank and its then existing stockholders.
128
<PAGE>
Regulatory Restrictions
Massachusetts Conversion Regulations. Regulations issued by the
Massachusetts Banking Commissioner provide that for a period of three years
following the date of the completion of the conversion, no person, acting singly
or together with associates in a group of persons acting in concert, shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than ten percent (10%) of any class of any equity security of Berkshire
Hills without the prior written notice to Berkshire Hills and the prior written
approval of the Massachusetts Banking Commissioner. Where any person, directly
or indirectly, acquires beneficial ownership of more than ten percent
(10%) of any class of any equity security of Berkshire Hills without the prior
written approval of the Massachusetts Banking Commissioner, the securities
beneficially owned by such person in excess of ten percent (10%) shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to the stockholders for a vote, and shall not be counted as
outstanding for purposes of determining the affirmative vote necessary to
approve any matter submitted to the stockholders for a vote. The Massachusetts
Banking Commissioner may take further action to enforce these regulatory
restrictions.
Change in Bank Control Act. The acquisition of ten percent (10%) or more
of the common stock outstanding may trigger the provisions of the Change in Bank
Control Act. The Federal Deposit Insurance Corporation has also adopted a
regulation under the Change in Bank Control Act which generally requires persons
who at any time intend to acquire control of a Federal Deposit Insurance
Corporation-insured state-chartered non-member bank, including a savings bank
such as Berkshire Bank, to provide at least 60 days' prior written notice and
certain financial and other information to the Federal Deposit Insurance
Corporation.
The 60-day notice period does not commence until the information is deemed
to be substantially complete. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least twenty-
five percent (25%) of any class of Berkshire Bank's voting stock or the power to
direct the management or policies of Berkshire Bank. However, under Federal
Deposit Insurance Corporation regulations, control is presumed to exist where
the acquiring party has voting control of at least ten percent (10%) of any
class of Berkshire Bank's voting securities if: (1) Berkshire Bank has a class
of voting securities which is registered under Section 12 of the Exchange Act,
or (2) the acquiring party would be the largest holder of a class of voting
shares of Berkshire Bank. The statute and underlying regulations authorize the
Federal Deposit Insurance Corporation to disapprove a proposed acquisition on
certain specified grounds. In some circumstances, similar findings with the
Massachusetts Banking Commissioner may be required under the Massachusetts
Change in Bank Control Act.
Federal Reserve Board Regulations. If Berkshire Bank does not maintain its
qualification as a qualified thrift lender, attempts to acquire control of
Berkshire Bank will trigger the regulations of the Federal Reserve Board under
the Change in Bank Control Act.
Massachusetts Banking Law. Massachusetts banking law also prohibits any
"company," defined to include banking institutions as well as corporations, from
directly or indirectly controlling the voting power of twenty-five percent (25%)
or more of the voting stock of two or more banking institutions without the
prior approval of the Board of Bank Incorporation. Additionally, an out-of-
state company which already directly or indirectly controls voting power of
twenty-five percent (25%) or more of the voting stock of two or more banking
institutions may not also acquire direct or indirect ownership or control of
more than five percent (5%) of the voting stock of a Massachusetts banking
institution without the prior approval of the Board of Bank Incorporation.
Finally, for a period of three years following completion of a conversion to
stock form, no person may directly or indirectly offer to acquire or acquire
beneficial ownership of more than ten percent (10%) of any class of equity
security of a converting mutual savings bank without prior written approval of
the Massachusetts Banking Commissioner.
Prior approval of the Massachusetts Banking Commissioner is also required
before any action is taken that causes any stock banking institution to acquire
all of the capital stock of any other stock banking institution. The
Massachusetts Banking Commissioner will approve such a plan of acquisition,
following approval by a majority vote of the boards of directors of the acquiror
and the acquiree and a two-thirds approval of the stockholders of the acquiree,
provided the Massachusetts Banking Commissioner finds that competition among
banking institutions will
129
<PAGE>
not be unreasonably affected and that public convenience and advantage will be
promoted. Any such company shall engage directly or indirectly only in such
activities as are now or may hereafter be proper activities for bank holding
companies under the Bank Holding Company Act.
DESCRIPTION OF BERKSHIRE HILLS STOCK
General
Berkshire Hills is authorized to issue 26,000,000 shares of common stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share. Berkshire Hills currently expects to issue
up to 10,326,609 shares of common stock at the maximum of the estimated
valuation range, as adjusted by 15% and including shares issued to Berkshire
Hills Foundation. Berkshire Hills will not issue any shares of preferred stock
in the conversion. Each share of Berkshire Hills' common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of common stock. Upon payment of the purchase price for the common stock,
as required by the plan of conversion, all stock will be duly authorized, fully
paid and nonassessable.
The common stock of Berkshire Hills will represent nonwithdrawable capital,
will not be an account of any type, and will not be insured by the Federal
Deposit Insurance Corporation, the Depositors Insurance Fund or any other
government agency.
Common Stock
Dividends. Berkshire Hills can pay dividends out of statutory surplus or
from certain net profits if, and when declared by its Board of Directors. The
payment of dividends by Berkshire Hills is limited by law and applicable
regulation. See "Dividend Policy" and "Regulation and Supervision." The holders
of common stock of Berkshire Hills will be entitled to receive and share equally
in any dividends declared by the Board of Directors of Berkshire Hills. If
Berkshire Hills issues preferred stock, the holders of preferred stock may have
a priority over the holders of the common stock with respect to dividends.
Voting Rights. After the conversion, the holders of common stock of
Berkshire Hills will possess exclusive voting rights in Berkshire Hills. They
will elect Berkshire Hills' Board of Directors and act on other matters as are
required to be presented to them under Delaware law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"Restrictions on Acquisition of Berkshire Hills and Berkshire Bank," each holder
of common stock will be entitled to one vote per share and will not have any
right to cumulate votes in the election of directors. If Berkshire Hills issues
preferred stock, holders of Berkshire Hills preferred stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote. See "Restrictions on Acquisition of Berkshire Hills and
Berkshire Bank."
As a subsidiary of a Massachusetts mutual holding company, corporate powers
and control of Berkshire Bank are indirectly vested in the corporators of
Berkshire Bancorp, who elect Berkshire Bancorp's trustees, and who, in turn,
elect the directors of Berkshire Bank. Berkshire Bank's directors then appoint
the officers of Berkshire Bank. After the conversion, voting rights will be
vested exclusively in Berkshire Hills, which will own all of the outstanding
capital stock of Berkshire Bank, and will be voted at the direction of Berkshire
Hills' Board of Directors. Consequently, the holders of the common stock of
Berkshire Hills will not have direct control of Berkshire Bank.
Liquidation. Upon liquidation, dissolution or winding up of Berkshire
Hills, the holders of its common stock would be entitled to receive all of the
assets of Berkshire Hills available for distribution after payment or provision
for payment of all its debts and liabilities. If Berkshire Hills issues
preferred stock, the preferred stock holders may have a priority over the
holders of the common stock upon liquidation or dissolution.
130
<PAGE>
Indemnification and Limit on Liability. Berkshire Hills' Certificate of
Incorporation contains provisions which limit the liability of and indemnify its
directors, officers and employees. Such provisions provide that each person who
was or is made a party or is threatened to be made a party to or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of Berkshire Hills shall be indemnified and held harmless
by Berkshire Hills to the fullest extent authorized by the Delaware General
Corporation Law against all expense, liability and loss reasonably incurred.
Under certain circumstances, the right to indemnification shall include the
right to be paid by Berkshire Hills the expenses incurred in defending any such
proceeding in advance of its final disposition. In addition, a director of
Berkshire Hills shall not be personally liable to Berkshire Hills or its
stockholders for monetary damages except for liability for any breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, under Section 174 of the
Delaware General Corporation Law, or for any transaction from which the director
derived an improper personal benefit.
Preemptive Rights; Redemption. Holders of the common stock of Berkshire
Hills will not be entitled to preemptive rights with respect to any shares that
may be issued. The common stock cannot be redeemed.
Preferred Stock
Berkshire Hills will not issue any preferred stock in the conversion and it
has no current plans to issue any preferred stock after the conversion.
Preferred stock may be issued with designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of Berkshire Hills are restricted by provisions in its
Certificate of Incorporation and Bylaws and by rules and regulations of various
regulatory agencies. See ''Regulation and Supervision" and "Restrictions on
Acquisition of Berkshire Hills and Berkshire Bank."
DESCRIPTION OF BERKSHIRE BANK STOCK
General
If the stock holding company form of organization is not utilized in
connection with the conversion, Berkshire Bank may offer shares of its common
stock in connection with the conversion. The following is a discussion of its
stock.
The Amended and Restated Articles of Organization of Berkshire Bank, to be
effective upon the conversion, authorize the issuance of 10,000,000 shares of
common stock, having a par value of $1.00 per share, and 10,000,000 shares of
preferred stock, having a par value of $1.00 per share. The preferred stock may
be issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common
stock of Berkshire Bank will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
conversion, the Board of Directors will be authorized to approve the issuance of
common stock up to the amount authorized by the Amended and Restated Articles of
Organization without the approval of Berkshire Bank's stockholders. Assuming
that the stock holding company form of organization is utilized, all of the
issued and outstanding common stock of Berkshire Bank will be held by Berkshire
Hills. Berkshire Bank stock will represent non-withdrawable capital, will not
be an account of an insurable type and will not be insured by the Federal
Deposit Insurance Corporation or the Depositors Insurance Fund.
131
<PAGE>
Common Stock
Dividends. The holders of Berkshire Bank's common stock will be entitled
to receive and to share equally in any dividends as may be declared by the Board
of Directors of Berkshire Bank. See "Dividend Policy" for certain restrictions
on the payment of dividends and "Federal and State Taxation of Income--Federal
Income Taxation" for a discussion of the consequences of the payment of cash
dividends from income appropriated to bad debt reserves.
Voting Rights. Immediately after the conversion, the holders of Berkshire
Bank's common stock will possess exclusive voting rights in Berkshire Bank.
Each holder of shares of common stock will be entitled to one vote for each
share held. Stockholders are not be entitled to cumulate their votes for the
election of directors. See "Restrictions on Acquisition of Berkshire Hills and
Berkshire Bank--Anti-Takeover Effects of Berkshire Hills' Certificate of
Incorporation and Bylaws and Management Remuneration Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up
of Berkshire Bank, the holders of common stock will be entitled to receive,
after payment of all Berkshire Bank's debts and liabilities (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to eligible and supplemental eligible account
holders, all assets of Berkshire Bank available for distribution in cash or in
kind. If additional preferred stock is issued after the conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.
Preemptive Rights; Redemption. Holders of Berkshire Bank's common stock
will not be entitled to preemptive rights with respect to any shares of
Berkshire Bank which may be issued. Upon receipt by Berkshire Bank of the full
specified purchase price therefor, the common stock will be fully paid and
nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ________________.
REGISTRATION REQUIREMENTS
Berkshire Hills has registered the common stock with the Securities and
Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934,
as amended, and will not deregister its common stock for a period of at least
three years following the conversion. As a result of registration, the proxy and
tender offer rules, insider trading reporting and restrictions, annual and
periodic reporting and other requirements of that statute will apply.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for Berkshire Hills
by Muldoon, Murphy & Faucette LLP, Washington, D.C. The federal tax consequences
of the conversion have been opined upon by Muldoon, Murphy & Faucette LLP and
the Commonwealth of Massachusetts tax consequences of the conversion have been
opined upon by Wolf & Company, P.C., Boston, Massachusetts. Muldoon, Murphy &
Faucette LLP and Wolf & Company, P.C. have consented to the references to their
opinions in this prospectus. Certain legal matters in connection with this
offering will be passed upon for Sandler O'Neill by Silver, Freedman &
Taff, L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of Berkshire Bancorp as of
December 31, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999 included in this prospectus and elsewhere in the
registration statement have been audited by Wolf & Company, P.C., independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
132
<PAGE>
FinPro has consented to the summary in this prospectus of its report to
Berkshire Bank setting forth its opinion as to the estimated pro forma market
value of Berkshire Hills and Berkshire Bank, as converted, and its letter letter
with respect to subscription rights, and to the use of its name and statements
with respect to it appearing in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Berkshire Hills has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (File No. 333-32146) under the Securities Act
of 1933, as amended, with respect to the common stock offered in the conversion.
This prospectus does not contain all the information contained in the
registration statement, certain parts of which are omitted as permitted by the
rules and regulations of the Securities and Exchange Commission. This
information may be inspected at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549 and at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies may be obtained at prescribed rates from the Public
Reference Room of the Securities and Exchange Commission at 450 Fifth Street,
NW, Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The registration statement also is available through the
Securities and Exchange Commission's World Wide Web site on the Internet at
http://www.sec.gov.
Following the conversion, Berkshire Hills will file annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission, all of which can be inspected and copied at the Securities
Exchange Commission's Public Reference Room. Copies of these materials can also
be obtained, upon payment of a copying fee, by writing to the Securities and
Exchange Commission.
Berkshire Bank has filed an application for approval of conversion with the
Massachusetts Banking Commissioner and has provided copies of the conversion
application to the Federal Deposit Insurance Corporation and the Federal Reserve
Bank of Boston. This prospectus omits certain information contained in that
application. The conversion application may be examined at the Office of the
Massachusetts Banking Commissioner, Office of the Commissioner of Banks, 1 South
Station, Boston, Massachusetts, 02110 or at Berkshire Bank's main office, 24
North Street, Pittsfield, Massachusetts 01201. Copies of the conversion
application may be examined at the Federal Deposit Insurance Corporation's
offices at 15 Braintree Hill Office Park, Suite 100, Braintree, Massachusetts
02184 and at the Federal Reserve Bank of Boston's offices at 600 Atlantic
Avenue, Boston, Massachusetts 02106.
Berkshire Hills has filed an application to become the holding company for
Berkshire Bank with the Office of Thrift Supervision. This prospectus omits
certain information contained in that application. The application may be
inspected, without charge, at the offices of the Office of Thrift Supervision,
1700 G Street, NW, Washington, D.C. 20552 and at the offices of the Regional
Director of the Office of Thrift Supervision at the Northeast Regional Office of
the Office of Thrift Supervision, 10 Exchange Place, 18th Floor, Jersey City,
New Jersey 07302.
A copy of the plan of conversion, Berkshire Hills' Certificate of
Incorporation and Bylaws and Berkshire Bank's Amended and Restated Articles of
Organization and Bylaws are available without charge from Berkshire Bank by
contacting the conversion center at (800) 220-6956.
A copy of FinPro's appraisal report is available for inspection at
Berkshire Bank's administrative offices located at 24 North Street, Pittsfield,
Massachusetts.
133
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BERKSHIRE BANCORP
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. F-3
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997.................................................. 36
Consolidated Statements of Changes in Retained Earnings for the Years
Ended December 31, 1999, 1998 and 1997............................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997..................................... F-5
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for Berkshire Hills have not been included in
this prospectus because Berkshire Hills, which has engaged only in
organizational activities to date, has no significant assets, contingent or
other liabilities, revenues or expenses.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Audit Committee
Berkshire Bancorp
Pittsfield, Massachusetts
We have audited the accompanying consolidated balance sheets of Berkshire
Bancorp and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Berkshire Bancorp
and subsidiary as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
WOLF & COMPANY, P.C.
/s/ Wolf & Company, P.C.
- ------------------------
Boston, Massachusetts
March 10, 2000
F-2
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Cash and due from banks $ 23,301 $ 19,554
Short-term investments 1,341 7,121
---------- ----------
Total cash and cash equivalents 24,642 26,675
Securities available for sale, at fair value 93,084 93,774
Securities held to maturity, at amortized cost 17,014 23,780
Federal Home Loan Bank stock, at cost 3,843 2,547
Loans, net of allowance for loan losses of $8,534
in 1999 and $7,589 in 1998 665,554 599,171
Foreclosed real estate 220 398
Banking premises and equipment, net 11,531 9,695
Accrued interest receivable 4,910 4,458
Savings Bank Life Insurance stock 2,043 2,043
Goodwill 6,809 7,358
Other assets 12,001 10,390
---------- ----------
$ 841,651 $ 780,289
========== ==========
LIABILITIES AND RETAINED EARNINGS
Deposits $ 679,985 $ 646,500
Federal Home Loan Bank advances 58,928 29,590
Securities sold under agreements to repurchase 1,120 7,000
Mortgagors' escrow accounts 782 622
Net deferred tax liability 6,073 7,252
Accrued expenses and other liabilities 6,411 5,124
---------- ----------
Total liabilities 753,299 696,088
---------- ----------
Commitments and contingencies
Retained earnings 70,679 65,056
Accumulated other comprehensive income 17,673 19,145
---------- ----------
Total retained earnings 88,352 84,201
---------- ----------
$ 841,651 $ 780,289
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other Total
Retained Comprehensive Retained
Earnings Income Earnings
--------------- ------------------- --------------
(In thousands)
<S> <C> <C> <C>
Balance at December 31, 1996 $ 58,129 $ 10,584 $ 68,713
--------------
Comprehensive income:
Net income 2,503 - 2,503
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment and
tax effects - 4,101 4,101
--------------
Total comprehensive income 6,604
--------------- ---------------- --------------
Balance at December 31, 1997 60,632 14,685 75,317
--------------
Comprehensive income:
Net income 4,424 - 4,424
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment and
tax effects - 4,460 4,460
--------------
Total comprehensive income 8,884
--------------- ---------------- --------------
Balance at December 31, 1998 65,056 19,145 84,201
--------------
Comprehensive income:
Net income 5,623 - 5,623
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment and
tax effects - (1,472) (1,472)
--------------
Total comprehensive income 4,151
--------------- ---------------- --------------
Balance at December 31, 1999 $ 70,679 $ 17,673 $ 88,352
=============== ================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,623 $ 4,424 $ 2,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,030 2,055 1,477
Net amortization of securities 400 158 11
Charitable contribution in the form of equity securities - - 2,457
Depreciation and amortization expense 1,860 1,735 1,737
Amortization of goodwill 549 259 286
Gain on sales and dispositions of securities, net (491) (425) (2,653)
Gain on sale of other real estate - (119) -
Losses (gains) on foreclosed real estate, net (18) (5) 477
Loss on sale of equipment 30 - -
Deferred tax provision (benefit) (319) (850) 320
Net change in loans held for sale (2,425) -- --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (2,063) (2,732) (1,575)
Accrued expenses and other liabilities 1,287 (283) 37
------------- ------------- -------------
Net cash provided by operating activities 7,463 4,217 5,077
------------- ------------- -------------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales 1,191 5,319 12,279
Maturities 8,468 16,475 17,017
Principal payments 21,589 23,244 8,009
Purchases (32,749) (61,859) (18,163)
Activity in held-to-maturity securities:
Maturities 9,171 8,351 11,978
Principal payments 15,902 41,240 24,554
Purchases (18,357) (38,753) (38,102)
Purchase of Federal Home Loan Bank stock (1,296) - (38)
Loan originations, net of principal payments (67,139) (92,872) (34,718)
Additions to banking premises and equipment (3,744) (2,278) (2,827)
Proceeds from sales of foreclosed real estate 347 193 2,604
Proceeds from sale of other real estate - 119 -
Proceeds from sale of equipment 18 - -
Cash and cash equivalents received from acquisition
of three branch offices - 44,843 -
------------- ------------- -------------
Net cash used in investing activities (66,599) (55,978) (17,407)
------------- ------------- -------------
</TABLE>
(continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 33,485 38,226 3,750
Net increase (decrease) in securities sold under
agreements to repurchase (5,880) 1,930 (1,270)
Proceeds from Federal Home Loan Bank advances with
maturities in excess of three months 40,000 32,000 2,000
Repayments of Federal Home Loan Bank advances with
maturities in excess of three months (13,662) (9,290) (2,074)
Proceeds (repayments) of borrowings with maturities
of three months or less 3,000 - (778)
Net increase in mortgagors' escrow accounts 160 153 152
------------- ------------- -------------
Net cash provided by financing activities 57,103 63,019 1,780
------------- ------------- -------------
Net change in cash and cash equivalents (2,033) 11,258 (10,550)
Cash and cash equivalents at beginning of year 26,675 15,417 25,967
------------- ------------- -------------
Cash and cash equivalents at end of year $ 24,642 $ 26,675 $ 15,417
============= ============= =============
Supplemental cash flow information:
Interest paid on deposits $ 23,834 $ 22,553 $ 21,452
Interest paid on borrowed funds 2,797 1,581 720
Income taxes paid 2,080 2,929 1,680
Transfers from loans to foreclosed real estate 151 222 557
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
Berkshire Bancorp is a mutual holding company formed in 1996. On May 1,
1997, Berkshire Bancorp's wholly-owned subsidiary, Berkshire County Savings
Bank, merged with Great Barrington Savings Bank to form Berkshire Bank
under a transaction accounted for by the pooling-of-interests method of
accounting.
The consolidated financial statements includes the accounts of Berkshire
Bancorp ("Corporation" or "Bancorp"), and its wholly-owned subsidiary,
Berkshire Bank ("Bank") and the Bank's wholly-owned subsidiaries, North
Street Securities Corporation (formerly GBSB Leasing Corporation), GBSB,
Inc. and Woodland Realty, Inc. In addition, Greenland Development
Corporation and its wholly-owned subsidiary, Forward Development
Corporation held title to certain loans and were dissolved during 1999.
North Street Securities Corporation and GBSB, Inc. hold title to certain
investment securities. Woodland Realty, Inc. is presently inactive. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities
as of the date of the consolidated balance sheet and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, deferred taxes and the
pension liability.
Business and operating segments
The Corporation provides a variety of financial services to individuals and
businesses through its offices in Berkshire County. Its primary deposit
products are savings, checking accounts and term certificate accounts and
its primary lending products are residential and commercial mortgage loans.
In addition, trust services are offered to individuals and small businesses
in the Berkshire County area.
F-7
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business and operating segments (concluded)
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual and interim financial statements. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. Generally, financial
information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Management evaluates the Corporation's performance
and allocates resources based on a single segment concept. Accordingly,
there are no separately identified operating segments for which discrete
financial information is available. The Corporation does not derive
revenues from, or have assets located in, foreign countries, nor does it
derive revenues from any single customer that represents 10% or more of the
Corporation's total revenues.
Reclassifications
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash, balances due from banks and short-term
investments, all of which mature within ninety days. The Bank is required
to maintain cash reserve balances with the Federal Reserve Bank based upon
a percentage of certain deposits. At December 31, 1999, cash and due from
banks included $7,585,000 to satisfy such reserve requirements.
Short-term investments
Short-term investments mature within ninety days and are carried at cost,
which approximates fair value.
Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and reflected at amortized
cost, less principal payments received. Securities classified as "available
for sale" are carried at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income.
F-8
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Securities (concluded)
Federal Home Loan Bank of Boston ("FHLB") stock is reflected at cost.
Savings Bank Life Insurance Company of Massachusetts ("SBLI") stock was
recorded at fair value at acquisition as determined by an appraisal
performed by independent investment consultants retained by SBLI.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair
value of securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. Gains and losses on
the sale of securities are recorded on the trade date and are determined
using the specific identification method.
Loans
The Bank grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
in Berkshire County. The ability of the Bank's debtors to honor their loans
is dependent upon the local economy and the local real estate market.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at
their outstanding unpaid principal balances adjusted for charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest
method.
Interest on loans is generally not accrued on loans which are
ninety days or more past due and not well secured and in the process of
collection.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest
on these loans is accounted for on the cash-basis or cost-recovery method,
until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate. Fair value
is based on commitments on hand from investors or prevailing market prices.
Net unrealized losses, if any, are recognized through a valuation allowance
by charges to income.
F-9
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis by either the present value of expected
future cash flows discounted at the loan's effective interest rate, or the
fair value of the collateral if the loan is collateral dependent.
Substantially all of the Bank's loans which have been identified as
impaired have been measured by the fair value of existing collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer loans or residential mortgage loans for
impairment disclosures.
Foreclosed assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at the lower of the investment in the loan or
fair value less estimated cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are
included in net expenses from foreclosed assets.
F-10
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Banking premises and equipment
Land is carried at cost. Buildings and improvements and equipment are
carried at cost, less accumulated depreciation and amortization computed on
the straight-line method over the estimated useful lives of the assets.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are capitalized
and depreciated.
Goodwill
Goodwill is associated with the Corporation's purchase of two branches from
another financial institution in December 1985 and three branches in 1998.
These costs are currently amortized against income on a straight-line basis
over 15 years.
Transfers of financial assets
Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the
Corporation, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Corporation does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes. The Bank's base amount
of its federal income tax reserve for loan losses is a permanent difference
for which there is no recognition of a deferred tax liability. However, the
loan loss allowance maintained for financial reporting purposes is a
temporary difference with allowable recognition of a related deferred tax
asset, if it is deemed realizable.
Pension plan
The compensation cost of an employee's pension benefit is recognized on the
net periodic pension cost method over the employee's approximate service
period. The aggregate cost method is utilized for funding purposes.
Advertising costs
Advertising costs are charged to earnings when incurred.
F-11
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Trust assets
Trust assets held in a fiduciary or agent capacity are not included in the
accompanying consolidated balance sheets because they are not assets of the
Corporation.
Comprehensive income
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on available-
for-sale securities, are reported as a separate component of retained
earnings on the consolidated balance sheet, such items, along with net
income, are components of comprehensive income.
The components of other comprehensive income, relative to securities
available for sale, and related tax effects are as follows for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Change in net unrealized holding gains on
available-for-sale securities $ (1,841) $ 7,276 $ 8,919
Reclassification adjustment for gains
realized in income (491) (425) (2,653)
------------- ------------ ------------
Net change in unrealized gains (2,332) 6,851 6,266
Tax effect 860 (2,391) (2,165)
------------- ------------ ------------
Net-of-tax change $ (1,472) $ 4,460 $ 4,101
============= ============ ============
</TABLE>
F-12
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Recent accounting pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments
and hedging activities, including certain derivative instruments embedded
in other contracts, and requires that an entity recognize all derivatives
as assets or liabilities in the balance sheet and measure them at fair
value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of
an unrecognized firm commitment, an available-for-sale security, a foreign
currency denominated forecasted transaction, or a net investment in a
foreign operation. The Statement generally provides for matching the timing
of the recognition of the gain or loss on derivatives designated as hedging
instruments with the recognition of the changes in the fair value of the
item being hedged. Depending on the type of hedge, such recognition will be
in either net income or other comprehensive income. For a derivative not
designated as a hedging instrument, changes in fair value will be
recognized in net income in the period of change. Management is currently
evaluating the impact of adopting this Statement on the consolidated
financial statements, but does not anticipate that it will have a material
impact.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following at December 31, 1999 and
1998:
[GRAPHIC OMITTED]
1999 1998
------------ -----------
(In thousands)
Federal funds sold $ 1,000 $ -
FHLB Overnight deposits 341 7,121
-------- ---------
$ 1,341 $ 7,121
======== =========
F-13
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SECURITIES
The amortized cost and estimated fair value of securities, with gross
unrealized gains and losses, follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
-----------------------------
Debt securities:
U.S. Treasury obligations $ 3,049 $ - $ (26) $ 3,023
Federal agency obligations 7,937 - (249) 7,688
Other bonds and obligations 31,177 1 (544) 30,634
Mortgage-backed securities:
FHLMC/ FNMA/GNMA 547 2 (4) 545
REMIC's and CMO's 9,584 105 (101) 9,588
Asset-backed securities 3,253 2 (48) 3,207
------------ ------------- ------------- -------------
Total debt securities 55,547 110 (972) 54,685
Mutual funds 947 - (148) 799
Marketable equity securities 9,507 28,446 (353) 37,600
------------ ------------- ------------- -------------
Total securities
available for sale $ 66,001 $ 28,556 $ (1,473) $ 93,084
============ ============= ============= =============
Securities Held to Maturity
---------------------------
Debt securities:
Municipal bonds and obligations $ 6,720 $ - $ - $ 6,720
Mortgage-backed securities:
FHLMC/GNMA 1,140 2 (4) 1,138
REMIC's and CMO's 9,154 2 (92) 9,064
------------ ------------- ------------- -------------
Total securities
held to maturity $ 17,014 $ 4 $ (96) $ 16,922
============ ============= ============= =============
</TABLE>
F-14
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (continued)
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
-----------------------------
Debt securities:
U.S. Treasury obligations $ 3,098 $ 15 $ - $ 3,113
Federal agency obligations 9,145 29 (1) 9,173
Other bonds and obligations 18,054 107 (88) 18,073
Mortgage-backed securities:
FHLMC/ FNMA/GNMA 406 10 - 416
REMIC's and CMO's 20,479 163 (33) 20,609
Asset-backed securities 2,639 8 (43) 2,604
------------ ------------ ----------- ---------
Total debt securities 53,821 332 (165) 53,988
Mutual funds 947 - (94) 853
Marketable equity securities 9,591 29,540 (198) 38,933
------------ ------------ ----------- ---------
Total securities
available for sale $ 64,359 $ 29,872 $ (457) $ 93,774
============ ============ =========== =========
Securities Held to Maturity
---------------------------
Debt securities:
Municipal bonds and obligations $ 6,997 $ - $ - $ 6,997
Mortgage-backed securities:
FHLMC/GNMA 124 1 - 125
REMIC's and CMO's 16,659 40 (65) 16,634
------------ ------------ ----------- ---------
Total securities held
to maturity $ 23,780 $ 41 $ (65) $ 23,756
============ ============ =========== =========
</TABLE>
F-15
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (concluded)
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 1999 is as follows. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------------- ------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 9,761 $ 9,701 $ 5,888 $ 5,888
Over 1 year to 5 years 28,215 27,602 221 221
Over 5 years to 10 years 2,349 2,250 - -
Over 10 years 1,838 1,792 611 611
------------ ------------- ------------- -------------
Total bonds and obligations 42,163 41,345 6,720 6,720
Mortgage-backed and asset-backed
securities 13,384 13,340 10,294 10,202
------------ ------------- ------------- -------------
Total debt securities $ 55,547 $ 54,685 $ 17,014 $ 16,922
============ ============= ============= =============
</TABLE>
At December 31, 1999 and 1998, the Corporation has pledged investment
securities with an amortized cost of $5,396,000 and $11,505,000,
respectively, and a fair value of $5,283,000 and $11,523,000,
respectively, to a commercial bank, as collateral for repurchase
agreements, and for its treasury, tax and loan account.
For the years ended December 31, 1999, 1998 and 1997, proceeds from
the sale of securities available for sale amounted to $1,191,000,
$5,319,000 and $12,279,000, respectively. Gross realized gains
amounted to $685,000, $511,000 and $216,000, respectively. Gross
realized losses amounted to $194,000, $86,000 and $20,000,
respectively.
During 1997, the Corporation established a private charitable
foundation (the "Foundation") to provide grants to charitable
organizations in Berkshire County. The Foundation, which is not a
subsidiary of the Corporation, was funded on May 1, 1997 by a donation
from the Bank of marketable equity securities with a cost basis and a
fair value of $97,000 and $2,457,000, respectively, at the date of
transfer. Such securities had been classified as available for sale
and, accordingly, the transfer resulted in the Bank recognizing the
unrealized appreciation of the securities of $2,360,000 in the
consolidated statement of income.
F-16
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. LOANS
A summary of the balances of loans follows at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
One- to four-family mortgage loans $ 245,240 $ 220,612
Commercial mortgage loans 46,419 51,598
Multi-family mortgage loans 14,793 15,393
Construction loans 12,534 12,821
Home equity loans 33,168 31,628
Consumer loans 175,568 140,549
Commercial loans 146,196 134,115
-------------- --------------
Total loans 673,918 606,716
Allowance for loan losses (8,534) (7,589)
Net deferred loan costs 170 44
-------------- --------------
Loans, net $ 665,554 $ 599,171
============== ==============
</TABLE>
At December 31, 1999, consumer loans include $2,425,000 of loans
which were held for sale and sold in January, 2000.
An analysis of the allowance for loan losses for the year ended
December 31, 1999, 1998 and 1997 follows:
1999 1998 1997
-------- -------- ---------
(In thousands)
Balance at beginning of year $ 7,589 $ 6,078 $ 6,303
Provision for loan losses 3,030 2,055 1,477
Loans charged-off (2,353) (812) (2,296)
Recoveries 268 268 594
--------- ---------- ---------
Balance at end of year $ 8,534 $ 7,589 $ 6,078
========= ========== =========
F-17
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LOANS (concluded)
The following is a summary of information pertaining to impaired and
non-accrual loans at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
(In thousands)
<S> <S> <C>
Impaired loans with no valuation allowance $ 1,522 $ 938
Impaired loans with a valuation allowance 50 1,552
------------- --------------
Total impaired loans $ 1,572 $ 2,490
============= ==============
Valuation allowance allocated to impaired loans $ 14 $ 304
============= ==============
Non-accrual loans $ 2,841 $ 3,490
============= ==============
</TABLE>
No additional funds are committed to be advanced in connection with
impaired loans.
For the years ended December 31, 1999, 1998 and 1997, the average
recorded investment in impaired loans amounted to $2,496,000,
$3,015,000 and $3,840,000, respectively. The Corporation recognized
$23,000, $218,000 and $256,000, respectively, of interest income on
impaired loans, during the period that they were impaired, on the cash
basis.
The Bank has sold loans in the secondary market and has retained the
servicing responsibility and receives fees for the services provided.
Mortgage loans sold and serviced for others amounted to $24,963,000
and $23,124,000 at December 31, 1999 and 1998, respectively.
Consumer loans sold and serviced for others amounted to $38,359,000
and $10,239,000 at December 31, 1999 and 1998, respectively.
Substantially all loans serviced for others were sold without recourse
provisions and are not included in the accompanying consolidated
balance sheets.
F-18
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Estimated
1999 1998 Useful Lives
-------------- -------------- -------------------
(In thousands)
<S> <C> <C> <C>
Banking premises:
Land $ 1,558 $ 1,558
Buildings and improvements 15,138 12,996 5 - 50 years
Equipment 5,639 7,991 2 - 38 years
Construction in process 323 356
-------------- --------------
22,658 22,901
Accumulated depreciation and
amortization (11,127) (13,206)
-------------- --------------
$ 11,531 $ 9,695
============== ==============
</TABLE>
Construction in process in 1999 includes a renovation project at the Bank's
main office. Estimated costs to complete this project amount to
approximately $296,000 at December 31, 1999.
Construction in process in 1998 included renovation projects at one branch
office and the cost of land and buildings purchased for future use as
office space. Estimated costs to complete these projects amounted to
approximately $1,700,000 at December 31, 1998. During 1999 these projects
were completed and costs were transferred to applicable categories.
Depreciation and amortization expense for the years ended December 31,
1999, 1998 and 1997 amount to $1,860,000, $1,735,000 and $1,737,000,
respectively.
F-19
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. DEPOSITS
A summary of deposit balances, by type, is as follows at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
(In thousands)
<S> <C> <C>
Demand $ 69,034 $ 69,796
NOW 78,223 78,202
Regular 144,704 138,088
Money market 92,721 69,757
-------- ---------
Total non-certificate accounts 384,682 355,843
-------- ---------
Term certificates less than $100,000 212,538 215,214
Term certificates $100,000 or more 82,765 75,443
-------- ---------
Total certificate accounts 295,303 290,657
-------- ---------
Total deposits $679,985 $ 646,500
======== =========
</TABLE>
A summary of certificate accounts by maturity is as follows at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------
Weighted
Average
Amount Rate Amount
--------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Within 1 year $ 206,556 5.13% $207,080
Over 1 year to 3 years 70,006 5.78 63,837
Over 3 years 18,741 5.99 19,740
--------- --------
$ 295,303 5.34% $290,657
========= ========
</TABLE>
F-20
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FEDERAL HOME LOAN BANK ADVANCES
A summary of outstanding advances from the Federal Home Loan Bank of
Boston, by maturity, is as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- --------
Maturity (In thousands)
--------
<S> <C> <C>
Within 1 year $ 26,352 $ 3,403
Over 1 to 2 years 2,310 2,253
Over 2 to 3 years 2,156 69
Over 3 to 5 years 1,482 5,153
Over 5 years 26,628 18,712
---------- ----------
$ 58,928 $ 29,590
========== ==========
</TABLE>
Interest rates on the above advances range from 4.18% to 6.50% as of both
December 31, 1999 and December 31, 1998.
The Bank maintains a line-of-credit with the Federal Home Loan Bank of
Boston which carries interest at a rate that adjusts daily. Borrowings
under the line are limited to 2% of the Bank's total assets. All borrowings
from the Federal Home Loan Bank of Boston are secured by a blanket lien on
certain qualified collateral, defined principally as 75% of the carrying
value of certain first mortgage loans on owner-occupied residential
property and 90% of the market value of U.S. Government and federal agency
obligations owned by the Bank.
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase ("repurchase agreements")
are funds borrowed from customers on an overnight basis that are secured by
the Bank's investment portfolio.
A summary of repurchase agreements is as follows at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Repurchase agreements with customers $ 1,120 $ 7,000
========= =========
Interest rate 5.20% 4.75%
========= =========
Fair value of securities underlying the
agreements $ 1,930 $ 8,199
========= =========
</TABLE>
F-21
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (concluded)
The Bank also has a repurchase agreement line of credit with the Depositors
Insurance Fund of up to $2,000,000 to be secured by securities or other
assets of the Bank. As of December 31, 1999 and 1998, there were no
outstanding borrowings against this agreement.
9. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ----------
(In thousands)
<S> <C> <C> <C>
Current tax provision: $ 2,230 $ 2,842 $ 791
Federal (487) - -
Federal tax credit 571 776 581
State -------- --------- ----------
2,314 3,618 1,372
-------- --------- ----------
Deferred tax provision (benefit): (75) (727) 355
Federal 104 171 (35)
State -------- --------- ----------
29 (556) 320
-------- --------- ----------
Change in valuation reserve (348) (294) -
-------- --------- ----------
$ 1,995 $ 2,768 $ 1,692
======== ========= ==========
</TABLE>
The reasons for the differences between the statutory federal income tax
rate and the effective tax rate is summarized as follows for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 5.2 6.8 8.6
Dividends received deduction (2.9) (3.4) (4.7)
Non-taxable appreciation of securities donated (3.6) (2.2) (2.9)
Rehabilitation tax credit (6.4) - -
Other, net (0.1) 3.3 5.3
----------- --------- ---------
Effective tax rate 26.2% 38.5% 40.3%
=========== ========= =========
</TABLE>
F-22
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (continued)
The components of the net deferred tax liability are as follows at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- --------
(In thousands)
<S> <C> <C>
Deferred tax liability:
Federal $ 10,246 $ 11,049
State 704 807
--------- ---------
10,950 11,856
--------- ---------
Deferred tax asset:
Federal (3,975) (3,895)
State (1,304) (1,459)
--------- ---------
(5,279) (5,354)
Valuation reserve 402 750
--------- ---------
(4,877) (4,604)
--------- ---------
Net deferred tax liability $ 6,073 $ 7,252
========= =========
</TABLE>
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Investments:
Net unrealized gain on securities
available for sale $ 9,410 $ 10,270
Other 546 332
Depreciation 308 136
Allowance for loan losses (3,032) (2,447)
Employee benefit plans (1,380) (1,339)
Charitable contribution carryover (196) (468)
Other 15 18
--------- ----------
5,671 6,502
Valuation reserve 402 750
--------- ----------
Net deferred tax liability $ 6,073 $ 7,252
========= ==========
</TABLE>
F-23
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (concluded)
A summary of the change in the net deferred tax liability is as follows for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 7,252 $ 5,711 $ 3,226
Deferred tax benefit 29 (556) 320
Deferred tax effects of net unrealized gains
on securities available for sale (860) 2,391 2,165
Utilization of valuation reserve (348) (294) -
--------- --------- ---------
Balance at end of year $ 6,073 $ 7,252 $ 5,711
========= ========= =========
</TABLE>
A summary of the change in the valuation reserve application to the
deferred tax assets is as follows for the years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 750 $ 1,044 $ 418
Benefits utilized by current year operations (348) (497) -
Increase in charitable contribution carryover - - 626
Change in future income assumptions - 203 -
------------ --------- ---------
Balance at end of year $ 402 $ 750 $ 1,044
============ ========= =========
</TABLE>
The valuation reserve relates to a state net operating loss carryforward
and a charitable contribution carryover. The net operating loss
carryforward has been used in full at December 31, 1999. The charitable
contribution carryover remains and expires in 2002.
The federal income tax reserve for loan losses at the Bank's base year is
approximately $844,000. If any portion of the reserve is used for purposes
other than to absorb the losses for which established, approximately 150%
of the amount actually used (limited to the amount of the reserve) would be
subject to taxation in the fiscal year in which used. As the Bank intends
to use the reserve only to absorb loan losses, a deferred income tax
liability of approximately $346,000 has not been provided.
F-24
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the accompanying consolidated
financial statements.
Loan commitments
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Such commitments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the accompanying consolidated balance sheets.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument is represented by the
contractual amount of these commitments. The Corporation uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments. A summary of financial instruments outstanding whose contract
amounts represent credit risk is as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Commitments to grant loans $ 25,153 $ 26,244
Unused funds on commercial lines-of-credit 49,103 43,668
Unadvanced funds on home equity and reddi-cash
lines of credit 36,429 35,070
Unadvanced funds on construction loans 4,732 5,826
Standby letters of credit 2,026 1,721
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments for lines of
credit may expire without being drawn upon. Therefore, the total commitment
amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's credit worthiness on a case-by-case
basis. Funds disbursed for loans and home equity lines of credit are
collateralized by real estate. Commercial lines of credit are generally
secured by business assets and securities. Reddi-cash lines of credit are
unsecured.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These letters of
credit are primarily issued to support borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
F-25
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
COMMITMENTS AND CONTINGENCIES (concluded)
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1999, pertaining to banking premises and equipment, future
minimum rent commitments are as follows:
Years Ending
December 31, (In thousands)
-----------------
2000 $ 461
2001 416
2002 399
2003 392
2004 392
Thereafter 1,467
-------
$ 3,527
=======
The leases contain options to extend for periods from ten to thirty years.
The cost of such rentals is not included above. Total rent expense for the
years ended December 31, 1999, 1998 and 1997 amounted to $448,000, $244,000
and $143,000, respectively.
Employment agreements
The Corporation has entered into employment agreements with certain senior
executives that generally provide for a specified minimum annual
compensation and the continuation of benefits currently received. The
original terms of the agreements are for three years and automatically
extend unless either party gives notice to the contrary. However, such
agreements may be terminated for cause, as defined, without incurring any
continuing obligations.
Other contingencies
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect
on the Corporation's consolidated financial statements.
F-26
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Corporation's and
the Bank's consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors. Prompt corrective action provisions are not applicable
to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1999 and 1998, that the Corporation and the Bank meet
all capital adequacy requirements to which they are subject.
F-27
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (continued)
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following tables. There are no conditions or events since that
notification that management believes have changed the Bank's category. The
Corporation's and Bank's actual capital amounts and ratios as of December
31, 1999 and 1998 are also presented in the table.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
---------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----------- --------------- --------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk
weighted assets:
Corporation $ 84,652 12.90% $ 52,516 8.0% N/A N/A
Berkshire Bank 84,554 12.88 52,516 8.0 $ 64,645 10.0%
Tier 1 capital to risk
weighted assets:
Corporation 63,870 9.73 26,258 4.0 N/A N/A
Berkshire Bank 63,773 9.71 26,258 4.0 39,387 6.0
Tier 1 capital to average
assets:
Corporation 63,870 7.91 32,309 4.0 N/A N/A
Berkshire Bank 63,773 7.90 32,305 4.0 40,381 5.0
</TABLE>
F-28
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
---------------------------- ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ---------------- ---------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk
weighted assets:
Corporation $ 78,449 13.04% $ 48,140 8.0% N/A N/A
Berkshire Bank 78,347 13.02 48,140 8.0 $ 60,175 10.0%
Tier 1 capital to risk
weighted assets:
Corporation 57,698 9.59 24,070 4.0 N/A N/A
Berkshire Bank 57,596 9.57 24,070 4.0 36,105 6.0
Tier 1 capital to average
assets:
Corporation 57,698 7.79 29,610 4.0 N/A N/A
Berkshire Bank 57,596 7.78 29,606 4.0 37,007 5.0
</TABLE>
12. EMPLOYEE BENEFIT PLANS
Defined benefit pension plan
The Corporation provides pension benefits for eligible employees through a
defined benefit pension plan. Each employee reaching the age of 21 and
having completed at least 1,000 hours of service in a twelve-month period,
beginning with such employee's date of employment, automatically becomes a
participant in the pension plan. Participants become fully vested when
credited with three years of service.
F-29
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EMPLOYEE BENEFIT PLANS (continued)
Defined benefit pension plan (continued)
Information pertaining to the activity in the plan is as follows:
<TABLE>
<CAPTION>
Plan Years Ended October 31,
----------------------------------------------------
1999 1998 1997
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 9,151 $ 7,897 $ 6,825
Actual return on plan assets 1,753 654 1,201
Employer contribution 348 916 493
Benefits paid (205) (316) (622)
------------- ------------- ------------
Fair value of plan assets at end of year 11,047 9,151 7,897
------------- ------------- ------------
Change in benefit obligation:
Benefit obligation at beginning of year 9,518 9,807 8,576
Service cost 519 611 560
Interest cost 642 711 643
Actuarial loss (gain) (982) (1,295) 650
Benefits paid (205) (316) (622)
------------- ------------- ------------
Benefit obligation at end of year 9,492 9,518 9,807
------------- ------------- ------------
Funded status 1,555 (367) (1,910)
Unrecognized net actuarial gain (4,286) (2,386) (1,116)
Unrecognized prior service cost 183 194 205
------------- ------------- ------------
Accrued pension cost $ (2,548) $ (2,559) $ $(2,821)
============= ============= ============
</TABLE>
The components of net periodic pension cost are as follows for the plan
year ended October 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Service cost $ 519 $ 611 $ 560
Interest cost 642 711 643
Expected return on plan assets (732) (631) (545)
Amortization of prior service cost 11 11 11
Recognized net actuarial gain (104) (48) (52)
------ ------ ------
$ 336 $ 654 $ 617
====== ====== ======
</TABLE>
F-30
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EMPLOYEE BENEFIT PLANS (continued)
Defined benefit pension plan (concluded)
Actuarial assumptions used in accounting were:
1999 1998 1997
---- ---- ----
Discount rate on benefit obligations 6.75% 7.25% 7.50%
Rates of increase in compensation levels 4.50 5.00 5.00
Expected long-term rates of return on plan assets 8.00 8.00 8.00
Defined contribution pension plan
The Corporation has a qualified savings plan under Section 401(k) of the
Internal Revenue Code. Each employee reaching the age of 21 and having
completed at least 1,000 hours of service in a twelve-month period,
beginning with such employee's date of employment, automatically becomes a
participant in the 401(k) Plan. Employees may contribute up to 15% of their
compensation subject to certain limits based on federal tax laws. The
Corporation may choose to make matching contributions equal to 100% of the
first 3% of an employee's compensation contributed to the 401(k) Plan. The
Corporation made matching contributions which amounted to $209,000,
$201,000 and $141,000, respectively, for the years ended December 31, 1999,
1998 and 1997.
Supplemental employee retirement plan
The Corporation has nonqualified supplemental employee retirement plans for
the benefit of certain senior executives. Benefits generally commence no
earlier than age sixty and continue for the life of the senior executive.
As of December 31, 1999 and 1998, the Corporation has an accrued expense
payable in the amount of $817,000 and $665,000, respectively, representing
the present value of future payments under the supplemental retirement
plans. In some instances, the Corporation has entered into split-dollar
life insurance agreements with senior executives to provide supplemental
retirement benefits.
Incentive plan
The Corporation adopted an incentive plan ("the Plan") whereby all
management and staff members are eligible to receive a bonus, tied to
performance, of up to 10% of net operating income accrued for on a monthly
basis. The structure of the Plan is to be reviewed on an annual basis by
the Executive Committee. The Plan year end is October 31. Incentive
compensation expense for the years ended December 31, 1999, 1998 and 1997
amounted to $1,132,000, $1,007,000 and $411,000, respectively.
F-31
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EMPLOYEE BENEFIT PLANS (concluded)
Other benefits
The Corporation has in the past offered its retirees optional medical
insurance coverage. All participating retirees are required to contribute
in part to the cost of this coverage. The retiree medical plan was
terminated on December 31, 1996. Any retiree participating in the plan at
that time will continue to be covered for life, however, no new retirees
can participate in this plan. At December 31, 1999 and 1998, the
Corporation had an accrued liability in the amount of $626,000 and
$663,000, respectively, for payment of future premiums under this plan.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to trustees
and officers and their affiliates. Such loans which aggregate more than
$60,000 on an individual basis, amounted to $3,909,000 and $3,956,000 at
December 31, 1999 and 1998, respectively.
14. BRANCH ACQUISITION
On May 1, 1998, the Bank entered into an agreement with another financial
institution in Berkshire County to acquire three branch offices including
loans receivable and deposit liabilities.
The Bank paid $7,463,000 as a premium in assuming the deposit liabilities
and acquiring the assets, and received $44,843,000 in cash from the other
financial institution. The premium paid is recorded as goodwill and is
being amortized over a 15 year period. The cost of the assets acquired and
value of liabilities assumed as of August 21, 1998 (the closing date) were
as follows:
(In thousands)
Assets
------
Cash $ 44,843
Loans, net 16,833
Goodwill 7,463
Accrued interest receivable and other assets 643
--------
Total $ 69,782
========
Liabilities
-----------
Deposits $ 69,682
Accrued expenses and other liabilities 100
--------
Total $ 69,782
========
F-32
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Corporation.
The total amount of dividends which may be paid at any date is generally
limited to the retained earnings of the Bank, and loans or advances are
limited to 10% of the Bank's capital stock and surplus on a secured basis.
At December 31, 1999 and 1998, the Bank's retained earnings available for
the payment of dividends was $47,393,000 and $41,765,000, respectively, and
funds available for loans or advances amounted to $2,319,000 for both
years.
In addition, dividends paid by the Bank to the Corporation would be
prohibited if the effect thereof would cause the Bank's capital to be
reduced below applicable minimum regulatory capital requirements.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of estimated fair values of all financial instruments
where it is practicable to estimate such values. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Accordingly, the derived fair value
estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying
value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of these instruments
-------------------------
approximate fair values.
Securities: Fair values for investment securities, excluding FHLB and
----------
SBLI stock, are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying value of
FHLB stock approximates fair value based on the redemption provisions
of the Federal Home Loan Bank and SBLI stock was recorded at fair
value at acquisition as determined by an appraisal performed by
independent investment consultants retained by SBLI.
F-33
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Loans: For variable-rate loans that reprice frequently and with no
-----
significant change in credit risk, fair values are based on carrying
values. Fair values for all other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
Deposits: The fair values for non-certificate accounts are, by
--------
definition, equal to the amount payable on demand at the reporting
date which is their carrying amounts. Fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances: The fair values of Federal Home Loan
-------------------------------
Bank advances are estimated using discounted cash flow analyses based
on the Bank's current incremental borrowing rates for similar types of
borrowing arrangements.
Securities sold under agreements to repurchase: The carrying amount of
----------------------------------------------
repurchase agreements approximates fair value. Repurchase agreements
generally mature or "roll over" on a daily basis.
Accrued interest and mortgagors' escrow accounts: The carrying amounts
------------------------------------------------
of these instruments approximate fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet
-----------------------------
lending com-mitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair values of
off-balance sheet instruments are immaterial.
F-34
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The carrying amounts and estimated fair values of the Corporation's
financial instruments are as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 24,642 $ 24,642 $ 26,675 $ 26,675
Securities available for sale 93,084 93,084 93,774 93,774
Securities held to maturity 17,014 16,922 23,780 23,756
Federal Home Loan Bank stock 3,843 3,843 2,547 2,547
Loans, net 665,554 644,276 599,171 611,297
Accrued interest receivable 4,910 4,910 4,458 4,458
Savings Bank Life Insurance stock 2,043 2,043 2,043 2,043
Financial liabilities:
Deposits 679,985 678,650 646,500 648,995
Federal Home Loan Bank advances 58,928 58,439 29,590 29,664
Securities sold under agreements
to repurchase 1,120 1,120 7,000 7,000
Mortgagors' escrow accounts 782 782 622 622
</TABLE>
17. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Berkshire Bancorp is as follows:
CONDENSED BALANCE SHEETS
------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Assets
------
Cash and due from banks $ 16 $ 1
Securities available for sale, at fair value 80 100
Investment in Bank subsidiary 88,255 84,099
Other assets 1 2
-------------- --------------
Total assets $ 88,352 $ 84,202
============== ==============
Liabilities and Retained Earnings
---------------------------------
Accrued expenses $ - $ 1
Retained earnings 88,352 84,201
-------------- --------------
Total liabilities and retained earnings $ 88,352 $ 84,202
============== ==============
</TABLE>
F-35
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
CONDENSED STATEMENTS OF INCOME
------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Income:
Interest on securities available for sale $ 3 $ 5 $ 5
------------- -------------- -------------
Operating expenses 9 11 -
------------- -------------- -------------
Income (loss) before income taxes and equity in
undistributed income of Berkshire Bank (6) (6) 5
Applicable income tax provision (benefit) (1) (1) 2
------------- -------------- -------------
(5) (5) 3
Equity in undistributed income of Berkshire Bank 5,628 4,429 2,500
------------- -------------- -------------
Net income $ 5,623 $ 4,424 $ 2,503
============= ============== =============
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,623 $ 4,424 $ 2,503
Adjustments to reconcile net income
to net cash used by operating activities:
Equity in undistributed income of Berkshire Bank (5,628) (4,429) (2,500)
Other - (2) 2
------------- -------------- -------------
Net cash provided (used) by operating activities (5) (7) 5
------------- -------------- -------------
Cash flows from investing activities:
Maturities of securities available for sale 100 - -
Purchases of securities available for sale (80) - -
------------- -------------- -------------
Net cash provided by investing activities 20 - -
------------- -------------- -------------
Net change in cash and cash equivalents 15 (7) 5
Cash and cash equivalents at beginning of year 1 8 3
------------- -------------- -------------
Cash and cash equivalents at end of year $ 16 $ 1 $ 8
============= ============== =============
</TABLE>
F-36
<PAGE>
BERKSHIRE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
18. PLAN OF CONVERSION (UNAUDITED)
On October 22, 1999, the Board of Trustees of the Corporation approved a
Plan of Conversion for Berkshire Bancorp (the "Plan"). The Plan provides
for the conversion of the Corporation from mutual to stock form. The
Plan is subject to the approval of the Corporation's corporators and
various regulatory agencies.
As part of the Conversion, the Corporation will establish a liquidation
account for the benefit of eligible and supplemental eligible account
holders. The liquidation account will be reduced annually to the extent
that such account holders have reduced their qualifying deposits as of each
anniversary date.
Subsequent increases will not restore an account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
and supplemental eligible account holder will be entitled to receive
balances for accounts then held. Subsequent to the Conversion, the
Corporation and the Bank may not declare or pay dividends on and the
Corporation may not repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below
applicable regulatory capital maintenance requirements or if such
declaration, payment or repurchase would otherwise violate regulatory
requirements.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold. If the Conversion is not completed, all costs will be
expensed. As of December 31, 1999, approximately $150,000 in offering costs
have been deferred and is included in other assets.
19. SUBSEQUENT EVENT (UNAUDITED)
The Bank intends to expand the offering of insurance products to its
customers through the establishment of an insurance agency. On February 24,
2000, Berkshire Bank entered into a Management and Service Agreement with
third party vendors for consulting and management services with respect to
insurance services. The agreement has an initial term of four years with a
management fee in the amount of $325,000 and servicing fees based upon a
percentage of gross commissions/revenue.
F-37
<PAGE>
You should rely only on the information contained in this prospectus. Neither
Berkshire Hills nor Berkshire Bank has authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered by this prospectus
to any person or in any jurisdiction in which an offer or solicitation is not
authorized or in which the person making an offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make an offer or
solicitation in those jurisdictions. Neither the delivery of this prospectus nor
any sale hereunder shall under any circumstances imply that there has been no
change in the affairs of Berkshire Hills or Berkshire Bank since any of the
dates as of which information is furnished in this prospectus or since the date
of this prospectus.
[Logo for Berkshire Hills]
(Proposed Holding Company for Berkshire Bank)
8,314,500 Shares of Common Stock
--------
Prospectus
--------
Sandler O'Neill & Partners, LP
________, 2000
DEALER PROSPECTUS DELIVERY OBLIGATION
Until ___________, 2000, all dealers that buy, sell or trade these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
SEC filing(1)................................................... $ 27,263
OTS filing fee.................................................. 2,000
Massachusetts filing fee........................................ 5,000
NASD filing fee(1).............................................. 10,827
Stock market listing fee(1)..................................... 42,500
Printing, postage and mailing................................... 500,000
Legal fees and expenses (including underwriter's
counsel).................................................... 500,000
Accounting fees and expenses.................................... 150,000
Appraisers' fees and expenses (including
business plan).............................................. 50,000
Marketing fees and selling commissions(1)....................... 1,279,000
Underwriter's expenses (excluding counsel's fees)............... 100,000
Conversion agent fees and expenses.............................. 45,000
Transfer agent fees and expenses................................ 20,000
Certificate printing............................................ 10,000
Telephone, temporary help and other equipment................... 25,000
Edgarization expenses........................................... 25,000
Miscellaneous................................................... 37,410
----------
TOTAL........................................................... $2,829,000
==========
</TABLE>
______________________
(1) Unless otherwise noted, based upon the registration and issuance of
10,326,609 shares at $10.00 per share.
Item 14. Indemnification of Directors and Officers.
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof)
<PAGE>
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full
by the Corporation within sixty days after a written claim has been received by
the Corporation, except in the case of a claim for an advancement of expenses,
in which case the applicable period shall be twenty days, the indemnitee may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim. If successful in whole or in part in any such suit, or in a
suit brought by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expenses of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of expenses)
it shall be a defense that, and (ii) in any suit by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred
in this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
<PAGE>
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
Item 15. Recent Sales of Unregistered Securities
None.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letters between Berkshire Bancorp, Berkshire Bank and Sandler
O'Neill & Partners, L.P.*
1.2 Form of Agency Agreement between Berkshire Bank and Sandler O'Neill &
Partners, L.P.
2.1 Amended Plan of Conversion (including the Amended and Restated Articles
of Organization and Stock Bylaws of Berkshire Bank)
3.1 Certificate of Incorporation of Berkshire Hills Bancorp, Inc.*
3.2 Bylaws of Berkshire Hills Bancorp, Inc.*
3.3 Amended and Restated Articles of Organization and Stock Bylaws of
Berkshire Bank (See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of Berkshire Hills Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette LLP re: legality
8.0 Opinion of Muldoon, Murphy & Faucette LLP re: Federal Tax Matters
8.1 Opinion of Wolf & Company, P.C. re: State Tax Matters
10.1 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.2 Form of Employment Agreement between Berkshire Bank and certain executive
officers*
10.3 Form of Employment Agreement between Berkshire Hills Bancorp, Inc. and
certain executive officers*
10.4 Form of Berkshire Bank Employee Severance Compensation Plan*
10.5 Form of Berkshire Bank Supplemental Executive Retirement Plan*
10.6 Form of Change in Control Agreement between Berkshire Bank and certain
executive officers*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette LLP*
23.3 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc. (P)*
99.2 Draft of Berkshire Hills Foundation Gift Instrument*
99.3 Draft Stock Order Form
- ---------------------
* Previously filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsfield, Commonwealth
of Massachusetts, April 24, 2000.
Berkshire Hills Bancorp, Inc.
By: /s/ James A. Cunningham, Jr.
----------------------------------------------
James A. Cunningham, Jr.
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ James A. Cunningham, Jr. President, Chief Executive Officer April 24, 2000
- ---------------------------- and Director
James A. Cunningham, Jr. (principal executive officer)
/s/ Charles F. Plungis, Jr. Senior Vice President, Treasurer April 24, 2000
- ---------------------------- and Chief Financial Officer
Charles F. Plungis, Jr. (principal accounting
and financial officer)
* Chairman of the Board
- ----------------------------
Robert A. Wells
* Director
- ----------------------------
Thomas O. Andrews
* Director
- ----------------------------
Thomas R. Dawson
* Director
- ----------------------------
Henry D. Granger
* Director
- ----------------------------
A. Allen Gray
* Director
- ----------------------------
John Kittredge
* Director
- ----------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
* Director
- ----------------------------
Edward G. McCormick
* Director
- ----------------------------
Catherine B. Miller
* Director
- ----------------------------
Michael G. Miller
* Director
- ----------------------------
Raymond B. Murray, III
* Director
- ----------------------------
Louis J. Oggiani
* Director
- ----------------------------
Robert S. Raser
* Director
- ----------------------------
Corydon L. Thurston
* Director
- -------------------------------
Ann H. Trabulsi
* Director
- -------------------------------
William E. Williams
* Director
- ------------------------------
Anne Everest Wojtkowski
</TABLE>
*Pursuant to the Power of Attorney filed as Exhibit 24.1 to the Registration
Statement on Form S-1 for Berkshire Hills Bancorp, Inc. filed on March 10,
2000.
<TABLE>
<S> <C> <C>
/s/ James A. Cunningham, Jr. President, Chief Executor Officer April 24, 2000
- ------------------------------ and Director
James A. Cunningham, Jr.
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on April 25, 2000
Registration No. 333-32146
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO THE
PRE-EFFECTIVE AMENDMENT No.1
TO THE
FORM S-1
Registration Statement
Under
THE SECURITIES ACT OF 1933
----------------
Berkshire Hills Bancorp, Inc.
(Exact name of registrant as specified in its charter)
================================================================================
<PAGE>
TABLE OF CONTENTS
List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letters between Berkshire Bancorp, Berkshire Bank and Sandler
O'Neill & Partners, L.P.*
1.2 Form of Agency Agreement between Berkshire Bank and Sandler O'Neill &
Partners, L.P.
2.1 Amended Plan of Conversion (including the Amended and Restated Articles of
Organization and Stock Bylaws of Berkshire Bank)
3.1 Certificate of Incorporation of Berkshire Hills Bancorp, Inc.*
3.2 Bylaws of Berkshire Hills Bancorp, Inc.*
3.3 Amended and Restated Articles of Organization and Stock Bylaws of
Berkshire Bank (See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of Berkshire Hills Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette LLP re: legality
8.0 Opinion of Muldoon, Murphy & Faucette LLP re: Federal Tax Matters
8.1 Opinion of Wolf & Company, P.C. re: State Tax Matters
10.1 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.2 Form of Employment Agreement between Berkshire Bank and certain executive
officers*
10.3 Form of Employment Agreement between Berkshire Hills Bancorp, Inc. and
certain executive officers*
10.4 Form of Berkshire Bank Employee Severance Compensation Plan*
10.5 Form of Berkshire Bank Supplemental Executive Retirement Plan*
10.6 Form of Change in Control Agreement between Berkshire Bank and certain
executive officers*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette LLP*
23.3 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc. (P)*
99.2 Draft of Berkshire Hills Foundation Gift Instrument*
99.3 Draft Stock Order Form
_________________
*Previously filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
Exhibit 1.2
8,314,500 Shares
(subject to increase up to 9,561,675 shares
in the event of an oversubscription)
BERKSHIRE HILLS BANCORP, INC.
(a Delaware corporation)
Common Stock
(par value $10 per share)
AGENCY AGREEMENT
May ___, 2000
Sandler O'Neill & Partners, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
Berkshire Bancorp, Inc., a Massachusetts-chartered mutual holding company
(the "Mutual Holding Company"), and Berkshire Bank, a Massachusetts-chartered
savings bank (the "Bank"), hereby confirm their agreement with Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill" or the "Agent") with respect to the offer and
sale by Berkshire Hills Bancorp, Inc. (the "Company") of 8,314,500 shares
(subject to increase up to 9,561,675 shares in the event of an oversubscription)
of the Company's Common Stock, par value $.01 per share (the "Common Stock").
The shares of Common Stock to be sold by the Company are hereinafter called the
"Securities." In addition, as described herein, the Company expects to
contribute shares of Common Stock in an amount equal to 8% of the shares of
Common Stock sold in the Offerings (as hereinafter defined) to the Berkshire
Hills Foundation (the "Foundation"), such shares hereinafter being referred to
as the "Foundation Shares."
The Securities are being offered for sale and the Foundation Shares are
being contributed in accordance with the plan of conversion (the "Plan") adopted
by the Board of Directors of the Company pursuant to which the Mutual Holding
Company will cease to exist and the newly formed Company will offer for sale
certain shares of its common stock to the Bank's eligible account holders in a
Subscription Offering, to members of the Bank's community in a Direct Community
Offering and, under certain circumstances, to the general public in a Syndicated
Community Offering (collectively, the "Offerings"). Pursuant to the Plan, the
Company is offering to the Bank's tax qualified employee benefit plan, the
Employee Stock Ownership Plan (the "ESOP") and to certain of the Bank's
depositors rights to subscribe for the Securities in a subscription offering
(the
<PAGE>
"Subscription Offering"). To the extent Securities are not subscribed for in the
Subscription Offering, such Securities may be offered to certain members of the
general public, with preference given to residents of Berkshire County,
Massachusetts, in a direct community offering (the "Community Offering" and
together with the Subscription Offering, as each may be extended or reopened
from time to time, the "Subscription and Community Offering") to be commenced
concurrently with the Subscription Offering. It is currently anticipated by the
Bank and the Company that any Securities not subscribed for in the Subscription
and Community Offering will be offered, subject to Section 2 hereof, in a
syndicated community offering (the "Syndicated Community Offering"). The
Subscription Offering and the Syndicated Community Offering are hereinafter
referred to collectively as the "Offerings," and the acquisition of the capital
stock of the Bank by the Company and the Offerings are hereinafter referred to
collectively as the "Conversion." It is acknowledged that the number of
Securities to be sold in the Conversion may be increased or decreased as
described in the Prospectus (as hereinafter defined). If the number of
Securities is increased or decreased in accordance with the Plan, the term
"Securities" shall mean such greater or lesser number, where applicable.
In connection with the Conversion and pursuant to the terms of the Plan as
described in the Prospectus, the Company has established the Foundation.
Immediately following the consummation of the Conversion, subject to the
approval of the establishment of the Foundation by the Corporators of the Bank
and compliance with certain conditions as may be imposed by regulatory
authorities, the Company will contribute newly issued shares of Common Stock in
an amount equal to 8% of the Securities sold in the Offering, or between 491,640
and 665,160 shares of Common Stock (subject to increase in certain circumstances
to 764,934 shares).
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-____), including a
related prospectus, for the registration of the Securities and the Foundation
Shares under the Securities Act of 1933, as amended (the "Securities Act"), has
filed such amendments thereto, if any, and such amended prospectuses as may have
been required to the date hereof by the Commission in order to declare such
registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectuses constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein and the
information, if any, deemed to be a part thereof pursuant to the rules and
regulations of the Commission under the Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")), are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus shall be used by the Company in connection with the Subscription and
Community Offering or the Syndicated Community Offering which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) or (c) of the Securities Act
Regulations), the term "Prospectus" shall refer to such revised prospectus from
and after the time it is first provided to the Agent for such use.
2
<PAGE>
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus of the Company to be used in
the Subscription and Community Offering. Such prospectus contains information
with respect to the Bank, the Company and the Common Stock.
SECTION 1. Representations and Warranties.
(a) The Company and the Bank jointly and severally represent and
warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared effective by
the Commission, no stop order has been issued with respect
thereto and no proceedings therefor have been initiated or, to
the knowledge of the Company and the Bank, threatened by the
Commission. At the time the Registration Statement became
effective and at the Closing Time referred to in Section 2
hereof, the Registration Statement complied and will comply in
all material respects with the requirements of the Securities
Act and the Securities Act Regulations and did not and will not
contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus, at
the date hereof does not and at the Closing Time referred to in
Section 2 hereof will not, include an untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions
from the Registration Statement or Prospectus made in reliance
upon and in conformity with information with respect to the
Agent furnished to the Company in writing by the Agent
expressly for use in the Registration Statement or Prospectus
(the "Agent Information," which the Company and the Bank
acknowledge appears only in the sections captioned "Market for
Common Stock" and the first three paragraphs of the section
"The Conversion-Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings" of the
Prospectus).
(ii) The Company has filed with the Department of the Treasury,
Office of Thrift Supervision (the "OTS") the Company's
application for approval of its acquisition of the Bank (the
"Holding Company Application") on Form H-(e)1-S promulgated
under the savings and loan holding company provisions of the
Home Owners' Loan Act, as amended ("HOLA") and the regulations
promulgated thereunder. The Company has received written notice
from the OTS of its approval of the acquisition of the Bank,
such approval remains in full force and effect and no order has
been issued by the OTS suspending or revoking such approval and
no proceedings therefor have been initiated or, to the
knowledge of the Company or the Bank, threatened by the OTS. At
the date of such approval and at the Closing Time referred
3
<PAGE>
to in Section 2, the Holding Company Application complied and will
comply in all material respects with the applicable provisions of HOLA
and the regulations promulgated thereunder.
(iii) Pursuant to the rules and regulations of the Massachusetts
Division of Banks (the "Division") governing the conversion of
Massachusetts chartered mutual savings banks to stock form (the
"Conversion Regulations"), the Bank has filed with the Division an
application for conversion, and has filed such amendments thereto and
supplementary materials as may have been required to the date hereof
(such application, as amended to date, if applicable, and as from time
to time amended or supplemented hereafter, is hereinafter referred to
as the "Conversion Application"), including copies of the Bank's
Notice and Information Statement, dated _________, 2000, relating to
the Conversion (the "Information Statement"), and the Prospectus. The
Division has, by letter dated _______, 2000, approved the Conversion
Application, such approval remains in full force and effect and no
order has been issued by the Division suspending or revoking such
approval and no proceedings therefor have been initiated or, to the
knowledge of the Company or the Bank, threatened by the Division. At
the date of such approval and at the Closing Time referred to in
Section 2, the Conversion Application complied and will comply in all
material respects with the applicable provisions of the Conversion
Regulations.
(iv) At the time of their use, the Information Statement will
comply in all material respects with the applicable provisions of the
Conversion Regulations and will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. The Company and the Bank will
promptly file the Prospectus and any supplemental sales literature
with the Commission, the Division and the Federal Deposit Insurance
Corporation (the "FDIC"), as requested by the Commission, Division,
and FDIC. The Prospectus and all supplemental sales literature, as of
the date the Registration Statement became effective and at the
Closing Time referred to in Section 2, complied and will comply in all
material respects with the applicable requirements of the Conversion
Regulations and, at or prior to the time of their first use, will have
received all required authorizations of the Division and the FDIC for
use in final form.
(v) Neither the Commission, the Division nor the FDIC has, by
order or otherwise, prevented or suspended the use of the Prospectus
or any supplemental sales literature authorized by the Company or the
Bank for use in connection with the Offerings.
(vi) At the Closing Time referred to in Section 2, the Company
and the Bank will have completed the conditions precedent to the
Conversion and
4
<PAGE>
the establishment of the Foundation in accordance with the Plan, the
applicable Conversion Regulations and all other applicable laws,
regulations, decisions and orders, including all material terms,
conditions, requirements and provisions precedent to the Conversion
imposed upon the Company or the Bank by the OTS, the Division, the
FDIC, or any other regulatory authority, other than those which the
regulatory authority permits to be completed after the Conversion.
(vii) FinPro, Inc., which prepared the valuation of the Bank as
part of the Conversion, has advised the Company and the Bank in
writing that it satisfies all requirements for an appraiser set forth
in the Conversion Regulations and any interpretations or guidelines
issued by the Division and the FDIC with respect thereto.
(viii) The accountants who certified the consolidated financial
statements and supporting schedules of the Bank included in the
Registration Statement have advised the Company and the Bank in
writing that they are independent public accountants within the
meaning of the Code of Ethics of the American Institute of Certified
Public Accountants (the "AICPA"), and such accountants are, with
respect to the Company, the Bank and each subsidiary of the Bank,
independent certified public accountants as required by the Securities
Act and the Securities Act Regulations.
(ix) The only subsidiaries of the Bank are G.B.S.B., Inc. and
North Street Securities Corporation.
(x) The consolidated financial statements and the related notes
thereto included in the Registration Statement and the Prospectus
present fairly the financial position of the Company, the Bank and its
consolidated subsidiaries at the dates indicated and the results of
operations, retained earnings and cash flows for the periods
specified, and comply as to form in all material respects with the
applicable accounting requirements of the Securities Act Regulations
and the Conversion Regulations; except as otherwise stated in the
Registration Statement, said financial statements have been prepared
in conformity with generally accepted accounting principles applied on
a consistent basis; and the supporting schedules and tables included
in the Registration Statement present fairly the information required
to be stated therein.
(xi) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as otherwise
stated therein (A) there has been no material adverse change in the
financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and (B)
except for transactions specifically referred to or contemplated in
the Prospectus, there have been no transactions
5
<PAGE>
entered into by the Company, the Bank or any of its subsidiaries,
other than those in the ordinary course of business, which are
material with respect to the Company, the Bank and its subsidiaries,
considered as one enterprise.
(xii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation
to transact business and is in good standing in the State of Delaware
and in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify would not
have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and its
subsidiaries, considered as one enterprise.
(xiii) Upon consummation of the Conversion and the contribution
of the Foundation Shares as described in the Prospectus, the
authorized, issued and outstanding capital stock of the Company will
be as set forth in the Prospectus under "Capitalization" (except for
subsequent issuances, if any, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus); no shares of
Common Stock have been or will be issued and outstanding prior to the
Closing Time referred to in Section 2; at the time of Conversion, the
Securities will have been duly authorized for issuance and, when
issued and delivered by the Company pursuant to the Plan against
payment of the consideration calculated as set forth in the Plan and
stated on the cover page of the Prospectus, will be duly and validly
issued and fully paid and non-assessable; the terms and provisions of
the Common Stock and the capital stock of the Company conform to all
statements relating thereto contained in the Prospectus; the
certificates representing the shares of Common Stock conform to the
requirements of applicable law and regulations; and the issuance of
the Securities is not subject to preemptive or other similar rights.
(xiv) The Bank, as of the date hereof, is a Massachusetts chartered
savings bank in stock form with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus; the Company, the Bank and its
subsidiaries have obtained all licenses, permits and other
governmental authorizations currently required for the conduct of
their respective businesses or required for the conduct of their
respective businesses as contemplated by the Holding Company
Application and the Conversion Application, except where the failure
to obtain such licenses, permits or other governmental authorizations
would not have a material adverse effect on the financial condition,
results of operations or business affairs of the Company, the Bank and
its subsidiaries considered as
6
<PAGE>
one enterprise; all such licenses, permits and other governmental
authorizations are in full force and effect and the Company, the Bank
and its subsidiaries are in all material respects in compliance
therewith; none of the Company, the Bank nor any of the Bank's
subsidiaries has received notice of any proceeding or action relating
to the revocation or modification of any such license, permit or other
governmental authorization which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a
material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and its
subsidiaries considered as one enterprise; and the Bank is in good
standing under the laws of the Commonwealth of Massachusetts and is
qualified as a foreign corporation to transact business in any
jurisdiction in which the failure to so qualify would have a material
adverse effect on the financial condition, results of operations or
business affairs of the Company, the Bank and its subsidiaries
considered as one enterprise.
(xv) The deposit accounts of the Bank are insured by the FDIC up
to the applicable limits and upon consummation of the Conversion, the
liquidation account for the benefit of eligible account holders and
supplemental eligible account holders will be duly established in
accordance with the requirements of the Conversion Regulations. The
Bank is a "qualified thrift lender" within the meaning of 12 U.S.C.
Section 1467a(m).
(xvi) The authorized capital stock of the Bank is ________
shares of common stock, par value $___ per share (the "Bank Common
Stock") and ________ shares of preferred stock, par value $____ per
share (the "Bank Preferred Stock"), and the issued and outstanding
capital stock of the Bank is ____________ shares of Bank Common Stock
and no shares of the Bank Preferred Stock, and no additional shares of
Bank Common Stock or Bank Preferred Stock have been or will be issued
prior to the Closing time referred to in Section 2; and as of Closing
Time referred to in Section 2, all of the issued and outstanding
capital stock of the Bank will be duly authorized, validly issued and
fully paid and nonassessable and have been issued in compliance with
all federal and state securities laws. The shares of Bank Common
Stock to be issued to the Company will have been duly authorized for
issuance and, when issued and delivered by the Bank pursuant to the
Plan against payment of the consideration calculated as set forth in
the Plan and as described in the Prospectus, will be dulay and validly
issued and fully paid and nonassessable, and all such Bank Common
Stock will be owned beneficially and of record by the Company free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
legal or equitable claim; the terms and provisions of the Bank Common
Stock and the Bank Preferred Stock conform to all statements relating
thereto contained in the Prospectus, and the certificates representing
the shares of the Bank Common Stock will conform with the requirements
of applicable laws and regulations; and the
7
<PAGE>
issuance of the Bank Common Stock is not subject to preemptive or
similar rights.
(xvii) The Foundation has been duly authorized and incorporated and
is validly existing as a non stock corporation in good standing under
the laws of the State of Delaware with corporate power and authority
to own, lease and operate its properties and to conduct its business
as described in the Prospectus; the Foundation will not be a savings
and loan holding company withing the meaning of 12 C.F.R. Section
574.2(q) as a result of the issuance of shares of Common Stock to it
in accordance with the terms of the Plan and in the amounts as
described in the Prospectus; no approvals are required to establish
the Foundation and to contribute the shares of Common Stock thereto as
described in the Prospectus other than those imposed by the Division
and the FDIC; except as specifically disclosed in the Prospectus and
the Proxy Statement, there are no agreements and/or understandings,
written or oral, between the Company and/or the Bank and the
Foundation with respect to the control, directly or indirectly, over
the voting and the acquisition or disposition of the Foundation
Shares; at the time of the Conversion, the Foundation Shares will have
been duly authorized for issuance and, when issued and contributed by
the Company pursuant to the Plan, will be duly and validly issued and
fully paid and non-assessable; and the issuance of the Foundation
Shares is not subject to preemptive or similar rights.
(xviii) Each direct and indirect subsidiary of the Bank has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the
Registration Statement and Prospectus, and is duly qualified to
transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse
effect on the financial condition, results of operations or business
affairs of the Company, the Bank and its subsidiaries considered as
one enterprise; the activities of each such subsidiary are permitted
to subsidiaries of a Massachusetts chartered savings bank; all of the
issued and outstanding capital stock of each such subsidiary has been
duly authorized and validly issued, is fully paid and nonassessable
and is owned by the Bank, directly, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or legal or equitable
claim.
(xix) The Company and the Bank have taken all corporate action
necessary for them to execute, deliver and perform this Agreement, and
this Agreement has been duly executed and delivered by, and is the
valid and binding agreement of, the Company and the Bank, enforceable
in accordance with its terms, except as may be limited by bankruptcy,
insolvency or other laws
8
<PAGE>
affecting the enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance and except
as the enforceability of indemnification and contribution provisions
may be limited by applicable securities laws.
(xx) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and prior to
the Closing Time, except as otherwise may be indicated or contemplated
therein, none of the Company, the Bank or any subsidiary of the Bank
will have (A) issued any securities or incurred any liability or
obligation, direct or contingent, or borrowed money, except borrowings
in the ordinary course of business from the same or similar sources
and in similar amounts as indicated in the Prospectus, or (B) entered
into any transaction or series of transactions which is material in
light of the business of the Company, the Bank and its subsidiaries,
taken as a whole, excluding the origination, purchase and sale of
loans or the purchase or sale of investment securities or mortgaged-
backed securities in the ordinary course of business.
(xxi) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Securities and the
Foundation Shares that has not been obtained and a copy of which has
been delivered to the Agent, except as may be required under the
securities laws of various jurisdictions.
(xxii) None of the Company, the Bank nor any of the Bank's
subsidiaries is in violation of its certificate of incorporation,
organization certificate, articles of incorporation or charter, as the
case may be, or bylaws (and the Bank will not be in violation of its
charter or bylaws in stock form upon consummation of the Conversion);
and neither the Company, the Bank nor any of the Bank's subsidiaries
is in default (nor has any event occurred which, with notice or lapse
of time or both, would constitute a default) in the performance or
observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which the Company, the Bank or any of its
subsidiaries is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company, the Bank or any
of its subsidiaries is subject, except for such defaults that would
not, individually or in the aggregate, have a material adverse effect
on the financial condition, results of operations or business of the
Company, the Bank and its subsidiaries considered as one enterprise;
and there are no contracts or documents of the Company, the Bank or
any of the Bank's subsidiaries which are required to be filed as
exhibits to the Registration Statement or the Conversion Application
which have not been so filed.
(xxiii) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein
have been duly
9
<PAGE>
authorized by all necessary corporate action and do not and will not
conflict with or constitute a breach of, or default under, or result
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company, the Bank or any of its
subsidiaries pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company, the
Bank or any of its subsidiaries is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company or any of its subsidiaries is subject, except for such
defaults that would not, individually or in the aggregate, have a
material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and its
subsidiaries considered as one enterprise; nor will such action result
in any violation of the provisions of the certificate of
incorporation, organization certificate, articles of incorporation or
charter or by-laws of the Company, the Bank or any of its
subsidiaries, or any applicable law, administrative regulation or
administrative or court decree.
(xxiv) No labor dispute with the employees of the Company, the
Bank or any of its subsidiaries exists or, to the knowledge of the
Company or the Bank, is imminent or threatened; and the Company and
the Bank are not aware of any existing or threatened labor disturbance
by the employees of any of its principal suppliers or contractors
which might be expected to result in any material adverse change in
the financial condition, results of operations or business affairs of
the Company, the Bank and its subsidiaries considered as one
enterprise.
(xxv) Each of the Company, the Bank and its subsidiaries have
good and marketable title to all properties and assets for which
ownership is material to the business of the Company, the Bank or its
subsidiaries and to those properties and assets described in the
Prospectus as owned by them, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the
Prospectus or are not material in relation to the business of the
Company, the Bank or its subsidiaries considered as one enterprise;
and all of the leases and subleases material to the business of the
Company, the Bank or its subsidiaries under which the Company, the
Bank or its subsidiaries hold properties, including those described in
the Prospectus, are valid and binding agreements of the Company, the
Bank and its subsidiaries, enforceable in accordance with their terms
(except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws of general applicability
relating to or affecting creditors' rights or general principles of
equity).
(xxvi) None of the Company, the Bank nor its subsidiaries are in
violation of any directive from the OTS, the Division or the FDIC to
make any material change in the method of conducting their respective
businesses; the Bank and its subsidiaries have conducted and are
conducting their business so as to comply in all material respects
with all applicable statutes, regulations and
10
<PAGE>
administrative and court decrees (including, without limitation, all
regulations, decisions, directives and orders of the OTS, the Division
or the FDIC).
(xxvii) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now
pending, or, to the knowledge of the Company or the Bank, threatened,
against or affecting the Company, the Bank or any of its subsidiaries
which is required to be disclosed in the Registration Statement (other
than as disclosed therein), or which might result in any material
adverse change in the financial condition, results of operations or
business affairs of the Company, the Bank and its subsidiaries
considered as one enterprise, or which might materially and adversely
affect the properties or assets thereof or which might materially and
adversely affect the consummation of the Conversion; all pending legal
or governmental proceedings to which the Company, the Bank or any
subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, are considered in the aggregate not material; and there are
no contracts or documents of the Company or any of its subsidiaries
which are required to be filed as exhibits to the Registration
Statement or the Conversion Application which have not been so filed.
(xxviii) The Bank has obtained an opinion of its counsel, Muldoon,
Murphy & Faucette LLP, with respect to the legality of the Securities
to be issued and the federal income tax consequences of the
Conversion, copies of which are filed as exhibits to the Registration
Statement. The federal income tax consequences of the Foundation and
the Commonwealth of Massachusetts income tax consequences will be
passed upon by Wolf & Company, P.C. ("Wolf"), all material aspects of
the aforesaid opinions are accurately summarized in the Prospectus;
the facts and representations upon which such opinions are based are
truthful, accurate and complete in all material respects; and neither
the Bank nor the Company has taken or will take any action
inconsistent therewith.
(xxix) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxx) All of the loans represented as assets on the most recent
consolidated financial statements or consolidated selected financial
information of the Bank included in the Prospectus meet or are exempt
from all requirements of federal, state or local law pertaining to
lending, including without limitation truth in lending (including the
requirements of Regulations Z and 12 C.F.R. Part 226 and Section
563.99), real estate settlement procedures, consumer credit
protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted,
would not result in a material adverse effect on the financial
condition, results of operations or
11
<PAGE>
business of the Company, the Bank and its subsidiaries considered as
one enterprise.
(xxxi) To the knowledge of the Company and the Bank, with the
exception of the intended loan to the Bank's ESOP by the Company to
enable the ESOP to purchase shares of Common Stock in an amount of up
to 8% of the Common Stock issued in the Conversion, none of the
Company, the Bank or employees of the Bank has made any payment of
funds of the Company or the Bank as a loan for the purchase of the
Common Stock or made any other payment of funds prohibited by law, and
no funds have been set aside to be used for any payment prohibited by
law.
(xxxii) The Company, the Bank and its subsidiaries are in compliance
in all material respects with the applicable financial recordkeeping
and reporting requirements of the Currency and Foreign Transaction
Reporting Act of 1970, as amended, and the rules and regulations
thereunder.
(xxxiii) None of the Company, the Bank nor its subsidiaries nor
any properties owned or operated by the Company, the Bank or its
subsidiaries is in violation of or liable under any Environmental Law
(as defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse
effect on the financial condition, results of operations or business
affairs of the Company, the Bank and the subsidiaries considered as
one enterprise. There are no actions, suits or proceedings, or
demands, claims, notices or investigations (including, without
limitation, notices, demand letters or requests for information from
any environmental agency) instituted or pending, or to the knowledge
of the Company or the Bank threatened, relating to the liability of
any property owned or operated by the Company, the Bank or the
subsidiaries thereof, under any Environmental Law. For purposes of
this subsection, the term "Environmental Law" means any federal,
state, local or foreign law, statute, ordinance, rule, regulation,
code, license, permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any regulatory
authority relating to (i) the protection, preservation or restoration
of the environment (including, without limitation, air, water, vapor,
surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any material
containing any such substance as a component.
12
<PAGE>
(xxxiv) The Company, the Bank and its subsidiaries have filed
all federal income and state and local franchise tax returns required
to be filed and have made timely payments of all taxes shown as due
and payable in respect of such returns, and no deficiency has been
asserted with respect thereto by any taxing authority.
(xxxv) The Company has received approval, subject to regulatory
approval to consummate the Offerings and issuance, to have the
Securities quoted on the National Market System of the National
Association of Securities Dealers' Automated Quotation System ("Nasdaq
National Market") effective as of the Closing Time referred to in
Section 2 hereof.
(xxxvi) The Company has filed a registration statement for the Common
Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and such registration statement was
declared effective concurrent with the effectiveness of the
Registration Statement.
(b) Any certificate signed by any officer of the Company or the Bank and
delivered to either of the Agent to counsel for the Agent shall be deemed a
representation and warranty by the Company or the Bank to each Agent as to the
matters covered thereby.
SECTION 2. Appointment of Sandler O'Neill; Sale and Delivery of the
Securities; Closing.
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company,
and to assist the Company with the solicitation of subscriptions and purchase
orders for Securities, in connection with the Company's sale of Common Stock in
the Subscription and Community Offering and the Syndicated Community Offering.
On the basis of the representations and warranties herein contained, and subject
to the terms and conditions herein set forth, Sandler O'Neill accepts such
appointment and agrees to use its best efforts to assist the Company with the
solicitation of subscriptions and purchase orders for Securities in accordance
with this Agreement; provided, however, that the Agent shall not be obligated to
take any action which is inconsistent with any applicable laws, regulations,
decisions or orders. The services to be rendered by Sandler O'Neill pursuant to
this appointment include the following: (i) consulting as to the securities
marketing implications of any aspect of the Plan of Conversion or related
corporate documents; (ii) reviewing with the Board of Directors the independent
appraiser's appraisal of the common stock; (iii) reviewing all offering
documents, including the Prospectus, stock order form and related offering
materials (it being understood that preparation and filing of such documents is
the sole responsibility of the Company and the Bank and their counsel); (iv)
assisting in the design and implementation of a marketing strategy for the
Offerings; (v) assisting the Company and the Bank in obtaining all requisite
regulatory approvals; (vi) assisting Bank management in preparing for meetings
with potential investors and broker-dealers; and (vii) providing such other
general advice and assistance as may be requested to promote the successful
completion of the Offerings.
13
<PAGE>
The appointment of the Agent hereunder shall terminate upon the earlier to
occur of (a) forty-five (45) days after the last day of the Subscription and
Community Offering, unless the Company and the Agent agree in writing to extend
such period and the OTS agrees to extend the period of time in which the Shares
may be sold, or (b) the receipt and acceptance of subscriptions and purchase
orders for all of the Securities, or (c) the completion of the Syndicated
Community Offering.
If any of the Securities remain available after the expiration of the
Subscription and Community Offering, at the request of the Company and the Bank,
Sandler O'Neill will seek to form a syndicate of registered brokers or dealers
("Selected Dealers") to assist in the solicitation of purchase orders of such
Securities on a best efforts basis, subject to the terms and conditions set
forth in a selected dealers' agreement (the "Selected Dealers' Agreement"),
substantially in the form set forth in Exhibit A to this Agreement. Sandler
O'Neill will endeavor to limit the aggregate fees to be paid by the Company and
the Bank under any such Selected Dealers' Agreement to an amount competitive
with gross underwriting discounts charged at such time for underwritings of
comparable amounts of stock sold at a comparable price per share in a similar
market environment; provided, however, that the aggregate fees payable to Sander
O'Neill and Selected Dealers shall not exceed 7% of the aggregate Purchase Price
of the Securities sold by such Selected Dealers. Sander O'Neill will endeavor
to distribute the Securities among the Selected Dealers in a fashion which best
meets the distribution objective of the Company and the requirements of the
Plan, which may result in limiting the allocation of stock to certain Selected
Dealers. It is understood that in no event shall Sandler O'Neill be obligated
to act as a Selected Dealer or to take or purchase any Securities.
In the event the Company is unable to sell at least the total minimum of
the Securities, as set forth on the cover page of the Prospectus, within the
period herein provided, this Agreement shall terminate and the Company shall
refund to any persons who have subscribed for any of the Securities the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the others hereunder, except for the obligations of the Company and the Bank as
set forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent as
provided in Sections 6(b) and 7 hereof. Appropriate arrangements for placing
the funds received from subscriptions for Securities or other offers to purchase
Securities in special interest-bearing accounts with the Bank until all
Securities are sold and paid for were made prior to the commencement of the
Subscription Offering, with provision for refund to the purchasers as set forth
above, or for delivery to the Company if all Securities are sold.
If at least the total minimum of Securities, as set forth on the cover page
of the Prospectus, are sold, the Company agrees to issue or have issued the
Securities sold and to release for delivery certificates for such Securities at
the Closing Time against payment therefor by release of funds from the special
interest-bearing accounts referred to above. The closing shall be held at the
offices of Muldoon, Murphy & Faucette, LLP, at 10:00 a.m., local time, or at
such other place and time as shall be agreed upon by the parties hereto, on a
business day to be agreed upon by the parties hereto. The Company shall notify
the Agent by telephone, confirmed in writing, when funds shall have been
received for all the Securities. Certificates for Securities shall be delivered
directly to the purchasers thereof in accordance with their directions.
Notwithstanding the foregoing, certificates for Securities purchased through
Selected Dealers shall be made available to the Agent for inspection at least 48
hours prior to the Closing Time at such office as the Agent shall designate.
The hour and date upon
14
<PAGE>
which the Company shall release for delivery all of the Securities, in
accordance with the terms hereof, is herein called the "Closing Time."
The Company will pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Securities.
In addition to the reimbursement of the expenses specified in Section 4
hereof, the Agent will receive the following compensation for its services
hereunder:
(a) One and one-half percent (1.5%) of the aggregate Purchase Price of
the Securities sold in the Subscription and Community Offering, excluding
in each case shares purchased by (i) any employee benefit plan of the
Company or the Bank established for the benefit of their respective
directors, officers and employees, (ii) by any charitable foundation formed
by the Bank or the Company in connection with the Conversion, and (iii) any
director, officer or employee of the Company or the Bank or members of
their immediate families (which term shall mean parents, grandparents,
spouse, siblings, children and grandchildren); and
(b) with respect to any Securities sold by an NASD member firm (other
than Sandler O'Neill) under the Selected Dealers' Agreement in the
Syndicated Community Offering, (i) the compensation payable to Selected
Dealers under any Selected Dealers' Agreement, (ii) any sponsoring dealer's
fees; and (iii) a management fee to Sandler O'Neill of one and one-half
percent (1.5%).
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or the Conversion is terminated by the
Company, no fee shall be payable by the Company to Sandler O'Neill; however, the
Company shall reimburse the Agent for all of its reasonable out-of-pocket
expenses incurred prior to termination, including the reasonable fees and
disbursements of counsel for the Agent in accordance with the provisions of
Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in immediately
available funds at Closing Time, or upon the termination of this Agreement, as
the case may be. In recognition of the long lead times involved in the
conversion process, the Bank agrees to make advance payments to the Agent in the
aggregate amount of $50,000, $25,000 of which has been previously paid and the
remaining $25,000 of which shall be payable upon execution hereof, which shall
be credited against any fees or reimbursement of expenses payable hereunder.
SECTION 3. Covenants of the Company. The Company and the Bank covenant
with the Agent as follows:
(a) The Company and the Bank will prepare and file such amendments or
supplements to the Registration Statement, the Prospectus, the Conversion
Application and the Proxy Statement as may hereafter be required by the
Securities Act Regulations or the Conversion Regulations or as may
hereafter be requested by the Agent. Following completion of the
Subscription and Community Offering, in the event of a Syndicated Community
Offering, the Company and the Bank will (i) promptly prepare and file with
the
15
<PAGE>
Commission a post-effective amendment to the Registration Statement
relating to the results of the Subscription and Community Offering, any
additional information with respect to the proposed plan of distribution
and any revised pricing information or (ii) if no such post-effective
amendment is required, will file with, or mail for filing to, the
Commission a prospectus or prospectus supplement containing information
relating to the results of the Subscription and Community Offering and
pricing information pursuant to Rule 424 of the Securities Act Regulations,
in either case in a form acceptable to the Agent. The Company and the Bank
will notify the Agent immediately, and confirm the notice in writing, (i)
of the effectiveness of any post-effective amendment of the Registration
Statement, the filing of any supplement to the Prospectus and the filing of
any amendment to the Conversion Application, (ii) of the receipt of any
comments from the Division, the FDIC or the Commission with respect to the
transactions contemplated by this Agreement or the Plan, (iii) of any
request by the Commission, the Division or the FDIC for any amendment to
the Registration Statement or the Conversion Application or any amendment
or supplement to the Prospectus or for additional information, (iv) of the
issuance by the Division or the FDIC of any order suspending the Offerings
or the use of the Prospectus or the initiation of any proceedings for that
purpose, (v) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose, and (vi) of the receipt of any notice with
respect to the suspension of any qualification of the Securities for
offering or sale in any jurisdiction. The Company and the Bank will make
every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) The Company and the Bank will give the Agent notice of its
intention to file or prepare any amendment to the Conversion Application or
Registration Statement (including any post-effective amendment) or any
amendment or supplement to the Prospectus (including any revised prospectus
which the Company proposes for use in connection with the Syndicated
Community Offering of the Securities which differs from the prospectus on
file at the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424(b) of the Securities Act Regulations), will furnish
the Agent with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file any such amendment or supplement or use any such
prospectus to which the Agent or counsel for the Agent may object.
(c) The Company and the Bank will deliver to the Agent as many signed
copies and as many conformed copies of the Conversion Application and the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein)
as the Agent may reasonably request, and from time to time such number of
copies of the Prospectus as the Agent may reasonably request.
(d) During the period when the Prospectus is required to be delivered,
the Company and the Bank will comply, at their own expense, with all
requirements imposed upon them by the FDIC, the Division and by the
applicable Conversion Regulations, as from time to time in force, and by
the Securities Act, the Securities Act Regulations, the Securities
16
<PAGE>
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission promulgated thereunder, including, without
limitation, Regulation M under the Exchange Act, so far as necessary to
permit the continuance of sales or dealing in shares of Common Stock during
such period in accordance with the provisions hereof and the Prospectus.
(e) If any event or circumstance shall occur as a result of which it
is necessary, in the opinion of counsel for the Agent, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Company and the Bank will forthwith amend or supplement the
Prospectus (in form and substance satisfactory to counsel for the Agent) so
that, as so amended or supplemented, the Prospectus will not include an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading, and the Company and the Bank will furnish to the Agent a
reasonable number of copies of such amendment or supplement. For the
purpose of this subsection, the Company and the Bank will each furnish such
information with respect to itself as the Agent may from time to time
reasonably request.
(f) The Company and the Bank will take all necessary action, in
cooperation with the Agent, to qualify the Securities for offering and sale
under the applicable securities laws of such states of the United States
and other jurisdictions as the Conversion Regulations may require and as
the Agent and the Company have agreed; provided, however, that the Company
and the Bank shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation in any jurisdiction in
which it is not so qualified. In each jurisdiction in which the Securities
have been so qualified, the Company and the Bank will file such statements
and reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for a period of not less than one year from
the effective date of the Registration Statement.
(g) The Company authorizes Sandler O'Neill and any Selected Dealers to
act as agent of the Company in distributing the Prospectus to persons
entitled to receive subscription rights and other persons to be offered
Securities having record addresses in the states or jurisdictions set forth
in a survey of the securities or "blue sky" laws of the various
jurisdictions in which the Offerings will be made (the "Blue Sky Survey").
(h) The Company will make generally available to its security holders
as soon as practicable, but not later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the 1933 Act Regulations) covering a twelve month
period beginning not later than the first day of the Company's fiscal
quarter next following the "effective date" (as defined in said Rule 158)
of the Registration Statement.
(i) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to its stockholders as
soon as practicable after the end of each such
17
<PAGE>
fiscal year an annual report (including consolidated statements of
financial condition and consolidated statements of income, stockholders'
equity and cash flows, certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), consolidated summary
financial information of the Company, the Bank and its subsidiaries for
such quarter in reasonable detail. In addition, such annual report and
quarterly consolidated summary financial information shall be made public
through the issuance of appropriate press releases at the same time or
prior to the time of the furnishing thereof to stockholders of the Company.
(j) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to the Agent (i) as
soon as publicly available, a copy of each report or other document of the
Company furnished generally to stockholders of the Company or furnished to
or filed with the Commission under the Exchange Act or any national
securities exchange or system on which any class of securities of the
Company is listed, and (ii) from time to time, such other information
concerning the Company as the Agent may reasonably request.
(k) The Company and the Bank will conduct the Conversion including the
formation and operation of the Foundation in all material respects in
accordance with the Plan, the Conversion Regulations and all other
applicable regulations, decisions and orders, including all applicable
terms, requirements and conditions precedent to the Conversion imposed upon
the Company or the Bank by the Division or the FDIC.
(l) The Company and the Bank will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds."
(m) The Company will file with the Commission a report on the use of
proceeds as required pursuant to Rule 463 of the Securities Act
Regulations.
(n) The Company will maintain the effectiveness of the Exchange Act
Registration Statement for not less than three years. The Company will
file with the Nasdaq Stock Market all documents and notices required by the
Nasdaq Stock Market of companies that have issued securities that are
traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
(o) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by the Agent in order for the Agent
to ensure compliance with the National Association of Securities Dealers,
Inc.'s "Interpretation Relating to Free-Riding and Withholding."
(p) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the
prior written consent of the Agent, sell or issue, contract to sell or
otherwise dispose of, any shares of Common Stock other than the Securities
for a period of 180 days following the Closing Time.
18
<PAGE>
(q) During the period beginning on the date hereof and ending on the
later of the third anniversary of the Closing Time or the date on which the
Agent receives full payment in satisfaction of any claim for
indemnification or contribution to which it may be entitled pursuant to
Sections 6 or 7, respectively, neither the Company nor the Bank shall,
without the prior written consent of the Agent, take or permit to be taken
any action that could result in the Bank Common Stock becoming subject to
any security interest, mortgage, pledge, lien or encumbrance; provided,
however, that this covenant shall be null and void if the Board of
Governors of the Federal Reserve System, by regulation, policy statement or
interpretive release, or by written order or written advice addressed to
the Bank or the Agent specifically addressing the provisions of Section
6(a) hereof, permits indemnification of the Agent by the Bank as
contemplated by such provisions.
(r) The Company and the Bank will comply with the conditions imposed
by or agreed to with the OTS in connection with its approval of the Holding
Company Application and with the FDIC and the Division in connection with
their approval or non-objection of, or non-objection to, the Conversion
Application, including those conditions relating to the establishment and
the operation of the Foundation; the Company and the Bank shall use their
best efforts to ensure that the Foundation submits within the time frames
required by applicable law a request to the Internal Revenue Service to be
recognized as a tax-exempt organization under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"); the Company and the
Bank will take no action which will result in the possible loss of the
Foundation's tax exempt status; and neither the Company nor the Bank will
contribute any additional assets to the Foundation until such time that
such additional contributions will be deductible for federal and state
income tax purposes.
(s) During the period ending on the first anniversary of the Closing
Time, the Bank will comply with all applicable law and regulation necessary
for the Bank to continue to be a "qualified thrift lender" within the
meaning of 12 U.S.C. Section 1467a(m).
(t) The Company shall not deliver the Securities until the Company and
the Bank have satisfied each condition set forth in Section 5 hereof,
unless such condition is waived by the Agent.
(u) The Company or the Bank will furnish to Sandler O'Neill as early
as practicable prior to the Closing Date, but no later than two (2) full
business days prior thereto, a copy of the latest available unaudited
interim consolidated financial statements of the Bank and the Subsidiaries
which have been read by Wolf, as stated in their letters to be furnished
pursuant to subsections (e) and (f) of Section 5 hereof.
SECTION 4. Payment of Expenses. The Company and the Bank jointly and
severally agree to pay all expenses incident to the performance of their
obligations under this Agreement, including but not limited to (i) the cost of
obtaining all securities and bank regulatory approvals, (ii) the printing and
filing of the Registration Statement as originally filed and of each amendment
thereto, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the purchasers in the Offerings, (iv) the fees and
disbursements of the Company's and the Bank's counsel, accountants, appraiser
and other advisors, (v) the qualification of the Securities under
19
<PAGE>
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the fees and disbursements of counsel in connection
therewith and in connection with the preparation of the Blue Sky Survey, (vi)
the printing and delivery to the Agent of copies of the Registration Statement
as originally filed and of each amendment thereto and the printing and delivery
of the Prospectus and any amendments or supplements thereto to the purchasers in
the Offerings and the Agent, (vii) the printing and delivery to the Agent of
copies of a Blue Sky Survey, and (viii) the fees and expenses incurred in
connection with the listing of the Securities on the Nasdaq National Market. In
the event the Agent incurs any such fees and expenses on behalf of the Bank or
the Company, the Bank will reimburse the Agent for such fees and expenses
whether or not the Conversion is consummated; provided, however, that the Agent
shall not incur any substantial expenses on behalf of the Bank or the Company
pursuant to this Section without the prior approval of the Bank.
The Company and the Bank jointly and severally agree to pay certain
expenses incident to the performance of the Agent's obligations under this
Agreement, regardless of whether the Conversion is consummated, including (i)
the filing fees paid or incurred by the Agent in connection with all filings
with the National Association of Securities Dealers, Inc., and (ii) all
reasonable out of pocket expenses incurred by the Agent relating to the
Offerings, including, without limitation, advertising, promotional, syndication
and travel expenses and fees and expenses of the Agent's counsel. All fees and
expenses to which the Agent is entitled to reimbursement under this paragraph of
this Section 4 shall be due and payable upon receipt by the Company or the Bank
of a written accounting therefor setting forth in reasonable detail the expenses
incurred by the Agent.
SECTION 5. Conditions of Agent's Obligations. The Company, the Bank and
the Agent agree that the issuance and the sale of Securities and all obligations
of the Agent hereunder are subject to the accuracy of the representations and
warranties of the Company and the Bank herein contained as of the date hereof
and the Closing Time, to the accuracy of the statements of officers and
directors of the Company and the Bank made pursuant to the provisions hereof, to
the performance by the Company and the Bank of their obligations hereunder, and
to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Securities Act or proceedings
therefor initiated or threatened by the Commission, no order suspending the
Offerings or authorization for final use of the Prospectus shall have been
issued or proceedings therefor initiated or threatened by the Division or
the FDIC and no order suspending the sale of the Securities in any
jurisdiction shall have been issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of Muldoon,
Murphy & Faucette LLP, counsel for the Company and the Bank, in form
and substance satisfactory to counsel for the Agent, to the effect
that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware.
20
<PAGE>
(ii) The Company has full corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and Prospectus and to
enter into and perform its obligations under this Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the Commonwealth of
Massachusetts and in each other jurisdiction in which such
qualification is required whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to so qualify would not have a material adverse effect
upon the financial condition, results of operations or business
affairs of the Company, the Bank and its subsidiaries, considered
as one enterprise.
(iv) Upon consummation of the Conversion, and the issuance of
the Foundation Shares to the Foundation immediately upon
completion thereof, in compliance with all conditions imposed
upon the contribution thereof by the FDIC under the terms of the
Intent Not to Object in an amount described in the Prospectus,
the authorized, issued and outstanding capital stock of the
Company will be as set forth in the Prospectus under
"Capitalization" and, no shares of Common Stock have been or will
be issued and outstanding prior to the Closing Time.
(v) The Securities and the Foundation Shares have been duly
and validly authorized for issuance and sale and, when issued and
delivered by the Company pursuant to the Plan against payment of
the consideration calculated as set forth in the Plan, will be
duly and validly issued and fully paid and non-assessable.
(vi) The issuance of the Securities and the Foundation Shares
is not subject to preemptive or other similar rights arising by
operation of law or, to the best of their knowledge and
information, otherwise.
(vii) The Bank has been at all times since the date hereof and
prior to the Closing Time duly organized, and is validly existing
and in good standing under the laws of the Commonwealth of
Massachusetts as a Massachusetts chartered savings bank in stock
form, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus; and the Bank is
duly qualified as a foreign corporation in each jurisdiction in
which the failure to so qualify would have a material adverse
effect upon the financial condition, results of operations or
business affairs of the Bank.
(viii) The Bank is a member in good standing of the Federal Home
Loan Bank of Boston and the deposit accounts of the Bank are
insured by the FDIC up to the applicable limits.
21
<PAGE>
(ix) Each direct and indirect subsidiary of the Bank has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and is duly qualified as
a foreign corporation to transact business and is in good
standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the
Bank and its subsidiaries, taken as a whole; the activities of
each such subsidiary are permitted to subsidiaries of a savings
association holding company and of a Massachusetts chartered
savings bank by the rules, regulations, resolutions and practices
of the Division and the FDIC; all of the issued and outstanding
capital stock of each such subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and is owned
by the Bank, directly or through subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
(x) The Foundation has been duly incorporated and is validly
existing as a non-stock corporation in good standing under the
laws of the State of Delaware with corporate power and authority
to own, lease and operate its properties and to conduct its
business as described in the Prospectus; the Foundation is not a
savings and loan holding company within the meaning of 12 C.F.R.
Section 574.2(q) as a result of the issuance of shares of Common
Stock to it in accordance with the terms of the Plan and in the
amounts as described in the Prospectus; no approvals are required
to establish the Foundation and to contribute the shares of
Common Stock thereto as described in the Prospectus other than
those set forth in any written notice or order of approval or
non-objection of the Conversion, the Conversion Application or
the Holding Company Application, copies of which were provided to
the Agent prior to the Closing Time.
(xi) Upon consummation of the Conversion, all of the issued and
outstanding capital stock of the Bank when issued and delivered
pursuant to the Plan against payment of consideration calculated
as set forth in the Plan and set forth in the Prospectus, will be
duly authorized and validly issued and fully paid and
nonassessable, and all such capital stock will be owned
beneficially and of record by the Company free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
(xii) The OTS has approved the Holding Company Application, the
Division has approved the Conversion Application and the FDIC has
issued its non-objection to the Plan, and no action is pending,
or to the best of such counsel's knowledge, threatened respecting
the Holding Company Application or the Conversion Application or
the acquisition by the Company of all of the Bank's issued and
outstanding capital stock; the Holding Company Application and
the Conversion Application comply with the
22
<PAGE>
applicable requirements of the OTS, the Division and the FDIC,
respectively, except as compliance therewith has been
specifically waived in writing by the provisions of the approvals
by the OTS, the Division and the FDIC as the case may be,
includes all documents required to be filed as exhibits thereto,
and is, to the best of such counsel's knowledge and information,
truthful, accurate and complete; and the Company is duly
authorized to become a savings association holding company and is
duly authorized to own all of the issued and outstanding capital
stock of the Bank to be issued pursuant to the Plan.
(xiii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including
the establishment of the Foundation and the contribution thereto
of the Foundation Shares, (A) have been duly and validly
authorized by all necessary action on the part of each of the
Company and the Bank, and this Agreement constitutes the legal,
valid and binding agreement of each of the Company and the Bank,
enforceable in accordance with its terms, except as rights to
indemnity and contribution hereunder may be limited under
applicable law (it being understood that such counsel may avail
itself of customary exceptions concerning the effect of
bankruptcy, insolvency or similar laws and the availability of
equitable remedies); (B) will not result in any violation of the
provisions of the charter or by-laws of the Company, the Bank or
any of its subsidiaries; and, (C) will not conflict with or
constitute a breach of, or default under, and no event has
occurred which, with notice or lapse of time or both, would
constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance, that, individually
or in the aggregate, would have a material adverse effect on the
financial condition, results of operations or business affairs of
the Company, the Bank and its subsidiaries considered as one
enterprise, upon any property or assets of the Company, the Bank
or its subsidiaries pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to
which the Company, the Bank or its subsidiaries is a party or by
which any of them may be bound, or to which any of the property
or assets of the Company, the Bank or its subsidiaries is
subject.
(xiv) The Prospectus has been duly authorized by the Division
for final use pursuant to the Conversion Regulations and no
action is pending, or to the best of such counsel's knowledge, is
threatened, by the OTS to revoke such authorization.
(xv) The Registration Statement is effective under the
Securities Act and no stop order suspending the effectiveness of
the Registration Statement has been issued under the Securities
Act or, to the best of such counsel's knowledge, proceedings
therefor initiated or threatened by the Commission.
23
<PAGE>
(xvi) No further approval, authorization, consent or other
order of any public board or body is required in connection with
the execution and delivery of this Agreement, the issuance of the
Securities and the consummation of the Conversion, except as may
be required under the securities or Blue Sky laws of various
jurisdictions as to which no opinion need be rendered.
(xvii) At the time the Registration Statement became effective,
the Registration Statement (other than the financial statements
and statistical data included therein, as to which no opinion
need be rendered) complied as to form in all material respects
with the requirements of the Securities Act and the Securities
Act Regulations and the Conversion Regulations.
(xviii) The Common Stock conforms to the description thereof
contained in the Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form and complies
with all applicable statutory requirements.
(xix) There are no legal or governmental proceedings pending
or threatened against or affecting the Mutual Holding Company,
the Company, the Bank or its subsidiaries which are required,
individually or in the aggregate, to be disclosed in the
Registration Statement and Prospectus, other than those disclosed
therein, and all pending legal or governmental proceedings to
which the Mutual Holding Company, the Company, the Bank or any of
its subsidiaries is a party or to which any of their property is
subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business,
are, considered in the aggregate, not material.
(xx) The information in the Prospectus under "Risk Factors -
Establishment of Berkshire Hills Foundation" and "-Anti-Takeover
Provisions and Statutory Provisions," "Dividend Policy,"
"Business of the Bank - Legal Proceedings," "Federal and State
Taxation of Income," "Regulation and Supervision," "The
Conversion," "Restrictions on Acquisitions of Berkshire Hills and
Berkshire Bank," and "Description of Capital Stock," to the
extent that it constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal conclusions, has been
reviewed by them and is complete and accurate in all material
respects.
(xxi) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments required to be described or referred to in
the Registration Statement or to be filed as exhibits thereto
other than those described or referred to therein or filed as
exhibits thereto, the descriptions thereof or references thereto
are correct, and no default exists, and no event has occurred
which, with notice or lapse of time or both, would constitute a
default, in the due performance
24
<PAGE>
or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument so described, referred
to or filed.
(xxii) The Plan and the establishment and funding of the
Foundation have been duly authorized by the Board of Directors of
the Company and the Board of Directors of the Bank and, the
Division's approval of the Plan and the FDIC's non-objection to
the Plan remain in full force and effect; the Company and the
Bank have conducted the Conversion and the establishment and
funding of the Foundation in all material respects in accordance
with applicable requirements of the Conversion Regulations,
except to the extent that the requirement to comply therewith was
specifically waived in writing by the terms of the approval or
non- objection of the Division or the FDIC, as the case may be,
the Plan and all other applicable regulations, decisions and
orders thereunder, including all material applicable terms,
conditions, requirements and conditions precedent to the
Conversion imposed upon the Company or the Bank by the Division
or the FDIC and, no order has been issued by the Division or the
FDIC to suspend the Conversion or the Offerings and no action for
such purpose has been instituted or threatened by the Division or
the FDIC; and, to the best of such counsel's knowledge, no person
has sought to obtain review of the final action of the Division
or the FDIC in approving the Conversion Application (which
includes the Plan which provides for the establishment of the
Foundation) or the Holding Company Application.
(xxiii) To the best of such counsel's knowledge, the Company and
the Bank and its subsidiaries have obtained all licenses, permits
and other governmental authorizations currently required for the
conduct of their respective businesses as described in the
Registration Statement and Prospectus, and all such licenses,
permits and other governmental authorizations are in full force
and effect, and the Company and the Bank and its subsidiaries are
in all material respects complying therewith.
(xxiv) Neither the Company, the Bank nor any of its subsidiaries
is in violation of its certificate of incorporation, organization
certificate, articles of incorporation or charter, as the case
may be, or bylaws (and the Bank will not be in violation of its
charter in stock form upon consummation of the Conversion) or, to
the best of such counsel's knowledge, in default (nor has any
event occurred which, with notice or lapse of time or both, would
constitute a default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Company, the Bank or any of its
subsidiaries is a party or by which the Company, the Bank or any
of its subsidiaries or any of their property may be bound.
25
<PAGE>
(xxv) The Company is not required to be registered as an
investment company under the Investment Company Act of 1940.
(2) The favorable opinion, dated as of Closing Time, of Silver,
Freedman & Taff, LLP, counsel for the Agent, with respect to the
matters set forth in Section 5(b)(1)(i), (iv), (v), (vi) (solely as to
preemptive rights arising by operation of law), (xii), (xiv), (xvi)
and (xvii) and such other matters as the Agent may reasonably require.
(3) In addition to giving their opinions required by
subsections (b)(l) and (b)(2), respectively, of this Section, Muldoon,
Murphy & Faucette LLP and Silver, Freedman & Taff LLP shall each
additionally state that nothing has come to their attention that would
lead them to believe that the Registration Statement (except for
financial statements and schedules and other financial or statistical
data included therein, as to which counsel need make no statement), at
the time it became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus (except for financial statements and
schedules and other financial or statistical data included therein, as
to which counsel need make no statement), at the time the Registration
Statement became effective or at Closing Time, included an untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In giving their opinions, Muldoon, Murphy & Faucette LLP and
Silver, Freedman & Taff LLP may rely as to matters of fact on
certificates of officers and directors of the Company and the Bank and
certificates of public officials, and as to certain matters of
Delaware law upon the opinion of Morris, Nichols, Arsnt & Tunnell,
which opinions shall be in form and substance satisfactory to counsel
for the Agent, and Silver, Freedman & Taff LLP may also rely on the
opinion of Muldoon, Murphy & Faucette LLP and Morris, Nichols, Arsnt &
Tunnell.
(c) At Closing Time referred to in Section 2, the Company and the
Bank shall have completed in all material respects the conditions precedent
to the Conversion in accordance with the Plan, the applicable Conversion
Regulations and all other applicable laws, regulations, decisions and
orders, including all terms, conditions, requirements and provisions
precedent to the Conversion imposed upon the Company or the Bank by the
Division or the FDIC, or any other regulatory authority other than those
which the Division or the FDIC permits to be completed after the
Conversion.
(d) At Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the Agent
shall have received a certificate of the Chief Executive Officer of the
Company and of the Bank, the President
26
<PAGE>
of the Company and the Bank and the chief financial or chief accounting
officer of the Company and of the Bank, dated as of Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) there
shall have been no material transaction entered into by the Company or the
Bank from the latest date as of which the financial condition of the
Company or the Bank as set forth in the Registration Statement and the
Prospectus other than transactions referred to or contemplated therein and
transactions in the ordinary cause of business, (iii) neither the Company
nor the Bank shall have received from the Division or the FDIC any
direction (oral or written) to make any material change in the method of
conducting its business with which it has not complied (which direction, if
any, shall have been disclosed to the Agent) or which materially and
adversely would affect the business, financial condition or results of
operations of the Company, the Bank or its subsidiaries, (iv) the
representations and warranties in Section 1 hereof are true and correct
with the same force and effect as though expressly made at and as of the
Closing Time, (v) the Company and the Bank have complied with all
agreements and satisfied all conditions on their part to be performed or
satisfied at or prior to Closing Time, (vi) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or threatened by the
Commission and (vii) no order suspending the Syndicated Community Offering
or the authorization for final use of the Prospectus has been issued and no
proceedings for that purpose have been initiated or threatened by the OTS,
the Division or the FDIC and no person has sought to obtain regulatory or
judicial review of the action of the Division or the FDIC in approving the
Plan in accordance with the Conversion Regulations nor has any person
sought to obtain regulatory or judicial review of the action of the OTS in
approving the Holding Company Application.
(e) At the time of the execution of this Agreement, the Agent shall
have received from Wolf a letter dated such date, in form and substance
satisfactory to the Agent, to the effect that (i) they are independent
public accountants with respect to the Company, the Bank and its
subsidiaries within the meaning of the Code of Ethics of the American
Institute of Certified Public Accountants, the Securities Act and the
Securities Act Regulations and the Conversion Regulations; (ii) it is their
opinion that the consolidated financial statements and supporting schedules
included in the Registration Statement and covered by their opinions
therein comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Securities Act
Regulations; (iii) based upon limited procedures as agreed upon by the
Agent and Wolf set forth in detail in such letter, nothing has come to
their attention which causes them to believe that (A) the unaudited
financial statements and supporting schedules of the Bank and its
subsidiaries included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements
of the Securities Act, the Securities Act Regulations and the Conversion
Regulations or are not presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement
and the Prospectus, (B) the unaudited amounts of net interest income and
net income set forth under "Selected Financial Information" in the
Registration Statement and Prospectus do not agree with the amounts set
forth in unaudited consolidated financial statements as of and for the
dates and periods presented under such captions or such amounts were not
determined on a basis substantially consistent with that used in
determining the corresponding amounts in the audited financial
27
<PAGE>
statements included in the Registration Statement, (C) at a specified date
not more than five days prior to the date of this Agreement, there has been
any increase in the consolidated long term or short term debt of the Bank
and its subsidiaries or any decrease in consolidated total assets, the
allowance for loan losses, total deposits or net worth of the Bank and its
subsidiaries, in each case as compared with the amounts shown in the
December 31, 1999 balance sheet included in the Registration Statement or,
(D) during the period from December 31, 1999 to a specified date not more
than five days prior to the date of this Agreement, there were any
decreases, as compared with the corresponding period in the preceding year,
in total interest income, net interest income, net interest income after
provision for loan losses, income before income tax expense or net income
of the Bank and its subsidiaries, except in all instances for increases or
decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur; and (iv) in addition to the examination referred to
in their opinions and the limited procedures referred to in clause (iii)
above, they have carried out certain specified procedures, not constituting
an audit, with respect to certain amounts, percentages and financial
information which are included in the Registration Statement and Prospectus
and which are specified by the Agent, and have found such amounts,
percentages and financial information to be in agreement with the relevant
accounting, financial and other records of the Company, the Bank and its
subsidiaries identified in such letter.
(e) At Closing Time, the Agent shall have received from FinPro, Inc. a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (d) of this
Section, except that the specified date referred to shall be a date not
more than five days prior to Closing Time.
(f) At Closing Time, the Securities shall have been approved for
listing on the Nasdaq National Market upon notice of issuance.
(g) At Closing Time, the Agent shall have received a letter from
FinPro, Inc., dated as of the Closing Time, confirming its appraisal.
(h) At Closing Time, counsel for the Agent shall have been furnished
with such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities and the
Foundation Shares as herein contemplated and related proceedings, or in
order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and sale
of the Securities and Foundation Shares as herein contemplated shall be
satisfactory in form and substance to the Agent and counsel for the Agent.
(i) At any time prior to Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which, in the judgment of the Agent,
are so material and adverse as to make it impracticable to market the
Securities or to enforce contracts, including subscriptions or orders, for
the sale of the Securities, and (ii) trading generally on either the
American Stock Exchange, the New York
28
<PAGE>
Stock Exchange or the Nasdaq Stock Market shall not have been suspended,
and minimum or maximum prices for trading shall not have been fixed, or
maximum ranges for prices for securities have been required, by either of
said Exchanges or by order of the Commission or any other governmental
authority, and a banking moratorium shall not have been declared by either
Federal or New York authorities.
SECTION 6. Indemnification.
(a) The Company and the Bank, jointly and severally, agree to
indemnify and hold harmless the Agent, each person, if any, who controls the
Agent, within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and its respective partners, directors, officers, employees
and agents as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, related to or arising out of
the Conversion (including the establishment of the Foundation and the
contribution of the Foundation Shares thereto by the Company) or any action
taken by the Agent where acting as agent of the Company or the Bank or
otherwise as described in Section 2 hereof.
(ii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, based upon or arising out of
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto), or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading
or arising out of any untrue statement or alleged untrue statement of a
material fact contained in the Proxy Statement or Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(iii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or
of any claim whatsoever described in clauses (i) or (ii) above, if such
settlement is effected with the written consent of the Company or the Bank,
which consent shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6(c) hereof, the fees and
disbursements of counsel chosen by the Agent), reasonably incurred in
investigating, preparing for or defending against any litigation, or any
investigation, proceeding or inquiry by any governmental agency or body,
commenced or threatened, or any claim pending or threatened whatsoever
described in clauses (i) or (ii) above, to the extent that any such expense
is not paid under (i), (ii) or (iii) above;
provided, however, that the indemnification provided for in this paragraph (a)
shall not apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or alleged
29
<PAGE>
untrue statement of a material fact contained in the Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading which was
made in reliance upon and in conformity with the Agent Information.
Notwithstanding the foregoing, the indemnification provided for in this
paragraph (a) shall not apply to the Bank to the extent that such
indemnification by the Bank would constitute a covered transaction under Section
23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the Company, the
Bank, their directors and trustees, each of their officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, of a material fact made in the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with the Agent
Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to no more than one local counsel
in each separate jurisdiction in which any action or proceeding is commenced)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The Company and the Bank also agree that the Agent shall not have
any liability (whether direct or indirect, in contract or tort or otherwise) to
the Bank, the Company, its security holders or the Bank's or the Company's
creditors relating to or arising out of the engagement of the Agent pursuant to,
or the performance by the Agent of the services contemplated by, this Agreement,
except to the extent that any loss, claim, damage or liability is found in a
final judgment by a court of competent jurisdiction to have resulted primarily
from the Agent's bad faith, willful misconduct or gross negligence.
(e) In addition to, and without limiting, the provisions of Section
(6)(a)(iv) hereof, in the event that any Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act or any of its partners, directors, officers, employees or
agents is requested or required to appear as a witness or otherwise gives
testimony in any action, proceeding, investigation or inquiry brought by or on
behalf of or against the Company, the Bank, the Agent or any of its respective
affiliates or any participant in the transactions contemplated hereby in which
the Agent or such person or agent is not named as a defendant, the Company and
the Bank jointly and severally agree to reimburse the Agent for all reasonable
and necessary out-of-pocket expenses incurred by it in connection with preparing
or appearing as a
30
<PAGE>
witness or otherwise giving testimony and to compensate the Agent in an amount
to be mutually agreed upon.
SECTION 7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company, the Bank
and the Agent shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company or the Bank and the Agent, as incurred, in such
proportions (i) that the Agent is responsible for that portion represented by
the percentage that the maximum aggregate marketing fees appearing on the cover
page of the Prospectus bears to the maximum aggregate gross proceeds appearing
thereon and the Company and the Bank are jointly and severally responsible for
the balance or (ii) if, but only if, the allocation provided for in clause (i)
is for any reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits to the Company and the Bank on the one
hand and the Agent on the other, as reflected in clause (i), but also the
relative fault of the Company and the Bank on the one hand and the Agent on the
other, as well as any other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls the Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act shall have the same rights to contribution as the
Agent, and each director of the Company, each trustee of the Bank, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company or the Bank within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company and the Bank. Notwithstanding anything to the
contrary set forth herein, to the extent permitted by applicable law, in no
event shall the Agent be required to contribute an aggregate amount in excess of
the aggregate marketing fees to which the Agent is entitled and actually paid
pursuant to this Agreement.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of the Company or the Bank submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Agent or controlling person, or
by or on behalf of the Company, and shall survive delivery of the Securities.
SECTION 9. Termination of Agreement.
(a) The Agent may terminate this Agreement, by notice to the
Company, at any time at or prior to Closing Time (i) if there has been, since
the date of this Agreement or since the respective dates as of which information
is given in the Registration Statement, any material adverse change in the
financial condition, results of operations or business affairs of the Company or
the Bank, or the Company, the Bank and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States or elsewhere or any outbreak of hostilities or escalation
thereof or other calamity or crisis the effect of which, in the judgment of the
Agent, are so material
31
<PAGE>
and adverse as to make it impracticable to market the Securities or to enforce
contracts, including subscriptions or orders, for the sale of the Securities,
(iii) if trading generally on the Nasdaq Stock Market, the American Stock
Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal or New York authorities, (iv) if any condition
specified in Section 5 shall not have been fulfilled when and as required to be
fulfilled; (v) if there shall have been such material adverse change in the
condition or prospects of the Company or the Bank or the prospective market for
the Company's securities as in the Agent's good faith opinion would make it
inadvisable to proceed with the offering, sale or delivery of the Securities;
(vi) if, in the Agent's good faith opinion, the price for the Securities
established by FinPro, Inc. is not reasonable or equitable under then prevailing
market conditions, or (vii) if the Conversion is not consummated on or prior to
____________________.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof relating to the reimbursement of expenses and
except that the provisions of Sections 6 and 7 hereof shall survive any
termination of this Agreement.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Agent
shall be directed to the Agent at Two World Trade Center, 104th Floor, New York,
New York 10048, attention of Catherine A. Lawton, Principal, facsimile number:
(212) 466-7711; notices to the Company and the Bank shall be directed to either
of them at 24 North Street, Pittsfield, Massachusetts, attention of James A.
Cunningham, President and Chief Executive Officer, with a copy to Muldoon,
Murphy & Faucette, LLP, 5101 Wisconsin Ave., N.W., Washington, D.C. 2016,
attention of Larry Spaccasi, facsimile number: (202) 966-9409.
SECTION 11. Parties. This Agreement shall inure to the benefit of and be
binding upon the Agent, the Company and the Bank and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Agent, the Company and the Bank and their respective successors and the
controlling persons and partners, officers and directors referred to in Sections
6 and 7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions hereof and
thereof are intended to be for the sole and exclusive benefit of the Agent, the
Company and the Bank and their respective successors, and said controlling
persons and partners, officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
SECTION 12. Entire Agreement; Amendment. This Agreement represents the
entire understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made, except for the engagement letter dated October 26, 1999, by and
between the Agent and the Mutual Holding Company and the Bank, relating to the
Agent's providing conversion agent services to the Company and the Bank in
32
<PAGE>
connection with the Conversion. No waiver, amendment or other modification of
this Agreement shall be effective unless in writing and signed by the parties
hereto.
SECTION 13. Governing Law and Time. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State without regard to the
conflicts of laws provisions thereof. Unless otherwise noted, specified times
of day refer to Eastern time.
SECTION 14. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
SECTION 15. Headings. Sections headings are not to be considered part of
this Agreement, are for convenience and reference only, and are not to be deemed
to be full or accurate descriptions of the contents of any paragraph or
subparagraph.
33
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Agent, the Company and the Bank in accordance with its terms.
Very truly yours,
Berkshire Bancorp, Inc.
By:
--------------------------------------------
James A. Cunningham, Jr.
Title: President and Chief Executive Officer
Berkshire Bank
By:
--------------------------------------------
James A. Cunningham, Jr.
Title: President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
- --------------------------------------------
Catherine A. Lawton
Principal
34
<PAGE>
EXHIBIT 2.1
AMENDED
PLAN OF CONVERSION
FOR
BERKSHIRE BANCORP
AND
BERKSHIRE BANK
1. INTRODUCTION.
Berkshire Bank (the "Bank"), headquartered in Pittsfield, Massachusetts, is
a Massachusetts-chartered stock savings bank which operates as a wholly-owned
subsidiary of Berkshire Bancorp (the "Mutual Holding Company"), a Massachusetts-
chartered mutual holding company. The Bank organized the Mutual Holding Company
in 1996.
This Plan of Conversion (the "Plan") provides for the combination, by
merger or otherwise, of the Mutual Holding Company with and into the Bank
(pursuant to which the Mutual Holding Company will cease to exist) and the
simultaneous organization of a stock holding company (the "Holding Company") to
issue Conversion Stock in the offerings, as provided herein, and the issuance by
the Bank of its Common Stock to the Holding Company in exchange for up to fifty
percent (50%) of the net proceeds received by the Holding Company from the sale
of Conversion Stock in the offerings. The Boards of Trustees of the Mutual
Holding Company and the Board of Directors of the Bank have carefully considered
the alternatives available with respect to their corporate structures and have
determined that a conversion of the Mutual Holding Company to stock form, as
described in this Plan (the "Conversion"), is in the best interests of the
Mutual Holding Company and the Bank, as well as in the best interests of the
Bank's depositors and the communities served by the Bank. The Conversion will
result in the Bank being wholly-owned by a stock holding company, which is a
more common ownership structure for financial institutions than the mutual
holding company structure. The Conversion also will enable the Bank to expand
its franchise, compete more effectively with commercial banks and other
financial institutions for new business opportunities and to increase its equity
capital base and access the capital markets when needed. The Conversion will
also provide the Bank with equity capital which will enable it to increase its
reserves and net worth to support future lending and operational growth,
including branching activities and acquisitions of other financial institutions
or financial services companies, and to increase its ability to render services
to the communities it serves.
The Boards of Trustees of the Mutual Holding Company and the Board of
Directors of the Bank currently contemplate that all of the stock of the Bank
shall be held by the Holding Company, which will be organized under the laws of
the State of Delaware, and that the Holding Company will issue and sell its
stock pursuant to this Plan. The use of the Holding Company, would provide
greater organizational and operating flexibility. Shares of common stock of the
Bank will be sold to the Holding Company and the Holding Company will offer the
Conversion Stock upon the terms and conditions set forth herein in a
Subscription Offering to the Eligible Account Holders, Supplemental Eligible
Account Holders, any Tax-Qualified Employee Stock Benefit Plan established by
the Bank or Holding Company and Directors, Trustees, Officers and employees of
<PAGE>
the Mutual Holding Company and the Bank, in the respective priorities set forth
in this Plan. Any shares of conversion stock not subscribed for by the
foregoing classes of persons will be offered for sale to certain members of the
public either directly by the Bank or the Holding Company through a Direct
Community Offering or a Syndicated Community Offering or through an underwritten
firm commitment public offering or through a combination thereof. In addition
to the foregoing, the Bank and the Holding Company intend to provide employment
or severance agreements to certain management employees and certain other
benefits to the Directors, Officers and employees of the Bank as will be
described in the Prospectus for the Conversion Stock.
In furtherance of the Bank's commitment to its community, this Plan
provides for the establishment of a charitable foundation as part of the
Conversion. The charitable foundation is intended to complement the Bank's
existing community reinvestment activities in a manner that will allow the
Bank's local communities to share in the growth and profitability of the Holding
Company and the Bank over the long term. Consistent with the Bank's goal, the
Holding Company intends to donate to the charitable foundation immediately
following the Conversion a number of shares of its authorized but unissued
common stock in an amount up to 8% of the common stock sold in the Conversion.
For these reasons, the Trustees of the Mutual Holding Company and the Board
of Directors of the Bank, on October 22, 1999, unanimously adopted, and on April
4, 2000 and April 18, 2000, amended, this Plan.
The terms of deposit accounts of the Bank's depositors will not be affected
by the Conversion provided for in this Plan. Each deposit account holder in the
Bank, prior to the Conversion, shall receive, after the Conversion, without
payment, a withdrawable account or accounts in the Bank equal in withdrawable
amount to the withdrawable value of such account holder's account or accounts in
the Bank prior to conversion. All deposit accounts in the Bank following the
Conversion will continue to be insured by the Federal Deposit Insurance
Corporation (the "FDIC") and the Depositors Insurance Fund (the "DIF"). The
stock to be issued in the Conversion, however, will not be insured by the FDIC,
the DIF or any other insurer. The Bank, upon combination with the Mutual Holding
Company, will succeed to all of the presently existing rights, interests, duties
and obligations of the Mutual Holding Company to the extent provided by law,
including, but not limited to, all of its rights to and interests in its assets
and properties, both real and personal.
This Plan, which has been adopted by the unanimous vote of the Board of
Trustees of the Mutual Holding Company and the Board of Directors of the Bank,
must also be approved at an annual meeting of the corporators of the Mutual
Holding Company called to consider the Plan by the affirmative vote of (1) a
majority of the total votes of the corporators, and (2) a majority of
Independent Corporators who shall constitute not less than sixty percent (60%)
of all Corporators eligible to vote. Subsequent to the submission of this Plan
to the Corporators for their consideration, the Plan must be approved by the
Massachusetts Commissioner of Banks (the "Commissioner") and any other banking
or bank regulatory authority, if required.
2
<PAGE>
2. DEFINITIONS.
As used in this Plan, the following terms have the meanings indicated
below:
Acting in Concert. The term "Acting in Concert" means: (a) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (b) a
combination or pooling of voting or other interest in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(c) a person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also in concert with that other party, except that any Tax-
Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with any other Tax-
Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock
Benefit Plan or with its director or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the director and
stock held by the plan will be aggregated. The Mutual Holding Company, the
Holding Company and the Bank may presume that certain Persons are Acting In
Concert based upon, among other things, joint account relationships and the fact
that such Persons have filed joint Schedules 13D with the Securities and
Exchange Commission with respect to other companies. When Persons act together
for such a common purpose, their group is deemed to have acquired their stock.
Affiliate. An "Affiliate" of, or a person "affiliated" with a specified
---------
person, means a person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, the
person specified. The term "control" means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a person, whether through ownership of voting securities, by contract, or
otherwise.
Aggregate Purchase Price. The term "Aggregate Purchase Price" means the
------------------------
total sum paid for all shares of Conversion Stock.
Annual Meeting. The term "Annual Meeting" means the meeting of the
--------------
Corporators, and any adjournments thereof, called for the specific purpose of
submitting the Plan to such Corporators for vote and approval.
Associate. The term "Associate" when used to indicate a relationship with
---------
any person means: (1) any corporation or organization (other than the Mutual
Holding Company, the Holding Company, the Bank or a majority-owned subsidiary of
the Mutual Holding Company, Holding Company or the Bank) of which such person is
an officer or partner or is, directly or indirectly, the beneficial owner of ten
percent (10%) or more of any class of equity securities; (2) any trust or other
estate in which such person has a substantial beneficial interest or as to which
such person serves as trustee or in a similar fiduciary capacity, except that
for the purposes of Sections 5 and 6 hereof, the term "Associate" does not
include any Non Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified
Employee Stock Benefit Plan in which a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and that for
purposes of aggregating total shares that may be held by Officers and Directors
the term "Associate" does not include any Tax-Qualified Employee Stock Benefit
Plan; and (3) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director, trustee or
officer
3
<PAGE>
of the Mutual Holding Company, the Holding Company, the Bank, or any of its
parents or subsidiaries.
Bank. The term "Bank" means Berkshire Bank.
----
Broker-Dealer. The term "Broker-Dealer" means any person who engages
-------------
either for all or part of such person's time, directly or indirectly, as agent,
broker or principal, in the business of offering, buying, selling or otherwise
dealing or trading in securities issued by another person.
Commissioner. The term "Commissioner" means the Massachusetts Commissioner
------------
of Banks.
Common Stock. The term "Common Stock" means any and all authorized common
------------
stock of the Holding Company outstanding subsequent to the Conversion.
Conversion. The term "Conversion" means (i) the combination of the Mutual
----------
Holding Company with and into the Bank pursuant to the MHC Combination, pursuant
to which the Mutual Holding Company will cease to exist and each share of the
Bank's common stock outstanding immediately prior to the effective time thereof
shall automatically be canceled; (ii) the issuance of Conversion Stock by the
Holding Company in the offerings as provided herein; and (iii) the issuance to
the Holding Company of the Bank's common stock to be outstanding upon
consummation of the Conversion in exchange for a portion of the net proceeds
received by the Holding Company from the sale of the Conversion Stock. All of
these transactions shall be in accordance with the Conversion Regulations and
shall otherwise conform to the requirements of a Massachusetts stock savings
bank and the issuance of the Bank's common stock in accordance with this Plan.
Conversion Regulations. The term "Conversion Regulations" means 209 CMR
----------------------
33.00, Subpart D of the Code of Massachusetts Regulations and, if applicable,
the federal mutual-to-stock conversion regulations issued by the Office of
Thrift Supervision and the FDIC, but only to the extent such regulations do not
conflict with Section 209 CMR 33.00, Subpart D of the Code of Massachusetts
Regulations.
Conversion Stock or Shares. The terms "Conversion Stock" or "Shares" mean
--------------------------
the common stock sold by the Holding Company.
Corporators. The term "Corporators" means the corporators of the Mutual
-----------
Holding Company as determined by the Bylaws of the Mutual Holding Company.
Direct Community Offering. The term "Direct Community Offering" means the
-------------------------
offering of Conversion Stock to the Local Community with preference given to
natural persons residing in the Local Community.
Directors. The term "Directors" refers to the directors of the Bank or the
---------
Holding Company, as indicated by the context.
4
<PAGE>
Eligibility Record Date. The term "Eligibility Record Date" means
-----------------------
September 30, 1998, the record date set by the MHC and the Bank for determining
Eligible Account Holders.
Eligible Account Holder. The term "Eligible Account Holder" means any
-----------------------
person holding a Qualifying Deposit in the Bank as of the Eligibility Record
Date.
Estimated Price Range. The term "Estimated Price Range" means the range of
---------------------
minimum and maximum aggregate values determined by the Board of Trustees of the
Mutual Holding Company and the Board of Directors of the Bank within which the
aggregate amount of Conversion Stock sold in the Conversion will fall. The
Estimated Price Range will be within the estimated pro forma market value of the
Conversion Stock as determined by the Independent Appraiser prior to the
Subscription Offering and as it may be amended from time to time thereafter.
FDIC. The term "FDIC" means the Federal Deposit Insurance Corporation.
----
Foundation. The term "Foundation" means a charitable foundation that will
----------
qualify as an exempt organization under Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended, the establishment and funding of which is
contemplated by Section 3A herein.
Holding Company. The term "Holding Company" means the Delaware corporation
---------------
formed for the purpose of acquiring all of the shares of stock of the Bank to be
issued in the Conversion.
Independent Corporators. The term "Independent Corporators" means
-----------------------
Corporators who are not employees, Officers, Trustees, Directors or significant
borrowers of the Mutual Holding Company or the Bank.
Independent Appraiser. The term "Independent Appraiser" means the firm
---------------------
employed by the Bank to prepare an appraisal of the pro forma market value of
the Bank which will be used as the basis for determining the price of the
Conversion Stock.
Local Community. The term "Local Community" means Berkshire County,
---------------
Massachusetts.
MHC Combination. The term "MHC Combination" means the combination, by
---------------
merger or otherwise, of the Mutual Holding Company with the Bank, resulting in
the Bank as the surviving entity.
Mutual Holding Company. The term "Mutual Holding Company" means Berkshire
----------------------
Bancorp.
Officer. The term "Officer" means the chairman of the board, the
-------
president, any officer of the level of vice president or above, the clerk and
the treasurer, and any other person performing similar functions of the Mutual
Holding Company, the Bank or the Holding Company.
5
<PAGE>
Order Form. The term "Order Form" means any form together with an attached
----------
cover letter, sent by the Holding Company to any Person containing among other
things a description of the alternatives available to such Person under the Plan
and by which any such Person may make elections regarding subscriptions for
Conversion Stock in the Subscription and Direct Community Offerings.
Person. The term "Person" means an individual, a corporation, a
------
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts ("IRA") and KEOGH Accounts), any unincorporated
organization or similar association, a government or political subdivision, a
syndicate or a group acting in concert.
Plan. The term "Plan" means this Plan of Conversion as adopted by the
----
Board of Trustees of the Mutual Holding Company and the Board of Directors of
the Bank and approved by the Commissioner, and any amendments thereto.
Prospectus. The term "Prospectus" means the offering circular or
----------
prospectus by which the Conversion Stock is being offered for sale.
Purchase Price. The term "Purchase Price" means the price per share of the
--------------
Conversion Stock, as offered for sale in the Conversion.
Qualifying Deposit. The term "Qualifying Deposit" means the balance of a
------------------
deposit account of any type offered by the Bank (including, but not limited to,
savings accounts, NOW account deposits, certificates of deposit, demand
deposits, money market deposits and deposits made pursuant to IRA/Keogh Plans)
of $50 or more in the Bank at the close of business as of the Eligibility Record
Date or the Supplemental Eligibility Record Date, whichever may be the case.
Deposit accounts with total deposit balances of less than $50 shall not
constitute a Qualifying Deposit.
Residence, Reside, or Residing. The terms "residence," "reside," or
------------------------------
"residing" as used herein with respect to any Person shall mean any Person who
occupies a dwelling within the Bank's Local Community, has an intent to remain
within the Local Community for a period of time, and manifests the genuineness
of that intent by establishing an ongoing physical presence within the Local
Community together with an indication that such presence within the Local
Community is not merely transitory in nature. To the extent the Person is a
corporation or other business entity, the principal place of business or
headquarters must be in the Local Community. The Bank may use deposit or loan
records or such other evidence provided to it to determine whether a Person is a
resident. In all cases, however, such a determination shall be in the sole
discretion of the Mutual Holding Company.
SEC. The term "SEC" means the Securities and Exchange Commission.
---
6
<PAGE>
Subscription Offering. The term "Subscription Offering" refers to the
---------------------
offering of Conversion Stock, through non-transferable subscription rights
issued to Eligible Account Holders, Supplemental Eligible Account Holders, the
Tax-Qualified Employee Stock Benefit Plan and Directors, Trustees, Officers and
employees of the Mutual Holding Company and the Bank.
Supplemental Eligible Account Holder. The term "Supplemental Eligible
------------------------------------
Account Holder" means any person holding a Qualifying Deposit in the Bank as of
the Supplemental Eligibility Record Date, except Officers, Directors, Trustees,
Corporators of the Mutual Holding Company and the Bank and their Associates.
Supplemental Eligibility Record Date. The term "Supplemental Eligibility
------------------------------------
Record Date" means September 30, 1999, the record date set for determining
Supplemental Eligible Account Holders of the Bank.
Syndicated Community Offering. The term "Syndicated Offering" means the
-----------------------------
offering of Conversion Stock not subscribed for in the Subscription and the
Direct Community Offerings, if any, to certain members of the general public
through a syndicate of registered broker-dealers.
Tax-Qualified Employee Stock Benefit Plan. The term "Tax-Qualified
-----------------------------------------
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Bank, such as an employee stock ownership plan, stock
bonus plan, profit-sharing plan or other plan, which, with any related trust,
meets the requirements to be "qualified" under section 401 of the Internal
Revenue Code of 1986, as amended.
Trustee. The term "Trustee" refers to the trustees of the Mutual Holding
-------
Company.
3. PROCEDURE FOR CONVERSION.
After adoption of the Plan by the Board of Trustees of the Mutual Holding
Company and the Board of Directors of the Bank, the Plan will be submitted,
together with all other requisite material in an application for conversion (the
"Application") to the Commissioner for approval. A copy of the Application will
also be submitted to the Federal Reserve Board and the FDIC, if required. The
Mutual Holding Company must also apply to the Internal Revenue Service for a tax
ruling or receive an opinion from counsel which provides that the Conversion
would not result in a taxable reorganization of the Mutual Holding Company under
the Internal Revenue Code of 1986, as amended, and with respect to the federal
tax consequences of the Conversion.
Following a determination by the Commissioner that the Application is
complete, the Mutual Holding Company will publish a public announcement of its
Application in newspapers having general circulation in each community in which
an office of the Mutual Holding Company or Bank
7
<PAGE>
is located, or in such other locations as may be satisfactory to the
Commissioner. Three such announcements shall be published, the first being as
close to the date of the determination of the completion of the application as
may be practical, the second during the next week, and the final notice during
the third week. Such notice shall also be posted in each office of the Mutual
Holding Company and the Bank for at least 21 days.
The Commissioner will review the Application. If the Commissioner finds
that the (1) formation of a stock holding company will be fair and not
prejudicial to the depositors of the Bank; (2) that the public interest will be
served by the proposed conversion of the Mutual Holding Company to stock form;
(3) that the approval will not result in any unsafe or unsound business
practices; (4) that the financial and management resources of the converting
Mutual Holding Company are satisfactory; and (5) that the competence, character
and banking experience of the converting Mutual Holding Company and the Bank,
including their record of compliance with applicable laws and regulations, are
satisfactory, he shall approve the Plan.
After approval of the Conversion by the Commissioner, the Plan and the
establishment of the Foundation will be submitted to the Corporators at the
Annual Meeting called to consider each such matter. Notice to all Corporators
of the Annual Meeting must be in a form previously approved by the Commissioner
and include other requisite material and must be given not less than seven (7)
days prior to the date of the meeting. The Plan must be approved by: (1) a
majority of the total votes of the Corporators and (2) a majority of the
Independent Corporators who shall constitute not less than sixty percent (60%)
of all Corporators entitled to vote. The establishment of the Foundation is
subject to the same approval requirements, unless a lesser amount is permitted
by the Commissioner. If the establishment of the Foundation is not approved as
provided herein, the Bank and the Mutual Holding Company may proceed with the
consummation of the Conversion without the Foundation subject to applicable
regulatory approval.
The Bank shall approve the Plan in accordance with its Bylaws.
If the Corporators approve the Plan, and the Commissioner authorizes the
sale of Conversion Stock pursuant to this Plan, Conversion Stock will be sold as
provided herein. The Conversion Stock to be issued pursuant to this Plan will be
offered in a Subscription Offering to Eligible Account Holders, Supplemental
Eligible Account Holders and any Tax-Qualified Employee Stock Benefit Plan and
as set forth in Section 5 of this Plan after such Corporator approval or, if
permitted by the Commissioner, after approval of the Application, provided that
any such offer and sale of Conversion Stock shall be conditioned upon the
approval of the Plan by Corporators at the Annual Meeting. If feasible, any
Conversion Stock remaining after purchases of Conversion Stock in the
Subscription Offering will then be offered to the general public through a
Direct Community Offering as provided in Section 6 of this Plan. The sale of all
Conversion Stock ordered in the Subscription Offering may be consummated
simultaneously on the date the Direct Community Offering is completed, or, if
there is no Direct Community Offering, as soon as practicable following
expiration of the Subscription Offering. If feasible, any shares of Conversion
Stock remaining unsold after completion of the Subscription Offering and the
Direct Community Offering will be sold in a Syndicated Community Offering as set
forth in Section 6 (which may commence following
8
<PAGE>
or simultaneously with the Direct Community Offering). If for any reason a
Syndicated Community Offering of all unsubscribed Conversion Stock cannot be
effected, the Mutual Holding Company will use its best efforts to obtain other
purchasers, subject to the approval of the Commissioner.
The Mutual Holding Company shall merge with and into the Bank, with the
Bank being the surviving entity, pursuant to the MHC Combination. As a result of
the MHC Combination, the shares of the Bank's common stock currently held by the
Mutual Holding Company shall be extinguished and Eligible Account Holders and
Supplemental Eligible Account Holders will be granted interests in the
liquidation account to be established by the Bank pursuant to Section 13
hereof.
The Boards of Trustees of the Mutual Holding Company and the Board of
Directors of the Bank intend to take all necessary steps to form the Holding
Company, including the filing of any necessary applications to the appropriate
regulatory authorities which will govern the activities of the Holding Company.
The Bank will be a wholly-owned subsidiary of the Holding Company. The initial
Directors of the Holding Company shall also be Directors of the Bank. The
Holding Company will make timely applications for any requisite regulatory
approvals, including an application to register as a bank or savings and loan
holding company, and the filing of a registration statement to register the sale
of the Conversion Stock with the SEC .
The Board of Trustees of the Mutual Holding Company and the Board of
Directors of the Bank also intend to take all necessary steps to establish the
charitable foundation and to fund such charitable foundation in the manner set
forth in Section 3A hereof.
Upon the issuance of the Conversion Stock, the Holding Company will
purchase from the Bank all of the stock of the Bank to be issued by the Bank in
the Conversion in exchange for up to fifty percent (50%) of the Conversion
proceeds.
The Board of Trustees of the Mutual Holding Company and the Board of
Directors of the Bank may determine for any reason at any time prior to the
issuance of the Conversion Stock not to utilize a holding company form of
organization in the Conversion. If the Board of Trustees of the Mutual Holding
Company and the Board of Directors of the Bank determine not to complete the
Conversion utilizing a holding company form of organization, the stock of the
Bank will be issued and sold in accordance with the Plan. In such case, the
Holding Company's registration statement will be withdrawn from the SEC and the
Bank will take steps necessary to complete the Conversion, including filing any
necessary documents with the Commissioner and any other required bank regulatory
authority. In such event, any subscriptions or orders received for Conversion
Stock of the Holding Company shall be deemed to be subscriptions or orders for
Conversion Stock of the Bank, and the Bank shall take such steps as permitted or
required by the Commissioner or any other banking or regulatory authority.
9
<PAGE>
3A. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION.
As part of the Conversion, the Mutual Holding Company, the Holding Company
and the Bank intend to establish a charitable foundation that will qualify as an
exempt organization under Section 501(c)(3) of the Internal Revenue Code of
1986, as amended (the "Foundation"), and to donate to the Foundation from
authorized but unissued shares of Common Stock, an amount up to 8% of the number
of shares of Conversion Stock sold in the Conversion. The Foundation is being
formed in connection with the Conversion in order to complement the Bank's
existing community reinvestment activities and to share with Berkshire County a
part of the Bank's financial success as a locally headquartered, community
minded, financial services institution. The funding of the Foundation with
Common Stock accomplishes this goal as it enables the community to share in the
growth and profitability of the Holding Company and the Bank over the long-term.
The Foundation will be dedicated to the promotion of charitable purposes in
Berkshire County, including community development, grants or donations to
support housing assistance, not-for-profit community groups and other types of
organizations or civic minded projects. The Foundation will annually distribute
total grants to assist charitable organizations operating in Berkshire County or
to fund projects within Berkshire County of not less than 5% of the average fair
value of Foundation assets each year, less certain expenses. In order to serve
the purposes for which it was formed and maintain its Section 501(c)(3)
qualification, the Foundation may sell, on an annual basis, a limited portion of
the Common Stock contributed to it by the Holding Company.
The board of directors of the Foundation will be comprised of individuals
who are Officers and/or Directors of the Holding Company or the Bank. The board
of directors of the Foundation will be responsible for establishing the polices
of the Foundation with respect to grants or donations, consistent with the
stated purposes of the Foundation.
4. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK.
The total number of shares of Conversion Stock which will be offered for
sale in the Conversion will be determined by the Board of Trustees of the Mutual
Holding Company and the Boards of Directors of the Bank and the Holding Company
immediately prior to the commencement of the Subscription Offering; provided,
that such Boards may elect to increase or decrease the number of shares of
Conversion Stock to be offered for sale in the Conversion depending upon market
and financial conditions, with the approval of the Commissioner and, if
required, any other applicable bank regulatory authority. In particular, the
total number of shares may be increased by up to 15% of the number of shares
offered in the Conversion if the Estimated Price Range is increased subsequent
to the commencement of the Subscription and Direct Community Offerings to
reflect changes in market and financial conditions and the Aggregate Purchase
Price is not more than 15% above the maximum of the Estimated Price Range.
An Independent Appraiser shall be engaged by the Mutual Holding Company and
the Bank to provide them with an independent valuation of the estimated pro
forma market value of the Conversion Stock as required by the Conversion
Regulations. The valuation will be made by a
10
<PAGE>
written report to the Mutual Holding Company and the Bank, contain the factors
upon which the valuation was made and conform to procedures adopted by the
Commissioner and any other applicable bank regulatory authority. The Board of
Trustees of the Mutual Holding Company and the Board of Directors of the Bank
shall thoroughly review and analyze the methodology and fairness of the
independent appraisal. The valuation shall establish an Estimated Price Range
for the Conversion Stock. The maximum of the Estimated Price Range shall be no
more than 15% above the estimated pro forma market value of the Conversion Stock
and the minimum of the Estimated Price Range shall be no more than 15% below the
estimated pro forma market value of the Conversion Stock. The number of shares
of Conversion Stock to be issued and the Purchase Price may be increased or
decreased by the Bank and the Mutual Holding Company. In the event that the
Aggregate Purchase Price of the Conversion Stock is below the minimum of the
Estimated Price Range, or materially above the maximum of the Estimated Price
Range, resolicitation of purchasers may be required, provided that up to a 15%
increase above the maximum of the Estimated Price Range will not be deemed
material so as to require a resolicitation and will not require the approval of
the Commissioner or any other bank regulatory agency. Any such resolicitation
shall be effected in such manner and within such time as the Mutual Holding
Company and the Bank shall establish, and with, if required, the approval of the
Commissioner and any other bank regulatory authority.
All Shares to be sold in the Conversion shall be sold at a uniform price
per share. The Independent Appraiser shall evaluate the pro forma market value
of the Conversion Stock, which value shall be included in the Prospectus (as
described in Section 8 of this Plan) filed with the Commissioner. The
Independent Appraiser shall also present at the close of the Subscription
Offering a valuation of the pro forma market value of the Conversion Stock. The
Aggregate Purchase Price of the Conversion Stock to be sold by the Holding
Company shall be adjusted to reflect any required changes in the pro forma
market value of the Bank and the Mutual Holding Company. If, as a result of
such adjustment, the Aggregate Purchase Price is more than 15% above the maximum
of the Estimated Price Range, the Mutual Holding Company and the Bank shall
obtain an amendment to the Commissioner's approval. If appropriate, the
Commissioner will condition his approval by requiring a resolicitation of
subscribers.
The price per share for each share of Conversion Stock when multiplied by
the number of shares of Conversion Stock shall be equivalent to the pro forma
market value of the Conversion Stock to be offered for sale in the Conversion in
accordance with the valuation furnished by the Independent Appraiser.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Mutual Holding Company, the Bank and the Commissioner that, to
the best knowledge of the Independent Appraiser, nothing of a material nature
has occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock at the Aggregate Purchase Price is incompatible with its estimate of the
aggregate consolidated pro forma market value of the Conversion Stock. If such
confirmation is not received, the Mutual Holding Company and the Bank may cancel
the Subscription and Direct Community Offerings and/or the Syndicated Community
Offering, extend the Conversion, establish a new Estimated Price Range, extend,
reopen
11
<PAGE>
or hold new Subscription and Direct Community Offerings and/or Syndicated
Community Offering or take such other action as the Commission may permit.
The Conversion Stock shall be fully paid and nonassessable.
5. SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS,
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, TAX-QUALIFIED EMPLOYEE STOCK BENEFIT
PLAN AND DIRECTORS, TRUSTEES, OFFICERS AND EMPLOYEES.
A. CATEGORY NO. 1: ELIGIBLE ACCOUNT HOLDERS
(a) Each Eligible Account Holder shall receive, as first priority and
without payment, non-transferable Subscription Rights to purchase shares of
Conversion Stock in the amount equal to the greater of: (1) $250,000 worth of
Conversion Stock offered in the Conversion, but which may be increased to 5% of
the Conversion Stock offered or decreased to 0.10% of the Conversion Stock
offered; (2) one-tenth of one percent (0.10%) of the total offering of
Conversion Stock; or (3) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of Conversion Stock to be
issued by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Eligible Account Holder, and the denominator is the total amount
of Qualifying Deposits of all Eligible Account Holders.
(b) In the event that subscriptions for Conversion Stock are received from
Eligible Account Holders upon exercise of subscription rights pursuant to
paragraph (a) in excess of the number of Shares offered for sale in the
Conversion, the Conversion Stock available for purchase will be allocated among
the subscribing Eligible Account Holders so as to permit each subscribing
Eligible Account Holder, to the extent possible, to purchase a number of Shares
sufficient to make his total allocation of Conversion Stock equal to the lesser
of 100 Shares or the number of Shares subscribed for by such Eligible Account
Holder. Any Shares remaining after such allocation will be allocated among the
subscribing Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion which the amount of each Eligible Account Holder's Qualifying
Deposit bears to the total amount of the Qualifying Deposits of all Eligible
Account Holders whose subscriptions remain unsatisfied. If the amount so
allocated exceeds the amount subscribed for by any one or more Eligible Account
Holders, the excess shall be reallocated on the same principle (one or more
times as necessary) among those Eligible Account Holders whose subscriptions are
still not fully satisfied until all available Shares have been allocated or all
subscriptions are satisfied.
(c) Non-transferable subscription rights held by Eligible Account Holders
who are also Directors, Trustees, Corporators or Officers of the Mutual Holding
Company or the Bank and their Associates, will be subordinated to those of other
Eligible Account Holders to the extent they are attributable to increased
deposits during the one-year period preceding the Eligibility Record Date.
12
<PAGE>
B. CATEGORY NO. 2: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS
(a) Each Supplemental Eligible Account Holder shall receive, as second
priority and without payment, nontransferable Subscription Rights to purchase
shares of Conversion Stock equal to the amount equal to the greater of: (1)
$250,000 worth of Conversion Stock offered in the Conversion, but which may be
increased to 5% of the Conversion Stock offered or decreased to 0.10% of the
Conversion Stock offered; (2) one-tenth of one percent (0.10%) of the total
offering of Conversion Stock; or (3) fifteen times the product (rounded down to
the next whole number) obtained by multiplying the total number of Conversion
Stock to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Supplemental Eligible Account Holder, and the
denominator is the total amount of Qualifying Deposits of all Supplemental
Eligible Account Holders.
(b) In the event that subscriptions for Conversion Stock are received from
Supplemental Eligible Account Holders upon exercise of subscription rights
pursuant to paragraph (a) in excess of the number of Shares offered for sale in
the Conversion, the Conversion Stock available for purchase will be allocated
among the subscribing Supplemental Eligible Account Holders so as to permit each
subscribing Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of Shares sufficient to make his total allocation of
Conversion Stock equal to the lesser of 100 Shares or the number of Shares
subscribed for by such Supplemental Eligible Account Holder. Any Shares
remaining after such allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion which the amount of each Supplemental Eligible Account Holder's
Qualified Deposit bears to the total of the Qualifying Deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied.
If the amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available Shares have been allocated or all subscriptions satisfied.
(c) Subscription rights received pursuant to Section 5B shall be
subordinated to all rights received by Eligible Account Holders to purchase
Conversion Stock.
(d) Subscription rights received by an Eligible Account Holder pursuant to
Section 5A shall be applied in partial satisfaction of the subscription rights
to be received as a Supplemental Eligible Account Holder pursuant to this
Section 5B.
C. CATEGORY NO. 3: TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN
The Tax-Qualified Employee Stock Benefit Plan shall receive, without
payment, as a third priority, after the satisfaction of the subscriptions of
Eligible Account Holders, non-transferable subscription rights to purchase up to
8% of the shares of Common Stock issued in the Conversion. If, after the
satisfaction of subscriptions of Eligible Account Holders and Supplemental
Eligible Account Holders, a sufficient number of shares are not available to
fill the subscriptions by such
13
<PAGE>
plan, the subscription by such plan shall be filled to the maximum extent
possible. If all the Conversion Stock offered for sale in the Conversion is
purchased by Eligible Account Holders and Supplemental Eligible Account Holders,
then the Tax-Qualified Employee Stock Benefit Plan may purchase shares in the
open market following consummation of the Conversion or directly from the
Holding Company through authorized but unissued shares with Commissioner
approval.
A Tax-Qualified Employee Stock Benefit Plan shall not be deemed to be an
Associate or Affiliate of, or a Person Acting in Concert with, any Director,
Trustee or Officer of the Mutual Holding Company, the Holding Company or the
Bank. Notwithstanding any provision contained herein to the contrary, the Bank
may make scheduled discretionary contributions to a Tax-Qualified Employee Stock
Benefit Plan; provided, that such contributions do not cause the Bank to fail to
meet its regulatory capital requirements.
D. CATEGORY NO. 4: DIRECTORS, TRUSTEES, OFFICERS AND EMPLOYEES
Directors, Trustees, Officers and employees of the Mutual Holding Company
and the Bank shall be entitled to purchase up to thirty percent (30%) of the
total offering of shares of stock, but only to the extent that shares are
available after satisfying the subscriptions of Eligible Account Holders,
Supplemental Eligible Account Holders and the Tax-Qualified Employee Stock
Benefit Plan. The shares shall be allocated among Directors, Trustees, Officers
and employees on an equitable basis such as by giving weight to the period of
service, compensation and position of the individual, subject to the five
percent (5%) limitation on the amount of shares which may be purchased by any
Person, together with any Associate or group of persons Acting in Concert.
However, Directors, Trustees and Officers of Mutual Holding Company and the Bank
shall not be deemed to be Associates or Persons Acting in Concert solely as a
result of their board membership, status or employment.
6. DIRECT COMMUNITY OFFERING, SYNDICATED COMMUNITY OFFERING AND PUBLIC
OFFERING.
Conversion Stock which remains unsubscribed after the exercise of
subscription rights in the Subscription Offering pursuant to Section 5 shall be
offered for sale to the general public through a Direct Community Offering, with
preference given to natural persons residing in the Bank's Local Community. The
Direct Community Offering, if any, may commence simultaneously with the
Subscription Offering, subject to the approval of the Commissioner, or may
commence during or after the commencement of the Subscription Offering, as the
Boards of Trustees of the Mutual Holding Company and the Boards of Directors of
the Bank and the Holding Company so determine. The right to subscribe for shares
of Conversion Stock in the Direct Community Offering is subject to the right of
the Mutual Holding Company, the Bank and Holding Company to accept or reject
such subscriptions in whole or in part. Conversion Stock being sold in the
Direct Community Offering will be offered and sold in a manner that will achieve
the widest distribution of the
14
<PAGE>
Conversion Stock. Purchases by Persons and their Associates in this phase of the
offering are limited to $250,000 of Conversion Stock subject to the maximum
purchase limitation specified in Section 7(a) and the minimum purchase
limitation specified in Section 7(b) and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of up to
15%; provided, however, that the amount permitted to be purchased in the Direct
Community Offering may be increased to 5% of the total offering of shares or
decreased to less than $250,000 without the further approval of the Corporators
or resolicitation of subscribers, unless required by the Commissioner and/or any
other banking or regulatory agency. If the maximum purchase limit is so
increased, orders accepted in the Direct Community Offering shall be filled up
to a maximum of 2% of the total offering and thereafter remaining shares shall
be allocated on an equal number of shares basis per order until all orders have
been filled.
If any Conversion Stock remains unsold after the close of the Subscription
and Direct Community Offerings, the Mutual Holding Company, the Holding Company
and the Bank may use the services of a syndicate of registered broker-dealers to
sell such unsold shares on a best efforts basis in a Syndicated Community
Offering. The syndicate of registered broker-dealers may be managed by one of
the syndicate members who will act as agent of the Mutual Holding Company, the
Holding Company and the Bank to assist the Mutual Holding Company, the Holding
Company and the Bank in the sale of the Conversion Stock. Neither the syndicate
manager nor any other syndicate member shall have any obligation to take or
purchase any of the shares of Conversion Stock in the Syndicated Community
Offering. Purchases by Persons and their Associates in this phase of the
offering are limited to $250,000 of Conversion Stock subject to the maximum
purchase limitation specified in Section 7(a) and the minimum purchase
limitation specified in Section 7(b) and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of up to
15%; provided, however, that the amount permitted to be purchased in the
Syndicated Community Offering may be increased to 5% of the total offering of
shares or decreased to less than $250,000 without the further approval of the
Corporators or resolicitation of subscribers, unless required by the
Commissioner and/or any other banking or regulatory agency. If the maximum
purchase limit is so increased, orders accepted in the Syndicated Community
Offering shall be filled up to a maximum of 2% of the total offering and
thereafter remaining shares shall be allocated on an equal number of shares
basis per order until all orders have been filled.
Any shares of Conversion Stock not sold in the Subscription Offering, the
Direct Community Offering or the Syndicated Community Offering may be offered
for sale through an underwritten firm commitment public offering. Any such
public offering shall be conducted in accordance with applicable law and
regulations.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Conversion Stock not sold in the
Subscription and Direct Community Offerings can not be effected, or in the event
that any insignificant residue of shares of Conversion Stock is not sold in the
Subscription and Direct Community Offerings or in the Syndicated Community
Offering or an underwritten firm commitment public offering, other purchase
arrangements will be made for the sale of unsubscribed shares, if possible.
Such other purchase arrangements will be subject to the approval of the
Commissioner.
15
<PAGE>
7. LIMITATIONS ON PURCHASES.
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Section 5, the following limitations shall apply
to all purchases of shares of Conversion Stock:
(a) The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the Conversion by any Person,
together with any Associate or group of Persons Acting in Concert, shall not
exceed 1% of the Conversion Stock offered (the "Maximum Overall Purchase
Limitation"), except for the Tax-Qualified Employee Stock Benefit Plan which may
subscribe for up to 8% of the Common Stock issued in the Conversion. The
Maximum Overall Purchase Limitation may be increased consistent with the
Conversion Regulations in the sole discretion of the Holding Company, the Mutual
Holding Company and the Bank subject to any required regulatory approval.
(b) A minimum of 25 Shares must be purchased by each person purchasing
Conversion Stock to the extent Shares are available, provided, however, that
such minimum number of Shares will be reduced if the price per Share times such
minimum number of Shares exceeds $500.
(c) The maximum number of Shares which may be purchased, in their
individual capacity, in the Conversion by Directors, Trustees, Corporators,
Officers, employees and their Associates, of the Mutual Holding Company, the
Bank and the Holding Company, in the aggregate shall not exceed thirty percent
(30%) of the total number of Shares. Each Director, Trustee, Corporator,
Officer and employee will be subject to the same purchase limitations as other
Eligible Account Holders and Supplemental Eligible Account Holders.
(d) For purposes of this Section 7, the Directors, Trustees, Corporators,
Officers and employees of the Mutual Holding Company, the Bank and the Holding
Company shall not be deemed to be Associates or a group affiliated with each
other or otherwise Acting in Concert solely as a result of their being
Directors, Trustees, Corporators, Officers and employees of the Mutual Holding
Company, the Bank or the Holding Company.
(e) Depending upon market or financial conditions, the Board of Trustees of
the Mutual Holding Company and the Boards of Directors of the Bank and the
Holding Company, with the approval of the Commissioner and, if required, any
other applicable bank regulatory authority, and without further approval of the
Corporators, unless such further approval is required by the Commissioner and/or
any other applicable bank regulatory authority, may increase or decrease the
purchase limitations in this Plan, provided that the maximum purchase
limitations may not be increased in the Conversion to a percentage in excess of
5% of the Conversion Stock offered for sale. Notwithstanding the foregoing, the
Maximum Overall Purchase Limitation may be increased up to 9.99% provided that
orders for Conversion Stock exceeding 5% of the shares being offered shall not
exceed, in the aggregate, 10% of the total offering. If the Bank, the Mutual
Holding Company or the Holding Company, as the case may be, increases the
maximum purchase limitations, the Bank, the Mutual Holding Company or the
Holding Company, as the case may be, is only required to
16
<PAGE>
resolicit Persons who subscribed for the maximum purchase amount and may, in the
sole discretion of the Bank, the Mutual Holding Company or the Holding Company,
as the case may be, resolicit certain other large subscribers. Requests to
purchase additional shares of the Conversion Stock in the event that the
purchase limitation is so increased will be granted by the Boards of Trustees of
the Mutual Holding Company and the Boards of Directors of the Bank and the
Holding Company in their sole discretion.
If the number of shares of Conversion Stock otherwise allocable pursuant to
Sections 5 and 6, to any Person or that Person's Associates would be in excess
of the maximum number of shares permitted as set forth above, the number of
shares of Conversion Stock allocated to each such Person shall be reduced to the
lowest limitation applicable to that Person, and then the number of shares
allocated to each group consisting of a Person and that Person's Associates
shall be reduced so that the aggregate allocation to that Person and his or her
Associates complies with the above maximums, and such maximum number of shares
shall be reallocated among that Person and his or her Associates as they may
agree, or in the absence of an aggregate, in proportion to the shares subscribed
by each (after first applying the maximums applicable to each Person,
separately).
Each Person purchasing Conversion Stock shall be deemed to confirm that
such purchase does not conflict with the above purchase limitations contained in
this Plan.
8. MANNER OF EXERCISING SUBSCRIPTION RIGHTS; ORDER FORMS.
(a) Promptly after the Commissioner has declared the Prospectus referred to
in paragraph (b) of this Section 8 effective, Order Forms approved by the
Commissioner for the exercise of the subscription rights provided for in this
Plan will be sent to all Eligible Account Holders, Supplemental Eligible Account
Holders, the Tax-Qualified Employee Benefit Plans and Directors, Trustees,
Officers and employees of the Mutual Holding Company and the Bank at their last
known address appearing in the records of the Mutual Holding Company and the
Bank.
17
<PAGE>
(b) Each Order Form will be preceded or accompanied by a Prospectus
which must be approved by the Commissioner. Such Prospectus shall describe the
Mutual Holding Company, the Bank, the Holding Company and the Conversion Stock
being offered and will contain all the information required by the Commissioner
and all applicable laws and regulations as necessary to enable the recipients of
the Order Forms to make informed investment decisions regarding the purchase of
Conversion Stock.
(c) The Order Forms will contain or will be accompanied by, among other
things, the following:
(i) An explanation of the rights and privileges granted under this Plan
to each class of persons granted subscription rights pursuant to Section 5 of
this Plan with respect to the purchase of Conversion Stock including the maximum
and minimum number of Shares that may be purchased;
(ii) A specified time by which Order Forms must be received by the Bank
for purposes of exercising the subscription rights of Eligible Account Holders,
Supplemental Eligible Account Holders, Tax-Qualified Employee Stock Benefit
Plans, Directors, Trustees, Officers and employees of the Mutual Holding Company
and the Bank under this Plan, as provided in Section 10 of this Plan;
(iii) A statement that the Aggregate Purchase Price at which the
Conversion Stock will ultimately be purchased in the Conversion has not been
determined as of the date of mailing of the Order Form, but that such price will
be within the range of prices which will be stated in the Order Form;
(iv) The amount which must be returned with the Order Form to subscribe
for Conversion Stock. Such amount will be equal to the Purchase Price multiplied
by the number of Shares subscribed for in accordance with the terms of this
Plan;
(v) Instructions concerning how to indicate on such Order Form the
extent to which the recipient elects to exercise subscription rights under this
Plan, the name or names in which the Shares subscribed for are to be registered,
the address to which certificates representing such Shares are to be sent and
the alternative methods of payment for Conversion Stock which will be permitted;
(vi) Specifically designated blank spaces for indicating the number of
Shares of Conversion Stock which each person wishes to purchase and for dating
and signing the Order Form;
(vii) An acknowledgment that the recipient of the Order Form has received,
prior to signing the Order Form, the Prospectus referred to in paragraph (b) of
this Section 8;
(viii) A statement that the subscription rights provided for in this Plan
are non-transferable, will be void after the specified time referred to in
paragraph (c)(ii) above and can be exercised only by delivery of the Order Form,
properly completed and executed, to the Bank, together with the full
18
<PAGE>
required payment (in the manner specified in Section 9 of this Plan) for the
number of Shares subscribed for prior to such specified time;
(ix) A certification to be executed by the recipient of the Order Form to
the effect that, as to any Shares which the recipient elects to purchase, such
recipient is purchasing such Shares for his own account only and has no present
agreement or understanding regarding any subsequent sale or transfer of such
Shares;
(x) A statement to the effect that the executed Order Form, once received
by the Bank, may not be modified or amended by the subscriber without the
consent of the Bank; and
(xi) An explanation of the manner of required payment and a statement that
payment may be made by withdrawal from a certificate of deposit without penalty.
Notwithstanding the above, the Bank and the Holding Company reserve the
right in their sole discretion to accept or reject orders received on
photocopied or facsimilied Order Forms.
9. PAYMENT FOR CONVERSION STOCK.
(a) Full payment for all Shares subscribed for must be received by the
Bank, together with properly completed and executed Order Forms therefor, prior
to the expiration time, which will be specified on the Order Forms, unless such
date is extended by the Mutual Holding Company and the Bank; provided, however,
that if the Tax-Qualified Employee Stock Benefit Plan subscribes for Conversion
Stock during the Subscription Offering, such plan will not be required to pay
for shares at the time they subscribe but may pay for such Shares of Conversion
Stock subscribed for by such plan at the Actual Purchase Price upon consummation
of the Conversion, provided that there is in force from time of its subscription
until the consummation of the Conversion, a loan commitment to lend to the Tax-
Qualified Employee Stock Benefit Plan, at such time, the aggregated purchase
price of the Shares for which it subscribed.
(b) If it is determined that the Aggregate Purchase Price should be
greater than the amount stated in the Order Forms, upon compliance with such
requirements as may be imposed by the Commissioner (which may include
resolicitation of votes for approval of the Plan by Corporators) each Person who
subscribed for Shares will be permitted to withdraw their subscription and have
their payment for Shares returned to them in whole or in part, with interest, or
to make payment to the Bank of the additional amount necessary to pay for the
Shares subscribed for by him at the Purchase Price in the manner and within the
time prescribed by the Mutual Holding Company and the Bank.
(c) If the Aggregate Purchase Price is outside the range of prices
established by the Independent Appraiser referred to in Section 4 of this Plan
and set forth in the Prospectus referred to in Section 8 of this Plan, the
Mutual Holding Company and the Bank will apply for an amendment to the
Commissioner's approval of this Plan and comply with such requirements as the
Commissioner may then establish.
19
<PAGE>
(d) Payment for Shares ordered for purchase by Eligible Account Holders
and Supplemental Eligible Account Holders will be permitted to be made in any of
the following manners:
(i) In cash, if delivered in person;
(ii) By check, bank draft or money order, provided that checks will only
be accepted subject to collection; and
(iii) By appropriate authorization of withdrawal from the subscriber's
deposit account at the Bank. The Order Forms will contain appropriate means by
which authorization of such withdrawals may be made. For purposes of determining
the withdrawable balance of such accounts, such withdrawals will be deemed to
have been made upon receipt of appropriate authorization therefor, but interest
at the rates applicable to the accounts from which the withdrawals have been
deemed to have been made will be paid by the Bank on the amounts deemed to have
been withdrawn until the date on which the Conversion is consummated, at which
date the authorized withdrawal will actually be made. Interest will be paid by
the Bank on payments for Conversion Stock received in the Subscription Offering
in cash or by check, bank draft, money order or negotiable order of withdrawal,
at not less than the rate per annum being paid by the Bank on its passbook
accounts at the time the Subscription Offering commences, from the date payment
is received until consummation or termination of the Conversion. The Bank shall
be entitled to invest all amounts paid for subscriptions in the Subscription
Offering for its own account until completion or termination of the Conversion.
(e) Wire transfers as payment for Shares ordered for purchase will not be
permitted or accepted as proper payment.
(f) Orders for Conversion Stock submitted by subscribers which aggregate
$50,000 or more must be paid by official bank or certified check, a check issued
by a NASD-registered Broker-Dealer or by withdrawal authorization from a deposit
account of the Bank.
(g) Payments for the purchase of Conversion Stock in the Subscription
Offering will be permitted through authorization of withdrawals from certificate
accounts at the Bank without early withdrawal penalties. If the remaining
balances of the certificate accounts after such withdrawals are less than the
minimum qualifying balances under applicable regulations, the certificates
evidencing the accounts will be canceled upon consummation of the Conversion,
and the remaining balances will thereafter earn interest at the rate provided
for in the certificates in the event of cancellation.
(h) Notwithstanding the foregoing, the Bank and the Mutual Holding
Company shall have the right, in their sole discretion, to permit institutional
investors to submit contractually irrevocable orders in the Direct Community
Offering and to thereafter submit payment for the Conversion Stock for which
they are subscribing in the Direct Community Offering at any time prior
20
<PAGE>
to 48 hours before the completion of the Conversion, unless such 48 hour period
is waived by the Bank and the Mutual Holding Company, in their sole discretion.
10. EXPIRATION OF SUBSCRIPTION RIGHTS; UNDELIVERED, DEFECTIVE OR LATE ORDER
FORMS; INSUFFICIENT PAYMENT.
(a) All subscription rights provided for in this Plan, including, without
limitation the subscription rights of all Persons whose Order Forms are returned
by the United States Post Office as undeliverable, will expire on a specified
date as described in the Prospectus which shall be not less than twenty (20)
days nor more than forty-five (45) days following the date on which Order Forms
are first mailed to Eligible Account Holders, provided that the Mutual Holding
Company and the Bank shall have the power to extend such expiration time subject
to the approval of the Commissioner.
(b) In those cases in which the Bank is unable to locate particular
persons granted subscription rights under this Plan, and cases in which Order
Forms: (1) are returned as undeliverable by the United States Post Office; (2)
are not received back by the Bank or are received by the Bank after the
expiration date specified thereon; (3) are defectively filled out or executed;
or (4) are not accompanied by the full required payment for the Conversion Stock
subscribed for (including cases in which Deposit Accounts from which withdrawals
are authorized are insufficient to cover the amount of the required payment),
the subscription rights of the person to whom such subscription rights have been
granted will lapse as though such person failed to return the completed Order
Form within the time period specified thereon.
(c) The Mutual Holding Company and the Bank may, but will not be obligated
to, waive any irregularity on any Order Form or require the submission of
corrected Order Forms or the remittance of full payment for Shares subscribed
for by such date as it may specify, and all interpretations by the Mutual
Holding Company and the Bank of terms and conditions of this Plan and of the
Order Forms will be final.
11. PERSONS IN NONQUALIFIED STATES OR IN FOREIGN COUNTRIES.
Subject to the following sentence, the Holding Company will make reasonable
efforts to comply with the securities laws of all states of the United States in
which Eligible Account Holders and Supplemental Eligible Account Holders
entitled to subscribe for Conversion Stock pursuant to this Plan reside.
However, no such Person will be offered any subscription rights or sold any
Conversion Stock under this Plan who resides in a foreign country or who resides
in a state of the United States with respect to which both of the following
apply: (a) less than 100 persons eligible to subscribe for Shares under the Plan
reside in such state, and (b) the granting of subscription rights or the offer
or sale of Common Stock to such persons would require the Holding Company or its
employees under the securities laws of such state to register as a broker,
dealer or agent or to register or otherwise qualify the Common Stock for sale in
such state and such registration or qualification would be impracticable for
reasons of cost or otherwise. No payments will be made in lieu of the granting
of subscription rights to such persons.
21
<PAGE>
12. VOTING RIGHTS AFTER CONVERSION.
Following Conversion, voting rights with respect to the Bank will be held
and exercised exclusively by the holders of the stock of the Bank; the Holding
Company shall own all of the issued and outstanding stock of the Bank.
13. ESTABLISHMENT OF A LIQUIDATION ACCOUNT.
(a) The Bank will, at the time of Conversion, establish a "Liquidation
Account" in an amount equal to the net worth of the Bank set forth in its latest
statement of financial condition contained in its final Prospectus. The function
of the Liquidation Account is to establish a priority on liquidation and, except
as provided for in this Section 13, shall not operate to restrict the use or
application of any of the net worth accounts of the Bank.
(b) The Liquidation Account shall be maintained by the Bank for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
who continue to maintain deposit accounts at the Bank. Each Eligible Account
Holder and Supplemental Eligible Account Holder will have a separate inchoate
interest in the Liquidation Account in relation to each deposit account making
up a Qualifying Deposit. Such inchoate interests are referred to herein as
"Subaccount Balances." For deposit accounts in existence on the Eligibility
Record Date and the Supplemental Eligibility Record Date, separate Subaccount
Balances shall be determined on the basis of the Qualifying Deposits in such
deposit accounts on each such date.
(c) Each initial Subaccount Balance in the Liquidation Account held by an
Eligible Account Holder and/or Supplemental Eligible Account Holder shall be an
amount determined by multiplying the amount in the Liquidation Account by a
fraction the numerator of which is the amount of Qualifying Deposits in such
deposit account on the Eligibility Record Date and/or Supplemental Eligibility
Record Date and the denominator of which is the total amount of all Qualifying
Deposits of Eligible Account Holders and Supplemental Account Holders on the
corresponding record date. For deposit accounts in existence at both dates,
separate Subaccounts shall be determined on the basis of the Qualifying Deposits
in such deposit accounts on such record dates.
(d) Each initial Subaccount Balance in the Liquidation Account shall never
be increased, but will be subject to downward adjustment as follows. If the
balance in the deposit account to which a Subaccount Balance relates, at the
close of business on any annual fiscal year closing date of the Bank subsequent
to the corresponding record date, is less than either (a) the lesser of the
deposit balance in such account at the close of business on any other annual
fiscal year closing date subsequent to the Eligibility Record Date or
Supplemental Eligibility Record Date, or (b) the amount of the Qualifying
Deposit as of the Eligibility Record Date or Supplemental Eligible Record Date,
then the Subaccount Balance for such deposit account shall be adjusted by
reducing such Subaccount Balance in an amount proportionate to the reduction in
such account balance. In the event of such downward adjustment, the Subaccount
Balance shall not be subsequently increased, notwithstanding
22
<PAGE>
any increase in the deposit balance of the related deposit account. If any
account is closed, its related Subaccount Balance shall be reduced to zero upon
such closing.
(e) In event of a complete liquidation of the converted Bank (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall receive from the Liquidation Account a liquidation distribution in
the amount of the then current adjusted Subaccount Balances for deposit accounts
then held, before any liquidation distribution may be made to any holders of the
conversion stock of the converted Bank. No merger, consolidation, purchase of
bulk assets with assumption of deposit accounts and other liabilities, or
similar transactions, in deposit accounts and other liabilities, which the
converted Bank is not the surviving institution, will be deemed to be a complete
liquidation for this purpose, and, in any such transaction, the Liquidation
Account shall be assumed by the surviving institution.
14. TRANSFER OF DEPOSIT ACCOUNT.
Each deposit account in the Bank at the time of the Conversion will
constitute, without payment or further action by the account holder, a
withdrawable deposit account in the Bank after the Conversion equivalent in
withdrawable amount to the withdrawable value, and subject to the same terms and
conditions (except as to voting and liquidation rights) as such deposit account
in the Bank at the time of the Conversion.
15. RESTRICTION ON TRANSFER OF CONVERSION STOCK OF OFFICERS, DIRECTORS,
TRUSTEES AND CORPORATORS.
(a) All Conversion Stock purchased by Officers, Directors, Trustees and
Corporators and their Associates of the Mutual Holding Company, the Holding
Company and the Bank either directly from the Holding Company (by subscription
or otherwise) or from an underwriter of such Shares will be subject to the
restriction that no such Shares shall be sold for a period of one year following
the date of purchase of such Shares, except in the event of death or substantial
disability (as determined by the Commissioner) or upon the written approval of
the Commissioner.
(b) With respect to all Conversion Stock subject to restriction on
subsequent disposition pursuant to the above paragraph, each of the following
provisions shall apply:
(i) Each certificate representing such Shares shall bear the following
legend prominently stamped on its face giving notice of such restriction on
transfer;
The shares represented by this certificate may not be sold by the
registered holder hereof for a period of not less than one year from the date of
issuance hereof, except in the event of the death of the registered holder or
substantial disability (as determined by the Commissioner) of the Officer,
Director, Trustee, or Corporator to whom such Shares were initially sold under
the terms of this Plan or upon the written approval of the Commissioner.
23
<PAGE>
(ii) Instructions will be given to the transfer agent for the Holding
Company, not to recognize or effect any transfer of any certificates
representing such Shares, or any change of record ownership thereof in violation
of such restriction on transfer; and
(iii) Any stock of the Holding Company issued in respect of a stock
dividend, stock split or otherwise in respect of ownership of outstanding Shares
subject to restrictions on transfer hereunder will be subject to the same
restrictions as are applicable to such Conversion Stock.
16. RESTRICTION ON STOCK PURCHASES BY OFFICERS, DIRECTORS, TRUSTEES AND
CORPORATORS.
For a three-year period following the Conversion, no purchases may be made
by Officers, Directors, Trustees and Corporators and their Associates of the
Mutual Holding Company, the Holding Company and the Bank without the prior
approval of the Commission, except through a broker-dealer registered with the
SEC. This restriction does not apply, however, to (a) negotiated transactions
involving more than one percent (1%) of the outstanding Common Stock or (b) the
purchase of Common Stock pursuant to a tax-qualified or non-tax-qualified
employee stock benefit plan even if the stock attributable to individual
Officers, Directors, Trustees and Corporators of the Mutual Holding Company, the
Holding Company or of the Bank.
17. AMENDMENT AND TERMINATION OF THE PLAN.
This Plan may be substantively amended by the Board of Trustees of the
Mutual Holding Company and the Board of Directors of the Bank in their sole
discretion as a result of comments from regulatory authorities or otherwise at
any time prior to approval of the Plan by the Commissioner, and at any time
thereafter with the concurrence of the Commissioner and, if required, any other
applicable bank regulatory authority. Any amendments made subsequent to the
approval of the Corporators may be made without their further approval unless
required by the Commissioner and/or any other applicable bank regulatory
authority. This Plan may be terminated by the Board of Trustees of the Mutual
Holding Company and the Board of Directors of the Bank at any time prior to the
approval of the Plan by the Commissioner and any time thereafter with the
concurrence of the Commissioner.
By adoption of this Plan, the Corporators authorize the Boards of Trustees
of the Mutual Holding Company and the Board of Directors of the Bank to amend or
terminate the Plan under the circumstances set forth in this Section.
18. TIME PERIOD FOR COMPLETION OF CONVERSION.
The Conversion shall be completed within 24 months from the date this Plan
is approved by the Boards of Trustees of the Mutual Holding Company and the
Board of Directors of the Bank.
24
<PAGE>
19. EXPENSES OF CONVERSION.
The expenses incurred in connection with the Conversion shall be
reasonable.
20. REGISTRATION UNDER SECURITIES EXCHANGE ACT OF 1934.
The Holding Company shall register its Common Stock under the Massachusetts
General Laws and the Securities Exchange Act of 1934, as amended, concurrently
with or promptly following the Conversion, provided that either or both such
registrations are required under applicable law. The Holding Company will not
deregister such securities for a period of at least three years.
21. MARKET FOR CONVERSION STOCK.
The Bank and Holding Company shall use their best efforts to (i) encourage
and assist a market maker to establish and maintain a market for the Common
Stock, and (ii) list or quote the Shares on a national or regional securities
exchange or on the Nasdaq quotation system.
22. CONVERSION STOCK NOT INSURED.
The Conversion Stock will not be covered by deposit insurance.
23. NO LOANS TO PURCHASE STOCK.
The Mutual Holding Company and the Bank shall not loan funds or otherwise
extend credit to any Person to purchase Conversion Stock in connection with the
Conversion. The Holding Company will not offer or sell Conversion Stock to any
Person whose purchase would be financed by funds loaned, directly or indirectly,
to the Person by the Mutual Holding Company or the Bank.
24. RESTRICTIONS ON ACQUISITION.
Current Massachusetts regulations provide that for a period of three years
following completion of the Conversion, no Person, or group of Persons Acting In
Concert, shall directly, or indirectly, offer to acquire or actually acquire the
beneficial ownership of more than ten percent (10%) of any class of equity
security of the Holding Company without prior written notice to the Holding
Company and the prior approval of the Commissioner. However, approval is not
required for purchases directly from the Holding Company or the underwriters or
selling group acting on its behalf with a view towards public resale, or for
purchases not exceeding one percent (1%) per annum of the shares outstanding, or
for the acquisition of securities by one or more Tax-Qualified Employee Stock
Benefit Plan of the Bank, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than twenty-five (25%) of any class of equity
security of the Holding Company. Civil penalties may be imposed by the
Commissioner for willful violation or assistance of any violation. Where any
person directly or indirectly, acquires beneficial ownership of more than ten
percent (10%) of any class of equity security of the Holding Company within such
25
<PAGE>
three-year period without the prior approval of the Commissioner, stock of the
Holding Company beneficially owned by such person in excess of ten percent (10%)
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matter submitted to
the stockholders for a vote.
25. STOCK ARTICLES OF ORGANIZATION AND BYLAWS.
As part of the Conversion, Amended and Restated Stock Articles of
Organization and Bylaws in the forms attached to this Plan will be adopted by
the Bank. By approving the Plan, the Corporators will thereby approve the
Amended and Restated Stock Articles of Organization and Bylaws of the Bank.
Prior to completion of the Conversion, the proposed Amended and Restated Stock
Articles of Organization and Bylaws of the Bank may be amended in accordance
with the provisions and limitations for amending the Plan under Section 17
herein. The effective date of the adoption of the Amended and Restated Stock
Articles of Organization and Bylaws of the Bank shall be the date of filing of
the Amended and Restated Stock Articles of Organization and such other documents
as required by the Conversion Regulations with the Secretary of State of the
Commonwealth of Massachusetts, including any required certificate of authority
as issued by the Commissioner, which shall be the date of consummation of the
Conversion.
26. CONDITIONS TO CONVERSION.
The Conversion pursuant to this Plan is expressly conditioned upon the
following:
(a) Prior receipt by the Mutual Holding Company or the Bank of either
rulings of the Internal Revenue Service and the Massachusetts taxing
authorities, or opinions of counsel or independent auditors, substantially to
the effect that the Conversion will not result in any adverse federal or state
tax consequences to Eligible Account Holders or to the Bank and the Holding
Company before or after the Conversion;
(b) The sale of all of the Conversion Stock offered in the Conversion
pursuant to this Plan; and
(c) The completion of the Conversion within the time period specified in
Section 3 of this Plan.
27. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Trustees of the Mutual
Holding Company and the Board of Directors of the Bank shall be final, subject
to the authority of the Commissioner and any other applicable bank regulatory
authority.
26
<PAGE>
ANNEX A
PLAN OF MERGER
Plan of Merger, dated as of _______________ between Berkshire Bancorp (the
"Mutual Holding Company"), a Massachusetts-chartered mutual holding company, and
Berkshire Bank (the "Bank" or the "Surviving Corporation"), a Massachusetts-
chartered savings bank.
WITNESSETH:
WHEREAS, the Mutual Holding Company and the Bank have adopted a Plan of
Conversion (the "Plan" or "Plan of Conversion") for the Mutual Holding Company
and the Bank pursuant to which the Bank organized Berkshire Hills Bancorp, Inc.
(the "Company"), and upon consummation of the following transactions, or in any
other manner consistent with the Plan and applicable regulations, will become a
wholly owned subsidiary of the Company: (1) the Mutual Holding Company, which
currently owns 100% of the outstanding shares of common stock of the Bank, will
merge into the Bank, with the Bank being the surviving entity; (2) the
outstanding shares of Bank common stock will be canceled; (3) the offer and sale
of shares of the Company's common stock; and (4) the issuance to the Company of
the newly authorized shares of the Bank's common stock in exchange for up to
fifty percent (50%) of the proceeds received from the sale of the Company's
common stock; and
WHEREAS, the Mutual Holding Company, which owns one hundred percent (100%)
of the outstanding common stock of the Bank, One Dollar ($1.00) par value per
share ("Bank Common Stock"), will merge with and into the Bank pursuant to this
Plan of Merger (the "Mutual Holding Company Merger"), pursuant to which, among
other things, all interests of the corporators in the Mutual Holding Company and
all shares of Bank Common Stock held by the Mutual Holding Company will be
canceled; and
WHEREAS, the Mutual Holding Company and the Bank (the "Constituent
Corporations") desire to provide for the terms and conditions of the Mutual
Holding Company Merger.
NOW, THEREFORE, the Mutual Holding Company and the Bank hereby agree as
follows:
1. Effective Date. The Mutual Holding Company Merger shall become
effective on the date specified in the articles of merger filed with the
Massachusetts Secretary of the Commonwealth (the "Effective Date").
<PAGE>
2. The Mutual Holding Company Merger and Effect Thereof. Subject to the
terms and conditions set forth herein and the prior approval of the
Massachusetts Division of Banks and any other required bank or regulatory
authority, as defined in the Plan of Conversion, and the expiration of all
applicable waiting periods, the Mutual Holding Company shall merge with and
into the Bank, which shall be the Surviving Corporation. Upon consummation of
the Mutual Holding Company Merger, the Surviving Corporation shall be considered
the same business and corporate entity as each of the Constituent Corporations
and thereupon and thereafter all the property, rights, powers and franchises of
each of the Constituent Corporations shall vest in the Surviving Corporation and
the Surviving Corporation shall be subject to and be deemed to have assumed all
of the debts, liabilities, obligations and duties of each of the Constituent
Corporations and shall have succeeded to all of each of their relationships,
fiduciary or otherwise, as fully and to the same extent as if such property,
rights, privileges, powers, franchises, debts, obligations, duties and
relationships had been originally acquired, incurred or entered into by the
Surviving Corporation. In addition, any reference to either of the Constituent
Corporations in any contract, will or document, whether executed or taking
effect before or after the Effective Date, shall be considered a reference to
the Surviving Corporation if not inconsistent with the other provisions of the
contract, will or document; and any pending action or other judicial proceeding
to which either of the Constituent Corporations is a party shall not be deemed
to have abated or to have been discontinued by reason of the Mutual Holding
Company Merger, but may be prosecuted to final judgment, order or decree in the
same manner as if the Mutual Holding Company Merger had not occurred or the
Surviving Corporation may be substituted as a party to such action or
proceeding, and any judgment, order or decree may be rendered for or against it
that might have been rendered for or against either of the Constituent
Corporations if the Mutual Holding Company Merger had not occurred.
3. Cancellation of Bank Common Stock held by the Mutual Holding Company
and Member Interests; Liquidation Account. On the Effective Date: (i) each
share of Bank Common Stock issued and outstanding immediately prior to the
Effective Date and held by the Mutual Holding Company shall, by virtue of the
Mutual Holding Company Merger and without any action on the part of the holder
thereof, be canceled; (ii) the interests in the Mutual Holding Company of any
person, firm or entity who or which qualified as a corporator of the Mutual
Holding Company in accordance with its Amended and Restated Articles of
Organization and Bylaws and the laws of Massachusetts prior to the Mutual
Holding Company's conversion from mutual to stock form (the "Corporators")
shall, by virtue of the Mutual Holding Company Merger and without any action on
the part of the holder thereof, be canceled; and (iii) the Bank shall establish
a liquidation account on behalf of each eligible and supplemental account holder
of the Bank, as defined in the Plan of Conversion, in accordance with Section 13
of the Plan of Conversion.
2
<PAGE>
4. Dissenting Shares. No Corporator of the Mutual Holding Company and,
subject to the laws of the Commonwealth of Massachusetts, no holder of shares of
Bank Common Stock shall have any dissenter or appraisal rights in connection
with the Mutual Holding Company Merger.
5. Name of Surviving Corporation. The name of the Surviving Corporation
shall be "Berkshire Bank."
6. Directors of the Surviving Corporation. Upon and after the Effective
Date, until changed in accordance with the Amended and Restated Articles of
Organization and Bylaws of the Surviving Corporation and applicable law, the
directors of the Surviving Corporation shall be the directors of the Bank
immediately prior to the Effective Date. Each such director shall serve the
remainder of his existing term and until a successor is elected and qualified.
The address of each such director is c/o 24 North Street, Pittsfield,
Massachusetts 01201.
7. Officers of the Surviving Corporation. Upon and after the Effective
Date, until changed in accordance with the Amended and Restated Articles of
Organization and Bylaws of the Surviving Corporation and applicable law, the
officers of the Bank immediately prior to the Effective Date shall be the
officers of the Surviving Corporation.
8. Offices. Upon the Effective Date, all offices of the Bank shall be
offices of the Surviving Corporation. As of the Effective Date, the home office
of the Surviving Corporation shall remain at 24 North Street, Pittsfield,
Massachusetts and the location of the other deposit-taking offices of the
Surviving Corporation shall remain at the location they existed immediately
prior to the Effective Date, except for the addition of deposit-taking offices
authorized or the deletion of deposit-taking offices closed subsequent to the
date hereof and the Effective Date.
9. Articles of Organization and Bylaws. On and after the Effective Date,
the Articles of Organization of the Bank as in effect immediately prior to the
Effective Date shall be replaced with the Amended and Restated Articles of
Organization of the Surviving Corporation.
On and after the Effective Date, the Bylaws of the Bank as in effect
immediately prior to the Effective Date shall be the Bylaws of the Surviving
Corporation until amended in accordance with the terms thereof and applicable
law.
10. Stockholder and Corporator Approvals. The affirmative votes of the
holders of the Bank Common Stock set forth in Section 3 of the Plan of
Conversion and the Corporators set forth in Section 3 of the Plan of Conversion
shall be required to approve the Plan of Conversion, of which this Plan of
Merger is a part, on behalf of the Bank and the Mutual Holding Company,
respectively.
11. Abandonment of Plan. This Plan of Merger may be abandoned by either
the Mutual Holding Company or the Bank at any time before the Effective Date in
the manner set forth in Section 17 of the Plan of Conversion.
3
<PAGE>
12. Amendments. This Plan of Merger may be amended in the manner set
forth in Section 17 of the Plan of Conversion by a subsequent writing signed by
the parties hereto upon the approval of the Board of Trustees of the Mutual
Holding Company and the Board of Directors of the Bank.
13. Successors. This Agreement shall be binding on the successors of the
Mutual Holding Company and the Bank.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the Mutual Holding Company and the Bank have caused
this Plan of Merger to be executed by their duly authorized officers as of the
day and year first above written.
BERKSHIRE BANCORP
Attest:
____________________________ By: _____________________________
John A. Davidson James A. Cunningham, Jr.
Clerk President
BERKSHIRE BANK
Attest:
____________________________ By: _____________________________
John Kittredge James A. Cunningham, Jr.
Clerk President and Chief Executive
Officer
4
<PAGE>
EXHIBIT I
AMENDED AND RESTATED
ARTICLES OF ORGANIZATION
OF BERKSHIRE BANK
WHEREAS, a Charter was granted in the year 1846 to incorporate Berkshire
County Savings Bank (hereinafter, the "Original Bank") as a Massachusetts
savings bank; and
WHEREAS, the Original Bank, in accordance with chapter 167H of the
Massachusetts General Laws and all other applicable law, voted to reorganize
into a mutual holding company by establishing a subsidiary banking institution
as a stock savings bank (hereinafter referred to as the "Bank"), and
transferring to the Bank all or the substantial part of its assets and
liabilities, including all of its deposit liabilities; and
WHEREAS, the Original Bank, in accordance with said Chapter 167H, voted
to establish the Bank as a stock form savings bank organized under Massachusetts
law; and
WHEREAS, the mutual holding company of the Bank voted to convert to stock
form in accordance with Chapter 167H;
NOW, THEREFORE, the Amended and Restated Articles of Organization
("Charter") of the Bank shall read as follows:
ARTICLE 1. Corporate Title. The full corporate title of the Bank is
---------------
"Berkshire Bank" and may be changed from time to time by the stockholders of
the Bank.
ARTICLE 2. Office. The main office of the Bank is located at The
------
PopCorner, Pittsfield, Massachusetts 01201 and may be changed from time to time
by the Board of Directors of the Bank, subject to applicable law.
ARTICLE 3. Powers. The Bank is a stock-form savings bank organized under
------
Massachusetts law and shall have and may exercise all the powers, privileges and
authority, express, implied and incidental, available to it under Chapters 167H
and 168 (including without limitation those sections of Chapter 172 listed in
Section 34C of Chapter 168) of the Massachusetts General Laws or other
applicable state and federal laws, and by all acts amendatory thereof and
supplemental thereto.
ARTICLE 4. Duration. The duration of the Bank is perpetual.
--------
ARTICLE 5. Capital Stock. The total number of shares of capital stock
-------------
which the Bank is authorized to issue is Twenty Million (20,000,000), of which
Ten Million (10,000,000) shares shall be common stock, One Dollar ($1.00) par
value per share, and Ten Million (10,000,000) shares shall be preferred stock,
One Dollar ($1.00) par value per share. The shares may be issued by the Bank
from time to time as authorized by its Board of Directors and as approved by its
stockholders to the extent that such approval is required by this Charter or by
applicable law or regulation. The
<PAGE>
consideration for the issuance of the shares shall be paid in full before their
issuance and shall not be less than the par value per share. The consideration
for the shares shall be cash, tangible or intangible property, labor, services
or expenses, or any combination of the foregoing, but no share shall be issued
unless the cash, so far as due, or the property, labor, services or expenses for
which it was authorized to be issued, has or have been actually received or
incurred by, or conveyed or rendered to, the Bank, or is in its possession as
surplus. Neither promissory notes nor future services shall constitute payment
or part payment for the issuance of shares of the Bank. The value of such
property, labor, services or expenses, as determined by the Board of Directors
of the Bank, shall be conclusive. Shares of capital stock issued in accordance
with the foregoing shall be fully paid and not assessable. In the case of a
stock dividend, that part of the surplus of the Bank which is transferred to
stated capital upon the issuance of stock as a stock dividend shall be deemed to
be the consideration for their issuance.
The minimum amount of capital and surplus with which the Bank shall
commence business shall be not less than that required to satisfy capital or
reserve requirements of any applicable state or federal law.
A description of the different classes and series of the Bank's capital
stock and a statement of the designations, and the relative rights, preferences
and limitations of the shares of each class and series of capital stock are as
follows:
A. Common Stock. Except as provided in this ARTICLE 5 (or in any
------------
certificate of establishment of series of preferred stock), the holders of the
common stock shall exclusively possess all voting power. Each holder of shares
of common stock shall be entitled to one vote on all matters for each share held
by such holder. There shall be no cumulative voting rights in the election of
Directors.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund, retirement fund or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock and on any class or series
of stock entitled to participate therewith as to dividends, out of any assets
legally available for the payment of dividends; but only when and as declared by
the Board of Directors.
In the event of any liquidation, dissolution or winding up of the Bank,
after there shall have been paid to or set aside for the holders of any class
having preferences over the common stock in the event of liquidation,
dissolution or winding up of the full preferential amounts of which they are
respectively entitled, the holders of the common stock, and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets, shall be entitled, after payment or provision for
payment of all debts and liabilities of the Bank, to receive the remaining
assets of the Bank available for distribution, in cash or in kind, in proportion
to their holdings.
-2-
<PAGE>
B. Preferred Stock. Subject to (i) regulatory approvals if they are
---------------
required by law, and (ii) stockholder approval to the extent required by this
Charter, the Board of Directors of the Bank is authorized by vote or votes, from
time to time adopted, to provide for the issuance of one or more classes of
preferred stock, which shall be separately identified. The Board of Directors
shall have the authority to divide any authorized class of preferred stock of
the Bank into one or more series and to fix and state the voting powers,
designations, preferences and relative, participating, optional or other special
rights of the shares of any series so established and the qualifications,
limitations and restrictions thereof. Each such series shall be separately
designated so as to distinguish the shares thereof from the shares of all other
series and classes. All shares of the same class shall be identical except as
to the following relative rights and preferences, as to which there by be
variations between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and,
if so, from which date or dates, the payment date or dates for
dividends, and the participating or other special rights, if any,
with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions on
which, such shares may be redeemed;
(e) The amount or amounts payable upon the shares of such series in
the event of voluntary or involuntary liquidation, dissolution or
winding up of the Bank;
(f) Whether the shares of such series shall be entitled to the benefit
of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such
fund and the manner of its application, including the price or
prices at which such shares may be redeemed or purchased through
the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any
other series of the same or any other class or classes of stock of
the Bank, and if so convertible or exchangeable, the conversion
price or prices or the rate or rates of exchange, and the
adjustments thereof, if any, at which such conversion or exchange
may be made, and any other terms and conditions of such conversion
or exchange;
-3-
<PAGE>
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of
preferred stock and whether such shares may be reissued as shares
of the same or any other series of stock.
Unless otherwise provided by law, any such vote shall become effective when
the Bank files with the Secretary of State of The Commonwealth of Massachusetts
a certificate of establishment of one or more series of preferred stock signed
by the President or any Vice President and by the Clerk, Assistant Clerk,
Secretary or Assistant Secretary of the Bank, setting forth a copy of the vote
of the Board of Directors establishing and designating the series and fixing and
determining the relative rights and preferences thereof, the date of adoption of
such vote and a certification that such vote was duly adopted by the Board of
Directors and the stockholders, if required by this Charter.
Each share of each series of preferred stock shall have the same relative
rights as and be identical in all respects with all the other shares of the same
series.
C. Stockholder Approval for Certain Events. The Bank shall not, without
---------------------------------------
the previous affirmative vote or written consent of holders of at least a
majority of the then outstanding shares of common stock, (i) authorize or issue,
or obligate itself to issue, any additional shares of common or preferred stock,
or (ii) effect any consolidation or merger involving the Bank (except into or
with a majority-owned subsidiary corporation).
ARTICLE 6. Preemptive Rights. Holders of the capital stock of the Bank
-----------------
shall not be entitled to pre-emptive rights with respect to any shares of the
capital stock of the Bank which may be issued.
ARTICLE 7. Directors. The Bank shall be under the direction of a Board of
---------
Directors. The number of Directors shall not be fewer nor more than permitted
by law, and shall be set by the stockholders in accordance with the By-Laws.
Absent such a number being set by the stockholders, the number of Directors
shall be set at eighteen (18).
-4-
<PAGE>
ARTICLE 8. Indemnification. The Directors, officers and employees of the
---------------
Bank shall be indemnified to the extent provided in the By-Laws of the Bank.
ARTICLE 9. Acting as a Partner. The Bank may be a partner in any business
-------------------
enterprise which it would have power to conduct by itself.
ARTICLE 10. Stockholders' Meetings. Meetings of stockholders may be held
----------------------
at such place in The Commonwealth of Massachusetts or, if permitted by
applicable law, elsewhere in the United States as the Board of Directors may
determine.
ARTICLE 11. Amendment of Charter. This charter may be amended by a
--------------------
majority vote of the shares of the Bank's capital stock outstanding and entitled
to vote, subject to applicable law.
ARTICLE 12. Liquidation Account. The Bank shall establish and maintain a
-------------------
liquidation account for the benefit of its deposit account holders as of
September 30, 1998 ("Eligible Account Holders") and its deposit account holders
as of September 30, 1999 ("Supplemental Eligible Account Holders"). In the event
of a complete liquidation of the Bank it shall comply with such rules and
regulations of the Commissioner with respect to the amount and the priorities on
liquidation of each of the Bank's Eligible Account Holder's and Supplemental
Eligible Account Holder's inchoate interests in the liquidation account to the
extent it is still existence; provided, however, that an Eligible Account
Holder's and Supplemental Eligible Account Holder's inchoate interest in the
liquidation account shall not entitle such Eligible Account Holder or
Supplemental Eligible Account Holder to any voting rights at meetings of the
Bank's stockholders.
ARTICLE 13. Certain Provisions Applicable for Three Years.
----------------------------------------------
Notwithstanding anything contained in the Bank's articles of organization or
bylaws to the contrary, for a period of three years from the date of
consummation of the Conversion, the following provisions shall apply.
A. Beneficial Ownership Limitation. No person shall directly or
-------------------------------
indirectly offer to acquire or acquire the beneficial ownership of more than ten
percent (10%) of any class of any equity security of the Bank without prior
written notice to the Bank and the prior written approval of the Commissioner.
This limitation shall not apply to a transaction in which the Bank forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter and appraisal rights, the purchase of shares by underwriters in
connection with a public offering, or the purchase of shares by an employee
stock benefit plan.
In the event shares are acquired in violation of this Article 13, all
shares beneficially owned by any person in excess of ten percent (10%) shall be
considered "excess shares" and shall not be counted as shares entitled to vote,
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to the stockholders for a vote, and shall not be counted
as outstanding for purposes of determining the affirmative vote necessary to
approve any matter submitted to the stockholders for a vote.
-5-
<PAGE>
For purposes of this ARTICLE 13, the following definitions apply:
1. The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate or any other group
formed for the purpose of acquiring, holding or disposing of the equity
securities of the Bank.
2. The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value.
3. The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
4. The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal whether or not
pursuant to an express agreement, or (b) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangements,
whether written or otherwise.
5. The term "conversion" means (i) the conversion of the Mutual Holding
Company to stock form and the combination of the Mutual Holding Company with and
into the Bank pursuant to the MHC Combination, pursuant to which the Mutual
Holding Company will cease to exist and each share of the Bank's common stock
outstanding immediately prior to the effective time thereof shall automatically
be canceled, (ii) the issuance of Conversion Stock by the Holding Company in the
offering in the Plan of Conversion, and (iii) the issuance to the Holding
Company of the Bank's common stock to be outstanding upon consummation of the
Conversion in exchange for a portion of the net proceeds received by the Holding
Company from the sale of the Conversion Stock, all of which shall be in
accordance with the Conversion Regulations, Massachusetts law and regulations
and the Plan of Conversion.
ARTICLE 14. Certain Requirements for Business Combinations. In addition
-----------------------------------------------
to any affirmative vote required by law or these articles of Organization, the
vote of stockholders of the Bank required to approve any Business Combination
(as defined below) shall be as set forth in this ARTICLE 14.
A. None of the following Business Combinations shall be consummated
without the affirmative vote of the holders of at least eighty percent (80%) of
the shares entitled to vote thereon ("Voting Stock"):
1. any merger or consolidation of the Bank with or into (a) any
Interested Shareholder or (b) any other corporation or entity (whether or not
itself an Interested Shareholder) which is, or after each merger or
consolidation would be, an Affiliate of an Interested Shareholder;
-6-
<PAGE>
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate of any Interested Shareholder of assets
of the Bank having an aggregate Fair Market Value of $100,000 or more;
3. the issuance or transfer by the Bank (in one transaction or a
series of transactions) of any securities of the Bank to any Interested
Shareholder or any Affiliate of any Interested Shareholder in exchange for cash,
securities or other property (or a combination thereof) having an aggregate Fair
Market Value of $100,000 or more, other than the issuance of securities upon the
conversion of any class or series of stock or securities convertible into stock
of the Bank which were not acquired by such Interested Shareholder or such
Affiliate from the Bank;
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Bank proposed by or on behalf of an Interested Shareholder or
any Affiliate of any Interested Shareholder; or
5. any reclassification of securities (including any reverse stock
split), or any recapitalization of the Bank, or any merger or consolidation of
the Bank or any other transaction (whether or not with or into or otherwise
involving an Interested Shareholder) which in any such case (a) has the effect,
directly or indirectly of increasing the proportionate share of the outstanding
shares of any class or series of stock of the Bank which is directly or
indirectly beneficially owned by any Interested Shareholder or any Affiliate of
any Interested Shareholder or (b) would have the effect of increasing such
proportionate share upon conversion of any class or series of stock or
securities convertible into stock of the Bank.
B. The provisions of paragraph A hereof shall not be applicable to any
Business Combination in respect of which the conditions specified in either of
the following subparagraphs 1 and 2 are met. Any such Business Combination shall
require the affirmative vote of only the holders of a majority of the Voting
Stock.
1. Such Business Combination shall have been approved by a majority
of the Disinterested Directors, or
2. All of the following conditions relating to minimum price and
consideration for stock shall have been met:
(a) Common Stock. The aggregate amount of the cash and the Fair
------------
Market Value as of the "Consummation Date" of any consideration other than cash
to be received by holders of the common stock of the Bank in such Business
Combination shall be at least equal to the higher of the following:
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid in order to
acquire any shares of such common stock
-7-
<PAGE>
beneficially owned by the Interested Shareholder which were acquired
beneficially by such Interested Shareholder within the two-year period
immediately prior to the Announcement Date or in the transaction in which it
became an Interested Shareholder, whichever is higher; or
(ii) the Fair Market Value per share of such common stock on the
Announcement Date or the Determination Date, whichever is higher; or
(b) Other Stock. The aggregate amount of the cash and the Fair
-----------
Market Value as of the Consummation Date of any consideration other than cash to
be received per share by holders of shares of any class or series of outstanding
Voting Stock other than common stock shall be at least equal to the highest of
the following (it being intended that the requirements of this subparagraph (b)
shall be required to be met with respect to every class and series of such
Voting Stock, whether or not the Interested Shareholder beneficially owns any
shares of a particular class or series of such Voting Stock):
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid in order to
acquire any shares of such class or series of Voting Stock beneficially owned by
the Interested Shareholder which were acquired beneficially by such Interested
Shareholder within the two-year period immediately prior to the Announcement
Date or in the transaction in which it became an Interested Shareholder,
whichever is higher;
(ii) the highest preferential amount per share to which the
holders of shares of such class or series of Voting Stock are entitled in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Bank; or
(iii) the Fair Market Value per share of such class or series of
Voting Stock on the Announcement date or the determination Date, whichever is
higher; and
(c) Form of Consideration. The consideration to be received by
---------------------
holders of a particular class or series of outstanding Voting Stock shall be in
cash or in the same form as was previously paid in order to acquire beneficially
shares of such class or series of Voting Stock that are beneficially owned by
the Interested Shareholder and, if the Interested Shareholder beneficially owns
shares of any class or series of Voting Stock that were acquired with varying
forms of consideration, the form of consideration to be received by the holders
of such class or series of Voting Stock shall be either cash or the form used to
acquire beneficially the largest number of shares of such class or series of
Voting Stock beneficially acquired by it prior to the Announcement Date; and
(d) Prohibited Conduct. After the Determination Date, and prior to
------------------
the Consummation Date:
(i) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at regular dates
therefor the full amount of any
-8-
<PAGE>
dividends (whether or not cumulative), payable on any class or series having a
preference over the common stock of the Bank as to dividends, or upon
liquidation;
(ii) there shall have been no reduction in the annual rate of
dividends paid on the common stock of the Bank (except as necessary to reflect
any division of the common stock) except as approved by a majority of the
Disinterested Directors; and there shall have been an increase in such annual
rate of dividends as necessary to prevent any such reduction in the event of any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the common stock, unless the failure so to
increase such annual rate was approved by a majority of the Disinterested
Directors;
(iii) an Interested Shareholder shall not have become the
beneficial owner of any additional shares of Voting Stock except as part of the
transaction in which it became an Interested Shareholder; and
(iv) after an Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance or tax credits or
other tax advantages provided by the Bank, whether in anticipation of or in
connection with such Business Combination or otherwise; and
(e) Informational Requirements. A proxy or information statement
---------------------------
describing the proposed Business Combination and complying with the then current
regulatory requirements shall be mailed to holders of Voting Stock at least 30
days prior to the shareholder vote on such Business Combination (whether or not
such proxy or information statement is required to be mailed pursuant to such
Act or subsequent provisions).
C. For the purpose of this ARTICLE 14:
1. The term "Business Combination" shall mean any transaction that
is referred to in any one or more subsections 1 through 5 of paragraph A hereof.
2. A "person" shall mean any individual, firm, corporation or other
entity.
3. "Interested Shareholder" shall mean any person (other than the
Bank) who or which:
(a) is the beneficial owner, directly or indirectly, of more than ten
percent (10%) of the combined voting power of the then outstanding shares of
Voting Stock;
-9-
<PAGE>
(b) is an Affiliate of the Bank and at any time within the two-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of ten percent (10%) or more of the combined voting
power of the then outstanding shares of Voting Stock; or
(c) is an assignee of or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock that were at any time within the two-
year period immediately prior to the date in question beneficially owned by any
Interested Shareholder, if such assignment or succession shall have occurred in
the course of a transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
4. A person shall be a "Beneficial Owner" of any Voting Stock:
(a) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly;
(b) which such person or any of its Affiliates or Associates has (i)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote or direct the vote
pursuant to any agreement, arrangement or understanding; or
(c) which is beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of any shares of Voting Stock.
5. For the purposes of determining whether a person is an Interested
Shareholder pursuant subparagraph 3 of this paragraph C, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of subparagraph 4 of this paragraph C.
6. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934.
7. "Subsidiary" means any corporation more than fifty percent (50%)
of whose outstanding stock having ordinary voting power in the election of
directors is owned, directly or indirectly, by the Bank or by a Subsidiary
thereof or by the Bank and one or more Subsidiaries thereof; provided, however,
that for the purposes of the definition of Interested Shareholder set forth in
subparagraph 3 of this paragraph C, the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security is owned,
directly or indirectly, by the Bank.
-10-
<PAGE>
8. "Disinterested Director" means any member of the Board of
Directors of the Bank who is unaffiliated with, and not a nominee of, the
Interested Shareholder and was a member of the Board prior to the time that the
Interested Shareholder became an Interested Shareholder, and any successor of a
Disinterested Director who is unaffiliated with, and not a nominee of, the
Interested Shareholder and who is recommended to succeed a Disinterested
Director by a majority of Disinterested Directors then on the Board of
Directors.
9. "Fair Market Value" means:
(a) in the case of stock, the highest closing sale price during
the 30-day period immediately preceding the date in question of a share of such
stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if
such stock is not quoted on the Composite Tape on the New York Stock Exchange,
or, if such stock is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934 on
which such stock is listed, or, if such stock is not listed on any such
exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, of a share of such stock. Such price
shall be the higher of (1) the closing sales price or bid quotation with respect
to a share of such stock during the 30-day period preceding the date in question
on the National Association of Securities Dealers, Inc. Automated Quotations
System or any system then in use, or if no such quotations are available, the
fair market value on the date in question of a share of such stock as determined
by a majority of the Disinterested Directors in good faith; and (2) in the case
of stock of any class or series which is not traded on any United States
registered securities exchange nor in the over-the-counter market or in the case
of property other than cash or stock, the fair market value of such property on
the date in question as determined by a majority of the Disinterested Directors
in good faith.
10. In the event of any Business Combination in which the Bank
survives, the phrase "any consideration other than cash" as used in subparagraph
2.a. of paragraph B hereof shall include the shares of common stock and/or the
shares of any class or series of outstanding Voting Stock other than common
stock of the Bank retained by the holders of such shares.
11. "Announcement Date" means the date of first public announcement
of the proposed Business Combination.
12. "Consummation Date" means the date of consummation of a Business
Combination.
13. "Determination Date" means the date on which the Interested
Shareholder became an Interested Shareholder.
-11-
<PAGE>
D. A majority of the Disinterested Directors of the Bank shall have the
power and duty to determine, on the basis of information known to them after
reasonable inquiry, all facts necessary to determine compliance with this
ARTICLE 14, including, without limitation, (i) whether a person is an Interested
Shareholder, (ii) the number of shares of Voting Stock beneficially owned by a
person, (iii) whether a person is an Affiliate or Associate of another person,
(iv) whether the requirements of paragraph B hereof have been met with respect
to any Business Combination, and (v) whether the assets which are the subject of
any Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the Bank or any subsidiary in any
Business Combination has, an aggregate Fair Market Value of $100,000 or
more. The good faith determination of a majority of the Disinterested Directors
on such matters shall be conclusive and binding for all purposes of this
ARTICLE 14.
E. Nothing contained in this ARTICLE 14 shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
F. This ARTICLE 14 may be amended only by the vote of holders of two-
thirds of the Voting Stock, unless the amendment is approved by a majority of
the Disinterested Directors, in which event it may be amended by the vote of
holders of a majority of the Voting Stock.
-12-
<PAGE>
EXHIBIT II
BYLAWS
OF
BERKSHIRE BANK
ARTICLE I
---------
Organization
------------
The name of this Bank shall be "Berkshire Bank". The main office of the
Bank is and shall be located in the City of Pittsfield, Massachusetts, or such
other location as the Board of Directors may designate, subject to change as
authorized by law. Branches and depots heretofore or hereafter established
shall be located and operated in accordance with applicable law. The Bank shall
have and may exercise all the powers, privileges and authority, express, implied
and incidental, now or hereafter conferred by applicable law.
ARTICLE II
----------
Stockholders
------------
SECTION 2.1 Annual Meeting. The annual meeting of the stockholders for
--------------
elections and other purposes shall be held on the first Wednesday in May (or if
that be a legal holiday in the place where the meeting is to be held, on the
next succeeding full business day), at the main office of the Bank in
Massachusetts, unless a different date or place within Massachusetts (or if
permitted by applicable law, elsewhere in the United States) is fixed by the
Board of Directors, the Chairman of the Board or the Chief Executive Officer.
If no annual meeting has been held on the date fixed above, a special meeting in
lieu thereof may be held, and such special meeting shall have for the purposes
of these By-Laws or otherwise all the force and effect of an annual meeting.
SECTION 2.2 Special Meetings. Special meetings of the stockholders for
----------------
any purpose or purposes may be called at any time only by the Chairman of the
Board, by the Chief Executive Officer, by a majority of the Directors then in
office or by the holder or holders of not less than a majority of all the
outstanding capital stock of the Bank entitled to vote at the meeting. Only
those matters set forth in the call of the special meeting may be considered or
acted upon at such special meeting, unless otherwise provided by law.
SECTION 2.3 Matters to be Considered at Annual Meetings. At an annual
-------------------------------------------
meeting of stockholders, only such new business shall be conducted, and only
such proposals shall be acted upon as shall be proper subjects for stockholder
action pursuant to the Charter, these By-Laws, or applicable law and shall have
been brought before the annual meeting (a) by, or at the direction of, the Board
of Directors, the Chairman of the Board, or the Chief Executive Officer or (b)
by the holder or holders of not less than a majority of all the outstanding
capital stock of the Bank entitled to vote at the meeting.
<PAGE>
SECTION 2.4 Notice of Meetings. A written notice of all annual and
------------------
special meetings of stockholders shall state the place, date, hour, and purposes
of such meetings, and shall be given by the Clerk or an Assistant Clerk (or
other person authorized by these By-Laws or by law) at least seven (7) days
before the meeting to each stockholder entitled to vote at such meeting or to
each stockholder who, under the Charter or under these By-laws, is entitled to
such notice, by leaving such notice with him or at his residence or usual place
of business, or by mailing it, postage prepaid, and addressed to such
stockholder at his address as it appears on the stock transfer books of the
Bank. When any stockholders' meeting, either annual or special, is adjourned for
thirty (30) days or more, notice of the adjourned meeting shall be given as in
the case of an original meeting. It shall not be necessary to give any notice of
the time and place of any meeting adjourned for less than thirty (30) days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken. A written waiver of notice, executed before
or after a meeting by such stockholder or his attorney thereunto authorized and
filed with the records of the meeting, shall be deemed equivalent to notice of
the meeting.
SECTION 2.5 Quorum. The holders of a majority in interest of all stock
------
issued, outstanding, and entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders, but if less than a
quorum is present at a meeting, a majority in interest of the stockholders
present may adjourn the meeting from time to time and the meeting may be held as
adjourned without further notice, except as provided in Section 2.4. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The stockholders present at a duly constituted meeting may
continue to transact business until adjournment notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 2.6 Voting and Proxies. Stockholders shall have one vote for
------------------
each share of stock entitled to vote owned by them of record according to the
books of the Bank, unless otherwise provided by law or by the Charter.
Stockholders of record may vote either in person or by written proxy dated not
more than six (6) months before the meeting named therein. Proxies shall be
filed with the Clerk at the meeting, or any adjournment thereof, before being
voted. Proxies solicited on behalf of the management shall be voted as directed
by the stockholder or, in the absence of such direction, as determined by a
majority of the Board of Directors. Except as otherwise limited therein, proxies
shall entitle the persons authorized thereby to vote at any adjournment of such
meeting, but they shall not be valid after final adjournment of such meeting. A
proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of the proxy the
Clerk of the Bank receives a specific written notice to the contrary from any
one of them. Whenever stock is held in the name of two or more persons, in the
absence of specific written notice to the Bank to the contrary, at any meeting
of the stockholders of the Bank any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority does not agree. A proxy
purporting to be executed by or on behalf of a stockholder shall be deemed valid
2
<PAGE>
unless successfully challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger.
SECTION 2.7 Action at Meeting. When a quorum is present, any matter
-----------------
before the meeting shall be decided by vote of the holders of a majority of the
shares of stock voting on such matter, except where a larger vote is required by
law, by the Charter or by these By-Laws. Any election by stockholders shall be
determined by a plurality of the votes cast, except where a larger vote is
required by law, by the Charter or by these By-Laws. No ballot shall be required
for any election unless requested by a stockholder entitled to vote in the
election.
SECTION 2.8 Action without Meeting. Any action to be taken at any annual
----------------------
or special meeting of stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders.
Such consents shall be treated for all purposes as a vote at a meeting.
ARTICLE III
-----------
Directors
---------
SECTION 3.1 Powers. The business and affairs of the Bank shall be managed
------
by a Board of Directors who may exercise all the powers of the Bank except as
otherwise provided by law, by the Charter or by these By-Laws. In the event of
a vacancy in the Board of Directors, the remaining Directors, except as
otherwise provided by law, may exercise the powers of the full Board.
SECTION 3.2 Composition and Term. The Board of Directors shall consist
--------------------
of eighteen (18) individuals and shall remain fixed at such number until another
number is fixed by the Board of Directors of the Bank. Except as otherwise
provided in these By-Laws, the members of the Board of Directors shall be
elected for a term of one (1) year and until their successors are elected and
qualified.
SECTION 3.3 Director Nominations. Nominations of candidates for election
--------------------
as Directors at any annual meeting of stockholders shall be made by the
Executive Committee of the Board of Directors of the Bank. Only persons
nominated in accordance with this Section 3.3 shall be eligible for election as
directors at an annual meeting.
3
<PAGE>
SECTION 3.4 Qualification. Each Director shall have such qualifications
-------------
as are required by applicable law. No Director shall serve as a corporator,
trustee, director or officer of any holding company for any bank or thrift
institution or as a trustee, director or officer of any other bank or thrift
institution. No person shall be qualified to continue to serve as a Director
after the annual meeting immediately following his or her seventy-second
birthday; provided, however, that any Director who was born prior to January 1,
1930 shall be qualified to serve as a Director until the expiration of his or
her last term. If required by applicable law, three- fourths (3/4) of the Board
of Directors shall be residents of The Commonwealth of Massachusetts.
SECTION 3.5 Resignation and Removal. Any Director may resign at any time
-----------------------
by delivering his written resignation to the main office of the Bank addressed
to the Chairman of the Board or the Chief Executive Officer. Such resignation
shall be effective upon receipt thereof by the Chairman of the Board or the
Chief Executive Officer, unless it is specified to be effective at some other
time or upon the happening of some other event. Any Director may be removed
from office, with or without cause, by the holder or holders of not less than a
majority of all the outstanding capital stock of the Bank entitled to vote at
the meeting.
SECTION 3.6 Vacancies. Any vacancy occurring on the Board of Directors,
---------
whether as a result of resignation, removal, death or increase in the number of
Directors, may be filled by the Executive Committee of the Board of Directors
of the Bank.
SECTION 3.7 Compensation. The members of the Board of Directors and the
------------
members of either standing or special committees may be allowed such
compensation for attendance at meetings as the Board of Directors may determine.
SECTION 3.8 Regular Meetings. Unless otherwise provided by the Board of
----------------
Directors, a regular meeting of the Board of Directors shall be held without
other notice than this By-Law on the same date and at the same place as the
annual meeting of stockholders, or the special meeting held in lieu thereof,
following such meeting of stockholders. The Board of Directors may provide by
resolution, the time, date and place for the holding of regular meetings without
other notice than such resolution. There shall be regular meetings of the Board
of Directors at a place or places fixed from time to time by the Board of
Directors.
SECTION 3.9 Special Meetings. Special meetings of the Board of Directors
----------------
may be called by or at the request of the Chairman of the Board, the Chief
Executive Officer, or a majority of the Directors. The persons authorized to
call special meetings of the Board of Directors may fix the time, date and place
for holding any special meeting of the Board of Directors called by such
persons.
4
<PAGE>
SECTION 3.10 Notice of Meetings. Notice of the time, date and place of
------------------
all special meetings of the Board of Directors shall be given to each Director
by the Clerk or Assistant Clerk or in the case of the death, absence, incapacity
or refusal of such persons, by the officer or one of the Directors calling the
meeting. Notice of any special meeting of the Board of Directors shall be given
to each Director in person or by telephone or sent to his business or home
address by telecommunication at least twenty-four (24) hours in advance of the
meeting, or by written notice mailed to his business or home address at least
forty-eight (48) hours in advance of such meeting. If mailed, such notice shall
be deemed to be delivered when deposited in the mail so addressed, with postage
thereon prepaid. When any Board of Directors' meeting, either regular or
special, is adjourned for thirty (30) days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
less than thirty (30) days or of the business to be transacted thereat, other
than an announcement at the meeting at which such adjournment is taken. Any
Director may waive notice of any meeting by a writing executed by him either
before or after the meeting and filed with the records of the meeting. The
attendance of a Director at a meeting shall constitute a waiver of notice of
such meeting, except where a Director attends a meeting for the express purpose
of objecting to the transaction of any business because such meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 3.11 Quorum. A majority of the number of Directors then in
------
office shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors, but if less than a quorum is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time and
the meeting may be held as adjourned without further notice, except as provided
in Section 3.10. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed.
SECTION 3.12 Action at Meeting. The act of the majority of the Directors
-----------------
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by governing law, by the
Charter or by these By-Laws.
SECTION 3.13 Action by Consent. Any action required or permitted to be
-----------------
taken by the Board of Directors at any meeting may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
of the Directors then in office. Such written consents shall be filed with the
records of the meetings of the Board of Directors and shall be treated for all
purposes as a vote at a meeting of the Board of Directors.
SECTION 3.14 Presumption of Assent. A Director of the Bank who is
---------------------
present at a meeting of the Board of Directors at which action on any Bank
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention has been entered in the minutes of the meeting or
unless he has filed a written dissent to such action with the person acting as
the Clerk of the meeting before the adjournment thereof or has forwarded such
dissent by registered mail to the Clerk of the Bank within five (5) days after
the date such dissenting Director receives a copy of the
5
<PAGE>
minutes of the meeting. Such right to dissent shall not apply to a Director who
voted in favor of such action.
SECTION 3.15 Committees. The Board of Directors, by vote of a majority
----------
of all of the Directors then in office, shall elect from its number an Audit
Committee and an Executive Committee, and may elect such other committees as it
deems appropriate, and may delegate to such committees some or all of its powers
except those which by law, by the Charter or by these By-Laws may not be
delegated. Any committees shall consist of not less than three (3) members of
the Board of Directors. Except as the Board of Directors may otherwise
determine, any committee may make rules for the conduct of its business, but
unless otherwise provided by the Board of Directors or in such rules, its
business shall be conducted so far as possible in the same manner as is provided
by these By-Laws for the Board of Directors. All members of committees shall
hold such offices at the pleasure of the Board of Directors. The Board of
Directors may abolish any committee (other than the Executive Committee) at any
time, subject to applicable law. Any committee to which the Board of Directors
delegates any of its powers or duties shall keep records of its meetings and
shall report its action to the Board of Directors. The Board of Directors shall
have power to rescind any action of any committee, but no such rescission shall
have retroactive effect.
SECTION 3.16 Manner of Participation. Members of the Board of Directors
-----------------------
may participate in meetings of the Board by means of conference telephone or
similar communications equipment by which all persons participating in the
meeting can hear each other. Such participation shall constitute presence in
person.
ARTICLE IV
----------
Officers
--------
SECTION 4.1 Enumeration. The officers of the Bank shall consist of a
-----------
President, a Treasurer, a Clerk, and such other officers, including without
limitation a Chairman of the Board, a Chief Executive Officer, a Secretary, and
one or more Vice Presidents, Vice Treasurers, Assistant Treasurers, Assistant
Clerks or Assistant Secretaries, as the Board of Directors may determine.
SECTION 4.2 Election. The President, the Chief Executive Officer, the
--------
Treasurer and all officers at the level of Vice President or above shall be
elected by the Board of Directors annually at their first meeting following the
annual meeting of stockholders. The Clerk shall be elected by the stockholders
at their annual meeting or at a special meeting of the stockholders. All other
officers may be elected by the Board of Directors or appointed by the President.
SECTION 4.3 Qualification. Any two or more offices may be held by any
-------------
person. The President shall be a Director. The Clerk shall be a resident of
Massachusetts unless the Bank has a resident agent appointed for the purpose of
service of process. Any officer may be required by the Board of Directors to
give bond for the faithful performance of his duties in such amount and with
such sureties as the Board of Directors may determine. Other than as required
by applicable law or regulation, no officer need be a stockholder. No officer
shall serve as a corporator, trustee, director
6
<PAGE>
or officer of any holding company for any bank or thrift institution or as a
trustee, director or officer of any other bank or thrift institution.
SECTION 4.4 Tenure. Except as otherwise provided by law, by the Charter
------
or by these By-Laws, the President and Treasurer shall hold office until the
first meeting of the Board of Directors following the next annual meeting of
stockholders and until their respective successors are chosen and qualified. The
Clerk shall hold office until the next annual meeting of stockholders and until
his successor is chosen and qualified. All other officers shall hold office
until the first meeting of the Board of Directors following the next annual
meeting of stockholders and until their successors are chosen and qualified, or
for such shorter term as the Board of Directors may fix at the time such
officers are chosen. Election or appointment of an officer, employee or agent
shall not of itself create contract rights to continued employment or otherwise.
The Board of Directors may authorize the Bank to enter into an employment
contract with any officer in accordance with governing law or regulation, but no
such contract right shall preclude the Board of Directors from exercising its
right to remove any officer at any time in accordance with Section 4.5.
SECTION 4.5 Resignation and Removal. Any officer may resign by
-----------------------
delivering his written resignation to the Bank at its main office addressed to
the Chief Executive Officer, Clerk or Secretary. Such resignation shall be
effective upon receipt thereof by the Chief Executive Officer, Clerk or
Secretary, unless it is specified to be effective at some other time or upon the
happening of some other event. Any officer elected by the Board of Directors may
be removed at any time with or without cause by the Board of Directors. Any
officer appointed by the Chief Executive Officer, and any employee or agent of
the Bank, may be removed at any time with or without cause by the Chief
Executive Officer, or by the Board of Directors.
SECTION 4.6 Chairman of the Board. The Board of Directors may annually
---------------------
elect a Chairman of the Board. Unless the Board of Directors otherwise
provides, the Chief Executive Officer of the Bank shall be the Chairman of the
Board and shall preside, when present, at all meetings of stockholders and the
Board of Directors.
SECTION 4.7 Chief Executive Officer. The Chief Executive Officer shall
-----------------------
have, subject to the direction of the Board of Directors, general supervision
and control of the Bank's business.
SECTION 4.8 President and Vice President. The President shall have such
----------------------------
powers and shall perform such duties as the Board of Directors may from time to
time designate and shall serve as the Chief Executive Officer of the Bank,
unless the Board of Directors otherwise provides. Unless otherwise provided by
the Board of Directors, he shall preside, when present, at all meetings of
stockholders and of the Board of Directors if there is no Chairman of the Board
or if the Chairman of the Board does not attend such meetings.
Any Vice President shall have such powers and shall perform such duties as
the Board of Directors may from time to time designate.
7
<PAGE>
SECTION 4.9 Treasurer, Vice Treasurers, and Assistant Treasurers. The
----------------------------------------------------
Treasurer shall, subject to the direction of the Board of Directors, have
general charge of the financial affairs of the Bank and shall cause to be kept
accurate books of account. He shall have custody of all funds, securities, and
valuable documents of the Bank, except as the Board of Directors may otherwise
provide. The Treasurer shall also perform such other duties as the Board of
Directors may from time to time designate.
Any Vice Treasurer and any Assistant Treasurer shall have such powers and
perform such duties as the Board of Directors or the Chief Executive Officer may
from time to time designate.
SECTION 4.10 Clerk and Assistant Clerks. The Clerk shall keep a record
--------------------------
of the meetings of stockholders. In case a Secretary is not elected or is
absent, the Clerk or an Assistant Clerk shall keep a record of the meetings of
the Board of Directors. In the absence of the Clerk from any meeting of the
stockholders, an Assistant Clerk if one be elected, otherwise a Temporary Clerk
designated by the person presiding at the meeting, shall perform the duties of
the Clerk.
SECTION 4.11 Secretary and Assistant Secretaries. The Secretary, if one
-----------------------------------
be elected, shall keep a record of the meetings of the Board of Directors. In
the absence of the Secretary, any Assistant Secretary, the Clerk and any
Assistant Clerk, a Temporary Secretary shall be designated by the person
presiding at such meeting to perform the duties of the Secretary.
SECTION 4.12 Other Powers and Duties. Subject to these By-Laws, each
-----------------------
officer of the Bank shall have in addition to the duties and powers specifically
set forth in these By-Laws, such duties and powers as are customarily incident
to his office, and such duties and powers as may be designated from time to time
by the Board of Directors or the Chief Executive Officer.
ARTICLE V
---------
Capital Stock
-------------
SECTION 5.1 Certificates of Stock. Each stockholder shall be entitled to
---------------------
a certificate of the capital stock of the Bank in such form as may from time to
time be prescribed by the Board of Directors. Such certificate shall be signed
by the President or a Vice President and by the Treasurer or an Assistant
Treasurer, and sealed with the corporate seal or a facsimile thereof. Such
signatures may be facsimile if the certificate is signed by a transfer agent, or
by a registrar, other than a Director, officer or employee of the Bank. In case
any officer who has signed or whose signature has been placed on such
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Bank with the same effect as if he were such
officer at the time of its issue. Each certificate for shares of capital stock
shall be consecutively numbered or otherwise identified. Every certificate for
shares of stock which are subject to any restriction on transfer and every
certificate issued when the Bank is authorized to issue more than one class or
series of stock shall contain such legend with respect thereto as is required by
law.
8
<PAGE>
SECTION 5.2 Transfers. Subject to any restrictions on transfer, shares
---------
of stock may be transferred on the books of the Bank by the surrender to the
Bank or its transfer agent of the certificate therefor properly endorsed or
accompanied by a written assignment and power of attorney properly executed,
with transfer stamps (if necessary) affixed, and with such proof of the
authenticity of signature as the Bank or its transfer agent may reasonably
require.
SECTION 5.3 Record Holders. Except as may be otherwise required by law,
--------------
by the Charter or by these By-Laws, the Bank shall be entitled to treat the
record holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
thereto, regardless of any transfer, pledge or other disposition of such stock,
until the shares have been transferred on the books of the Bank in accordance
with the requirements of these By-Laws.
It shall be the duty of each stockholder to notify the Bank of his current
post office address.
SECTION 5.4 Record Date. The Board of Directors may fix in advance a
-----------
time of not more than sixty (60) days preceding the date of any meeting of
stockholders, or the date for the payment of any dividend or the making of any
distribution to stockholders, or the last day on which the consent or dissent of
stockholders may be effectively expressed for any purpose, as the record date
for determining the stockholders having the right to notice of and to vote at
such meeting, and any adjournment thereof, or the right to receive such dividend
or distribution or the right to give such consent or dissent. In such case only
stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the Bank after the record
date. Without fixing such record date the Board of Directors may for any of such
purposes close the transfer books for all or any part of such period.
If no record date is fixed and the transfer books are not closed, (a) the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and (b) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.
SECTION 5.5 Replacement of Certificates. In case of the alleged loss,
---------------------------
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
SECTION 5.6 Issuance of Capital Stock. Subject to (i) regulatory
-------------------------
approvals if they are required by law, and (ii) stockholder approval if required
by the Charter, the Board of Directors shall have the authority to issue or
reserve for issue from time to time the whole or any part of the capital stock
of the Bank which may be authorized from time to time, to such persons or
organizations, for such consideration, whether cash, property, services or
expenses, and on such terms as the Board of Directors may determine, including
without limitation the granting of options, warrants, or conversion or other
rights to subscribe to said capital stock.
9
<PAGE>
SECTION 5.7 Dividends. Subject to applicable law, the Charter and these
---------
By-Laws, the Board of Directors may from time to time declare, and the Bank may
pay, dividends on outstanding shares of its capital stock.
ARTICLE VI
----------
Indemnification
---------------
SECTION 6.1 Officers. To the extent permitted by law and except as
--------
provided in Sections 6.3 and 6.4, each Officer of the Bank (and his heirs and
personal representatives) shall be indemnified by the Bank against all Expenses
incurred by him in connection with any Proceeding in which he is involved as a
result of (a) his serving or having served as an Officer or employee of the
Bank, (b) his serving or having served as a director, officer or employee of any
of its wholly-owned subsidiaries, or (c) his serving or having served any other
corporation, organization, partnership, joint venture, trust or other entity at
the request or direction of the Bank.
SECTION 6.2 Non-Officer Employees. To the extent permitted by law and
---------------------
except as provided in Sections 6.3 and 6.4, each non-Officer Employee of the
Bank (and his heirs and personal representatives) may, in the discretion of the
Board of Directors, be indemnified against any or all Expenses incurred by him
in connection with any Proceeding in which he is involved as a result of (a) his
serving or having served as a non-Officer Employee of the Bank, (b) his serving
or having served as a director, officer, or employee of any of its wholly-owned
subsidiaries, or (c) his serving or having served any other corporation,
organization, partnership, joint venture, trust or other entity at the request
or direction of the Bank.
SECTION 6.3 Service at Direction of Board of Directors. No
------------------------------------------
indemnification shall be provided to an Officer or non-Officer Employee with
respect to his serving or having served in any of the capacities described in
Sections 6.1(c) and 6.2(c), respectively, unless such service was required or
directed by vote of the Board of Directors prior to the occurrence of the event
to which the indemnification relates; provided that the Board of Directors may
provide an Officer or non-Officer Employee with indemnification, as to a
specific Proceeding, even though such Board of Directors vote was not obtained,
if in its discretion, the Board of Directors determines it to be appropriate for
the Bank to do so.
SECTION 6.4 Good Faith. No indemnification shall be provided to an
----------
Officer or to a non-Officer Employee with respect to a matter as to which he
shall have been adjudicated in any Proceeding not to have acted in good faith in
the reasonable belief that his action was in the best interests of the Bank. In
the event that a Proceeding is compromised or settled so as to impose any
liability or obligation upon an Officer or upon a non-Officer Employee, no
indemnification shall be provided to said Officer or to said non-Officer
Employee with respect to a matter if there is a determination that with respect
to said matter said Officer or said non-Officer Employee did not act in good
faith in the reasonable belief that his action was in the best interests of the
Bank. The determination shall be made by a majority vote of those Directors who
are not involved in such Proceeding. However, if more than half of the Directors
are involved in such Proceeding, the
10
<PAGE>
determination shall be made by a majority vote of a committee of three
disinterested Directors chosen at a regular or special meeting of the Board of
Directors to make such determination; provided, however, that if there are fewer
than three disinterested Directors, the determination shall be made by a
committee consisting of three disinterested Directors of the holding company
which owns at least a majority of the outstanding common stock of the Bank,
chosen at a regular or special meeting of the Board of Directors to make such a
determination.
SECTION 6.5 Prior to Final Disposition. Any indemnification provided
--------------------------
under this Article may, in the discretion of the Board of Directors, include
payment by the Bank of Expenses incurred in defending a civil or criminal
Proceeding in advance of the final disposition of such Proceeding, upon the
Bank's receipt of an undertaking by the Officer or non-Officer Employee
indemnified to repay such payment if he shall be adjudicated or determined to be
not entitled to indemnification under Section 6.4
SECTION 6.6 Insurance. The Bank may purchase and maintain insurance to
---------
protect itself and any Officer or non-Officer Employee against any liability of
any character asserted against and incurred by the Bank or any such Officer or
non-Officer Employee, or arising out of any such status, whether or not the Bank
would have the power to indemnify such person against such liability by law or
under the provisions of this Article VI.
SECTION 6.7 Definitions. For the purposes of this Article VI:
-----------
(a) "Officer" means any person who serves or has served as a Director or
officer of the Bank;
(b) "non-Officer Employee" means any person who serves or has served as an
employee of the Bank but who is not an Officer;
(c) "Proceeding" means any action, suit or proceeding, civil or criminal,
brought or threatened in or before any court, tribunal, administrative or
legislative body or agency; and
(d) "Expenses" means any liability fixed by a judgment, order, decree or
award in a Proceeding, any amount actually and reasonably paid in settlement of
a Proceeding and any professional fees and other disbursements reasonably
incurred in a Proceeding.
SECTION 6.8 Other Indemnification Rights. The provisions of this Article
----------------------------
VI shall not be construed to be exclusive. The Bank shall have the power and
authority to indemnify any person entitled or eligible to be indemnified under
this Article VI and to enter into specific agreements, commitments or
arrangements for indemnification on any terms not prohibited by law which the
11
<PAGE>
Board of Directors deems to be appropriate. Nothing in this Article VI shall
limit any lawful rights to indemnification existing independently of this
Article.
SECTION 6.9 Survival of Benefits. The provisions of this Article VI
--------------------
shall be applicable to persons who shall have ceased to be directors or officers
of the Bank, and shall inure to the benefit of the heirs, executors and
administrators of persons entitled to be indemnified hereunder. Nothing
hereunder shall be deemed to limit the Bank's authority to indemnify any person
pursuant to any contract or otherwise.
ARTICLE VII
-----------
Certain Operating Provisions
----------------------------
SECTION 7.1 Deposits. The Bank may receive demand, time and any other
--------
types of deposits authorized by applicable law upon such terms and conditions as
may be agreed upon between the depositor and the Bank. Each depositor, when
making the first deposit in an account, shall subscribe to the appropriate
account agreement for that type of account (if there be such an agreement) and
shall subscribe to the By-Laws, assenting to the same and to all of the
regulations of the Bank whether then existing or thereafter enacted.
The Bank in its discretion shall be at liberty to refuse to receive any
deposits and may require, on such notice as may be required by applicable law,
any depositor or his representative to withdraw the whole or any part of the
amount standing to the credit of his account, except that on a systematic
savings account which has been accepted, the designated monthly deposit may not
be refused nor may such an account or any other term account be ordered to be
withdrawn during the term of the applicable account agreement. In case of
neglect or refusal to withdraw, no part of said account shall be entitled to
receive any subsequent interest.
Where a depositor becomes indebted to the Bank under any circumstances, the
Bank shall have the right at its option and subject to applicable law, to set
off against such indebtedness an amount equal to such indebtedness by deducting
such amount from the deposits of the depositor.
SECTION 7.2 Withdrawals. Deposits and interest may be withdrawn by the
-----------
depositor or by any person authorized to act on the depositor's behalf, by
written order or by any other method permitted by the Bank, subject to such
requirements as may be established from time to time by the Bank or by
applicable law. All withdrawals may be made on demand, except that the Bank may
impose such limitations on withdrawals as may be required or permitted by
agreement with the depositor or by law. The Bank may honor withdrawals made
payable to the depositor or to one or more other payees. Any payment made by
the Bank to the depositor, to any person authorized to act on the depositor's
behalf or in accordance with the request or with the consent of the depositor or
of any such person shall discharge the liability of the Bank to all persons to
the extent of such payment. No alleged agreement with a depositor, or with any
person authorized to act on the depositor's behalf, which is inconsistent with
applicable law or these By-Laws or with any rules,
12
<PAGE>
regulation or requirement established by or limitations imposed by the Bank,
shall be valid or binding upon the Bank.
The Bank may collect any fees for services authorized by the Executive
Committee by making charges against a depositor's account. Any depositor may
file with the Treasurer a permanent order, requesting payment of interest as it
is credited, except for interest on deposits in accounts in which the interest
declared thereon may not be withdrawn pursuant to the terms of the applicable
account. Payment of interest pursuant to a permanent interest order by check
payable to such depositor or to such person as he may name in such order, as
evidenced by the return of such check shall be a discharge to the Bank for the
amount paid.
Deposits standing in the name of a deceased depositor or a minor shall be
paid in accordance with law; and payments may be made to the surviving husband,
wife or next of kin of a deceased depositor or to either parent of a minor, to
the extent authorized by applicable law.
SECTION 7.3 Conveyances and Foreclosures. Unless otherwise provided by
----------------------------
law or the Board of Directors, the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, any Assistant Vice President, the
Treasurer, any Vice Treasurer, any Assistant Treasurer, any Mortgage Officer,
any Loan Officer and any Real Estate Officer are authorized and empowered
severally to execute, acknowledge and deliver, in the name and on behalf of the
Bank, whenever authorized by the Board of Directors or the Executive Committee
by general or specific vote, all deeds and conveyances of real estate, all
assignments, extensions, releases, partial releases and discharges of mortgages,
and all assignments and transfers of bonds and other securities, and in
connection with any of the foregoing said officers are authorized and empowered
severally to release or assign the interest of the Bank in any policy of
insurance held by it.
Unless otherwise provided by law or the Board of Directors, in the event of
a breach of condition of any mortgage held by the Bank, the Chairman of the
Board, the Chief Executive Officer, the President, any Vice President, any
Assistant Vice President, the Treasurer, any Vice Treasurer, any Assistant
Treasurer, any Mortgage Officer, any Loan Officer and any Real Estate Officer
are authorized and empowered severally, in the name and on behalf of the Bank,
whenever authorized by the Executive Committee or by the Board of Directors by
general or specific vote, to make entry for the purpose of taking possession of
the mortgaged property or of foreclosing such mortgage and to perform any and
all acts necessary or proper to consummate such foreclosure and effect the due
execution of any power of sale contained in such mortgage, including the
execution, acknowledgment and delivery of all deeds and instruments of
conveyance to the purchaser and the execution of all affidavits and certificates
required by law or deemed necessary by any of such officers.
13
<PAGE>
SECTION 7.4 Transfer. Accounts may be transferred by the owner to one or
--------
more other persons, subject to applicable provisions of law, and a charge
therefor may be imposed as the Board of Directors from time to time may
prescribe, provided that such charge shall not exceed the maximum amount
permitted by law. No transfer shall be valid against the Bank until recorded on
the books of the Bank.
SECTION 7.5 Loans and Investments. Funds of the Bank shall be loaned or
---------------------
invested in such manner, upon such terms and conditions, in such amounts and at
such rates of interest, as from time to time may be authorized or approved by
the Board of Directors or appropriate officers of the Bank in accordance with
applicable provisions of law.
SECTION 7.6 Attorneys. The Board of Directors or the President may
---------
appoint one or more attorneys to examine titles to property offered as security
for loans and to prepare papers of a legal nature required in connection
therewith. The Board of Directors or the President may approve the appointment
of the same or such other attorneys, in general or specific matters, as from
time to time the Board or such officer may deem necessary or advisable.
SECTION 7.7 Charges on Overdue Payment. The Board of Directors shall fix
--------------------------
the rate of charges to be imposed upon delinquent payments due the Bank within
the limits prescribed by law and shall determine the circumstances under which
and the periods in which such charges may be waived by the President, a Vice
President, Treasurer or other officer authorized by the Board of Directors.
SECTION 7.8 Emergency. In the event of an emergency declared by a proper
---------
governmental authority, State or Federal, and until declaration of the
termination of such emergency, or in the event of a disaster, either of which
renders ordinary operations of the Bank and/or communications in the area
practically impossible, and until the effects of such a disaster are
substantially overcome, the officers and employees of the Bank shall continue to
conduct its affairs with the assistance of those members of the Board of
Directors who are readily available. The powers and duties of the Board of
Directors may be exercised and performed by said available members with or
without formal meetings and free from the usual notice and quorum requirements.
The emergency powers herein granted shall cease upon declaration of the
termination of the emergency or the overcoming of the same, as aforesaid.
ARTICLE VIII
------------
Conflicts of Interest
---------------------
No contract or transaction between the Bank and one or more of its
Directors or officers, or between the Bank and any other corporation,
partnership, association, or other organization of which one or more of its
Directors, officers, partners, or members are members of the Board of Directors
or officers of the Bank, or in which one or more of the Bank's Directors or
officers have a financial or other interest, shall be void or voidable solely by
reason thereof, or solely because the Director
14
<PAGE>
or officer is present at or participates in the meeting of the Board of
Directors of the Bank or a committee thereof which authorized the contract or
transaction; if:
(1) Any duality of interest or possible conflict of interest on the
part of any Director or officer of the Bank is disclosed to the other
members of the Board or committee at a meeting at which a matter
involving such duality or conflict of interest is considered or acted
upon; and
(2) Any Director having a duality of interest or possible conflict of
interest on any matter refrains from voting on the matter. The minutes
shall reflect that a disclosure was made and the abstention from
voting.
The foregoing requirements shall not be construed as preventing a Director
from briefly stating his or her position in the matter, nor from answering
pertinent questions of other members of the Board or committee.
Each Director and officer shall be advised of the foregoing upon the
acceptance of his or her office and shall answer an annual questionnaire that
requests the disclosure of such duality of interest or possible conflict of
interest.
ARTICLE IX
----------
Miscellaneous Provisions
------------------------
SECTION 9.1 Fiscal Year. Except as otherwise determined by the Board of
-----------
Directors, the fiscal year of the Bank shall be the twelve months ending
December 31st.
SECTION 9.2 Seal. The Board of Directors shall have power to adopt and
----
alter the seal of the Bank.
SECTION 9.3 Execution of Instruments. All deeds, leases, transfers,
------------------------
contracts, bonds, notes and other instruments and obligations to be entered into
by the Bank in the ordinary course of its business without Board of Directors
action may be executed on behalf of the Bank by the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, Treasurer or, as the
Board of Directors may authorize, any other officer, employee or agent of the
Bank.
SECTION 9.4 Voting of Securities. Unless otherwise provided by the Board
--------------------
of Directors, the Chairman of the Board, the Chief Executive Officer, the
President or any other officer or agent designated by the Board of Directors may
waive notice of and act on behalf of the Bank, or appoint another person or
persons to act as proxy or attorney in fact for the Bank with or without
discretionary power and/or power of substitution, at any meeting of stockholders
or shareholders of any other organization, any of whose securities are held by
the Bank.
15
<PAGE>
SECTION 9.5 Resident Agent. The Board of Directors may appoint a
--------------
resident agent upon whom legal process may be served in any action or proceeding
against the Bank. Said resident agent shall be either an individual who is a
resident of and has a business address in Massachusetts, a corporation organized
under the laws of The Commonwealth of Massachusetts, or a corporation organized
under the laws of any other state of the United States, which has qualified to
do business in, and has an office in, Massachusetts.
SECTION 9.6 Bank Records. The original, or attested copies, of the
------------
Charter, By-Laws and record of all meetings of the Directors or stockholders,
and the stock and transfer records, which shall contain the names of all
stockholders and the record address and the amount of stock held by each, shall
be kept in Massachusetts at the main office of the Bank, or at an office of its
transfer agent, Clerk or resident agent.
SECTION 9.7 Charter. All references in these By-Laws to the Charter
-------
shall be deemed to refer to the Charter of the Bank, as amended and in effect
from time to time.
SECTION 9.8 Amendments. These By-Laws may be altered, amended or
----------
repealed by a majority vote of the shares outstanding and entitled to vote.
16
<PAGE>
[LETTERHEAD OF MULDOON, MURPHY & FAUCETTE LLP]
EXHIBIT 5.0
April 24, 2000
Board of Directors
Berkshire Hills Bancorp, Inc.
24 North Street
Pittsfield, Massachusetts 01201
Re: The issuance of up to 10,326,609 shares of
Berkshire Hills Bancorp, Inc. Common Stock
Members of the Board
You have requested our opinion under of Delaware law in connection with the
conversion of Berkshire Bancorp, a Massachusetts-chartered mutual holding
company that owns all of the outstanding common stock of Berkshire Bank, a
Massachusetts-chartered stock savings bank (the "Bank"), into the stock form of
organization (the "Conversion"), and the related subscription offering, direct
community offering and syndicated community offering (the "Offerings") by
Berkshire Hills Bancorp, Inc. (the "Company"), a Delaware corporation and the
proposed holding company for the Bank, of up to 8,314,500 shares of its common
stock, par value $.01 per share ("Common Stock") (9,561,675 shares if the
estimated valuation range is increased up to 15% to reflect changes in market
and financial conditions following commencement of the Offerings) and the
issuance of 665,160 shares of Common Stock to Berkshire Hills Foundation (the
"Foundation"), a privately-owned charitable foundation formed by the Company
(764,934 shares if the estimated valuation range is increased up to 15% to
reflect changes in market and financial conditions following commencement of the
Offerings), pursuant to a gift instrument.
We understand that the Company will contribute funds to a wholly-owned
subsidiary of the Company (the "Subsidiary") which Subsidiary will lend funds to
the trust for the Bank's Employee Stock Ownership Plan (the "ESOP") which the
ESOP trust will use to purchase shares of Common Stock for which the ESOP trust
subscribes pursuant to the Offerings. For purposes of rendering the opinion set
forth in paragraph 2 below, we assume that: (a) the Board of Directors of the
Company (the "Board") has duly authorized the capital contribution to the
Subsidiary for the purpose of making the loan to the ESOP trust (the "Loan");
(b) the Board of Directors of the Subsidiary has duly authorized the Loan to the
ESOP trust; (c) the ESOP serves a valid corporate purpose for the Company; (d)
the Loan will be made at an interest rate and on other terms that are fair to
the Subsidiary; (e) the terms of the Loan will be set forth in customary
<PAGE>
Board of Directors
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 2
and appropriate documents including, without limitation, a promissory note
representing the indebtedness of the ESOP trust to the Subsidiary as a result of
the Loan; and (f) the closing for the Loan and for the sale of Common Stock to
the ESOP trust will be held after the closing for the sale of the other shares
of Common Stock sold in the Offerings and the receipt by the Company of the
proceeds thereof and the contribution by the Company to the Subsidiary of funds
sufficient to make the Loan.
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on January 10, 2000 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as initially filed with the Securities and Exchange Commission on
March 10, 2000 (the "Registration Statement"); a consent of the sole
incorporator of the Company; the Plan of Conversion; the gift instrument whereby
shares will be granted to the Foundation; the ESOP trust agreement and the ESOP
Loan agreement; resolutions of the Board concerning the organization of the
Company, the Offerings and designation of a pricing committee of the Board (the
"Pricing Committee"), and the form of stock certificate approved by the Board to
represent shares of Common Stock. We have also been furnished a certificate of
the Delaware Secretary of State certifying the Company's good standing as a
Delaware corporation. Capitalized terms used but not defined herein shall have
the meaning given them in the Certificate of Incorporation.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares and the total price of the Common Stock to be sold in the
Offerings, the Common Stock to be issued in the Offerings (including the shares
to be issued to the ESOP trust) and the shares to be granted to the Foundation
will be duly authorized and, when such shares are sold and paid for or granted,
in the case of the Foundation, in accordance with the terms set forth in the
prospectus which is included in the Registration Statement and such resolution
of the Pricing Committee or, in the case of the Foundation, in accordance with
the gift instrument and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
<PAGE>
Board of Directors
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 3
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the extent that subsection obligates any
person to provide to the Board the information such subsection
authorizes the Board to demand, and the provision of Subsection
C.7 of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent, if any,
that a court applying Delaware law were to impose equitable
limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We assume no obligation to advise you of any events that occur subsequent
to the date of this opinion.
Very truly yours,
/s/ Muldoon, Murphy & Faucette LLP
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
Exhibit 8.0
[Letterhead of Muldoon, Murphy & Faucette LLP]
April 24, 2000
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
24 North Street
Pittsfield, Massachusetts 01201
Dear Board Members:
You have requested our opinion regarding the federal income tax
consequences of the conversion of Berkshire Bancorp (the "MHC") and its wholly-
owned subsidiary, Berkshire Bank (the "Bank"), from the mutual holding company
structure to the stock holding company form, as effectuated pursuant to the
integrated transactions described below. Our opinion is based upon the existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code") and
regulations thereunder (the "Treasury Regulations"), and upon current Internal
Revenue Service published rulings and existing court decisions, any of which
could be changed at any time. Any such changes may be retroactive and could
significantly modify the statements and opinions expressed herein. Similarly,
any change in the facts and assumptions stated below, upon which this opinion is
based, could modify the conclusions. This opinion is as of the date hereof, and
we disclaim any obligation to advise you of any change in any matter considered
herein after the date hereof. Since our opinion is rendered in advance of the
closing of the transactions described below, we have assumed that the
transactions will be consummated in accordance with such description, as well as
all of the information and representations referred to herein. Any changes in
the transaction could cause us to modify our opinion.
We express no opinion on the state or local income tax consequences of the
transactions described herein. We understand that Wolf & Company, P.C. will
address such matters in a separate letter.
<PAGE>
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 2
We have made such other investigations as we have deemed relevant or
necessary for the purpose of this opinion. In our examination, we have assumed
the authenticity of original documents, the accuracy of copies and the
genuineness of signatures. We have further examined and have relied upon the
accuracy of the factual matters set forth in the Plan of Conversion (the "Plan")
and the Registration Statement on Form S-1 filed by Berkshire Hills Bancorp,
Inc. (the "Company") with the Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended, and the Application for Conversion
(the "Application") filed with the Massachusetts Division of Banks (the
"Division").
The Proposed Transactions
- -------------------------
The MHC, a Massachusetts-chartered mutual holding company, and the Bank, a
Massachusetts-chartered stock savings bank, were created in a reorganization of
a Massachusetts-chartered mutual savings bank, at that time named Berkshire
County Savings Bank (the "Mutual Bank"), in 1996 (the "MHC Reorganization"). In
the MHC Reorganization, the Mutual Bank organized the MHC and the MHC organized
the Bank. In connection with the reorganization, the Bank issued shares of its
common stock ("Bank Common Stock") to the MHC. The Mutual Bank then merged with
and into the Bank under a plan of reorganization in which all of the Mutual
Bank's equity interests were exchanged for liquidation interests in the MHC. No
other shares of Bank Common Stock were issued in connection with the MHC
Reorganization. The MHC will own 100% of the outstanding Bank Common Stock
immediately prior to the Conversion.
Subsequently, on October 22, 1999, the MHC adopted the Plan, providing for
the conversion of the MHC into the capital stock form of organization.
The Board of Trustees of the MHC and the Board of Directors of the Bank
believe that the reorganization of the MHC and the Bank in the stock holding
company form of organization pursuant to the Plan is in the best interests of
the MHC and the Bank, as well as in the best interests of the Bank's depositors.
Accordingly, the following transactions will occur in the Conversion (as defined
in the Plan) pursuant to the Plan:
1. The Bank will incorporate the Company, a Delaware corporation, for the
purpose of holding all of the capital stock of the Bank and in order to
facilitate the Conversion.
<PAGE>
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 3
2. Subscription rights ("Subscription Rights") to purchase shares of the
common stock of the Company ("Company Common Stock") will be issued without
payment therefor to Eligible Account Holders, Supplemental Eligible Account
Holders and Tax-Qualified Employee Stock Benefit Plans (as such persons are
defined in the Plan). In addition, Subscription Rights will be issued to
directors, trustees, officers and employees of the Bank in a fourth priority
category who do not otherwise qualify as Eligible or Supplemental Eligible
Account Holders.
3. Upon the effective date (the "Effective Date") of the Conversion, the
MHC will merge with and into the Bank pursuant to a plan of merger, with the
Bank being the surviving institution (the "MHC Merger"). As a result of the MHC
Merger, (a) the shares of Bank Common Stock currently held by the MHC will be
extinguished, and (b) the Eligible and Supplemental Eligible Account Holders
will be granted interests in a liquidation account (the "Liquidation Account")
to be established by the Bank pursuant to the Plan.
4. Upon the Effective Date, the Company will sell shares of Company
Common Stock in a subscription offering (the "Subscription Offering") in order
of priority to Eligible Account Holders, Supplemental Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans and directors, trustees, officers and
employees of the Bank. Any shares of Company Common Stock remaining unsold after
the Subscription Offering will be sold to the public through a Community
Offering (as defined in the Plan), a Syndicated Community Offering (as defined
in the Plan), and/or Public Offering (as defined in the Plan) as determined by
the Boards of Trustees and Directors of the MHC, the Company and the Bank in
their sole discretion. Collectively, the Subscription Offering, the Community
Offering, the Syndicated Community Offering and the Public Offering are referred
to herein as the Offerings.
5. The Company will contribute to the Bank 50% of the net proceeds
received by the Company in the Offerings (the "Contributed Offering Proceeds")
in exchange for 100% of the Bank Common Stock.
The Liquidation Account will be established by the Bank for the benefit of
the Eligible and Supplemental Eligible Account Holders who maintain Deposit
Accounts (as defined in the Plan) in the Bank after the Conversion. The
Liquidation Account balance will initially be an amount equal to 100% of the
Bank's net worth as reflected in its latest statement of financial condition
contained in the final prospectus utilized in the Conversion. Each Eligible and
Supplemental Eligible Account Holder will have an undivided interest in the
Liquidation Account balance (referred to as a "subaccount balance"). The
proportionate interest of an Eligible or Supplemental Eligible Account Holder in
the Liquidation Account will never increase, but will, however, decrease to
reflect
<PAGE>
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 4
subsequent withdrawals from the Deposit Account of such Eligible or Supplemental
Eligible Account Holders. In the sole event of a complete liquidation of the
Bank after the Conversion, each Eligible or Supplemental Eligible Account Holder
will be entitled to receive a liquidation distribution from the Liquidation
Account in the amount of their then current interest before any liquidation
distribution may be made with respect to the capital stock of the Bank.
Each Deposit Account in the Bank at the time of the consummation of the
Conversion will become a Deposit Account in the Bank equivalent in withdrawable
amount to the withdrawal value (as adjusted to give effect to any withdrawal
made for the purchase of Company Common Stock purchased in the Offerings) and
subject to the same terms and conditions (except as to liquidation rights) as
such Deposit Account in the Bank immediately preceding consummation of the
Conversion.
Representations
- ---------------
You have made the following representations to us with regard to the
Conversion. We have not independently investigated these representations, but,
we are relying on them as an integral part of our opinion.
a. The merger of the MHC into the Bank in the MHC Merger will be effected
pursuant to applicable state and/or federal banking laws.
b. The aggregate fair market value of the interest in the Liquidation
Account and the Subscription Rights received by each Eligible or Supplemental
Eligible Account Holder pursuant to the MHC Merger will be approximately equal
to the fair market value of the equity interest in the MHC surrendered by the
Eligible or Supplemental Eligible Account Holder in exchange therefor.
c. To the best of the knowledge of the management of the MHC and the
Bank, there is no plan or intention on the part of the Eligible or Supplemental
Eligible Account Holders to withdraw from their Deposit Accounts subsequent to
the Conversion such that the withdrawals would reduce their aggregate interests
in the Liquidation Account to an amount having a value at the Effective Date of
less than fifty percent of the value of the aggregate interests which the
Eligible and Supplemental Eligible Account Holders of the MHC will have in the
residual equity of the MHC immediately prior to the Conversion.
d. The Bank has no plan or intention to reacquire any of the interests in
the Liquidation Account issued in the MHC Merger.
<PAGE>
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 5
e. The liabilities of the MHC assumed by the Bank in the MHC Merger and
the liabilities to which the transferred assets of the MHC are subject were
incurred by the MHC in the ordinary course of its business.
f. The Company, the Bank, the MHC and the Eligible and Supplemental
Eligible Account Holders will pay their respective expenses, if any, incurred in
connection with the Conversion, except that the Company, the Bank, and the MHC
may pay fees to brokers and investment bankers for assisting Eligible and
Supplemental Eligible Account Holders and other eligible subscribers in
completing and/or submitting Order Forms (as defined in the Plan). The expenses
for brokers and investment bankers to assist Eligible and Supplemental Eligible
Account Holders and other eligible subscribers are solely and directly related
to the Conversion and will be paid by the Company, the Bank, and the MHC
directly to the brokers and investment bankers.
g. There is no intercorporate indebtedness existing (i) between the MHC
and the Bank, or (ii) between the Company and the Bank that was issued,
acquired, or will be settled at a discount in the Conversion.
h. None of the Company, the Bank or the MHC is an investment company as
defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
i. Neither the MHC nor the Bank are under the jurisdiction of a court in
a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
j. The fair market value of the assets of the MHC transferred to the Bank
in the MHC Merger will equal or exceed the sum of the liabilities assumed by the
Bank plus the amount of liabilities, if any, to which the transferred assets are
subject.
k. The total adjusted basis of the assets of the MHC transferred to the
Bank in the MHC Merger will equal or exceed the sum of the liabilities assumed
by the Bank, plus the amount of liabilities, if any, to which the transferred
assets are subject.
l. The Bank has no plan or intention to issue additional shares of its
stock that would result in the Company owning less than all of the outstanding
stock of the Bank.
m. The Company has no plan or intention to liquidate the Bank; to merge
the Bank with or into another corporation; to sell or otherwise dispose of the
stock of the Bank except for transfers of stock to corporations controlled by
the Company; or to cause the Bank to sell or otherwise dispose
<PAGE>
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 6
of any of its assets, except for dispositions made in the ordinary course of
business or transfers of assets to a corporation controlled by the Bank.
n. The Company does not own, nor has it owned during any period of its
existence, any shares of stock of the Bank.
o. On the Effective Date, the fair market value of the assets of the Bank
will exceed the sum of its liabilities, plus the amount of liabilities, if any,
to which the assets are subject.
Opinions
- --------
Based on the foregoing description of the Conversion, and subject to the
qualifications and limitations set forth in this letter, we are of the opinion
that, if the Conversion were to be consummated as described above as of the date
hereof, then:
1. The MHC Merger will constitute a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code.)
2. The exchange, as a result of the the MHC Merger, of the equity
interests of the Eligible and the Supplemental Eligible Account Holders in the
MHC for interests in the Liquidation Account established by the Bank in the MHC
Merger will satisfy the continuity of interest requirement of Section 1.368-1(b)
of the Treasury Regulations (cf. Rev. Rul. 69-3, 1969-1 C.B. 103, and Rev. Rul.
69-646, 1969-2 C.B. 54).
3. Neither the MHC nor the Bank will recognize any gain or loss as a
result of the MHC Merger or upon the transfer of the MHC's assets to the Bank in
exchange for an interest in the Liquidation Account established in the Bank for
the benefit of the Eligible and the Supplemental Eligible Account Holders who
remain depositors of the Bank. (Section 361 of the Code.)
4. No gain or loss will be recognized by the Bank as a result of the MHC
Merger or upon the receipt of the assets of the MHC in the MHC Merger in
exchange for the transfer to the Eligible and the Supplemental Eligible Account
Holders of an interest in the Liquidation Account. (Section 1032(a) of the
Code.)
5. The basis of the assets of the MHC to be received by the Bank will be
the same as the basis of such assets in the hands of the MHC immediately prior
to the transfer. (Section 362(b) of the Code.)
<PAGE>
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 7
6. The holding period of the assets of the MHC to be received by the Bank
will include the holding period of those assets in the hands of the MHC.
(Section 1223(2) of the Code.)
7. The Eligible and Supplemental Eligible Account Holders will recognize
no gain or loss as a result of the MHC Merger or upon the receipt of Deposit
Accounts and interests in the Liquidation Account in the Bank in exchange for
their Deposit Accounts in the Bank and liquidation interests in the MHC.
(Section 354(a) of the Code.)
8. The Company will recognize no gain or loss upon the receipt of cash in
the Offerings in exchange for shares of Company Common Stock. (Section 1032 of
the Code.)
9. The Company will recognize no gain or loss upon the transfer of the
Contributed Offering Proceeds to the Bank in exchange for common stock of the
Bank. (Section 351(a) of the Code.)
10. The Bank will recognize no gain or loss upon the receipt of the
Contributed Offering Proceeds from the Company in exchange for common stock of
the Bank. (Section 1032 of the Code.)
11. No gain or loss will be recognized by the Company, or by the Eligible
or Supplemental Eligible Account Holders and other persons described in the Plan
who will receive Subscription Rights, as a result of the distribution to the
Eligible and Supplemental Eligible Account Holders and such other persons of
Subscription Rights relating to Company Common Stock. Eligible and Supplemental
Eligible Account Holders and other recipients of Subscription Rights will not
recognize gain or loss as a result of the exercise of such Subscription Rights
to purchase shares of Company Common Stock, provided that the amount to be paid
for the Company Common Stock is equal to the fair market value of the Company
Common Stock. The basis of the Company Common Stock to the Company's
stockholders will be the purchase price thereof plus the basis, if any, of the
Subscription Rights (which, as described below, we have assumed is zero).
We note that you have received an opinion of FinPro, Inc. which concludes
that the Subscription Rights have no value. Under past rulings of the Internal
Revenue Service, gain may be recognized by a recipient of Subscription Rights to
the extent of the fair market value of the Subscription Rights received. The
opinion of FinPro, Inc. has no binding effect on the Internal Revenue Service.
We express no opinion on the fair market value of the Subscription Rights and,
insofar as our opinion in paragraph 16 relates to the federal income tax
consequences of the distribution of Subscription Rights, we are relying upon the
opinion of FinPro, Inc. regarding the valuation of the subscription rights.
<PAGE>
Boards of Trustees and Directors
Berkshire Bank
Berkshire Bancorp
Berkshire Hills Bancorp, Inc.
April 24, 2000
Page 8
We hereby consent to the filing of the opinion as an exhibit to the
Application filed with the Division and to the Company's Registration Statement
on Form S-l as filed with the SEC. We also consent to the references to our firm
in the Prospectus contained in the Application and S-l under the captions "The
Conversion--Tax Effects" and "Legal Opinions."
Very truly yours,
/s/ Muldoon, Murphy & Faucette LLP
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
EXHIBIT 8.1
[Letterhead of Wolf & Company, P.C.]
April 24, 2000
Board of Trustees
Berkshire Hills Bancorp, Inc.
24 North Street
Pittsfield, MA 01201
Board of Directors
Berkshire Bancorp
24 North Street
Pittsfield, MA 01201
Ladies and Gentlemen:
This letter constitutes our opinion as to the state income tax consequences of
the proposed conversion of Berkshire Bancorp, (the "Mutual Holding Company" or
"MHC") of Berkshire Bank (the "Bank"), into Berkshire Hills Bancorp, Inc. a
stock holding company followed by the acquisition of the Bank's capital stock by
Berkshire Hills Bancorp, Inc. (the "Holding Company" or "Company"), a Delaware
corporation, pursuant to the plan of conversion (the "Conversion").
The opinions contained herein are based solely on the FACTS and REPRESENTATIONS
stated herein. All Section references are to the Internal Revenue Code of 1986,
as amended (the "Code") and Massachusetts General Laws ("MGL") as in effect as
of the date of this opinion. If any of the FACTS and REPRESENTATIONS is not
correct or complete, it is imperative that we be informed in writing as this
could have a material adverse effect on our opinion.
STATEMENT OF FACTS
------------------
Berkshire Bancorp is a Massachusetts chartered mutual holding company and has no
stock or stockholders. Berkshire Bank is a stock savings bank all the stock of
which is owned by Berkshire Bancorp. The proprietary interest in the reserves
and undivided profits of the Bank belong to the deposit account holders of the
Bank, hereinafter sometimes referred to as "depositors". A depositor of the
Bank has a right to share, pro rata, with respect to the withdrawal value of his
respective deposit account in any liquidation proceeds distributed in the event
the Bank is ever liquidated. In addition, a depositor of the Bank is entitled
to interest on his account balance as fixed and paid by the Bank.
1
<PAGE>
Holding Company is a Delaware corporation recently organized by the Bank for the
purpose of acquiring all of the capital stock of the Bank to be issued in the
Conversion. Holding Company will have authorized capital stock consisting of 26
million shares of common stock ("Common Stock") and 1 million shares of
preferred stock. Only Common Stock will be issued in connection with the
Conversion. Holding Company will acquire the stock of the Bank in exchange for
the greater of that portion of the net proceeds of the Offerings sufficient to
increase the Bank's tangible capital to 10% of its total adjusted assets or 50%
of the net proceeds from the Offerings.
DESCRIPTION OF THE CONVERSION
-----------------------------
In order to provide organizational and economic strength to the Bank, the Board
of Directors has adopted a plan of conversion, as amended, (the "Plan of
Conversion") whereby the Berkshire Bancorp will merge with and into Berkshire
Bank (the "MHC Merger"). In connection with the merger, shares of Berkshire Bank
common stock previously held by Berkshire Bancorp will be cancelled. Berkshire
Hills Bancorp Inc. will then contribute 50% of the net offering proceeds to
Berkshire Bank in exchange for its common stock. In connection with the
Conversion, the Holding Company will issue shares of its $0.01 par value Common
Stock in Subscription and Direct Community Offerings. It is anticipated that all
such shares of Common Stock not subscribed for in the Subscription and Direct
Community Offerings will be offered to the general public in a Syndicated
Community Offering.
The aggregate sales price of the Common Stock issued in the Conversion will be
based on an independent appraiser's valuation of the estimated pro forma value
of the Common Stock of the Converted Bank. The Conversion and sale of the
Common Stock will be accomplished pursuant to the rules and regulations and will
be subject to the approval of the Commissioner of the Massachusetts Division of
Banks.
In accordance with the Plan of Conversion, rights to subscribe for the purchase
of Common Stock have been granted under the Plan of Conversion to the following
persons in the following order of priority: (1) depositors whose accounts in the
Bank totaled $50 or more on September 30, 1998 ("Eligible Account Holders"); (2)
depositors whose accounts in the Bank totaled $50 or more on September 30, 1999
("Supplemental Eligible Account Holders"); (3) the Employee Plans, including the
ESOP; and (4) trustees, directors, officers, and employees who do not otherwise
qualify as Eligible Account Holders or Supplemental Eligible Account Holders.
All subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion.
2
<PAGE>
REPRESENTATIONS
---------------
Berkshire Bank has received an opinion from Muldoon, Murphy & Faucette LLP,
Washington, D.C., that addresses the material federal income tax consequences of
the conversion. The opinion, which relies upon standard factual representations
given by Berkshire Bank, concludes, as follows:
1. The MHC Merger will constitute a tax-free reorganization within
the meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A)
of the Code.)
2. The exchange, as a result of the MHC Merger, of the equity interests of
the Eligible and the Supplemental Eligible Account Holders in the
Mutual Holding Company for interests in the Liquidation Account
established by the Bank in the MHC Merger will satisfy the continuity
of interest requirements of Section 1.368-1(b) of the Treasury
Regulations (of Rev. Rul. 69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646,
1969-2 C.B. 54.)
3. Neither the Mutual Holding Company nor the Bank will recognize any
gain or loss as a result of the MHC Merger or upon the transfer of the
MHC's assets to the Bank in exchange for an interest in the Liquidation
Account established in the Bank for the benefit of the Eligible and
Supplemental Eligible Account Holders who remain depositors of the
Bank. (Section 361 of the Code.)
4. No gain or loss will be recognized by the Bank as a result of the MHC
Merger or upon the receipt of the assets of the MHC in the MHC Merger
in exchange for the transfer to the Eligible and Supplemental Eligible
Account Holders of an interest in the Liquidation Account. (Section
1032(a) of the Code.)
5. The basis of the assets of the MHC to be received by the Bank will be
the same as the basis of such assets in the hands of the MHC
immediately prior to the transfer. (Section 362(b) of the Code.)
6. The holding period of the assets of the MHC to be received by
the Bank will include the holding period of those assets
in the hands of the MHC. (Section 1223(2) of the Code.)
7. The Eligible or Supplemental Eligible Account Holders will recognize
no gain or loss as a result of the MHC Merger or upon the receipt of
Deposit Accounts and interests in the Liquidation Account in the Bank
in exchange for their Deposit Accounts in the Bank and liquidation
interests in the Mutual Holding Company. (Section 354(a) of the Code.)
8. The Holding Company will recognize no gain or loss upon the receipt of
cash in the Offerings in exchange for shares of Holding Company Common
Stock. (Section 1032 of the Code.)
3
<PAGE>
9. The Holding Company will recognize no gain or loss upon the transfer
of the Contributed Offering Proceeds to the Bank in exchange for
common stock of the Bank. (Section 351(a) of the Code.)
10. The Bank will recognize no gain or loss upon the receipt of the
Contributed Offering Proceeds from the Holding Company in exchange
for common stock of the Bank. (Section 1032 of the Code.)
11. No gain or loss will be recognized by the Holding Company, or by the
Eligible or Supplemental Eligible Account Holders or other persons
described in the Plan who will receive Subscription Rights, as a result
of the distribution to the Eligible and Supplemental Eligible Account
Holders and such other persons of Subscription Rights relating to
Holding Company Common Stock. Eligible or Supplemental Eligible Account
Holders and other recipients of Subscription Rights will not recognize
gain or loss as a result of the exercise of such Subscription Rights to
purchase shares of Holding Company Common Stock, provided that the
amount to be paid for the Holding Company Common Stock is equal to the
fair market value of the Holding Company Common Stock. The basis of the
Holding Company Common Stock to the Holding Company's stockholders will
be the purchase price thereof plus the basis, if any, of the
Subscription Rights (which, as described below, we assumed is zero).
4
<PAGE>
DISCUSSION
----------
Financial Institution Excise Tax
Bank is a Massachusetts stock savings bank subject to the Massachusetts
Financial Institution excise tax under MGL chapter 63, sections 1, 2, 2A, and
7. Holding Company will be a Delaware chartered corporation subject to
Massachusetts excise tax under MGL chapter 63, section 39 or the excise imposed
under MGL chapter 63, section 38B(b) if Holding Company is classified as a
security corporation pursuant to that section. ESOP Loan Subsidiary will be a
Massachusetts domestic corporation subject to the Massachusetts Financial
Institution excise tax under MGL chapter 63, sections 1, 2, 2A and 7 whose
purpose is to loan money to the ESOP to enable the ESOP to purchase stock.
The Massachusetts Financial Institution excise tax provides that banks and
certain corporations are taxed on net income as defined in MGL chapter 63,
section 1, which provides that net income is equal to "gross income other than
ninety-five percent of dividends received in any taxable year beginning on or
after January first, nineteen hundred and ninety-nine from or on account of the
ownership of any class of stock if the financial institution owns fifteen
percent or more of the voting stock of the institution paying the dividend, less
the deductions, but not the credits allowable under the provisions of the
Internal Revenue Code, as amended and in effect for the taxable year. For
taxable years beginning on or after January first, nineteen hundred and ninety-
nine, the provisions of section 291 of said Code shall not apply; and the
provisions of section 171(a)(2) and 265 of said Code shall only apply to the
extent that the income to which the deductions relate is excludable from gross
income. Deductions with respect to the following items, however, shall not be
allowed except as otherwise provided:
(a) dividends received, except as otherwise provided;
(b) losses sustained in other taxable years; or
(c) taxes on or measured by income, franchise taxes measured by net
income, franchise taxes for the privilege of doing business and
capital stock taxes imposed by any state."
Pursuant MGL chapter 63, section 1 for taxable years beginning on or after
January 1, 1995 gross income "is defined under the provisions of the federal
Internal Revenue Code, as amended and in effect for the taxable year, plus the
interest from bonds, notes and evidences of indebtedness of any state, including
the Commonwealth". Accordingly, a transaction that is non-taxable for federal
income tax purposes because it qualities as a tax-free reorganization within the
meaning of Section 368(a)(1)(F) of the federal Internal Revenue Code would also
be non-taxable for Massachusetts Financial Institution excise tax purposes by
reason of the fact that the federal treatment is controlling for Massachusetts
purposes.
5
<PAGE>
Although there is no case law nor regulations, announcements, or letter rulings
issued by the Department of Revenue ("DOR") since the adoption of the revised
definition of gross income, the DOR has issued numerous letter rulings regarding
reorganizations under pre-1995 law. In several letter rulings, the DOR has ruled
that no gain or loss should be recognized on transactions which qualify as
reorganizations under Code section 368(a)./1/ Other letter rulings have held no
Massachusetts gross income or loss resulted from the conversion of a mutual
savings or cooperative bank to a stock savings or cooperative bank./2/
The letter rulings relating to the conversion from mutual to stock form of doing
business specifically address the issue of whether the issuance of stock, under
Section 1032 of the Code, creates income to the issuer. In all of the rulings,
the DOR stated that no gain or loss should be recognized on the receipt of money
in exchange for shares of common stock./3/
Accordingly, no gain should be recognized by either Holding Company upon
issuance of its shares to the public or by Bank upon issuance of its shares to
Holding Company.
While the above rulings apply to pre-1995 tax law, the statutory definition of
gross income under pre-1995 tax law was very broad to include gross income from
all sources. Accordingly, the conclusions reached by these rulings would provide
weight to our conclusion that a non-taxable transaction for federal income tax
purposes would also be non-taxable for Massachusetts Financial Institution
excise tax purposes.
Corporate Excise Tax
It is the intent of management of Holding Company to obtain classification as a
Massachusetts Security Corporation under Massachusetts Chapter 63, Section
38B(b) for Massachusetts excise tax purposes. One of the requirements for
obtaining classification as a Massachusetts Security Corporation is that the
company be engaged "exclusively in buying. selling, dealing in, or holding
securities its own behalf and not as a broker."/4/
- --------------------
/1/ Massachusetts Letter Rulings 82-5, 83-53, 85-3, and 85-63.
/2/ Massachusetts Letter Rulings 84-11, 83-61 and 83-53.
/3/ Ibid.
/4/ MGL Chapter 63, Section 38(B).
6
<PAGE>
Holding Company has been authorized to loan money to the ESOP plan to be used
for the purchase of Holding Company stock. The lending of money is an
impermissible activity for Massachusetts Security Corporations/5/ and would
result in disqualification as a Massachusetts Security Corporation. Such
disqualification could result in additional income taxes being incurred by
Holding Company.
Management has represented to us that if it becomes necessary for the Holding
Company to loan money to the ESOP plan, the Holding Company will create a newly
formed subsidiary, ESOP Loan Subsidiary. ESOP Loan Subsidiary will then loan
the money to the ESOP plan.
Massachusetts Letter Rulings 88-13 and 91-3 addressed the issues of whether bank
holding companies and other corporations, respectively, were allowed to own
wholly-owned subsidiaries and what their permissible activities would be. In
both rulings, and particularly in the case of bank holding companies,
corporations were given fairly broad powers to manage the investment in their
wholly-owned subsidiaries provided they did not actually conduct a trade or
business themselves.
Provided ESOP Loan Subsidiary is created in such a manner that the business of
ESOP Loan Subsidiary can be managed by ESOP Loan Subsidiary and is not managed
by Holding Company, the formation of ESOP Loan Subsidiary followed by the
lending of money from ESOP Loan Subsidiary, to the ESOP plan should not violate
the requirements necessary to obtain and retain Massachusetts Security
Corporation classification status for Holding Company.
OPINION
-------
Accordingly, based upon the facts and representations stated herein, it is the
opinion of Wolf and Company, P.C. regarding the Massachusetts income tax effect
of the planned reorganization that:
1.) Provided the merger of Berkshire Bancorp with and into Berkshire Bank
constitutes a tax-free reorganization with the meaning of Section
368(a)(1)(A) of the Internal Revenue Code, the Conversion will also
qualify as a tax-free reorganization for Massachusetts excise tax
purposes (Massachusetts Letter Rulings 84-11, 83-53 and 83-61).
2.) No gain or loss shall be recognized by the Berkshire Bank or the
Holding Company on the receipt by the Berkshire Bank of money from the
Holding Company in exchange for shares of the Berkshire Bank's capital
stock, or by the Holding Company upon the receipt of money from the
sale of its Common Stock (Massachusetts Letter Ruling 87-11, Section
1032(a) of the Code).
- --------------------
/5/ Massachusetts Directive 86-35.
7
<PAGE>
3.) The basis of the assets of the Berkshire Bancorp in the hands of the
Berkshire Bank shall be the same as the basis of such assets in the
hands of the Berkshire Bancorp immediately prior to the Conversion
(Massachusetts Letter Ruling 84-11, Section 362(b) of the Code).
4.) The holding period of the assets of the Berkshire Bancorp in the
hands of the Berkshire Bank shall include the period during which
Berkshire Bancorp held the assets (Section 1223(2) of the Code and
Massachusetts Letter Ruling 84-11).
5.) No gain or loss will be recognized by the Eligible Account Holders and
the Supplemental Eligible Account Holders on the constructive issuance
to them of withdrawable deposit accounts plus interests in the
liquidation account of Berkshire Bank in exchange for their deposit
accounts in Berkshire Bank and liquidation interests in Berkshire
Bancorp. (Massachusetts Letter Ruling 84-11 and Section 354(a) of
the Code).
6.) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no
gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders and other persons described in
the Plan upon the distribution to them of the nontransferable
subscription rights to purchase shares of stock in the Holding Company
(Section 356(a) and Massachusetts Letter Ruling 84-11). Gain realized,
if any, by the Eligible Account Holders and Supplemental Eligible
Account Holders and other persons described in the Plan on the
distribution to them of nontransferable subscription rights to
purchase shares of Common Stock will be recognized but only in an
amount not in excess of the fair market value of such subscription
rights (Section 356(a) and Massachusetts Letter Ruling 84-11).
Eligible Account Holders and Supplemental Eligible Account Holders and
other persons described in the Plan will not realize any taxable
income as a result of the exercise by them of the nontransferable
subscription rights (Massachusetts Letter Ruling 84-11).
7.) The basis of the Holding Company Common Stock to its stockholders will
be the purchase price thereof plus the fair market values, if any, of
nontransferable subscription rights (Section 1012 of the Code and
Massachusetts Letter Rulings 84-11 and 83-61). Accordingly, assuming
the nontransferable subscription rights have no value, the basis of
the Common Stock to the Eligible Account
8
<PAGE>
Holders and Supplemental Eligible Account Holders and other persons
described in the Plan will be the amount paid therefor. The holding
period of the Common Stock purchased pursuant to the exercise of
subscription rights shall commence on the date on which the right to
acquire such stock was exercised (Section 1223(6) of the Code and
Massachusetts Letter Ruling 84-11 and 83-61).
8.) Under MGL Chapter 63, Sections 1, 2 and 7, Berkshire Bank will be
treated as the same savings bank and as if the Conversion had not
occurred (Massachusetts Letter Ruling 84-11). Accordingly:
a.) the part of the current taxable year of the Berkshire Bank before
the Conversion and the part of the current taxable year of the
Berkshire Bank after the Conversion will constitute a single
taxable year of Berkshire Bank;
b.) Berkshire Bank will succeed to and take into account the net
operating income of Berkshire Bank as of the date of the
Conversion; and
c.) for the current taxable year, the Berkshire Bank may claim as a
credit any estimated tax under MGL Chapter 63, Section 2 paid by
Berkshire Bank prior to the Conversion.
9.) The lending of money from ESOP Loan Subsidiary to the ESOP plan will
not prevent Holding Company from qualifying as a Massachusetts
Security Corporation provided that Holding Company does not conduct
any other activities deemed impermissible under MGL Chapter 63,
Section 38B, and the various regulations, announcements and letter
rulings issued by the Department of Revenue.
Our opinion under paragraph (6) above is predicated on the representation that
no person shall receive any payment, whether in money or property, in lieu of
the issuance of subscription rights. Our opinion under paragraphs (6) and (7)
above assumes that the subscription rights to purchase shares of Common Stock
received by Eligible Account Holders, and Supplemental Eligible Account Holders
have a fair market value of zero. We understand that you have received an
opinion of FinPro, Inc. that the subscription rights do not have any value. We
express no view regarding the valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market value,
income may be recognized by various recipients of the subscription rights (in
certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
9
<PAGE>
Our opinion assumes that the Conversion qualifies under Code Section 368(a) as a
tax free reorganization. We understand that the federal tax opinion is being
rendered by Muldoon, Murphy & Faucette, Attorneys at Law. We express no view
regarding whether the Conversion qualifies as a tax free reorganization under
the Code.
CONCLUSION
----------
THE OPINIONS CONTAINED HEREIN ARE RENDERED ONLY WITH RESPECT TO THE SPECIFIC
MATTERS DISCUSSED HEREIN AND WE EXPRESS NO OPINION WITH RESPECT TO ANY OTHER
LEGAL, FEDERAL, STATE, OR LOCAL TAX ASPECT OF THESE TRANSACTION. THIS OPINION
IS NOT BINDING UPON ANY TAX AUTHORITY INCLUDING THE MASSACHUSETTS DEPARTMENT OF
REVENUE OR ANY COURT AND NO ASSURANCE CAN BE GIVEN THAT A POSITION CONTRARY TO
THAT EXPRESSED HEREIN WILL NOT BE ASSERTED BY A TAX AUTHORITY.
IN RENDERING OUR OPINIONS WE ARE RELYING UPON THE RELEVANT PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, MASSACHUSETTS GENERAL LAWS AND THE
REGULATIONS, JUDICIAL AND ADMINISTRATIVE INTERPRETATIONS THEREOF, ALL AS OF THE
DATE OF THIS LETTER.
HOWEVER, ALL OF THE FOREGOING AUTHORITIES ARE SUBJECT TO CHANGE OR MODIFICATION
WHICH CAN BE RETROACTIVE IN EFFECT AND, THEREFORE, COULD ALSO AFFECT OUR
OPINIONS. WE UNDERTAKE NO RESPONSIBILITY TO UPDATE OUR OPINION FOR ANY
SUBSEQUENT CHANGE OR MODIFICATION.
Very truly yours,
/s/ Wolf and Company, P.C.
Wolf and Company, P.C.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this First Amendment to the Registration Statement on
Form S-1 and Prospectus of Berkshire Hills Bancorp, Inc. (proposed holding
company for Berkshire Bank) of our report dated March 10, 2000, on the
consolidated balance sheets of Berkshire Bancorp (mutual holding company of
Berkshire Bank) as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in retained earnings and cash flows for each of
the years in the three-year period ended December 31, 1999 and to the use of our
name and the statements with respect to us, as appearing under the headings
"Experts," "Massachusetts Taxation," "Tax Effects" and "Legal and Tax Opinions"
in the Prospectus.
We also consent to the inclusion of our State Tax Opinion as an exhibit to the
Registraton Statement and the references to summary of such opinion in the
Registration Statement.
Wolf & Company, P.C.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
April 21, 2000
<PAGE>
<TABLE>
<S> <C>
LOGO: BERKSHIRE HILL BANCORP, INC.
Subscription & Direct Community Offering Stock Order Form
------------------------------------ -------------------------------
Bank Use Berkshire Bank
Conversion Center
------------------------------------ 244 Main Street
IMPORTANT-PLEASE NOTE: A properly Great Barrington, MA 01230
completed original stock order form (800) 220-6956
must be used to subscribe for Common --------------------------------
Stock. Copies of this form are not Expiration Date
required to be accepted. Please read for Stock Order Forms:
the Stock Ownership Guide and _______, ____________, 2000
Stock Order Form instructions as 4:00 p.m., Eastern Time,
you complete this form. unless extended
====================================================================================================================================
(1) Number of Shares (2) Total Payment Due The minimum number of shares that may be subscribed for is
- ------------------------- Subscription Price ---------------------- 25. The maximum number of shares that may be subscribed for
X $ 10.00 = in the Subscription Offering is 25,000 shares. The maximum
- ------------------------- ---------------------- number of shares that may be subscribed for in the Direct
Community offering by any person, together with associates
or persons acting in concert, is 25,000 shares. See
instructions.
====================================================================================================================================
[_] (3) Employee/Officer/Director/Trustee/Corporator Information
Check here if you are an employee, officer, director, trustee (6) Purchaser Information
or corporator of Berkshire Bancorp or Berkshire Bank or a a [_] Check here if you are an Eligible Account Holder with
member of such person's immediate family living in the same a deposit account(s) totalling $50.00 or more as of
household. the close of business on September 30, 1998. List
- ----------------------------------------------------------------- account(s) below.
(4) Method of Payment/Check ----------------
Enclosed is a check, bank draft or money Check Amount b [_] Check here if you are a Supplemental Eligible
order made payable to Berkshire Hills Account Holder with a deposit account(s) totalling
Bancorp, Inc. in the amount indicated ---------------- $50.00 or more as of the close of business on
in this box. September 30, 1999. List account(s) below.
c [_] Check here if you are a director, trustee, officer,
or employee of Berkshire Bancorp or Berkshire Bank
who is not entitled to a higher priority subscription
right.
================================================================= -----------------------------------------------------------------
(5) Method of Payment/Withdrawal Account Title (Names on Accounts) Account Number(s) Bank Use
The undersigned authorizes withdrawal from the following _________________________________________________________________
account(s) at Berkshire Bank. Individual Retirement
Accounts maintained at Berkshire Bank cannot be _________________________________________________________________
used unless special transfer arrangements are made.
There is no early withdrawal penalty for this form of _________________________________________________________________
payment.
- ----------------------------------------------------------------- _________________________________________________________________
Account Number(s) Withdrawal Amount(s) Bank Use
_________________________________________________________________ ________________________________________________________________
_________________________________________________________________ PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS ABOVE MAY RESULT
IN THE LOSS OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS.
_________________________________________________________________ IF ADDITIONAL SPACE IS NEEDED, PLEASE UTILIZE SPACE PROVIDED
ON THE BACK OF THIS STOCK ORDER FORM.
_________________________________________________________________
Total Withdrawal Amount
====================================================================================================================================
(7) Stock Registration/Form of Stock Ownership ------- ------- -------------
[_] Individual [_] Joint Tenants [_] Tenants in Common - -
------- ------- -------------
[_] Fiduciary (i.e. [_] Company/Corp/Partnership [_] Uniform Transfers to Minors Act [_] IRA or other Qualified Plan -
trust, estate, etc.) Beneficial Owner's SS#
(8) Name(s) in which stock is to be registered (PLEASE PRINT CLEARLY)- ADDING THE NAMES OF OTHER PERSON(S) WHO ARE NOT OWNERS OF
YOUR QUALIFYING ACCOUNT(S) WILL RESULT IN YOUR ORDER
BECOMING NULL AND VOID.
- ------------------------------------------------------------------------------------------------------------------------------------
Name(s) Social Security # or Tax ID
- ------------------------------------------------------------------------------------------------------------------------------------
Name(s) continued Social Security # or Tax ID
- ------------------------------------------------------------------------------------------------------------------------------------
Street Address County of Residence
------------------------------------------------------------------------------------------------------------------------------
City State Zip Code
------------------------------------------------------------------------------------
(9) Telephone - Daytime ( ) Evening ( )
- ------------------------------------------------------------------------------------------
====================================================================================================================================
[_] (10) NASD Affiliation - Check here if you are a member of the National Association [_] (11) Associates - Acting In Concert
of Securities Dealers, Inc. ("NASD"), a person associated with an NASD member, a Check here, and complete the reverse side of
member of the immediate family of any such person to whose support such person this form, if you or any associates or
contributes, directly or indirectly, or the holder of an account in which an NASD persons acting in concert with you (as
member or person associated with a NASD member has a beneficial interest. To defined on the reverse side of this form)
comply with conditions under which an exemption from the NASD's Interpretation have submitted other orders for shares in
With Respect to Free-Riding and Withholding is available, you agree, if you have the Subscription and/or Direct Community
checked the NASD Affiliation box, (i) not to sell, transfer or hypothecate the Offerings.
stock for a period of three months following issuance, and (ii) to report this
subscription in writing to the applicable NASD member within one day of payment
therefor.
====================================================================================================================================
(12) Acknowledgment - To be effective, this stock order form and accompanying certification form must be BANK USE ONLY
properly completed and physically received by Berkshire Bancorp no later than 4:00 p.m., Eastern time, ==================
on _________, _____________ __, 2000, unless extended; otherwise this stock order form and all
subscription rights will be void. The undersigned agrees that after receipt by Berkshire Bancorp,
this stock order form may not be modified, withdrawn or canceled without Berkshire Bancorp's consent
and if authorization to withdraw from deposit accounts at Berkshire Bank has been given as payment for
shares, the amount authorized for withdrawal shall not otherwise be available for withdrawal by the ==================
undersigned. Under penalty of perjury, I hereby certify that the Social Security or Tax ID number and
the information provided on this stock order form is true, correct and complete, that I am not subject
to back-up withholding, and that I am purchasing solely for my own account and that there is no agreement
or understanding regarding the sale or transfer of such shares, or my right to subscribe for shares
herewith. It is understood that this stock order form will be accepted in accordance with, and subject to,
the terms and conditions of the plan of conversion, as amended, described in the accompanying Prospectus. ------------------
The undersigned hereby acknowledges receipt of the Prospectus at least 48 hours prior to delivery of this BANK USE ONLY
stock order form to Berkshire Bancorp. ==================
Applicable regulations prohibit any person from transferring, or entering into any agreement, directly or
indirectly, to transfer the legal or beneficial ownership of subscription rights or the underlying
securities to the account of another. Berkshire Bank, Berkshire Bancorp and Berkshire Hills Bancorp, Inc.
will pursue any and all legal and equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve such transfer.
------------------------------------------------------- --------------------------------------------------
Signature Date Signature Date
------------------------------------------------------- --------------------------------------------------
THE CERTIFICATION FORM ON THE REVERSE SIDE MUST BE SIGNED
====================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Item (6) a,b - (continued)
- ---------------------------------------------------------------------- "Associate" is defined as: (i) any corporation or
Account Title (Names on Accounts) Account Number(s) Bank Use organization (other than Berkshire Bancorp, Berkshire Hills
______________________________________________________________________ Bancorp, Inc., the Bank or a majority-owned subsidiary of
Berkshire Bancorp, Berkshire Hills Bancorp, Inc., or the
______________________________________________________________________ Bank) of which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10% or
______________________________________________________________________ more of any class of equity securities; (ii) any trust or
other estate in which such person has a substantial
______________________________________________________________________ beneficial interest or as to which such person serves as
a trustee or in a similar fiduciary capacity; provided,
______________________________________________________________________ however, such term shall not include Berkshire Hills
Bancorp, Inc.'s or Berkshire Bank's employee benefit plans
______________________________________________________________________ in which such person has a substantial beneficial interest
or serves as a trustee or in a similar fiduciary capacity;
______________________________________________________________________ and (iii) any relative or spouse of such person, or any
relative of such spouse, who either has the same home as
Item (11) - (continued) such person or who is a trustee, director or officer of
List below all other orders submitted by you or Associates Berkshire Bancorp, Berkshire Hills Bancorp, Inc., or the
(as defined) or by persons acting in concert with you. Bank or any subsidiaries thereof. Trustees, directors or
officers of Berkshire Bancorp, Berkshire Hills Bancorp,
- ----------------------------------------------------------------- Inc. or the Bank are not treated as associates solely
Number of Shares because of their Board memberships.
Name(s) listed on other Stock Order Forms Ordered
_________________________________________________________________ "Acting in Concert" (a) knowing participation in a joint
activity or interdependent conscious parallel action
_________________________________________________________________ towards a common goal whether or not pursuant to an express
agreement; or (b) a combination or pooling of voting or
_________________________________________________________________ other interests in the securities of an issuer for a common
purpose under any contract, understanding, relationship,
_________________________________________________________________ agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with
_________________________________________________________________ another party shall also be deemed to be acting in concert
with any person who is also acting in concert with that
other party. Berkshire Hills Bancorp, Inc. and Berkshire
Bank may presume that certain persons are acting in concert
based upon, among other things, joint account relationships
and the fact that persons may have filed joint Schedules
13D with the Securities and Exchange Commission with
respect to other companies.
- ------------------------------------------------------------------------------------------------------------------------------------
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, AND IS NOT INSURED OR GUARANTEED BY BERKSHIRE BANCORP, BERKHIRE BANK, BERKSHIRE HILLS BANCORP,
INC., THE FEDERAL GOVERNMENT, THE DEPOSITORS INSURANCE FUND OR BY ANY GOVERNMENT AGENCY. THE ENTIRE AMOUNT OF AN INVESTOR'S
PRINCIPAL IS SUBJECT TO LOSS.
I further certify that, before purchasing the Common Stock, par value $0.01 per share, of Berkshire Hills Bancorp, Inc.
(the "Company"), the proposed holding company for Berkshire Bank, I received a Prospectus of the Company
dated _______________ ___, 2000 relating to such offer of Common Stock.
The Prospectus that I received contains disclosure concerning the nature of the Common Stock being offered by the Company
and describes in the "Risk Factors" section beginning on page ____, the risks involved in the investment in this Common
Stock, including but not limited to the following:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
1. Berkshire Bank's lower than average return on equity may decrease the market price of the common stock. (page )
2. Berkshire Bank's increased emphasis on commercial and consumer lending may hurt both asset quality and (page )
profits.
3. A decline in the stock market may hurt Berkshire Bank's profits and negatively impact its net worth. (page )
4. Recent market conditions may effect the market price of the common stock. (page )
5. Competition has hurt Berkshire Bank's net interest imcome. (page )
6. Declining interest rates could hurt Berkshire Bank's profits. (page )
7. Banking reform legislation restricts the activities in which Berkshire Hills may engage compared to (page )
existing unitary holding companies.
8. Management will have substantial discretion over investment of the offering proceeds and may make (page )
investments with which you may disagree.
9. Implementation of additional benefit plans will increase future compensation expense and lower (page )
Berkshire Bank's profits.
10. A downturn in the local economy could hurt Berkshire Bank's profits. (page )
11. Issuance of shares for benefit programs may lower your ownership interest. (page )
12. The contribution to Berkshire Hills Foundation means that a stockholder's total ownership interest will be (page )
7.4% less after the contribution.
13. Contribution to Berkshire Hills Foundation may not be tax deductible which could hurt Berkshire Hills' (page )
profits.
14. Establishment of Berkshire Hills Foundation will hurt Berkshire Hills' profits for the year 2000. (page )
15. Various factors could make takeover attempts that you need to occur more difficult to achieve. (page )
16. Berkshire Hills cannot assure or guarantee an active trading market for the common stock. (page )
------------------------------------------------------- --------------------------------------------------
Signature Date Signature Date
------------------------------------------------------- --------------------------------------------------
------------------------------------------------------- --------------------------------------------------
Name (Please Print) Name (Please Print)
------------------------------------------------------- --------------------------------------------------
THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[LOGO] Berkshire Hills Bancorp, Inc.
================================================================================
Stock Ownership Guide
Individual
Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership rights,
such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
- --------------------------------------------------------------------------------
Joint Tenants
Joint Tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
- --------------------------------------------------------------------------------
Tenants in Common
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or sale of shares
held by tenants in common.
_______________________________________________________________________________
Uniform Transfers to Minors Act ("UTMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Transfers to Minors Act of each state. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation for
Custodian is "CUST", while the Uniform Transfers to Minors Act is "UTMA".
Standard U.S. Postal Service state abbreviations should be used to describe the
appropriate state. For example, stock held by John Doe as custodian for Susan
Doe under the Massachusetts Uniform Transfers to Minors Act will be abbreviated
John Doe, CUST Susan Doe UTMA MA (use minor's social security number).
- --------------------------------------------------------------------------------
Fiduciaries
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
. The name(s) of the fiduciary. If an individual, list the first name, middle
initial and last name. If a corporation, list the full corporate title(name).
If an individual and a corporation, list the corporation's title before the
individual.
. The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
. A description of the document governing the fiduciary relationship, such as
a trust agreement or court order. Documentation establishing a fiduciary
relationship may be required to register your stock in a fiduciary capacity.
. The date of the document governing the relationship, except that
the date of a trust created by a will need not be included in the
description.
. The name of the maker, donor or testator and the name of the beneficiary.
An example of fidiciary ownership of stock in the case of a trust is: John Doe,
Trustee Under Agreement Dated 10-1-87 for Susan Doe.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Stock Order Form Instructions
Items 1 and 2-Number of Shares and Total Payments Due
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares by $10.00.
The minimum purchase in the Subscription Offering is 25 shares. As more fully
described in the Prospectus, the maximum purchase by each Eligible Account
Holder in the Subscription Offering is $250,000 (25,000 shares), and the maximum
purchase in the Direct Community Offering by any person, together with
associates or persons acting in concert, is $250,000 (25,000 shares). However,
no person, together with associates and persons acting in concert with such
person, may purchase in the aggregate more than 1.0% of the shares sold. Based
on the offering of 8,314,500 shares, 1.0% amounts to 83,145 shares. The
aggregate purchase price of the shares of common stock that will be ultimately
sold in the conversion has not yet been determined, but will be within the range
of prices set forth in the Prospectus or any supplement thereto.
- --------------------------------------------------------------------------------
Item 3-Employee/Officer/Director/Trustee Information
Please check this box to indicate whether you are an employee, officer, director
or trustee of Berkshire Bank, Berkshire Bancorp or a member of such person's
immediate family living in the same household.
- --------------------------------------------------------------------------------
Item 4-Method of Payment by Cash or Check
Payment for shares may be made in cash (only if delivered by you in person to a
full service banking office of Berkshire Bank) or by check, bank draft or money
order payable to Berkshire Hills Bancorp, Inc. Your funds will earn interest at
the Bank's passbook rate of interest until the conversion is completed. DO NOT
MAIL CASH TO PURCHASE STOCK! Please indicate the total check(s) amount in this
box if your method of payment is by check, bank draft or money order.
- --------------------------------------------------------------------------------
Item 5-Method of Payment By Withdrawal
If you pay for your stock by a withdrawal from a deposit account at Berkshire
Bank, indicate the account number(s) and the amount of your withdrawal
authorization for each account. The total amount withdrawn should equal the
amount of your stock purchase. There will be no penalty assessed for early
withdrawals from certificate accounts used for stock purchases. This form of
payment may not be used if your account at the Bank is an Individual Retirement
Account or Qualified Plan unless special transfer arrangements are made.
- --------------------------------------------------------------------------------
Item 6-Purchaser Information
a. Please check this box if you are an Eligible Account Holder with a deposit
account(s) totalling $50.00 or more as of the close of business on September 30,
1998.
b. Please check this box if you are a Supplemental eligible Account Holder with
a deposit account(s) totalling $50.00 or more as of the cloe of business on
September 30, 1999.
c. Please check this box if you are a director, trustee, officer or employee of
Berkshire Bancorp or Berkshire Bank who is not entitled to a higher priority
subscription right.
Please list all names and all account numbers on accounts you had as of the
close of business on September 30, 1998 and September 30, 1999 in order to
insure proper identification of your purchase rights.
Please note: Failure to list all your accounts may result in the loss of part or
all of your subscription rights.
- --------------------------------------------------------------------------------
Items 7,8,9-Stock Registration/Form of Stock Ownership, Names and Telephone
Number
The stock transfer industry has developed a uniform system of shareholder
registrations that will be used in the issuance of your Berkshire Hills Bancorp,
Inc. Common Stock. Please complete items 7, 8 and 9 as fully and accurately as
possible, and be certain to supply your social security or Tax I.D. number(s)
and your daytime and evening phone number(s). We may need to call you if we
cannot execute your order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Stock ownership
must be registered in one of the ways described above under "Stock Ownership
Guide". Adding the names of other persons who are not owners of your qualifying
account(s) will result in your order becoming null and void.
- --------------------------------------------------------------------------------
Item 10-NASD Affiliation
Please check this box if you are a member of the NASD or if this item otherwise
applies to you.
- --------------------------------------------------------------------------------
Item 11-Associates-Acting in Concert
Please check this box if you or any associate or person acting in concert with
you (as defined on the reverse side of the stock order form) has submitted
another order for shares and complete the reverse side of the stock order form.
- --------------------------------------------------------------------------------
Item 12-Acknowledgement
Please sign and date the stock order form and certification form where
indicated. Before you sign, review the stock order form, including the
acknowledgement, and the certification form. Normally, one signature is
required. An additional signature is required only when payment is to be made by
withdrawal from a deposit account that requires multiple signatures to withdraw
funds.
- --------------------------------------------------------------------------------
You may mail your completed stock order form and certification form in the
envelope that has been provided, or you may deliver your stock order form and
certification form to any full-service banking office of Berkshire Bank. Your
stock order form and certification form, properly completed, and payment in full
(or withdrawal authorization) at the subscription price must be physically
received by Berkshire Bancorp no later than 4:00 p.m., Eastern time, on _____
__________, 2000, unless extended, or it will become void. If you have any
remaining questions, or if you would like assistance in completing your stock
order form and certification form, you may call our conversion center at
(800)220-6958, Monday through Friday from 10:00 a.m. to 4:00 p.m. Please note
that the conversion center will be closed from 12:00 noon Fricay, May 26,
through 12:00 noon Tuesday, May 30, in observance of the Memorial Day holiday.
================================================================================
