UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 1-15781
BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3510455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 North Street, Pittsfield, Massachusetts 01201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (413) 443-5601
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, par value American Stock Exchange
$0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates was $129,290,890 based upon the closing price of $18.32
as listed on the American Stock Exchange on March 12, 2001. Solely for purposes
of this calculation, the shares held by the directors and officers of the
registrant are deemed to be held by affiliates.
As of March 12, 2001, the registrant had 7,290,073 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Proxy Statement for the Annual Meeting of Stockholders
("Proxy Statement"). (Part III)
INDEX
Part I
Page
Item 1. Business....................................................... 1
Item 1A. Executive Officers of the Registrant........................... 30
Item 2. Properties..................................................... 31
Item 3. Legal Proceedings.............................................. 32
Item 4. Submission of Matters to a Vote of Securities Holders.......... 32
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 33
Item 6. Selected Financial Data........................................ 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 47
Item 8. Financial Statements and Supplementary Data.................... 49
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 93
Part III
Item 10. Directors and Executive Officers of the Registrant............. 94
Item 11. Executive Compensation......................................... 94
Item 12. Security Ownership of Certain Beneficial Owners and Management. 94
Item 13. Certain Relationships and Related Transactions................. 94
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 94
PART I
ITEM 1. BUSINESS
General
Berkshire Hills Bancorp, Inc. (the "Company" or "Berkshire Hills"), a
Delaware corporation, was organized in January 2000 for the purpose of becoming
the holding company for Berkshire Bank (the "Bank" or "Berkshire Bank") upon the
conversion of the Bank's former parent holding company, Berkshire Bancorp (the
"MHC" or "Berkshire Bancorp"), from the mutual to stock form of organization
(the "Conversion"). The Conversion was completed on June 27, 2000. In connection
with the Conversion, the Company sold 7,105,334 shares of its common stock, par
value $0.01 per share (the "Common Stock") at a purchase price of $10 per share
to depositors of the Bank in a subscription offering. In addition, the Company
issued an additional 568,427 shares, representing 8% of the shares sold in the
subscription offering, to Berkshire Hills Foundation, a charitable foundation
established by the Bank. The Company owns all of the outstanding shares of the
Bank and has invested a portion of the net proceeds it retained from its initial
public offering in securities such as industrial revenue bonds, municipal notes,
and corporate bonds. The Company has no significant liabilities. Management of
the Company and the Bank are substantially similar and the Company neither owns
nor leases any property, but instead uses the premises, equipment and furniture
of the Bank. Accordingly, the information set forth in this report, including
the consolidated financial statements and related financial data, relates
primarily to the Bank.
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. The Bank is
regulated by the Massachusetts Division of Banks and the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank's deposits are insured to the
maximum allowable amount by the Bank Insurance Fund (the "BIF") of the FDIC and
the Depositors Insurance Fund (the "DIF"). 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 11 full-service 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. 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, 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
securities and advances from the Federal Home Loan Bank of Boston.
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 11 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, Mead Corporation and several
institutions of higher education.
Competition
The 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 comes 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 several
commercial and savings banks operating in its primary market area and, to a
lesser extent, from
1
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 due to 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 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).
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.
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.
At December 31,
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- --------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Real estate loans:
One- to four-family.......... $249,440 31.44% $245,240 36.39% $220,612 36.36% $202,305 40.64% $196,712 42.26%
Commercial.................. 63,871 8.05 46,419 6.89 51,598 8.50 41,267 8.29 50,824 10.92
Multi-family................ 15,699 1.98 14,793 2.20 15,393 2.54 14,740 2.96 12,451 2.67
Construction ............... 14,290 1.80 12,534 1.86 12,821 2.11 11,531 2.32 6,229 1.34
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans.... 343,300 43.27 318,986 47.34 300,424 49.51 269,843 54.21 266,216 57.19
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Home equity lines of credit 34,471 4.34 33,168 4.92 31,628 5.21 25,801 5.18 24,945 5.36
Automobile.................. 230,648 29.08 164,862 24.46 134,616 22.19 84,979 17.07 67,006 14.39
Other....................... 18,014 2.27 10,706 1.59 5,933 0.98 5,889 1.18 3,446 0.74
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans....... 283,133 35.69 208,736 30.97 172,177 28.38 116,669 23.43 95,397 20.49
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial loans............... 166,956 21.04 146,196 21.69 134,115 22.11 111,372 22.36 103,884 22.32
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.............. 793,389 100.00% 673,918 100.00% 606,716 100.00% 497,884 100.00% 465,497 100.00%
====== ====== ====== ====== ======
Net deferred loan origination
costs (fees)............ 232 170 44 (63) (135)
Allowance for loan losses.. (10,216) (8,534) (7,589) (6,078) (6,303)
-------- -------- -------- -------- --------
Total loans, net..... $783,405 $665,554 $599,171 $491,743 $459,059
======== ======== ======== ======== ========
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,
2000, $249.4 million, or 31.4%, 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 34% were fixed-rate mortgage loans
and approximately 66% were adjustable-rate loans.
2
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 $279,500. 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 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, 2000, the initial discounted rate on
these loans was 100 to 200 basis points below the current fully indexed rate.
Generally, these loans will begin to reprice towards their fully indexed rate on
their next review date.
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. During periods of rising interest rates the risk of default on
adjustable-rate mortgage loans increases 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 periodic 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 to 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.
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, 2000, construction loans totaled
$14.3 million, or 1.8% of Berkshire Bank's total loan portfolio, of which $5.8
million were residential construction loans and $8.5 million were commercial
construction loans. At December 31, 2000, the unadvanced portion of construction
loans totaled $12.4 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
3
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, 2000, the largest outstanding residential construction
loan commitment was for $850,000, $335,500 of which was outstanding. This loan
was performing according to its terms at December 31, 2000. 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
is at the sole discretion of Berkshire Bank and is 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, 2000, the largest outstanding commercial
construction loan commitment was $6.0 million, of which $1.6 million was
outstanding. The accommodation was granted to a non-profit organization for the
renovation and upgrade of a 320 acre property in Stockbridge, Massachusetts.
This loan was performing according to the terms at December 31, 2000.
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
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.
Berkshire Bank's multi-family and commercial 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.
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
4
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, 2000 was a performing $5.7
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.
Commercial Lending
Commercial Loans. At December 31, 2000, Berkshire Bank had $167.0
million in commercial loans which amounted to 21.0% of total loans. In addition,
at such date, Berkshire Bank had $48.5 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's largest commercial loan relationship was a $5.8 million loan to
a long time customer secured by various types of business assets located in
counties adjacent to Berkshire County in New York and Connecticut. This loan was
performing according to its original terms at December 31, 2000.
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 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, 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. Operating facility loans are revolving
lines of credit secured by business assets other than real estate, such as
business equipment, inventory, and accounts receivable. 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, 2000, Business Manager Lines of Credit
totaled $1.4 million, or 0.8% of commercial loans. Additionally, the unadvanced
amounts of Business Manager Lines of Credit totaled approximately $867,400.
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.
5
Consumer Lending
Automobile Lending. At December 31, 2000, automobile loans totaled
$230.6 million, or 29.1% of Berkshire Bank's total loans and 81.5% 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 over eight 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. 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
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 27.0% of the
loans originated in 2000. 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, 2000, home equity lines of credit totaled $34.5
million, or 4.3% of Berkshire Bank's total loans and 12.2% of consumer loans.
Additionally, at December 31, 2000, the unadvanced amounts of home equity lines
of credit totaled $35.4 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, 2000 amounted to $18.0 million, or
2.3% of Berkshire Bank's total loans and 6.4% of consumer loans. These loans
include education, collateral, personal and unsecured loans, and second mortgage
loans other than home equity 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. 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, 2000, Berkshire Bank's
statutory limit on loans to one borrower was $24.9 million. At that date,
Berkshire Bank's largest amount of loans to one borrower, including the
borrower's related interests, was approximately $7.8 million and consisted of
five loans secured by various types of business assets. These loans were
performing according to their original terms at December 31, 2000.
6
Maturity of Loan Portfolio. The following table shows the remaining
contractual maturity of Berkshire Bank's total loans at December 31, 2000,
excluding the effect of future principal prepayments.
At December 31, 2000
---------------------------------------------------------------------------------------------
Commercial Home
One-to and Equity
Four- Construction Multi-Family Lines of Other
Family (1) Real Estate Credit Automobile Consumer Commercial Total
---------------------------------------------------------------------------------------------
(In thousands)
Amounts due in:
One year or less.... $ 467 $14,268 $ 130 $ 1,898 $ 12,179 $ 1,015 $ 52,336 $ 82,293
More than one year
to three years... 2,025 22 5,406 - 33,565 4,874 15,796 61,688
More than three
years
to five years.... 1,594 - 5,749 - 131,095 7,282 13,441 159,161
More than five
years
to 15 years...... 71,565 - 36,352 15,338 53,809 3,084 43,649 223,797
More than 15 years.. 173,789 - 31,933 17,235 - 1,759 41,734 266,450
-------- ------- ------- ------- -------- ------- -------- --------
Total amount due. $249,440 $14,290 $79,570 $34,471 $230,648 $18,014 $166,956 $793,389
======== ======= ======= ======= ======== ======= ======== ========
(1) Includes residential and commercial construction loans.
The following table sets forth, at December 31, 2000, the dollar amount
of loans contractually due after December 31, 2001, and whether such loans have
fixed interest rates or adjustable interest rates.
Due After December 31, 2001
-----------------------------------------------
Fixed Adjustable Total
-----------------------------------------------
(In thousands)
Real estate loans:
One- to four-family..................... $ 88,675 $160,298 $248,973
Construction............................ 22 - 22
Commercial and multi-family............. 9,318 70,122 79,440
-------- -------- --------
Total real estate loans.............. 98,015 230,420 328,435
Home equity loans.......................... - 32,573 32,573
Automobile................................. 218,469 - 218,469
Other consumer............................. 13,840 3,159 16,999
Commercial loans........................... 11,057 103,563 114,620
-------- -------- --------
Total loans.......................... $341,381 $369,715 $711,096
======== ======== ========
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.
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 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 and the Senior
Vice President-Retail Lending. 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 Retail Loan
7
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 $1.5 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 $1.5 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 relationships with automobile dealers. Currently, Berkshire Bank has
contractual relationships with over 100 automobile dealers who originate
automobile loans for Berkshire Bank. 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 an amount by which the interest rate paid on the
loan exceeds a specified threshold, up to a maximum of four points. The
compensation is paid at the time the loan is closed and assigned to Berkshire
Bank. For the fiscal years 2000 and 1999, Berkshire Bank originated or purchased
$180.3 million and $129.4 million of automobile loans, respectively, of which
97.9% and 97.5% were originated indirectly through the automobile dealers.
Berkshire Bank purchased consumer loans from a third party which originates
loans through smaller automobile dealers. The consumer loans purchased from the
third party are underwritten and closed by that third party. Berkshire Bank,
however, also performs its own credit analysis before purchasing such loans.
Berkshire Bank purchased $48.7 million of these consumer loans in 2000.
From time to time, Berkshire Bank will purchase whole loans or
participations in loans. The commercial real estate loans and other commercial
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 $4.7 million of such
loans in 2000. Amounts outstanding related to loan participation interests
purchased by Berkshire Bank totaled $9.7 million and $3.5 million at December
31, 2000 and December 31, 1999, respectively, and consisted primarily of loans
secured by commercial real estate.
At December 31, 2000, Berkshire Bank was servicing $75.3 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 2000, Berkshire Bank sold $38.9 million of loans,
which consisted primarily of automobile loans. Berkshire Bank currently
anticipates that future loan sales will consist predominately of automobile
loans. Generally, loans are sold without recourse, however,
8
$7.7 million of the aforementioned loans sold in 2000 were subject to recourse
until nine months from their origination date. These loans remained as an asset
for Berkshire Bank on December 31, 2000.
The following table presents total loans originated, purchased, sold
and repaid during the periods indicated.
For the Year Ended December 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
(In thousands)
Loans at beginning of period...................................... $673,918 $606,716 $497,884
-------- -------- --------
Originations:
Real estate loans:
One-to four-family ...................................... 31,231 49,207 66,410
Construction............................................. 25,071 7,199 10,978
Commercial............................................... 2,289 9,478 24,454
Multi-family............................................. 7,671 3,620 926
-------- -------- --------
Total real estate loans............................... 66,262 69,504 102,768
-------- -------- --------
Consumer loans:
Home equity lines of credit.............................. 8,225 10,796 21,942
Other (1)................................................ 145,126 135,574 101,035
-------- -------- --------
Total consumer loans.................................. 153,351 146,370 122,977
Commercial loans............................................ 64,887 64,542 51,989
-------- -------- --------
Total loans originated................................ 284,500 280,416 277,734
-------- -------- --------
Purchases:
Real estate loans:
Multi-family............................................. - 566 2,080
Commercial real estate................................... 4,664 2,228 --
-------- -------- --------
Total real estate loans............................... 4,664 2,794 2,080
Consumer loans:
Other (1)................................................ 48,724 11,877 6,006
Commercial loans............................................ 3,175 1,088 15,567
-------- -------- --------
Total loans purchased................................. 56,563 15,759 23,653
-------- -------- --------
Deduct:
Principal loan repayments, repayments and other, net........ 181,082 182,429 186,199
Loan sales.................................................. 38,942 44,308 5,590
Net loan charge-offs........................................ 1,488 2,085 544
Transfers to real estate owned.............................. 80 151 222
-------- -------- --------
Total deductions...................................... 221,592 228,973 192,555
-------- -------- --------
Net increase in loans............................................. 119,471 67,202 108,832
-------- -------- --------
Loans at end of period............................................ $793,389 $673,918 $606,716
======== ======== ========
(1) Consists primarily of automobile loans.
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, 2000,
Berkshire Bank had loan commitments and unadvanced loans and lines of credit
totaling $137.4 million.
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.
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,
9
2000, Berkshire Bank had approximately $232,000 of net deferred loan fees and
costs. Berkshire Bank amortized approximately $44,000 of net deferred loan fees
and costs during the year ended December 31, 2000.
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 after payment is due. In
most cases, delinquencies are cured promptly. If a delinquency continues beyond
the 15th day after the payment is due, the loan will appear on a delinquency
list and the account officer will contact the borrower. If a delinquency
continues beyond the 30th day, 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, 2000 and December 31, 1999, Berkshire Bank had a $395,000 and $1.5 million,
respectively, recorded investment in impaired loans, which had no specific
allowances and $71,000 and $50,000 in loans with valuation allowances of $4,000
and $14,000, respectively.
The following table sets forth information regarding nonperforming
assets at the dates indicated.
At December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------
(Dollars in thousands)
Nonaccruing loans:
One- to four-family real estate................... $ 390 $ 450 $1,272 $ 623 $ 766
Commercial real estate............................ -- -- 1,064 336 1,421
Commercial........................................ 466 1,572 612 613 2,619
Consumer (1)...................................... 2,013 819 542 584 39
------ ------ ------ ------ ------
Total nonperforming loans...................... 2,869 2,841 3,490 2,156 4,845
Real estate owned.................................... 50 220 398 364 2,888
------ ------ ------ ------ ------
Total nonperforming assets..................... $2,919 $3,061 $3,888 $2,520 $7,733
====== ====== ====== ====== ======
Total nonperforming loans as a percentage
of total loans.................................... 0.36% 0.42% 0.58% 0.43% 1.04%
Total nonperforming assets as a percentage
of total assets................................... 0.29% 0.36% 0.50% 0.40% 1.23%
(1) Consists primarily of automobile loans.
Interest income that would have been recorded for the year ended
December 31, 2000 had nonaccruing loans been current according to their original
terms amounted to approximately $291,000, $33,000 of which was included in
interest income related to these loans.
10
The following tables set forth the delinquencies in Berkshire Bank's
loan portfolio as of the dates indicated.
At December 31, 2000 At December 31, 1999 At December 31, 1998
---------------------------------------------------------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------- --------------- -------------- ---------------- -------------- ---------------
Principal Principal Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance
of of of of of of of of of of of of
Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Real estate loans:
One- to four-family... 2 $ 154 2 $ 43 6 $ 384 1 $ 106 2 $169 4 $ 375
Commercial............ -- -- -- -- -- -- -- -- -- -- -- --
Multi-family.......... -- -- -- -- -- -- -- -- -- -- 1 79
Consumer loans:
Equity lines of credit 2 57 1 20 -- -- -- -- -- -- 1 50
All other (1)......... 238 1,728 262 1,923 95 831 121 776 68 607 65 492
Commercial loans......... 4 129 3 149 6 335 11 1,168 2 150 19 1,397
--- ------ --- ------ --- ------ --- ------ -- ---- -- ------
Total.............. 246 $2,068 268 $2,135 107 $1,550 133 $2,050 72 $926 90 $2,393
=== ====== === ====== === ====== === ====== == ==== == ======
Delinquent loans to
total loans........... 0.60% 0.26% 0.66% 0.27% 0.34% 0.23% 0.43% 0.31% 0.29% 0.15% 0.36% 0.39%
(1) Consists primarily of automobile loans.
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, 2000,
Berkshire Bank had $50,000 of real estate owned, net, consisting primarily of a
vacant manufacturing facility.
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
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 as 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.
11
The following table sets forth Berkshire Bank's classified assets at
December 31, 2000.
Loss Doubtful Substandard Special Mention
------------------------------------------------------------------------------------
Number Number Number Number
of Principal of Principal of Principal of Principal
Loans Balance Loans Balance Loans Balance Loans Balance
------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
One- to four-family........ -- $-- -- $-- 10 $ 470 2 $ 154
Commercial................. -- -- -- -- 5 1,209 4 1,449
Multi-family............... -- -- -- -- 3 725 -- --
Consumer loans:
Equity lines of credit..... 1 20 -- -- -- -- 2 57
Automobile................. -- -- -- -- 269 1,987 233 1,720
All other.................. -- -- -- -- 4 6 5 8
Commercial loans.............. -- -- 1 20 29 3,924 42 6,906
--- --- --- --- --- ------ --- -------
Total................... 1 $20 1 $20 320 $8,321 288 $10,294
=== === === === === ====== === =======
At December 31, 2000, Berkshire Bank had no classified loans greater
than $500,000 which were not performing according to their terms.
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 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.
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 in the United States of America 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
12
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.
The following table presents an analysis of Berkshire Bank's allowance
for loan losses for the years indicated.
At or For the Year Ended December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses, beginning of year.......... $8,534 $7,589 $6,078 $6,303 $6,484
------ ------ ------ ------ ------
Charged-off loans:
One- to four-family real estate.................... -- 117 14 66 188
Multi-family....................................... -- -- -- 82 --
Commercial real estate............................. 19 297 253 959 103
Consumer (1)....................................... 1,422 731 311 699 363
Commercial......................................... 469 1,208 234 490 1,754
------ ------ ------ ------ ------
Total charged-off loans......................... 1,910 2,353 812 2,296 2,408
Recoveries on loans previously charged off............ 422 268 268 594 247
------ ------ ------ ------ ------
Net loans charged off................................. 1,488 2,085 544 1,702 2,161
Provision for loan losses............................. 3,170 3,030 2,055 1,477 1,980
------ ------ ------ ------ ------
Allowance for loan losses, end of year................ $10,216 $8,534 $7,589 $6,078 $6,303
======= ====== ====== ====== ======
Ratios:
Net loans charged-off to interest-earning loans....... 0.19% 0.31% 0.09% 0.34% 0.47%
Allowance for loan losses to total loans.............. 1.29% 1.27% 1.25% 1.22% 1.35%
Allowance for loan losses to nonperforming loans ..... 356.08% 300.39% 217.45% 281.91% 130.09%
Net loans charged-off to allowance
for loan losses.................................... 14.57% 24.43% 7.17% 28.00% 34.29%
Recoveries to charge-offs............................. 22.09% 11.39% 33.00% 25.87% 10.26%
(1) Consists primarily of automobile loans.
13
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.
At December 31,
----------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------
Percent of Percent Percent of Percent Percent of Percent
Allowance of Loans Allowance of Loans Allowance of Loans
in Each In Each in Each In Each in Each In Each
Category Category to Category Category to Category Category to
to Total Total to Total Total to Total Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans ... $ 2,337 22.88% 43.27% $ 2,322 27.20% 47.34% $ 2,262 29.81% 49.51%
Consumer loans ...... 4,528 44.32 35.69 2,867 33.60 30.97 2,339 30.82 28.38
Commercial .......... 3,351 32.80 21.04 3,345 39.20 21.69 2,988 39.37 22.11
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance
for loan losses $10,216 100.00% 100.00% $ 8,534 100.00% 100.00% $ 7,589 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
At December 31,
-----------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------
Percent Percent
of Percent of Percent
Allowance of Loans Allowance of Loans
in Each in Each in Each in Each
Category Category to Category Category to
to Total Total to Total Total
Amount Allowance Loans Amount Allowance Loans
-----------------------------------------------------------------------
(Dollars in thousands)
Real estate loans.... $1,938 31.88% 54.21% $1,866 29.60% 57.19%
Consumer loans....... 1,590 26.16 23.43 1,901 30.15 20.49
Commercial........... 2,550 41.96 22.36 2,536 40.25 22.32
------ ------ ------ ------ ------ ------
Total allowance
for loan losses $6,078 100.00% 100.00% $6,303 100.00% 100.00%
====== ====== ====== ====== ====== ======
Investment Securities Activities
General. Under Massachusetts law, Berkshire Bank has authority to
purchase a wide range of investment securities. As a result of 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.
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.
14
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 76.7% 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 rising 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 cost
of the marketable equity securities portfolio is currently limited by the
investment policy to 100% of Tier 1 capital. At December 31, 2000, the cost of
the marketable equity securities portfolio, including restricted equity
securities, totaled $19.7 million or 20.0% of its authorized limit and consisted
primarily of bank, utility and industrial stocks. At December 31, 2000, the
gross unrealized gains associated with the marketable equity securities
portfolio were $31.6 million and the gross unrealized losses were $603,000. The
marketable 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 securities be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's 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. 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. Berkshire Bank has
used covered call option strategies in the past and will continue to do so in
the future. Berkshire Bank has not emphasized interest rate futures or options
on futures as part of its interest rate hedging strategies. 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.
15
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.
At December 31,
---------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------------------------------------------------------------------
(In thousands)
Investment securities:
Obligations of U.S. Treasury and
U.S. Government agencies........... $10,146 $10,106 $10,986 $10,711 $12,243 $12,286
Corporate bonds and notes.............. 31,750 31,034 31,177 30,634 18,054 18,073
Asset-backed securities................ 1,986 1,998 3,253 3,207 2,639 2,604
Marketable equity securities........... 12,022 43,060 10,454 38,399 10,538 39,786
------- ------- ------- ------- ------- -------
Total investment securities......... 55,904 86,198 55,870 82,951 43,474 72,749
------- ------- ------- ------- ------- -------
Mortgage-backed securities:
Freddie Mac............................ 2,203 2,257 2,469 2,493 3,591 3,654
Fannie Mae............................. 2,619 2,670 1,604 1,618 2,124 2,188
Private label REMICs................... 8,022 8,049 5,878 5,841 14,877 14,886
Ginnie Mae............................. 133 135 180 181 293 297
------- ------- ------- ------- ------- -------
Total mortgage-backed securities.... 12,977 13,111 10,131 10,133 20,885 21,025
------- ------- ------- ------- ------- -------
Total available-for-sale securities. $68,881 $99,309 $66,001 $93,084 $64,359 $93,774
======= ======= ======= ======= ======= =======
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.
At December 31,
-----------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------------
(In thousands)
Investment securities:
Obligations of U.S. Treasury and
U.S. Government agencies............ $ -- $ -- $ -- $ -- $ -- $ --
Municipal notes........................ 10,825 10,825 6,720 6,720 6,997 6,997
Other bonds and notes.................. -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities......... 10,825 10,825 6,720 6,720 6,997 6,997
------- ------- ------- ------- ------- -------
Mortgage-backed securities:
Freddie Mac............................ 10,686 10,726 5,368 5,334 8,642 8,643
Fannie Mae............................. 10,466 10,533 4,352 4,303 7,306 7,288
Ginnie Mae............................. 261 258 574 565 835 828
------- ------- ------- ------- ------- -------
Total mortgage-backed securities.... 21,413 21,517 10,294 10,202 16,783 16,759
------- ------- ------- ------- ------- -------
Total held-to-maturity securities... $32,238 $32,342 $17,014 $16,922 $23,780 $23,756
======= ======= ======= ======= ======= =======
At December 31, 2000, 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.
16
The following presents the activity in the investment securities and
mortgage-backed securities portfolios for the years indicated.
For the Year Ended December 31,
------------------------------------------------
2000 1999 1998
------------------------------------------------
(In thousands)
Investment securities:
Investment securities, beginning of year..................... $89,671 $79,746 $63,539
-------- -------- --------
Purchases.................................................... 91,904 34,636 56,472
Sales........................................................ (32,431) (2,440) (16,554)
Maturities and calls......................................... (52,314) (16,646) (27,220)
Net (premium)/discount....................................... (3,020) (3,426) (3,373)
(Decrease)/increase in unrealized gain....................... 3,213 (2,199) 6,882
-------- -------- --------
Net increase in investment securities..................... 7,352 9,925 16,207
-------- -------- --------
Investment securities, end of year..................... 97,023 89,671 79,746
-------- -------- --------
Mortgage-backed securities:
Mortgage-backed securities, beginning of year................ 20,427 37,808 42,914
-------- -------- --------
Purchases.................................................... 32,707 18,256 58,638
Maturities and calls......................................... -- -- --
Repayments and prepayments................................... (18,794) (36,246) (62,592)
Net (premium)/discount....................................... 52 742 (1,122)
(Decrease)/increase in unrealized gain....................... 132 (133) (30)
-------- -------- --------
Net (decrease)/increase in mortgage-backed securities..... 14,097 (17,381) (5,106)
-------- -------- --------
Mortgage-backed securities, end of year................ 34,524 20,427 37,808
-------- -------- --------
Total securities, end of year....................... $131,547 $110,098 $117,554
======== ======== ========
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, 2000.
At December 31, 2000
-----------------------------------------------------------------------------------------------------
More than One More than Five More than Ten
One Year or Less Year to Five Years Years to Ten Years Years Total
-----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Investment securities:
Obligations of U.S.
Treasury and U.S. Government
agencies ................. $1,288 5.24% $7,597 6.04% $1,158 5.76% $ 103 9.30% $10,146 5.94%
Mortgage-backed securities.. 19,470 7.00 12,722 7.39 933 8.20 1,265 8.28 34,390 7.22
Municipal notes............. 6,084 4.93 225 5.70 1,377 7.02 3,139 6.46 10,825 5.65
Corporate bonds and notes... 9,423 6.72 19,489 6.86 1,002 6.35 1,836 7.07 31,750 6.81
Asset-backed securities..... 1,628 7.20 358 7.53 -- -- -- -- 1,986 7.26
------- ------- ------ ------- -------
Total................. $37,893 6.55% $40,391 6.87% $4,470 6.79% $ 6,343 7.05% $89,097 6.74%
======= ======= ====== ======= =======
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 uses 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
17
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 businesses. 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, 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, 2000, Berkshire Bank had no brokered deposits.
In the unlikely event Berkshire Bank is liquidated, 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.
For the Year Ended December 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
(In thousands)
Increase before interest credited................ $21,224 $9,797 $85,460
Interest credited................................ 27,603 23,848 22,601
------- ------- --------
Net increase............................... $48,827 $33,645 $108,061
======= ======= ========
At December 31, 2000, Berkshire Bank had certificate of deposit
accounts in amounts of $100,000 or more maturing as follows:
Weighted
Average
Maturity Period Amount Rate
--------------------------------------------------------------------------
(Dollars in thousands)
Three months or less................. $20,469 6.02%
Over 3 months through 6 months....... 20,668 6.19
Over 6 months through 12 months...... 26,993 6.37
Over 12 months....................... 39,283 6.73
--------
Total.......................... $107,413 6.53%
========
18
The following table presents information concerning average balances
and weighted average interest rates on Berkshire Bank's deposit accounts for the
years indicated.
For the Year Ended December 31,
------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------
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)
Money market accounts... $ 106,058 15.09% 4.43% $84,971 12.88% 3.73% $62,043 10.72% 3.50%
NOW accounts............ 75,673 10.76 1.05 73,615 11.16 1.13 60,039 10.37 1.94
Savings (1)............. 143,357 20.39 3.19 142,193 21.55 3.07 129,020 22.30 3.04
Certificates of deposit. 301,920 42.94 5.81 291,344 44.16 5.34 271,959 47.00 5.64
Demand accounts......... 76,060 10.82 -- 67,563 10.25 -- 55,585 9.61 --
-------- ------ -------- ------ -------- ------
Total............. $703,068 100.00% 3.93% $659,686 100.00% 3.62% $578,646 100.00% 3.91%
======== ====== ======== ====== ======== ======
(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.
Period to Maturity from December 31, 2000
------------------------------------------
Less than One to Two to Over Total at December 31,
One Two Three Three ----------------------------------
Year Years Years Years 2000 1999 1998
-------------------------------------------------------------------------------------
(Dollars in thousands)
0.00-4.00%.............. $ -- $ -- $ -- $ 5 $ 5 $ 851 $ 1,095
4.01-5.00%.............. 3,786 151 36 - 3,973 108,037 61,510
5.01-6.00%.............. 83,469 11,908 1,341 4,975 101,693 154,861 188,280
6.01-7.00%.............. 139,326 38,845 12,716 14,699 205,586 22,242 27,626
7.01% and above......... 15 7,076 11 1,414 8,516 9,312 12,146
-------- ------- ------- ------- -------- -------- --------
Total.......... $226,596 $57,980 $14,104 $21,093 $319,773 $295,303 $290,657
======== ======= ======= ======= ======== ======== ========
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 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, 2000, Berkshire Bank had the ability to borrow a total of
approximately $246 million from the Federal Home Loan Bank of Boston. At that
date, Berkshire Bank had outstanding advances of $101.4 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, 2000, 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 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, 2000, such retail
repurchase agreement borrowings totaled $2.0 million.
19
The following tables present certain information regarding Berkshire
Bank's Federal Home Loan Bank advances during the periods and at the dates
indicated.
Year Ended December 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
(Dollars in thousands)
Maximum amount of advances
outstanding at any month end................. $112,158 $76,861 $42,892
Approximate average advances
outstanding.................................. 92,567 50,951 23,941
Approximate weighted average rate
paid on advances............................. 6.23% 5.49% 5.07%
At December 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
(Dollars in thousands)
Balance outstanding at end of year.............. $101,386 $58,928 $29,590
Weighted average rate on advances............... 6.18% 5.64% 4.52%
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 and 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, 2000, the trust department managed
665 accounts with aggregate assets of $268.8 million, of which the largest
relationship totaled $9.0 million, or 3.3% of the trust department's total
assets, at December 31, 2000. Trust fees were unchanged at $1.7 million in 2000.
However, 1999 benefited from a one-time adjustment of $245,000 made in
connection with a change in accounting for trust fees from a cash to an accrual
basis.
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, 2000, Berkshire Bank was working with
approximately 35 municipalities. For 2000, government banking generated $82,209
of net fee income compared to $94,500 for 1999.
Personnel
As of December 31, 2000, Berkshire Bank had 250 full-time employees and
39 part-time employees. The employees are not represented by a collective
bargaining unit and the Bank believes its relationship with its employees is
good.
20
Subsidiary Activities
The following are descriptions of Berkshire Bank's wholly owned active
subsidiaries, which are indirectly owned by Berkshire Hills.
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, 2000, G.B.S.B., Inc. had assets totaling $49.7
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, 2000, North Street had assets totaling $35.0
million, consisting primarily of corporate bonds and private label REMICs.
Gold Leaf Insurance Agency and Gold Leaf Investment Services. In May
2000, Berkshire Bank formed two subsidiaries designed to offer insurance and
investment products to its customers. Gold Leaf Insurance Agency opened in
September of 2000. Gold Leaf Investment Services, while formed in 2000, will
begin operations in the first quarter of 2001.
21
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 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 the Bank,
not bank stockholders.
The Company is also 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 the Company and the Bank is a summary
and is qualified in its entirety by reference to such laws and regulations.
The Bank is and the Company, as a savings and loan holding company, are
extensively regulated and supervised. Regulations, which affect the 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 Congress, could
have a material impact on the Company, the Bank and its operations.
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.
22
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. Berkshire Bank is eligible to engage in certain of
the above-referenced activities within the limits of the applicable 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.
As a savings and loan holding company regulated by the Office of Thrift
Supervision, Berkshire Hills is not, under current law, 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 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.
23
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 or
undergoes a change in control. As of December 31, 2000, Berkshire Bank had
securities with a market value of $50.8 million which were held under such
grandfathering authority.
Interstate Banking and Branching
The Gramm-Leach-Bliley Act of 1999 imposed certain conditions on state
bank investments in subsidiaries that are engaged in activities permitted for
national banks to conduct through a "financial subsidiary" under the
legislation.
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 the 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% (3% or less for institutions with the highest examination
rating). An institution is deemed to be "significantly undercapitalized" if it
has a total risk-based capital ratio of
24
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, 2000, Berkshire Bank was 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. No institution may make a capital distribution, including
payment as a dividend, if it would be "undercapitalized" after the payment. 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.
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 the 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.
25
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
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 members and Savings Association Insurance
Fund members commenced and totaled 2.07 basis points for the year. 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 the 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 the 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. See " - Massachusetts Banking Laws and Supervision."
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 $42.8 million less an exemption of $5.5 million (which may be
adjusted by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts greater than $42.8 million, the reserve requirement is $1.1 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 $42.8 million.
The 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."
The Bank is also subject to similar obligations under Massachusetts law
which has an additional CRA rating category. The 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
26
latest Massachusetts Community Reinvestment Act received from the Massachusetts
Division of Banks was "Outstanding."
Federal Home Loan Bank System
The 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, 2000 of $5.7 million.
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 2000,
1999, 1998, 1997 and 1996, cash dividends from the Federal Home Loan Bank of
Boston to Berkshire Bank amounted to approximately $332,700, $180,900, $163,600,
$155,000 and $155,600, 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
the 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. The Bank made such
election and the Company is a nondiversified savings and loan holding company
within the meaning of the Home Owners' Loan Act. The Company is registered with
the Office of Thrift Supervision and has adhered to the Office of Thrift
Supervision's regulations and reporting requirements. In addition, the Office of
Thrift Supervision may examine and supervise the Company and the Office of
Thrift Supervision has enforcement authority over the Company 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, the Bank is required to notify the Office of Thrift Supervision at
least 30 days before declaring any dividend to the Company. By regulation, the
Office of Thrift Supervision may restrict or prohibit the Bank from paying
dividends.
The Company is a unitary savings and loan holding company under federal
law because the Bank is its only insured subsidiary. 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 securities activities, and those permitted for a multiple savings and loan
holding company as described below. The Company is subject to these activities
restrictions. Upon any non-supervisory acquisition by the Company of another
savings association as a separate subsidiary, the Company 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.
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.
27
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), the Bank must qualify as a Qualified Thrift Lender. To qualify as a
Qualified Thrift Lender, the 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, 2000 Berkshire Bank maintained in excess of 73.1% 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 the Company is not a bank holding company
for purposes of Massachusetts law, 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. The Company
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.
Federal Securities Laws
The Company's common stock is registered with the Securities and
Exchange Commission under the Exchange Act. The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
Shares of the common stock purchased by persons who are not affiliates
of the Company may be resold without registration. The resale restrictions of
Rule 144 under the Securities Act govern shares purchased by an affiliate of the
Company. If the Company meets the current public information requirements of
Rule 144 under the Securities Act, each affiliate of the Company 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 the Company 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
the Company to permit affiliates to have their shares registered for sale under
the Securities Act under specific circumstances.
28
FEDERAL AND STATE TAXATION ON INCOME
Federal Income Taxation
General. The Company and the Bank report their income on a calendar
year basis using the accrual method of accounting. The federal income tax laws
apply to the Company and the Bank in the same manner as to other corporations
with some exceptions, including particularly the 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 the Bank or the Company. The Bank's federal income tax returns
have been either audited or closed under the statute of limitations through tax
year 1996. For its 2000 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 required savings institutions to recapture or
take into income certain portions of their accumulated bad debt reserves.
Approximately $844,000 of the Bank's accumulated bad debt reserves would not be
recaptured into taxable income unless the Bank makes a "non-dividend
distribution" to the Company as described below.
Distributions. If the Bank makes "non-dividend distributions" to the
Company, they will be considered to have been made from the 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 the
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 the Bank's taxable income.
Non-dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial or
complete liquidation. Dividends paid out of the Bank's current or accumulated
earnings and profits will not be so included in the 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 the Bank makes a non-dividend
distribution to the Company, 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. The 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. 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, except no deduction is allowed for
taxes paid to the state which are based on income. 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. Two of the Bank's
subsidiaries, North Street Securities Corporation and G.B.S.B., Inc., are
Massachusetts security corporations.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company 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.
29
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of Berkshire Hills and Berkshire Bank.
Name Age (1) Position
------------------------ ------- -------------------------------------
James A. Cunningham, Jr. 50 President and Chief Executive Officer
Robert A. Wells 61 Chairman of the Board
Michael P. Daly 39 Executive Vice President
Charles F. Plungis, Jr. 49 Senior Vice President, Treasurer and Chief Financial Officer
Susan M. Santora 47 Executive Vice President
- ----------------------------
(1) As of December 31, 2000
The executive officers are elected annually and hold office until their
successors have been elected and qualified or until they are removed or
replaced.
Biographical Information
James A. Cunningham, Jr. serves as President and Chief Executive
Officer of the Company and Berkshire Bank. 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.
Robert A. Wells is Chairman of the Board of the Company and Berkshire
Bank. 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.
Michael P. Daly is Executive Vice President and Senior Loan Officer of
Berkshire Bank and Executive Vice President of the Company. 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 at Berkshire County Savings Bank.
Charles F. Plungis, Jr. is Senior Vice President, Treasurer and Chief
Financial Officer of the Company and Berkshire Bank. Prior to the merger of
Berkshire County Savings Bank and Great Barrington Savings Bank, Mr. Plungis was
Senior Vice President and Treasurer of Great Barrington Savings Bank.
Susan M. Santora is Executive Vice President of Retail Banking of
Berkshire Bank and Executive Vice President of the Company. Prior to the merger
of Berkshire County Savings Bank and Great Barrington Savings Bank, Ms. Santora
was Vice President of Great Barrington Savings Bank.
30
ITEM 2 PROPERTIES
The Company and the Bank currently conducts their business through the
main office located in Pittsfield, Massachusetts, and 11 other full-service
banking offices and one other facility listed below. The Company and the Bank
believe that their facilities are adequate to meet their present and immediately
foreseeable needs.
Net Book Value
of Property
Original or Leasehold
Location Lease Year Date of Improvements at
Or Leased Lease December 31,
Own Acquired Expiration 2000
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
Main Office:
24 North Street Own 1898 -- $1,939
Pittsfield, Massachusetts
Banking Offices:
244 Main St. Own 1950 -- 912
Great Barrington, Massachusetts
103 North Main Street Own 1966 -- 221
Sheffield, Massachusetts
Old Town Hall Lease 1969 2030 177
Pittsfield, Massachusetts
Allendale Shopping Center Lease 1970 2001 59
Pittsfield, Massachusetts
2 Depot Street Own 1975 -- 116
W. Stockbridge, Massachusetts
165 Elm Street Own 1977 -- 311
Pittsfield, Massachusetts
255 Stockbridge Road Own 1985 -- 277
Great Barrington, Massachusetts
37 Main Street Lease 1985 2005(1) 376
North Adams, Massachusetts
1 Park Street Own 1991 -- 243
Lee, Massachusetts
32 Main Street Own 1991 -- 306
Stockbridge, Massachusetts
66 West Street Lease 1998 2015(1) 96
Pittsfield, Massachusetts
Other Office
66 Allen Street (2) Own 1999 -- 2,354
Pittsfield, Massachusetts
- -------------------------------
(1) Berkshire Bank has two options to renew each for an additional five-year
period.
(2) This facility houses Berkshire Bank's Commercial Lending Division, Asset
Management/Trust Department and Government Banking Program.
31
ITEM 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Company 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 the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the American Stock Exchange under the
symbol "BHL." As of December 31, 2000, the Company had approximately 1,062
holders of record. The following table sets forth, for the quarters indicated,
the high and low sales price for the Common Stock and the dividends paid. The
Company is subject to the requirements of Delaware law, which generally limits
dividends to an amount equal to the excess of the net assets of the Company (the
amount by which total assets exceed total liabilities) over its statutory
capital or, if there is no excess, to its net profits for the current and/or
immediately preceding fiscal year.
Year Ended December 31, 2000
---------------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
High.............................. $16.00 $14.875 $12.75 N/A
Low............................... $13.00 $12.5625 $12.25 N/A
Dividend Paid..................... $0.10 N/A N/A N/A
33
ITEM 6. SELECTED FINANCIAL DATA
The Company has derived the following selected consolidated financial and
other data of the Company and the Bank in part from the consolidated financial
statements and notes appearing elsewhere in this Form 10-K. The data as of
December 31, 1996 and for the year 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. The data as of December 31, 2000 is
derived from the audited consolidated financial statements for Berkshire Hills
Bancorp and Berkshire Bank.
At December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
(In thousands)
Selected Financial Data:
Total assets................................. $1,011,340 $841,651 $780,289 $637,346 $627,453
Loans, net................................... 783,405 665,554 599,171 491,743 459,059
Investment securities:
Available for sale........................ 99,309 93,084 93,774 71,778 82,888
Held to maturity.......................... 32,238 17,014 23,780 34,675 33,243
Federal Home Loan Bank stock.............. 5,651 3,843 2,547 2,547 2,509
Savings Bank Life Insurance stock......... 2,043 2,043 2,043 2,043 2,043
Deposits (1)................................. 729,594 680,767 647,122 539,061 535,505
Federal Home Loan Bank advances.............. 101,386 58,928 29,590 6,880 7,732
Repurchase agreements........................ 2,030 1,120 7,000 5,070 6,340
Total stockholders' equity................... 161,322 88,352 84,201 75,317 68,713
Real estate owned............................ 50 220 398 364 2,888
Nonperforming loans.......................... 2,869 2,841 3,490 2,156 4,845
34
For the Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------
(In thousands)
Selected Operating Data:
Total interest and dividend income........... $71,018 $58,468 $52,495 $48,423 $46,890
Total interest expense....................... 33,468 26,922 24,182 22,290 22,032
------- ------- ------- ------- -------
Net interest income....................... 37,550 31,546 28,313 26,133 24,858
Provision for loan losses.................... 3,170 3,030 2,055 1,477 1,980
------- ------- ------- ------- -------
Net interest income after provision
for loan losses........................ 34,380 28,516 26,258 24,656 22,878
------- ------- ------- ------- -------
Noninterest income:
Service charges and fees.................. 3,743 3,405 2,568 2,440 2,801
Gain on sales and dispositions of
securities, net........................ 423 491 425 2,653 1,364
Other..................................... 580 402 300 512 653
------- ------- ------- ------- -------
Total noninterest income............... 4,746 4,298 3,293 5,605 4,818
------- ------- ------- ------- -------
Total noninterest expense.............. 32,184 25,196 22,359 26,066 19,257
------- ------- ------- ------- -------
Income before income taxes................ 6,942 7,618 7,192 4,195 8,439
Income taxes.............................. 2,360 1,995 2,768 1,692 3,039
------- ------- ------- ------- -------
Net income............................. $4,582 $5,623 $4,424 $2,503 $5,400
======= ======= ======= ======= ======
Dividends per share $ 0.10 N/A N/A N/A N/A
35
At December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
Selected Other Data:
Number of:
Mortgage loans outstanding........................ 3,607 3,667 2,961 2,879 2,967
Deposit accounts.................................. 75,818 76,493 75,648 65,012 65,142
Banking offices and other facilities.............. 13 14 14 11 11
At or For the Year Ended December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------
Selected Operating Ratios and Other Data (2):
Performance Ratios:
Average yield on interest-earning assets....... 8.04% 7.65% 7.83% 8.10% 8.07%
Average rate paid on interest-bearing
liabilities................................. 4.64 4.15 4.36 4.45 4.42
Interest rate spread (3)....................... 3.40 3.50 3.47 3.65 3.65
Net interest margin (4)........................ 4.25 4.13 4.22 4.37 4.28
Interest-bearing assets to interest-bearing
liabilities................................. 122.53 117.75 120.94 119.44 116.46
Net interest income after provision for loan
losses to noninterest expense............... 106.82 113.18 117.44 94.59 118.80
Non-interest expense as a percent of average
assets...................................... 3.44 3.09 3.19 4.16 3.13
Return on average assets (5)................... 0.49 0.69 0.63 0.40 0.88
Return on average equity (6)................... 3.72 6.51 5.56 3.54 8.55
Average equity to average assets............... 13.15 10.59 11.34 11.30 10.25
Regulatory Capital Ratios:
Tier 1 capital to average assets............... 14.54 7.91 7.79 9.80 9.46
Total capital to risk-weighted assets.......... 20.15 12.90 13.04 13.46 14.52
Asset Quality Ratios:
Nonperforming loans as a percent of
total loans (7)............................. 0.36 0.42 0.58 0.43 1.04
Nonperforming assets as a percent of
total assets (8)............................ 0.29 0.36 0.50 0.40 1.23
Allowance for loan losses as a percent of
total loans................................. 1.29 1.27 1.25 1.22 1.35
Allowance for loan losses as a percent of
nonperforming loans......................... 356.08 300.39 217.45 281.91 130.09
Net loans charged-off as a percent of
interest-earning loans...................... 0.19 0.31 0.09 0.34 0.47
(1) Includes mortgagors' escrow accounts.
(2) Regulatory Capital and Asset Quality Ratios are end of period ratios.
Performance Ratios for 2000, 1999 and 1998 are based on daily
averages. Performance Ratios for 1997 and 1996 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.
(8) Nonperforming assets consist of nonaccrual loans and real estate
owned.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes contained in this report.
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking
statements which are based on certain assumptions and describe future plans,
strategies and expectations of the Company. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
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 the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. The Company does not undertake -- and
specifically disclaims any obligation -- to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
Operating Strategy
The 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, the 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 non-interest income and
by improving operating efficiencies while managing its capital position and
limiting its credit and interest rate risk exposure. To accomplish these
objectives, the Bank has sought to:
o Operate as a full service community bank by expanding the
services and products it offers.
o 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.
o Increase fee income by broadening non-depository product
offerings and services, including expansion of its trust
services through an investment services subsidiary and by
expanding the offering of insurance products through a
recently established insurance agency.
o Increase fee income through the sale of a portion of its
indirect automobile loan portfolio, while retaining the
servicing rights.
o 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.
o Control credit risk by continuing to employ conservative
underwriting standards to minimize the level of new problem
assets.
o Manage interest rate risk by emphasizing investments in
shorter-term loans and investment securities.
o 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.
37
Comparison of Financial Condition at December 31, 2000 and 1999
Total assets increased $169.7 million, or 20.2%, to $1.01 billion at
December 31, 2000 from $841.7 million at December 31, 1999. Loan growth
accounted for the majority of the increase as net loans grew to $783.4 million
at the end of December 2000 as compared to $665.6 million at the end of December
1999, an increase of $117.9 million or 17.7%. The consumer loan portfolio,
primarily automobile loans, was the fastest growing segment of the loan
portfolio. Increased originations by Berkshire Bank's dealer network helped
consumer loans rise to $283.1 million at the end of 2000 from $208.7 million at
the end of 1999, an increase of $74.4 million or 35.6%. Automobile loans
increased $65.8 million, or 39.9%, to $230.6 million from $164.9 million and
comprised 29.1% of the total loan portfolio at December 31, 2000 as compared to
24.5% at December 31, 1999. The growth in the automobile portfolio was mitigated
somewhat by the sale of $38.9 million of automobile loans throughout the course
of 2000. One-to-four family mortgage loans grew by $4.2 million, or 1.7%, to
$249.4 million at the end of 2000 from $245.2 million at the end of 1999 as
heightened competition slowed loan growth in this area. Commercial real estate
loans and other commercial loans increased more substantially as Berkshire
Bank's dominant position in the local commercial marketplace, especially with
larger credits, helped to increase the portfolio's size. Commercial real estate
loans increased $17.5 million, or 37.6%, to $63.9 million at December 31, 2000
from $46.4 million at December 31, 1999 while commercial loans increased $20.8
million, or 14.2%, to $167.0 million from $146.2 million over the same time
period. Berkshire Bank's ratio of net loans to assets was 77.5% and 79.1% at
December 31, 2000 and 1999, respectively.
The securities portfolio also increased during 2000 as a portion of the
net proceeds from the initial public offering were invested in short-term fixed
income investments. Excluding Federal Home Loan Bank stock and Savings Bank Life
Insurance stock, total securities increased $21.4 million, or 19.5%, to $131.5
million at year end 2000 from $110.1 million at year end 1999. Short-term
investments totaled $16.7 million at December 31, 2000 from $1.3 at December 31,
1999. The increase at year end 2000 was the result of the investment of the
proceeds from the sale of just under $17.0 million of automobile loans in the
latter half of December 2000.
Nonperforming loans totaled $2.9 million at December 31, 2000 just
above the $2.8 million of December 31, 1999. A decline in nonperforming
commercial loans due to the sale of a large commercial property in North Adams
was fully offset by a rise in nonperforming consumer loans, primarily auto
loans. Nonperforming automobile loans totaled $2.0 million at December 31, 2000,
and represented 0.86% of total automobile loans and 0.25% of total loans. At the
end of 1999, nonperforming automobile loans totaled $817,000, and equaled 0.50%
of total automobile loans and 0.12% of total loans. The rise in nonperforming
automobile loans was due to increasing economic difficulties of our borrowers
and the more aggressive recognition of nonperforming loans in anticipation of a
softening in the economy.
Total interest bearing liabilities increased $84.5 million, or 12.6%,
to $756.3 million at December 31, 2000 from 671.8 million at December 31, 1999
as both interest bearing deposits and Federal Home Loan Bank of Boston
borrowings increased during the year. Interest bearing deposits grew by
$41.1million, or 6.7%, to $652.8 million at December 31, 2000 from $611.7
million one year ago. Certificates of deposit rose by $24.5 million during 2000
and by $16.0 million in the fourth quarter 2000 as customers sought to lock in
favorable interest rates. Money market accounts increased by $23.1 million in
2000 as commercial and governmental customers continued to increase their
balances at the bank. In addition, noninterest bearing checking account balances
increased $7.7 million at year-end from one year ago. However, deposit growth
was not sufficient enough to keep up with loan growth during 2000. As a result,
increased borrowings from the Federal Home Loan Bank of Boston were used to
support the growth in the loan portfolio. FHLB advances increased $42.5 million,
or 72.0%, to $101.4 million at December 31, 2000 from $58.9 million at December
31, 1999.
Stockholders' equity, including retained earnings, rose to $161.3
million at December 31, 2000 from $88.4 million at December 31, 1999. The
increase was primarily due to the influx of capital from the June 27, 2000,
conversion of Berkshire Bancorp, Berkshire Hills Bancorp's predecessor, from a
mutual to a stock holding company. Net of conversion fees and expenses, $68.4
million was raised in the initial public offering. Also contributing to the
increase in stockholders' equity for the year were net income of $4.6 million
and an increase in the net unrealized gain in the securities portfolio of $2.2
million net of tax effects as a rebound in financial stocks over the second half
of 2000 aided portfolio performance. In the fourth quarter of 2000, Berkshire
Hills Bancorp paid an initial common stock dividend of $0.10 per share.
38
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
Net Income. Net income declined $1.0 million, or 18.5%, to $4.6
million in 2000 from $5.6 million in 1999. Included in the current year's result
is a one-time donation of $5.7 million of the Company's common stock to
Berkshire Hills Foundation, a charitable foundation formed by Berkshire Hills
Bancorp in conjunction with the conversion of its mutual holding company to
stock form in June 2000. Excluding this contribution, net income would have been
$8.3 million, which represents a $3.8 million, or 81.9%, increase from 1999. Net
interest income increased $6.0 million, or 19.0%, to $37.6 million in 2000 from
$31.5 million in 1999 aided by strong loan growth and the investment of the
Company's net public offering proceeds over the second half of the year. In
addition, non-interest income rose to $4.7 million in 2000 from $4.3 million in
1999, an increase of $448,000 or 10.4%. However, non-interest expense rose $7.0
million, or 27.7%, to $32.2 million in 2000 from $25.2 million in 1999, due
primarily to the one-time contribution mentioned above. Absent this donation,
expenses would have risen $1.3 million or 5.2%.
Net Interest Income. Net interest income increased $6.0 million, or
19.0%, to $37.5 million in 2000 from $31.5 million in 1999. Total interest and
dividend income rose $12.6 million, or 21.5%, to $71.0 million in 2000 from
$58.5 million in 1999, but was partially offset by an increase in interest
expense of $6.5 million, or 24.3% in 2000. Interest expense totaled $33.5
million in 2000 as compared to $26.9 million in 1999.
The increase in interest income was due to a $119.6 million, or 15.6%,
increase in average interest earning assets to $883.8 million this year from
$764.2 million last year and a 39 basis point increase in the average yield on
interest earning assets to 8.04% in 2000 from 7.65% in 1999. Proceeds from the
Company's initial public offering, initially invested in money market
instruments, coupled with strong loan demand in the commercial and consumer
sectors helped boost average interest earning assets in 2000. The reallocation
of funds from money market instruments to loans along with a higher interest
rate environment led to the increase in the average yield.
Interest on loans rose $11.1 million, or 21.2%, to $63.7 million in
2000 from $52.5 million in 1999 fueled by the growth in all sectors of the loan
portfolio. In addition, the higher interest rate environment resulted in the
average yield on the loan portfolio rising to 8.53% in 2000 from 8.21% in 1999.
Similarly, investment security income, including dividends on Federal Home Loan
Bank stock and Savings Bank Life Insurance stock, rose $1.1 million, or 19.6% to
$6.7 million this year from $5.6 million last year. Higher balances and a 54
basis point increase in the average rate earned on investment securities to
5.24% in 2000 from 4.70% in 1999 contributed to the increase.
Interest expense increased $6.5 million, or 24.3%, to $33.5 million in
2000 from $26.9 million in 1999. The largest portion of the increase was due to
a rise in deposit costs as interest on deposits rose $3.8 million, or 15.7%, to
$27.6 million in 2000 from $23.8 million the previous year. Higher interest
rates, an erratic stock market, and a continuing effort to attract commercial
and governmental deposit accounts may have helped boost money market and
certificate of deposit balances and interest costs. Average interest bearing
deposit balances increased $34.9 million, or 5.9%, to $627.0 million this year
from $592.1 million last year. With this year's rise in rates, the average rate
paid on interest bearing deposit account was 4.40% in 2000 against 4.03% in
1999. Interest on Federal Home Loan Bank advances accounted for the rest of the
increase and was partially offset by a decline in the interest paid on customer
repurchase accounts. Federal Home Loan Bank interest expense increased $3.0
million, or 106.2%, to $5.8 million this year from $2.8 million last year.
Average borrowings outstanding increased $41.6 million, or 81.7%, to $92.6
million in 2000 from $51.0 in 1999 as the funds were needed to support the loan
portfolio's growth. The average rate paid on the borrowings was 6.23% in 2000 as
compared to 5.49% in 1999. A number of borrowings repriced at higher rates in
2000, and rates on the new advances were contracted for at levels higher than
those already in the portfolio.
Buoyed by the investment of the initial public offering proceeds,
Berkshire Hills' net interest margin increased to 4.25% for 2000 as compared to
4.13% for 1999.
Provision for Loan Losses. The provision for loan losses increased
$140,000, or 4.6%, to $3.2 million in 2000 from $3.0 million in 1999 as the loan
portfolio continued to grow strongly in 2000 especially in the commercial and
consumer sectors. As a result, even though loan charge-offs declined to $1.9
million in 2000 from $2.4 million the previous year and non-performing loans as
a percent of total loans fell to 0.36% on December 31, 2000 from 0.42% on
December 31, 1999, management deemed it prudent to increase the allowance as a
percent of total loans to 1.29% at year end 2000 from 1.27% last year. Vigilant
collection efforts and a good economy helped keep commercial loan losses
extremely low while consumer loan charge-offs increased $691,000 or 94.5%
primarily due to the larger size of the portfolio and some weakening in credit
quality. Indirect automobile loan charge-offs expressed as a percent of the
automobile portfolio were 0.52% and 0.31% in 2000 and 1999, respectively. At
December 31, 2000, the allowance for loan losses was $10.2 million as compared
to $8.5 million at December 31, 1999 and represented 356.08% of non-performing
loans this year as compared to 300.39% last year.
39
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.
Noninterest Income. Noninterest income totaled $4.7 million for
2000 and $4.3 million for 1999, an increase of $448,000, or 10.4%. Customer
service fees advanced $257,000, or 19.3%, as increased usage of debit and credit
cards led to an additional $60,000 in card fees. Also, more automobile loan
customers requested life insurance coverage which led to an additional $69,000
in life insurance fees. Much of the balance of the increase in customer service
fees was due to a rise of $96,000 in overdraft fees. Loan servicing fees
increased $104,000, or 30.6%, as $38.9 million of consumer loans were sold in
2000 with servicing retained. Miscellaneous income increased $166,000 or 38.4%
and was wholly due to a rise in the cash surrender value of bank owned life
insurance policies. Partially offsetting these increases was a decline of
$68,000, or 13.8% in gains realized on the sale of securities.
Noninterest Expense. Noninterest expense increased $7.0 million, or
27.7%, to $32.2 million in 2000 from $25.2 million in 1999. Included in 2000's
total is a one-time contribution of $5.7 million to the Berkshire Hills
Foundation, a charitable foundation set up by the Company at the time of the
mutual to stock conversion. Excluding this expense, noninterest expense
increased $1.3 million or 5.2%. The major contributor to the increase was other
general and administrative expenses which rose $1.0 million or 33.8% to $4.1
million in 2000 from $3.1 million in 1999. The rise in general and
administrative expense was primarily due to an increase of $501,000, or 110.1%,
in costs associated with the handling, servicing, and selling of a larger number
of repossessed automobiles. The balance of the increase was due to a large
number of other expenses such as phone, postage, and trust department expenses
experiencing smaller increases. Data processing expenses grew by $272,000, or
18.3%, as the Company spent approximately $250,000 to convert from an
out-sourced to an in-house imaging system.
Income Taxes. Income taxes for the year ending December 31, 2000 were
$2.4 million, an increase of $365,000 or 18.3%, over the $2.0 million paid for
the year ending December 31, 1999. The effective tax rates for 2000 and 1999
were 34.0% and 26.2%, respectively. The lower effective tax rate in 1999 was
partially attributable to the use of approximately $850,000 of deductible
contribution carryforwards related to the establishment of the Greater Berkshire
Foundation, Inc. in 1997. Approximately $544,000 more of these carryforwards
remained at December 31, 1999, and were fully used during 2000. In addition,
approximately $300,000 of federal tax credits relating to the rehabilitation of
an historic firehouse in Pittsfield, Massachusetts were booked in 1999. However,
the Company's application for the tax credits was denied by federal authorities
in August 2000, and the credits were subsequently reversed. The Company has also
established two securities corporations, which were in effect in both 2000 and
1999, in an effort to minimize state taxes.
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, 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
40
$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 an 8 basis point decline on the average rate earned on investment
securities to 4.70% for 1999 from 4.78% for 1998, due to investments 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's assessment of increased charge-offs 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.
Noninterest Income. Noninterest 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
noninterest 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
41
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 in 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 $544,000 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, 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.
42
Average Balances, Interest and Average Yields/Cost
The following table presents certain information for the years
indicated regarding average daily 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 daily balances of assets or
liabilities, respectively, for the years presented. The yields and rates include
fees which are considered adjustments to yields.
For the Year Ended December 31,
---------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans (1)................................ $746,018 $63,664 8.53% $639,517 $52,522 8.21% $546,845 $46,449 8.49%
Short-term investments................... 10,492 654 6.23 4,042 215 5.32 9,336 498 5.33
Investment securities.................... 120,123 6,296 5.24 113,929 5,351 4.70 108,048 5,165 4.78
Federal Home Loan Bank stock............. 4,959 333 6.72 3,193 181 5.67 2,546 164 6.44
Savings Bank Life Insurance
stock................................. 2,043 63 3.08 2,043 63 3.08 2,043 63 3.08
Interest-earning deposits................ 127 8 6.30 1,470 136 9.25 1,754 156 8.89
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets...... 883,762 71,018 8.04 764,194 58,468 7.65 670,572 52,495 7.83
------- ------- -------
Non-interest earning assets.............. 52,891 51,111 30,933
-------- -------- --------
Total assets....................... $936,653 $815,305 $701,505
======== ======== ========
Interest-bearing liabilities:
Deposits:
Money market accounts................. $106,058 4,701 4.43 $84,971 3,169 3.73 $62,043 2,173 3.50
NOW accounts.......................... 75,673 794 1.05 73,615 830 1.13 60,039 1,165 1.94
Savings accounts (2).................. 143,357 4,578 3.19 142,193 4,366 3.07 129,020 3,925 3.04
Certificates of deposit............... 301,920 17,530 5.81 291,344 15,483 5.31 271,959 15,338 5.64
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing deposits.... 627,008 27,603 4.40 592,123 23,848 4.03 523,061 22,601 4.32
Federal Home Loan Bank
advances........................... 92,567 5,766 6.23 50,951 2,796 5.49 23,941 1,214 5.07
Repurchase agreements................. 1,683 99 5.88 5,923 278 4.69 7,446 367 4.93
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities..................... 721,258 33,468 4.64 648,997 26,922 4.15 554,448 24,182 4.36
------- ------- -------
Non-interest-bearing
demand deposits................. 76,060 67,563 55,585
Other noninterest-bearing liabilities. 16,170 12,396 11,940
-------- -------- --------
Total liabilities............... 813,488 728,956 621,973
Equity................................ 123,165 86,349 79,532
-------- -------- --------
Total liabilities and equity.... $936,653 $815,305 $701,505
======== ======== ========
Net interest-earning assets........... $162,504 $115,197 $116,124
======== ======== ========
Net interest income................... $37,550 $31,546 $28,313
======= ======= =======
Interest rate spread.................. 3.40% 3.50% 3.47%
Interest margin (net interest
income as a percentage of
total average interest-earning
assets)............................ 4.25% 4.13% 4.22%
Total average interest-earning
assets to total average interest-
bearing liabilities... 122.53% 117.75% 120.94%
(1) Average balances include nonaccrual loans.
(2) Includes mortgagors' escrow accounts.
43
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.
Year Ended Year Ended
December 31, 2000 December 31, 1999
Compared to Year Ended Compared to Year Ended
December 31, 1999 December 31, 1998
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------- ---------------------
Rate Volume Net Rate Volume Net
-------- -------- -------- -------- -------- --------
(In thousands)
Interest-earning assets:
Loans .................................. $ 1,949 $ 9,193 $ 11,142 $ (1,581) $ 7,654 $ 6,073
Short-term investments ................. 42 397 439 (1) (282) (283)
Investment securities .................. 707 390 1,097 (103) 306 203
Interest-bearing deposits .............. (33) (95) (128) 6 (26) (20)
-------- -------- -------- -------- -------- --------
Total interest-earning assets ....... 2,665 9,885 12,550 (1,679) 7,652 5,973
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Money market accounts ............... 661 871 1,532 149 847 996
NOW accounts ........................ (58) 22 (36) (560) 225 (335)
Savings accounts .................... 176 36 212 37 404 441
Certificates of deposit ............. 1,453 594 2,047 (913) 1,058 145
-------- -------- -------- -------- -------- --------
Total deposits ................... 2,232 1,523 3,755 (1,287) 2,534 1,247
Federal Home Loan Bank
advances ............................ 377 2,593 2,970 107 1,475 1,582
Repurchase agreements .................. 104 (283) (179) (16) (73) (89)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 2,713 3,833 6,546 (1,196) 3,936 2,740
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest
income ................................. $ (48) $ 6,052 $ 6,004 $ (483) $ 3,716 $ 3,233
======== ======== ======== ======== ======== ========
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial
obligations of a short-term nature. The 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.
The 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, 2000 and 1999, Berkshire
Bank's loan originations totaled $284.5 million and $280.4 million,
respectively. At December 31, 2000 and 1999, the Bank's investments in mortgage-
and asset-backed securities, U.S. Government and agency obligations and
corporate equity securities and debt obligations totaled $139.2 million and
$116.0 million, respectively. The Bank experienced a net increase in total
deposits of $48.8 million and $33.6 million for the years ended December 31,
2000 and 1999, respectively, primarily as a result of increased money market and
transaction account deposits from commercial and governmental customers and
increased certificate of deposit usage by retail customers and increased
marketing efforts, special promotions, and a higher interest rate environment.
Deposit flows
44
are affected by the overall level of interest rates, the interest rates and
products offered by the Bank and its local competitors and other factors. The
Bank closely monitors its liquidity position on a daily basis. If the 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 $137.4 million at December 31, 2000. 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, 2000 totaled $226.6 million. The
Bank relies primarily on competitive rates, customer service, and long-standing
relationships with customers to retain deposits. Occasionally, the Bank will
also offer special competitive promotions to its customers to increase retention
and promote deposit growth. Based upon the 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 the Bank.
The 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, 2000, Berkshire Bank exceeded all of its regulatory capital
requirements with Tier 1 capital to average assets of $98.4 million, or 10.64%
of average assets, which is above the required level of $37.0 million, or 4.0%,
and total capital to risk-weighted assets of $122.2 million, or 15.61% of
risk-weighted assets, which is above the required level of $62.6 million, or
8.0%. The Bank is considered "well capitalized" under regulatory guidelines.
The capital from the Conversion initially increased the Company's
liquidity and capital resources. Over time, the initial level of liquidity has
been reduced as net proceeds are used for general corporate purposes, including
the funding of lending activities. The Company's financial condition and results
of operations have been 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
has been adversely impacted.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in
this Form 10-K have been prepared in conformity with accounting principles
generally accepted in the United States of America, 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 Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 137 and 138,
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 a hedging
instrument. 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. The Company adopted this Statement on January 1, 2001 with no
material impact on the consolidated financial statements.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. During September of 2000, SFAS No. 140 was
issued replacing SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on a financial components
approach
45
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and serving assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. In addition,
this Statement requires certain disclosures regarding securitized financial
assets. SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
Management is currently evaluating the impact of adopting this Statement on the
consolidated financial statements and does not anticipate a material impact.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Aspects of Market Risk. The Bank's most significant form of
market risk is interest rate risk. The principal objectives of Berkshire Bank's
interest rate risk management are to evaluate the interest rate risk inherent in
certain balance sheet accounts, determine the level of risk appropriate given
its business strategy, operating environment, capital and liquidity requirements
and performance objectives, and manage the risk consistent with its established
policies. Berkshire Bank maintains an Asset/Liability Committee that is
responsible for reviewing its asset/liability policies and interest rate risk
position, which meets quarterly and reports trends and interest rate risk
position to the Executive Committee of the Board of Directors and the Board of
Directors on a quarterly basis. The Asset/Liability Committee consists of
Berkshire Bank's President and Chief Executive Officer, Senior Vice President,
Treasurer and Chief Financial Officer, Executive Vice President-Senior Loan
Officer and Executive Vice President-Retail Banking. The extent of the movement
of interest rates is an uncertainty that could have a negative impact on the
earnings of Berkshire Bank.
In recent years, Berkshire Bank has managed interest rate risk by:
o 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;
o originating shorter-term commercial and consumer loans, with
an emphasis on automobile loans;
o 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;
o promoting lower cost liability accounts such as core deposits;
and
o 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 portfolios had gross
unrealized gains of $31.6 million at December 31, 2000 and gross unrealized
losses of $603,000 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, 2000, estimated net interest income and the estimated changes in
Berkshire Bank's net interest income for the next twelve month period which may
result given instantaneous increases or decreases in market interest rates of
100 and 200 basis points.
47
Increase/
(Decrease)
in Market
Interest Rates
in Basis Points
(Rate Shock) At December 31, 2000
- --------------- ------------------------------------------------
Amount $ Change % Change
---------- -------- ---------
(Dollars in thousands)
200 $12,882 $524 4.24%
100 12,697 339 2.74
Static 12,358 --- ---
(100) 11,891 (467) (3.78)
(200) 11,369 (989) (8.00)
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
$467,000 and $989,000, 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 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.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
Independent Auditors' Report 50
Consolidated Balance Sheets as of December 31, 2000
and 1999 51
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998 52
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 2000,
1999 and 1998 53
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998 54-55
Notes to Consolidated Financial Statements 56-92
49
INDEPENDENT AUDITORS' REPORT
The Audit Committee
Berkshire Hills Bancorp, Inc.
Pittsfield, Massachusetts
We have audited the accompanying consolidated balance sheets of Berkshire Hills
Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company'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 auditing standards generally accepted
in the United States of America. 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 Hills
Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/Wolf & Company, P.C.
- -----------------------
Wolf & Company, P.C.
Boston, Massachusetts
January 31, 2001
50
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
2000 1999
----------- -----------
(In Thousands)
Cash and due from banks.......................................... $ 26,891 $ 23,301
Short-term investments........................................... 16,721 1,341
----------- -----------
Total cash and cash equivalents.............................. 43,612 24,642
Securities available for sale, at fair value..................... 99,309 93,084
Securities held to maturity, at amortized cost................... 32,238 17,014
Federal Home Loan Bank stock, at cost............................ 5,651 3,843
Loans, net of allowance for loan losses of $10,216,000 in
2000 and $8,534,000 in 1999 ..................................... 783,405 665,554
Foreclosed real estate .......................................... 50 220
Banking premises and equipment, net.............................. 12,370 11,531
Accrued interest receivable...................................... 6,310 4,910
Savings Bank Life Insurance stock................................ 2,043 2,043
Goodwill ........................................................ 6,260 6,809
Other assets .................................................... 20,092 12,001
----------- -----------
$1,011,340 $ 841,651
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ........................................................ $ 729,594 $ 680,767
Federal Home Loan Bank advances.................................. 101,386 58,928
Loans sold with recourse......................................... 7,740 --
Securities sold under agreements to repurchse.................... 2,030 1,120
Net deferred tax liability....................................... 4,482 6,073
Accrued expenses and other liabilities........................... 4,786 6,411
----------- -----------
Total liabilities ........................................... 850,018 753,299
----------- -----------
Commitments and contingencies (Notes 5 and 11)
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding................ -- --
Common stock ($.01 par value; 26,000,000 shares
authorized; 7,673,761 shares issued and outstanding
at December 31, 2000) ...................................... 77 --
Additional paid-in capital....................................... 74,054 --
Unearned compensation - ESOP..................................... (7,187) --
Retained earnings................................................ 74,554 70,679
Accumulated other comprehensive income - net
unrealized gain on securities available for sale,
net of tax effects............................................. 19,824 17,673
----------- -----------
Total stockholders' equity....................................... 161,322 88,352
----------- -----------
Total liabilities and stockholders' equity....................... $ 1,011,340 $ 841,651
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
51
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------- -------- --------
(In thousands)
Interest and dividend income:
Interest and fees on loans ............................... $ 63,664 $ 52,522 $ 46,449
Interest on debt securities:
Taxable ................................................ 5,142 4,160 4,123
Tax-exempt ............................................. 188 252 227
Dividends ................................................ 1,362 1,183 1,042
Interest on short-term and other investments ............. 662 351 654
-------- -------- --------
Total interest and dividend income ................... 71,018 58,468 52,495
-------- -------- --------
Interest expense:
Interest on deposits ..................................... 27,603 23,848 22,601
Interest on Federal Home Loan Bank advances .............. 5,766 2,796 1,214
Interest on securities sold under agreements to repurchase 99 278 367
-------- -------- --------
Total interest expense ............................... 33,468 26,922 24,182
-------- -------- --------
Net interest income ........................................ 37,550 31,546 28,313
Provision for loan losses .................................. 3,170 3,030 2,055
-------- -------- --------
Net interest income, after provision for loan losses ....... 34,380 28,516 26,258
-------- -------- --------
Other income:
Customer service fees .................................... 1,590 1,333 1,180
Trust department fees .................................... 1,707 1,730 1,154
Loan servicing fees ...................................... 446 342 234
Gain on sales and dispositions of securities, net ........ 423 491 425
Gain on sale of other real estate ........................ -- -- 119
Loss on sale of equipment ................................ (18) (30) --
Miscellaneous ............................................ 598 432 181
-------- -------- --------
Total other income ................................... 4,746 4,298 3,293
-------- -------- --------
Operating expenses:
Salaries and employee benefits ........................... 13,631 13,767 11,842
Occupancy and equipment .................................. 4,178 4,152 3,591
Data processing .......................................... 1,765 1,493 1,204
Charitable contribution to foundation .................... 5,684 -- --
Foreclosed real estate, net .............................. 111 (8) 54
Office supplies .......................................... 706 687 930
Professional fees ........................................ 850 869 895
Advertising .............................................. 578 599 792
Amortization of goodwill ................................. 549 549 259
Other general and administrative expenses ................ 4,132 3,088 2,792
-------- -------- --------
Total operating expenses ............................. 32,184 25,196 22,359
-------- -------- --------
Income before income taxes ................................. 6,942 7,618 7,192
Provision for income taxes ................................. 2,360 1,995 2,768
-------- -------- --------
Net income ........................................... $ 4,582 $ 5,623 $ 4,424
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
52
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2000, 1999 and 1998
Accumulated
Additional Unearned Other
Common Paid-In Compensation- Retained Comprehenensive
Stock Capital ESOP Earnings Income Total
------- ------- ------- --------- --------- ---------
(In thousands)
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
---------
Comprehensive income:
Net income ........................... -- -- -- 4,582 -- 4,582
Change in net unrealized gain on
securities available for sale, net
of reclassificationm adjustment and
tax effects ........................... -- -- -- -- 2,151 2,151
---------
Total comprehensive income ..... 6,733
---------
Issuance of common stock in connection with
Bank's conversion from mutual to stock-
owned bank holding company ............ 77 73,993 (7,701) -- -- 66,369
Change in unearned compensation - ESOP ..... -- 61 514 -- -- 575
Cash dividends declared ($0.10 per share) .. -- -- -- (707) -- (707)
------- ------- ------- --------- --------- ---------
Balance at December 31, 2000 ............... $ 77 $ 74,054 $ (7,187) $ 74,554 $ 19,824 $ 161,322
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
53
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------- --------- ---------
(In thousands)
Cash flows from operating activities:
Net income ........................................... $ 4,582 $ 5,623 $ 4,424
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................ 3,170 3,030 2,055
Net amortizaton of securities .................... 206 400 158
Charitable contribution in the form of equity
securities .................................... 5,684 -- --
Depreciation and amortization expense ............ 1,668 1,860 1,735
Amortization of goodwill ......................... 549 549 259
Employee stock ownership plan expense ............ 575 -- --
Gain on sales and dispositions of securities, net (423) (491) (425)
Gain on sale of other real estate ................ -- -- (119)
Loss (gain) on sale of foreclosed real estate, net 86 (18) (5)
Loss on sale of equipment ........................ 18 30 --
Deferred income tax benefits ..................... (2,785) (319) (850)
Net change in loans held for sale ................ -- (2,425) --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets .. (9,491) (2,063) (2,732)
Accrued expenses and other liabilities ........ (1,625) 1,287 (283)
--------- --------- ---------
Net cash provided by operating activities ... 2,214 7,463 4,217
--------- --------- ---------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales ............................................ 32,854 1,191 5,319
Maturities ....................................... 41,238 8,468 16,475
Principal payments ............................... 10,263 21,589 23,244
Purchases ........................................ (87,029) (32,749) (61,859)
Activity in held-to-maturity securities:
Maturities ....................................... 11,076 9,171 8,351
Principal payments ............................... 11,294 15,902 41,240
Purchases ........................................ (37,583) (18,357) (38,753)
Purchase of FHLB stock ................................ (1,808) (1,296) --
Loan originations and purchases, net of
principal payments ............................... (121,101) (67,139) (92,872)
Additions to banking premises and equipment ........... (2,528) (3,744) (2,278)
Proceeds from sales of foreclosed real estate ......... 164 347 193
Proceeds from sales of other real estate .............. -- -- 119
Proceeds from sale of equipment ....................... 3 18 --
Cash received from acquisition of three branch offices -- -- 44,843
Loan to fund employee stock ownership plan ............ (7,701) -- --
--------- --------- ---------
Net cash used in investing activities ....... (150,858) (66,599) (55,978)
--------- --------- ---------
(continued)
The accompanying notes are an integral part of these consolidated financial
statements.
54
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------- --------- ---------
(In thousands)
Cash flows from financing activities:
Net increase in deposits ....................... 48,827 33,645 38,379
Net increase (decrease) in securities sold under
agreements to repurchase ..................... 910 (5,880) 1,930
Proceeds from Federal Home Loan Bank advances
with maturities in excess of three months .... 140,000 40,000 32,000
Repayments of Federal Home Loan Bank advances
with maturities in excess of three months .... (97,542) (13,662) (9,290)
Proceeds of borrowings with maturities of
three months or less ......................... -- 3,000 --
Increase in loans sold with recourse ........... 7,740 -- --
Net proceeds from initial public offering ...... 68,386 -- --
Cash dividends paid ............................ (707) -- --
--------- --------- ---------
Net cash provided by financing activities 167,614 57,103 63,019
--------- --------- ---------
Net change in cash and cash equivalents ........... 18,970 (2,033) 11,258
Cash and cash equivalents at beginning of year .... 24,642 26,675 15,417
--------- --------- ---------
Cash and cash equivalents at end of year .......... $ 43,612 $ 24,642 $ 26,675
========= ========= =========
Supplemental cash flow information:
Interest paid on deposits ...................... $ 27,603 $ 23,834 $ 22,553
Interest paid on borrowed funds ................ 5,610 2,797 1,581
Income taxes paid, net ......................... 6,314 2,080 2,929
Transfers from loans to foreclosed real estate . 80 151 222
The accompanying notes are an integral part of these consolidated financial
statements.
55
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
Berkshire Hills Bancorp, Inc. (the "Company") is a Delaware Corporation
and the holding company for Berkshire Bank (the "Bank"), a
state-chartered savings bank headquartered in Pittsfield, Massachusetts.
The 2000 consolidated financial statements include the accounts of
Berkshire Hills Bancorp, Inc. and its wholly owned subsidiaries,
Berkshire Bank and Berkshire Hills Funding Corporation. The Bank's
wholly-owned subsidiaries are North Street Securities Corporation,
G.B.S.B., Inc., Gold Leaf Insurance Agency ("Gold Leaf"), Gold Leaf
Investment Services and Woodland Realty, Inc. North Street Securities
Corporation and G.B.S.B., Inc. hold title to certain investment
securities. Gold Leaf was formed in 2000 and offers insurance products
to customers. Gold Leaf Investment Services and Woodland Realty, Inc.
are presently inactive. Berkshire Hills Funding Corporation was
established and funded to loan funds to the Employee Stock Ownership
Plan. All significant intercompany balances and transactions have been
eliminated in consolidation.
On June 27, 2000, Berkshire Hills Bancorp, Inc. acquired the Bank. Prior
to that time, Berkshire Bancorp existed as a mutual holding company and
owned all of the outstanding capital stock of Berkshire Bank. After the
conversion on June 27, 2000, Berkshire Bancorp ceased to exist. In
connection with the conversion, the Company issued an aggregate of
7,673,761 shares of its common stock of which 7,105,334 shares were sold
at a purchase price of $10 per share. At that time, 568,427 shares of
stock were donated to Berkshire Hills Foundation, a charitable
foundation established by the Company. The net proceeds, after offering
expenses of $2.6 million, resulting from the offering totaled $68.4
million.
Business and operating segments
The Company 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 and automobile loans. In addition, trust services and insurance
products are offered to individuals and small businesses in the
Berkshire County area.
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
Company'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
Company 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 Company's total revenues.
56
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America, 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.
Reclassifications
Certain amounts in the 1999 and 1998 consolidated financial statements
have been reclassified to conform to the 2000 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, 2000 and
1999, cash and due from banks included $10,144,000 and $7,585,000,
respectively, 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, net of tax effects.
57
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
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 unless the loan is 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 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.
58
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans (concluded)
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. Impaired loans are generally
maintained on a nonaccrual basis. 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 Company does not separately
identify individual consumer loans or residential mortgage loans for
impairment disclosures.
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.
59
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses (concluded)
The allowance consists of allocated, general and unallocated loss
components. The allocated loss component relates to loans that are
classified as either doubtful, substandard or special mention. For such
loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could
affect management's estimate of probable losses. The unallocated
component of the allowance reflects the margin of imprecision inherent
in the underlying assumptions used in the methodologies for estimating
allocated losses and general losses in the portfolio.
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.
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 or terms of the leases, if shorter.
Goodwill
Goodwill is associated with the Company's purchase of two branches from
another financial institution in 1985 and three branches in 1998. These
costs are currently amortized against income on a straight-line basis
over 15 years.
Securities sold under agreements to repurchase
The Company enters into repurchase agreements with commercial customers.
The funds are invested in an overnight sweep account and deposited back
in customers' accounts on a daily basis. These agreements are secured by
pledged securities in the Bank's investment portfolio.
60
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Company, (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 Company 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.
Employee stock ownership plan ("ESOP")
Compensation expense is recognized as ESOP shares are committed to be
released. Allocated and committed to be released ESOP shares are
considered outstanding for earnings per share calculations based on debt
service payments. Other ESOP shares are excluded from earnings per share
calculations. Dividends declared on allocated ESOP shares are charged to
retained earnings. Dividends declared on unallocated ESOP shares are
used to satisfy debt service. The value of unearned shares to be
allocated to ESOP participants for future services not yet performed is
reflected as a reduction of stockholders' equity.
Earnings per common share
Basic and diluted earnings per share represents income available to
common stockholders divided by the weighted-average number of common
shares outstanding during the period. Earnings per share data is not
presented in these consolidated financial statements for the years ended
December 31, 2000, 1999 and 1998 since shares of the Company's common
stock were not issued until June 27, 2000.
61
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising costs
Advertising costs are charged to earnings when incurred.
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 Company.
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 the equity section of 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, 2000, 1999 and 1998:
2000 1999 1998
------- ------- --------
(In Thousands)
Change in net unrealized holding gains
on available-for-sale securities... $ 3,768 $(1,841) $ 7,276
Reclassification adjustment for gains
realized in income................. (423) (491) (425)
------- ------- --------
Net change in unrealized gains........ 3,345 (2,332) 6,851
Tax effects .......................... (1,194) 860 (2,391)
------- ------- --------
Net-of-tax change .................... $ 2,151 $(1,472) $ 4,460
======= ======= =======
62
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which,
as amended by SFAS No. 137 and 138, 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 a hedging instrument. 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. The Company adopted this Statement on January 1,
2001 with no material impact on the consolidated financial statements.
During September of 2000, SFAS No. 140 was issued replacing SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on a financial-components approach
that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. In addition, this Statement requires
certain disclosures regarding securitized financial assets. SFAS No. 140
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001.
Management is currently evaluating the impact of adopting this Statement
on the consolidated financial statements and does not anticipate a
material impact.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following at December 31, 2000 and
1999:
2000 1999
------- -------
(In Thousands)
Federal funds sold........................ $ 5,000 $ 1,000
FHLB Overnight deposits................... 7,721 341
BIF Liquidity fund........................ 4,000 --
------- -------
$16,721 $ 1,341
======= =======
63
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SECURITIES
The amortized cost and estimated fair value of securities, with gross
unrealized gains and losses, follows:
December 31, 2000
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
Securities Available for Sale
- -----------------------------
Debt securities:
U.S. Treasury obligations ......... $ 2,045 $ 18 $ (2) $ 2,061
Federal agency obligations ........ 8,101 4 (60) 8,045
Other bonds and obligations ....... 31,750 76 (792) 31,034
Mortgage-backed securities:
FHLMC/ FNMA/GNMA ................ 641 6 (6) 641
REMIC's and CMO's ............... 12,336 160 (26) 12,470
Asset-backed securities ........... 1,986 14 (2) 1,998
------- ------- ------- -------
Total debt securities ....... 56,859 278 (888) 56,249
Mutual funds ........................ 907 -- (188) 719
Marketable equity securities ........ 11,115 31,641 (415) 42,341
------- ------- ------- -------
Total securities
available for sale ...... $68,881 $31,919 $(1,491) $99,309
======= ======= ======= =======
Securities Held to Maturity
- ---------------------------
Debt securities:
Municipal bonds and obligations ... $10,825 $ -- $ -- $10,825
Mortgage-backed securities:
FHLMC/GNMA ...................... 3,625 23 (4) 3,644
REMIC's and CMO's ............... 17,788 118 (33) 17,873
------- ------- ------- -------
Total securities
held to maturity ........ $32,238 $ 141 $ (37) $32,342
======= ======= ======= =======
64
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (continued)
December 31, 1999
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
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
======= ======= ======= =======
65
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (concluded)
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 2000 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.
Available for Sale Held to Maturity
-------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
(In thousands)
Within 1 year ...................... $10,711 $10,694 $ 6,084 $ 6,084
Over 1 year to 5 years ............. 27,086 26,633 225 225
Over 5 years to 10 years ........... 2,160 1,897 1,377 1,377
Over 10 years ...................... 1,939 1,916 3,139 3,139
------- ------- ------- -------
Total bonds and obligations 41,896 41,140 10,825 10,825
Mortgage-backed and asset-backed
securities ..................... 14,963 15,109 21,413 21,517
------- ------- ------- -------
Total debt securities ..... $56,859 $56,249 $32,238 $ 32,342
======= ======= ======= ========
At December 31, 2000 and 1999, the Company has pledged investment
securities with an amortized cost of $7,592,000 and $5,396,000,
respectively, and a fair value of $7,584,000 and $5,283,000,
respectively, to a commercial bank, as collateral for repurchase
agreements, and for its treasury tax and loan account.
For the years ended December 31, 2000, 1999 and 1998, proceeds from the
sales of securities available for sale amounted to $32,854,000,
$1,191,000 and $5,319,000, respectively. Gross realized gains amounted
to $458,000, $685,000 and $511,000, respectively. Gross realized losses
amounted to $35,000, $194,000 and $86,000, respectively.
66
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. LOANS
A summary of the balances of loans follows at December 31, 2000 and
1999:
2000 1999
--------- ---------
(In thousands)
One- to four-family mortgage loans ......... $ 249,440 $ 245,240
Commercial mortgage loans .................. 63,871 46,419
Multi-family mortgage loans ................ 15,699 14,793
Construction loans ......................... 14,290 12,534
Home equity loans .......................... 34,471 33,168
Consumer loans ............................. 248,662 175,568
Commercial loans ........................... 166,956 146,196
--------- ---------
Total loans .......................... 793,389 673,918
Allowance for loan losses .................. (10,216) (8,534)
Net deferred loan costs .................... 232 170
--------- ---------
Loans, net ........................... $ 783,405 $ 665,554
========= =========
At December 31, 2000 and 1999, consumer loans include $0 and $2,425,000,
respectively, of loans which were held for sale.
An analysis of the allowance for loan losses for the years ended
December 31, 2000, 1999 and 1998 follows:
2000 1999 1998
-------- -------- --------
(In thousands)
Balance at beginning of year ...... $ 8,534 $ 7,589 $ 6,078
Provision for loan losses ......... 3,170 3,030 2,055
Loans charged-off ................. (1,910) (2,353) (812)
Recoveries ........................ 422 268 268
-------- -------- --------
Balance at end of year ............ $ 10,216 $ 8,534 $ 7,589
======== ======== ========
67
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LOANS (concluded)
The following is a summary of information pertaining to impaired and
nonaccrual loans at December 31, 2000 and 1999:
2000 1999
------ ------
(In thousands)
Impaired loans with no valuation allowance ........... $ 395 $1,522
Impaired loans with a valuation allowance ............ 71 50
------ ------
Total impaired loans ................................. $ 466 $1,572
====== ======
Valuation allowance allocated to impaired loans ...... $ 4 $ 14
====== ======
Nonaccrual loans ..................................... $2,869 $2,841
====== ======
No additional funds are committed to be advanced in connection with
impaired loans.
For the years ended December 31, 2000, 1999 and 1998, the average
recorded investment in impaired loans amounted to $1,094,000, $2,496,000
and $3,015,000, respectively. The Company recognized $16,000, $23,000
and $218,000, 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 $19,359,000 and
$24,963,000 at December 31, 2000 and 1999, respectively. Consumer loans
sold and serviced for others amounted to $49,901,000 and $38,359,000 at
December 31, 2000 and 1999, respectively.
Substantially all loans serviced for others were sold without recourse
provisions and are not included in the accompanying consolidated balance
sheets. However, one consumer loan sale during 2000 included recourse
provisions amounting to $7,740,000 at December 31, 2000, and such
recourse provisions will expire by September 30, 2001. These loans and
the recourse provision are included in the accompanying consolidated
balance sheet.
68
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
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, 2000 and 1999:
Estimated
2000 1999 Use Lives
-------- -------- ----------
(In thousands)
Banking premises:
Land ......................... $ 1,558 $ 1,558
Buildings and improvements ... 16,074 15,138 5-50 years
Equipment .................... 6,537 5,639 2-38 years
Construction in process ...... 996 323
-------- --------
25,165 22,658
Accumulated depreciation and
amortization .............. (12,795) (11,127)
-------- --------
$ 12,370 $ 11,531
======== ========
Construction in process in 2000 includes a renovation project at the
Allendale branch. Estimated costs to complete are $534,000 including
committed costs of $406,000.
Construction in process in 1999 includes a renovation project at the
Bank's main office. During 2000, this project was completed and costs
were transferred to the applicable categories.
Depreciation and amortization expense for the years ended December 31,
2000, 1999 and 1998 amount to $1,668,000, $1,860,000 and $1,735,000,
respectively.
69
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OTHER ASSETS
Other assets consist of the following at December 31, 2000 and 1999:
2000 1999
------- -------
(In thousands)
Prepaid dealer reserves ........................ $10,019 $ 6,211
Repossessed vehicles ........................... 3,177 996
Cash surrender values, life insurance .......... 4,171 3,470
Other .......................................... 2,725 1,324
------- -------
Total other assets ...................... $20,092 $12,001
======= =======
7. DEPOSITS
A summary of deposit balances, by type, is as follows at December 31,
2000 and 1999:
2000 1999
-------- --------
(In Thousands)
Demand ..................................... $ 76,750 $ 69,034
NOW ........................................ 79,978 78,223
Savings .................................... 136,430 144,704
Money market ............................... 115,800 92,721
Escrow ..................................... 863 782
-------- --------
Total non-certificate accounts....... 409,821 385,464
-------- --------
Term certificates less than $100,000........ 212,360 212,538
Term certificates of $100,000 or more....... 107,413 82,765
-------- --------
Total certificate accounts.................. 319,773 295,303
-------- --------
Total deposits ...................... $729,594 $680,767
======== ========
70
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DEPOSITS (concluded)
A summary of certificate accounts by maturity is as follows at December
31, 2000 and 1999:
2000 1999
------------------------ ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
(Dollars in thousands)
Within 1 year .............. $226,596 6.03% $206,556 5.13%
Over 1 year to 3 years ..... 72,084 6.47 70,006 5.78
Over 3 years ............... 21,093 6.38 18,741 5.99
-------- --------
$319,773 6.15% $295,303 5.34%
======== ========
71
8. FEDERAL HOME LOAN BANK ADVANCES
A summary of outstanding advances from the Federal Home Loan Bank of
Boston ("FHLB"), by maturity, is as follows at December 31, 2000 and
1999:
2000 1999
----------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Fixed rate advances maturing:
2000 $ - - % $23,995 5.46%
2000 - - 188 * 5.91
2001 49,000 6.59 - -
2002 3,166 * 6.13 4,746 * 6.13
2003 3,000 6.61 - -
2003 2,847 * 6.65 - -
2004 2,476 * 6.45 3,000 * 6.45
2005 - - 3,000 5.25
2006 627 5.67 6,627 5.12
2006 698 * 6.50 762 * 6.50
2007 4,000 5.95 - -
2007 1,962 * 6.71 - -
2009 7,000 5.40 7,000 5.40
2010 20,000 5.84 - -
2011 610 5.70 610 5.70
2013 6,000 5.19 9,000 4.85
-------- -------
Total FHLB advances $101,386 6.18% $58,928 5.64%
======== =======
* Amortizing advances requiring monthly principal and interest payments.
72
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEDERAL HOME LOAN BANK ADVANCES (concluded)
At December 31, 2000, certain FHLB advances are callable in the amounts
of $22,000,000, $6,000,000 and $9,000,000 during 2001, 2002 and 2003,
respectively.
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.
9. 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 investment securities.
A summary of repurchase agreements is as follows for the years ended
December 31, 2000 and 1999:
2000 1999
------- -------
(Dollars in thousands)
Balance at year end.......................... $ 2,030 $ 1,120
Fair value of securities underlying the
agreements at year end.................... $ 4,177 $ 1,930
Interest rate on year end balance............ 6.00% 5.20%
Average amount outstanding during year....... $ 1,683 $ 5,923
Maximum amount outstanding at
any month-end.............................. $ 2,980 $ 9,300
Weighted average interest rate during the year 5.88% 4.70%
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, 2000 and
1999, there were no outstanding borrowings against this agreement.
73
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES
Allocation of federal and state income taxes between current and
deferred portions is as follows for the years ended December 31, 2000,
1999 and 1998:
2000 1999 1998
------- ------- -------
(In thousands)
Current tax provision:
Federal ........................... $ 4,024 $ 1,743 $ 2,842
State ............................. 1,121 571 776
------- ------- -------
5,145 2,314 3,618
------- ------- -------
Deferred tax provision (benefit):
Federal ........................... (1,822) (75) (727)
State ............................. (561) 104 171
------- ------- -------
(2,383) 29 (556)
------- ------- -------
Change in valuation reserve .......... (402) (348) (294)
------- ------- -------
$ 2,360 $ 1,995 $ 2,768
======= ======= =======
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates is summarized as follows for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Statutory tax rate ............................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit ....... 5.3 5.9 8.7
Dividends received deduction ................. (3.3) (2.9) (3.4)
Non-taxable appreciation of securities donated. -- (3.6) (2.2)
Change in valuation reserve ................... (5.8) (4.6) (4.1)
Other, net .................................... 3.8 (2.6) 5.5
---- ---- ----
Effective tax rates .............................. 34.0% 26.2% 38.5%
==== ==== ====
74
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (continued)
The components of the net deferred tax liability are as follows at
December 31, 2000 and 1999:
2000 1999
-------- --------
(In thousands)
Deferred tax liability:
Federal ............................. $ 10,898 $ 10,246
State ............................... 635 704
-------- --------
11,533 10,950
-------- --------
Deferred tax asset:
Federal ............................. (5,652) (3,975)
State ............................... (1,399) (1,304)
-------- --------
(7,051) (5,279)
Valuation reserve ................... -- 402
-------- --------
(7,051) (4,877)
-------- --------
Net deferred tax liability ............. $ 4,482 $ 6,073
======== ========
The tax effects of each type of income and expense item that give rise
to deferred taxes are as follows at December 31, 2000 and 1999:
2000 1999
-------- --------
(In thousands)
Investments:
Net unrealized gain on securities
available for sale ..................... $ 10,604 $ 9,410
Other .................................... 649 546
Depreciation ............................... 53 308
Allowance for loan losses .................. (4,126) (3,032)
Employee benefit plans ..................... (1,192) (1,380)
Charitable contribution carryover .......... (1,598) (196)
Other ...................................... 92 15
-------- --------
4,482 5,671
Valuation reserve .......................... -- 402
-------- --------
Net deferred tax liability ................. $ 4,482 $ 6,073
======== ========
75
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
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, 2000, 1999 and 1998:
2000 1999 1998
------- ------- -------
(In thousands)
Balance at beginning of year ............... $ 6,073 $ 7,252 $ 5,711
Deferred tax (benefit) provision ........... (2,383) 29 (556)
Deferred tax effects of net unrealized gains
on securities available for sale ........ 1,194 (860) 2,391
Utilization of valuation reserve ........... (402) (348) (294)
------- ------- -------
Balance at end of year ..................... $ 4,482 $ 6,073 $ 7,252
======= ======= =======
A summary of the change in the valuation reserve application to the
deferred tax assets is as follows for the years ended December 31, 2000,
1999 and 1998:
2000 1999 1998
------- ------- -------
(In thousands)
Balance at beginning of year ............... $ 402 $ 750 $ 1,044
Benefits utilized by current year
operations............................. (402) (348) (497)
Change in future income assumptions ........ -- -- 203
------- ------- -------
Balance at end of year ..................... $ -- $ 402 $ 750
======= ======= =======
The valuation reserve at December 31, 1998 related primarily to a state
net operating loss carryfoward and a charitable contribution carryover.
The net operating loss carryfoward was used in full by December 31,
1999. The charitable contribution carryover, which existed at December
31, 1999, was used in full by December 31, 2000. There is a new
contribution carryover at December 31, 2000, which expires in 2005.
Management believes that the deferred tax assets related to this
contribution carryover and other deductible temporary differences will
be realized. As a result, no valuation reserve has been established at
December 31, 2000.
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.
76
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. 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 Company 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 Company'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 Company 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,
2000 and 1999:
2000 1999
------- -------
(In thousands)
Commitments to grant loans ......................... $37,882 $25,153
Unused funds on commercial lines-of-credit ......... 48,485 49,103
Unadvanced funds on home equity and reddi-cash
lines of credit ................................. 36,672 36,429
Unadvanced funds on construction loans ............. 12,350 4,732
Standby letters of credit .......................... 2,004 2,026
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 Company 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.
77
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
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, 2000, pertaining to banking premises and equipment, future
minimum rent commitments are as follows:
Years Ending
December 31, (In thousands)
------------
2001 $ 422
2002 417
2003 433
2004 432
2005 399
Thereafter 1,445
-------
$ 3,548
=======
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, 2000, 1999 and 1998 amounted to
$593,000, $448,000 and $244,000, respectively.
Employment and change in control agreements
The Company and the Bank have entered into employment agreements with
certain senior executives that generally provide for a specified minimum
annual compensation, participation in stock benefit plans 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.
The Bank has also entered into change in control agreements with certain
officers, all of whom are not covered by an employment agreement. The
change in control agreements generally provide a severance payment if
the officer is terminated following a "change in control," as defined in
the agreements.
Legal claims
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 Company's consolidated financial statements.
78
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company (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 Company's and the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company 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 Company 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, 2000 and 1999, that
the Company and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 2000, 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.
79
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (continued)
The Company's and Bank's actual capital amounts and ratios as of
December 31, 2000 and 1999 are also presented in the table. The
Company's capital amounts and ratios are not presented for December 31,
1999 since the conversion was not consummated until June 27, 2000.
Berkshire Bancorp's capital amounts and ratios are set forth at December
31, 1999.
December 31, 2000
------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------- ------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total capital to risk
weighted assets:
Berkshire Hills Bancorp,
Inc. .................... $159,164 20.15% $ 63,198 8.0% N/A N/A
Berkshire Bank .............. 122,270 15.61 62,649 8.0 $ 78,311 10.0%
Tier 1 capital to risk
weighted assets:
Berkshire Hills Bancorp,
Inc. .................... 135,238 17.12 31,599 4.0 N/A N/A
Berkshire Bank .............. 98,429 12.57 31,325 4.0 46,987 6.0
Tier 1 capital to average
assets:
Berkshire Hills Bancorp,
Inc. .................... 135,238 14.54 37,216 4.0 N/A N/A
Berkshire Bank .............. 98,429 10.64 37,003 4.0 46,253 5.0
80
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded)
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)
Total capital to risk
weighted assets:
Berkshire Bancorp .................. $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:
Berkshire Bancorp .................. 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:
Berkshire Bancorp .................. 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
13. EMPLOYEE BENEFIT PLANS
Defined benefit pension plan
The Company 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.
81
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
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:
Plan Years Ended October 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Change in plan assets:
Fair value of plan assets at
beginning of year ....................... $ 11,047 $ 9,151 $ 7,897
Actual return on plan assets ................. 1,639 1,753 654
Employer contribution ........................ 676 348 916
Benefits paid ................................ (405) (205) (316)
-------- -------- --------
Fair value of plan assets at end of year ..... 12,957 11,047 9,151
-------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ...... 9,492 9,518 9,807
Service cost ................................. 564 519 611
Interest cost ................................ 736 642 711
Actuarial gain ............................... (18) (982) (1,295)
Benefits paid ................................ (405) (205) (316)
-------- -------- --------
Benefit obligation at end of year ............ 10,369 9,492 9,518
-------- -------- --------
Funded status .................................. 2,588 1,555 (367)
Unrecognized net actuarial gain ................ (4,872) (4,286) (2,386)
Unrecognized prior service cost ................ 171 183 194
-------- -------- --------
Accrued pension cost ........................... $ (2,113) $ (2,548) (2,559)
======== ======== ========
The components of net periodic pension cost are as follows for the plan
year ended October 31, 2000, 1999 and 1998:
2000 1999 1998
----- ----- -----
(In thousands)
Service cost ............................ $ 564 $ 519 $ 611
Interest cost ........................... 736 642 711
Expected return on plan assets .......... (885) (732) (631)
Amortization of prior service cost ...... 12 11 11
Recognized net actuarial gain ........... (186) (104) (48)
----- ----- -----
$ 241 $ 336 $ 654
===== ===== =====
82
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EMPLOYEE BENEFIT PLANS (continued)
Defined benefit pension plan (concluded)
Actuarial assumptions used in accounting were:
2000 1999 1998
---- ---- ----
Discount rate on benefit obligations ............. 7.75% 6.75% 7.25%
Rates of increase in compensation levels ......... 4.50 4.50 5.00
Expected long-term rates of return on plan assets. 8.00 8.00 8.00
Defined contribution pension plan
The Company 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 Company 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 Company made matching contributions which amounted to
$237,000, $209,000 and $201,000, respectively, for the years ended
December 31, 2000, 1999 and 1998.
Supplemental employee retirement plan
The Company 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, 2000 and 1999, the Company has an accrued
expense payable in the amount of $808,000 and $817,000, respectively,
representing the present value of future payments under the supplemental
retirement plans. In some instances, the Company has entered into
split-dollar life insurance agreements with senior executives to provide
supplemental retirement benefits.
Incentive plan
The Company 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, 2000,
1999 and 1998 amounted to $874,000, $1,132,000 and $1,007,000,
respectively.
83
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EMPLOYEE BENEFIT PLANS (concluded)
Other benefits
The Company 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, 2000 and
1999, the Company had an accrued liability in the amount of $584,000 and
$626,000, respectively, for payment of future premiums under this plan.
14. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an Employee Stock Ownership Plan (the
"ESOP") for the benefit of each employee that has reached the age of 21
and has completed at least 1,000 hours of service in the previous
twelve-month period. As part of the conversion, Berkshire Hills Funding
Corporation provided a loan to the Berkshire Bank Employee Stock
Ownership Plan Trust which was used to purchase 8%, or 613,901 shares,
of the Company's outstanding stock in the open market. The loan bears
interest equal to 9.5% and provides for quarterly payments of interest
and annual payments of principal.
At December 31, 2000, the remaining principal balance is payable as
follow:
Years Ending
December 31, (In thouands)
------------
2001 $ 242
2002 266
2003 292
2004 319
2005 352
Thereafter 5,651
-------
$ 7,122
=======
The Bank has committed to make contributions to the ESOP sufficient to
support the debt service of the loan. The loan is secured by the shares
purchased which are held in a suspense account for allocation among the
members as the loan is paid. Total compensation expense applicable to
the ESOP amounted to $575,000 for the year ended December 31, 2000.
84
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EMPLOYEE STOCK OWNERSHIP PLAN (concluded)
Shares held by the ESOP include the following at December 31, 2000:
Allocated --
Committed to be allocated 40,868
Unallocated 573,033
-------
613,901
=======
The fair value of these shares was approximately $9,669,000 at December
31, 2000.
15. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
directors and officers and their affiliates. Such loans which aggregate
more than $60,000 on an individual basis, amounted to $4,710,000 and
$5,233,000 at December 31, 2000 and 1999, respectively.
During the year ended December 31, 2000 total principal additions were
$454,000 and total principal payments were $977,000.
16. 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
========
85
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. 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 Company.
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, 2000 and 1999, the Bank's retained earnings available
for the payment of dividends was $70,973,000 and $47,393,000,
respectively, and funds available for loans or advances amounted to
$2,319,000 and $2,319,000, respectively.
In addition, dividends paid by the Bank to the Company would be
prohibited if the effect thereof would cause the Bank's capital to be
reduced below applicable minimum regulatory capital requirements.
In conjunction with Massachusetts conversion regulations, the Bank
established a liquidation account for eligible account holders which at
the time of conversion amounted to approximately $70 million. In the
event of a liquidation of the Bank, the eligible account holders will be
entitled to receive their pro-rata share of the net worth of the Bank
prior to conversion. However, as qualifying deposits are reduced, the
liquidation account will also be reduced in an amount proportionate to
the reduction in the qualifying deposit accounts.
18. 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 Company.
86
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following methods and assumptions were used by the Company 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 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.
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: The carrying amounts of accrued interest
approximate fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet
lending commitments 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.
87
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows at December 31, 2000 and 1999:
2000 1999
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Financial assets:
Cash and cash equivalents ............. $ 43,612 $ 43,612 $ 24,642 $ 24,642
Securities available for sale ......... 99,309 99,309 93,084 93,084
Securities held to maturity ........... 32,238 32,342 17,014 16,922
Federal Home Loan Bank stock .......... 5,651 5,651 3,843 3,843
Loans, net ........................... 783,405 772,970 665,554 644,276
Accrued interest receivable ........... 6,310 6,310 4,910 4,910
Savings Bank Life Insurance stock ..... 2,043 2,043 2,043 2,043
Financial liabilities:
Deposits .............................. 729,594 730,451 680,767 679,432
Federal Home Loan Bank advances ....... 101,386 102,874 58,928 58,439
Securities sold under agreements
to repurchase ...................... 2,030 2,030 1,120 1,120
88
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to the parent company, Berkshire
Hills Bancorp, Inc. commencing June 27, 2000 is as follows:
CONDENSED BALANCE SHEET
-----------------------
December 31,
Assets 2000
- ------ ---------
(In thousands)
Cash due from Berkshire Bank .................................... $ 12,740
Securities available for sale, at fair value..................... 13,937
Investment in common stock of Berkshire Bank .................... 124,590
Investment in common stock of Berkshire Hills Funding Corp. ..... 8,020
Other assets .................................................... 2,050
--------
Total assets .............................................. $161,337
========
Liabilities and Stockholders' Equity
- ------------------------------------
Accounts payable ................................................ $ 15
Stockholders' equity ............................................ 161,322
--------
Total liabilities and stockholders' equity ................ $161,337
========
89
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued)
CONDENSED STATEMENT OF INCOME
-----------------------------
Period Ended
December 31,
------------
2000
(In thousands)
Income:
Dividends from Berkshire Bank .................................. $ 800
Interest on securities ......................................... 205
-------
Total income ................................................. 1,005
-------
Operating expenses:
Charitable contribution ........................................ 5,684
Other .......................................................... 72
-------
Total operating expenses ..................................... 5,756
-------
Loss before income taxes and equity in
undistributed income of subsidiaries ........................... (4,751)
Applicable income tax benefit ..................................... (1,932)
-------
Loss before equity in undistributed income of subsidiaries ....... (2,819)
Equity in undistributed income of Berkshire Bank .................. 7,082
Equity in undistributed income of Berkshire Hills Funding Corp. .. 319
-------
Net income ................................................... $ 4,582
=======
90
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
CONDENSED STATEMENT OF CASH FLOWS
---------------------------------
Period Ended
December 31,
2000
--------
(In thousands)
Cash flows from operating activities:
Net income ................................................. $ 4,582
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed income of Berkshire Bank ....... (7,082)
Equity in undistributed income of Berkshire Hills
Funding Corporation ................................ (319)
Charitable contribution in the form of Berkshire
Hills Bancorp, Inc. common stock ................... 5,684
Deferred tax benefit ................................... (1,598)
Net amortization of securities ......................... (10)
Other, net ............................................. (320)
--------
Net cash provided by operating activities .......... 937
--------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales .................................................. 1,000
Maturities ............................................. 1,950
Principal payments ..................................... 25
Purchases .............................................. (16,958)
Investment in Berkshire Bank ................................ (34,192)
Investment in Berkshire Hills Funding Corporation ........... (7,701)
--------
Net cash used in investing activities .............. (55,876)
--------
Cash flows from financing activities:
Proceeds from issuance of common stock ...................... 68,386
Dividends paid .............................................. (707)
--------
Net cash provided by investing activities .......... 67,679
--------
Net change in cash and cash equivalents ........................ 12,740
Cash and cash equivalents at beginning of period ............... --
--------
Cash and cash equivalents at end of period ..................... $ 12,740
========
91
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
20. QUARTERLY DATA (UNAUDITED)
Quarterly results of operations for the years ended December 31, 2000
and 1999 are as follows:
2000 1999
------------------------------------------- ----------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
Interest and dividend income $ 19,503 $ 18,826 $ 17,143 $ 15,546 $ 15,315 $ 15,022 $ 14,213 $ 13,918
Interest expense............ 9,235 8,639 8,250 7,343 7,374 6,766 6,486 6,296
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income......... 10,268 10,187 8,893 8,203 7,941 8,256 7,727 7,622
Provision for loan losses... 740 810 810 810 1,005 675 675 675
Other income................ 1,242 1,161 965 1,378 1,258 830 885 1,325
Operating expenses (1)...... 7,057 6,742 11,954 6,432 6,993 6,147 6,130 5,926
Provision (benefit) for
income taxes ............... 1,256 1,297 (975) 782 314 593 473 615
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ 2,457 $ 2,499 $ (1,931) $ 1,557 $ 887 $ 1,671 $ 1,334 $ 1,731
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share (2):
Basic ...................... $ 0.35 $ 0.35 N/A N/A N/A N/A N/A N/A
Diluted .................... $ 0.35 $ 0.35 N/A N/A N/A N/A N/A N/A
Notes: (1) Operating expenses in the 2000 second quarter were impacted
by the $5,684,000 charitable contribution in connection with
the conversion to a stock institution.
(2) Earnings per share is not applicable ("N/A") for quarters
prior to the 2000 third quarter since shares of the
Company's stock were not issued until June 27, 2000.
21. SUBSEQUENT EVENTS
At the January 23, 2001 Special Meeting of Stockholders of Berkshire
Hills Bancorp, Inc., the 2001 Stock-based Incentive Plan was approved.
Subject to the terms of the Plan, all employees and Outside Directors
shall be eligible to received Awards under the Plan. The Awards that may
be granted under the Plan are non-statutory stock options, incentive
stock options, and stock awards. The number of shares available for
issuance as stock options is 767,376. The number of shares available for
issuance as restricted stock awards is 306,950. The Plan will be
administered by a Committee appointed by the Board of Directors.
On January 24, 2001, the Board of Directors voted to cease defined
benefit pension plan accruals effective February 28, 2001 in conjunction
with termination of the Plan. As a result, the Company expects to
recognize a settlement gain during the year 2001. Termination of the
Plan is subject to approval by the Internal Revenue Service.
92
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
93
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the directors of the Company, the
information contained under the sections captioned "Proposal I -- Election of
Directors" and "Directors Compensation" in Berkshire Hills' Proxy Statement for
the 2001 Annual Meeting of Stockholders is incorporated by reference. For
information concerning officers of the Company, reference is made to Part I,
Item 1, "Business--Executive Officers of the Registrant" in this report.
Reference is made to the cover page of this report and to the section captioned
"Compliance with Section 16(a) of the "Exchange Act" in the Proxy Statement for
information regarding compliance with Section 16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" in the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" in the
Proxy Statement.
(c) Management of Berkshire Hills knows of no arrangements,
including any pledge by any person of securities of Berkshire
Hills, the operation of which may at a subsequent date result
in a change in control of the registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section captioned "Transactions with Management" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
o Independent Auditors' Report
o Consolidated Balance Sheets as of December 31, 2000 and 1999
o Consolidated Statements of Income for the Years Ended December
31, 2000, 1999 and 1998
o Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 2000, 1999, and 1998
o Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999, and 1998
o Notes to Consolidated Financial Statements
94
(2) Financial Statement Schedules
All financial statement schedules are omitted because
they are not required or applicable, of the required
information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
3.1 Certificate of Incorporation of Berkshire Hills Bancorp,
Inc. (1)
3.2 Bylaws of Berkshire Hills Bancorp, Inc. (1)
4.0 Draft Stock Certificate of Berkshire Hills Bancorp, Inc.
(1)
10.1 Employment Agreement between Berkshire Bank and James A.
Cunningham, Jr.
10.2 Employment Agreement between Berkshire Bank and Robert A.
Wells
10.3 Employment Agreement between Berkshire Bank and Susan M.
Santora
10.4 Employment Agreement between Berkshire Bank and Michael P.
Daly
10.5 Employment Agreement between Berkshire Bank and Charles F.
Plungis, Jr.
10.6 Employment Agreement between Berkshire Hills Bancorp, Inc.
and James A. Cunningham, Jr.
10.7 Employment Agreement between Berkshire Hills Bancorp, Inc.
and Robert A. Wells
10.8 Employment Agreement between Berkshire Hills Bancorp, Inc.
and Susan M. Santora
10.9 Employment Agreement between Berkshire Hills Bancorp, Inc.
and Michael P. Daly
10.10 Employment Agreement between Berkshire Hills Bancorp, Inc.
and Charles F. Plungis, Jr.
10.11 Form of Berkshire Bank Employee Severance Compensation
Plan (1)
10.12 Form of Berkshire Bank Supplemental Executive Retirement
Plan (1)
21.0 Subsidiary Information is incorporated herein by reference
to Part I, Item 1, "Business -
23.0 Consent of Wolf & Company, P.C.
--------------------
(1) Incorporated herein by reference into this
document from the Exhibits to Form S-1,
Registration Statement and amendments
thereto, initially filed on March 10, 2000,
Registration No. 333-32146.
(b) Reports on Form 8-K
None.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Berkshire Hills Bancorp, Inc.
Date: March 21, 2001 By: /s/ James A. Cunningham, Jr.
----------------------------
James A. Cunningham, Jr.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
/s/ James A. Cunningham, Jr. President, Chief Executive Officer March 21, 2001
- ---------------------------- and Director
James A. Cunningham, Jr. (principal executive officer)
/s/ Charles F. Plungis, Jr. Senior Vice President, Treasurer March 21, 2001
- -------------------------- and Chief Financial Officer
Charles F. Plungis, Jr. (principal accounting
and financial officer)
/s/ Robert A. Wells Chairman of the Board March 21, 2001
- -------------------
Robert A. Wells
/s/ Thomas O. Andrews Director March 21, 2001
- ---------------------
Thomas O. Andrews
/s/ Thomas R. Dawson, CPA Director March 21, 2001
- -------------------------
Thomas R. Dawson
/s/ Henry D. Granger Director March 21, 2001
- --------------------
Henry D. Granger
/s/ A. Allen Gray, Esq. Director March 21, 2001
- ----------------------
A. Allen Gray
/s/ John Kittredge Director March 21, 2001
- ------------------
John Kittredge
/s/ Peter J. Lafayette Director March 21, 2001
- ----------------------
Peter J. Lafayette
/s/ Edward G. McCormick, Esq. Director March 21, 2001
- -----------------------------
Edward G. McCormick
/s/ Catherine B. Miller Director March 21, 2001
- -----------------------
Catherine B. Miller
/s/ Michael G. Miller Director March 21, 2001
- ---------------------
Michael G. Miller
/s/ Raymond B. Murray, III Director March 21, 2001
- --------------------------
Raymond B. Murray, III
/s/ Louis J. Oggiani, Esq. Director March 21, 2001
- --------------------------
Louis J. Oggiani
/s/ Robert S. Raser Director March 21, 2001
- -------------------
Robert S. Raser
/s/ Corydon L. Thurston Director March 21, 2001
- -----------------------
Corydon L. Thurston
/s/ Ann H. Trabulsi Director March 21, 2001
- -------------------
Ann H. Trabulsi
/s/ William E. Williams Director March 21, 2001
- -----------------------
William E. Williams
/s/ Anne Everest Wojtkowski Director March 21, 2001
- ---------------------------
Anne Everest Wojtkowski