UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 1-15781
BERKSHIRE HILLS BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3510455
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 North Street, Pittsfield, Massachusetts 01201
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 443-5601
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(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes [X] No [ ]
The Issuer had 7,290,073 shares of common stock, par value $0.01
per share, outstanding as of May 11, 2001.
BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000 1
Consolidated Statements of Income for the Three
Months Ended March 31, 2001 and 2000 2
Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2001 and 2000 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II:OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
March 31, December 31,
2001 2000
----------- ------------
(In thousands)
Assets:
Cash and due from banks $ 20,356 $ 26,891
Short-term investments 1,107 16,721
----------- -----------
Total cash and cash equivalents 21,463 43,612
Securities available for sale, at fair value 97,134 99,309
Securities held to maturity, at amortized cost 31,775 32,238
Federal Home Loan Bank Stock, at cost 6,184 5,651
Savings Bank Life Insurance Stock, at cost 2,043 2,043
Loans 803,501 793,621
Allowance for loan losses (10,545) (10,216)
----------- -----------
Net loans 792,956 783,405
Banking premises and equipment, net 12,578 12,370
Foreclosed real estate -- 50
Accrued interest receivable 5,990 6,310
Goodwill 6,136 6,260
Other assets 18,991 20,092
----------- -----------
Total assets $ 995,250 $ 1,011,340
=========== ===========
Liabilities and Stockholders' Equity:
Deposits $ 715,005 $ 729,594
Federal Home Loan Bank advances 114,089 101,385
Securities sold under agreements to repurchase 1,710 2,030
Net deferred tax liability 4,057 4,482
Loans sold with recourse 4,791 7,740
Accrued expenses and other liabilities 5,631 4,787
----------- -----------
Total liabilities 845,283 850,018
----------- -----------
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares -- --
authorized; none issued or outstanding)
Common stock ($.01 par value: 26,000,000 shares 77 77
authorized; shares issued: 7,673,761 at March 31, 2001
and December 31, 2000; shares outstanding: 7,290,073
at March 31, 2001 and 7,673,761 at December 31, 2000)
Additional paid-in capital 74,105 74,054
Unearned compensation (12,330) (7,187)
Retained earnings 75,926 74,554
Accumulated other comprehensive income 19,013 19,824
Treasury stock, at cost (383,688 shares at March 31,2001) (6,824) --
----------- -----------
Total stockholders' equity 149,967 161,322
----------- -----------
Total liabilities and stockholders' equity $ 995,250 $ 1,011,340
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended
March 31
--------------------------
2001 2000
---------- ----------
(In thousands, except
for per share amounts)
Interest and Dividend Income:
Bond interest $ 1,513 $ 1,162
Stock dividends 394 318
Short term investment interest 75 52
Loan interest 17,154 14,074
-------- --------
Total interest and dividend income 19,136 15,606
-------- --------
Interest expense:
Interest on deposits 7,261 6,320
Interest on FHLB advances 1,673 1,010
Interest on securities sold under agreements
to repurchase 179 13
-------- --------
Total interest expense 9,113 7,343
-------- --------
Net interest income 10,023 8,263
Provision for loan losses 840 810
-------- --------
Net interest income, after provision for loan losses 9,183 7,453
-------- --------
Non-interest income:
Customer service fees 407 336
Trust department fees 430 539
Loan servicing fees 119 158
Gain (loss) on sale of securities, net (1) 232
Other income 155 53
-------- --------
Total non-interest income 1,110 1,318
-------- --------
Operating expenses:
Salaries and benefits 3,622 3,435
Occupancy and equipment 1,089 1,098
Marketing and advertising 146 79
Data processing 171 344
Professional services 253 146
Office supplies 285 274
Foreclosed real estate and other loan expenses, net 536 318
Amortization of goodwill 124 137
Contributions -- --
Other expenses 975 601
-------- --------
Total operating expenses 7,201 6,432
-------- --------
Income before taxes 3,092 2,339
Provision for income taxes 1,014 782
-------- --------
Net income $ 2,078 $ 1,557
======== ========
Earnings per share:
Basic $ 0.31 NA
Diluted 0.30 NA
Weighted average shares outstanding:
Basic 6,676 NA
Diluted 6,914 NA
See accompanying notes to unaudited consolidated financial statements.
2
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
UNAUDITED
(In Thousands)
Common Additional Unearned Retained Accumulated Treasury Total
Stock Paid-in Compensation Earnings Other Stock
Capital Comprehensive
Income
--------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 77 $ 74,054 $ (7,187) $ 74,554 $ 19,824 $ -- $ 161,322
Comprehensive income:
Net income -- -- -- 2,078 -- -- 2,078
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustments and tax
effects -- -- -- -- (811) (811)
---------
Total comprehensive income 1,267
---------
Cash dividends declared ($0.10 per share) -- -- -- (706) -- -- (706)
Treasury stock purchased -- -- -- -- -- (6,824) (6,824)
Purchase of common stock - MRP -- -- (5,453) -- -- -- (5,453)
Change in unearned compensation - MRP -- -- 182 -- -- -- 182
Change in unearned compensation - ESOP -- 51 128 -- -- -- 179
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2001 $ 77 $ 74,105 $ (12,330) $ 75,926 $ 19,013 $ (6,824) $ 149,967
========= ========= ========= ========= ========= ========= =========
Balance at December 31, 1999 $ -- $ -- $ -- $ 70,679 $ 17,673 $ -- $ 88,352
Comprehensive income:
Net income -- -- -- 1,557 -- -- 1,557
Change in net unrealized gain on -- -- -- -- (1,298) -- (1,298)
securities available for sale, net of
reclassification adjustments and
tax effects
Total comprehensive income 259
---------
Balance at March 31, 2000 $ -- $ -- $ -- $ 72,236 $ 16,375 $ -- $ 88,611
========= ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
3
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended
March 31
---------------------------
2001 2000
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 2,078 $ 1,557
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 840 810
Net amortization of securities 63 86
Depreciation and amortization expense 416 428
Amortization of goodwill 124 137
Management rewards plan expense 182 --
Employee stock ownership plan expense 179 --
(Gain) loss on sales and dispositions of securities, net 1 (232)
Deferred tax provision (benefit) (1) --
Loans originated for sale -- (6,338)
Principal balance of loans sold -- 6,338
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 1,421 (1,189)
Accrued expenses and other liabilities 844 (191)
-------- --------
Net cash provided by operating activities 6,147 1,406
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales 999 10,454
Maturities 10,720 500
Principal payments 2,211 2,072
Purchases (13,066) (13,543)
Activity in held-to-maturity securities:
Maturities 985 2,363
Principal payments 4,211 1,676
Purchases (4,721) (8,473)
Purchase of Federal Home Loan Bank stock (533) (374)
Loan originations, net of principal payments (22,013) (31,071)
Proceeds from sale of loans from portfolio 11,622 --
Additions to banking premises and equipment (624) (823)
Proceeds from sales of foreclosed real estate 50 --
-------- --------
Net cash used in investing activities (10,159) (37,219)
-------- --------
(Continued)
See accompanying notes to unaudited consolidated financial statements.
4
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Unaudited
Three Months Ended
March 31
---------------------------
2001 2000
-------- --------
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits (14,589) 7,265
Net (decrease) in securities sold under agreements to purchase (320) (250)
Proceeds from Federal Home Loan Bank advances with maturities 35,000 37,000
in excess of three months
Repayments of Federal Home Loan Bank advances with maturities (24,855) (19,581)
in excess of three months
Net proceeds of borrowings with maturities of three months or less 2,559 10,000
Net decrease in loans sold with recourse (2,949) --
Treasury stock purchased (6,824) --
Purchase of common stock in connection with employee and non- (5,453) --
employee directors benefit program
Dividends paid (706) --
-------- --------
Net cash provided (used) by financing activities (18,137) 34,434
-------- --------
Net change in cash and cash equivalents (22,149) (1,379)
Cash and cash equivalents at beginning of period 43,612 24,642
-------- --------
Cash and cash equivalents at end of period $ 21,463 $ 23,263
======== ========
Supplemental cash flow information:
Interest paid on deposits $ 7,243 $ 6,315
Interest paid on borrowed funds 1,521 651
Income taxes paid (refunded), net (48) 850
See accompanying notes to unaudited consolidated financial statements.
5
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2000
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated interim financial statements of Berkshire Hills
Bancorp, Inc. ("Berkshire Hills" or the "Company") and its wholly-owned
subsidiaries, Berkshire Bank (the "Bank") and Berkshire Hills Funding Corp.
herein presented are intended to be read in conjunction with the consolidated
financial statements presented in the Company's most recent Securities and
Exchange Commission Form 10-K and accompanying notes to the Consolidated
Financial Statements filed by the Company for the year ended December 31, 2000.
The consolidated financial information at March 31, 2001 and for the three month
periods ended March 31, 2001 and 2000 are derived from unaudited consolidated
financial statements but, in the opinion of management, reflect all adjustments
necessary to present fairly the results for these interim periods in accordance
with accounting principles generally accepted in the United States of America.
These adjustments consist only of normal recurring adjustments. The interim
results are not necessarily indicative of the results of operations that may be
expected for the entire year.
NOTE 2. COMMITMENTS
At March 31, 2001, the Company had outstanding commitments to originate
new residential and commercial loans totaling $30.8 million which are not
reflected on the consolidated balance sheet. In addition, unadvanced funds on
home equity lines totaled $36.5 million while unadvanced commercial lines,
including unadvanced construction loan funds, totaled $75.7 million.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share represents net income divided by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflects additional common shares that would have been
outstanding if potential diluted shares, such as stock options or restricted
stock, had been issued. Unallocated shares of common stock held by the Bank's
employee stock ownership plan (the "ESOP") are not included in the
weighted-average number of common shares outstanding for either basic or diluted
earnings per share calculations. Earnings per share data is presented for the
three months ended March 31, 2001, but not for the three months ended March 31,
2000, since shares of common stock were not issued until June 27, 2000.
Earnings per share equaled $0.31 for the quarter ending March 31, 2001,
based on 6,676,291 average shares outstanding. Diluted earnings per share
equaled $0.30 for the quarter ending March 31, 2001, based on 6,913,828 average
shares outstanding.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended March 31, 2001 and 2000,
and should be read in conjunction with Berkshire Hills Bancorp, Inc.'s
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Forward Looking Statements
This report contains forward-looking statements that are based on
assumptions and may describe future plans, strategies, and expectations of
Berkshire Hills and Berkshire Bank. These forward looking statements are
6
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Berkshire Hills'
and Berkshire Bank'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 Berkshire Hills and its subsidiaries
include, but are not limited to, changes in interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
Berkshire Hills' and Berkshire Bank's market area, changes in real estate market
values in Berkshire Hills' market area, and changes in relevant accounting
principles and guidelines. These risks and uncertainties should be considered in
evaluating forward looking statements and undue reliance should not be placed on
such statements. Except as required by applicable law or regulation, Berkshire
Hills does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward looking
statements to reflect events or circumstances after the date of the statements
or to reflect the occurrence of anticipated or unanticipated events.
General
Berkshire Hills is a Delaware corporation and the holding company for
Berkshire Bank, a state-chartered savings bank headquartered in Pittsfield,
Massachusetts. Established in 1846, Berkshire Bank is one of Massachusetts'
oldest and largest independent banks. With eleven full service branch offices
serving communities throughout Berkshire County, Berkshire Bank is the largest
banking institution based in Western Massachusetts. The Bank is a
community-based financial institution that originates a variety of loan products
including real estate loans, commercial loans, and consumer loans primarily in
Berkshire County, Massachusetts and its surrounding areas. The Bank offers a
wide variety of deposit products and other investment products and financial
services to its customers, including asset management and trust services.
In connection with the mutual to stock conversion of Berkshire Bancorp,
the Bank's former mutual holding company, on June 27, 2000, Berkshire Hills sold
7,105,334 shares of common stock raising net proceeds of $68,415,488. As part of
the conversion, 568,427 shares of Berkshire Hills common stock were donated to
the Berkshire Hills Foundation, a charitable foundation.
On January 24, 2001, our Board of Directors approved the payment of a
cash dividend of $0.10 per share, payable on February 23, 2001, to stockholders
of record on February 5, 2001.
Comparison of Financial Condition at March 31, 2001 and December 31, 2000
Total assets at March 31, 2001 were $995.3 million, a decrease of $16.1
million, or 1.6%, from $1,011.3 million at December 31, 2000. Total assets
declined during the quarter as $6.5 million in cash and due from banks, and
$15.6 million in short-term investments were used to fund $14.6 million in
deposit withdrawals and to purchase 383,688 shares under the Company's 5% stock
repurchase program and 306,950 shares to fund the Company's granting of
restricted stock awards under the 2001 Stock-Based Incentive Plan. Loans
outstanding increased $9.9 million during the quarter to $803.5 million and were
supported by an increase of $12.7 million in borrowings from the Federal Home
Loan Bank of Boston.
Loans
Total loans outstanding increased $9.9 million, or 1.2%, during the
first quarter of 2001 due to growth in the various commercial lending
categories. Unlike previous quarters, automobile loans fell $2.5 million, or
1.1%, as new originations were offset by the sale of $11.6 million of loans from
the portfolio during the quarter.
7
At March 31, 2001 At December 31, 2000
----------------------- -----------------------------
Balance % Balance %
of Total of Total
--------- --------- --------- ---------
(Dollars in thousands)
Mortgage loans on real estate:
Residential 1 - 4 family $ 242,577 30.19% $ 244,290 30.78%
Commercial 1 - 4 family 11,370 1.42% 11,063 1.39%
Commercial Real Estate 70,432 8.77% 63,871 8.05%
Commercial Construction 13,017 1.62% 8,480 1.07%
Multi-family 15,819 1.97% 15,699 1.98%
--------- -----------
Total real estate loans 353,215 43.96% 343,403 43.27%
Commercial loans 167,819 20.89% 167,085 21.05%
Consumer loans:
Automobile 228,134 28.39% 230,648 29.06%
Home Equity Loans 33,094 4.12% 34,471 4.34%
Other 21,239 2.64% 18,014 2.27%
--------- -----------
Total consumer loans 282,467 35.15% 283,133 35.68%
Total loans 803,501 793,621
Less: Allowance for loan losses (10,545) 1.31% (10,216) 1.29%
----------- -----------
Loans, net $ 792,956 $ 783,405
=========== ===========
Commercial real estate loans and commercial construction loans
accounted for the bulk of the increase over the winter months. Commercial real
estate loans grew $6.6 million, or 10.3%, to $70.4 million, and commercial
construction loans grew $4.5 million, or 53.5%, to $13.0 million. As evidence of
a sustaining local economy, loans were granted for various purposes ranging from
the construction of a hotel, to the purchase of a headquarters and modernization
of a music facility for a local cultural organization, to the renovation of a
summer camp. In the consumer loan category, other consumer loans increased $3.2
million, or 17.9%, to $21.2 million due to a number of second mortgage loans
other than home equity loans being granted.
Allowance for Loan Losses
All banks that manage loan portfolios will experience losses to varying
degrees. The allowance for loan losses is the amount available to absorb these
losses and represents management's evaluation of the risks inherent in the
portfolio including the collectibility of the loans, changing collateral values,
past loan loss history, specific borrower situations, and general economic
conditions. Management continually assesses the adequacy of the allowance for
loan losses and makes monthly provisions in an amount considered adequate to
cover losses in the loan portfolio. Because future events affecting the loan
portfolio cannot be predicted with complete accuracy, there can be no assurances
that management's estimates are correct and that the existing allowance for loan
losses is adequate. However, management believes that based on the information
available to it on March 31, 2001, the Company's allowance for loan losses is
sufficient to cover losses inherent in the Company's current loan portfolio.
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
8
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
On March 31, 2001, the allowance for loan losses totaled $10.5 million,
or 1.31%, of total loans as compared to $10.2 million, or 1.29%, of total loans
on December 31, 2000. Net consumer loan charge-offs, primarily auto loans,
amounted to $514,000 this year against $121,000 for the same three month period
last year due to some deterioration in the auto portfolio along with the normal
aging of a larger portfolio. For the quarter ending March 31, 2001, there were
$3,000 in net recoveries in the commercial loan portfolio as compared to
$66,000 in net charge-offs last year as one problem credit was resolved.
Combined, net loans charged-off during the quarter amounted to 0.06% of total
loans as compared to .03% last year. The allowance expressed as a percentage of
nonperforming loans was 308.69% at March 31, 2001, as compared to 359.95% at
March 31, 2000.
At and for the
Three Months Ended
----------------------------
March 31, March 31,
2001 2000
--------- ---------
(Dollars in thousands)
Allowance for loan losses, beginning of period $10,216 $ 8,534
Charged-off loans:
Real estate -- --
Consumer 642 184
Commercial 6 90
------- -------
Total charged-off loans 648 274
Recoveries:
Real estate -- 11
Consumer 128 63
Commercial 9 24
------- -------
Total recoveries 137 98
Provision for loan losses 840 810
------- -------
Allowance for loan losses, end of period $10,545 $ 9,168
======= =======
Net loans charged-off to total loans 0.06% 0.03%
Allowance for loan losses to total loans 1.31% 1.30%
Allowance for loan losses to nonperforming loans 308.69% 359.95%
Recoveries to charge-offs 21.14% 35.77%
9
Nonperforming Assets
The following table sets forth information regarding nonperforming
assets as of March 31, 2001 and December 31, 2000.
At March 31, At December 31,
2001 2000
------------- -----------------
(Dollars in thousands)
Nonaccruing loans:
Real estate:
One- to four-family $ 347 $ 390
Commercial -- --
Home equity -- 20
Consumer 2,112 1,993
Commercial 957 466
------ ------
Total 3,416 2,869
Foreclosed real estate -- 50
------ ------
Total nonperforming assets $3,416 $2,919
====== ======
Total nonaccruing loans to total loans 0.43% 0.36%
Total nonperforming assets to total assets 0.34% 0.29%
Nonaccruing loans increased from $2.9 million at the end of December to
$3.4 million on March 31, 2001. Nonaccruing commercial loans increased $491,000
as a loan to a company in the special effects industry was transferred to
nonaccrual status. Nonaccruing consumer loans increased $119,000, or 6.0%, to
$2.1 million due to increased automobile delinquencies. The Company disposed of
its sole remaining foreclosed real estate property during the quarter.
Generally, the Company ceases accruing interest on all loans when
principal or interest payments are 90 days or more past due unless management
determines the principal and interest to be fully secured and in the process of
collection. Once management determines that interest is uncollectible and ceases
accruing interest on a loan, all previously accrued interest is reversed against
current interest income. At March 31, 2001, the Company had $25,000 of loans
that were 90 days or more past due but which were still accruing interest.
Investment Securities
Securities totaled $137.1 million at the end of March 2001 as compared
to $139.2 million on December 31, 2000. An $811,000 reduction in the net
unrealized gain in the portfolio was due to a decline in the equity portfolio as
a result of a lackluster stock market. This change will be recognized in
accumulated other comprehensive income on the consolidated statement of changes
in stockholders' equity. The balance of the decline in securities during the
quarter was due to the use of normal portfolio cash flows to meet deposit
run-off. Normally, such cash flows would be reinvested in the portfolio.
Other Assets
Included in other assets are the Bank's prepaid automobile dealer
reserve accounts, the cash surrender value of life insurance policies, and the
portfolio of repossessed automobiles. From December 31, 2000 to March 31, 2001,
other assets fell $1.1 million. Prominent in the decline was a decrease of
$333,000 in repossessed automobiles from $3.2 million at December 31, 2000, to
$2.8 million at March 31, 2001. A strong sales effort during the first quarter
of 2001 enabled the Bank to bring down the balance of its automobile portfolio.
Other assets also declined due to the January 2, 2001 collection of a $1.0
10
million security that matured on Sunday, December 31, 2001, that was partially
offset by an increase of $147,000 in the dealer reserve accounts.
Deposits
Customers' deposits are the primary funding vehicle for the Company's
asset base. The following table sets forth the Company's deposit stratification
as of March 31, 2001 and December 31, 2000.
At March 31, 2001 At December 31, 2000
----------------------- -----------------------
Balance % of Balance % of
Deposits Deposits
------- -------- ------- --------
(Dollars in thousands)
Demand deposits $ 68,089 9.52% $ 76,750 10.52%
NOW accounts 77,408 10.83% 79,978 10.96%
Savings accounts 138,341 19.35% 137,293 18.82%
Money Market accounts 103,231 14.44% 115,800 15.87%
Term certificates 327,936 45.86% 319,773 43.83%
-------- --------
Total $715,005 $729,594
======== ========
Total deposits were $715.0 million on March 31, 2001, a decrease of
$14.6 million or 2.0% for the quarter. Core deposits, which the Company
considers to be all but term certificates, were 54.1% of total deposits on March
31, 2001 as compared to 56.2% on December 31, 2000. Historically, the first
quarter of the year is a difficult period for deposit growth. This year, in
addition to normal seasonality, declines in municipal deposits and corporate
checking and sweep accounts contributed to decreases in NOW, demand deposit, and
money market accounts.
Borrowings
Since deposit growth has been insufficient to keep up with loan growth,
the Company has found it necessary to supplement its funding of the loan
portfolio with borrowings from the Federal Home Loan Bank of Boston. The amount
of these borrowings has increased $12.7 million to $114.1 million since the end
of last year. The Company's borrowing capacity at the Federal Home Loan Bank of
Boston is in excess of $240 million.
Stockholders' Equity and Regulatory Capital
At March 31, 2001, the Company had $150.0 million in stockholders'
equity compared to $161.3 million at December 31, 2000. The Company earned $2.1
million during the first quarter of 2001, but purchased 306,950 shares of its
common stock at a cost of $5.5 million to fund the granting of a restricted
stock awards under the Company's 2001 Stock-Based Incentive Plan and acquired an
additional 383,688 shares for $6.8 million to complete a 5% repurchase program.
The Company also declared and paid a cash dividend of $0.10 per common share,
amounting to $706,000.
The Company's capital to assets ratio for March 31, 2001, and December
31, 2000, was 15.07% and 15.95%, respectively. The various regulatory capital
ratios for the Company on March 31, 2001 and December 31, 2000 were as follows:
March 31, 2001 December 31, 2000
-------------- -----------------
Total capital to risk weighted assets 18.66% 20.15%
Tier 1 capital to risk weighted assets 15.76% 17.12%
Tier 1 capital to average assets 12.80% 14.54%
11
Regulations have been established that require the Company and the Bank
to maintain minimum amounts and ratios of Tier 1 and total capital to average
assets to ensure capital adequacy. Failure to meet these requirements can
initiate regulatory actions that could have a material effect on the Company's
financial statements. As of December 31, 2000, the Company was in compliance
with all capital adequacy requirements to be categorized as well capitalized.
Management knows of no events that have since occurred that would jeopardize
this rating and believes that the Company would continue to be considered well
capitalized on March 31, 2001.
Comparison of Operating Results for the Three Months Ended March 31, 2001 and
2000
Net Interest Income. Net interest income is the largest component of
the Company's revenue stream and is the difference between the interest and
dividends earned on the loan and investment portfolios and the interest paid on
the Company's funding sources, primarily customer deposits and advances from the
Federal Home Loan Bank of Boston. Net interest income, before the provision for
loan losses, increased $1.8 million or 21.3%, to $10.0 million in the first
quarter of 2001. The Company's net interest margin increased to 4.21% this
quarter from 4.09% for the same quarter last year. Higher yields were the main
contributor to the increase in net interest margin.
Total interest and dividend income increased $3.5 million, or 22.6%, to
$19.1 million for the first quarter of 2001 as compared to the same period last
year. Strong commercial and automobile loan growth coupled with loans that
repriced at higher rates throughout 2000 contributed to a higher level of
interest earnings. Loan interest grew to $17.2 million in the current quarter,
an increase of $3.1 million, or 21.9%, from the same period last year.
Investment income rose to $2.0 million in 2001 from $1.5 million in 2000, an
increase of $450,000, or 29.4%, as the Company's investment securities also
benefited from growth in the portfolio and a higher yield on invested assets.
Interest expense rose $1.8 million, or 24.1%, to $9.1 million this year
due to increased deposits, a higher concentration of certificates of deposits,
and additional FHLB advances. Deposit growth has been unable to fully fund the
growth in the Company's asset base and has been supplemented by borrowings from
the Federal Home Loan Bank of Boston. Deposit expense grew by $941,000 this year
to $7.3 million while interest on FHLB advances increased $663,000 or 65.6%, to
$1.7 million from $1.0 million last year. Other interest expense rose to
$179,000 from $13,000 as the Bank incurred $152,000 in interest expense related
to loans sold with recourse.
The Company's provision for loan losses was $840,000 in the first
quarter of this year as compared to $810,000 in the same quarter last year. In
setting the provision for the first quarter of 2001, management considered the
current level of commercial and automobile loan originations, current
delinquencies in the loan portfolio, prospects for future loan delinquencies,
especially automobile, and the likelihood for future recoveries of previously
charged-off loans, among other items. In addition, Berkshire Hills has a
material investment in commercial and automobile loans which generally bear a
greater degree of risk than one-to-four family real estate loans.
After the provision, net interest income was $9.2 million for the
quarter ending March 31, 2001 as compared to $7.5 million for the same period
last year, an increase of $1.7 million or 23.2%.
Non-interest Income. Non-interest income earned by the Company comes
primarily from three recurring sources: Trust department fees, customer service
fees, and servicing fees on loans sold to others. For the three months ended
March 31, 2001, non-interest income totaled $1.1 million, a decrease of
$208,000, or 15.8%, from the same quarter last year. The decline in non-interest
income can be attributed to a $109,000 decline in trust department fees as first
quarter 2000 benefited from a switch from a cash to an accured method of
accounting, along with a decline in loan servicing fees of $39,000 as greater
than anticipated payments in the automobile loan portfolio resulted in lower
earned fees. In addition, with 2001's volatile stock market, more securities
were sold at a profit in 2000
12
than 2001 resulting in a decline in securities gains of $233,000. Partially
offsetting these declines were an increase of $71,000 in customer service fees
primarily due to increased overdraft fees, ATM card fees, and miscellaneous loan
fees and an increase of $102,000 in other income from the proceeds of an
insurance policy.
Non-interest Expense. Non-interest (operating) expense amounted to $7.2
million for the three months ending March 31, 2001 as compared to $6.4 million
for the same three months last year. Included in this quarter's expenses were
$182,000 for the 2001 Stock-Based Incentive Plan and $179,000 for the Bank's
ESOP. As the Company completed its mutual to stock conversion on June 27, 2000,
there were no such corresponding expenses in the same quarter last year. In
addition, other expenses increased $379,000 primarily due to $203,000 of
expenses associated with being a public company. Various other items, such as
insurance expense, postage and courier expense, imaging expense, and start-up
expenses for Gold Leaf Investments added approximately $180,000 to other
expenses. Foreclosed real estate and other loan expense rose $218,000 year over
year primarily due to expenses related to the sale of repossessed autos.
One-time expenses in the first quarter included $20,000 related to the closing
of a branch office and $50,000 for examining new ventures that pertain to
non-interest income generation. Partially offsetting these increases was a
decline in data processing costs of $173,000 as savings were realized due to a
switch to an in-house imaging system from an outsourced operation.
Income Taxes. Income taxes were $232,000 higher in this year's first
quarter as increased income offset a lower effective tax rate. The Company's
effective tax rate was 32.8% in 2001, compared to 33.4% in 2000.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Berkshire Bank further defines liquidity as
the ability to respond to the needs of depositors and borrowers as well as
maintaining the flexibility to take advantage of investment opportunities.
Berkshire Bank's primary investing activities are: (1) originating
residential 1 - 4 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. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit outflows and mortgage
prepayments are greatly influenced by interest rates, economic conditions, and
competition. Additionally, deposit flows are affected by the overall level of
interest rates, the interest rates and products offered by Berkshire Bank and
its local competitors, and other factors. Berkshire Bank closely monitors its
liquidity position on a daily basis. If Berkshire Bank should require funds
beyond its ability to generate them internally, additional sources of funds are
available through advances or a line of credit with the Federal Home Loan Bank
and through a repurchase agreement with the Depositors Insurance Fund.
Berkshire Bank relies primarily on competitive rates, customer service,
and long-standing relationships with customers to retain deposits. Occasionally,
Berkshire Bank will also offer special competitive promotions to its customers
to increase retention and promote deposit growth. Based upon Berkshire Bank's
historical experience with deposit retention, management believes that, although
it is not possible to predict future terms and conditions upon renewal, a
significant portion of its deposits will remain with Berkshire Bank.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Berkshire Bank's most significant form of market risk is interest rate
risk. The principal objectives of Berkshire Bank's interest rate risk management
are to evaluate the interest rate risk inherent in certain balance sheet
accounts, determine the level of risk appropriate given its business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with its established policies.
Berkshire Bank maintains an Asset/Liability Committee that is responsible for
reviewing its asset/liability policies and interest rate risk position, which
meets quarterly and reports to the Executive Committee of the Bank and the Board
of Directors. The Asset/Liability Committee consists of Berkshire Bank's
President and Chief Executive Officer, Senior Vice President, Treasurer and
Chief Financial Officer, Executive Vice President-Senior Loan Officer, and
Executive Vice President-Retail Banking. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of
Berkshire Bank.
In recent years, Berkshire Bank has managed interest rate risk by:
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.
For Berkshire Bank, market risk also includes price risk, primarily
equity price risk. The securities portfolio had unrealized gains before taxes of
$29.2 million at March 31, 2001. Changes in this figure are reflected, net of
taxes, in accumulated other comprehensive income as a separate component of
Berkshire Bank's equity. Since December 31, 2000, this component has declined
$811,000. It is not possible to predict with complete accuracy the direction and
magnitude of securities price changes. Unfavorable market conditions or other
factors could cause further price declines in the securities portfolio.
Berkshire Bank uses a simulation model to measure the potential change
in net interest income, incorporating various assumptions regarding the shape of
the yield curve, the pricing characteristics of loans, deposits and borrowings,
prepayments on loans and securities, and changes in balance sheet mix. The table
below sets forth, as of March 31, 2001, 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.
Increase/ (Decrease)
in Market Interest Rates At March 31, 2001
in Basis Points --------------------------------------
(Rate Shock) Amount $ Change % Change
------------------------ ----------- ------------ ----------
(Dollars in thousands)
200 $45,553 $906 2.03%
100 45,248 601 1.35%
Static 44,646 -- --
(100) 43,857 (789) (1.77)%
(200) 43,058 (1,588) (3.56)%
14
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
$789,000 and $1.6 million respectively.
Computation of prospective effects of hypothetical interest rate
changes are based on a number of assumptions including the level of market
interest rates, the degree to which certain assets and liabilities with similar
maturities or periods to repricing react to changes in market interest rates,
the expected prepayment rates on loans and investments, the degree to which
early withdrawals occur on certificates of deposit, and other deposit flows. As
a result, these computations should not be relied upon as indicative of actual
results. Further, the computations do not reflect any actions that management
may undertake in response to changes in interest rates.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented have
been prepared in conformity with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike many industrial companies,
substantially all of the assets and liabilities of Berkshire Bank are monetary
in nature. As a result, interest rates have a more significant impact on
Berkshire Bank's performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the same direction
or in the same magnitude as inflation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company is not involved in any legal proceedings other than routine
legal proceedings occurring in the normal course of business. Such routine
proceedings, in the aggregate, are believed by management to be immaterial to
the Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Special Meeting of the Stockholders of the Company was held on
January 23, 2001. The results of the vote were as follows:
1. The approval of the Berkshire Hills Bancorp, Inc. 2001
Stock-Based Incentive Plan was adopted by the stockholders by
the following vote:
FOR AGAINST ABSTAIN
--- ------- -------
5,125,051 666,363 25,911
Item 5. Other Information.
------------------
None.
15
Item 6. Exhibits and Reports on Form 8-K (ss.249.308 of this Chapter).
--------------------------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Berkshire Hills Bancorp, Inc.(1)
3.2 Bylaws of Berkshire Hills Bancorp, Inc.(1)
4.0 Stock Certificate of Berkshire Hills Bancorp, Inc.(1)
10.1 Berkshire Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(2)
- -----------------------------
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, and any amendments thereto,
Registration No. 333-32146.
(2) Incorporated by reference into this document from the appendix to the Proxy
Statement as filed with the Securities and Exchange Commission on December
11, 2000.
(b) Reports on Form 8-K
None.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE HILLS BANCORP, INC.
Dated: May 14, 2001 By: /s/ James A. Cunningham, Jr.
-----------------------------------
James A. Cunningham, Jr.
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: May 14, 2001 By: /s/ Charles F. Plungis, Jr.
------------------------------------------
Charles F. Plungis, Jr.
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)