UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] 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 $0.01 per share American Stock Exchange
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. [ X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates was $126,632,488 based upon the closing price of $21.97 as listed
on the American Stock Exchange on March 11, 2002. 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 11, 2002, the registrant had 6,273,740 shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Proxy Statement for the Annual Meeting of Stockholders. (Part III)
1
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....................................................36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................45
Item 8. Financial Statements and Supplementary Data..................................48
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................87
Part III
Item 10. Directors and Executive Officers of the Registrant...........................87
Item 11. Executive Compensation.......................................................87
Item 12. Security Ownership of Certain Beneficial Owners and Management...............87
Item 13. Certain Relationships and Related Transactions...............................87
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............88
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") upon the conversion of the
Bank's former parent holding company, 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. 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 occasionally
sells some of its loans, including automobile and fixed-rate mortgage loans, in
the secondary market. In 2001, automobile loans were sold with servicing rights
retained while fixed-rate mortgages were sold with servicing rights released.
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 full service 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 of America, Crane & Company, GE Plastics, Kay Bee Toys,
Berkshire Health Systems, General Dynamics Defense Systems, Mead Corporation and
several institutions of higher education.
1
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 one large credit union in the area, which
has a competitive advantage as credit unions 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 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 also increases competition for Berkshire Bank's customers.
Additionally, competition has increased as a result of regulatory actions and
legislative changes, most notably the enactment of the Gramm-Leach-Bliley Act of
1999. These changes have eased 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,
----------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ---------------- --------------- ----------------- -----------------
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 ............. $ 240,852 29.99% $ 249,440 31.44% $ 245,240 36.39% $220,612 36.36% $ 202,305 40.64%
Commercial ...................... 84,741 10.55 63,871 8.05 46,419 6.89 51,598 8.50 41,267 8.29
Multi-family .................... 13,183 1.65 15,699 1.98 14,793 2.20 15,393 2.54 14,740 2.96
Construction .................... 22,936 2.86 14,290 1.80 12,534 1.86 12,821 2.11 11,531 2.32
--------- ----- --------- ----- --------- ----- -------- ----- --------- -----
Total real estate loans ...... 361,712 45.05 343,300 43.27 318,986 47.34 300,424 49.51 269,843 54.21
--------- ----- --------- ----- --------- ----- -------- ----- --------- -----
Consumer loans:
Home equity lines of
credit .......................... 34,439 4.29 34,471 4.34 33,168 4.92 31,628 5.21 25,801 5.18
Automobile ...................... 215,964 26.90 230,648 29.08 164,862 24.46 134,616 22.19 84,979 17.07
Other ........................... 20,640 2.56 18,014 2.27 10,706 1.59 5,933 0.98 5,889 1.18
--------- ----- --------- ----- --------- ----- -------- ----- --------- -----
Total consumer loans .......... 271,043 33.75 283,133 35.69 208,736 30.97 172,177 28.38 116,669 23.43
--------- ----- --------- ----- --------- ----- -------- ----- --------- -----
Commercial loans ................. 170,230 21.20 166,956 21.04 146,196 21.69 134,115 22.11 111,372 22.36
--------- ----- --------- ----- --------- ----- -------- ----- --------- -----
Total loans .................... 802,985 100.00% 793,389 100.00% 673,918 100.00% 606,716 100.00% 497,884 100.00%
====== ===== ====== ====== ======
Net deferred loan
origination
costs (fees) ................... 172 232 170 44 (63)
Unamortized discount on
purchased loans ................ (203) -- -- -- --
Allowance for loan losses (11,034) (10,216) (8,534) (7,589) (6,078)
--------- --------- --------- -------- ---------
Total loans, net ............... $ 791,920 $ 783,405 $ 665,554 $ 599,171 $ 491,743
========= ========= =========== ========= ===========
2
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, 2001, $240.9
million, or 30.0%, 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 37% were fixed-rate mortgage loans and approximately 63%
were adjustable-rate loans.
Berkshire Bank originates fixed-rate fully amortizing loans with
maturities of 15, 20 and 30 years. Management establishes the loan interest
rates based on market conditions. Berkshire Bank offers mortgage loans that
conform to Fannie Mae and Freddie Mac guidelines, as well as jumbo loans, which
presently are loans in amounts over $300,700. Berkshire Bank generally
originates loans for its own portfolio, but in 2001, entered into an agreement
to sell newly originated fixed-rate loans to a third party. The determination of
whether to sell loans is determined periodically by management in response to
changes in prevailing market interest rates and liquidity needs.
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, 2001, the initial discounted rate on
these loans was 25 to 150 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. These
risks have not had a material adverse effect on Berkshire Bank to date.
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 inThe Wall Street Journal,
which adjust 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.
3
Construction Loans. At December 31, 2001, construction loans totaled $22.9
million, or 2.9% of Berkshire Bank's total loan portfolio, of which $3.6 million
were residential construction loans and $19.3 million were commercial
construction loans. At December 31, 2001, the unadvanced portion of construction
loans totaled $8.7 million.
Berkshire Bank originates construction loans to individuals for the
construction and acquisition of personal residences. Berkshire Bank's
residential construction loans generally provide for the payment of interest
only during the construction phase, which is usually twelve months. At the end
of the construction phase, the loan converts to a permanent mortgage loan. Loans
can be made with a maximum loan to value ratio of 85%, 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, 2001, the largest outstanding residential
construction loan commitment was for $800,000, $233,262 of which was
outstanding. This loan was performing according to its terms at December 31,
2001. 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 and planned improvements 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, 2001, the largest commercial construction commitment
was $7.7 million granted to a group of investors who own a 321 acre parcel in
Southwick, MA. An 18 hole golf course has been developed and opened for play in
June 2001. The commitment outstanding for this loan was $6.0 million at December
31, 2001. The aforementioned commitment includes a $2.0 million line for the
development and marketing of 54 improved single-family building lots on the
site. This loan was performing according to the terms at December 31, 2001.
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 an 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. Berkshire Bank's land loans are
generally secured by property in its primary market area. Berkshire Bank
requires title insurance and, if applicable, either a hazardous waste survey or
environmental insurance coverage.
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.
Multi-Family and Commercial 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 inThe 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
4
1.25x. Environmental surveys or environmental insurance coverage are generally
required for commercial real estate loans. Additionally, in larger real estate
projects, it is recommended that a feasibility study be obtained. A feasibility
study is particularly important with respect to multi-family housing projects,
hotel/motel construction and health care facilities. Generally, multi-family and
commercial real estate loans made to corporations, partnerships and other
business entities require personal guarantees by the principals. The largest
multi-family or commercial real estate loan in Berkshire Bank's portfolio at
December 31, 2001 was a performing $5.9 million real estate loan secured by a
luxury hotel 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.
Consumer Lending
Automobile Lending. At December 31, 2001, automobile loans totaled $216.0
million, or 26.9% of Berkshire Bank's total loans and 79.7% 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 theNADA 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 nine years ago. Historically, Berkshire Bank has emphasized the
origination of indirect automobile loans including lower credit quality or
sub-prime automobile loans. However, due to increased delinquencies on these
loans in recent years, due in part to the decline in the local, regional and
national economies, management revised its automobile lending strategy in 2001
whereby it would decrease the emphasis on lower quality or sub-prime loans and
attempt to reduce the overall size of the automobile loan portfolio. At December
31, 2001, approximately $113.9 million, or 52.7%, of automobile loans were lower
quality or sub-prime loans or 14.2% of total loans. As part of management's
revised strategy to address the level of automobile loans and the overall credit
risk to Berkshire Bank, management has determined to maintain capital levels in
an amount in excess of the regulatory requirements and in amounts which
management will determine in consideration of the amount of lower quality or
sub-prime automobile loans in the loan portfolio.
Currently, Berkshire Bank maintains contractual relationships with over 90
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 27.4% of the loans originated in 2000. This percentage increased to 31.5% in
2001. However, with originations decreasing from $176.5 million in 2000 to
$102.7 million in 2001, the dollar amount of originations by the three largest
dealers decreased by $16.0 million, or 33.1%, from $48.4 million in 2000 to
$32.4 million in 2001. These decreases were due to a management decision to
decrease the size of the indirect loan portfolio. 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, 2001, home equity lines of credit totaled $34.4
million, or 4.3% of Berkshire Bank's total loans and 12.7% of consumer loans.
Additionally, at December 31, 2001, the unadvanced amounts of home equity lines
of credit totaled $37.6 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,
5
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, 2001 amounted to $20.6 million, or
2.6% of Berkshire Bank's total loans and 7.6% 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.
Commercial Lending
Commercial Loans.At December 31, 2001, Berkshire Bank had $170.2 million
in commercial loans which amounted to 21.2% of total loans. In addition, at such
date, Berkshire Bank had $46.1 million of unadvanced commercial lines of credit.
Berkshire Bank makes commercial business loans primarily in its market area to a
variety of professionals, sole proprietorships and small businesses. Berkshire
Bank's largest commercial loan relationship was a $5.6 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, 2001.
Berkshire Bank offers secured commercial term loans, which have maturities
of greater than one year and the repayment 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 seven years or less. Berkshire Bank also offers loans originated in
order to finance a business' operating facility, lines of credit, letters of
credit, time notes and Small Business Administration guaranteed loans. Operating
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.
Due to declining profitability, Berkshire Bank has discontinued the
Business Manager Line of Credit Program and is no longer purchasing customer's
accounts receivable. At December 31, 2001, $86,000 remained on Berkshire Bank's
balance sheet and was expected to be fully collectible.
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
generally 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.
Loans to One Borrower.The maximum amount that Berkshire Bank may lend to
one borrower is limited by statute. At December 31, 2001, Berkshire Bank's
statutory limit on loans to one borrower was $22.6 million. At that date,
Berkshire Bank's largest amount of loans to one borrower, including the
borrower's related interests, was approximately $7.9 million and consisted of
five loans secured by various types of business and real estate assets. These
loans were performing according to their original terms at December 31, 2001.
6
Maturity of Loan Portfolio. The following table shows the remaining
contractual maturity of Berkshire Bank's total loans at December 31, 2001,
excluding the effect of future principal prepayments.
At December 31, 2001
--------------------------------------------------------------------------------------------------------
Commercial Home
One- to and Equity
Four- Multi-Family Lines of Other
Family Construction Real Estate Credit Automobile Consumer Commercial Total
------ ------------ ----------- ------ ---------- -------- ---------- -----
(In thousands)
Amounts due in:
One year or less . $ 851 $ 10,529 $ 1,694 $ 1,478 $ 2,345 $ 1,262 $ 45,545 $ 63,704
More than one year
to five years .... 4,984 12,407 13,583 17,052 175,682 15,410 25,996 265,114
More than 5 years 235,017 -- 82,647 15,909 37,937 3,968 98,689 474,167
-------- -------- -------- -------- -------- -------- -------- --------
Total amount due . $240,852 $ 22,936 $ 97,924 $ 34,439 $215,964 $ 20,640 $170,230 $802,985
======== ======== ======== ======== ======== ======== ======== ========
The following table sets forth, at December 31, 2001, the dollar amount of
loans contractually due after December 31, 2002, and whether such loans have
fixed interest rates or adjustable interest rates.
Due After December 31, 2002
---------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real estate loans:
One- to four-family ...... $ 84,702 $155,299 $240,001
Construction .............. -- 12,407 12,407
Commercial and multi-family 12,790 83,440 96,230
-------- -------- --------
Total real estate loans .. 97,492 251,146 348,638
Home equity loans ......... -- 32,961 32,961
Automobile ................ 213,619 -- 213,619
Other consumer ............ 16,994 2,384 19,378
Commercial loans .......... 12,428 112,257 124,685
-------- -------- --------
Total loans ............. $340,533 $398,748 $739,281
======== ======== ========
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 retail
lenders have been delegated authority to approve residential mortgage loans up
to $300,000; home equity lines of credit ranging from $50,000 to $300,000;
unsecured consumer loans from $5,000 to $30,000; and secured consumer loans from
$20,000 to $50,000. One- to four-family mortgage loans and home equity loans up
to $300,000, secured consumer loans up to $50,000 and unsecured 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.
One-to four- family mortgage loans and home equity loans from $300,000 to
$600,000 may be approved by a combination of individual officer authorities
provided that approval must include the signature of either the Executive Vice
President-Senior Loan Officer or Senior Vice President-Retail Lending. Approvals
from $600,000 to $1.5 million require signatures of both the Executive Vice
President-Senior Loan Officer and the Senior Vice President-Retail 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.
7
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 Commercial Lender 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 Commercial Lender 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 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 90 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
2001 and 2000, Berkshire Bank originated or purchased $112.6 million and $180.3
million of automobile loans, respectively, of which 91.2% and 97.9% were
originated indirectly through the automobile dealers. Included in the total are
automobile loans that Berkshire Bank purchased from a third party which
originates loans through smaller automobile dealers. The automobile 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 $7.5 million of these consumer loans in
2001.
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 underwriting criteria and procedures and are generally purchased with the
accompanying servicing rights. Berkshire Bank purchased $6.0 million of such
loans in 2001. Amounts outstanding related to loan participation interests
purchased by Berkshire Bank totaled $11.7 million and $9.7 million at December
31, 2001 and December 31, 2000, respectively, and consisted primarily of loans
secured by commercial real estate.
At December 31, 2001, Berkshire Bank was servicing $45.2 million of
automobile and one-to four-family mortgage loans and $4.6 million of commercial
loans. 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 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 its own 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. In 2001, Berkshire Bank established a program
with an outside third party lender whereby Berkshire Bank originated fixed rate
one-to four-family mortgages for sale. In 2001, $10.8 million in fixed rate
residential loans were originated and sold to this third party. In addition,
Berkshire Bank sold $11.7 million of automobile loans to a regional financial
institution in 2001. Some of the automobile loans were sold with limited
recourse. The recourse periods expired prior to December 31, 2001.
8
The following table presents total loans originated, purchased, sold and repaid
during the periods indicated.
For the Years Ended December 31,
------------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Loans at beginning of year .............. $793,389 $673,918 $606,716
-------- -------- --------
Originations:
Real estate loans:
One-to four-family .................. 36,668 31,231 49,207
Construction ........................ 22,170 25,071 7,199
Commercial .......................... 13,296 2,289 9,478
Multi-family ........................ 800 7,671 3,620
-------- -------- --------
Total real estate loans ........... 72,934 66,262 69,504
-------- -------- --------
Consumer loans:
Home equity lines of credit .......... 6,887 8,225 10,796
Automobile ........................... 105,124 128,327 128,583
Other ................................ 4,527 16,799 6,991
-------- -------- --------
Total consumer loans ............... 116,538 153,351 146,370
Commercial loans ...................... 63,456 64,887 64,542
-------- -------- --------
Total loans originated ............. 252,928 284,500 280,416
-------- -------- --------
Purchases:
Real estate loans:
Multi-family ........................ -- -- 566
Commercial real estate .............. 4,042 4,664 2,228
-------- -------- --------
Total real estate loans ............ 4,042 4,664 2,794
Consumer loans:
Automobile .......................... 7,451 48,724 11,877
Commercial loans ...................... 2,000 3,175 1,088
-------- -------- --------
Total loans purchased .............. 13,493 56,563 15,759
-------- -------- --------
Deduct:
Principal loan repayments, repayments
and other, net ....................... 226,179 181,082 182,429
Loan sales ............................ 24,263 38,942 44,308
Net loan charge-offs .................. 6,357 1,488 2,085
Transfers to real estate owned ........ 26 80 151
-------- -------- --------
Total deductions ................... 256,825 221,592 228,973
-------- -------- --------
Net increase in loans ................... 9,596 119,471 67,202
-------- -------- --------
Loans at end of year .................... $802,985 $793,389 $673,918
======== ======== ========
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, 2001,
Berkshire Bank had loan commitments and unadvanced loans and lines of credit
totaling $118.5 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, 2001, Berkshire Bank had
approximately $172,000 of net deferred loan fees and costs. Berkshire Bank
amortized approximately $59,000 of net deferred loan fees and costs during the
year ended December 31, 2001.
9
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 Loan 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 commercial and residential 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 management determines that interest is uncollectible, the
accrual of interest income on a loan is discontinued and all interest previously
accrued is reversed against current period interest income. In 2001, as a
measure to enhance its risk management practices, the Bank initiated a more
conservative policy for automobile loans whereby all delinquent automobile loans
remain on accrual status until they reach 120 days delinquent at which time they
are charged-off, except for those customers who are in bankruptcy proceedings
with a secured loan, in which case the loan is transferred to nonaccrual status.
Because of this change, nonaccruing consumer loans declined to $315,000 at
December 31, 2001 from $2.0 million at December 31, 2000.
Berkshire Bank has 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, 2001 and
December 31, 2000, Berkshire Bank had $778,000 and $395,000, respectively,
recorded investment in impaired loans, which had no specific allowances and $1.4
million and $71,000 in loans with valuation allowances of $113,000 and $4,000,
respectively.
The following table sets forth information regarding nonperforming assets
and loans that were 90 days or more past due and still accruing at the dates
indicated.
At December 31,
-----------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccruing loans:
One- to four-family real estate ........ $ 310 $ 390 $ 450 $1,272 $ 623
Commercial real estate ................. -- -- -- 1,064 336
Commercial ............................. 2,077 466 1,572 612 613
Consumer(1) ............................ 315 2,013 819 542 584
------ ------ ------ ------ ------
Total nonperforming loans .............. 2,702 2,869 2,841 3,490 2,156
Real estate owned ........................ -- 50 220 398 364
------ ------ ------ ------ ------
Total nonperforming assets ............. $2,702 $2,919 $3,061 $3,888 $2,520
====== ====== ====== ====== ======
Total nonperforming loans as a
percentage of total loans .............. 0.34% 0.36% 0.42% 0.58% 0.43%
Total nonperforming assets as a percentage
of total assets ........................ 0.26% 0.29% 0.36% 0.50% 0.40%
Loans 90 days or more past due and
still accruing (2) ..................... $1,306 -- -- -- --
(1) Consists primarily of automobile loans.
(2) Total in 2001 reflects Bank's new policy on delinquent automobile loans. In
prior reported periods, automobile loans past due 90 days or more were
reported as nonaccrual.
10
Nonaccruing commercial loans increased to $2.1 million at December 31,
2001 from $466,000 at December 31, 2000 as four commercial relationships ranging
in size from $300,000 to $900,000 became more than 90 days past due. The
companies involved are in diverse and unrelated industries and have been
adversely affected by national and regional economic conditions.
Interest income that would have been recorded for the year ended December
31, 2001, had nonaccruing loans been current according to their original terms,
amounted to approximately $82,000, $16,000 of which was included in interest
income related to these loans.
The following tables set forth the delinquencies in Berkshire Bank's loan
portfolio as of the dates indicated.
At December 31,2001 At December 31,2000 At December 31, 1999
----------------------------------- ----------------------------------- ---------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ----------------- ----------------- ---------------- ----------------- ----------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------
(Dollars in thousands)
Real estate loans:
One- to four-family .. 3 $ 144 3 $ 254 2 $ 154 2 $ 43 6 $ 384 1 $ 106
Commercial ........... -- -- -- -- -- -- -- -- -- -- -- --
Multi-family ......... -- -- -- -- -- -- -- -- -- -- -- --
Consumer loans:
Equity lines of credit -- -- -- -- 2 57 1 20 -- -- -- --
All other(1) ......... 323 2,645 217 1,621 238 1,728 262 1,923 95 831 121 776
Commercial loans ..... 2 381 7 1,234 4 129 3 149 6 335 11 1,168
--- ------ --- ------ --- ------ --- ------ --- ------ --- ------
Total ................ 328 $3,170 227 $3,109 246 $2,068 268 $2,135 107 $1,550 133 $2,050
=== ====== === ====== === ====== === ====== === ====== === ======
Delinquent loans to
total loans ..........0.96% 0.39% 0.66% 0.39% 0.73% 0.26% 0.79% 0.27% 0.40% 0.23% 0.50% 0.31%
- -------------------
(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, 2001, Berkshire
Bank had no foreclosed real estate owned.
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.
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 to determine the appropriate level of the allowance for loan
losses.
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
11
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."
The following table sets forth Berkshire Bank's classified assets at
December 31, 2001.
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 .. -- $ -- -- $ -- 7 $ 380 2 $ 139
Commercial ........... -- -- -- -- 2 1,065 5 1,865
Multi-family ......... -- -- -- -- 1 186 -- --
Consumer loans:
Equity lines of credit -- -- -- -- -- -- -- --
Automobile ........... -- -- -- -- 193 1,588 304 2,593
All other ............ -- -- -- -- 24 33 19 52
Commercial loans ....... 1 30 3 485 46 8,251 41 7,180
--- ------- ------- ------- ------- ------- ---- -------
Total ................ 1 $ 30 3 $ 485 273 $11,503 371 $11,829
== ======= ======= ======= ======= ======= === =======
At December 31, 2001, Berkshire Bank had two outstanding commercial loans
with one borrower, which were adversely classified or identified as a problem
credit, totaling $912,000. These loans were delinquent and classified
substandard (except for a $30,000 portion classified loss) and are in the
process of foreclosure. Berkshire Bank had no other classified loans greater
than $500,000 which were not performing according to their terms on December 31,
2001.
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.
All classified loans are reviewed for adequacy of their estimated
supporting collateral values and guarantees. If a loan is determined to have a
recovery value less than the loan balance after deducting the general reserve
assigned to that loan based upon its classification, an additional specific
reserve is assigned in an amount equal to the projected shortfall.
12
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 accounting
principles generally accepted in the United States of America, there can be no
assurance that regulators, in reviewing Berkshire Bank's loan portfolio, will
not request Berkshire Bank to increase its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above. Any
material increase in the allowance for loan losses may adversely affect
Berkshire Bank's financial condition and results of operations.
The following table presents an analysis of Berkshire Bank's allowance for
loan losses for the years indicated.
At or For the Years Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance for loan losses, beginning
of year ........................... $10,216 $ 8,534 $ 7,589 $ 6,078 $ 6,303
------- ------- ------- ------- -------
Charged-off loans (1):
One- to four-family real estate ... 2 -- 117 14 66
Multi-family ...................... 222 -- -- -- 82
Commercial real estate ............ -- 19 297 253 959
Consumer(2) ....................... 5,989 1,422 731 311 699
Home Equity ....................... 52 -- -- -- --
Commercial ........................ 797 469 1,208 234 490
------- ------- ------- ------- -------
Total charged-off loans ........... 7,062 1,910 2,353 812 2,296
Recoveries on loans previously
charged-off ....................... 705 422 268 268 594
------- ------- ------- ------- -------
Net loans charged-off ................... 6,357 1,488 2,085 544 1,702
Provision for loan losses ............... 7,175 3,170 3,030 2,055 1,477
------- ------- ------- ------- -------
Allowance for loan losses, end of year .. $11,034 $10,216 $ 8,534 $ 7,589 $ 6,078
======= ======= ======= ======= =======
Ratios:
Net loans charged-off to interest-earning
loans ............................. 0.79% 0.19% 0.31% 0.09% 0.34%
Allowance for loan losses to total loans 1.37% 1.29% 1.27% 1.25% 1.22%
Allowance for loan losses to
nonperforming loans ............... 408.36% 356.08% 300.39% 217.45% 281.91%
Net loans charged-off to allowance
for loan losses ................... 57.61% 14.57% 24.43% 7.17% 28.00%
Recoveries to charge-offs ............... 9.98% 22.09% 11.39% 33.00% 25.87%
(1) For further discussion of the increase in charged-off loans in 2001, see
"Management's Discussion and Analysis of Item 7 Financial Condition and
Results of Operations-Comparison of Financial Condition at 2001 and 2000."
December 31,
(2) 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 December31,
--------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
Percent of of Loans Percent of of Loans Percent of of Loans
Allowance in Each Allowance in Each Allowance in Each
in Each Category in Each Category in Each Category
Category to Category to 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 $ 2,347 21.27% 45.05% $ 2,337 22.88% 43.27% $ 2,322 27.20% 47.34%
Consumer loans .. 4,217 38.22 33.75 4,528 44.32 35.69 2,867 33.60 30.97
Commercial ...... 4,470 40.51 21.20 3,351 32.80 21.04 3,345 39.20 21.69
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance
for loan losses . $11,034 100.00% 100.00% $10,216 100.00% 100.00% $ 8,534 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
At December 31,
---------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Percent Percent
Percent of of Loans Percent of of Loans
Allowance in Each Allowance in Each
in Each Category in Each Category
Category to Category to
to Total Total to Total Total
Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- -----
(Dollars in thousands)
Real estate loans $2,262 29.81% 49.51% $1,938 31.88% 54.21%
Consumer loans .. 2,339 30.82 28.38 1,590 26.16 23.43
Commercial ...... 2,988 39.37 22.11 2,550 41.96 22.36
------ ------ ------ ------ ------ ------
Total allowance
for loan losses . $7,589 100.00% 100.00% $6,078 100.00% 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.
Berkshire Bank's investment 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,
14
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 investment
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 over 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 investment 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 investment 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. At present, 70.9% 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 automobile
loans, credit card receivables, consumer loans and other similar obligations.
Both mortgage-backed and asset-backed securities carry the risk that changing
market interest rates may cause a change 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 marketable equity
securities portfolio consists primarily of bank, utility and industrial stocks
and is currently limited by the investment policy to 100% of Tier I capital.
Berkshire Bank had $88.5 million of Tier 1 Capital at December 31, 2001. The
gross unrealized gains associated with the marketable equity securities
portfolio were $28.9 million and the gross unrealized losses were $534,000. 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 used interest rate futures or options on
futures as part of its interest rate hedging strategies.
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,
-------------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- --------------------
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 ....... $ 13,876 $ 14,017 $ 10,146 $ 10,106 $ 10,986 $ 10,711
Corporate bonds and notes ...... 31,017 31,251 31,750 31,034 31,177 30,634
Asset-backed securities ........ 1,484 1,496 1,986 1,998 3,253 3,207
Marketable equity securities(1) 11,447 39,803 12,022 43,060 10,454 38,399
-------- -------- -------- -------- -------- --------
Total investment securities . 57,824 86,567 55,904 86,198 55,870 82,951
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
Freddie Mac .................... 3,292 3,335 2,203 2,257 2,469 2,493
Fannie Mae ..................... 2,774 2,845 2,619 2,670 1,604 1,618
Private label REMICs ........... 11,555 11,619 8,022 8,049 5,878 5,841
Ginnie Mae ..................... 78 80 133 135 180 181
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities .................. 17,699 17,879 12,977 13,111 10,131 10,133
-------- -------- -------- -------- -------- --------
Total available for sale
securities .................. $ 75,523 $104,446 $ 68,881 $ 99,309 $ 66,001 $ 93,084
======== ======== ======== ======== ======== ========
- ------------------------------
(1) Includes mutual funds.
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,
-------------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
(In thousands)
Investment securities:
Municipal notes .............. $11,241 $11,241 $10,825 $10,825 $ 6,720 $ 6,720
------- ------- ------- ------- ------- -------
Total investment securities. 11,241 11,241 10,825 10,825 6,720 6,720
------- ------- ------- ------- ------- -------
Mortgage-backed securities:
Freddie Mac ................ 9,790 9,851 10,686 10,726 5,368 5,334
Fannie Mae ................. 11,177 11,253 10,466 10,533 4,352 4,303
Ginnie Mae ................. 1,055 1,064 261 258 574 565
------- ------- ------- ------- ------- -------
Total mortgage-backed
securities ................. 22,022 22,168 21,413 21,517 10,294 10,202
------- ------- ------- ------- ------- -------
Total held to maturity
securities ................. $33,263 $33,409 $32,238 $32,342 $17,014 $16,922
======= ======= ======= ======= ======= =======
At December 31, 2001, Berkshire Bank did not own any investment or
mortgage-backed securities of a single issuer, other than U.S. Treasury and U.S.
Government 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 Years Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Investment securities:
Investment securities, beginning of year ..... $ 97,023 $ 89,671 $ 79,746
--------- --------- ---------
Purchases .................................... 49,212 91,904 34,636
Sales ........................................ (3,697) (32,431) (2,440)
Maturities and calls ......................... (39,559) (52,314) (16,646)
Repayments and prepayments ................... (2,395) (2,537) (3,314)
Net premium .................................. (1,225) (483) (112)
Increase/(decrease) in unrealized gain ....... (1,551) 3,213 (2,199)
--------- --------- ---------
Net increase in investment securities ..... 785 7,352 9,925
--------- --------- ---------
Investment securities, end of year ...... 97,808 97,023 89,671
--------- --------- ---------
Mortgage-backed securities:
Mortgage-backed securities, beginning of year 34,524 20,427 37,808
--------- --------- ---------
Purchases ................................... 43,853 32,707 18,256
Repayments and prepayments .................. (39,477) (18,794) (36,246)
Net discount ................................ 955 52 742
Increase/(decrease) in unrealized gain ...... 46 132 (133)
--------- --------- ---------
Net increase/(decrease) in
mortgage-backed securities .............. 5,377 14,097 (17,381)
--------- --------- ---------
Mortgage-backed securities, end of year 39,901 34,524 20,427
--------- --------- ---------
Total securities, end of year ..... $ 137,709 $ 131,547 $ 110,098
========= ========= =========
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, 2001.
At December 31, 2001
-----------------------------------------------------------------------------------------------------
More than one More than Five Years
One Year or Less Year to Five Years to Ten Years More than Ten 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 $ 1,015 6.66% $12,641 4.71% $ 140 1.58% $ 80 5.43% $13,876 4.82%
Mortgage-backed securities . 12,168 6.05 24,889 5.59 1,969 4.67 695 3.89 39,721 5.65
Municipal notes ............ 6,612 2.91 60 5.00 1,191 7.13 3,378 6.31 11,241 4.39
Corporate bonds and notes .. 16,913 6.48 11,981 5.65 1,128 7.20 995 6.61 31,017 6.19
Asset-backed securities .... 695 3.80 789 6.68 -- -- -- -- 1,484 5.33
------- ------- ------- ------- -------
Total ...................... $37,403 5.67% $50,360 5.40% $ 4,428 5.88% $ 5,148 6.03% $97,339 5.55%
======= ======= ======= ======= =======
17
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 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 an additional
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 initial maturities of Berkshire Bank's certificate
of deposit accounts range from three months to ten years. In addition, Berkshire
Bank offers retirement accounts, including Traditional IRAs, Roth IRAs, Simple
IRAs, Self-Directed IRAs and Keogh accounts, simplified employee pension plan,
profit-sharing qualified plan and money purchase pension plan accounts.
Berkshire Bank also offers a variety of deposit accounts designed for the
businesses operating in its 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'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 reviews its deposit mix and pricing on a weekly basis and
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.
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 Years Ended December 31,
---------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Increase/(decrease) before
interest credited ........ $(13,550) $ 21,224 $ 9,797
Interest credited ........ 26,685 27,603 23,848
-------- -------- --------
Net increase ........... $ 13,135 $ 48,827 $ 33,645
======== ======== ========
At December 31, 2001, Berkshire Bank had certificate of deposit accounts
in amounts of $100,000 or more maturing as follows:
Maturity Period Amount Weighted Average Rate
- ---------------------------------- -------- ---------------------
(Dollars in thousands)
Three months or less .............. $ 35,181 4.88%
Over 3 months through 6 months..... 27,946 4.45
Over 6 months through 12 months ... 25,219 4.88
Over 12 months .................... 30,223 5.64
Total ............................. $118,569 4.97%
========
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 Years Ended December 31,
---------------------------------------------------------------------------------------
2001 2000 1999
-------------------------- -------------------------- -----------------------------
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 . $112,434 15.31% 3.30% $106,058 15.09% 4.43% $ 84,971 12.88% 3.73%
NOW accounts .......... 77,276 10.52 1.04 75,673 10.76 1.05 73,615 11.16 1.13
Savings(1) ............ 142,150 19.36 2.88 143,357 20.39 3.19 142,193 21.55 3.07
Certificates of deposit 325,639 44.34 5.55 301,920 42.94 5.81 291,344 44.16 5.34
Demand accounts ....... 76,912 10.47 -- 76,060 10.82 -- 67,563 10.25 --
-------- ------ -------- ------ -------- ------
Total.................. $734,411 100.00% 3.63% $703,068 100.00% 3.93% $659,686 100.00% 3.62%
======== ====== ======== ====== ======== ======
- ------------------------------------
(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 31,2001
------------------------------------------------
Less than One to Two to Over Total at December 31,
One Two Three Three ----------------------------------
Year Years Years Years 2001 2000 1999
---- ----- ----- ----- ---- ---- ----
(In thousands)
0.00-4.00% .... $ 90,905 $ 16,097 $ 972 $ 10 $107,984 $ 5 $ 851
4.01-5.00% .... 61,241 13,275 2,369 2,750 79,635 3,973 108,037
5.01-6.00% .... 36,777 3,988 3,860 6,101 50,726 101,693 154,861
6.01-7.00% .... 42,304 13,015 2,472 12,432 70,223 205,586 22,242
7.01% and above 7,072 12 80 1,505 8,669 8,516 9,312
-------- -------- -------- -------- ------- -------- --------
Total ....... $238,299 $ 46,387 $ 9,753 $ 22,798 $317,237 $319,773 $295,303
======== ======== ======== ======== ======== ======== ========
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 may 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, 2001,
Berkshire Bank had the ability to borrow a total of approximately $175 million
from the Federal Home Loan Bank of Boston. At that date, Berkshire Bank had
outstanding advances of $134.0 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. At December 31,
2001, Berkshire Bank had no outstanding borrowings against this agreement.
19
The following tables present certain information regarding Berkshire
Bank's Federal Home Loan Bank advances during the periods and at the dates
indicated.
For the Years Ended December 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Maximum amount of advances
outstanding at any month end .... $140,115 $112,158 $ 76,861
Approximate average advances
outstanding ..................... 127,990 92,567 50,951
Approximate weighted average rate
paid on advances ................ 5.17% 6.23% 5.49%
At December 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Balance outstanding at end of year.. $133,964 $101,386 $58,928
Weighted average rate on advances
at end of year...................... 4.26% 6.18% 5.64%
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, 2001, such retail
repurchase agreement borrowings totaled $1.9 million.
The following tables represent certain information regarding Berkshire
Bank's retail repurchase agreements during the years and at the dates indicated.
For the Years Ended December 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Maximum amount of repurchase agreements
outstanding at any month end ............ $ 2,340 $ 2,980 $10,360
Approximate average repurchase agreements
outstanding ............................. 1,584 1,683 5,923
Approximate weighted average rate paid on
repurchase agreements ................... 3.78% 5.88% 4.69%
At December 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Balance outstanding at end of year ........... $ 1,890 $ 2,030 $ 1,120
Weighted average rate on repurchase agreements
at end of year ............................. 1.74% 6.00% 5.20%
20
Trust Services
Berkshire Bank maintains the Asset Management/Trust 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, 2001, the trust department managed 700
accounts with aggregate assets of $265.4 million, of which the largest
relationship totaled $11.5 million, or 4.3%, of the trust department's total
assets. Trust fees were up $75,000, or 4.4%, to $1.8 million in 2001 from $1.7
million in 2000.
Government Banking
In 1998, Berkshire Bank began offering full service government banking for
cities, towns and municipal school districts in western Massachusetts 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, 2001,
Berkshire Bank was working with approximately 51 municipal entities. For 2001,
government banking generated $117,000 of net fee income compared to $82,000 for
2000.
Personnel
As of December 31, 2001, Berkshire Bank had 259 full-time employees and 42
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank will strive to continue its strong relationship
with its employees.
Subsidiary Activities
The following are descriptions of Berkshire Bank's active subsidiaries,
all of which are wholly-owned except for Gold Leaf Capital Corporation which is
majority-owned. All subsidiaries are incorporated in Massachusetts and 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., Inc. 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, 2001, G.B.S.B., Inc. had assets totaling $48.7
million, consisting primarily of state and municipal bonds, and bank, utility
and industrial stocks.
North Street Securities Corporation. 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, 2001, North
Street had assets totaling $37.9 million, consisting primarily of corporate
bonds and private label REMICs.
Gold Leaf Investment Services, Inc. Gold Leaf Investment Services, Inc.,
established in May 2000, began operations during the first quarter of 2001. Gold
Leaf Investment Services, Inc. offers access to a full range of security
brokerage services, including financial planning, professional money management,
stocks, bonds, mutual funds, and annuities. These services are available through
a partnership with UVEST Investment Services, a registered securities
broker/dealer and member NASD/SIPC and are available in the Bank's branch
network.
Gold Leaf Insurance Agency, Inc. Gold Leaf Insurance Agency, Inc.,
established in May 2000, began operations during the third quarter of 2000. Gold
Leaf Insurance Agency, Inc. offers a full line of products including automobile,
home, business, and life insurance.
21
Gold Leaf Capital Corporation. Gold Leaf Capital Corporation was
established in April 2001 as a direct operating subsidiary of the Bank intended
to satisfy the requirements to qualify for treatment as a real estate investment
trust ("REIT"). The REIT was formed to invest in mortgage loans and
mortgage-backed securities. Currently, Gold Leaf Capital has solely invested in
mortgage loans originated by Berkshire Bank.
Excluding Berkshire Bank, the following are descriptions of Berkshire
Hills' wholly-owned active subsidiaries. All of Berkshire Hills' subsidiaries,
including Berkshire Bank, are incorporated in Massachusetts.
Berkshire Hills Funding Corporation. Berkshire Hills Funding Corporation
was established in May 2000 as a general purpose funding vehicle for Berkshire
Hills. Outside of cash, its sole asset is a loan to Berkshire Bank's Employee
Stock Ownership Plan ("ESOP"). The proceeds of such loan were used to fund the
ESOP trustee's purchase of Berkshire Hills common stock.
Berkshire Hills Technology, Inc. Berkshire Hills Technology, Inc., was
established in May 2001 to invest in, own, and sell any type of business
enterprise including, but not limited to, corporations and limited liability
companies. In June 2001, along with a consortium of five other banks, Berkshire
Hills Technology, Inc., announced its investment of $4.7 million in EastPoint
Technologies, LLC. With all the banks having received the necessary approvals,
the Company's equity interest in EastPoint equals 60.3%. EastPoint,
headquartered in Bedford, New Hampshire, is a software and data processing
provider for financial institutions.
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 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. The Massachusetts Banking Commissioner may take
possession of a Massachusetts bank if it shall appear that the bank has violated
its charter or any law of the Commonwealth, is conducting its business in an
unsafe or unauthorized manner, or has suspended payment of its obligations, or
has impaired capital.
22
All Massachusetts-chartered savings banks are required to be members of
the Depositors Insurance Fund and as such must pay its assessments. The
Depositors Insurance Fund is a private deposit insurer which insures all
deposits in member banks in excess of Federal Deposit Insurance Corporation
deposit insurance limits. 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.
Additionally, the Massachusetts Banking Commissioner may restrict the payment of
dividends by a bank in the event that it was determined that such payment would
result in safety and soundness concerns.
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, non-cumulative 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). Recent regulatory amendments also require the deduction from
Tier I capital of a percentage of the carrying value of certain non-financial
equity investments acquired after March 13, 2000 except for common and preferred
stock and investment company investments held pursuant to grandfathered
authority as discussed later. (SeeInvestment Activities) Additionally, the FDIC
may require an institution to maintain capital levels in excess of the minimum
requirements in the event it is determined that due to the operations of the
institution, additional capital is warranted for safety and soundness reasons.
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%,
23
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. Additionally, the Bank through its capital management
and risk assessment policies may determine to maintain capital levels in excess
of its regulatory required minimums. In this regard, with the recent performance
and level of the Bank's sub-prime automobile loan portfolio, management
considers the amount of such portfolios in determining the level of capital it
believes to be adequate.
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.
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. 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 determi-
24
nation 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, 2001, Berkshire Bank had marketable equity securities with a
market value of $39.8 million which were held under such grandfathering
authority.
Interstate Banking and Branching
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
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 authorizesde 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 undercapi-talized" if it
has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based
capital ratio of less than 3%, or a leverage ratio of less than 3%. An
institution is considered to be "critically undercapitalized" if it has a ratio
of tangible equity (as defined in the regulations) to total assets that is equal
to or less than 2%. As of December 31, 2001, Berkshire Bank met the conditions
to be classified 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
25
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 non-affiliates.
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.
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. Effective January 1, 2000, full pro rata sharing of the
payments between Bank Insurance Fund members and Savings Association Insurance
Fund members commenced. Financing corporation payments approximated 1.9 basis
points of assessable deposits 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
26
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 Depositors 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 noninterest-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 $41.3 million less an exemption of $5.7 million (which may be
adjusted by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts greater than $41.3 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 $41.3 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 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, 2001 of
$7.0 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 2001,
2000, 1999, 1998 and 1997, cash dividends from the Federal Home Loan Bank of
Boston to Berkshire Bank amounted to approximately $303,560, $332,700, $180,900,
$163,600, and $155,000, 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.
27
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 non-diversified 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 financial
holding company's 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.
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, 2001 Berkshire Bank maintained 72.4% 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
28
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.
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 1999. For its 2001 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
non-qualifying 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 "nondividend
distribution" to the Company as described below.
Distributions. If the Bank makes "nondividend 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 "nondividend distributions," and then from the Bank's
supplemental reserve for losses on
29
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. Nondividend 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 nondividend 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 nondividend
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 "securities 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 "securities corporation" by the Commissioner of the
Massachusetts Department of Revenue. A securities corporation that is also a
bank holding company under the Code must pay a tax equal to 0.33% of its gross
income. A securities 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 securities corporations.
Delaware 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.
30
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 51 President and Chief Executive Officer
Robert A. Wells 62 Chairman of the Board
Michael P. Daly 40 Executive Vice President
Charles F. Plungis, Jr. 50 Senior Vice President, Treasurer and Chief Financial Officer
Susan M. Santora 48 Executive Vice President
- ----------------------------
(1) As of December 31, 2001.
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 of the Company and Executive
Vice President and Senior Loan Officer of Berkshire Bank. 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 in May 1997, 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 the Company and Executive
Vice President of Retail Banking of Berkshire Bank. Prior to the merger of
Berkshire County Savings Bank and Great Barrington Savings Bank in May 1997, Ms.
Santora was Vice President of Great Barrington Savings Bank.
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
Lease Original Year or Leasehold
Or Leased Date of Lease Improvements at
Location Own or Acquired Expiration December 31, 2001
- ------------------------------- --- ----------- ----------- -----------------
(In thousands)
Main Office:
24 North Street
Pittsfield, Massachusetts Own 1898 -- $1,638
Banking Offices:
244 Main Street
Great Barrington, Massachusetts Own 1950 -- 884
103 North Main Street
Sheffield, Massachusetts Own 1966 -- 199
Old Town Hall
43 East Street
Pittsfield, Massachusetts Lease 1969 2030 491
31
Net Book Value
of Property
Lease Original Year or Leasehold
Or Leased Date of Lease Improvements at
Location Own or Acquired Expiration December 31, 2001
- -------- --- ----------- ---------- -----------------
(In thousands)
2 Depot Street
W. Stockbridge, Massachusetts Own 1975 -- 101
165 Elm Street
Pittsfield, Massachusetts Own 1977 -- 291
255 Stockbridge Road
Great Barrington, Massachusetts Own 1985 -- 254
37 Main Street
North Adams, Massachusetts Lease 1985 2005(1) 360
1 Park Street
Lee, Massachusetts Own 1991 -- 223
32 Main Street
Stockbridge, Massachusetts Own 1991 -- 290
66 West Street
Pittsfield, Massachusetts Lease 1998 2009(2) 89
Allendale Shopping Center
39 Cheshire Road
Pittsfield, Massachusetts Lease 2001 2021(3) 1,260
Other Office
66 Allen Street(4)
Pittsfield, Massachusetts Own 1999 -- 2,294
- -----------------------
(1) Berkshire Bank has one option to renew for ten years.
(2) Berkshire Bank has two options to renew each for an additional five-year
period.
(3) Berkshire Bank has four options to renew each for an additional five-year
period.
(4) This facility houses Berkshire Bank's Commercial Lending Division,
Investment Department, Asset Management/Trust Department and Government
Banking Program.
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 February 28, 2002, the Company had approximately 1,511 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's
common stock began trading on June 28, 2000. 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.
For the Year Ended December 31, 2001
----------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
High ............ $ 20.25 $ 19.90 $ 18.75 $ 18.65
Low ............. $ 17.85 $ 16.75 $ 17.10 $ 15.13
Dividend Paid.... $ 0.11 $ 0.11 $ 0.11 $ 0.10
For the Year Ended December 31, 2000
----------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
High ............ $ 16.00 $ 14.88 $ 12.75 N/A
Low ............. $ 13.00 $ 12.56 $ 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, 2001 and 2000 are derived from the audited consolidated financial
statements for Berkshire Hills Bancorp and Berkshire Bank. 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.
At or For the Years Ended December 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- -------- -------- --------
(In thousands except per share date)
Selected Financial Data:
Total assets ........................ $1,030,701 $1,011,340 $841,651 $780,289 $637,346
Loans, net .......................... 791,920 783,405 665,554 599,171 491,743
Investment securities:
Available for sale ................ 104,446 99,309 93,084 93,774 71,778
Held to maturity .................. 33,263 32,238 17,014 23,780 34,675
Federal Home Loan Bank stock ...... 7,027 5,651 3,843 2,547 2,547
Savings Bank Life Insurance stock . 2,043 2,043 2,043 2,043 2,043
Deposits(1) ......................... 742,729 729,594 680,767 647,122 539,061
Federal Home Loan Bank advances ..... 133,964 101,386 58,928 29,590 6,880
Repurchase agreements ............... 1,890 2,030 1,120 7,000 5,070
Total stockholders' equity .......... 139,323 161,322 88,352 84,201 75,317
Real estate owned ................... -- 50 220 398 364
Nonperforming loans ................. 2,702 2,869 2,841 3,490 2,156
Selected Operating Data:
Total interest and dividend income .. $ 75,796 $ 71,018 $ 58,468 $ 52,495 $ 48,423
Total interest expense .............. 33,560 33,468 26,922 24,182 22,290
---------- ---------- -------- -------- --------
Net interest income ............... 42,236 37,550 31,546 28,313 26,133
Provision for loan losses ........... 7,175 3,170 3,030 2,055 1,477
---------- ---------- -------- -------- --------
Net interest income after provision
for loan losses ................. 35,061 34,380 28,516 26,258 24,656
---------- ---------- -------- -------- --------
Noninterest income:
Service charges and fees ........... 4,187 3,743 3,405 2,568 2,440
Gain on sales and dispositions of
securities, net ................. 268 423 491 425 2,653
Other .............................. 6,093(2) 580 402 300 512
---------- ---------- -------- -------- --------
Total noninterest income ....... 10,548 4,746 4,298 3,293 5,605
---------- ---------- -------- -------- --------
Total noninterest expense ...... 32,349 32,184 25,196 22,359 26,066
---------- ---------- -------- -------- --------
Income before income taxes ......... 13,260 6,942 7,618 7,192 4,195
Income taxes ....................... 4,349 2,360 1,995 2,768 1,692
---------- ---------- -------- -------- --------
Net income ...................... $ 8,911 $ 4,582 $ 5,623 $ 4,424 $ 2,503
========== ========== ======== ======== ========
Dividends per share ............... $ 0.43 $ 0.10 N/A N/A N/A
Earnings per share
Basic ............................. $ 1.42 N/A N/A N/A N/A
Diluted ........................... $ 1.35 N/A N/A N/A N/A
Book value per share .............. $ 21.68 $ 21.02 N/A N/A N/A
34
At or For the Years Ended December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Selected Operating Ratios
and Other Data (3):
Performance Ratios:
Average yield on interest-earning assets ......... 7.80% 8.04% 7.65% 7.83% 8.10%
Average rate paid on interest-bearing liabilities 4.25 4.64 4.15 4.36 4.45
Interest rate spread(4) .......................... 3.55 3.40 3.50 3.47 3.65
Net interest margin(5) ........................... 4.35 4.25 4.13 4.22 4.37
Interest-bearing assets to
interest-bearing liabilities ................... 123.04 122.53 117.75 120.94 119.44
Net interest income after provision for loan
losses to noninterest expense .................. 108.39 106.82 113.18 117.44 94.59
Noninterest expense as a percent of average assets 3.13 3.44 3.09 3.19 4.16
Return on average assets(6) ...................... 0.86 0.49 0.69 0.63 0.40
Return on average equity(7) ...................... 5.74 3.72 6.51 5.56 3.54
Average equity to average assets ................. 15.00 13.15 10.59 11.34 11.30
Dividend payout ratio(8) ......................... 30.28 N/A N/A N/A N/A
Efficiency ratio(9) .............................. 61.60 76.86 71.27 71.71 89.62
Regulatory Capital Ratios:
Tier 1 capital to average assets ................. 11.02 14.54 7.91 7.79 9.80
Total capital to risk-weighted assets ............ 15.73 20.15 12.90 13.04 13.46
Asset Quality Ratios:
Nonperforming loans as a percent of
total loans(10) ................................ 0.34 0.36 0.42 0.58 0.43
Nonperforming assets as a percent of
total assets(11) ............................... 0.26 0.29 0.36 0.50 0.40
Allowance for loan losses as a percent of
total loans .................................... 1.37 1.29 1.27 1.25 1.22
Allowance for loan losses as a percent of
nonperforming loans ............................ 408.36 356.08 300.39 217.45 281.91
Net loans charged-off as a percent of
interest-earning loans ......................... 0.79 0.19 0.31 0.09 0.34
- ----------------------------------
(1) Includes mortgagors' escrow accounts.
(2) Consists primarily of license fees of $1.3 million, license sales of $2.1
million and gain on curtailment of defined benefit pension plan of $2.2
million.
(3) Regulatory Capital and Asset Quality Ratios are end of period ratios.
Performance Ratios for 2001, 2000, 1999 and 1998 are based on daily
averages. Performance Ratios for 1997 are based on monthly averages.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Net income divided by average total assets.
(7) Net income divided by average total equity.
(8) Dividends per share divided by basic earnings per share. Comparable figures
for 2000, 1999, 1998, 1997 are not available as the Company began paying
dividends in the fourth quarter of 2000.
(9) Operating expenses divided by net interest income plus other income less
gain on sale of securities.
(10) Nonperforming loans consist of nonaccrual loans.
(11) Nonperforming assets consist of nonaccrual loans and real estate owned.
35
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 noninterest income and
by improving operating efficiencies while managing its capital position and
limiting its credit and interest rate risk exposure. To accomplish these
objectives, 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
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 the offering of insurance products through an
insurance agency beginning in 2000 and the expansion of its trust
services through the operation of an investment services subsidiary
in 2001.
o Continue to increase its emphasis on high quality commercial and
consumer loans to maintain 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.
In 2001, as part of the Bank's effort to enhance its risk management
practices and lower its indirect automobile loan exposure, the Bank began to
reduce its emphasis on the origination of automobile loans and in particular,
sub-prime indirect automobile loans. Berkshire Bank intends to continue to
implement this strategy throughout 2002.
36
Comparison of Financial Condition at December 31, 2001 and 2000
Total assets increased $19.4 million, or 1.9%, to $1.03 billion at
December 31, 2001 from $1.01 billion at December 31, 2000. Loan growth accounted
for approximately half the increase as total loans grew to $803.0 million at the
end of December 2001 compared to $793.4 million at the end of December 2000 as
commercial mortgage loans and construction loans were the fastest growing
segments of the loan portfolio. Commercial mortgage and construction loans,
mainly loans to retirement/assisted living facilities and various hotels, motels
and bed and breakfasts throughout Berkshire County, rose $29.5 million, or
37.8%, to $107.7 million in 2001 from $78.2 million in 2000. These increases
were somewhat offset by declines in one-to four-family mortgage loans and
automobile loans. One-to four-family mortgage loans totaled $240.9 million at
the end of 2001, an $8.6 million, or 3.4%, decrease from 2000's year end figure.
A very competitive local marketplace coupled with the Bank's decision to sell to
a third party all newly originated fixed rate mortgages accounted for the
reduction. Automobile loan balances declined $14.7 million, or 6.4%, to $216.0
million at December 31, 2001 from $230.6 million at December 31, 2000 as the
Company sold $11.7 million of automobile loans in 2001 and continued its
strategy to reduce the level of lower quality indirect automobile loans in its
portfolio and focus its origination efforts on higher quality automobile loans.
Commercial loans showed a small increase despite 2001's economic slowdown,
rising $3.3 million, or 2.0%, to $170.2 million at the end of 2001 from $167.0
million at the end of 2000.
The securities portfolio also increased in 2001, accounting for most of
the other half of total asset growth. Excluding Federal Home Loan Bank stock and
Savings Bank Life Insurance ("SBLI") stock, total securities increased $6.2
million, or 4.7%, to $137.7 million at December 31, 2001 from $131.5 million at
December 31, 2000. Due to increased borrowings from the Federal Home Loan Bank
of Boston, FHLB stock increased $1.4 million to $7.0 million. Cash and due from
banks decreased $4.2 million to $22.7 million at the end of 2001 with $2.8
million being shifted into short term investments. Short term investments
totaled $19.5 million at December 31, 2001 as compared to $16.7 million at
December 31, 2000.
Nonperforming loans totaled $2.7 million at December 31, 2001 just below
the $2.9 million at December 31, 2000. The change was due to an increase in
nonaccruing commercial loans offset by a decrease in nonaccruing consumer loans.
Nonaccruing commercial loans were $2.1 million on December 31, 2001, an increase
of $1.6 million, or 345.7%, from $466,000 on December 31, 2000, reflecting a
weakening national and local economy. In 2001, the Bank initiated a more
aggressive charge-off policy for automobile loans whereby all automobile loans
that were 120 days or more past due, except for those customers who are in
bankruptcy proceedings, were charged-off. In addition, the Bank established a
new classification for automobile loans that were 90 days or more past due but
still accruing interest. Automobile loans in the amount of $1.3 million were 90
days or more past due and still accruing interest at the end of 2001. As a
result of these changes, consumer nonaccruing loans were $315,000 at the end of
2001, a $1.7 million, or 84.4%, decrease from $2.0 million at the end of 2000.
The ratio of nonperforming loans to total loans for 2001 and 2000 were 0.34% and
0.36%, respectively.
Goodwill and other intangible assets were $10.6 million at the end of
2001, a $4.3 million, or 69.2%, increase from 2000's $6.3 million figure as the
Company purchased a controlling interest in EastPoint Technologies, LLC., a
software and data processing provider for financial institutions, in June 2001.
Other assets declined $891,000, or 4.4%, to $19.2 million at December 31,
2001 from $20.1 million at December 31, 2000. Decreases of $1.4 million in
prepaid dealer reserves and $628,000 in repossessed vehicles were partially
offset by increases of $354,000 in the value of bank-owned life insurance and
$808,000 in other items. Prepaid dealer reserves, the amount Berkshire Bank
compensates the originator of an indirect automobile loan, declined as the Bank
implemented its aforementioned strategy of reducing emphasis on indirect
automobile loans. The total value of repossessed vehicles fell in 2001 due to
declining used car prices and lowered valuations placed on vehicles repossessed
by the Bank. Repossessed vehicles are priced at net realizable value including
deductions made for expenses necessary to prepare the vehicle for sale.
Total interest bearing liabilities increased $31.8 million, or 4.2%, to
$795.8 million at December 31, 2001 from $764.0 million at December 31, 2000 as
both interest bearing deposits and Federal Home Loan Bank of Boston borrowings
increased during the year. Interest bearing deposits grew by $7.1 million, or
1.1%, to $660.0 million at December 31, 2001 from $652.8 million one year ago.
Certificates of deposit dropped $2.5 million to $317.2 million at December 31,
2001 and money market accounts fell $5.6 million to $110.2 million at December
31, 2001. Savings accounts rose $14.3 million to $151.6 million at the end of
2001 as customers eschewed low yielding certificates of deposit and money market
accounts and sought the comfort of regular savings accounts in the current low
interest rate
37
environment. Noninterest bearing demand deposits grew $6.0 million, or 7.8%, to
$82.8 million at December 31, 2001 from $76.8 million at December 31, 2000 as
the Bank continued to court commercial customers. However, deposit growth was
not enough to fund all the Bank's loan and investment activities. As a result,
borrowings from the Federal Home Loan Bank of Boston were used to support these
activities. FHLB advances increased $32.6 million, or 32.1%, to $134.0 million
at December 31, 2001 from $101.4 million at December 31, 2000.
Stockholders' equity decreased $22.0 million, or 13.6%, to $139.3 million
at December 31, 2001 from $161.3 million at December 31, 2000. This decrease was
primarily due to dividend payments of $2.8 million, the funding of restricted
stock awards at a net cost of $4.0 million and the Company's completion of three
5% stock repurchase programs totaling 1,094,469 shares at a cost of $20.2
million. In addition, the Company is currently engaged in its fourth 5%
repurchase program having purchased 154,152 shares out of an announced 328,964
shares as of December 31, 2001 at a cost of $3.1 million. Somewhat offsetting
the stock buy-backs was net income of $8.9 million.
Comparison of Operating Results for the Years Ended December 31, 2001 and 2000
Net Income. Net income rose $4.3 million, or 94.5%, to $8.9 million for
the year ended December 31, 2001 from $4.6 million for the year ended December
31, 2000. Included in 2001's figure was a one-time gain of $2.2 million from the
dissolution of the Bank's defined benefit pension plan while the results from
2000 include a $5.7 million donation to Berkshire Hills Foundation, a charitable
foundation, with Company stock in connection with the mutual to stock conversion
in June of 2000. Basic and diluted earnings per share for the year ended
December 31, 2001 were $1.42 and $1.35, respectively. There are no comparable
earnings per share figures for 2000, as the Company became a public company in
June 2000.
Net Interest Income. Net interest income increased $4.7 million, or 12.5%,
to $42.2 million in 2001 from $37.5 million in 2000. A sustained decline in
market interest rates throughout 2001 coupled with a change in the Bank's
deposit pricing strategies helped to increase net interest income and kept
margins high. The Bank's net interest margin for the twelve months ended
December 31, 2001 and 2000 were 4.35% and 4.25%, respectively. Total interest
and dividend income rose $4.8 million, or 6.7%, to $75.8 million in 2001 from
$71.0 million in 2000 and was reduced by an increase in interest expense of only
$92,000 in 2001. Interest expense totaled $33.6 million in 2001 as compared to
$33.5 million in 2000 as increases in interest bearing liabilities were nearly
offset by lower rates paid.
The increase in interest income was wholly due to an $87.9 million, or
9.9%, increase in average interest earning assets which totaled $971.7 million
this year from $883.8 million last year. This increase more than offset a 24
basis point decrease on average yield on interest earning assets which fell to
7.80% in 2001 from 8.04% in 2000 as market rates began to have an adverse effect
on asset portfolio yields.
Interest on loans rose $4.6 million, or 7.3%, to $68.3 million in 2001
from $63.7 million in 2000 fueled by the growth in commercial real estate and
construction sectors of the loan portfolio. The increase in loan interest
occurred despite a 15 basis point drop on average yield on loans to 8.38% in
2001 from 8.53% in 2000. Investment securities income, not including FHLB stock
and SBLI stock, rose to $6.7 million in 2001 from $6.3 million in 2000, a
$429,000, or 6.8%, increase. As with loans, an increase in average balances was
more than enough to offset a decrease in average rate earned. The average
balance of investment securities increased $16.8 million to $136.9 million in
2001 while average yield on investment securities dropped 33 basis points to
4.91%.
Interest expense increased $92,000, or 0.3%, to $33.6 million in 2001 from
$33.5 million in 2000. Interest expense on deposits decreased $918,000, or 3.3%,
to $26.7 million in 2001 as the average cost of interest bearing deposits fell
to 4.06% in 2001 from 4.40% in 2000. This was somewhat offset by a $30.5 million
increase in average interest bearing deposit balances, bringing the total to
$657.5 million in 2001 from $627.0 million in 2000 as people looked for a safe
haven for their investments. However, interest paid on Federal Home Loan Bank of
Boston advances increased $847,000 to $6.6 million as a 106 basis point drop in
average cost could not offset a $35.4 million increase in average FHLB balances.
The average cost on FHLB borrowings was 5.17% in 2001 versus 6.23% in 2000 while
the average balance equaled $128.0 million in 2001 compared to $92.6 million in
2000. Interest paid on securities sold under agreement to repurchase and other
borrowings totaled $262,000 in 2001 as the Bank realized $202,000 in interest
expense early in the year to finance automobile loans sold with recourse.
Provision for Loan Losses. The provision for loan losses increased $4.0
million, or 126.3%, to $7.2 million in 2001 from $3.2 million in 2000. The Bank
initiated a more aggressive charge-off policy for automobile loans whereby all
automobile loans that are 120 days or more past due, except customers who are in
bankruptcy proceedings, were charged-off. This change was the primary reason
total charge-offs increased to $7.1 million in 2001 from $1.9 million
38
in 2000. Additional provisions were also required to offset growth in the loan
portfolio and an increase in commercial loan delinquencies as a weakening
economy contributed to an increase in nonaccruing commercial loans to $2.1
million at December 31, 2001 from $466,000 at December 31, 2000. Lastly, the
Bank also reviewed and updated its loan classifications and corresponding
reserve requirement percentages. As a result, the allowance for loan losses as a
percent of total loans increased to 1.37% in 2001 from 1.29% in 2000. The
allowance for loan losses as a percent of nonperforming loans was 408.36% this
year from 356.08% last year.
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 nonperforming 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 $10.5 million for 2001 and
$4.7 million for 2000, an increase of $5.8 million, or 122.3%. Included in
2001's figure is a one-time gain of $2.2 million related to the curtailment of
the Bank's defined benefit pension plan, and revenue of $3.5 million for license
maintenance and processing fees, and license sales and other fees that were
derived from the operations of EastPoint Technologies, LLC which was purchased
in June of 2001. Excluding the pension plan gain and EastPoint's revenues,
noninterest income increased $164,000, or 3.5%, in 2001. Customer service fees
increased $220,000 to $1.8 million in 2001 as higher activity levels resulted in
increases in ATM fees, debit card fees, and bank service charges. Loan servicing
fees increased $149,000 to $595,000 in 2001 as the Bank executed a strategy of
selling newly written fixed-rate loans.
Noninterest Expense. Noninterest expense increased $165,000, or 0.5%, to
$32.3 million for the year ended December 31, 2001 from $32.2 million last year.
Included in 2001's figure are expenses totaling $3.4 million relating to
EastPoint's operations. The year 2000's figure includes a contribution of $5.7
million to fund Berkshire Hills Foundation. Excluding these two items,
noninterest expenses rose $2.5 million, or 9.3%, to $29.0 million in 2001 from
$26.5 million in 2000. Expenses related to foreclosed real estate and other
loans, and in particular, the repossession and sale of a larger number of
automobiles, accounted for an increase of $1.1 million, or 92.1%, to $2.2
million in 2001 from $1.2 million in 2000. Salaries and benefits increased to
$17.6 million in 2001, up $4.0 million, or 29.0%, from $13.6 million in 2000 as
the Company's operating staff expanded due to the EastPoint purchase. Occupancy
and equipment expense was $4.7 million, an increase of $511,000, or 12.2%, from
2000 as the Bank renovated two branches. Professional services increased
$464,000, or 54.6%, to $1.3 million in 2001 from $850,000 in 2000 primarily due
to legal and consulting expenses related to the acquisition and operation of
EastPoint Technologies, LLC. Data processing expense fell $700,000 as the Bank
switched to an in-house imaging system from an outsourced operation.
Income Taxes. Income taxes for the year ending December 31, 2001 were $4.3
million, an increase of $2.0 million, or 84.3%, over the $2.4 million paid for
the year ending December 31, 2000. The effective tax rates for 2001 and 2000
were 32.8% and 34.0%, respectively. The lower effective rate in 2001 was
partially attributable to the establishment of a Real Estate Investment Trust
through which the bank receives state tax benefits.
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. 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, noninterest income rose to $4.7 million in 2000 from $4.3 million
39
in 1999, an increase of $448,000 or 10.4%. However, noninterest 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 bearing 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 accounts 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 nonperforming 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 nonper-forming loans this year as
compared to 300.39% last year.
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.
40
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.
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.
41
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 Years Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- -------------------------- ----------------------------
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) ......................... $ 815,078 $68,291 8.38% $746,018 $63,664 8.53% $639,517 $52,522 8.21%
Short-term investments ........... 11,883 413 3.48 10,492 654 6.23 4,042 215 5.32
Investment securities ............ 136,944 6,725 4.91 120,123 6,296 5.24 113,929 5,351 4.70
Federal Home Loan Bank stock ..... 5,707 304 5.33 4,959 333 6.72 3,193 181 5.67
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
---------- ------- -------- ------ -------- ------
Total interest-earning assets .... 971,655 75,796 7.80 883,762 71,018 8.04 764,194 58,468 7.65
------- ------ -----
Noninterest-earning assets ....... 63,207 52,891 51,111
---------- -------- --------
Total assets ..................... $1,034,862 $936,653 $815,305
========== ======== ========
Interest-bearing liabilities:
Deposits:
Money market accounts ............ $ 112,434 3,712 3.30 $106,058 4,701 4.43 $ 84,971 3,169 3.73
NOW accounts ..................... 77,276 806 1.04 75,673 794 1.05 73,615 830 1.13
Savings accounts(2) .............. 142,150 4,087 2.88 143,357 4,578 3.19 142,193 4,366 3.07
Certificates of deposit .......... 325,639 18,080 5.55 301,920 17,530 5.81 291,344 15,483 5.31
---------- ------- -------- ------ -------- ------
Total interest-bearing deposits 657,499 26,685 4.06 627,008 27,603 4.40 592,123 23,848 4.03
Federal Home Loan Bank Advances ... 127,990 6,613 5.17 92,567 5,766 6.23 50,951 2,796 5.49
Repurchase agreements ............. 4,215 262 6.22 1,683 99 5.88 5,923 278 4.69
---------- ------- -------- ------ -------- ------
Total interest-bearing liabilities 789,704 33,560 4.25 721,258 33,468 4.64 648,997 26,922 4.15
------- ------ -----
Noninterest-bearing demand
deposits ........................ 76,912 76,060 67,563
Other noninterest-bearing
liabilities...................... 12,968 16,170 12,396
---------- -------- --------
Total liabilities ............... 879,584 813,488 728,956
Equity ............................. 155,278 123,165 86,349
---------- -------- --------
Total liabilities and equity .... $1,034,862 $936,653 $815,305
========== ======== ========
Net interest-earning assets ........ $ 181,951 $162,504 $115,197
========== ======== ========
Net interest income ................. $42,236 $37,550 $31,546
======= ======= =======
Interest rate spread ................ 3.55% 3.40% 3.50%
Interest margin (net interest
income as a percentage of total
average interest-earning assets).. 4.35% 4.25% 4.13%
Total average interest-earning
assets to total average interest-
bearing liabilities ............. 123.04% 122.53% 117.75%
(1) Average balances include nonaccrual loans.
(2) Includes mortgagors' escrow accounts.
42
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, 2001 December 31, 2000
Compared to Year Ended Compared to Year Ended
December 31, 2000 December 31, 1999
--------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------- ---------------------------------
Rate Volume Net Rate Volume Net
------- ------- ------- ------- ------- --------
(In thousands)
Interest-earning assets:
Loans ....................... $(1,133) $ 5,760 $ 4,627 $ 1,949 $ 9,193 $ 11,142
Short-term investments ...... (340) 99 (241) 42 397 439
Investment securities ....... (398) 798 400 70 390 1,097
Interest-bearing deposits ... (4) (4) (8) (33) (95) (128)
------- ------- ------- ------- ------- --------
Total interest-earning
assets ................... (1,875) 6,653 4,778 2,665 9,885 12,550
------- ------- ------- ------- ------- --------
Interest-bearing liabilities:
Deposits:
Money market accounts ....... (1,294) 305 (989) 661 871 1,532
NOW accounts ................ (5) 17 12 (58) 22 (36)
Savings accounts ............ (453) (38) (491) 176 36 212
Certificates of deposit ..... (691) 1,241 550 1,453 594 2,047
------- ------- ------- ------- ------- --------
Total deposits ............ (2,443) 1,525 (918) 2,232 1,523 3,755
Federal Home Loan Bank
advances ................... (681) 1,528 847 377 2,593 2,970
Repurchase agreements ......... 6 157 163 104 (283) (179)
------- ------- ------- ------- ------- --------
Total interest-bearing
liabilities .............. (3,118) 3,210 92 2,713 3,833 6,546
------- ------- ------- ------- ------- --------
Increase (decrease) in net
interest income ............ $ 1,243 $ 3,443 $ 4,686 $ (48) $ 6,052 $ 6,004
======= ======= ======= ======= ======= ========
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
43
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, 2001 and 2000, Berkshire
Bank's loan originations totaled $252.9 million and $284.5 million,
respectively. At December 31, 2001 and 2000, the Bank's investments in mortgage-
and asset-backed securities, U.S. Government and agency obligations and
corporate equity securities and debt obligations totaled $146.8 million and
$139.2 million, respectively. The Bank experienced a net increase in total
deposits of $13.1 million and $48.8 million for the years ended December 31,
2001 and 2000, respectively. Deposit flows 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 $118.5 million at December 31, 2001. 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, 2001 totaled $238.3 million. The
Bank relies primarily on competitive rates, customer service, and longstanding
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,
2001, Berkshire Bank exceeded all of its regulatory capital requirements with
Tier 1 capital to average assets of $88.5 million, or 9.05% of average assets,
which is above the required level of $39.1 million, or 4.0%, and total capital
to risk-weighted assets of $111.6 million, or 13.38% of risk-weighted assets,
which is above the required level of $66.7 million, or 8.0%. The Bank meets the
conditions to be considered "well capitalized" under regulatory guidelines.
The primary source of funding for Berkshire Hills Bancorp is dividend
payments from Berkshire Bank, sales and maturities of investment securities and,
to a lesser extent, earnings on investments and deposits held by Berkshire Hills
Bancorp. Dividend payments by Berkshire Bank have primarily been used to fund
stock repurchase programs. The Bank's ability to pay dividends and other capital
distributions to Berkshire Hills Bancorp is generally limited by Massachusetts
banking regulations and regulations of the Federal Deposit Insurance
Corporation. (See Regulation and Supervision - Massachusetts Regulation)
Additionally, the Massachusetts Banking Commissioner and Federal Deposit
Insurance Corporation may prohibit the payment of dividends which are otherwise
permissible by regulation for safety and soundness reasons. As of February 28,
2002, Berkshire Bank had $1.5 million of dividends it could pay to Berkshire
Hills Bancorp without regulatory approval (representing current year net income
plus previous two years'net income less dividends paid during those years) and
Berkshire Hills Bancorp had $586,000 of securities available for sale and $3.5
million cash due from Berkshire Bank. Any dividend by the Bank beyond its
current year's earnings and prior two years' retained net income would require
the approval of the Massachusetts Banking Commissioner, and notification to or
approval of the Federal Deposit Insurance Corporation and the Office of Thrift
Supervision. To the extent the Bank were to apply for a dividend distribution to
Berkshire Hills Bancorp in excess of the regulatory permitted dividend amount,
no assurances can be made such application would be approved by the regulatory
authorities.
Berkshire Hills Bancorp is currently engaged in its fourth 5% stock
repurchase program. To date, all purchases have been open market purchases. In
the current program, 154,152 shares out of an announced 328,964 have been
purchased at a cost of $3.1 million through December 31, 2001. The Company has
sufficient funds available to complete the repurchase program without having a
material adverse effect on liquidity.
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
44
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 Goodwill and Other Intangible Assets. On June 30, 2001, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. With the adoption of SFAS No. 142,
effective January 1, 2002, goodwill is no longer subject to amortization over
its estimated useful life, but will be subject to at least an annual assessment
for impairment by applying a fair value based test. Additionally, under SFAS No.
142, acquired intangible assets (such as core deposit intangibles) should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of intent to do so.
Unidentified intangible assets pertaining to branch acquisitions will continue
to be amortized as such transactions are outside the scope of SFAS No. 142.
Management does not anticipate that the adoption of this Statement will have a
material impact on the consolidated financial statements.
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; (As previously mentioned, management
intends to continue to reduce its emphasis on sub-prime indirect
automobile loans in 2002.)
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 $28.9 million at December 31, 2001 and gross unrealized
losses of $534,000 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.
45
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 the balance sheet mix. The model assumes the yield
curve is derived from the interpolated Treasury yield curve and that an
instantaneous increase or decrease of market interest rates would cause a
simultaneous parallel shift along the entire yield curve. The model assumes
loans, deposits and borrowings will reprice at the new market rate on the
contractual review or maturity date. The model also assumes that the Bank's loan
prepayments are similar to national standards and generally uses prepayment
guidelines set forth by Freddie Mac and Fannie Mae. However, the Bank monitors
its loan prepayment trends and uses Bank generated figures where applicable. All
prepayments are assumed to roll over into new loans originated in the same loan
category at the new market rate. Berkshire Bank believes that its securities'
cash flows, especially its mortgage backed securities cash flows, are such that
they too will generally follow industry standards and that prepayments will be
reinvested in the same category at the prevailing market rate. Finally, the
model assumes that its balance sheet mix will remain relatively unchanged
throughout the next calendar year. The tables below set forth, as of December
31, 2001 and 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.
Increase/
(Decrease)
in Market
Interest Rates At December 31, 2001
in Basis Points ------------------------------------------
(Rate Shock) Amount $ Change % Change
- ------------ ------ -------- --------
(Dollars in thousands)
200 $45,863 $ 64 0.14%
100 45,209 (590) (1.29)
Static 45,799 -- --
(100) 46,332 533 1.16
(200) 44,955 (844) (1.84)
Increase/
(Decrease)
in Market
Interest Rates At December 31, 2000
in Basis Points ------------------------------------------
(Rate Shock) Amount $ Change % Change
- ------------ ------ -------- --------
(Dollars in thousands)
200 $44,498 $ 804 1.84%
100 44,216 522 1.19
Static 43,694 -- --
(100) 42,972 (722) (1.65)
(200) 42,165 (1,529) (3.50)
The December 31, 2000 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 $722,000 and $1.5 million, respectively. These figures vary from the
results of the December 31, 2001 table where a 100 basis point decline would
lead to a $533,000 net interest income increase while a 200 basis point decline
would lead to a decline in net interest income of $844,000. From December 31,
2000 to December 31, 2001, short-term interest rates fell significantly. Due to
this rapid decline in market rates the Bank decided to lower rates in its core
deposit liability accounts, such as NOW accounts and savings accounts, that were
previously thought to be set at floor rates, and in doing so has made the Bank
liability sensitive. The switch to being liability sensitive in 2001 from
46
being asset sensitive in 2000 caused net interest income to increase in December
31, 2001's report for a 100 basis points decline in interest rates while net
interest income decreased in December 31, 2000's chart. However, the December
31, 2001 chart shows a smaller decrease in net interest income if rates fall 200
basis points as many of the liability accounts hit predetermined floors and
cannot be lowered past those points. Since the yields on the Bank's assets would
continue to decline, net interest income would also decline.
In the event of a sudden and sustained increase in prevailing market
interest rates of 100 basis points, the December 31, 2001 chart indicates a
decline in net interest income of $590,000 while the December 31, 2000 chart
predicts a $522,000 increase. As mentioned above, with the change in liability
pricing during 2001, the Bank is now liability sensitive. As such, the Bank's
liabilities reprice faster than its assets, resulting in a decline in net
interest income if market rates were to rise 100 basis points. However, if
prevailing rates were to rise 200 basis points, the December 31, 2001 chart
indicates an increase of $64,000 while the December 31, 2000 graph predicts an
increase of $804,000. At December 31, 2001, if market rates increased 200 basis
points, various liability accounts would hit Bank determined caps. Meanwhile,
interest income earned on assets would continue to rise and the Bank would see
an increase in net interest income similar to the pattern seen in the December
31, 2000 chart.
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.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
Independent Auditors' Report....................................49
Consolidated Balance Sheets as of December 31, 2001
and 2000........................................................50
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999................................51
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 2001,
2000 and 1999...................................................52
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001, 2000 and 1999..........................53
Notes to Consolidated Financial Statements......................55
48
[LETTERHEAD - WOLF & COMPANY]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Berkshire Hills Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Berkshire Hills
Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, 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, 2001.
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, 2001 and 2000 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
- ------------------------------
Boston, Massachusetts
January 23,2002
49
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
---- ----
(In thousands)
ASSETS
Cash and due from banks $ 22,652 $ 26,891
Short-term investments 19,471 16,721
----------- -----------
Total cash and cash equivalents 42,123 43,612
Securities available for sale, at fair value 104,446 99,309
Securities held to maturity, at amortized cost 33,263 32,238
Federal Home Loan Bank stock, at cost 7,027 5,651
Loans, net of allowance for loan losses of $11,034,000
in 2001 and $10,216,000 in 2000 791,920 783,405
Foreclosed real estate -- 50
Premises and equipment, net 14,213 12,370
Accrued interest receivable 5,873 6,310
Savings Bank Life Insurance stock 2,043 2,043
Goodwill and other intangibles 10,592 6,260
Other assets 19,201 20,092
----------- -----------
Total assets $ 1,030,701 $ 1,011,340
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 742,729 $ 729,594
Federal Home Loan Bank advances 133,964 101,386
Loans sold with recourse -- 7,740
Securities sold under agreements to repurchase 1,890 2,030
Net deferred tax liability 4,573 4,482
Accrued expenses and other liabilities 5,099 4,786
----------- -----------
Total liabilities 888,255 850,018
----------- -----------
Minority Interests 3,123 --
----------- -----------
Commitments and contingencies (Notes 5, 11 and 12)
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;
6,425,140 and 7,673,761 shares issued and outstanding
at December 31, 2001 and 2000, respectively) 77 77
Additional paid-in capital 74,146 74,054
Unearned compensation (11,101) (7,187)
Retained earnings 80,657 74,554
Accumulated other comprehensive income 18,836 19,824
Treasury stock, at cost (1,248,621 shares at December 31, 2001) (23,292) --
----------- -----------
Total stockholders' equity 139,323 161,322
----------- -----------
Total liabilities and stockholders' equity $ 1,030,701 $ 1,011,340
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
50
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 68,291 $63,664 $52,522
Interest on debt securities:
Taxable 5,233 5,142 4,160
Tax-exempt 375 188 252
Dividends 1,484 1,362 1,183
Interest on short-term and other investments 413 662 351
-------- ------- -------
Total interest and dividend income 75,796 71,018 58,468
-------- ------- -------
Interest expense:
Deposits 26,685 27,603 23,848
Federal Home Loan Bank advances 6,613 5,766 2,796
Securities sold under agreements to repurchase 262 99 278
-------- ------- -------
Total interest expense 33,560 33,468 26,922
-------- ------- -------
Net interest income 42,236 37,550 31,546
Provision for loan losses 7,175 3,170 3,030
-------- ------- -------
Net interest income, after provision for loan losses 35,061 34,380 28,516
-------- ------- -------
Other income:
Customer service fees 1,810 1,590 1,333
Trust department fees 1,782 1,707 1,730
Loan fees 595 446 342
Gain on sales and dispositions of securities, net 268 423 491
License maintenance and processing fees 1,322 -- --
License sales and other fees 2,143 -- --
Gain on curtailment of defined benefit pension plan, net 2,173 -- --
Miscellaneous 455 580 230
-------- ------- -------
Total other income 10,548 4,746 4,126
-------- ------- -------
Operating expenses:
Salaries and employee benefits 17,590 13,631 13,767
Occupancy and equipment 4,689 4,178 4,152
Marketing and advertising 629 578 599
Data processing 1,065 1,765 1,493
Professional services 1,314 850 869
Office supplies 899 706 687
Foreclosed real estate and repossessed assets, net 2,238 1,165 534
Amortization of goodwill and other intangibles 827 549 549
Charitable contribution to foundation -- 5,684 --
Minority interests (119) -- --
Other general and administrative expenses 3,217 3,078 2,374
-------- ------- -------
Total operating expenses 32,349 32,184 25,024
-------- ------- -------
Income before income taxes 13,260 6,942 7,618
Provision for income taxes 4,349 2,360 1,995
-------- ------- -------
Net income $ 8,911 $ 4,582 $ 5,623
======== ======= =======
Earnings per share:
Basic $ 1.42 N/A N/A
Diluted $ 1.35 N/A N/A
The accompanying notes are an integral part of these consolidated financial
statements.
51
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
----- ------- ----------- -------- ------ ----- -----
(In thousands)
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 reclassification 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 ....... -- 61 514 -- -- -- 575
Cash dividends paid ($0.10 per share) . -- -- -- (707) -- -- (707)
------ -------- -------- -------- -------- -------- ---------
Balance at December 31, 2000 .......... 77 74,054 (7,187) 74,554 19,824 -- 161,322
--------
Comprehensive income:
Net income ............................ -- -- -- 8,911 -- -- 8,911
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment and
tax effects ......................... -- -- -- -- (988) -- (988)
--------
Total comprehensive income ....... 7,923
--------
Cash dividends paid ($0.43 per share) . -- -- -- (2,808) -- -- (2,808)
Treasury stock purchased .............. -- -- -- -- -- (23,292) (23,292)
Purchase of common stock - stock awards -- -- (5,453) -- -- -- (5,453)
Change in unearned compensation ....... -- 234 1,539 -- -- -- 1,773
Minority interest adjustment .......... -- (142) -- -- -- -- (142)
------ -------- -------- -------- -------- -------- ---------
Balance at December 31, 2001 .......... $ 77 $ 74,146 $(11,101) $ 80,657 $ 18,836 $(23,292) $ 139,323
====== ======== ======== ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
52
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income ................................................ $ 8,911 $ 4,582 $ 5,623
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ................................. 7,175 3,170 3,030
Net amortizaton of securities ............................. 270 206 400
Charitable contribution in the form of equity
securities .............................................. -- 5,684 --
Depreciation and amortization expense ..................... 2,081 1,668 1,860
Amortization of goodwill and other intangibles ............ 827 549 549
Management rewards plan expense ........................... 1,000 -- --
Employee stock ownership plan expense ..................... 773 575 --
Gain on curtailment of defined benefit pension plan, net .. 2,173 -- --
Gain on sales and dispositions of securities, net ......... (268) (423) (491)
Loss (gain) on sale of foreclosed real estate, net ........ -- 86 (18)
Loss on sale of equipment ................................. 35 18 30
Deferred income tax provision (benefit) ................... 608 (2,785) (319)
Net change in loans held for sale ......................... (2,540) -- (2,425)
Undistributed minority interest ........................... (119) -- --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets .............. 1,899 (9,491) (2,063)
Accrued expenses and other liabilities .................... (2,929) (1,625) 1,287
-------- --------- --------
Net cash provided by operating activities .............. 19,896 2,214 7,463
-------- --------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales ................................................... 3,965 32,854 1,191
Maturities .............................................. 26,577 41,238 8,468
Principal payments ...................................... 19,685 10,263 21,589
Purchases ............................................... (56,890) (87,029) (32,749)
Activity in held to maturity securities:
Maturities .............................................. 12,982 11,076 9,171
Principal payments ...................................... 22,187 11,294 15,902
Purchases ............................................... (36,175) (37,583) (18,357)
Purchase of FHLB stock .................................... (1,376) (1,808) (1,296)
Loan originations and purchases, net of
principal payments ...................................... (13,176) (121,101) (67,139)
Additions to premises and equipment ....................... (2,344) (2,528) (3,744)
Proceeds from sales of foreclosed real estate ............. 76 164 347
Proceeds from sale of equipment ........................... 20 3 18
Loan to fund employee stock ownership plan ................ -- (7,701) --
Payment for purchase of EastPoint Technologies, LLC ....... (4,700) -- --
-------- --------- --------
Net cash used in investing activities .................. (29,169) (150,858) (66,599)
-------- --------- --------
(continued)
The accompanying notes are an integral part of these consolidated financial
statements.
53
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(Concluded) Years Ended December 31,
2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(In thousands)
Cash flows from financing activities:
Net increase in deposits ............................. 14,638 48,827 33,645
Net increase/(decrease) in securities sold under
agreements to repurchase ........................... (140) 910 (5,880)
Proceeds from Federal Home Loan Bank advances ........ 152,000 140,000 40,000
Repayments of Federal Home Loan Bank advances ........ (119,421) (97,542) (13,662)
Proceeds of borrowings with maturities of
three months or less ............................... -- -- 3,000
Increase/(decrease) in loans sold with recourse ...... (7,740) 7,740 --
Treasury stock purchased ............................. (23,292) -- --
Purchase of common stock in connection with restricted
stock awards under stock based incentive plan ...... (5,453) -- --
Net proceeds from initial public offering ............ -- 68,386 --
Cash dividends paid .................................. (2,808) (707) --
--------- --------- --------
Net cash provided by financing activities ........ 7,784 167,614 57,103
--------- --------- --------
Net change in cash and cash equivalents ................ (1,489) 18,970 (2,033)
Cash and cash equivalents at beginning of year ......... 43,612 24,642 26,675
--------- --------- --------
Cash and cash equivalents at end of year ............... $ 42,123 $ 43,612 $ 24,642
========= ========= ========
Supplemental cash flow information:
Interest paid on deposits ............................ $ 26,746 $ 27,603 $ 23,834
Interest paid on borrowed funds ...................... 6,719 5,610 2,797
Income taxes paid, net ............................... 2,882 6,314 2,080
Transfers from loans to foreclosed real estate ....... 26 80 151
The accompanying notes are an integral part of these consolidated financial
statements.
54
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
Berkshire Hills Bancorp, Inc. (the "Company" or "Berkshire Hills") is a
Delaware corporation and the holding company for Berkshire Bank (the "Bank"), a
state-chartered savings bank headquartered in Pittsfield, Massachusetts. These
consolidated financial statements include the accounts of Berkshire Hills
Bancorp, Inc. and its wholly-owned subsidiaries, Berkshire Bank, Berkshire Hills
Funding Corporation, and Berkshire Hills Technology, Inc., which was formed
during 2001 for the purpose of acquiring a controlling interest in EastPoint
Technologies, Inc. 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 and Gold Leaf Investment Services were formed in 2000 and
offer insurance and investment products to customers. Woodland Realty, Inc. is
presently inactive. Berkshire Hills Funding Corporation was established and
funded to loan funds to the Employee Stock Ownership Plan. During 2001, the Bank
established a majority owned subsidiary, Gold Leaf Capital Corporation, which
holds real estate mortgages. All significant intercompany balances and
transactions have been eliminated in consolidation.
On June 29, 2001, the Company, through its wholly-owned subsidiary,
Berkshire Hills Technology, Inc., purchased a controlling interest in EastPoint
Technologies, LLC, ("EastPoint") which on the same date acquired all of the
domestic operations and service contracts of M&I EastPoint Technology, Inc,
Bedford, New Hampshire, a software and data processing provider for financial
institutions, as well as substantially all of the operations and service
contracts of Preferred Financial Systems, Inc., Arden Hills, Minnesota, a data
processing service provider which utilized the EastPoint Technology, Inc.
software. The Company's equity interest in EastPoint at December 31, 2001 is
60.3% and represents a total investment of $4.7 million. During 2001 the
Company's ownership percentage decreased from 93.6% as other investors obtained
regulatory approval. The change in ownership percentage is shown as an
adjustment to additional paid-in capital. This acquisition was accounted for
under the purchase method.
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, commercial 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.
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
55
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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, 2001 and 2000, cash and due from banks
included $8,250,000 and $10,144,000, 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.
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. Automobile loans continue accruing to one hundred and twenty days
delinquent at which time they are charged off, unless the customer is in
bankruptcy proceedings. 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.
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
56
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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.
The allowance consists of allocated, general and unallocated components.
The allocated 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 and general
losses in the portfolio.
Loans held for sale
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Foreclosed and repossessed assets
Assets acquired through, or in lieu of, loan foreclosure or repossession
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 or
repossession, establishing a new cost basis. Subsequently, 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 real estate and repossessed assets.
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.
57
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
Goodwill and other intangibles
Goodwill and other intangibles includes goodwill associated with the
acquisition of EastPoint Technologies, LLC and will be evaluated for impairment
on an annual basis. Intangible assets refer to customer relationships acquired
in association with the EastPoint Technologies purchase, which are being
amortized on a straight-line basis over three years, as well as the Company's
purchase of two branches from another financial institution in 1991 and three
branches in 1998. The branch acquisition costs are currently being amortized on
a straight-line basis over 15 years, respectively.
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.
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
For the year ended December 31, 2000 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.
The defined benefit pension plan was terminated during 2001.
Stock compensation plans
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which encourages all entities to adopt a fair value based method
of accounting for employee stock compensation plans, whereby compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Company stock option plan have no intrinsic value at the grant date, and under
Opinion No. 25 no compensation cost is recognized for them. The Company has
elected to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per share
and other disclosures, as if the fair value based method of accounting had been
applied. (See Note 14)
58
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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.
Stock awards
The fair market value of the stock awards, based on the market price at
date of grant, is recorded as unearned compensation. Unearned compensation is
amortized over the vesting period at 20% per year. Stock award shares are
considered outstanding for basic earnings per share in the period that they
vest. Stock award shares not vested are considered in the calculation of diluted
earnings per share.
Earnings per common share
Basic earnings per share represents income available to common
stockholders 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 dilutive potential common shares had been
issued. Potential common shares that may be issued by the Company related to
outstanding stock awards and stock options, and are determined using the
treasury stock method. Earnings per share data is not presented in these
financial statements for the years ended December 31, 2000 and 1999 since shares
of the Company common stock were not issued until June 27, 2000.
Earnings per common share for the year ended December 31, 2001 have been
computed based upon the following:
Net income applicable to common stock ....................... $8,911
======
Average number of common shares outstanding.................. 6,264
Effect of dilutive options................................... 340
------
Average number of common shares outstanding
used to calculate diluted earnings per common share......... 6,604
======
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.
59
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
(In thousands)
Change in net unrealized holding gains on
available for sale securities ................. $(1,237) $ 3,768 $(1,841)
Reclassification adjustment for gains
realized in income ............................ (268) (423) (491)
------- ------- -------
Net change in unrealized gains .................. (1,505) 3,345 (2,332)
Tax effects ..................................... 517 (1,194) 860
------- ------- -------
Net-of-tax change ............................... $ (988) $ 2,151 $(1,472)
======= ======= =======
Subsequent accounting changes
On June 30, 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. With the adoption of SFAS No. 142, effective
January 1, 2002, goodwill is no longer subject to amortization over its
estimated useful life, but will be subject to at least an annual assessment for
impairment by applying a fair value based test. Additionally, under SFAS No.
142, acquired intangible assets (such as core deposit intangibles) should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of intent to do so.
Unidentified intangible assets pertaining to branch acquisitions will continue
to be amortized as such transactions are outside the scope of SFAS No. 142.
Management does not anticipate that the adoption of this Statement will have a
material impact on the consolidated financial statements.
60
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following at December 31, 2001 and
2000:
2001 2000
------- -------
(In thousands)
Federal funds sold ...................... $12,000 $ 5,000
FHLB Overnight deposits ................. 7,471 7,721
BIF Liquidity Fund ...................... -- 4,000
------- -------
$19,471 $16,721
======= =======
3. SECURITIES
The amortized cost and estimated fair value of securities, with gross
unrealized gains and follows: losses,
December 31, 2001
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
U.S. Treasury and U.S.
Government agencies ............... $13,876 $ 156 $ (15) $ 14,017
Other bonds and obligations ....... 31,017 361 (127) 31,251
Mortgage-backed securities:
FHLMC/ FNMA/GNMA .................. 396 22 -- 418
REMIC's and CMO's ................. 17,303 185 (27) 17,461
Asset-backed securities ........... 1,484 12 -- 1,496
------- ------- ------ --------
Total debt securities ............. 64,076 736 (169) 64,643
Mutual funds .............................. 907 -- (188) 719
Marketable equity securities .............. 10,540 28,890 (346) 39,084
------- ------- ------ --------
Total securities available for sale $75,523 $29,626 $(703) $104,446
======= ======= ===== ========
Securities Held to Maturity
Debt securities:
Municipal bonds and obligations ... $11,241 $ -- $ -- $ 11,241
Mortgage-backed securities:
FHLMC/FNMA ........................ 3,358 62 (7) 3,413
REMIC's and CMO's ................. 18,664 137 (46) 18,755
------- ------- ------ --------
Total securities held to maturity . $33,263 $ 199 $ (53) $ 33,409
======= ======= ====== ========
61
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
December 31, 2000
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
Securities Available for Sale
Debt securities:
U.S. Treasury and U.S.
Government agencies ................. $10,146 $ 22 $ (62) $10,106
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/FNMA .......................... 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
======= ======= ======= =======
62
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 2001 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 .................. $17,928 $18,082 $ 6,612 $ 6,612
Over 1 year to 5 years ......... 24,622 24,891 60 60
Over 5 years to 10 years ....... 1,268 1,188 1,191 1,191
Over 10 years .................. 1,075 1,107 3,378 3,378
------- ------- ------- -------
Total bonds and obligations . 44,893 45,268 11,241 11,241
Mortgage-backed and asset-backed
securities .................... 19,183 19,375 22,022 22,168
------- ------- ------- -------
Total debt securities ....... $64,076 $64,643 $33,263 $33,409
======= ======= ======= =======
At December 31, 2001 and 2000, the Company has pledged securities with an
amortized cost of $5,807,000 and $7,592,000, respectively, and a fair value of
$5,882,000 and $7,584,000, respectively, as collateral for repurchase
agreements, and for its treasury tax and loan account.
For the years ended December 31, 2001, 2000 and 1999, proceeds from the
sales of securities available for sale amounted to $3,965,000, $32,854,000 and
$1,191,000, respectively. Gross realized gains amounted to $440,000, $458,000
and $685,000, respectively. Gross realized losses amounted to $172,000, $35,000
and $194,000, respectively.
63
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, 2001 and 2000:
2001 2000
---- ----
(In thousands)
One- to four-family mortgage ............ $ 240,852 $ 249,440
Commercial mortgage ..................... 84,741 63,871
Multi-family mortgage ................... 13,183 15,699
Construction ............................ 22,936 14,290
Home equity ............................. 34,439 34,471
Consumer ................................ 236,604 248,662
Commercial .............................. 170,230 166,956
--------- ---------
Total loans ......................... 802,985 793,389
Allowance for loan losses ............... (11,034) (10,216)
Unamortized discount on purchased loans . (203) --
Net deferred loan costs ................. 172 232
--------- ---------
Loans, net .......................... $ 791,920 $ 783,405
========= =========
At December 31, 2001, one- to four-family mortgage loans include $2,540,000 of
loans which were held for sale. At December 31, 2000 no loans were held for
sale.
An analysis of the allowance for loan losses for the years ended December 31,
2001, 2000 and 1999 follows:
2001 2000 1999
---- ---- ----
(In thousands)
Balance at beginning of year ............ $ 10,216 $ 8,534 $ 7,589
Provision for loan losses ............... 7,175 3,170 3,030
Loans charged-off ....................... (7,062) (1,910) (2,353)
Recoveries .............................. 705 422 268
-------- -------- -------
Balance at end of year .................. $ 11,034 $ 10,216 $ 8,534
======== ======== =======
64
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
The following is a summary of information pertaining to impaired and nonaccrual
loans at December 31, 2001 and 2000:
2001 2000
------ ------
(In thousands)
Impaired loans with no valuation allowance ............ $ 778 $ 395
Impaired loans with a valuation allowance ............. 1,359 71
------ ------
Total impaired loans .................................. $2,137 $ 466
====== ======
Valuation allowance allocated to impaired loans ....... $ 113 $ 4
====== ======
Nonaccrual loans ...................................... $2,702 $2,869
====== ======
No additional funds are committed to be advanced in connection with
impaired loans.
For the years ended December 31, 2001, 2000 and 1999, the average recorded
investment in impaired loans amounted to $1,344,000, $1,094,000 and $2,496,000,
respectively. The Company recognized $14,000, $16,000 and $23,000, 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 $4,520,000 and $19,359,000 at
December 31, 2001 and 2000, respectively. Consumer loans sold and serviced for
others amounted to $40,694,000 and $49,901,000 at December 31, 2001 and 2000,
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 provision
expired on September 30, 2001. These loans and the recourse provision are
included in the accompanying consolidated balance sheet.
65
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
5. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
premises and equipment and their estimated useful lives follows at December 31,
2001 and 2000:
Estimated
2001 2000 Useful Lives
---- ---- ------------
(In thousands)
Banking premises:
Land..................................... $ 1,558 $ 1,558
Buildings and improvements............... 17,737 16,074 5-50 years
Equipment................................ 9,601 6,537 2-38 years
Construction in process.................. 193 996
------- --------
29,089 25,165
Accumulated depreciation and amortization.. (14,876) (12,795)
------- --------
$14,213 $ 12,370
======= ========
Construction in process in 2000 includes a renovation project at the
Allendale branch. During 2001, this project was completed and costs were
transferred to the applicable categories.
Construction in process in 2001 includes a computer conversion project on
the consumer loan system. Estimated costs to complete are $31,000.
Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999 amount to $2,081,000, $1,668,000 and $1,860,000,
respectively.
6. OTHER ASSETS
Other assets consist of the following at December 31, 2001 and 2000:
2001 2000
---- ----
(In thousands)
Prepaid dealer reserves $ 8,594 $10,019
Repossessed vehicles 2,549 3,177
Cash surrender values, life insurance 4,525 4,171
Other 3,533 2,725
-------- -------
Total other assets $ 19,201 $20,092
======== =======
66
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
7. DEPOSITS
A summary of deposit balances, by type, is as follows at December 31, 2001
and 2000:
2001 2000
---- ----
(In thousands)
Demand .............................. $ 82,758 $ 76,750
NOW ................................. 80,970 79,978
Savings ............................. 150,836 136,430
Money market ........................ 110,199 115,800
Escrow .............................. 729 863
-------- --------
Total non-certificate accounts ... 425,492 409,821
-------- --------
Term certificates less than $100,000 198,668 212,360
Term certificates of $100,000 or more 118,569 107,413
-------- --------
Total certificate accounts ....... 317,237 319,773
-------- --------
Total deposits ................... $742,729 $729,594
======== ========
A summary of certificate accounts by maturity is as follows at December 31,
2001 and 2000:
2001 2000
---------------- --------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Within 1 year ........ $238,270 4.49% $226,596 6.03%
Over 1 year to 3 years 56,140 4.80 72,084 6.47
Over 3 years ......... 22,827 6.08 21,093 6.38
-------- --------
$317,237 4.67% $319,773 6.15%
======== ========
67
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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, 2001 and 2000:
2001 2000
-----------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Fixed rate advances maturing:
2001.................. $ -- --% $ 49,000 6.59%
2002.................. 60,000 2.84 -- --
2002.................. 1,484 * 6.13 3,166 * 6.13
2003.................. 5,000 5.32 3,000 6.61
2003.................. 5,886 * 4.81 2,847 * 6.65
2004.................. 10,000 5.10 -- --
2004.................. 1,917 * 6.45 2,476 * 6.45
2006.................. 5,627 4.58 627 5.67
2006.................. 629 * 6.50 698 * 6.50
2007.................. 4,000 5.95 4,000 5.95
2007.................. 1,727 * 6.71 1,962 * 6.71
2009.................. 7,000 5.40 7,000 5.40
2010.................. 16,000 5.74 20,000 5.84
2010.................. 3,084 * 6.21 -- --
2011.................. 5,610 4.95 610 5.70
2013.................. 6,000 5.19 6,000 5.19
-------- --------
Total FHLB advances $133,964 4.26% $101,386 6.18%
======== ========
* Amortizing advances requiring monthly principal and interest payments.
At December 31, 2001, certain FHLB advances are callable in the amounts of
$33,000,000, $9,000,000 and $5,000,000 during 2002, 2003 and 2004, 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. No amounts
were outstanding under this line during 2001 and 2000.
68
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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, 2001 and 2000:
2001 2000
---- ----
(Dollars in thousands)
Balance at year end ................................... $1,890 $2,030
Fair value of securities underlying the
agreements at year end ............................. $2,312 $4,177
Interest rate on year end balance ..................... 1.74% 6.00%
Average amount outstanding during year ................ $1,584 $1,683
Maximum amount outstanding at
any month end ...................................... $2,340 $2,980
Weighted average interest rate during the year ........ 3.78% 5.88%
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, 2001 and 2000, there were no outstanding
borrowings against this agreement.
10. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
(In thousands)
Current tax provision:
Federal .............................. $ 3,496 $ 4,024 $ 1,743
State ................................ 245 1,121 571
------- ------- -------
3,741 5,145 2,314
------- ------- -------
Deferred tax provision (benefit):
Federal .............................. 531 (1,822) (75)
State ................................ 77 (561) 104
------- ------- -------
608 (2,383) 29
------- ------- -------
Change in valuation reserve ............. -- (402) (348)
------- ------- -------
$ 4,349 $ 2,360 $ 1,995
======= ======= =======
69
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Statutory tax rate .............................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit ...... 1.6 5.3 5.9
Dividends received deduction ................. (1.9) (3.3) (2.9)
Non-taxable appreciation of securities donated -- -- (3.6)
Change in valuation reserve .................. -- (5.8) (4.6)
Other, net ................................... (0.9) 3.8 (2.6)
---- --- ----
Effective tax rates .......................... 32.8% 34.0% 26.2%
==== ==== ====
The components of the net deferred tax liability are as follows at December 31,
2001 and 2000
2001 2000
---- ----
(In thousands)
Deferred tax liability:
Federal .................................. $ 10,352 $ 10,898
State .................................... 623 635
-------- --------
10,975 11,533
Deferred tax asset:
Federal .................................. (5,090) (5,652)
State .................................... (1,312) (1,399)
-------- --------
(6,402) (7,051)
-------- --------
Net deferred tax liability ............... $ 4,573 $ 4,482
======== ========
70
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows at December 31, 2001 and 2000:
2001 2000
-------- ---------
(In thousands)
Investments:
Net unrealized gain on securities
available for sale .................... $ 10,087 $ 10,604
Other ................................... 653 649
Depreciation ............................ 16 53
Allowance for loan losses ............... (4,295) (4,126)
Employee benefit plans .................. (736) (1,192)
Charitable contribution carryover ....... (1,288) (1,598)
Other ................................... 136 92
-------- ---------
Net deferred tax liability .............. $ 4,573 $ 4,482
======== =========
A summary of the change in the net deferred tax liability is as follows for the
years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
(In thousands)
Balance at beginning of year ....................... $ 4,482 $ 6,073 $7,252
Deferred tax (benefit) provision ................... 608 (2,383) 29
Deferred tax effects of net unrealized (losses)
gains on securities available for sale ........... (517) 1,194 (860)
Utilization of valuation reserve ................... -- (402) (348)
------- -------- ------
Balance at end of year ............................. $ 4,573 $ 4,482 $6,073
======= ======== ======
A summary of the change in the valuation reserve applicable to the deferred tax
assets is as follows for the years ended December 31, 2000 and 1999:
2001 2000
---- ----
(In thousands)
Balance at beginning of year .......................... $ 402 $ 750
Benefits utilized by current year operations .......... (402) (348)
Change in future income assumptions ................... -- --
---- ----
Balance at end of year ................................ $-- $ 402
==== ====
71
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
The valuation reserve at December 31, 1999 related primarily to a
charitable contribution carryover, which 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,
2001 or December 31, 2000.
The federal income tax reserve for loan losses at the Bank's base year is
$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 $346,000
has not been provided.
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, 2001 and 2000:
2001 2000
---- ----
(In thousands)
Commitments to grant loans ............................ $23,031 $37,882
Unused funds on commercial lines of credit ............ 46,059 48,485
Unadvanced funds on home equity and reddi-cash
lines of credit ..................................... 38,909 36,672
Unadvanced funds on construction loans ................ 8,659 12,350
Standby letters of credit ............................. 1,817 2,004
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 to be 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.
72
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 2001, pertaining to banking premises and
equipment, future minimum rent commitments are as follows:
Years Ending
December 31, (In thousands)
------------
2002 $ 417
2003 432
2004 432
2005 398
2006 351
Thereafter 2,139
-----
$4,169
======
The leases contain options to extend for periods up to twenty years. The
cost of such rentals is not included above. Total rent expense for the years
ended December 31, 2001, 2000 and 1999 amounted to $375,000, $593,000 and
$448,000, 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.
73
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
12. STOCKHOLDERS' EQUITY
Minimum regulatory capital requirements
The Bank is 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 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 savings and loan holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the 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, 2001 and 2000, that
the Bank met the capital adequacy requirements.
As of December 31, 2001, Berkshire Bank met the conditions to be classified
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. As part of management's revised strategy to address the
level of automobile loans and the overall credit risk to Berkshire Bank,
management has determined to maintain capital levels in an amount in excess of
the regulatory requirements and in amounts which management will determine in
consideration of the amount of lower quality of sub-prime automobile loans in
the loan portfolio.
The Company's and Bank's actual capital amounts and ratios as of December 31,
2001 and 2000 are also presented in the table.
At December 31, 2001
-------------------------------------------------------------------
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 $133,240 15.73% N/A N/A N/A N/A
Berkshire Bank 111,640 13.38 $66,749 8.0% $83,437 10.0%
Tier 1 capital to risk weighted assets:
Berkshire Hills Bancorp, Inc 109,895 12.98 N/A N/A N/A N/A
Berkshire Bank 88,450 10.60 33,375 4.0 50,062 6.0
Tier 1 capital to average assets:
Berkshire Hills Bancorp, Inc 109,895 11.02 N/A N/A N/A N/A
Berkshire Bank 88,450 9.05 39,108 4.0 48,885 5.0
74
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
At December 31, 2001
-------------------------------------------------------------------
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% N/A N/A 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 N/A N/A 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 N/A N/A N/A N/A
Berkshire Bank 98,429 10.64 37,003 4.0 46,253 5.0
Common stock
On March 28, 2001, the Board of Directors approved a dividend reinvestment
plan and authorized its implementation. The plan, which is available to all
shareholders of record of the Company's common stock, permits the reinvestment
of all cash dividends, the deposit of shares for safekeeping and the sale and
gifting of shares held under the plan. Common shares purchased pursuant to this
plan were 3,094 shares. All shares are purchased in open market transactions.
During 2001, the Company repurchased approximately 1,249,000 shares of
outstanding common stock under a stock repurchase plan which began in January of
this year. The Company also announced on November 15, 2001 that its Board of
Directors approved an additional repurchase program for 328,965 shares or 5%, of
its outstanding common stock and at December 31, 2001, had 174,812 shares
remaining to be purchased in the latest 5% repurchase.
75
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
13. EMPLOYEE BENEFIT PLANS
Defined benefit pension plan
The Company terminated its defined benefit pension plan effective February
24, 2001. During the second quarter of 2001, the Company recorded a loss of
$167,000 from the curtailment of its defined benefit pension plan. The final
plan settlement was approved by the IRS in the fourth quarter. The settlement
gain was $2,341,000.
The Company had provided 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 became a participant in
the pension plan. Participants became fully vested when credited with three
years of service.
Information pertaining to the activity in the plan is as follows:
Plan Years Ended October 31,
----------------------------
2000 1999
---- ----
(In thousands)
Change in plan assets:
Fair value of plan assets at beginning of year $ 11,047 $ 9,151
Actual return on plan assets ................. 1,639 1,753
Employer contribution ........................ 676 348
Benefits paid ................................ (405) (205)
-------- --------
Fair value of plan assets at end of year ..... 12,957 11,047
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ...... 9,492 9,518
Service cost ................................. 564 519
Interest cost ................................ 736 642
Actuarial gain ............................... (18) (982)
Benefits paid ................................ (405) (205)
-------- --------
Benefit obligation at end of year ............ 10,369 9,492
-------- --------
Funded status ................................ 2,588 1,555
Unrecognized net actuarial gain .............. (4,872) (4,286)
Unrecognized prior service cost .............. 171 183
-------- --------
Accrued pension cost ......................... $ (2,113) $ (2,548)
======== ========
76
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
The components of net periodic pension cost are as follows for the plan year
ended October 31, 2000 and 1999:
2000 1999
---- ----
(In thousands)
Service cost ......................................... $ 564 $ 519
Interest cost ........................................ 736 642
Expected return on plan assets ....................... (885) (732)
Amortization of prior service cost ................... 12 11
Recognized net actuarial gain ........................ (186) (104)
----- -----
$ 241 $ 336
===== =====
Actuarial assumptions used in accounting were:
2000 1999
---- ----
Discount rate on benefit obligations ................. 7.75% 6.75%
Rates of increase in compensation levels ............. 4.50 4.50
Expected long-term rates of return on plan assets .... 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. During 2001, the Company has chosen to
make matching contributions equal to 100% of the first 4% of an employee's
compensation contributed to the 401(k) Plan. The Company made matching
contributions which amounted to $528,000, $237,000 and $209,000, respectively,
for the years ended December 31, 2001, 2000 and 1999.
Supplemental executive retirement plan
The Company has nonqualified supplemental executive 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, 2001 and 2000, the Company has an accrued expense payable in the amount of
$799,000 and $808,000, respectively, representing the present value of future
payments under the supplemental retirement plans. In some instances, the Company
has also entered into split-dollar life insurance agreements with senior
executives to provide supplemental retirement benefits.
Incentive plan
The Company has an incentive plan ("the Plan") whereby all management and
staff members are eligible to receive a bonus, tied to performance. The
structure of the Plan is to be reviewed on an annual basis by the Executive
Committee. The Plan year end is December 31. Incentive compensation expense for
the years ended December 31, 2001, 2000 and 1999 amounted to $600,000, $874,000
and $1,132,000, respectively.
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, 2001 and 2000, the Company had an accrued liability
in the amount of $535,000 and $584,000, respectively, for payment of future
premiums under this plan.
77
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
14. STOCK-BASED INCENTIVE PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
Stock options
Under the Company's Stock-Based Incentive Plan, the Company may grant
options to its directors, officers and employees for up to 767,376 shares of
common stock. Both incentive stock options and non-statutory stock options may
be granted under the plan. The exercise price of each option equals the market
price of the Company's stock on the date of grant and an option's maximum term
is ten years. Options vest at 20% per year.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the stock options. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by SFAS No. 123, the Company's net income
(in thousands) and earnings per share would have been adjusted to the pro forma
amounts indicated below:
Year Ended
December 31,
2001
----
(In thousands, except for per share data)
Net income ............................ As reported $ 8,911
Pro forma $ 8,556
Earnings per share .................... As reported $ 1.42
Pro forma $ 1.37
Earnings per share - .................. As reported $ 1.35
assuming dilution ..................... Pro forma $ 1.30
The fair value of each option grant is estimated on the date of grant
using the Modified Roll Geske option pricing model with the following
weighted-average assumptions:
Year Ended
December 31,
2001
----
Dividend yield 2.12%
Expected life in years 10 years
Expected volatility 18.01%
Risk-free interest rate 5.12%
A summary of the status of the Company's stock options for the year ended
December 31, 2001 is presented below:
2001
-------------------------
Weighted Average
Shares Exercise Price
------ --------------
Fixed Options:
Outstanding at beginning of year -- $ --
Granted ........................ 767,366 16.75
Exercised ...................... -- --
Forfeited ...................... --
-------
Outstanding at end of year ..... 767,366 $16.75
=======
Options exercisable at year-end -- $ --
Weighted-average fair value of
options granted during the year $ 3.44
78
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
Information pertaining to options outstanding at December 31, 2001 is as
follows:
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
$16.75 767,366 9.2 years --
======= ============
Stock awards
Under the Company's Stock-Based Incentive Plan, the Company may grant
stock awards to its directors, officers and employees for up to 306,950 shares
of common stock. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for stock awards. The stock awards vest at 20% per
year. The fair market value of the stock allocations, based on the market price
at date of grant, is recorded as unearned compensation. Unearned compensation is
amortized over the periods to be benefited. The Company recorded compensation
cost related to the stock awards of approximately $1,000,000 in 2001. No
compensation expense was recorded in 2000 as the plan was approved in 2001.
A summary of the status of the Company's stock awards is presented below:
Year Ended
December 31,
2001
-------
Balance at beginning of year ....................... --
Granted .......................................... 306,945
Cancelled ........................................ --
-------
Balance at end of year ............................. 306,945
=======
Fair value of stock awards granted during the year $ 17.76
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 613,900 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 principal.
At December 31, 2001, the remaining principal balance is payable as
follows:
Years Ending
December 31, (In thousands)
- ------------
2002 $ 245
2003 269
2004 294
2005 325
2006 356
Thereafter 5,278
------
$6,767
======
79
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
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
participants as the loan is paid. Total compensation expense applicable to the
ESOP amounted to $773,000 for the year ended December 31, 2001. Shares held by
the ESOP include the following at December 31, 2001:
Allocated ............... 43,016
Committed to be allocated 40,938
Unallocated ............. 529,946
-------
613,900
=======
Cash dividends received on allocated shares are allocated to participants
and cash dividends received on shares held in suspense are applied to repay the
outstanding debt of the ESOP. The fair value of these shares was approximately
$12,431,000 at December 31, 2001.
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 $6,089,000 and $3,967,000 at
December 31, 2001 and 2000, respectively.
During the year ended December 31, 2001 total principal additions were
$2,941,000 and total principal payments were $819,000.
16. 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, 2001 and 2000, the Bank's retained earnings available for
the payment of dividends was $66,749,000 and $62,649,000, respectively, and
funds available for loans or advances amounted to $11,164,000 and $12,227,000,
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.
80
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
17. 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.
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.
81
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows at December 31, 2001 and 2000:
2001 2000
------------------ ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Financial assets:
Cash and cash equivalents ....... $ 42,123 $ 42,123 $ 43,612 $ 43,612
Securities available for sale ... 104,446 104,446 99,309 99,309
Securities held to maturity ..... 33,263 33,409 32,238 32,342
Federal Home Loan Bank stock .... 7,027 7,027 5,651 5,651
Loans, net ...................... 791,920 800,669 783,405 772,970
Accrued interest receivable ..... 5,873 5,873 6,310 6,310
Savings Bank Life Insurance stock 2,043 2,043 2,043 2,043
Financial liabilities:
Deposits ........................ 742,729 748,615 729,594 730,451
Federal Home Loan Bank advances . 133,964 137,748 101,386 102,874
Securities sold under agreements
to repurchase ................. 1,890 1,890 2,030 2,030
82
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
18. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Condensed financial information pertaining only to the parent company,
Berkshire Hills Bancorp, Inc. which commenced operations on June 27, 2000 is as
follows:
CONDENSED BALANCE SHEET
At December 31,
2001 2000
---- ----
(In thousands)
Assets
Cash due from Berkshire Bank ................ $ 6,777 $ 12,740
Securities available for sale, at fair value 6,119 13,937
Investment in common stock of Berkshire Bank 113,050 124,590
Investment in common stock of Berkshire Hills
Funding Corporation ......................... 6,949 8,020
Investment in common stock of Berkshire
Hills Technology, Inc. .................... 4,743 --
Other assets ................................ 1,712 2,050
-------- --------
Total assets .............................. $139,350 $161,337
======== ========
Liabilities and Stockholders' Equity
Accounts payable ............................ $ 27 $ 15
Stockholders' equity ........................ 139,323 161,322
-------- --------
Total liabilities and stockholders' equity $139,350 $161,337
======== ========
83
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
CONDENSED STATEMENT OF INCOME
Years Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
Income:
Dividends from Berkshire Bank ............................ $ 14,650 $ 800
Dividends from Berkshire Hills Funding Corporation ....... 1,700 --
Interest on securities ................................... 779 205
Other .................................................... 206 --
-------- -------
Total income ......................................... 17,335 1,005
-------- -------
Operating expenses:
Charitable contribution .................................. -- 5,684
Other .................................................... 459 72
-------- -------
Total operating expenses ............................. 459 5,756
-------- -------
Income (loss) before income taxes and equity in
undistributed income (loss) of subsidiaries ............ 16,876 (4,751)
Applicable income tax provision (benefit) ................ 138 (1,932)
-------- -------
Income (loss) before equity in undistributed income (loss)
of subsidiaries ........................................ 16,738 (2,819)
Equity in undistributed income (loss) of Berkshire Bank .. (6,799) 7,082
Equity in undistributed income (loss) of Berkshire Hills
Funding Corporation ...................................... (1,071) 319
Equity in undistributed income of Berkshire Hills
Technology, Inc ........................................ 43 --
-------- -------
Net income ........................................... $ 8,911 $ 4,582
======== =======
84
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(concluded)
CONDENSED STATEMENT OF CASH FLOWS
Years Ended
December 31,
--------------------
2001 2000
---- ----
(In thousands)
Cash flows from operating activities:
Net income ............................................ $ 8,911 $ 4,582
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed loss (income) of Berkshire Bank 6,799 (7,082)
Equity in undistributed loss (income) of
Berkshire Hills Funding Corporation ................... 1,071 (319)
Equity in undistributed income of
Berkshire Hills Technology, Inc ....................... (43) --
Charitable contribution in the form of
Berkshire Hills Bancorp, Inc. common stock ............ -- 5,684
Deferred tax benefit .................................. (310) (1,598)
Net accretion (amortization) of securities ............ 5 (10)
Other, net ............................................ 591 (320)
-------- --------
Net cash provided by operating activities .......... 17,024 937
-------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales ............................................... 4,666 1,000
Maturities .......................................... 15,460 1,950
Principal payments .................................. 147 25
Purchases ........................................... (12,460) (16,958)
Investment in Berkshire Bank .......................... -- (34,192)
Investment in Berkshire Hills Funding Corporation ..... -- (7,701)
Investment in Berkshire Hills Technology, Inc. ........ (4,700) --
-------- --------
Net cash provided by (used in) investing activities 3,113 (55,876)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ................ -- 68,386
Payments to acquire treasury stock .................... (23,292) --
Dividends paid ........................................ (2,808) (707)
-------- --------
Net cash provided by investing activities .......... (26,100) 67,679
-------- --------
Net change in cash and cash equivalents ................. (5,963) 12,740
Cash and cash equivalents at beginning of period ........ 12,740 --
-------- --------
Cash and cash equivalents at end of period .............. $ 6,777 $ 12,740
======== ========
85
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
19. QUARTERLY DATA (UNAUDITED)
Quarterly results of operations for the years ended December 31, 2001
and 2000 are as follows:
2001 2000
--------------------------------------------- -----------------------------------------------
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. $ 18,300 $ 19,096 $ 19,264 $ 19,136 $ 19,503 $ 18,826 $ 17,143 $ 15,546
Interest expense ...... 7,233 8,463 8,751 9,113 9,235 8,639 8,250 7,343
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income ... 11,067 10,633 10,513 10,023 10,268 10,187 8,893 8,203
Provision for loan losses(1) 4,550 945 840 840 740 810 810 810
Other income .......... 4,420 3,606 1,447 1,110 1,242 1,161 965 1,378
Operating expenses(2) . 8,380 9,429 7,374 7,201 7,057 6,742 11,954 6,432
Provision (benefit) for
income taxes .......... 838 1,258 1,239 1,014 1,256 1,297 (975) 782
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ..... $ 1,719 $ 2,607 $ 2,507 $ 2,078 $ 2,457 $ 2,499 $ (1,931) $ 1,557
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share:(3)
Basic ................. $ 0.30 $ 0.42 $ 0.39 $ 0.31 $ 0.35 $ 0.35 N/A N/A
Diluted ............... 0.28 0.40 0.37 0.30 0.35 0.35 N/A N/A
Notes: (1)The increase in the fourth quarter provision loan lossesis
attributable to a more aggressive 2001 for charge-off policy for
automobile loans.
(2)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.
(3)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.
86
PART III
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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" in
Berkshire Hills' Proxy Statement for the 2002 Annual Meeting of Stockholders is
incorporated by reference. For information concerning officers of the Company,
reference is made to Part I, Item 1 A, "Business--Executive Officers of the
Registrant" in this report. Reference is made to the cover page of this report
and to the section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" 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 sections captioned "Executive
Compensation" and "Directors 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.
87
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statement
o Independent Auditors' Report
o Consolidated Balance Sheets as of December 31, 2001 and 2000
o Consolidated Statements of Income for the Years Ended December 31,
2001, 2000 and 1999
o Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2001, 2000, and 1999
o Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000, and 1999
o Notes to Consolidated Financial Statements
(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.(2)
10.2 Employment Agreement between Berkshire Bank and Robert A. Wells(2)
10.3 Employment Agreement between Berkshire Bank and Susan M. Santora(2)
10.4 Employment Agreement between Berkshire Bank and Michael P. Daly(2)
10.5 Employment Agreement between Berkshire Bank and Charles F. Plungis,
Jr.(2)
10.6 Employment Agreement between Berkshire Hills Bancorp, Inc. and James
A. Cunningham, Jr.(2)
10.7 Employment Agreement between Berkshire Hills Bancorp, Inc. and Robert
A. Wells(2)
10.8 Employment Agreement between Berkshire Hills Bancorp, Inc. and Susan
M. Santora(2)
10.9 Employment Agreement between Berkshire Hills Bancorp, Inc. and Michael
P. Daly(2)
10.10 Employment Agreement between Berkshire Hills Bancorp, Inc. and
Charles F. Plungis, Jr.(2)
10.11 Form of Berkshire Bank Employee Severance Compensation Plan(1)
10.12 Form of Berkshire Bank Supplemental Executive Retirement Plan(1)
10.13 Berkshire Hills Bancorp, Inc. 2001 Stock-Based Incentive Plan(3)
11.0 Statement re: Computation of Per Share Earnings
21.0 Subsidiary Information is incorporated herein by reference to Part I,
Item 1, "Business - Subsidiary Activities"
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.
(2) Incorporated herein by reference into this document from the Exhibits to
the Form 10-K as filed in March 29, 2001 (File No. 001-15781)
(3) Incorporated herein by reference into this document from the appendix to
the proxy statement as filed on December 7, 2000 (File No. 001-15781)
(b) Reports on Form 8-K None.
88
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 27, 2002 By: /s/ James A. Cunningham, Jr.
----------------------------
James A. Cunningham, Jr. President,
Chief Executive Officer and Director
/s/ James A. Cunningham, Jr. President, Chief Executive Officer March 27, 2002
- ----------------------------- and Director
James A. Cunningham, Jr. (principal executive officer)
/s/ Charles F. Plungis, Jr. Senior Vice President, Treasurer March 27, 2002
- ------------------------ and Chief Financial Officer
Charles F. Plungis, Jr. (principal accounting
and financial officer)
/s/ Robert A. Wells Chairman of the Board March 27, 2002
- -------------------
Robert A. Wells
/s/ Thomas O. Andrews Director March 27, 2002
- -------------------
Thomas O. Andrews
/s/ Thomas R. Dawson, CPA Director March 27, 2002
- -------------------
Thomas R. Dawson, CPA
/s/ Henry D. Granger Director March 27, 2002
- -------------------
Henry D. Granger
/s/ A. Allen Gray, Esq. Director March 27, 2002
- -------------------
A. Allen Gray, Esq.
/s/ John Kittredge Director March 27, 2002
- -------------------
John Kittredge
/s/ Peter J. Lafayette Director March 27, 2002
- -------------------
Peter J. Lafayette
/s/ Edward G. McCormick, Esq. Director March 27, 2002
- -------------------
Edward G. McCormick, Esq.
89
/s/ Catherine B. Miller Director March 27, 2002
- -------------------
Catherine B. Miller
/s/ Michael G. Miller Director March 27, 2002
- -------------------
Michael G. Miller
/s/ Raymond B. Murray, III Director March 27, 2002
- -------------------
Raymond B. Murray, III
/s/ Louis J. Oggiani, Esq. Director March 27, 2002
- -------------------
Louis J. Oggiani, Esq.
/s/ Robert S. Raser Director March 27, 2002
- -------------------
Robert S. Raser
/s/ Corydon L. Thurston Director March 21, 2001
- -------------------
Corydon L. Thurston
/s/ Ann H. Trabulsi Director March 27, 2002
- -------------------
Ann H. Trabulsi
/s/ William E. Williams Director March 27, 2002
- -------------------
William E. Williams
/s/ Anne Everest Wojtkowski Director March 27, 2002
- -------------------
Anne Everest Wojtkowski
90