UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________
Commission File Number 1-15781
BERKSHIRE HILLS BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3510455
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 North Street, Pittsfield, Massachusetts 01201
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 443-5601
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
The Issuer had 6,127,927 shares of common stock, par value $0.01 per share,
outstanding as of August 7, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of 1
June 30, 2002 and December 31, 2001
Consolidated Statements of Income for the Three and Six 2
Months Ended June 30, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity 3
for the Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the 4
Six Months Ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
June 30, December 31,
2002 2001
----------- -----------
(In thousands)
Assets:
Cash and due from banks $ 25,339 $ 22,652
Short term investments 17,398 19,471
----------- -----------
Total cash and cash equivalents 42,737 42,123
Securities available for sale, at fair value 118,906 104,446
Securities held to maturity, at amortized cost 28,626 33,263
Federal Home Loan Bank stock, at cost 7,313 7,027
Savings Bank Life Insurance stock, at cost 2,043 2,043
Loans 801,859 800,414
Loans held for sale, at lower of cost or fair value -- 2,540
Allowance for loan losses (10,962) (11,034)
----------- -----------
Net loans 790,897 791,920
Premises and equipment, net 13,539 14,213
Foreclosed real estate 2,000 --
Accrued interest receivable 5,757 5,873
Goodwill and other intangibles 10,242 10,592
Other assets 20,218 19,201
----------- -----------
Total assets $ 1,042,278 $ 1,030,701
=========== ===========
Liabilities and Stockholders' Equity:
Deposits 750,111 742,729
Federal Home Loan Bank advances 144,726 133,964
Securities sold under agreements to repurchase 1,040 1,890
Net deferred tax liability 3,819 4,573
Accrued expenses and other liabilities 4,764 5,099
----------- -----------
Total liabilities 904,460 888,255
----------- -----------
Minority Interests 2,866 3,123
Stockholders' Equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized;
None issued or outstanding) -- --
Common stock ( $.01 par value: 26,000,000 shares authorized;
shares issued: 7,673,761 at June 30, 2002 and
December 31, 2000; shares outstanding: 6,141,727 at
June 30, 2002 and 6,425,140 at December 31, 2001) 77 77
Additional paid-in capital 74,410 74,146
Unearned compensation (10,318) (11,101)
Retained earnings 83,080 80,657
Accumulated other comprehensive income 17,289 18,836
Treasury stock, at cost (1,532,034 shares at June 30, 2002
and 1,248,621 shares at December 31, 2001) (29,586) (23,292)
----------- -----------
Total stockholders' equity 134,952 139,323
----------- -----------
Total liabilities and stockholders' equity $ 1,042,278 $ 1,030,701
=========== ===========
See accompanying notes to unaudited consolidated financial statements
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands, except per share amounts)
Interest and dividend income:
Bond interest $ 1,316 $ 1,451 $ 2,572 $ 2,964
Stock dividends 330 356 620 750
Short term investment interest 148 69 205 144
Loan interest 14,774 17,388 29,731 34,542
-------- -------- -------- --------
Total interest and dividend income 16,568 19,264 33,128 38,400
-------- -------- -------- --------
Interest expense:
Interest on deposits 4,467 6,989 9,131 14,250
Interest on FHLB advances 1,430 1,701 2,844 3,374
Interest on securities sold under agreements
to repurchase and other borrowings 6 61 14 240
-------- -------- -------- --------
Total interest expense 5,903 8,751 11,989 17,864
-------- -------- -------- --------
Net interest income 10,665 10,513 21,139 20,536
Provision for loan losses 1,315 840 2,825 1,680
-------- -------- -------- --------
Net interest income, after provision for loan losses 9,350 9,673 18,314 18,856
-------- -------- -------- --------
Noninterest income:
Customer service fees 662 516 1,109 923
Trust department fees 467 445 954 875
Loan fees 115 132 315 251
Gain(loss) on securities, net 12 278 (8) 277
License maintenance & processing fees 1,093 -- 2,170 --
License sales & other fees 545 -- 909 --
Other income 192 76 381 231
-------- -------- -------- --------
Total noninterest income 3,086 1,447 5,830 2,557
-------- -------- -------- --------
Operating expenses:
Salaries & benefits 5,322 3,980 10,850 7,602
Occupancy & equipment 1,278 952 2,696 2,041
Marketing & advertising 124 143 212 289
Data processing 156 269 346 440
Professional services 306 177 605 430
Office supplies 194 235 377 520
Foreclosed real estate and other loans, net 757 700 1,240 1,236
Amortization of other intangibles 175 125 350 249
Minority Interests (90) -- (257) --
Other expenses 1,046 793 2,075 1,768
-------- -------- -------- --------
Total operating expenses 9,268 7,374 18,494 14,575
-------- -------- -------- --------
Income before taxes 3,168 3,746 5,650 6,838
Provision for income taxes 1,030 1,239 1,836 2,253
-------- -------- -------- --------
Net income $ 2,138 $ 2,507 $ 3,814 $ 4,585
======== ======== ======== ========
Earnings per share:
Basic $ 0.39 $ 0.39 $ 0.69 $ 0.70
Diluted $ 0.36 $ 0.37 $ 0.64 $ 0.67
Weighted average shares outstanding:
Basic 5,455 6,427 5,497 6,552
Diluted 5,906 6,786 5,935 6,849
See accompanying notes to unaudited consolidated financial statements.
2
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
UNAUDITED
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
Balance at December 31, 2001 $ 77 $ 74,146 $ (11,101) $ 80,657 $ 18,836 $ (23,292) $ 139,323
Comprehensive income :
Net income -- -- -- 3,814 -- -- 3,814
Change in net unrealized gain on
securities available for sale, net of
re-classification adjustments and
tax effects -- -- -- -- (1,547) -- (1,547)
---------
Total comprehensive income 2,267
Cash dividends declared ($.24 per share) -- -- -- (1,391) -- -- (1,391)
Treasury stock purchased -- -- -- -- -- (6,294) (6,294)
Change in unearned compensation - MRP -- 74 545 -- -- -- 619
Change in unearned compensation - ESOP -- 190 238 -- -- -- 428
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2002 $ 77 $ 74,410 $ (10,318) $ 83,080 $ 17,289 $ (29,586) $ 134,952
========= ========= ========= ========= ========= ========= =========
Balance at December 31, 2000 $ 77 $ 74,054 $ (7,187) $ 74,554 $ 19,824 $ -- $ 161,322
Comprehensive income:
Net Income -- -- -- 4,585 -- -- 4,585
Change in net unrealized gain on
securities available for sale, net of
re-classification adjustments and
tax effects -- -- -- -- 228 -- 228
---------
Total comprehensive income 4,813
Cash dividends declared -- -- -- (1,449) -- -- (1,449)
Treasury stock purchased -- -- -- -- -- (6,824) (6,824)
Purchase of common stock - MRP -- -- (5,453) -- -- -- (5,453)
Change in unearned compensation - MRP -- -- 454 -- -- -- 454
Change in unearned compensation - ESOP -- 108 257 -- -- -- 365
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2001 $ 77 $ 74,162 $ (11,929) $ 77,690 $ 20,052 $ (6,824) $ 153,228
========= ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
3
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended June 30,
-------------------------
2002 2001
------- -------
(In thousands)
Cash flows from operating activities:
Net income $ 3,814 $ 4,585
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 2,825 1,680
Net amortization of securities 335 86
Depreciation and amortization expense 1,204 857
Amortization of other intangibles 350 249
Management Rewards Plan Expense 619 454
ESOP Plan Expense 428 365
Loss(gain) on sales and dispositions of securities, net 8 (277)
Loss on sale of equipment -- 35
Deferred tax benefit (2) (3)
Net change in loans held for sale 2,540 (1,200)
Minority interest (257) --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (901) 3,514
Accrued expenses and other liabilities (335) (101)
------- -------
Net cash provided by operating activities 10,628 10,244
------- -------
Cash flows from investing activities:
Activity in available for sale securities:
Sales 5,785 6,430
Maturities 23,441 17,202
Principal payments 12,190 6,806
Purchases (58,425) (27,930)
Activity in held to maturity securities:
Maturities 9,057 6,149
Principal payments 12,297 10,269
Purchases (16,810) (15,736)
Purchase of Federal Home Loan Bank stock (286) (1,376)
Loan originations, net of principal payments (6,342) (29,707)
Additions to banking premises and equipment (530) (1,447)
Proceeds from sales of foreclosed real estate -- 50
Proceeds from sale of equipment -- 20
Payment for purchase of EastPoint Technologies, LLC -- (7,300)
------- -------
Net cash used by investing activities (19,623) (36,570)
------- -------
(continued)
4
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
Unaudited
Six Months Ended June 30,
-------------------------
2002 2001
------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 7,382 $ (4,158)
Net decrease in securities sold under agreements
to repurchase (850) (1,000)
Proceeds from Federal Home Loan Bank advances with maturities
in excess of three months 55,172 90,000
Repayments of Federal Home Loan Bank advances with maturities
in excess of three months (44,410) (50,849)
Proceeds of borrowings with maturities of three months or less, net of
repayments -- --
Net decrease in loans sold with recourse -- (6,542)
Treasury stock purchased (6,294) (6,824)
Purchase of common stock in connection with employee and
non-employee directors benefit programs -- (5,453)
Dividends paid (1,391) (1,449)
-------- --------
Net cash provided by financing activities 9,609 13,725
-------- --------
Net change in cash and cash equivalents 614 (12,601)
Cash and cash equivalents at beginning of period 42,123 43,612
-------- --------
Cash and cash equivalents at end of period $ 42,737 $ 31,011
======== ========
Supplemental cash flow information:
Interest paid on deposits $ 9,176 $ 14,461
Interest paid on borrowed funds 2,968 3,374
Income taxes paid 1,065 1,120
Transfers from loans to foreclosed real estate 2,000 26
See accompanying notes to unaudited consolidated financial statements.
5
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)
Note 1. Basis of Presentation
- -------------------------------
The consolidated interim financial statements of Berkshire Hills
Bancorp, Inc. ("Berkshire Hills" or the "Company") and its wholly owned
subsidiaries, Berkshire Bank (the "Bank"), Berkshire Hills Funding Corp., and
Berkshire Hills Technology, Inc. herein presented are intended to be read in
conjunction with the consolidated financial statements presented in the
Company's most recent Securities and Exchange Commission Form 10-K and
accompanying notes to the Consolidated Financial Statements filed by the Company
for the year ended December 31, 2001. The consolidated financial information at
June 30, 2002 and for the three and six month periods ended June 30, 2002 and
2001 are derived from unaudited consolidated financial statements but, in the
opinion of management, reflect all adjustments necessary to present fairly the
results for these interim periods in accordance with accounting principles
generally accepted in the United States of America. These adjustments consist
only of normal recurring adjustments. The interim results are not necessarily
indicative of the results of operations that may be expected for the entire
year.
Note 2. Commitments
- ---------------------
At June 30, 2002, the Company had outstanding commitments to originate
new residential and commercial loans totaling $26.3 million, which are not
reflected on the consolidated balance sheet. In addition, unadvanced funds on
home equity lines totaled $42.1 million and unadvanced commercial lines,
including unadvanced construction loan funds, totaled $55.8 million. The Company
anticipates it will have sufficient funds to meet these commitments.
Note 3. Earnings Per Share
- ----------------------------
Basic earnings per share represents net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share reflect additional common shares that would have been outstanding if
potential dilutive shares, such as stock options, had been issued. Unallocated
shares of common stock held by the Bank's employee stock ownership plan (the
"ESOP") are not included in the weighted average number of common shares
outstanding for either basic or diluted earnings per share calculations.
Earnings per share data is presented for the three and six months ended June 30,
2002 and 2001, respectively.
Basic earnings per share equaled $0.39 for the quarter ending June 30,
2002, based on 5,455,099 average shares outstanding as compared to $0.39 for the
quarter ending June 30, 2001 based on 6,427,320 average shares outstanding.
Diluted earnings per share equaled $0.36 for the quarter ending June 30, 2002,
based on 5,906,075 average shares outstanding as compared to $0.37 for the
quarter ending June 30, 2001 based on 6,785,865 average shares outstanding.
Basic and diluted earnings per share for the six months ending June 30,
2002 were $0.69 and $0.64 respectively, based on 5,497,431 average shares
outstanding and 5,935,479 average shares outstanding, respectively. This
compares to basic and diluted earnings per share for the six months ended June
30, 2001 of $0.70 and $0.67 respectively, based on 6,552,152 average shares
outstanding and 6,849,329 average shares outstanding, respectively.
Note 4. Book Value
- --------------------
The book value per share of Berkshire Hills' common stock at June 30,
2002 was $21.97, based on total equity of $135.0 million and outstanding shares
of 6,141,727. The book value at December 31, 2001 was $21.68, based on total
equity of $139.3 million and total outstanding shares of 6,425,140.
6
Note 5. Dividend
- ------------------
On April 24, 2002, the Company's Board of Directors approved the
payment of a cash dividend of $0.12 per share, payable on May 24, 2002, to
stockholders of record on May 9, 2002.
Note 6. Stock Repurchase Program
- ----------------------------------
During the second quarter of 2002, the Company completed its fourth 5%
stock repurchase program purchasing 23,413 shares at a cost of $517,000. The
Company also undertook a fifth stock repurchase program and in the second
quarter bought 108,600 shares at a cost of $2.5 million. The Company has
repurchased 283,413 shares at a cost of $6.3 million during 2002.
Note 7. Recent Accounting Pronouncements
- ------------------------------------------
On June 30, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. With the adoption of SFAS No. 142,
effective January 1, 2001, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill 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 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. An
annual evaluation of the Company's goodwill was completed in June 2002 and
resulted in no impairment in 2002, as of that date.
Note 8. Real Estate Investment Trust (REIT)
- ---------------------------------------------
Berkshire Hills established a REIT in the second quarter of 2001. As a
result of the REIT's operation, the Company was able to reduce its net tax
obligations by an estimated $54,000 in the second quarter of 2002 and $141,000
for the first six months of 2002. Similarly, for the year ended December 31,
2001, it is estimated the operation of the REIT reduced the Company's net tax
liability by $494,000. Recently, the Massachusetts Department of Revenue has
questioned the applicability of allowing a dividend received deduction on
dividends upstreamed from a bank established REIT to a parent company. The
ultimate resolution of the matter is uncertain. To date, the Department of
Revenue has not assessed additional taxes from the Company. However, should the
Department of Revenue prevail and assess additional taxes from the Company, the
Company could be liable for an estimated $689,000 in taxes plus interest and
penalties. Berkshire Hills believes the deductions it has taken to date are
appropriate and thus has not taken any provision in its financial statements for
any amounts that the Department of Revenue may assess in the future.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended June 30, 2002
and 2001, and should be read in conjunction with Berkshire Hills Bancorp, Inc.'s
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Forward Looking Statements
This report contains forward looking statements that are based on
assumptions and may describe future plans, strategies, and expectations of
Berkshire Hills and Berkshire Bank. These forward looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Berkshire Hills'
and Berkshire Bank's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations of Berkshire Hills and its subsidiaries
include, but are not limited to, changes in interest rates, national and
regional economic conditions, legislative and regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality and composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in Berkshire Hills' and Berkshire Bank's market
area, changes in real estate market values in Berkshire Hills' market area, and
changes in relevant accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward looking statements and
undue reliance should not be placed on such statements. Except as required by
applicable law or regulation, Berkshire Hills does not undertake, and
specifically disclaims any obligation, to publicly release the result of any
revisions which may be made to any forward looking statements to reflect events
or circumstances after the date of the statements or to reflect the occurrence
of anticipated or unanticipated events.
General
Berkshire Hills is a Delaware corporation and the holding company for
Berkshire Bank, a state-chartered savings bank headquartered in Pittsfield,
Massachusetts. Established in 1846, Berkshire Bank is one of Massachusetts'
oldest and largest independent banks. With eleven full service branch offices
serving communities throughout Berkshire County, Berkshire Bank is the largest
banking institution based in Western Massachusetts. The Bank is a
community-based financial institution that originates a variety of loan products
including real estate loans, commercial loans, and consumer loans primarily in
Berkshire County, Massachusetts and its surrounding areas. The Bank offers a
wide variety of deposit products and other investment products and financial
services to its customers, including asset management and trust services.
Berkshire Hills, through its wholly owned subsidiary Berkshire Hills Technology,
Inc., owns a 60.3% interest in EastPoint Technologies, LLC ("EastPoint"), a data
and financial services provider for financial institutions.
Recent Developments
On June 26, 2002 the Board of Directors amended the Company's Dividend
Reinvestment Plan to allow purchases of common stock of up to $5,000 to be made
each quarter. Such purchases would be made by the Plan Administrator in the open
market.
Effective July 1, 2002, Berkshire Hills was added to the Russell 3000
Index, an index of the 3,000 largest U.S. companies measured by market
capitalization. The Russell 3000 is an industry recognized benchmark that
measures the performance of the U.S. equity markets.
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Total assets at June 30, 2002 were $1.04 billion, an increase of $11.6
million, or 1.1%, from $1.03 billion at December 31, 2001. The increase in
assets was due primarily to growth in the securities portfolio. Securities,
including Federal Home Loan Bank stock and Savings Bank Life Insurance stock,
totaled $156.9 million at June 30, 2002, a $10.1 million, or 6.9%, increase from
$146.8 million at December 31, 2001. This increase was funded through a $7.4
million increase in deposits and a $10.8 million increase in Federal Home Loan
Bank advances.
8
Loans
Total loans outstanding decreased $1.1 million, or 0.1%, to $801.9
million during the first six months of 2002, as a planned decrease in sub-prime
automobile loans was nearly offset by increases in the real estate and
commercial loan portfolios. The consumer loan portfolio fell $19.5 million, or
7.2%, to $251.6 million at June 30, 2002. The automobile loan portion of the
portfolio decreased by $17.3 million during the first half of 2002 and comprised
24.78% of total loans outstanding at June 30, 2002 down from 26.90% at December
31, 2001. The Company has decided to exit the sub-prime automobile loan business
by allowing its existing sub-prime automobile loans to run off and by
discontinuing the origination of new sub-prime loans. In implementing this
strategy during the first six months of 2002, the Company saw its sub-prime
automobile loans fall from $113.9 million at December 31, 2001 to $97.1 million
at June 30, 2002. It is estimated that the balance of sub-prime automobile loans
held by the Company on December 31, 2002 will be approximately $77.0 million.
Residential one-to four-family loans declined $1.6 million to $227.8
million at June 30, 2002 as mortgage originations did not fully offset monthly
amortization and prepayments.
Commercial construction loans decreased by $8.6 million as several
large projects completed construction in the first half of 2002. In each
instance, construction loans were converted to permanent financing. The decrease
in construction loans was more than offset by a $22.6 million, or 26.8%,
increase in commercial real estate loans as several new loans were added to the
portfolio.
Commercial loans increased by $3.8 million, or 2.2%, in the first half
of 2002. The increase was the direct result of developing a large number of
smaller new relationships in Berkshire County as well as adding a new $2.0
million commercial loan to a newspaper distributor.
At June 30, 2002 At December 31, 2001
----------------------------- -----------------------------
Percent Percent
Balance of total Balance of total
------- -------- ------- --------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 227,796 28.39% $ 229,432 28.57%
Residential construction 5,354 0.67% 3,585 0.45%
Commercial one-to four-family 11,437 1.43% 11,517 1.43%
Commercial real estate 107,184 13.37% 84,538 10.53%
Commercial construction 10,797 1.35% 19,351 2.41%
Multi-family 13,597 1.70% 13,183 1.64%
--------- ----- --------- -----
Total real estate loans 376,165 46.91% 361,606 45.03%
Commercial loans 174,122 21.72% 170,305 21.21%
Consumer loans:
Automobile 198,742 24.78% 216,026 26.90%
Home equity loans 35,822 4.47% 34,439 4.30%
Other 17,008 2.12% 20,578 2.56%
--------- ----- --------- -----
Total consumer loans 251,572 31.37% 271,043 33.76%
Total loans 801,859 802,954
Less: Allowance for loan losses (10,962) 1.37% (11,034) 1.37%
--------- ---------
Loans, net $ 790,897 $ 791,920
========= =========
9
Allowance for Loan Losses
All banks that manage loan portfolios will experience losses to varying
degrees. The allowance for loan losses is the amount available to absorb these
losses and represents management's evaluation of the risks inherent in the
portfolio including the collectibility of the loans, changing collateral values,
past loan loss history, specific borrower situations, and general economic
conditions. Management continually assesses the adequacy of the allowance for
loan losses and makes monthly provisions in an amount considered adequate to
cover losses in the loan portfolio. Because future events affecting the loan
portfolio cannot be predicted with complete accuracy, there can be no assurances
that management's estimates are correct and that the existing allowance for loan
losses is adequate. However, management believes that based on the information
available to it on June 30, 2002, the Company's allowance for loan losses is
sufficient to cover losses inherent in the Company's current loan portfolio.
The allowance consists of allocated, general and unallocated
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 such as the credit history and credit quality of the
borrower, the type and geographic concentration of loans in the portfolio, and
the local economic environment. 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
losses in the portfolio.
On June 30, 2002 and December 31, 2001, the allowance for loan losses
totaled $11.0 million, or 1.37% of total loans. Charged-off loans totaled $5.0
million during the first six months this year as compared to $1.5 million last
year primarily due to continued weakness in the indirect automobile portfolio
and the institution of a new, more aggressive policy in the fourth quarter of
2001 regarding the charge-off of automobile loans. Under the new policy, all
delinquent automobile loans remain on accrual status until they are 120 days
past due at which time they are charged off, except for loans to customers in
bankruptcy proceedings, which are transferred to nonaccrual status. However,
recoveries totaled $2.1 million this year as compared to $470,000 last year, an
increase of $1.6 million, as the Company aggressively pursued the collection of
previously charged-off loans. On June 30, 2002, the allowance expressed as a
percentage of nonperforming loans was 459.82% while on June 30, 2001, it was
268.63%.
10
Six Months Ended
--------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $11,034 $10,216
Charge-offs:
Residential one-to four-family -- --
Residential construction -- --
Commercial one-to four-family -- --
Commercial real estate 360 --
Commercial construction -- --
Multi-family -- --
Commercial 226 35
Consumer (1) 4,428 1,454
------- -------
Total charge-offs 5,014 1,489
------- -------
Recoveries:
Residential one-to four-family -- --
Residential construction -- --
Commercial one-to four-family -- --
Commercial real estate -- --
Commercial construction -- --
Multi-family -- --
Commercial 138 220
Consumer (1) 1,979 250
------- -------
Total recoveries 2,117 470
------- -------
Net charge offs 2,897 1,019
Provision 2,825 1,680
------- -------
Allowance for loan losses, end of period $10,962 $10,877
======= =======
Net loans charged-off to total loans 0.36% 0.12%
Allowance for loan losses to total loans 1.37% 1.32%
Allowance for loan losses to nonperforming loans 459.82% 268.63%
Recoveries to charge-offs 42.22% 31.56%
(1) Consists primarily of automobile loans
11
Nonperforming Assets
The following table sets forth information regarding nonperforming assets
as of June 30, 2002 and December 31, 2001.
At June 30, 2002 At December 31, 2001
---------------- --------------------
(Dollars in thousands)
Nonaccruing loans:
Residential one-to four-family $ 169 $ 250
Residential construction -- --
Commercial one-to four-family 60 60
Commercial real estate -- --
Commercial construction -- --
Multi-family -- --
Commercial 1,612 2,077
Automobile 543 315
Home equity -- --
Other consumer -- --
------ ------
Total 2,384 2,702
------ ------
Other real estate owned 2,000 --
------ ------
Total nonperforming assets $4,384 $2,702
====== ======
Total nonperforming loans to total loans 0.30% 0.34%
Total nonperforming assets to total assets 0.42% 0.26%
Generally, the Company ceases accruing interest on all loans when
principal or interest payments are 90 days or more past due unless management
determines the principal and interest to be fully secured and in the process of
collection. Once management determines that interest is uncollectible and ceases
accruing interest on a loan, all previously accrued interest is reversed against
current interest income. However, in the last quarter of 2001, the Company
initiated a new policy for automobile loans whereby all delinquent automobile
loans remain on accrual status until they are 120 days past due at which time
they are charged off, except for loans to customers in bankruptcy proceedings,
which are transferred to nonaccrual status. At June 30, 2002, the Company had
$1.2 million in automobile loans that were 90 days past due and still accruing
as compared to $1.3 million at December 31, 2001.
As a result of the new policy and the reduction in sub-prime indirect
automobile loans, at June 30, 2002, total nonaccruing loans amounted to $2.4
million, a decrease of $318,000, or 11.8%, from $2.7 million at December 31,
2001. The ratio of nonperforming loans as a percentage of total loans decreased
to 0.30% at June 30, 2002 from 0.34% as of December 31, 2001. Foreclosed real
estate was $2.0 million at June 30, 2002 versus zero at December 31, 2001 as the
Company took possession of one commercial property.
Investment Securities
Securities, including Federal Home Loan Bank stock and Savings Bank
Life Insurance stock, totaled $156.9 million at June 30, 2002, a $10.1 million,
or 6.9%, increase from $146.8 million at December 31, 2001. The net unrealized
gain in the portfolio decreased by $1.5 million from December 31, 2001 to $17.3
million. This change was recognized in accumulated other comprehensive income on
the consolidated statement of changes in stockholders' equity.
12
Miscellaneous Assets
Miscellaneous assets totaled $51.8 million at June 30, 2002, an
increase of $1.9 million, or 3.8%, from $49.9 million at December 31, 2001. This
increase was primarily due to foreclosed real estate of $2.0 million at June 30,
2002, as the Company took possession of one commercial property. The increase in
miscellaneous assets was somewhat offset by a $405,000 decrease in repossessed
automobiles from December 31, 2001, as repossessed automobiles totaled $2.1
million at June 30, 2002.
Deposits
Customers' deposits have always been the primary funding vehicle for
the Company's asset base. The following table sets forth the Company's deposit
stratification as of June 30, 2002 and December 31, 2001.
At June 30, 2002 At December 31, 2001
---------------- --------------------
Percent Percent
Balance of deposits Balance of deposits
------- ----------- ------- -----------
(Dollars in thousands)
Demand deposits $ 80,296 10.70% $ 82,758 11.14%
NOW accounts 85,578 11.41% 80,970 10.90%
Savings accounts 159,938 21.32% 151,565 20.41%
Money Market accounts 107,940 14.39% 110,199 14.84%
Certificates of Deposit 316,359 42.18% 317,237 42.71%
-------- --------
Total deposits $750,111 $742,729
======== ========
Total deposits were $750.1 million on June 30, 2002, an increase of
$7.4 million for the first six months of the year as deposits rebounded well in
the second quarter from a seasonally slow first quarter. An increase in NOW
accounts and savings deposits of $13.0 million more than offset a decrease of
$4.7 million in money market and demand deposits. Core deposits, which the
Company considers to be all but certificates of deposit, were 57.8% of total
deposits on June 30, 2002 as compared to 57.3% on December 31, 2001.
Borrowings
Borrowings from the Federal Home Loan Bank of Boston totaled $144.7
million at June 30, 2002, a $10.8 million, or 8.0%, increase from $134.0 million
at December 31, 2001, as the Company has looked to extend maturities and take
advantage of low cost funds. The Company's borrowing capacity at the Federal
Home Loan Bank of Boston is in excess of $175 million.
Stockholders' Equity and Regulatory Capital
At June 30, 2002, the Company had $135.0 million in stockholders'
equity compared to $139.3 million at December 31, 2001. The decrease was
primarily due to the purchase of 283,413 shares of the Company's common stock
under this year's repurchase programs at a cost of $6.3 million. The Company
also declared and paid cash dividends of $0.24 per common share amounting to
$1.4 million during the first six months of 2002. The net unrealized gain in the
securities portfolio decreased by $1.5 million from December 31, 2001 to $17.3
million. This change was recognized in accumulated other comprehensive income on
the consolidated statement of changes in stockholders' equity. Partially
offsetting these decreases in stockholders' equity was net income of $3.8
million.
The Company's capital to assets ratio for June 30, 2002 and December
31, 2001 were 12.95% and 13.52%, respectively. The various regulatory capital
ratios for the Company and the Bank at June 30, 2002 and December 31, 2001 were
as follows:
13
At June 30, 2002
--------------------------------------------------------------------
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. $129,805 15.33% N/A N/A N/A N/A
Berkshire Bank 115,785 13.78 $67,204 8.00% $84,006 10.00%
Tier I capital to risk weighted assets:
Berkshire Hills Bancorp, Inc. 107,420 12.68 N/A N/A N/A N/A
Berkshire Bank 93,484 11.13 33,602 4.00 50,403 6.00
Tier I capital to average assets:
Berkshire Hills Bancorp, Inc. 107,420 10.45 N/A N/A N/A N/A
Berkshire Bank 98,484 9.19 40,708 4.00 50,885 5.00
As of June 30, 2002, 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 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 sub-prime automobile loans in the loan portfolio.
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
2001
Net Interest Income. Net interest income is the largest component of
the Company's revenue stream and is the difference between the interest and
dividends earned on the loan and investment portfolios and the interest paid on
the Company's funding sources, primarily customer deposits and advances from the
Federal Home Loan Bank of Boston. Net interest income, before the provision for
loan losses, increased $152,000, or 1.4%, to $10.7 million for the second
quarter of 2002. The Company's net interest margin was 4.36% for the quarter
ended June 30, 2002 compared to 4.37% for the same quarter last year.
Total interest and dividend income decreased $2.7 million, or 14.0%, to
$16.6 million for the second quarter of 2002 as compared to the same period last
year. Loan interest dropped to $14.8 million in the current quarter, a decrease
of $2.6 million, or 15.0%, from the same period last year as rates dropped
significantly in response to the Federal Reserve Bank's decisions to lower
short-term interest rates eleven times in 2001 and have remained low thus far in
2002.
Total interest expense fell $2.8 million, or 32.5%, to $5.9 million
this year due to lower rates paid on all interest-bearing liabilities. Deposit
expense fell by $2.5 million this year to $4.5 million as customers moved funds
out of certificate of deposit accounts and into more liquid and lower cost
demand and savings accounts in the second quarter of 2002 compared to the second
quarter of last year. Interest on FHLB advances decreased $271,000 to $1.4
million from $1.7 million last year as lower rates paid on new borrowings
replaced higher cost advances.
The Company's provision for loan losses was $1.3 million in the second
quarter of this year as compared to $840,000 in the same quarter last year. In
setting the provision for the second quarter of 2002, management took into
consideration a $16.1 million increase in commercial loans from the second
quarter of last year. This increase in commercial loans, along with a weakened
local economy, directly resulted in a $1.4 million increase in the commercial
loan reserve requirement. However, this increase in reserve requirements was
somewhat offset by a $1.1 million decrease in the consumer loan reserve
requirement as consumer loan balances dropped $37.3 million to $251.6 million at
June 30, 2002 from $288.9 million at June 30, 2001. The Company also looks
closely at loan charge-offs, which increased $1.1 million to $1.9 million in the
second quarter of this year from $841,000 last year. Foremost in this increase
was consumer loan charge-offs which rose $917,000 to $1.7 million at June 30,
2002 from $812,000 at June 30, 2001. In looking to
14
determine the provision for loan losses, the Company also examined nonperforming
loans which decreased significantly, from $4.0 million at June 30, 2001 to $2.4
million at June 30, 2002. The Company also evaluates current recoveries and the
likelihood for recoveries of previously charged-off loans, among other items.
After the provision for loan losses, net interest income was $9.4
million for the quarter ending June 30, 2002, as compared to $9.7 million for
the same period last year, a decrease of $323,000, or 3.3%.
Noninterest Income. For the three months ended June 30, 2002,
noninterest income totaled $3.1 million, an increase of $1.6 million from the
same quarter last year. This increase was due to two new income sources for the
Company derived from the June 29, 2001 investment in EastPoint. License sales
and other fees totaled $545,000 this quarter and license maintenance and
processing fees amounted to $1.1 million for the quarter. Excluding the income
derived from the investment in EastPoint, non-interest income was relatively
unchanged at 1.4 million. A $146,000 increase in customer service fees and
$116,000 increase in other income was fully offset by a $266,000 decrease in
gains on securities.
Noninterest Expenses. Noninterest (operating) expenses amounted to $9.3
million for the three months ending June 30, 2002, an increase of $1.9 million,
or 25.7%, from last year's $7.4 million. Salaries and benefits expense rose $1.3
million to $5.3 million this year from $4.0 million last year due to the
inclusion of EastPoint salary expense to the total. Non-interest expenses also
rose due to a $363,000 increase in occupancy and equipment expenses and a
$64,000 increase in professional services related to the operations at
EastPoint. Meanwhile, data processing expense decreased $113,000 to $156,000.
Excluding the operating expenses of EastPoint, which equaled $1.8 million, this
quarter's operating expenses totaled $7.4 million, a $68,000 increase, or 0.9%,
from last year's second quarter.
Income Taxes. Income taxes were $1.0 million in this year's second
quarter with an effective tax rate of 32.5%. In the second quarter of last year,
the effective rate was 33.1%. The effective tax rate for 2002 is lower than 2001
as the Company received the benefits from the establishment of a real estate
investment trust for only a portion of the second quarter last year.
Berkshire Hills established a REIT in the second quarter of 2001. As a
result of REIT's operations, the Company was able to reduce its net tax
obligations by an estimated $54,000 in the second quarter of 2002 and $141,000
for the first six months of 2002. Similarly, for the year ended December 31,
2001, it is estimated the operations of the REIT reduced the Company's net tax
liability by $494,000. Recently, the Massachusetts Department of Revenue has
questioned the applicability of allowing a dividend received deduction on
dividends upstreamed from a bank established REIT to a parent company. The
ultimate resolution of the matter is uncertain. To date, the Department of
Revenue has not assessed additional taxes from the Company. However, should the
Department of Revenue prevail and assess additional taxes from the Company, the
Company could be liable for an estimated $689,000 in taxes plus interest and
penalties. Berkshire Hills believes the deductions it has taken to date are
appropriate and thus has not taken any provision in its financial statements for
any amounts that the Department of Revenue may assess in the future.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and 2001
Net Interest Income. Net interest income, before the provision for loan
losses, totaled $21.1 million for the first six months of 2002, up $603,000 from
$20.5 million over the same period last year. The Company's net interest margin
equaled 4.36% over the first half of 2002 versus 4.28% last year. The increase
in net interest margin, and the resulting increase in net interest income, was
primarily due to the elimination of interest rate floors on certain deposit
accounts in the second half of 2001.
Total interest and dividend income totaled $33.1 million for the first
six months of 2002, a $5.3 million, or 13.7%, decrease from $38.4 million over
the first six months last year. The interest earned on the Company's loan
portfolio dropped $4.8 million to $29.7 million for the six months ended June
30, 2002 as loan yields have fallen due to the sharp decline in short-term rates
orchestrated by the Federal Reserve Bank last year and a competitive local
marketplace.
Total interest expense dropped $5.9 million, or 32.9%, to $12.0 million
for the six months ended June 30, 2002 due to lower rates paid on all interest
bearing liabilities. Interest paid on deposits totaled $9.1 million, a decrease
of $5.1 million from $14.3 million over the comparable period last year. In
addition to the elimination of floors on certain
15
deposit accounts, as rates paid on certificates of deposits decreased, customers
moved their money out of certificates of deposits into more liquid and lower
cost savings and checking accounts. FHLB advances interest expense dropped
$530,000 as lower rates offset higher balances.
The provision for loan losses increased $1.1 million to $2.8 million
for the first half of 2002 from $1.7 million for the first six months of 2001.
In setting the Company's provision, management looks closely at the balances in
the various Company loan portfolios, especially its consumer loan and commercial
loan portfolios. Due to increases in the balance of the commercial loan
portfolio, the Company increased that portion of the provision directly related
to commercial loans by $1.4 million from where it was one year ago. Somewhat
offsetting this is a lower balance in the consumer loan portfolio and in
particular, the sub-prime indirect automobile loan portfolio, which allowed
management to lower the portion of the provision based on consumer loans by $1.1
million. The Company also evaluates loan charge-offs in determining the
provision for loan losses. Loan charge-offs increased by $3.5 million in the
first half of 2002 over the same period last year. Of these, consumer loan
charge-offs increased $3.0 million to $4.4 million at June 30, 2002 from $1.5
million at June 30, 2001. Management also considers the level and trend of
nonperforming loans in determining the provision for loan losses. Nonperforming
loans totaled $2.4 million at June 30, 2002, a $1.7 million decrease from $4.1
million at June 30, 2001. Among other items, the Company also evaluates current
recoveries and the likelihood for recoveries of previously charged-off loans.
After the provision for loan losses, net interest income was $18.3
million for the first half of 2002, as compared to $18.9 million for the same
period last year, a decrease of $542,000, or 2.9%.
Noninterest Income. For the six months ended June 30, 2002, noninterest
income totaled $5.8 million, a $3.3 million increase from $2.6 million for the
same period last year. Substantially all of this increase, $3.1 million, was
directly related to various license fees related to the operation of EastPoint.
Excluding EastPoint's contribution, noninterest income equaled $2.8 million, a
$194,000 increase, or 7.6%, over last year's $2.6 million. During the first half
of 2002 customer service fees increased $186,000 to $1.1 million and trust
department fees rose $79,000 to $954,000 versus the same period last year. Other
income rose $150,000 in 2002 versus 2001. Somewhat offsetting these increases
was an $8,000 loss on the sale of securities this year as opposed to a gain of
$277,000 last year, a difference of $285,000.
Noninterest Expenses. Noninterest (operating) expense totaled $18.5
million for the six months ended June 30, 2002, an increase of $3.9 million, or
26.9%, from $14.6 million for the same period last year. As was the case with
noninterest income, substantially all of the increase in expenses was due to the
operations of EastPoint. Total salaries and benefits expense equaled $10.9
million at June 30, 2002, an increase of $3.2 million from $7.6 million last
year while occupancy and equipment expenses totaled $2.7 million for the six
months ended June 30, 2002, an increase of $655,000. Included in the increase in
salaries and benefits expense were expenses of $2.6 million related to EastPoint
and $686,000 related to EastPoint's occupancy and equipment totals. Excluding
the operations of EastPoint, noninterest expenses equaled $14.9 million, an
increase of $354,000, or 2.4%, from last year primarily due to additional FICA
costs, medical insurance premiums, employee stock awards expense and ESOP
expense.
Income Taxes. Income taxes were $1.8 million for the first six months
of this year versus $2.3 million for the same six months as last year. The
effective tax rates were 32.5% and 32.9% respectively. The lower tax rate in
2002 was due to the operation of the Company's REIT for the full six months of
this year versus only a portion of the first six months of last year.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial
obligations of a short term nature. Berkshire Bank further defines liquidity as
the ability to respond to the needs of depositors and borrowers as well as
maintaining the flexibility to take advantage of investment opportunities.
Berkshire Bank's primary investing activities are: (1) originating
residential one-to four-family mortgage loans, commercial business and real
estate loans, multi-family loans, home equity loans and lines of credit, and
consumer loans; and (2) investing in mortgage-and asset-backed securities, U.S.
Government and agency obligations, and corporate equity securities and debt
obligations. These activities are funded primarily by principal and interest
payments on loans, maturities of securities, deposits and Federal Home Loan Bank
of Boston advances. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by interest rates, economic conditions, and
competition. Additionally, deposit flows are affected by the overall level of
interest rates, the interest rates and products offered by Berkshire Bank and
its local competitors, and other
16
factors. Berkshire Bank closely monitors its liquidity position on a daily
basis. If Berkshire Bank should require funds beyond its ability to generate
them internally, additional sources of funds are available through advances or a
line of credit with the Federal Home Loan Bank and through a repurchase
agreement with the Depositors Insurance Fund, the Bank's excess deposit insurer.
Berkshire Bank relies primarily on competitive rates, customer service,
and long-standing relationships with customers to retain deposits. Occasionally,
Berkshire Bank will also offer special competitive promotions to its customers
to increase retention and promote deposit growth. Based upon Berkshire Bank's
historical experience with deposit retention, management believes that, although
it is not possible to predict future terms and conditions upon renewal, a
significant portion of such deposits will remain with Berkshire Bank.
Certificates of deposit that were scheduled to mature in one year or less from
June 30, 2002 were approximately $233.5 million.
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 pay
holding company obligations, including the payments of dividends and fund stock
repurchase programs. The Bank's ability to pay dividends and other capital
distributions to Berkshire Hills Bancorp is generally limited by the
Massachusetts banking regulations and the regulations of the Federal Deposit
Insurance Corporation. 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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Aspects of Market Risk. Berkshire Bank's most significant
form of market risk is interest rate risk. The principal objectives of Berkshire
Bank's interest rate risk management are to evaluate the interest rate risk
inherent in certain balance sheet accounts, determine the level of risk
appropriate given its business strategy, operating environment, capital and
liquidity requirements and performance objectives, and manage the risk
consistent with its established policies. Berkshire Bank maintains an
Asset/Liability Committee that is responsible for reviewing its asset/liability
policies and interest rate risk position, which meets quarterly and reports to
the Executive Committee of the Bank and the Board of Directors. The
Asset/Liability Committee consists of Berkshire Bank's President and Chief
Executive Officer, Senior Vice President, Treasurer and Chief Financial Officer,
Executive Vice President-Senior Loan Officer, and Executive Vice
President-Retail Banking. The extent of the movement of interest rates is an
uncertainty that could have a negative impact on the earnings of Berkshire Bank.
Berkshire Bank manages 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;
o investing in a high quality liquid securities portfolio that provides
adequate liquidity and flexibility to take advantage of opportunities
that may arise from fluctuations in market interest rates, the overall
maturity and duration of which is monitored in relation to the
repricing of its loan portfolio;
o promoting lower cost liability accounts such as core deposits; and
o using Federal Home Loan Bank advances to better structure maturities
of its interest rate sensitive liabilities.
For Berkshire Bank, market risk also includes price risk, primarily
security price risk. The securities portfolio had unrealized gains before taxes
of $26.6 million at June 30, 2002. Changes in this figure are reflected, net of
taxes, in accumulated other comprehensive income as a separate component of
Berkshire Hills' equity. Since December 31, 2001, this component has decreased
$1.5 million. It is not possible to predict with complete accuracy the direction
and magnitude of securities price changes. Unfavorable market conditions or
other factors could cause price declines in the securities portfolio.
Quantitative Aspects of Market Risk. Berkshire Hills 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
17
increase or decrease of market interest rates would cause a simultaneous
parallel shift along the entire yield curve. Loans, deposits and borrowings are
expected to reprice at the new market rate on the contractual review or maturity
date. The Company closely monitors its loan prepayment trends and uses
prepayment guidelines set forth by Freddie Mac and Fannie Mae as well as Company
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 Hills further assumes that its securities' cash flows, especially its
mortgage backed securities cash flows, are such that they will generally follow
industry standards and that prepayments will be reinvested in the same category
at the prevailing market rate. Finally, the model presumes that its balance
sheet mix will remain relatively unchanged throughout the next calendar year.
The tables below set forth, as of June 30, 2002 and December 31, 2001,
estimated net interest income and the estimated changes in Berkshire Hills 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 At June 30, 2002 At December 31, 2001
interest rates --------------------------------------- -------------------------------------
in basis points Dollar Percent Dollar Percent
(rate shock) Amount change change Amount change change
------------ ------ ------ ------ ------ ------ ------
200 $ 41,993 $ (32) (0.08)% $ 45,863 $ 64 0.14%
100 41,191 (834) (1.98) 45,209 (590) (1.29)
Static 42,025 -- -- 45,799 -- --
(100) 42,508 483 1.15 46,332 533 1.16
(200) 41,277 (748) (1.78) 44,955 (844) (1.84)
At June 30, 2002, for small movements in market interest rates (+/- 100
basis points), Berkshire Hills is liability sensitive as it was at December 31,
2001. Thus, in the event of a sudden and sustained decline in prevailing market
rates of 100 basis points, the June 30, 2002 chart indicates a $483,000 increase
in net interest income while the December 31, 2001 chart indicates an increase
of $533,000. Likewise, in the event of a 100 basis point increase, the June 30,
2002 chart indicates a decrease in net interest income of $834,000 compared to a
$590,000 decrease in the December 31, 2001 chart. June figures are hurt due to
various shifts in the balance sheet make-up, specifically increases in rate
sensitive deposit accounts and decreases in rate sensitive consumer loan
accounts.
In the event of a sudden and sustained decrease in prevailing market
interest rates of 200 basis points, the June 30, 2002 table indicates a decline
in net interest income of $748,000 compared to a $844,000 decline in the
December 31, 2001 chart. A sudden and sustained increase of 200 basis points in
market interest rates would lead to a $32,000 decrease in net interest income in
the June 30, 2002 scenario while the December 31, 2001 scenario shows an
increase of $64,000. The Company's net interest income is hurt in the case of a
200 basis point drop as deposit accounts hit predetermined floors while net
interest income is enhanced in the case of a 200 basis point increase because
these same deposit accounts hit Bank determined caps.
Computation of prospective effects of hypothetical interest rate
changes are based on a number of assumptions including the level of market
interest rates, the degree to which certain assets and liabilities with similar
maturities or periods to repricing react to changes in market interest rates,
the expected prepayment rates on loans and investments, the degree to which
early withdrawals occur on certificates of deposit, and other deposit flows. As
a result, these computations should not be relied upon as indicative of actual
results. Further, the computations do not reflect any actions that management
may undertake in response to changes in interest rates.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented have
been prepared in conformity with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike many industrial companies,
substantially all of the assets and liabilities of Berkshire Bank are monetary
in nature. As a result, interest rates have a more significant impact on
Berkshire Bank's performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the same direction
or in the same magnitude as inflation.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings other than routine
legal proceedings occurring in the normal course of business. Such routine
proceedings, in the aggregate, are believed by management to be immaterial to
the Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the Stockholders of the Company was held on May
2, 2002.
1. The following individuals were elected as directors, each for a
three-year term by the following vote:
VOTES FOR VOTES WITHHELD
--------- --------------
Thomas O. Andrews 5,500,693 49,645
A. Allen Gray 5,505,149 45,189
Catherine B. Miller 5,500,852 49,486
Michael G. Miller 5,482,867 67,471
Louis J. Oggiani 5,502,864 47,474
William E. Williams 5,502,857 47,481
2. The appointment of Wolf & Company, P.C. as independent auditors of
Berkshire Hills Bancorp, Inc. for the fiscal year ending December 31, 2002
was ratified by the stockholders by the following vote:
FOR AGAINST ABSTENTIONS
--- ------- -----------
5,493,533 27,809 28,996
ITEM 5. OTHER INFORMATION.
None.
19
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K (ss.249.308 OF THIS CHAPTER).
(a) Exhibits
3.1 Certificate of Incorporation of Berkshire
Hills Bancorp, Inc. (1)
3.2 Bylaws of Berkshire Hills Bancorp, Inc. (1)
4.0 Stock Certificate of Berkshire Hills
Bancorp, Inc.(1)
99.1 Certificates of Chief Executive Officer and
Chief Financial Officer
(b) Reports in Form 8-K
None
- -------------------------------
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, and any amendments thereto,
Registration No. 333-32146.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE HILLS BANCORP, INC.
Dated: August 13, 2002 By: /s/ James A. Cunningham, Jr.
-------------------------------------------
James A. Cunningham, Jr.
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: August 13, 2002 By: /s/ Charles F. Plungis, Jr.
------------------------------------------
Charles F. Plungis, Jr.
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
21