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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, 2003
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 (I.R.S. Employer
of 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The Issuer had 5,871,316 shares of common stock, par value $0.01 per
share, outstanding as of August 11, 2003.
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, 2003 and December 31, 2002
Consolidated Statements of Income for the Three and Six 2
Months Ended June 30, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity 3
for the Six Months Ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows for the 4
Six Months Ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
June 30, December 31,
2003 2002
----------- ------------
(In thousands)
Assets:
Cash and due from banks $ 11,303 $ 17,258
Short term investments 8,024 43,397
----------- -----------
Total cash and cash equivalents 19,327 60,655
Securities available for sale, at fair value 179,011 173,169
Securities held to maturity, at amortized cost 46,476 44,267
Federal Home Loan Bank stock, at cost 7,858 7,440
Savings Bank Life Insurance stock, at cost 2,043 2,043
Loans 822,873 723,022
Allowance for loan losses (10,282) (10,308)
----------- -----------
Net loans 812,591 712,714
Premises and equipment, net 13,132 13,267
Foreclosed real estate -- 1,500
Accrued interest receivable 5,256 5,125
Goodwill and other intangibles (1) 10,334 10,435
Net deferred tax assets 2,601 2,185
Bank owned life insurance 7,529 --
Other assets 12,211 13,315
----------- -----------
Total assets $ 1,118,369 $ 1,046,115
=========== ===========
Liabilities and Stockholders' Equity:
Deposits 816,772 782,360
Federal Home Loan Bank advances 157,156 133,002
Securities sold under agreements to repurchase -- 700
Loans sold with recourse 765 1,201
Due to broker 16,411 --
Accrued expenses and other liabilities (1) 6,714 5,846
----------- -----------
Total liabilities 997,818 923,109
----------- -----------
Minority interests 2,301 2,438
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, 2003 and
December 31, 2002; shares outstanding: 5,871,316 at
June 30, 2003 and 6,117,134 at December 31, 2002) 77 77
Additional paid-in capital 75,430 74,632
Unearned compensation (9,273) (9,535)
Retained earnings (1) 82,603 80,010
Accumulated other comprehensive income 5,870 5,542
Treasury stock, at cost (1,802,445 shares at June 30, 2003
and 1,556,627 shares at December 31, 2002) (36,457) (30,158)
----------- -----------
Total stockholders' equity 118,250 120,568
----------- -----------
Total liabilities and stockholders' equity $ 1,118,369 $ 1,046,115
=========== ===========
(1) For the period ended December 31, 2002, the information reflects the
adoption of SFAS 147.
The impact resulted in increases to goodwill of $497,000, to deferred
taxes of $169,000, and to retained earnings of $328,000.
See accompanying notes to unaudited consolidated financial statements.
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except per share amounts)
Interest and dividend income:
Bond interest $ 1,551 $ 1,316 $ 3,123 $ 2,572
Stock dividends 214 330 478 620
Short term investment interest 14 148 98 205
Loan interest 12,360 14,774 24,341 29,731
-------- -------- -------- --------
Total interest and dividend income 14,139 16,568 28,040 33,128
-------- -------- -------- --------
Interest expense:
Interest on deposits 3,613 4,467 7,371 9,131
Interest on FHLB advances and other borrowings 1,093 1,436 2,156 2,858
-------- -------- -------- --------
Total interest expense 4,706 5,903 9,527 11,989
-------- -------- -------- --------
Net interest income 9,433 10,665 18,513 21,139
Provision for loan losses 785 1,315 1,110 2,825
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,648 9,350 17,403 18,314
-------- -------- -------- --------
Noninterest income:
Customer service fees 619 592 1,175 1,039
Trust department fees 554 467 990 954
Loan fees 147 185 195 385
Gain(loss) on securities, net 317 12 1,157 (8)
Gain on sale of loans 138 -- 138 --
License maintenance and processing fees 1,136 1,093 2,277 2,170
License sales and other fees 990 545 1,470 909
Other income 121 192 181 381
-------- -------- -------- --------
Total noninterest income 4,022 3,086 7,583 5,830
-------- -------- -------- --------
Operating expenses:
Salaries and benefits 5,962 5,322 11,248 10,850
Occupancy and equipment 1,222 1,278 2,603 2,696
Marketing and advertising 139 124 242 212
Data processing 239 156 460 346
Professional services 294 306 542 605
Office supplies 155 194 361 377
Foreclosed real estate and other loans, net 286 757 407 1,240
Amortization of other intangibles (1) 51 51 102 102
Minority interests (38) (90) (137) (257)
Other general and administrative expenses 1,457 1,046 2,590 2,075
-------- -------- -------- --------
Total operating expenses 9,767 9,144 18,418 18,246
-------- -------- -------- --------
Income before taxes 2,903 3,292 6,568 5,898
Provision for income taxes (1) 765 1,070 2,608 1,918
-------- -------- -------- --------
Net income $ 2,138 $ 2,222 $ 3,960 $ 3,980
======== ======== ======== ========
Earnings per share:
Basic $ 0.40 $ 0.41 $ 0.74 $ 0.72
Diluted $ 0.38 $ 0.38 $ 0.69 $ 0.67
Weighted average shares outstanding:
Basic 5,291 5,455 5,355 5,497
Diluted 5,687 5,906 5,733 5,935
(1) For the quarter and six months ended June 30, 2002, the information
reflects the adoption of SFAS 147. The impact for the quarter, and every
quarter in 2002, resulted in a decrease of $124,000 in amortization
expense, and an increase of $42,000 in the provision for income taxes. For
the six months ended, the amortization expense decreased $248,000 and the
provision for income taxes increased $84,000.
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, 2003 AND 2002
Unaudited
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
------- ---------- ------------ -------- ------------- -------- ---------
(In thousands)
Balance at December 31, 2002 $ 77 $74,632 $ (9,535) $ 80,010 $ 5,542 $(30,158) $ 120,568
Comprehensive income :
Net income -- -- -- 3,960 -- -- 3,960
Change in net unrealized gain on
securities available for sale, net of
re-classification adjustments and
tax effects -- -- -- -- 328 -- 328
---------
Total comprehensive income 4,288
Cash dividends declared ($.24 per share) -- -- -- (1,333) -- -- (1,333)
Treasury stock purchased -- -- -- -- -- (6,885) (6,885)
Treasury stock released -- -- -- (34) -- 586 552
Change in unearned compensation - MRP -- 570 25 -- -- -- 595
Change in unearned compensation - ESOP -- 228 237 -- -- -- 465
------- ------- -------- -------- -------- -------- ---------
Balance at June 30, 2003 $ 77 $75,430 $ (9,273) $ 83,603 $ 5,870 $(36,457) $ 118,250
======= ======= ======== ======== ======== ======== =========
Balance at December 31, 2001 $ 77 $74,146 $(11,101) $ 80,657 $ 18,836 $(23,292) $ 139,323
Comprehensive income:
Net Income -- -- -- 3,980 -- -- 3,980
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 -- -- -- -- -- -- 2,433
Cash dividends declared ($0.24 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) $ 83,246 $ 17,289 $(29,586) $ 135,118
======= ======= ======== ======== ======== ======== =========
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,
--------------------------
2003 2002
--------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 3,960 $ 3,980
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,110 2,825
Net amortization of securities 917 335
Depreciation and amortization expense 1,089 1,204
Amortization of other intangibles 101 102
Management Rewards Plan Expense 595 619
ESOP Plan Expense 465 428
Increase in cash surrender value of Bank Owned Life Insurance (29) --
(Gain) loss on sales and dispositions of securities, net (1,157) 8
Deferred tax provision (benefit) 269 (2)
Loss on sale of foreclosed real estate 44 --
Net change in loans held for sale -- 2,540
Minority interest (137) (257)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 973 (903)
Accrued expenses and other liabilities 868 (251)
--------- --------
Net cash provided by operating activities 9,068 10,628
--------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales 9,600 5,785
Maturities 85,247 23,441
Principal payments 14,231 12,190
Purchases (98,315) (58,425)
Activity in held to maturity securities:
Maturities 11,788 9,057
Principal payments 23,771 12,297
Purchases (38,079) (16,810)
Purchase of Federal Home Loan Bank stock (418) (286)
Purchase of Bank Owned Life Insurance (7,500) --
Loan originations, net of principal payments and purchases (100,987) (6,342)
Additions to banking premises and equipment (954) (530)
Proceeds from sale of foreclosed real estate 1,456 --
--------- --------
Net cash (used) by investing activities (100,160) (19,623)
--------- --------
(continued)
4
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Unaudited
Six Months Ended June 30,
-------------------------
2003 2002
-------- --------
(In thousands)
Cash flows from financing activities:
Net increase in deposits $ 34,412 $ 7,382
Net decrease in securities sold under agreements
to repurchase (700) (850)
Proceeds from Federal Home Loan Bank advances with maturities
in excess of three months 55,000 55,172
Repayments of Federal Home Loan Bank advances with maturities
in excess of three months (57,846) (44,410)
Proceeds of borrowings with maturities of three months or less,
net of repayments 27,000 --
Net decrease in loans sold with recourse (436) --
Treasury stock purchased (6,885) (6,294)
Re-issuance of treasury stock in connection with
stock benefit programs 552 --
Dividends (1,333) (1,391)
-------- --------
Net cash provided by financing activities 49,764 9,609
-------- --------
Net change in cash and cash equivalents (41,328) 614
Cash and cash equivalents at beginning of period 60,655 42,123
-------- --------
Cash and cash equivalents at end of period $ 19,327 $ 42,737
======== ========
Supplemental cash flow information:
Interest paid on deposits $ 7,379 $ 9,176
Interest paid on borrowed funds 2,153 2,968
Income taxes paid (refunded), net (209) 1,065
Transfers from loans to foreclosed real estate -- 2,000
Due to broker 16,411 --
See accompanying notes to unaudited consolidated financial statements.
5
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
(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 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, 2002. The consolidated financial information at June 30, 2003 and
for the three- and six-month periods ended June 30, 2003 and 2002 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, 2003, the Company had outstanding commitments to
originate new residential and commercial loans totaling $38.0 million, which are
not reflected on the consolidated balance sheet. In addition, unadvanced funds
on home equity lines totaled $43.9 million and unadvanced commercial lines,
including unadvanced construction loan funds, totaled $64.4 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, 2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands, except per share amounts)
Net income $ 2,138 $ 2,222 $ 3,960 $ 3,980
======= ======= ======= =======
Weighted Average common shares 5,291 5,455 5,355 5,497
Dilutive effect of potential common shares
related to stock compensation plans 396 451 378 438
------- ------- ------- -------
Weighted average common shares
including potential dilution 5,687 5,906 5,733 5,935
======= ======= ======= =======
Basic earnings per share $ 0.40 $ 0.41 $ 0.74 $ 0.72
Diluted earnings per share $ 0.38 $ 0.38 $ 0.69 $ 0.67
6
Note 4. Tangible Book Value
The tangible book value per share of Berkshire Hills' common stock
at June 30, 2003 was $18.38, based on tangible stockholders' equity of $107.9
million and outstanding shares of 5,871,316. The book value at December 31, 2002
was $18.00, based on tangible stockholders' equity of $110.1 million and total
outstanding shares of 6,117,134.
Note 5. Dividend
On April 23, 2003, the Company's Board of Directors declared a cash
dividend of $0.12 per share, which was paid on May 23, 2003, to stockholders of
record on May 8, 2003.
Note 6. Stock Repurchase Program
During the second quarter of 2003, the Company completed its fifth
stock repurchase program, purchasing 26,216 shares at a cost of $653,084, and
initiated a sixth 5% stock repurchase program, purchasing 106,400 shares at a
cost of $2.9 million. The Company has 193,486 shares available as of August 11,
2003 under this program.
Note 7. Goodwill and Other Intangibles
Goodwill and other intangibles includes goodwill associated with the
acquisition of EastPoint Technologies, LLC ("EastPoint") as well as the
Company's purchase of two branches from another financial institution in 1991
and three branches in 1998, which are evaluated for impairment on an annual
basis. Intangible assets refer to customer relationships acquired in association
with the EastPoint purchase, which are being amortized on a straight-line basis
over three years. The carrying amount of goodwill as of June 30, 2003 and
December 31, 2002 was $10.1 million.
A summary of other intangible assets as of June 30, 2003 and
December 31, 2002 is as follows:
At June 30, 2003 At December 31, 2002
----------------------- -------------------------
(In thousands)
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------- -------------------------
Customer Relationships $ 202 $ 406 $ 304 $ 304
The amortization expense and other intangible assets amounted to
$102,000 for the six-month periods ended June 30, 2003 and June 30, 2002. The
remaining amortization of $202,000 will be expensed by the year ending December
31, 2004.
Note 8. Stock Compensation Plans
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," 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 Principals Board Opinion ("APB") 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's stock-based incentive plan have
no intrinsic value at the grant date, and under Opinion No. 25, no compensation
cost is recognized for them.
7
At June 30, 2003 and December 31, 2002 the Company had a stock-based
incentive plan and has elected to continue with the accounting methodology in
Opinion No. 25, and as a result, the following table provides pro forma
disclosures of net income and earnings per share, if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands, except per share amounts)
Net income, as reported $ 2,138 $ 2,222 $ 3,960 $ 3,980
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects 104 81 208 162
----------- ----------- ------------ ------------
Pro forma net income $ 2,034 $ 2,141 $ 3,752 $ 3,818
=========== =========== ============ ============
Earnings per share
Basic - as reported $ 0.40 $ 0.41 $ 0.74 $ 0.72
=========== =========== ============ ============
Basic - pro forma $ 0.38 $ 0.39 $ 0.70 $ 0.69
=========== =========== ============ ============
Diluted - as reported $ 0.38 $ 0.38 $ 0.69 $ 0.67
=========== =========== ============ ============
Diluted - pro forma $ 0.36 $ 0.36 $ 0.65 $ 0.64
=========== =========== ============ ============
Note 9. Real Estate Investment Trust
On June 24, 2003, the Company announced it had reached a settlement
agreement with the Massachusetts Department of Revenue ("DOR") with respect to
the tax assessment resulting from the DOR's disallowance of the Company's
deduction for state tax purposes of certain dividend distributions received by
the Bank from its real estate investment trust ("REIT"). The Company reversed
charges during the second quarter of 2003 totaling $259,000, representing a
partial reversal of the $515,000 charge, net of taxes, taken in the first
quarter of 2003 associated with the DOR's disallowance.
8
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,
2003 and 2002, 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' and Berkshire
Bank's 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 and
municipal finance. 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 July 22, 2003, the Company announced that Robert A. Wells will
retire as Chairman of the Boards of the Company and the Bank as of December 31,
2003. Mr. Wells will continue to serve as a director of the Company and the
Bank. Mr. Wells also announced that he will retire as Chairman of Berkshire
Hills Foundation and the Greater Berkshire Foundation, Inc., on December 31,
2003, and will remain a director of those organizations. Michael P. Daly will
succeed him as Chairman of each foundation.
Comparison of Financial Condition at June 30, 2003 and December 31, 2002
Total assets at June 30, 2003 were $1.12 billion, an increase of
$72.3 million, or 6.9%, from December 31, 2002. The increase in assets was
primarily due to growth in the loan portfolio, which increased $99.9 million, or
13.8%, to $822.9 million. Securities, including Federal Home Loan Bank stock and
Savings Bank Life Insurance stock, totaled $235.4 million at June 30, 2003, an
increase of $8.5 million, or 3.7%, from December 31, 2002. These increases were
largely funded by a $34.4 million increase in deposits, a $24.2 million increase
in Federal Home Loan Bank advances, and a $41.3 million decrease in cash and
cash equivalents.
9
Loans
Residential one-to four-family loans increased $80.7 million during
the first six months of 2003 as the Bank purchased $69.0 million in one-to
four-family loans, $59.0 million of which were purchased in the first quarter.
These purchased loans consist primarily of adjustable rate mortgages that have a
fixed rate of interest for the first three or seven years, adjusting annually
thereafter, and to a lesser extent, 15-year fixed rate mortgages. These loans
were funded by the proceeds from the sale of sub-prime automobile loans in
December 2002. Commercial land development and construction loans increased $4.5
million in the first half of 2003 and commercial real estate loans increased
$7.0 million as several new loans were added to the portfolio. Commercial loans
increased $8.9 million, or 5.4%, in the first half of 2003. The majority of this
increase occurred in the second quarter and was comprised of a number of new
relationships with an average loan size of approximately $350,000. The
automobile loan portfolio decreased $4.3 million, or 3.8%, during the first half
of 2003, but was up $2.1 million, or 1.9%, from the first quarter, as marketing
efforts aimed at generating high quality loans with FICO scores above 700 are
gaining momentum. Sub-prime automobile loans decreased from $19.6 million at
December 31, 2002 to $15.1 million at June 30, 2003. The allowance for sub-prime
automobile loans to total sub-prime automobile loans at quarter end June 30,
2003 was 15.79%, compared to 15.83% at December 31, 2002.
At June 30, 2003 At December 31, 2002
---------------------- -----------------------
Percent Percent
Balance of total Balance of total
--------- -------- --------- --------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 315,677 38.36% $ 235,020 32.50%
Residential land development
and construction 7,887 0.96% 6,576 0.91%
Commercial real estate 138,160 16.79% 131,130 18.14%
Commercial land development
and construction 15,547 1.89% 11,051 1.53%
Multi-family 14,580 1.77% 14,920 2.06%
--------- ------ --------- ------
Total real estate loans 491,851 59.77% 398,697 55.14%
Commercial loans 174,151 21.16% 165,274 22.86%
Consumer loans:
Automobile 109,070 13.26% 113,321 15.68%
Home equity loans 43,712 5.31% 40,713 5.63%
Other 4,089 0.50% 5,017 0.69%
--------- ------ --------- ------
Total consumer loans 156,871 19.07% 159,051 22.00%
Total loans 822,873 100.00% 723,022 100.00%
====== ======
Less: Allowance for loan losses (10,282) 1.25% (10,308) 1.43%
--------- ---------
Loans, net $ 812,591 $ 712,714
========= =========
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 on June 30, 2003, 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
10
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.
At June 30, 2003, the allowance for loan losses totaled $10.3
million, or 1.25% of total loans outstanding and 286.57% of nonperforming loans,
as compared to $10.3 million, or 1.43% of total loans outstanding and 275.54% of
nonperforming loans at December 31, 2002. Charged-off loans totaled $2.3 million
during the first six months this year, a decline of $2.7 million compared to the
same six months last year. Consumer loan charge-offs totaled $2.2 million for
the six months ended June 30, 2003, a decrease of $2.2 million, or 49.6%,
compared to the same period last year, as the Bank's credit risk profile
benefited from the December 2002 sale of $69.7 million in sub-prime automobile
loans. Recoveries totaled $1.1 million for the first six months this year,
decreasing $978,000 for the same period last year, consistent with the decline
in the level of charge-offs, while recoveries to loan charge-offs increased from
42.22% to 50.07%.
The following table sets forth information regarding the allowance
for loan losses for the six-month periods ended June 30, 2003 and 2002.
Six Months Ended
------------------------------
June 30, 2003 June 30, 2002
------------- -------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $10,308 $11,034
Charge-offs:
Residential one-to four-family -- --
Residential land development and construction -- --
Commercial real estate -- 360
Commercial land development and construction -- --
Multi-family -- --
Commercial 43 226
Consumer (1) 2,232 4,428
------- -------
Total charge-offs 2,275 5,014
------- -------
Recoveries:
Residential one-to four-family -- --
Residential land development and construction -- --
Commercial real estate -- --
Commercial land development and construction -- --
Multi-family -- --
Commercial 416 138
Consumer (1) 723 1,979
------- -------
Total recoveries 1,139 2,117
------- -------
Net charge offs 1,136 2,897
Provision 1,110 2,825
------- -------
Allowance for loan losses, end of period $10,282 $10,962
======= =======
Net loans charged-off to total loans 0.14% 0.36%
Allowance for loan losses to total loans 1.25% 1.37%
Allowance for loan losses to nonperforming loans 286.57% 459.82%
Recoveries to charge-offs 50.07% 42.22%
(1) Consists primarily of automobile loans
11
Nonperforming Assets
The following table sets forth information regarding nonperforming
assets as of June 30, 2003 and December 31, 2002.
At June 30, 2003 At December 31, 2002
---------------- --------------------
(Dollars in thousands)
Nonaccruing loans:
Residential one-to four-family $ 213 $ 230
Residential land development and construction -- --
Commercial real estate 165 --
Commercial land development and construction -- --
Multi-family -- --
Commercial 2,490 2,850
Automobile 710 593
Home equity -- --
Other consumer 10 68
------ ------
Total
3,588 3,741
------ ------
Other real estate owned -- 1,500
------ ------
Total nonperforming assets $3,588 $5,241
====== ======
Total nonperforming loans to total loans 0.44% 0.52%
Total nonperforming assets to total assets 0.32% 0.50%
Generally, the Company ceases accruing interest on all loans, except
automobile 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 2001, the
Company initiated a 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, 2003, the
Company had $249,000 in automobile loans that were 90 days past due and still
accruing as compared to $590,000 at December 31, 2002.
Nonaccruing loans totaled $3.6 million at June 30, 2003, a decrease
of $153,000, or 4.1%, from December 31, 2002. Commercial nonaccruing loans
decreased $360,000 as more loans returned to accrual status or were paid down
than new loans placed on nonaccrual. Automobile nonaccruals increased $117,000
from December 31, 2002, but decreased $144,000 from March 31, 2003. The ratio of
nonperforming loans as a percentage of total loans decreased to 0.44% at June
30, 2003, from 0.52% at December 31, 2002. The Bank held no foreclosed real
estate at June 30, 2003 compared to $1.5 million at December 31, 2002.
Investment Securities
Securities, including Federal Home Loan Bank stock and Savings Bank
Life Insurance stock, totaled $235.4 million at June 30, 2003, an increase of
$8.5 million, or 3.7%, from December 31, 2002. Security purchases consisted of
primarily pass-through mortgage-backed securities with average maturities of
three years with limited risk of average life extension. The Bank continued its
strategy of exiting the equities market by selling equities totaling $572,000
for a net gain of $312,000. The net unrealized gain in the securities portfolio
increased $328,000 to $5.9 million at June 30, 2003, which was recognized in
accumulated other comprehensive income on the consolidated statement of changes
in stockholders' equity.
12
Bank Owned Life Insurance
The Bank executed a single premium bank owned life insurance
contract in June 2003 totaling $7.5 million. This transaction is expected to
earn a tax-equivalent return in excess of other earning assets with similar risk
characteristics.
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, 2003 and December 31, 2002.
At June 30, 2003 At December 31, 2002
------------------------ -------------------------
Percent Percent
Balance of deposits Balance of deposits
------- ----------- ------- -----------
(Dollars in thousands)
Demand deposits $ 90,125 11.03% $ 87,148 11.14%
NOW accounts 91,637 11.22% 92,245 11.79%
Savings accounts 176,792 21.65% 158,469 20.26%
Money Market accounts 125,656 15.38% 114,309 14.61%
Certificates of Deposit 332,562 40.72% 330,189 42.20%
-------- ------ -------- ------
Total deposits $816,772 100.00% $782,360 100.00%
======== ====== ======== ======
Total deposits were $816.8 million at June 30, 2003, an increase of
$34.4 million, or 4.4%, for the first six months of the year. Core deposits,
which the Company considers to be all but certificates of deposit, were 59.3% of
total deposits at June 30, 2003 as compared to 57.8% at December 31, 2002, an
increase of $32.0 million. The Bank had the largest increase in savings
accounts, which increased $18.3 million, or 11.6%, in part, attributable to the
Bank's cross-selling efforts. Money market accounts increased $11.3 million, or
9.9%, as the Bank has aggressively pursued municipal deposits.
Borrowings
Borrowings from the Federal Home Loan Bank of Boston totaled $157.2
million at June 30, 2003, a $24.2 million, or 18.2%, increase from December 31,
2002. The Company had additional borrowing capacity of $347 million at the
Federal Home Loan Bank of Boston at June 30, 2003.
Due to Broker
Due to broker totaled $16.4 million as the Bank executed several
security transactions in June 2003 that had not yet settled by June 30, 2003.
Stockholders' Equity
At June 30, 2003, the Company had $118.2 million in stockholders'
equity compared to $120.6 million at December 31, 2002. The decrease was
primarily due to the net increase in treasury stock of 245,818 shares at a net
cost of $6.3 million. This was primarily due to the purchase of 278,816 shares,
partially offset by the exercise of 32,998 shares of stock options. The Company
also declared and paid cash dividends of $0.24 per common share amounting to
$1.3 million. Partially offsetting these decreases in stockholders' equity was
net income of $4.0 million and an increase of $328,000 in net unrealized gains
in the securities portfolio.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2003
and 2002
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 decreased $1.2 million, or
11.6%, to $9.4 million for the three months ended June 30, 2003, and $2.6
million, or 12.4%, to $18.5 million, for the six months ended June 30, 2003. The
decreases occurred as an increase of $33.2 million in average earning assets for
the three months ended June 30, 2003 and $30.2 million for the six months ended
June 30, 2003 were not enough to offset a 118 basis point decrease for the three
13
months ended June 30, 2003 and a 123 basis point decrease for the six months
ended June 30, 2003 in the yield earned on earning assets. The yield average
earning assets declined from 6.77% to 5.59% for the three month period ended
June 30, 2003 and from 6.83% to 5.60% for the six month period ended June 30,
2003. Partially offsetting the decline in the yield on average earning assets
was a 64 basis point decrease and a 70 basis point decrease in the rate paid on
funding liabilities from the same periods last year. As a result, the Company's
net interest margin was 3.73% for the three month period ended June 30, 2003 and
3.70% for the six month period ended June 30, 2003 compared to 4.36% and 4.38%
for the same periods last year.
Total interest and dividend income decreased $2.4 million, or 14.7%,
for the three months ended June 30, 2003 and $5.1 million, or 15.4%, for the six
months ended June 30, 2003, compared to the same periods last year. Loan
interest declined to $12.4 million in the current quarter, a decrease of $2.4
million, or 16.3%, from the same period last year and decreased $5.4 million, or
18.1%, for the six months ended June 30, 2003, due to the sale of higher rate
sub-prime automobile loans in December 2002 and the impact of lower market
interest rates resulting from comparatively stronger loan refinance activity.
Interest earned on the Company's investment portfolio remained flat for the
three months ended June 30, 2003 increasing $302,000 for the six months ended
June 30, 2003, as higher average balances were able to offset lower average
rates earned.
In connection with the lower interest rate environment, and
increases in lower cost core deposits, total interest expense fell $1.2 million,
or 20.3%, and $2.5 million, or 20.5%, for the three and six months ended June
30, 2003, respectively, compared to the same periods last year. Interest expense
on deposits fell by $854,000, or 19.1%, and $1.8 million, or 19.3%, for the
three- and six-month periods ended June 30, 2003 compared to the same periods
last year, as higher average balances were offset by lower rates paid. Interest
paid on Federal Home Loan Bank of Boston advances and other borrowings decreased
$343,000, or 23.9%, and $702,000, or 24.5%, for the three and six months ended
June 30, 2003 compared to the same periods last year, as lower rates paid on new
borrowings replaced maturing higher cost advances.
Provision for Loan Losses. The Company's provision for loan losses
was $785,000 and $1.1 million for the three and six months ended June 30, 2003
as compared to $1.3 million and $2.8 million for the same periods last year.
Although up from the first quarter of 2003, the provision for the current
quarter was consistent with the growth in the loan portfolio and net charge-offs
associated with the remaining level of sub-prime automobile loans. In assessing
the provision for the three and six months ended June 30, 2003, management took
into consideration a $91.4 million decrease in indirect automobile loans, most
of which were sub-prime automobile loans, from the second quarter of last year.
The Company also considered loan charge-offs, which decreased $761,000 to $1.2
million in the second quarter of this year compared to last year. Foremost in
this decrease were consumer loan charge-offs, which decreased $605,000,
consisting mainly of sub-prime automobile loans. Additionally, management
considered the level of delinquent loans, which declined from 1.49% of total
loans at June 30, 2002, to 1.06% at June 30, 2003, current recoveries and
evaluated the likelihood for recoveries of previously charged-off loans, among
other factors.
Noninterest Income. For the three and six months ended June 30,
2003, noninterest income increased $936,000, or 30.3%, and $1.8 million, or
30.1%, respectively, from the same periods last year. The primary reason for
these increases was a $455,000 and a $1.3 million gain on the sale of securities
and loans during the three and six months ended June 30, 2003 compared to a net
gain of $12,000 and a net loss of $8,000 on the sale of securities for the same
periods last year. Additionally, Eastpoint's license maintenance and processing
fees and license sales and other fees increased a total of $488,000 and $668,000
for the three and six months ended June 30, 2003 as compared to the same periods
last year. Expenses for Eastpoint, which are recorded in various noninterest
expense categories, were up $400,000 for the current quarter and $475,000 year
to date from 2002.
Customer service fees increased $27,000 and $136,000 for the three
and six months ended June 30, 2003, primarily due to a higher level of deposit
transaction activity, specifically in ATM and debit card usage. Trust department
fees increased $87,000 and $36,000 for the three and six months ended June 30,
2003, compared to the same periods last year, primarily due to 28 new
relationships with assets totaling $18.9 million that were added to the
portfolio during the first quarter of 2003. Loan fees declined $38,000 and
$190,000 for the three and six months ended June 30, 2003 due to the residual
effects of the December 2002 indirect automobile loan sale. The decline of
$71,000 and $200,000 for the three and six months ended June 30, 2003 in other
income was largely due to lower municipal finance fees, which can fluctuate
quarter to quarter.
Operating Expenses. Operating (noninterest) expenses increased
$623,000 and $172,000 for the three and six months ended June 30, 2003 compared
to the same periods last year. Salaries and benefits expense rose $640,000 and
$398,000 for the three and six months ended June 30, 2003, as compared to the
same periods last year, primarily due
14
to a non-recurring charge of $800,000 taken in the current quarter related to
Mr. Wells' retirement. Exclusive of this charge, salaries and benefits would
have decreased $160,000 for the three month period ended June 30, 2003 and
$402,000 for the six month period ended June 30, 2003 primarily due to the
management reorganization that occurred in December 2002. Data processing
expenses increased $83,000 and $114,000 for the three and six months ended June
30, 2003, primarily due to the Bank's increased ATM, debit card services and
internet banking applications, the majority of which occurred in the first
quarter. Increases in other expenses of $411,000, and $515,000 for the three and
six months ended June 30, 2003 were primarily due to an increase in expenses
attributed to EastPoint, which was consistent with the increase in EastPoint's
revenue. Partially offsetting these increases, foreclosed real estate and other
loans, net, decreased $471,000 and $833,000 for the three and six months ended
June 30, 2003, as compared to the same periods last year, primarily due to a
decrease in the expenses associated with repossessed automobiles.
Income Taxes. The provision for income taxes for the second quarter
of 2003 was $765,000 compared to $1.1 million for the second quarter of 2002.
This difference was primarily due to the settlement and a partial recovery of
$244,000 of the first quarter's state tax assessment resulting from legislation
which retroactively prohibited, for state tax purposes, the dividend received
deductions previously taken through the Bank's REIT. For the six months ended
June 30, 2003, the provision for income taxes totaled $2.6 million as compared
to $1.9 million for 2002. This increase was due to the unrecovered portion of
the DOR's assessment to the Company, as well as, an increase in the effective
tax rate to 36.0% in 2003 from 32.5% in 2002.
Regulatory Capital
The Company's capital to assets ratios for June 30, 2003 and
December 31, 2002 were 10.57% and 11.53%, respectively. The various regulatory
capital ratios for the Bank at June 30, 2003 and December 31, 2002 were as
follows:
FDIC Minimums
At June 30, 2003 At December 31, 2002 to be Well Capitalized
---------------- -------------------- ----------------------
Total capital to risk weighted assets:
Berkshire Bank 12.10% 13.60% 10.00%
Tier I capital to risk weighted assets:
Berkshire Bank 10.41 11.85 6.00
Tier I capital to average assets:
Berkshire Bank 8.37 8.81 5.00
As of June 30, 2003, 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 overall credit
risk to the Bank, management has determined to maintain capital levels in an
amount in excess of the regulatory requirements, which consider the amount of
lower quality sub-prime automobile loans in the loan portfolio.
Liquidity
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 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,
15
the interest rates and products offered by the Bank and its local competitors,
and other factors. Berkshire Bank closely monitors its liquidity position on a
daily basis. If the Bank requires 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, 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. Certificates
of deposit that were scheduled to mature in one year or less from June 30, 2003
were approximately $206.9 million.
The primary source of funding for the Company is dividend payments
from the Bank, and to a lesser extent, earnings on deposits held by the Company.
Dividend payments by the 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
the Company 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.
16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Aspects of Market Risk. The Bank's most significant form
of market risk is interest rate risk. The principal objectives of the 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. The 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 the Bank's
President and Chief Executive Officer; Senior Vice President and Chief Financial
Officer; Senior Vice President-Retail Banking and Operations; Senior Vice
President-Commercial Lending; Senior Vice President-Retail Lending; First Vice
President and Controller; and Senior Financial Analyst. The extent of the
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of the Bank.
The Bank manages interest rate risk by:
o emphasizing the origination and purchase 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 high credit quality, liquid securities that provide the
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 core deposits; and
o using Federal Home Loan Bank of Boston advances to better structure
maturities of its interest rate sensitive liabilities.
For the Bank, market risk also includes price risk, primarily security
price risk. The securities portfolio had unrealized gains before taxes of $9.0
million at June 30, 2003. Changes in this figure are reflected, net of taxes, in
accumulated other comprehensive income as a separate component of Berkshire
Hills' stockholders' equity. Since December 31, 2002, this component has
increased $328,000. It is not possible to predict with complete accuracy the
direction and magnitude of market value changes in the securities portfolio.
Unfavorable market conditions or other factors could cause price declines in the
securities portfolio.
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. Loans, deposits and
borrowings are expected to reprice at the new market rate on the contractual
review or maturity date. The Bank closely monitors its loan prepayment trends
and uses prepayment guidelines set forth by Freddie Mac, Fannie Mae and other
market sources as well as 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 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 the balance sheet mix will remain relatively unchanged
throughout the next calendar year.
17
The tables below set forth, as of June 30, 2003 and December 31, 2002,
estimated net interest income and the estimated changes in the Company'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 At June 30, 2003 At December 31, 2002
interest rates ---------------------------------- -----------------------------------
in basis points Dollar Percent Dollar Percent
(rate shock) Amount Change change Amount change change
--------------- ------- ------- ------- ------ ------- -------
200 $38,220 $ 302 0.80% $34,583 $(1,027) (2.88)%
100 38,471 553 1.46 34,741 (869) (2.44)
Static 37,918 -- -- 35,610 -- --
(100) 37,994 76 0.20 35,162 (448) (1.26)
(200) 35,354 (2,564) (6.76) 32,908 (2,702) (7.59)
In the event of a sudden and sustained decline in prevailing market
interest rates of 100 basis points, the June 30, 2003 chart indicates an
increase in net interest income of $76,000 while the December 31, 2002 chart
indicates a decrease of $448,000. In the event of a sudden and sustained 200
basis point decline in market interest rates, the June 30, 2003 table indicates
a decrease of $2.6 million, consistent with the decrease of $2.7 million
indicated by the December 31, 2002 chart.
In the event of a sudden and sustained increase in prevailing market
interest rates of 100 and 200 basis points, the June 30, 2003 chart indicates
that net interest income would increase by $553,000 and $302,000, respectively.
This differs from the December 31, 2002 chart which indicates that a sudden and
sustained increase of 100 and 200 basis points would decrease net interest
income by $869,000 and $1.0 million, respectively. This change in the Company's
interest rate risk profile resulted primarily from management's re-evaluation,
in the first quarter of 2003, of the repricing assumptions on certain
non-maturity deposits, and due to a higher level of core deposits, the rates on
which are assumed to increase less than an increase in prevailing market
interest rates . After examining the past repricing history and considering
expectations for future repricing, management determined that for every 100
basis point rise in prevailing market interest rates, the rates paid on savings
and money market accounts would be expected to rise by 50 basis points, down
from an expected increase of 100 basis points at December 31, 2002. Municipal
money market accounts and commercial money market accounts would be expected to
increase 75 basis points while NOW accounts would be expected to increase by 25
basis points, all down from an expected increase of 100 basis points at December
31, 2002.
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.
18
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this
report, the chief executive officer and the chief financial officer
of the Company concluded that the Company's disclosure controls and
procedures were effective.
(b) Changes in internal controls. The Company made no significant
changes in its internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation of those controls by the chief executive officer and
chief financial officer.
19
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 1,
2003.
1. The following individuals were elected as directors, each for a
three-year term by the following vote:
FOR WITHHELD
--- --------
Lawrence A. Bossidy 4,872,206 198,061
Thomas R. Dawson 4,854,589 215,678
Peter J. Lafayette 4,853,803 216,464
Corydon L. Thurston 4,889,758 180,509
The following individual was elected as a director, for a two-year
term by the following vote:
FOR WITHHELD
--- --------
Michael P. Daly 4,891,729 178,538
2. The Berkshire Hills Bancorp, Inc. 2003 Equity Compensation Plan was
approved by the stockholders by the following vote:
FOR AGAINST ABSTENTIONS
--- ------- -----------
4,022,682 1,004,556 43,029
3. The appointment of Wolf & Company, P.C. as independent auditors of
Berkshire Hills Bancorp, Inc. for the fiscal year ending December
31, 2003 was ratified by the stockholders by the following vote:
FOR AGAINST ABSTENTIONS
--- ------- -----------
4,951,102 107,316 11,848
ITEM 5. OTHER INFORMATION.
None.
20
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. (2)
4.0 Stock Certificate of Berkshire Hills Bancorp, Inc.(1)
10.1 Employment Agreement between Berkshire Hills Bancorp,
Inc. and Michael P. Daly
10.2 Employment Agreement between Berkshire Bank and Michael
P. Daly
10.3 Letter Agreement, dated June 26, 2003, by and among
Berkshire Hills Bancorp, Inc., Berkshire Bank and Robert
A. Wells
10.4 Berkshire Hills Bancorp, Inc., 2003 Equity Compensation
Plan (3)
31.1 Rule 13a - 14(a)/15d - 14(a) Certification of Chief
Executive Officer
31.2 Rule 13a - 14(a)/15d - 14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
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(1) Incorporated herein by reference into this document from the
Exhibits filed with the Registration Statement on Form S-1, and any
amendments thereto, Registration No. 333-32146.
(2) Incorporated herein by reference into this document from the
Exhibits to the Form 10-Q as filed on November 14, 2002.
(3) Incorporated herein by reference into this document from the Proxy
Statement as filed on March 27, 2003.
(b) Reports on Form 8-K
On April 10, 2003, the Company furnished a Form 8-K in which
it announced it expected to issue its first quarter earnings release
on April 23, 2003 and conduct a conference call at 10:00 a.m. on
April 24, 2003 to discuss first quarter results and full-year
earnings projections. The press release announcing these items was
attached by exhibit.
On April 24, 2003, the Company filed a Form 8-K in which it
announced under Item 9 its first quarter earnings and the
declaration of a quarterly dividend of $0.12 per share. The press
release announcing these items was attached by exhibit.
Additionally, the Company updated its 2003 earnings guidance as the
result of recent legislation in Massachusetts that eliminated the
state tax deduction of dividends Berkshire Bank received from its
real estate investment subsidiary.
On June 3, 2003, the Company furnished a Form 8-K in which it
announced under Item 9 the completion of a 312,516 share repurchase
program at an average cost of $23.08 per share, and the
authorization of an additional repurchase program of 300,000 shares,
or approximately 5%, of the Company's outstanding shares. The press
release announcing these items was attached by exhibit.
On June 24, 2003, the Company furnished a Form 8-K in which it
announced under Item 9 that it had reached a settlement agreement
with the Massachusetts Department of Revenue with respect to taxes
owed on dividends received from Berkshire Bank's real estate
investment trust subsidiary. The press release announcing this was
attached by exhibit.
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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 11, 2003 By: /s/ Michael P. Daly
--------------------------
Michael P. Daly
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: August 11, 2003 By: /s/ Wayne F. Patenaude
-------------------------------------
Wayne F. Patenaude
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
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