UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 Identification No.)
incorporation or organization)
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 changes since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The Issuer had 6,236,727 shares of common stock, par value $0.01 per share,
outstanding as of May 10, 2002.
BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of 1
March 31, 2002 and December 31, 2001
Consolidated Statements of Income for the Three Months 2
Ended March 31, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity 3
for the Three Months Ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows for the 4
Three Months Ended March 31, 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 16
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 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
March 31, December 31,
2002 2001
---- ----
(In thousands)
Assets:
Cash and due from banks $ 22,561 $ 22,652
Short-term investments 37,910 19,471
---------- ----------
Total cash and cash equivalents 60,471 42,123
Securities available for sale, at fair value 106,326 104,446
Securities held to maturity, at amortized cost 32,549 33,263
Federal Home Loan Bank stock, at cost 7,102 7,027
Savings Bank Life Insurance stock, at cost 2,043 2,043
Loans 785,720 800,414
Loans held for sale, at fair value 170 2,540
Allowance for loan losses (10,759) (11,034)
---------- ----------
Net loans 775,131 791,920
Premises and equipment, net 14,000 14,213
Foreclosed real estate 2,000 --
Accrued interest receivable 5,632 5,873
Goodwill and other intangibles 10,417 10,592
Other assets 18,968 19,201
---------- ----------
Total assets $1,034,639 $1,030,701
========== ==========
Liabilities and Stockholders' Equity:
Deposits $ 741,442 $ 742,729
Federal Home Loan Bank advances 142,030 133,964
Securities sold under agreements to repurchase 1,590 1,890
Net deferred tax liability 4,488 4,573
Accrued expenses and other liabilities 4,621 5,099
---------- ----------
Total liabilities 894,171 888,255
---------- ----------
Minority Interests 2,956 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 March 31, 2002
and December 31, 2001; shares outstanding: 6,273,740
at March 31, 2002 and 6,425,140 at December 31, 2001) 77 77
Additional paid-in capital 74,305 74,146
Unearned compensation (10,709) (11,101)
Retained earnings 81,628 80,657
Accumulated other comprehensive income 18,756 18,836
Treasury stock, at cost (1,400,021 shares at March 31, 2002
and 1,248,621 shares at December 31, 2001) (26,545) (23,292)
---------- ----------
Total stockholders' equity 137,512 139,323
---------- ----------
Total liabilities and stockholders' equity $1,034,639 $1,030,701
========== ==========
See accompanying notes to unaudited consolidated financial statements.
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended
March 31,
-------------------
2002 2001
---- ----
(In thousands, except
per share amounts)
Interest and dividend income:
Bond interest $ 1,256 $ 1,513
Stock dividends 290 394
Short-term investment interest 57 75
Loan interest 14,957 17,154
-------- --------
Total interest and dividend income 16,560 19,136
-------- --------
Interest expense:
Interest on deposits 4,664 7,261
Interest on FHLB advances 1,414 1,673
Interest on securities sold under agreements
to repurchase and other borrowings 8 179
-------- --------
Total interest expense 6,086 9,113
-------- --------
Net interest income 10,474 10,023
Provision for loan losses 1,510 840
-------- --------
Net interest income, after provision for loan losses 8,964 9,183
-------- --------
Non-interest income:
Customer service fees 447 407
Trust department fees 487 430
Loan fees 200 119
Loss on sale of securities, net (20) (1)
License maintenance and processing fees 1,077 --
License sales and other fees 364 --
Other income 189 155
-------- --------
Total non-interest income 2,744 1,110
-------- --------
Operating expenses:
Salaries and benefits 5,528 3,622
Occupancy and equipment 1,418 1,089
Marketing and advertising 88 146
Data processing 190 171
Professional services 299 253
Office supplies 183 285
Foreclosed real estate and other loans, net 483 536
Amortization of other intangibles 175 124
Minority interests (167) --
Other expenses 1,029 975
-------- --------
Total operating expenses 9,226 7,201
-------- --------
Income before taxes 2,482 3,092
Provision for income taxes 806 1,014
-------- --------
Net income $ 1,676 $ 2,078
======== ========
Earnings per share:
Basic $ 0.30 $ 0.31
Diluted $ 0.28 $ 0.30
Weighted average shares outstanding:
Basic 5,540 6,678
Diluted 5,963 6,916
See accompanying notes to unaudited consolidated financial statements.
2
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
UNAUDITED
(In Thousands)
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
----- ------- ------------ -------- ------ ----- -----
Balance at December 31, 2001 $ 77 $ 74,146 $ (11,101) $ 80,657 $ 18,836 $ (23,292) $ 139,323
Comprehensive income:
Net income -- -- -- 1,676 -- -- 1,676
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustments and
tax effects -- -- -- -- (80) -- (80)
---------
Total comprehensive income 1,596
Cash dividends declared ($.12 per share) -- -- -- (705) -- -- (705)
Stock repurchased -- -- -- -- -- (3,253) (3,253)
Change in unearned compensation - MRP -- 74 273 -- -- -- 347
Change in unearned compensation - ESOP -- 85 119 -- -- -- 204
------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2002 $ 77 $ 74,305 $ (10,709) $ 81,628 $ 18,756 $ (26,545) $ 137,512
======= ========= ========= ========= ========= ========= =========
Balance at December 31, 2000 $ 77 $ 74,054 $ (7,187) $ 74,554 $ 19,824 $ -- $ 161,322
Comprehensive income:
Net income -- -- -- 2,078 -- -- 2,078
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustments and
tax effects -- -- -- -- (811) -- (811)
---------
Total comprehensive income 1,267
Cash dividends declared ($.10 per share) -- -- -- (706) -- -- (706)
Stock repurchased -- -- -- -- -- (6,824) (6,824)
Purchase of common stock - MRP -- -- (5,453) -- -- -- (5,453)
Change in unearned compensation - MRP -- -- 182 -- -- -- 182
Change in unearned compensation - ESOP -- 51 128 -- -- -- 179
------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2001 $ 77 $ 74,105 $ (12,330) $ 75,926 $ 19,013 $ (6,824) $ 149,967
======= ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
3
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 1,676 $ 2,078
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,510 840
Net amortization of securities 167 63
Depreciation and amortization expense 598 416
Amortization of other intangibles 175 124
Management rewards plan expense 347 182
Employee stock ownership plan expense 204 179
Gain(Loss) on sales and dispositions of securities, net (20) 1
Deferred tax provision (benefit) (1) (1)
Net change in loans held for sale 2,370 --
Minority interest (167) --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 474 1,421
Accrued expenses and other liabilities (478) 844
------ -------
Net cash provided by operating activities 6,855 6,147
------ -------
Cash flows from investing activities:
Activity in available for sale securities:
Sales 1,255 999
Maturities 7,985 10,720
Principal payments 6,687 2,211
Purchases (18,073) (13,066)
Activity in held to maturity securities:
Maturities 2,222 985
Principal payments 7,213 4,211
Purchases (8,766) (4,721)
Purchase of Federal Home Loan Bank stock (75) (533)
Loan originations, net of principal payments 10,909 (22,013)
Proceeds from sale of loans from portfolio -- 11,622
Additions to banking premises and equipment (385) (624)
Proceeds from sales of foreclosed real estate -- 50
------ -------
Net cash provided (used) by investing activities 8,972 (10,159)
------ -------
(continued)
4
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Unaudited
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(In thousands)
Cash flows from financing activities:
Net decrease in deposits (1,287) (14,589)
Net decrease in securities sold under
agreements to repurchase (300) (320)
Proceeds from Federal Home Loan Bank advances with
maturities in excess of three months 30,000 35,000
Repayments of Federal Home Loan Bank advances with
maturities in excess of three months (21,934) (24,855)
Proceeds of borrowings with maturities of three months
or less, net of repayments -- 2,559
Net decrease in loans sold with recourse -- (2,949)
Treasury stock purchased (3,253) (6,824)
Purchase of common stock in connection with employee and non-
employee directors benefit programs -- (5,453)
Dividends paid (705) (706)
-------- --------
Net cash provided (used) by financing activities 2,521 (18,137)
-------- --------
Net change in cash and cash equivalents 18,348 (22,149)
Cash and cash equivalents at beginning of quarter 42,123 43,612
-------- --------
Cash and cash equivalents at end of quarter $ 60,471 $ 21,463
======== ========
Supplemental cash flow information:
Interest paid on deposits $ 4,754 $ 7,267
Interest paid on borrowed funds 1,479 1,521
Income taxes paid (refunded), net 781 (48)
Transfers from loans to foreclosed real estate 2,000 --
See accompanying notes to unaudited consolidated financial statements.
5
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 2002 and
for the three month periods ended March 31, 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 March 31, 2002, the Company had outstanding commitments to originate new
residential and commercial loans totaling $24.8 million, which are not reflected
on the consolidated balance sheet. In addition, unadvanced funds on home equity
lines totaled $38.9 million and unadvanced commercial lines, including
unadvanced construction loan funds, totaled $53.6 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 reflects additional common shares that would have been outstanding if
potential diluted 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 months ended March 31, 2002
and 2001 respectively.
Basic earnings per share equaled $0.30 for the quarter ending March 31,
2002, based on 5,540,348 average shares outstanding as compared to $0.31 for the
quarter ending March 31, 2001 based on 6,678,372 average shares outstanding.
Diluted earnings per share equaled $0.28 for the quarter ending March 31, 2002,
based on 5,963,229 average shares outstanding as compared to $0.30 for the
quarter ending March 31, 2001 based on 6,915,909 average shares outstanding.
Note 4. Book Value
- --------------------
The book value per share of Berkshire Hills' common stock on March 31, 2002
was $21.92, based on total equity of $137.5 million and outstanding shares of
6,273,740. This compares to December 31, 2001's book value of $21.68, based on
total equity of $139.3 million and total outstanding shares of 6,425,140.
6
Note 5. Dividend
- ------------------
On January 23, 2002, our Board of Directors approved the payment of a cash
dividend of $0.12 per share, payable on February 22, 2002, to stockholders of
record on February 7, 2002.
Note 6. Stock Repurchase Program
- ----------------------------------
During the first quarter of 2002, the Company continued its fourth 5% stock
repurchase program purchasing 151,400 shares at a cost of $3.3 million. At March
31, 2002, a total of 305,552 shares out of an authorized 328,965 shares had been
purchased.
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. 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. The impact of adopting this
pronouncement benefited the Company by approximately $22,000 in the first
quarter. The Company will evaluate its goodwill for impairment prior to June 30,
2002.
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 months ended March 31, 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/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.
Comparison of Financial Condition at March 31, 2002 and December 31, 2001
Total assets at March 31, 2002 were $1.035 billion, an increase of $3.9
million, or 0.4%, from $1.031 billion at December 31, 2001. A planned reduction
in the origination of indirect automobile loans was the primary factor
responsible for a $17.1 million decrease in loans outstanding. Excess funds were
used to purchase securities which led to an $18.4 million increase in short-term
investments. Deposits declined $1.3 million to $741.4 million in the quarter as
growth in savings and money market accounts, fueled by municipal deposits,
nearly offset a decline in demand deposits and certificates of deposit.
8
Loans
Total loans outstanding decreased $17.1 million, or 2.1%, to $785.9 million
during the first quarter of 2002. Much of the decline came in the consumer loan
portfolio, which fell $10.8 million to $260.2 million at March 31, 2002,
reflecting the Company's strategy to reduce emphasis on indirect automobile
lending. The automobile loan portion of the portfolio decreased by $8.9 million
during the quarter and comprised 26.36% of total loans outstanding down from
26.90% at December 31, 2001. In an effort to mitigate future losses in the
consumer loan portfolio, 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 quarter of 2002, the Company saw its
sub-prime automobile loans fall from $113.9 million at December 31, 2001 to
$107.5 million at March 31, 2002. It is estimated that the balance of sub-prime
automobile loans held by the Company on December 31, 2002 will be approximately
$67.0 million.
Residential one-to four-family loans declined $7.3 million to $222.2
million at March 31, 2002 as the first quarter has historically been a slow
quarter for new mortgage originations and the Company continued to sell a
majority of its fixed rate one-to four-family loan originations.
Commercial construction loans decreased by $3.9 million as two large
projects completed construction in the first quarter of 2002. In each instance,
construction loans were converted to permanent financing. Somewhat offsetting
this decrease was over $2.2 million advanced on new construction projects.
Commercial loans increased by $4.7 million, or 2.7%, in the first quarter
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 in Albany, NY. In addition,
advances on lines of credits to existing borrowers accounted for over a million
dollars in new loans. This growth was partially offset by the transfer of a $2.0
million commercial loan secured by real estate into other real estate owned as
well as the full collection of a $912,000 nonaccrual loan.
At March 31, 2002 At December 31, 2001
-------------------------- ------------------------
Percent Percent
Balance of Total Balance of Total
------- -------- ------- --------
(Dollars in thousands)
Mortgage loans on real estate:
Residential one-to four-family $ 222,166 28.27% $ 229,432 28.57%
Residential construction 4,197 0.53% 3,585 0.45%
Commercial one-to four-family 11,177 1.42% 11,517 1.43%
Commercial real estate 84,583 10.76% 84,538 10.53%
Commercial construction 15,464 1.97% 19,351 2.41%
Multi-family 13,106 1.67% 13,183 1.64%
----------- ----- ----------- -----
Total real estate 350,693 44.62% 361,606 45.03%
Commercial loans 174,964 22.26% 170,305 21.21%
Consumer loans:
Automobile 207,165 26.36% 216,026 26.90%
Home equity loans 34,676 4.41% 34,439 4.30%
Other 18,392 2.34% 20,578 2.56%
----------- ----- ----------- -----
Total consumer loans 260,233 33.11% 271,043 33.76%
Total loans 785,890 802,954
Less: Allowance for loan losses (10,759) 1.37% (11,034) 1.37%
----------- -----------
Loans, net $ 775,131 $ 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 March 31, 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 March 31, 2002, the allowance for loan losses totaled $10.8 million, or
1.37% of total loans, as compared to $11.0 million, or 1.37% of total loans, on
December 31, 2001. Charged-off loans totaled $3.1 million during the first three
months this year as compared to $648,000 last year primarily due to continued
weakness in the indirect automobile portfolio and a change in charge-off policy
whereby all automobile loans that were 120 days or more past due, except for
those customers who are in bankruptcy proceedings, were charged-off. However,
recoveries totaled $1.3 million this year as compared to $137,000 last year, an
increase of $1.2 million, as the Company aggressively pursued the collection of
previously charged-off loans. On March 31, 2002, the allowance expressed as a
percentage of nonperforming loans was 329.12% while on March 31, 2001, it was
308.69%.
10
Three Months Ended
--------------------------------
March 31, 2002 March 31, 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 30 6
Consumer /1/ 2,699 642
-------- --------
Total charge-offs 3,089 648
Recoveries:
Residential one-to four-family -- --
Residential construction -- --
Commercial one-to four-family -- --
Commercial real estate -- --
Commercial construction -- --
Multi-family -- --
Commercial 22 9
Consumer /1/ 1,282 128
-------- --------
Total recoveries 1,304 137
Provision 1,510 840
-------- --------
Allowance for loan losses, end of period $ 10,759 $ 10,545
======== ========
Net loans charged-off to total loans 0.23% 0.06%
Allowance for loan losses to nonperforming loans 329.12% 308.69%
Recoveries to charge-offs 42.21% 21.14%
/1/ Consists primarily of automobile loans
11
Nonperforming Assets
The following table sets forth information regarding nonperforming assets
as of March 31, 2002 and December 31, 2001.
At March 31, 2002 At December 31, 2001
----------------- --------------------
(Dollars in thousands)
Nonaccruing loans:
Residential one-to four-family $ 961 $ 250
Residential construction -- --
Commercial one-to four-family 60 60
Commercial real estate -- --
Commercial construction -- --
Multi-family -- --
Commercial 1,806 2,077
Automobile 442 315
Home equity -- --
Other consumer -- --
----- -----
Total 3,269 2,702
----- -----
Other real estate owned 2,000 --
----- -----
Total nonperforming assets $5,269 $2,702
===== =====
Total nonperforming loans to total loans 0.42% 0.34%
Total nonperforming assets to total assets 0.51% 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 March 31, 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 of March 31, 2002, total nonaccruing loans amounted to $3.3 million, an
increase of $567,000, or 21.0%, from $2.7 million at December 31, 2001.
Nonaccruing residential one-to four- family loans totaled $961,000 at March 31,
2002, up $711,000 from $250,000 at December 31, 2001 as the Company put one
large property on nonaccrual. As a result, the ratio of nonperforming loans as a
percentage of total loans increased to 0.42% in March of 2002, from 0.34% as of
December 31, 2001. Foreclosed real estate was $2.0 million at March 31, 2002
versus zero at December 31, 2001 as the Company took possession of one
commercial property.
Investment Securities
Investment securities totaled $138.9 million at the end of March 2002 as
compared to $137.7 million at December 31, 2001. The net unrealized gain in the
portfolio decreased by $80,000 from December 31, 2001 to $18.8 million. This
change was recognized in accumulated other comprehensive income on the
consolidated statement of changes in stockholders' equity.
12
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 March 31, 2002 and December 31, 2001.
At March 31, 2002 At December 31, 2001
--------------------- --------------------
% of % of
Balance Deposits Balance Deposits
------- -------- ------- --------
(Dollars in thousands)
Demand deposits $ 78,795 10.63% $ 82,758 11.14%
NOW accounts 80,750 10.89% 80,970 10.90%
Savings accounts 155,246 20.94% 151,565 20.41%
Money Market accounts 115,530 15.58% 110,199 14.84%
Certificates of Deposit 311,121 41.96% 317,237 42.71%
------- -------
Total deposits $741,442 $742,729
======= =======
Total deposits were $741.4 million on March 31, 2002, a decrease of $1.3
million for the first three months of the year. An increase in municipal money
markets and savings deposits nearly offset a $6.1 million decrease in
certificates of deposit accounts. With market interest rates on certificates of
deposit approaching the levels paid on savings accounts, depositors transferred
funds from certificates of deposit into savings accounts. Demand deposit
accounts also dropped as companies who increased their balances at year end put
that cash to use as the first quarter progressed. Core deposits, which the
Company considers to be all but certificates of deposit, were 58.0% of total
deposits on March 31, 2002 as compared to 57.3% on December 31, 2001.
Borrowings
Borrowings from the Federal Home Loan Bank of Boston totaled $142.0 million
at March 31, 2002, an $8.1 million, or 6.0%, 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 $169 million.
Stockholders' Equity and Regulatory Capital
At March 31, 2002, the Company had $137.5 million in stockholders' equity
compared to $139.3 million at December 31, 2001. The decrease was primarily due
to the purchase of 151,400 shares of the Company's common stock under the
current repurchase program at a cost of $3.3 million. The Company also declared
and paid cash dividends of $0.12 per common share amounting to $705,000 during
the first quarter of 2002. Partially offsetting these decreases in stockholders'
equity was net income of $1.7 million.
The Company's capital to assets ratios for March 31, 2002 and December 31,
2001 were 13.29% and 13.52%, respectively. The various regulatory capital ratios
for the Company on March 31, 2002 and December 31, 2001 were as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Total capital to risk weighted assets 15.74% 15.73%
Tier 1 capital to risk weighted assets 12.94% 12.98%
Tier 1 capital to average assets 10.66% 11.02%
As of March 31, 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
13
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 March 31, 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 $451,000, or 4.5%, to $10.5 million for the first quarter
of 2002. The Company's net interest margin was 4.36% for the quarter ended March
31, 2002 compared to 4.21% for the same quarter last year. The elimination of
interest rate floors on certain deposit accounts helped widen the Company's net
interest margin this year.
Total interest and dividend income decreased $2.6 million, or 13.5%, to
$16.6 million for the first quarter of 2002 as compared to the same period last
year. Loan interest dropped to $15.0 million in the current quarter, a decrease
of $2.2 million, or 12.8%, 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.
Total interest expense fell $3.0 million, or 33.2%, to $6.1 million this
year due to lower rates paid on all interest-bearing liabilities. Deposit
expense fell by $2.6 million this year to $4.7 million as customers moved funds
out of certificate of deposit accounts and into more liquid money market and
savings accounts in the first quarter of 2002 compared to the first quarter of
last year. Interest on FHLB advances decreased $259,000 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 $1.5 million in the first
quarter of this year as compared to $840,000 in the same quarter last year. In
setting the provision for the first quarter of 2002, management took into
consideration a $21.2 million increase in commercial loans from the first
quarter of last year. This increase in commercial loans, along with a weakened
local economy, directly resulted in a $1.3 million increase in the commercial
loan reserve requirement. However, this increase in reserve requirements was
somewhat offset by a $662,000 decrease in the consumer loan reserve requirement
as consumer loan balances dropped $22.2 million to $260.2 million at March 31,
2002 from $282.5 million at March 31, 2001. The Company also looks closely at
loan charge-offs, which increased $2.4 million to $3.1 million in the first
quarter of this year from $648,000 last year. Foremost in this increase was
consumer loan charge-offs which rose $2.1 million to $2.7 million at March 31,
2002 from $642,000 at March 31, 2001. In looking to determine the provision for
loan losses, the Company also examined nonperforming loans which remained
relatively unchanged from the first quarter last year as total nonperforming
loans decreased $147,000 to $3.3 million at March 31, 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 $9.0 million
for the quarter ending March 31, 2002, as compared to $9.2 million for the same
period last year, a decrease of $219,000, or 2.4%.
Non-interest Income. For the three months ended March 31, 2002,
non-interest income totaled $2.7 million, an increase of $1.6 million from the
same quarter last year. This increase was primarily due to two new income
sources for the Company derived from the June 29, 2001 investment in EastPoint.
License sales and other fees totaled $364,000 this quarter and license
maintenance and
14
processing fees amounted to $1.1 million for the quarter. Excluding the income
derived from the investment in EastPoint, non-interest income increased
$193,000, or 17.4%. This increase was due primarily to an increase in loan fees
of $81,000 due to the sale of $4.2 million of long term fixed rate residential
mortgages and an increase in trust department fees of $57,000 primarily due to
an increased number of estate settlements during the quarter.
Non-interest Expenses. Non-interest (operating) expenses amounted to $9.2
million for the three months ending March 31, 2002, an increase of $2.0 million,
or 28.1%, from last year's $7.2 million. Salaries and benefits expense rose $1.9
million to $5.5 million this year from $3.6 million last year. Included in this
increase was a $1.3 million salaries expense for EastPoint and a $180,000
increase in 401(k), ESOP and Stock-Based Incentive Plan costs. Non-interest
expenses also rose due to a $329,000 increase in occupancy and equipment
expenses and a $46,000 increase in professional services related to the
operations at EastPoint. Meanwhile, office supplies expense decreased $102,000
to $183,000. Excluding the operating expenses of EastPoint which equaled $1.7
million, this quarter's operating expenses totaled $7.5 million, a $286,000
increase, or 4.0%, from last year's first quarter.
Income Taxes. Income taxes were $806,000 in this year's first quarter with
an effective tax rate of 32.5%. In the first quarter of last year, the effective
rate was 32.8%. The effective tax rate for 2002 is lower than 2001 due in part
to the establishment of a real estate investment trust in the second quarter 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 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 its deposits will remain with Berkshire Bank.
The primary source of funding for Berkshire Hills Bancorp is dividend
payments from Berkshire Bank, sales and maturities of investment securities, and
to a lesser extent, earnings on investments and deposits held by Berkshire Hills
Bancorp. Dividend payments by Berkshire Bank have primarily been used to fund
stock repurchase programs. The Bank's ability to pay dividends and other capital
distributions to Berkshire Hills Bancorp is generally limited by the
Massachusetts banking
15
regulations and 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 $28.8 million at March 31, 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
$80,000. It is not possible to predict with complete accuracy the direction and
magnitude of securities price changes. Unfavorable market conditions or other
factors could cause 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 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 believes 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.
16
The tables below set forth, as of March 31, 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
Interest Rates At March 31, 2002
in Basis Points -----------------------------------------------
(Rate Shock) Amount $ Change % Change
------------ ------ -------- --------
(Dollars in thousands)
200 $43,022 $ 500 1.18%
100 42,061 (461) (1.08)
Static 42,522 -- --
(100) 42,885 363 0.85
(200) 41,309 (1,213) (2.85)
Increase/
(Decrease)
in Market
Interest Rates At December 31, 2001
in Basis Points -----------------------------------------------
(Rate Shock) Amount $ Change % Change
------------ ------ -------- --------
(Dollars in thousands)
200 $45,863 $ 64 0.14%
100 45,209 (590) (1.29)
Static 45,799 -- --
(100) 46,332 533 1.16
(200) 44,955 (844) (1.84)
At March 31, 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 March 31, 2002 chart indicates a $363,000
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
March 31, 2002 chart indicates a decrease in net interest income of $461,000
compared to a $590,000 decrease in the December 31, 2001 chart. Increased
sensitivity to market interest rates in the consumer loan portfolio aids results
in the current quarter when rates rise, but mitigates the benefits when rates
fall.
In the event of a sudden and sustained decrease in prevailing market
interest rates of 200 basis points, the March 31, 2002 graph indicates a decline
in net interest income of $1.2 million compared to a $844,000 decline in the
December 31, 2001 chart. Similarly, a sudden and sustained increase of 200 basis
points in market interest rates would lead to a $500,000 increase in net
interest income in the March 31, 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.
17
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.
None.
ITEM 5. OTHER INFORMATION.
None.
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)
(b) 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.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE HILLS BANCORP, INC.
Dated: May 10, 2002 By: /s/ James A. Cunningham, Jr.
---------------------------------------------
James A. Cunningham, Jr.
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: May 10, 2002 By: /s/ Charles F. Plungis, Jr.
---------------------------------------------
Charles F. Plungis, Jr.
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
20