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 September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 1-15781
BERKSHIRE HILLS BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3510455
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 North Street, Pittsfield, Massachusetts 01201
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 443-5601
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 6,110,227 shares of common stock, par value $0.01 per share,
outstanding as of November 12, 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
September 30, 2002 and December 31, 2001
Consolidated Statements of Income for the Three and Nine 2
Months Ended September 30, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity 3
for the Nine Months Ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the 4
Nine Months Ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
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
Signatures 21
Certifications 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
----------- -----------
(In thousands)
Unaudited
Assets:
Cash and due from banks $ 24,320 $ 22,652
Short term investments 35,109 19,471
----------- -----------
Total cash and cash equivalents 59,429 42,123
Securities available for sale, at fair value 131,147 104,446
Securities held to maturity, at amortized cost 42,040 33,263
Federal Home Loan Bank stock, at cost 7,440 7,027
Savings Bank Life Insurance stock, at cost 2,043 2,043
Loans 786,687 800,414
Loans held for sale, at lower of cost or fair value -- 2,540
Allowance for loan losses (10,676) (11,034)
----------- -----------
Net loans 776,011 791,920
Premises and equipment, net 13,478 14,213
Foreclosed real estate 2,000 --
Accrued interest receivable 5,479 5,873
Goodwill and other intangibles 10,068 10,592
Other assets 17,507 19,201
----------- -----------
Total assets $ 1,066,642 $ 1,030,701
=========== ===========
Liabilities and Stockholders' Equity:
Deposits 774,721 742,729
Federal Home Loan Bank advances 146,947 133,964
Securities sold under agreements to repurchase 1,250 1,890
Net deferred tax liability 1,878 4,573
Accrued expenses and other liabilities 6,080 5,099
----------- -----------
Total liabilities 930,876 888,255
----------- -----------
Minority Interests 2,823 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 September 30, 2002 and
December 31, 2000; shares outstanding: 6,113,527 at
September 30, 2002 and 6,425,140 at December 31, 2001) 77 77
Additional paid-in capital 74,524 74,146
Unearned compensation (9,927) (11,101)
Retained earnings 84,652 80,657
Accumulated other comprehensive income 13,821 18,836
Treasury stock, at cost (1,560,234 shares at September 30, 2002
and 1,248,621 shares at December 31, 2001) (30,204) (23,292)
----------- -----------
Total stockholders' equity 132,943 139,323
----------- -----------
Total liabilities and stockholders' equity $ 1,066,642 $ 1,030,701
=========== ===========
See accompanying notes to unaudited consolidated financial statements
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- -------
(In thousands, except per share amounts)
Interest and dividend income:
Bond interest $ 1,368 $ 1,286 $ 3,940 $ 4,250
Stock dividends 411 393 1,031 1,143
Short term investment interest 121 128 326 272
Loan interest 14,551 17,289 44,282 51,831
-------- -------- -------- -------
Total interest and dividend income 16,451 19,096 49,579 57,496
-------- -------- -------- -------
Interest expense:
Interest on deposits 4,425 6,749 13,556 20,999
Interest on FHLB advances 1,463 1,703 4,307 5,077
Interest on securities sold under agreements
to repurchase and other borrowings 4 11 18 251
-------- -------- -------- -------
Total interest expense 5,892 8,463 17,881 26,327
-------- -------- -------- -------
Net interest income 10,559 10,633 31,698 31,169
Provision for loan losses 1,050 945 3,875 2,625
-------- -------- -------- -------
Net interest income, after provision for loan losses 9,509 9,688 27,823 28,544
-------- -------- -------- -------
Noninterest income:
Customer service fees 557 434 1,666 1,357
Trust department fees 411 428 1,365 1,303
Loan fees 79 235 394 486
Gain (loss) on securities, net (29) (11) (37) 266
License maintenance and processing fees 1,098 1,006 3,268 1,006
License sales and other fees 1,075 1,390 1,984 1,390
Other income 69 124 450 355
-------- -------- -------- -------
Total noninterest income 3,260 3,606 9,090 6,163
-------- -------- -------- -------
Operating expenses:
Salaries and benefits 5,411 5,063 16,261 12,665
Occupancy and equipment 1,236 1,291 3,932 3,332
Marketing and advertising 177 120 389 409
Data processing 148 424 494 864
Professional services 337 429 942 859
Office supplies 154 162 531 682
Foreclosed real estate and other loans, net 581 604 1,822 1,840
Amortization of other intangibles 175 196 524 445
Minority Interests (43) 29 (300) 29
Other expenses 1,268 1,111 3,343 2,879
-------- -------- -------- -------
Total operating expenses 9,444 9,429 27,938 24,004
-------- -------- -------- -------
Income before taxes 3,325 3,865 8,975 10,703
Provision for income taxes 1,081 1,258 2,917 3,511
-------- -------- -------- -------
Net income $ 2,244 $ 2,607 $ 6,058 $ 7,192
======== ======== ======== =======
Earnings per share:
Basic $ 0.42 $ 0.42 $ 1.11 $ 1.12
Diluted $ 0.38 $ 0.40 $ 1.03 $ 1.06
Weighted average shares outstanding:
Basic 5,378 6,196 5,457 6,432
Diluted 5,850 6,568 5,907 6,755
See accompanying notes to unaudited consolidated financial statements
2
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
UNAUDITED
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
-------- -------- ------------ -------- ------- -------- --------
(In thousands)
Balance at December 31, 2000 $ 77 $ 74,054 $ (7,187) $ 74,554 $19,824 $ -- $161,322
Comprehensive income :
Net income -- -- -- 7,192 -- -- 7,192
Change in net unrealized gain on
securities available for sale, net of
re-classification adjustments and tax effects -- -- -- -- (1,729) -- (1,729)
--------
Total comprehensive income -- -- -- -- -- -- 5,463
Cash dividends declared -- -- -- (2,147) -- -- (2,147)
Treasury stock purchased -- -- -- -- -- (15,428) (15,428)
Purchase of common stock - MRP -- -- (5,453) -- -- -- (5,453)
Change in unearned compensation - MRP -- -- 727 -- -- -- 727
Change in unearned compensation - ESOP -- 167 411 -- -- -- 578
-------- -------- -------- -------- ------- -------- --------
Balance at September 30, 2001 $ 77 $ 74,221 $(11,502) $ 79,599 $18,095 $(15,428) $145,062
======== ======== ======== ======== ======= ======== ========
Balance at December 31, 2001 $ 77 $ 74,146 $(11,101) $ 80,657 $18,836 $(23,292) $139,323
Comprehensive income:
Net Income -- -- -- 6,058 -- -- 6,058
Change in net unrealized gain on
securities available for sale, net of
re-classification adjustments and tax effects -- -- -- -- (5,015) -- (5,015)
--------
Total comprehensive income 1,043
Cash dividends declared ($.36 per share) -- -- -- (2,063) -- -- (2,063)
Treasury stock purchased -- -- -- -- -- (6,912) (6,912)
Change in unearned compensation - MRP -- 74 818 -- -- -- 892
Change in unearned compensation - ESOP -- 304 356 -- -- -- 660
-------- -------- -------- -------- ------- -------- --------
Balance at September 30, 2002 $ 77 $ 74,524 $ (9,927) $ 84,652 $13,821 $(30,204) $132,943
======== ======== ======== ======== ======= ======== ========
See accompanying notes to unaudited consolidated financial statements.
3
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended September 30,
--------------------------
2002 2001
--------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 6,058 $ 7,192
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 3,875 2,625
Net amortization of securities 593 131
Depreciation and amortization expense 1,797 1,441
Amortization of other intangibles 524 445
Management Rewards Plan Expense 892 727
ESOP Plan Expense 660 578
Gain on sales and dispositions of securities, net (310) (266)
Loss on impairment of securities 347 --
Loss on sale of equipment -- 35
Deferred tax provision -- 9
Net change in loans held for sale -- (1,265)
Minority interest (300) 29
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 2,088 395
Accrued expenses and other liabilities 981 2,250
--------- --------
Net cash provided by operating activities 17,205 14,326
--------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales 9,067 8,315
Maturities 43,123 22,369
Principal payments 17,963 11,280
Purchases (105,046) (38,624)
Activity in held to maturity securities:
Maturities 9,431 11,597
Principal payments 17,693 16,462
Purchases (36,049) (23,130)
Purchase of Federal Home Loan Bank stock (413) (1,376)
Loan originations, net of principal payments 10,034 (23,613)
Additions to banking premises and equipment (1,062) (1,836)
Proceeds from sales of foreclosed real estate -- 76
Proceeds from sale of equipment -- 20
Payment for purchase of EastPoint Technologies, LLC -- (7,300)
--------- --------
Net cash used by investing activities (35,259) (25,760)
--------- --------
(continued)
4
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
Unaudited
Nine Months Ended September 30,
--------------------------
2002 2001
-------- ---------
(In thousands)
Cash flows from financing activities:
Net increase in deposits $ 31,992 $ 14,298
Net decrease in securities sold under agreements
to repurchase (640) (180)
Proceeds from Federal Home Loan Bank advances with maturities
in excess of three months 75,172 122,000
Repayments of Federal Home Loan Bank advances with maturities
in excess of three months (62,189) (87,516)
Proceeds of borrowings with maturities of three months or less, net of
Repayments -- --
Net decrease in loans sold with recourse -- (7,740)
Treasury stock purchased (6,912) (15,428)
Purchase of common stock in connection with employee and
non-employee directors benefit programs -- (5,453)
Dividends paid (2,063) (2,147)
-------- ---------
Net cash provided by financing activities 35,360 17,834
-------- ---------
Net change in cash and cash equivalents 17,306 6,400
Cash and cash equivalents at beginning of period 42,123 43,612
-------- ---------
Cash and cash equivalents at end of period $ 59,429 $ 50,012
======== =========
Supplemental cash flow information:
Interest paid on deposits $ 13,551 $ 21,060
Interest paid on borrowed funds 4,352 5,146
Income taxes paid 1,675 2,316
Transfers from loans to foreclosed real estate 2,000 26
See accompanying notes to unaudited consolidated financial statements.
5
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(Unaudited)
Note 1. Basis of Presentation
- -----------------------------
The consolidated interim financial statements of Berkshire Hills Bancorp,
Inc. ("Berkshire Hills" or the "Company") and its wholly owned subsidiaries,
Berkshire Bank (the "Bank"), Berkshire Hills Funding Corp., and Berkshire Hills
Technology, Inc. herein presented are intended to be read in conjunction with
the consolidated financial statements presented in the Company's most recent
Securities and Exchange Commission Form 10-K and accompanying notes to the
Consolidated Financial Statements filed by the Company for the year ended
December 31, 2001. The consolidated financial information at September 30, 2002
and for the three and nine month periods ended September 30, 2002 and 2001 are
derived from unaudited consolidated financial statements but, in the opinion of
management, reflect all adjustments necessary to present fairly the results for
these interim periods in accordance with accounting principles generally
accepted in the United States of America. These adjustments consist only of
normal recurring adjustments. The interim results are not necessarily indicative
of the results of operations that may be expected for the entire year.
Note 2. Commitments
- -------------------
At September 30, 2002, the Company had outstanding commitments to originate
new residential and commercial loans totaling $27.0 million, which are not
reflected on the consolidated balance sheet. In addition, unadvanced funds on
home equity lines totaled $40.6 million and unadvanced commercial lines,
including unadvanced construction loan funds, totaled $62.3 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 nine months ended
September 30, 2002 and 2001, respectively.
Basic earnings per share equaled $0.42 for the quarter ending September 30,
2002, based on 5,378,371 average shares outstanding as compared to $0.42 for the
quarter ending September 30, 2001 based on 6,196,013 average shares outstanding.
Diluted earnings per share equaled $0.38 for the quarter ending September 30,
2002, based on 5,849,618 average shares outstanding as compared to $0.40 for the
quarter ending September 30, 2001 based on 6,567,976 average shares outstanding.
Basic and diluted earnings per share for the nine months ending September
30, 2002 were $1.11 and $1.03 respectively, based on 5,457,271 average shares
outstanding and 5,907,230 average shares outstanding, respectively. This
compares to basic and diluted earnings per share for the nine months ended
September 30, 2001 of $1.12 and $1.06 respectively, based on 6,432,179 average
shares outstanding and 6,754,663 average shares outstanding, respectively.
Note 4. Book Value
- ------------------
The book value per share of Berkshire Hills' common stock at September 30,
2002 was $21.75, based on total equity of $132.9 million and outstanding shares
of 6,113,527. The book value at December 31, 2001 was $21.68 based on total
equity of $139.3 million and total outstanding shares of 6,425,140.
6
Note 5. Dividend
- -----------------
On July 24, 2002, the Company's Board of Directors approved the payment of
a cash dividend of $0.12 per share, payable on August 23, 2002, to stockholders
of record on August 8, 2002.
Note 6. Stock Repurchase Program
- --------------------------------
During the third quarter of 2002, the Company continued its fifth 5% stock
repurchase program purchasing 28,200 shares at a cost of $618,000. The Company
has 172,416 shares available for repurchase under this program. The Company has
repurchased 311,613 shares at a cost of $6.9 million during 2002.
Note 7. Recent Accounting Pronouncements
- ------------------------------------------
On June 30, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. With the adoption of SFAS No. 142,
effective January 1, 2001, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair value based test.
Additionally, under SFAS No. 142, acquired intangible assets should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of intent to do so. As a
result of the Company's investment in EastPoint Technologies, LLC, $4.3 million
of goodwill was recorded on the books of the Company. An annual evaluation of
this goodwill was completed in June 2002 and resulted in no impairment in 2002,
as of the evaluation date.
Note 8. Real Estate Investment Trust (REIT)
- ---------------------------------------------
Berkshire Hills established a real estate investment trust (REIT) in the
second quarter of 2001. As a result of its operations, the Company was able to
reduce its tax obligations by an estimated $205,000 in the third quarter of 2002
and $346,000 for the first nine months of 2002. Similarly, for the year ended
December 31, 2001, it is estimated the operations of the REIT reduced the
Company's net tax liability by $494,000. Recently, the Massachusetts Department
of Revenue has questioned the applicability of allowing a deduction on dividends
upstreamed from a bank-established REIT to a parent company. While the ultimate
resolution of the matter is uncertain and no assurances can be made that such
deductions will be deemed to be appropriate for state tax purposes, the Company
believes the deductions it has taken to date are appropriate and thus has not
taken any provision in its financial statements for any amounts that the
Department of Revenue may assess in the future.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following analysis discusses changes in the financial condition and
results of operations at and for the three and nine months ended September 30,
2002 and 2001, and should be read in conjunction with Berkshire Hills Bancorp,
Inc.'s Consolidated Financial Statements and the notes thereto, appearing in
Part I, Item 1 of this document.
Forward Looking Statements
This report contains forward looking statements that are based on
assumptions and may describe future plans, strategies, and expectations of
Berkshire Hills and Berkshire Bank. These forward looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Berkshire Hills'
and Berkshire Bank's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations of Berkshire Hills and its subsidiaries
include, but are not limited to, changes in interest rates, national and
regional economic conditions, legislative and regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality and composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in Berkshire Hills' and Berkshire Bank's market
area, changes in real estate market values in Berkshire Hills' 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.
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 October 17, 2002, Berkshire Hills announced that Michael P. Daly, who
previously served as Executive Vice President of the Company and the Bank, was
appointed to serve as President, Chief Executive Officer and a Director of the
Company and the Bank and that Lawrence A. Bossidy was appointed as Non-Executive
Chairman of the Board of Directors of the Company.
On October 17, 2002, the Company also announced that James A. Cunningham,
Jr. resigned as President, Chief Executive Officer and a Director of the Company
and the Bank, effective October 16, 2002. In connection with his resignation,
the Company, the Bank and Mr. Cunningham entered into a severance agreement to
resolve the obligation owed Mr. Cunningham under his existing employment
agreements which provided severance payments and benefits. Such severance
agreement also provides the Company and Bank with a release from certain other
claims related to Mr. Cunningham's employment and impose certain restrictions on
him, including non-competition and confidentiality requirements.The Company
expects to incur a $2.4 million (after-tax) charge in the fourth quarter in
connection with the severance agreement.
Berkshire Hills named Michael J. Ferry as Senior Vice President of
Commercial Lending of Berkshire Bank and Linda A. Johnston had been named Senior
Vice President of Human Resources of Berkshire Bank. Mr. Ferry and Ms. Johnston
had each previously served as a vice president of Berkshire Bank. Additionally,
Berkshire Hills announced that the responsibilities of Gayle P. Fawcett, Senior
Vice President of Systems and Operations, had been expanded to include oversight
over branch administration, marketing and facilities.
The individuals listed above have assumed the responsibilities of Susan M.
Santora, Executive Vice President of Berkshire Hills and Berkshire Bank, who
will resign effective November 15, 2002, and John A. Davidson, Senior Vice
President of Berkshire Bank, who will resign effective December 20, 2002.
Additionally, Charles F. Plungis, Jr., Senior Vice President, Treasurer and
Chief Financial Officer of Berkshire Hills and Berkshire Bank, will be resigning
effective upon the earlier of February 28, 2003 or as Berkshire Hills and
Berkshire Bank may determine to be appropriate after the fiscal year-end
reporting is completed. Berkshire Hills and Berkshire Bank entered into
severance agreements with such departing officers to resolve obligations owed
under existing employment agreements or change-in-control agreements which
provided severance payments and benefits to such officers. Such severance
agreements also provide the Company and Bank with a release from certain other
claims related to their employment and impose certain restrictions on such
individuals, including non-competition and confidentiality requirements.
Berkshire Hills expects to incur an after-tax charge of approximately $2.0
million in the fourth quarter in connection with these severance agreements.
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Total assets at September 30, 2002 were $1.07 billion, an increase of $35.9
million, or 3.5%, from $1.03 billion at December 31, 2001. Securities, including
Federal Home Loan Bank stock and Savings Bank Life Insurance stock, totaled
$182.7 million at September 30, 2002, a $35.9 million, or 24.4%, increase from
$146.8 million at December 31, 2001. Short-term investments increased $15.6
million, or 80.3%, to $35.1 million at September 30, 2002. A $16.3 million, or
2.0%, decrease in loans outstanding, which totaled $786.7 million at September
30, 2002, as well as a $32.0 million increase in deposits to $774.7 million at
8
September 30, 2002 and a $13.0 million increase in Federal Home Loan Bank
advances, which totaled $146.9 million at September 30, 2002, funded the
securities and short term investments increases.
Loans
Total loans outstanding decreased $16.3 million, or 2.0%, to $786.7 million
during the first nine months of 2002. The lower total outstanding was due to a
decrease in sub-prime automobile loans resulting from the Company's strategy to
exit the sub-prime automobile loan business and lower balances in the commercial
land development and construction loan category outpaced increases in the
commercial real estate and residential land development and construction loan
portfolios. The consumer loan portfolio fell $30.1 million, or 11.1%, to $241.0
million at September 30, 2002. The automobile loan portion of the portfolio
decreased by $29.0 million during the first nine months of 2002 and comprised
23.78% of total loans outstanding at September 30, 2002 down from 26.90% at
December 31, 2001. The Company has decided to exit the sub-prime automobile loan
business by allowing its existing sub-prime automobile loans to pay down and by
discontinuing the origination of new sub-prime loans. In implementing this
strategy during the first nine months of 2002, the Company saw its sub-prime
automobile loans fall from $113.9 million at December 31, 2001 to $88.2 million
at September 30, 2002. It is estimated that the balance of sub-prime automobile
loans held by the Company on December 31, 2002 will be approximately $79.0
million.
Residential one-to four-family loans declined $2.9 million to $226.5
million at September 30, 2002 as mortgage originations did not fully offset
monthly amortization and prepayments. Residential land development and
construction loans increased $3.8 million, or 107.4%, to $7.4 million reflecting
a strong local new housing market.
Commercial land development and construction loans decreased by $9.5
million as several large projects converted to permanent financing. The
conversion of these loans as well as the origination of $12.0 million in net new
business resulted in a $21.5 million, or 25.5%, increase in commercial real
estate loans.
At September 30, 2002 At December 31, 2001
---------------------- -----------------------
Percent Percent
Balance of total Balance of total
----------- -------- ----------- ---------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 226,525 28.81% $ 229,432 28.57%
Residential land development
and construction 7,434 0.94% 3,585 0.45%
Commercial one-to four-family 10,768 1.37% 11,517 1.43%
Commercial real estate 106,074 13.48% 84,538 10.53%
Commercial land development
and construction 9,832 1.25% 19,351 2.41%
Multi-family 14,973 1.90% 13,183 1.64%
----------- -------- ----------- ---------
Total real estate loans 375,606 47.75% 361,606 45.03%
Commercial loans 170,130 21.62% 170,305 21.21%
Consumer loans:
Automobile 187,025 23.78% 216,026 26.90%
Home equity loans 38,645 4.91% 34,439 4.30%
Other 15,281 1.94% 20,578 2.56%
----------- -------- ----------- ---------
Total consumer loans 240,951 30.63% 271,043 33.76%
Total loans 786,687 802,954
Less: Allowance for loan losses (10,676) 1.36% (11,034) 1.37%
----------- -----------
Loans, net $ 776,011 $ 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 September 30, 2002, the Company's allowance for loan losses
is sufficient to cover losses inherent in the Company's current loan portfolio.
The allowance consists of allocated, general and unallocated components.
The allocated component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors such as the credit history and credit quality of the borrower, the type
and geographic concentration of loans in the portfolio, and the local economic
environment. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating losses in the portfolio.
On September 30, 2002, the allowance for loan losses totaled $10.7 million,
or 1.36% of total loans outstanding, as compared to $11.0 million, or 1.37% of
total loans outstanding, at December 31, 2001. Charged-off loans totaled $6.8
million during the first nine months this year as compared to $2.6 million last
year primarily due to continued weakness in the indirect automobile portfolio
and the institution of a new, more aggressive policy in the fourth quarter of
2001 regarding the charge-off of automobile loans. Under the new policy, all
delinquent automobile loans remain on accrual status until they are 120 days
past due at which time they are charged off, except for loans to customers in
bankruptcy proceedings, which are transferred to nonaccrual status. In addition,
two commercial real estate loans totaling $510,000 were charged off in the first
nine months of 2002 versus none last year. Recoveries totaled $2.6 million for
the nine months this year as compared to $591,000 for the nine months last year,
an increase of $2.0 million, as the Company aggressively pursued the collection
of previously charged-off loans. On September 30, 2002, the allowance expressed
as a percentage of nonperforming loans was 424.66% while on September 30, 2001
it was 179.58%.
10
The following table sets forth information regarding the allowance for loan
losses for the nine month periods ended September 30, 2002 and 2001.
Nine Months Ended
------------------------------------------
September 30, 2002 September 30, 2001
------------------ -------------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $11,034 $10,216
Charge-offs:
Residential one-to four-family -- 33
Residential land development and construction -- --
Commercial one-to four-family -- --
Commercial real estate 510 --
Commercial land development and construction -- --
Multi-family -- --
Commercial 204 139
Consumer (1) 6,115 2,419
------- -------
Total charge-offs 6,829 2,591
------- -------
Recoveries:
Residential one-to four-family -- --
Residential land development and construction -- --
Commercial one-to four-family -- --
Commercial real estate -- --
Commercial land development and construction -- --
Multi-family -- --
Commercial 133 225
Consumer (1) 2,463 366
------- -------
Total recoveries 2,596 591
------- -------
Net charge offs 4,233 2,000
Provision 3,875 2,625
------- -------
Allowance for loan losses, end of period $10,676 $10,841
======= =======
Net loans charged-off to total loans 0.54% 0.24%
Allowance for loan losses to total loans 1.36% 1.33%
Allowance for loan losses to nonperforming loans 424.66% 179.58%
Recoveries to charge-offs 38.01% 22.81%
(1) Consists primarily of automobile loans
11
Nonperforming Assets
The following table sets forth information regarding nonperforming assets
as of September 30, 2002 and December 31, 2001.
At September 30, 2002 At December 31, 2001
--------------------- ---------------------
(Dollars in thousands)
Nonaccruing loans:
Residential one-to four-family $ 166 $ 250
Residential land development
and construction -- --
Commercial one-to four-family -- 60
Commercial real estate -- --
Commercial land development
and construction -- --
Multi-family -- --
Commercial 1,490 2,077
Automobile 858 315
Home equity -- --
Other consumer -- --
------ ------
Total 2,514 2,702
------ ------
Other real estate owned 2,000 --
------ ------
Total nonperforming assets $4,514 $2,702
====== ======
Total nonperforming loans to total loans 0.32% 0.34%
Total nonperforming assets to total assets 0.42% 0.26%
Generally, the Company ceases accruing interest on all loans when principal
or interest payments are 90 days or more past due unless management determines
the principal and interest to be fully secured and in the process of collection.
Once management determines that interest is uncollectible and ceases accruing
interest on a loan, all previously accrued interest is reversed against current
interest income. However, in the last quarter of 2001, the Company initiated a
new policy for automobile loans whereby all delinquent automobile loans remain
on accrual status until they are 120 days past due at which time they are
charged off, except for loans to customers in bankruptcy proceedings, which are
transferred to nonaccrual status. At September 30, 2002, the Company had $1.2
million in automobile loans that were 90 days past due and still accruing as
compared to $1.3 million at December 31, 2001.
Total nonaccruing loans amounted to $2.5 million, a decrease of $188,000,
or 7.0%, from $2.7 million at December 31, 2001. This decrease was due to the
decrease in commercial nonaccruing loans, which declined to $1.5 million at
September 30, 2002 from $2.1 million at December 31, 2001 as collections more
than offset new loans added to the commercial nonaccruing totals. Partially
offsetting this decrease was an increase in automobile nonaccruing loans of
$543,000 as all previous nonaccural automobile loans remain on nonaccrual until
such loans are current for a period of six months. The ratio of nonperforming
loans as a percentage of total loans decreased to 0.32% at September 30, 2002
from 0.34% as of December 31, 2001. Foreclosed real estate was $2.0 million at
September 30, 2002 versus zero at December 31, 2001 as the Company took
possession of one commercial property.
Investment Securities
Securities, including Federal Home Loan Bank stock and Savings Bank Life
Insurance stock, totaled $182.7 million at September 30, 2002, a $35.9 million,
or 24.4%, increase from $146.8 million at December 31, 2001. This increase was
primarily due to an increase in investments in callable agency securities with
final maturities of five years or less. The net unrealized gain in the portfolio
decreased by $5.0 million from December 31, 2001 to $13.8 million due to this
year's decline in equity prices. This change was recognized in accumulated other
comprehensive income on the consolidated statement of changes in stockholders'
equity.
12
Miscellaneous Assets
Miscellaneous assets, which include premises and equipment, foreclosed real
estate, accrued interest receivable, goodwill and other intangibles, and other
assets, totaled $48.5 million at September 30, 2002, a decrease of $1.3 million,
or 2.7%, from $49.9 million at December 31, 2001. The decrease in miscellaneous
assets was primarily due to a $477,000 decrease in repossessed automobiles from
December 31, 2001, as repossessed automobiles totaled $2.1 million at September
30, 2002 and a $524,000 decrease in other intangible assets due to normal
amortization.
Deposits
Customers' deposits are the primary funding vehicle for the Company's asset
base. The following table sets forth the Company's deposit stratification as of
September 30, 2002 and December 31, 2001.
At September 30, 2002 At December 31, 2001
--------------------------- ---------------------------
Percent Percent
Balance of deposits Balance of deposits
----------- ----------- ----------- -----------
(Dollars in thousands)
Demand deposits $84,829 10.95% $82,758 11.14%
NOW accounts 84,208 10.87% 80,970 10.90%
Savings accounts 158,510 20.46% 151,565 20.41%
Money market accounts 117,002 15.10% 110,199 14.84%
Certificates of deposit 330,172 42.62% 317,237 42.71%
----------- -----------
Total deposits $ 774,721 $ 742,729
=========== ===========
Total deposits were $774.7 million on September 30, 2002, an increase of
$32.0 million for the first nine months of the year as deposits rebounded well
in the second and third quarters from a seasonally slow first quarter.
Certificates of deposit and savings accounts increased $19.9 million from
December 31, 2001 while demand deposit accounts increased $2.1 million. Money
market and NOW accounts increased $10.0 million. Core deposits, which the
Company considers to be all but certificates of deposit, were 57.4% of total
deposits on September 30, 2002 as compared to 57.3% on December 31, 2001.
Borrowings
Borrowings from the Federal Home Loan Bank of Boston totaled $146.9 million
at September 30, 2002, a $13.0 million, or 9.7%, increase from $134.0 million at
December 31, 2001, as the Company has looked to extend maturities and take
advantage of low cost funds. The Company's borrowing capacity at the Federal
Home Loan Bank of Boston is in excess of $175 million.
Stockholders' Equity
At September 30, 2002, the Company had $132.9 million in stockholders'
equity compared to $139.3 million at December 31, 2001. The decrease was
primarily due to the purchase of 311,613 shares of the Company's common stock
under this year's repurchase programs at a cost of $6.9 million. The Company
also declared and paid cash dividends of $0.36 per common share amounting to
$2.1 million during the first nine months of 2002. The net unrealized gain in
the securities portfolio decreased by $5.0 million from December 31, 2001 to
$13.8 million. This change was recognized in accumulated other comprehensive
income on the consolidated statement of changes in stockholders' equity.
Partially offsetting these decreases in stockholders' equity was net income of
$6.1 million.
Comparison of Operating Results for the Three Months Ended September 30, 2002
and 2001
Net Interest Income. Net interest income is the largest component of the
Company's revenue stream and is the difference between the interest and
dividends earned on the loan and investment portfolios and the interest paid on
the Company's funding sources, primarily customer deposits and advances from the
Federal Home Loan Bank of Boston. Net interest income, before the provision for
loan losses, decreased $74,000, or 0.7%, to $10.6 million for the third quarter
of 2002. The Company's net interest margin was 4.21% for the quarter ended
September 30, 2002 compared to 4.36% for the same quarter last year as customers
refinanced loans at lower rates and pay downs for higher rate automobile and
other loans were reinvested in lower yielding securities.
13
Total interest and dividend income decreased $2.6 million, or 13.9%, to
$16.5 million for the third quarter of 2002 as compared to the same period last
year. Loan interest dropped to $14.6 million in the current quarter, a decrease
of $2.7 million, or 15.8%, due to lower average loan balances compared to the
third quarter last year and due to lower yields as rates have remained at levels
below those experienced in 2001.
Total interest expense fell $2.6 million, or 30.4%, to $5.9 million for the
third quarter due to lower rates paid on all interest-bearing liabilities.
Deposit expense fell by $2.3 million for the third quarter of 2002 to $4.4
million while interest on FHLB advances decreased $240,000 to $1.5 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 $1.1 million in the third
quarter of this year as compared to $945,000 in the same quarter last year. In
assessing the provision for the third quarter of 2002, management took into
consideration a $14.6 million increase in commercial loans from the third
quarter of last year. This increase in commercial loans directly resulted in a
$714,000 increase in the commercial loan reserve requirement. However, this
increase in reserve requirement was more than offset by a $1.3 million decrease
in the consumer loan reserve requirement as consumer loan balances dropped $40.5
million to $241.0 million at September 30, 2002 from $281.4 million at September
30, 2001. The Company also looks closely at loan charge-offs, which increased
$738,000 to $1.8 million in the third quarter of this year from $1.1 million
last year. Foremost in this increase was consumer loan charge-offs which rose
$723,000 to $1.7 million at September 30, 2002 from $965,000 at September 30,
2001. In establishing the provision for loan losses, the Company also examined
nonperforming loans which decreased significantly, from $6.0 million at
September 30, 2001 to $2.5 million at September 30, 2002. The Company also
evaluates current recoveries and the likelihood for recoveries of previously
charged-off loans, among other items.
After the provision for loan losses, net interest income was $9.5 million
for the quarter ending September 30, 2002, as compared to $9.7 million for the
same period last year, a decrease of $179,000, or 1.8%.
Noninterest Income. For the three months ended September 30, 2002,
noninterest income totaled $3.3 million, a decrease of $346,000 from the same
quarter last year. A large one-time incremental license fee earned by EastPoint
of $1.1 million inflated last year's total. Excluding that $1.1 million fee,
revenues for EastPoint were $2.2 million for the three months ended September
30, 2002 compared to $1.3 million for the three months ended September 30, 2001.
Higher ATM and debit card usage helped produce an increase of $123,000 to
$557,000 in 2002's third quarter customer service fees. However, loan fees
dropped $156,000 to $79,000 as the Company decided earlier this year to retain
in portfolio all loans that it originates and thus is now servicing fewer loans.
Noninterest Expenses. Noninterest (operating) expenses amounted to $9.4
million for the three months ending September 30, 2002, an increase of only
$15,000 from last year's third quarter totals. Salaries and benefits expense
rose $348,000, or 6.9%, to $5.4 million in the third quarter of this year from
$5.1 million in the third quarter of last year. However, this increase was
partially offset by a $276,000 decrease in data processing expenses as a switch
in ATM network vendors resulted in lower operating costs for the third quarter
this year. The data processing expense for the third quarter of last year
included $173,000 in nonrecurring costs. In addition, professional services fees
decreased $92,000.
Income Taxes. Income taxes were $1.1 million in this year's third quarter
with an effective tax rate of 32.5%, the same tax rate as the third quarter last
year.
Berkshire Hills established a real estate investment trust (REIT) in the
second quarter of 2001. As a result of its operations, the Company was able to
reduce its tax obligations by an estimated $205,000 in the third quarter of 2002
and $346,000 for the first nine months of 2002. Similarly, for the year ended
December 31, 2001, it is estimated the operations of the REIT reduced the
Company's net tax liability by $494,000. Recently, the Massachusetts Department
of Revenue has questioned the applicability of allowing a deduction on dividends
upstreamed from a bank-established REIT to a parent company. While the ultimate
resolution of the matter is uncertain and no assurances can be made that such
deductions will be deemed to be appropriate for state tax purposes, the Company
believes the deductions it has taken to date are appropriate and thus has not
taken any provision in its financial statements for any amounts that the
Department of Revenue may assess in the future.
14
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
2001
Net Interest Income. Net interest income, before the provision for loan
losses, totaled $31.7 million for the first nine months of 2002, up $529,000
from $31.2 million over the same period last year. Both interest income and
interest expense have declined over the first nine months of this year due to
the lower market interest rate environment, however, the decline in interest
income was more than offset by the decline in interest expense. The Company's
net interest margin equaled 4.32% over the first nine months of 2002 versus
4.31% last year. The increase in net interest margin was primarily due to the
elimination of interest rate floors on certain deposit accounts in the second
half of 2001. The Company's Asset/Liability committee strives to keep the
Company's net interest margin as unaffected as possible by market interest rate
fluctuations. This was accomplished as declines in the rates earned on the
Company's loan and securities portfolios over the first nine months this year
were more than offset by decreases in the rates paid on deposits and the
refinancing of advances from the Federal Home Loan Bank of Boston at lower
rates.
Total interest and dividend income totaled $49.6 million for the first nine
months of 2002, a $7.9 million, or 13.8%, decrease from $57.5 million over the
first nine months last year. The interest earned on the Company's loan portfolio
dropped $7.5 million to $44.3 million for the nine months ended September 30,
2002 as loan yields fell due to heavy refinancing activity resulting from the
sharp decline in interest rates and a competitive local marketplace.
Total interest expense dropped $8.4 million, or 32.1%, to $17.9 million for
the nine months ended September 30, 2002 due to lower rates paid on all interest
bearing liabilities. Interest paid on deposits totaled $13.6 million, a decrease
of $7.4 million from $21.0 million over the comparable period last year.
Interest on FHLB advances dropped $770,000 as lower rates offset higher
balances.
The provision for loan losses increased $1.3 million to $3.9 million for
the first three quarters of 2002 from $2.6 million for the first nine months of
2001. In assessing the Company's provision, management looks closely at the
balances and rate of loan growth in the various Company loan portfolios,
especially its consumer loan and commercial loan portfolios. Due to increases in
the balance of the commercial loan portfolio, the Company increased the
provision by $714,000 from where it was one year ago. Offsetting this is a lower
balance in the consumer loan portfolio and in particular, the sub-prime indirect
automobile loan portfolio, which allowed management to lower the provision by
$1.3 million. The Company also evaluates loan charge-offs in determining the
provision for loan losses. Loan charge-offs increased by $4.3 million in the
first nine months of 2002 over the same period last year. Of these, consumer
loan charge-offs increased $3.7 million to $6.1 million at September 30, 2002
from $2.4 million at September 30, 2001. Management also considers the level and
trend of nonperforming loans in determining the provision for loan losses.
Nonperforming loans totaled $2.5 million at September 30, 2002, a $3.5 million
decrease from $6.0 million at September 30, 2001. Among other items, the Company
also evaluates current recoveries and the likelihood for recoveries of
previously charged off loans.
After the provision for loan losses, net interest income was $27.8 million
for the first nine months of 2002, as compared to $28.5 million for the same
period last year, a decrease of $721,000, or 2.5%.
Noninterest Income. For the nine months ended September 30, 2002,
noninterest income totaled $9.1 million, a $2.9 million increase from $6.2
million for the same period last year. Substantially all of this increase was
related to the operations of EastPoint, as nine months worth of license fees
totaling $5.3 million were included in 2002's results while only three months
worth of license fees totaling $2.4 million were included in 2001's results.
Excluding EastPoint's contribution, noninterest income increased $71,000, or
1.9%, over last year's $3.8 million. During the first nine months of 2002
customer service fees increased $309,000 to $1.7 million due to higher ATM and
debit card usage and deposit account service charges. Trust department fees rose
$62,000 to $1.4 million versus the same period last year. Somewhat offsetting
these increases was a $37,000 loss on the sale of securities this year as
opposed to a gain of $266,000 last year, a difference of $303,000. Loan fees
decreased $92,000 for the first nine months of 2002 versus the first nine months
last year as the Company decided to retain new originations and is servicing
fewer loans.
Noninterest Expenses. Noninterest (operating) expense totaled $27.9 million
for the nine months ended September 30, 2002, an increase of $3.9 million, or
16.4%, from $24.0 million for the same period last year. As was the case with
noninterest income, substantially all of the increase in expenses was due to the
operations of EastPoint. Total salaries and benefits expense equaled $16.3
million at September 30, 2002, an increase of $3.6 million from $12.7 million
last year while occupancy and equipment expenses totaled $3.9 million for the
nine months ended September 30, 2002, an increase of $600,000. Included in these
increases were expenses of $3.9 million related to EastPoint and $1.0 million
related to EastPoint's occupancy and equipment totals. Excluding the operations
of EastPoint, noninterest expenses
15
equaled $22.1 million, an increase of only $52,000 from last year. Data
processing expenses dropped $370,000 to $494,000 for the first three quarters of
2002 due to a switch in ATM network vendors last year.
Income Taxes. Income taxes were $2.9 million for the first nine months of
this year versus $3.5 million for the same nine months as last year. The
effective tax rates were 32.5% and 32.8% respectively. The lower tax rate in
2002 was due to the operation of the Company's REIT for the full nine months of
this year versus only a portion of the first nine months of last year.
Regulatory Capital
The Company's capital to assets ratios for September 30, 2002 and December
31, 2001 were 12.46% and 13.52%, respectively. The various regulatory capital
ratios for the Company and the Bank at September 30, 2002 and December 31, 2001
were as follows:
At September 30, 2002
---------------------------------------------------------------------------------------
Minimum To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Total capital to risk weighted assets:
Berkshire Hills Bancorp, Inc. $128,802 15.34 % N/A N/A N/A N/A
Berkshire Bank 114,678 13.77 $66,612 8.00 % $83,265 10.00 %
Tier I capital to risk weighted assets:
Berkshire Hills Bancorp, Inc. 109,055 12.98 N/A N/A N/A N/A
Berkshire Bank 95,020 11.41 33,306 4.00 49,959 6.00
Tier I capital to average assets:
Berkshire Hills Bancorp, Inc. 109,055 10.83 N/A N/A N/A N/A
Berkshire Bank 95,020 9.48 40,098 4.00 50,122 5.00
At December 31, 2001
---------------------------------------------------------------------------------------
Minimum To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Total capital to risk weighted assets:
Berkshire Hills Bancorp, Inc. $133,240 15.73 % N/A N/A N/A N/A
Berkshire Bank 111,640 13.38 $66,749 8.00 % $83,437 10.00 %
Tier I capital to risk weighted assets:
Berkshire Hills Bancorp, Inc. 109,895 12.98 N/A N/A N/A N/A
Berkshire Bank 88,450 10.60 33,375 4.00 50,062 6.00
Tier I capital to average assets:
Berkshire Hills Bancorp, Inc. 109,895 11.02 N/A N/A N/A N/A
Berkshire Bank 88,450 9.05 39,108 4.00 48,885 5.00
16
As of September 30, 2002, Berkshire Bank met the conditions to be
classified as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios. As part of management's revised strategy to address the level of
sub-prime 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.
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 corporate equity securities and debt
obligations. Outstanding commitments for all loans and unadvanced construction
loans and lines of credit totaled $129.9 million at September 30, 2002. The
Company's investments in mortgage-and asset-backed securities, U. S. Government
and agency obligations, corporate debt obligations and corporate equity
securities totaled $182.7 million at September 30, 2002. 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 such deposits will remain with Berkshire Bank.
Certificates of deposit that were scheduled to mature in one year or less from
September 30, 2002 were approximately $227.1 million.
The primary source of funding for Berkshire Hills 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. Dividend
payments by Berkshire Bank have primarily been used to pay holding company
obligations, including the payment of dividends and the funding of stock
repurchase programs. The Bank's ability to pay dividends and other capital
distributions to Berkshire Hills 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. As of
September 30, 2002, the Bank had the ability to declare $4.9 million of
dividends to the Company without regulatory approval.
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
17
Asset/Liability Committee consists of Berkshire Bank's President and Chief
Executive Officer; Senior Vice President, Treasurer and Chief Financial Officer;
Senior Vice President-Lending Officer; and Senior 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 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 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 $21.2 million at September 30, 2002. Changes in this figure are reflected,
net of taxes, in accumulated other comprehensive income as a separate component
of Berkshire Hills' equity. Since December 31, 2001, this component has
decreased $5.0 million. It is not possible to predict with complete accuracy the
direction and magnitude of securities price changes. Unfavorable market
conditions or other factors could cause price declines in the securities
portfolio.
Quantitative Aspects of Market Risk. Berkshire Hills uses a simulation
model to measure the potential change in net interest income, incorporating
various assumptions regarding the shape of the yield curve, the pricing
characteristics of loans, deposits and borrowings, prepayments on loans and
securities and changes in the balance sheet mix. The model assumes the yield
curve is derived from the interpolated Treasury yield curve and that an
instantaneous increase or decrease of market interest rates would cause a
simultaneous parallel shift along the entire yield curve. Loans, deposits and
borrowings are expected to reprice at the new market rate on the contractual
review or maturity date. The Company closely monitors its loan prepayment trends
and uses prepayment guidelines set forth by Freddie Mac and Fannie Mae as well
as Company generated figures where applicable. All prepayments are assumed to
roll over into new loans originated in the same loan category at the new market
rate. Berkshire Hills further assumes that its securities' cash flows,
especially its mortgage backed securities cash flows, are such that they will
generally follow industry standards and that prepayments will be reinvested in
the same category at the prevailing market rate. Finally, the model presumes
that the balance sheet mix will remain relatively unchanged throughout the next
calendar year.
The tables below set forth, as of September 30, 2002 and December 31, 2001,
estimated net interest income and the estimated changes in Berkshire Hills net
interest income for the next twelve month period which may result given
instantaneous increases or decreases in market interest rates of 100 and 200
basis points.
Increase/
(decrease)
in market At September 30, 2002 At December 31, 2001
interest rates --------------------------------------- ------------------------------------
in basis points Dollar Percent Dollar Percent
(rate shock) Amount Change change Amount change change
-------------------- ----------- ----------- ---------- ---------- ---------- ----------
200 $ 40,855 $ 349 0.86 % $ 45,863 $ 64 0.14 %
100 39,971 (535) (1.32) 45,209 (590) (1.29)
Static 40,506 -- -- 45,799 -- --
(100) 40,796 290 0.72 46,332 533 1.16
(200) 39,436 (1,070 ) (2.64 ) 44,955 (844 ) (1.84)
At September 30, 2002, for small movements in market interest rates (+/-
100 basis points), Berkshire Hills was 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 September 30, 2002 chart indicates a
$290,000 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 September 30, 2002 chart indicates a decrease in net interest
income of $535,000 compared to a $590,000 decrease in the December 31, 2001
chart. The Company was less liability sensitive at September 30, 2002 as
continuing loan pay downs and funds from new certificate of deposits were
invested in short-term securities.
18
In the event of a sudden and sustained decrease in prevailing market
interest rates of 200 basis points, the September 30, 2002 table indicates a
decline in net interest income of $1.1 million compared to a $844,000 decline in
the December 31, 2001 chart. A sudden and sustained increase of 200 basis points
in market interest rates would lead to a $349,000 increase in net interest
income in the September 30, 2002 scenario while the December 31, 2001 scenario
shows an increase of $64,000. The Company's net interest income is negatively
impacted 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 Company determined
caps.
Computation of prospective effects of hypothetical interest rate changes
are based on a number of assumptions including the level of market interest
rates, the degree to which certain assets and liabilities with similar
maturities or periods to repricing react to changes in market interest rates,
the expected prepayment rates on loans and investments, the degree to which
early withdrawals occur on certificates of deposit, and other deposit flows. As
a result, these computations should not be relied upon as indicative of actual
results. Further, the computations do not reflect any actions that management
may undertake in response to changes in interest rates.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented have been
prepared in conformity with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike many industrial companies,
substantially all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company'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.
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 adequate.
(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.
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.
4.0 Stock Certificate of Berkshire Hills Bancorp, Inc. (1)
10.1 Severance Agreement, dated October 16, 2002, by and
among James A. Cunningham, Jr.,
Berkshire Hills Bancorp, Inc. and Berkshire Bank (2)
10.2 Severance Agreement, dated November 13, 2002, by and
among Charles F. Plungis, Jr., Berkshire Hills
Bancorp, Inc. and Berkshire Bank
10.3 Severance Agreement, dated November 13, 2002, by and
among Susan M. Santora, Berkshire Hills
Bancorp, Inc. and Berkshire Bank
99.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
None
_____________________________
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, and any amendments thereto,
Registration No. 333-32146.
(2) Incorporated by reference into this document from the Exhibits filed with
the Company's Form 8-K on October 18, 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE HILLS BANCORP, INC.
Dated: November 12, 2002 By: /s/ Michael P. Daly
---------------------------------------
Michael P. Daly
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: November 12, 2002 By: /s/ Charles F. Plungis, Jr.
----------------------------------------
Charles F. Plungis, Jr.
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
21
CERTIFICATION
I, Michael P. Daly, certify, that:
1. I have reviewed this quarterly report of Form 10-Q of Berkshire Hills
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Michael P. Daly
-------------------------------------
Michael P. Daly
President and Chief Executive Officer
22
CERTIFICATION
I, Charles F. Plungis, Jr., certify, that:
1. I have reviewed this quarterly report of Form 10-Q of Berkshire Hills
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Charles F. Plungis, Jr.
------------------------------------
Charles F. Plungis, Jr.
Senior Vice President, Treasurer and
Chief Financial Officer
23