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, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-15781
BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3510455
(State or other jurisdiction 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 5,993,932 shares of common stock, par value $0.01 per
share, outstanding as of May 12, 2003.
BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of 1
March 31, 2003 and December 31, 2002
Consolidated Statements of Income for the Three 2
Months Ended March 31, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity 3
for the Three Months Ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows for the 4
Three Months Ended March 31, 2003 and 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
Item 4. Controls and Procedures
19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
Certifications 23
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
March 31, December 31,
2003 2002
----------- -----------
(In thousands)
Assets:
Cash and due from banks $ 15,073 $ 17,258
Short-term investments 2,104 43,397
----------- -----------
Total cash and cash equivalents 17,177 60,655
Securities available for sale, at fair value 151,902 173,169
Securities held to maturity, at amortized cost 55,901 44,267
Federal Home Loan Bank stock, at cost 7,440 7,440
Savings Bank Life Insurance stock, at cost 2,043 2,043
Loans 789,897 723,022
Allowance for loan losses (10,349) (10,308)
----------- -----------
Net loans 779,548 712,714
Premises and equipment, net 13,107 13,267
Foreclosed real estate -- 1,500
Accrued interest receivable 5,336 5,125
Goodwill and other intangibles (1) 10,384 10,435
Net deferred tax assets 3,111 2,185
Other assets 15,099 13,315
----------- -----------
Total assets $ 1,061,048 $ 1,046,115
=========== ===========
Liabilities and Stockholders' Equity:
Deposits 791,120 782,360
Federal Home Loan Bank advances 136,783 133,002
Securities sold under agreements to repurchase -- 700
Loans sold with recourse 965 1,201
Accrued expenses and other liabilities (1) 11,011 5,846
----------- -----------
Total liabilities 939,879 923,109
----------- -----------
Minority Interests 2,340 2,438
Stockholders' Equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized;
None issued or outstanding) -- --
Common stock ( $.01 par value: 26,000,000 shares authorized;
shares issued: 7,673,761 at March 31, 2003 and
December 31, 2002; shares outstanding: 6,000,862 at
March 31, 2003 and 6,117,134 at December 31, 2002) 77 77
Additional paid-in capital 75,302 74,632
Unearned compensation (9,662) (9,535)
Retained earnings (1) 81,129 80,010
Accumulated other comprehensive income 4,950 5,542
Treasury stock, at cost (1,672,899 shares at March 31, 2003
and 1,556,627 shares at December 31, 2002) (32,967) (30,158)
----------- -----------
Total stockholders' equity 118,829 120,568
----------- -----------
Total liabilities and stockholders' equity $ 1,061,048 $ 1,046,115
=========== ===========
(1) For the period ended December 31, 2002, the information reflects the
adoption of SFAS 147.
The impact resulted in increases to goodwill of $497,000, to deferred
taxes of $169,000, and to retained earnings of $328,000.
See accompanying notes to unaudited consolidated financial statements.
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended
March 31,
2003 2002
-------- --------
(In thousands, except
per share amounts)
Interest and dividend income:
Bond interest $ 1,572 $ 1,256
Stock dividends 263 290
Short-term investment interest 84 57
Loan interest 11,982 14,957
-------- --------
Total interest and dividend income 13,901 16,560
-------- --------
Interest expense:
Interest on deposits 3,758 4,664
Interest on FHLB advances and other borrowings 1,063 1,422
-------- --------
Total interest expense 4,821 6,086
-------- --------
Net interest income 9,080 10,474
Provision for loan losses 325 1,510
-------- --------
Net interest income, after provision for loan losses 8,755 8,964
Noninterest income:
Customer service fees 556 447
Trust department fees 436 487
Loan fees 48 200
Gain (loss) on sale of securities, net 840 (20)
License maintenance and processing fees 1,141 1,077
License sales and other fees 480 364
Other income 60 189
-------- --------
Total noninterest income 3,561 2,744
-------- --------
Operating expenses:
Salaries and benefits 5,286 5,528
Occupancy and equipment 1,381 1,418
Marketing and advertising 103 88
Data processing 221 190
Professional services 248 299
Office supplies 206 183
Foreclosed real estate and other loans, net 121 483
Amortization of other intangibles (1) 51 51
Minority interests (98) (167)
Other expenses 1,132 1,029
-------- --------
Total operating expenses 8,651 9,102
-------- --------
Income before taxes 3,665 2,606
Provision for income taxes (1) 1,843 848
-------- --------
Net income $ 1,822 $ 1,758
======== ========
Earnings per share:
Basic $ 0.34 $ 0.32
Diluted $ 0.32 $ 0.29
Weighted average shares outstanding:
Basic 5,357 5,540
Diluted 5,731 5,963
(1) For the quarter ended March 31, 2002, the information reflects the
adoption of SFAS 147.
The impact for the quarter resulted in a decrease of $124,000 in
amortization expense and an increase of $42,000 in the provision for
income taxes.
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, 2003 AND 2002
Unaudited
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
Balance at December 31, 2002 $ 77 $ 74,632 $ (9,535) $ 80,010 $ 5,542 $ (30,158) $ 120,568
Comprehensive income :
Net income -- -- -- 1,822 -- -- 1,822
Change in net unrealized gain on
securities available for sale, net of re-
classification adjustments and tax effects -- -- -- -- (592) -- (592)
---------
Total comprehensive income -- -- -- -- -- -- 1,230
Cash dividends declared -- -- -- (673) -- -- (673)
Treasury stock purchased -- -- -- -- -- (3,341) (3,341)
Treasury stock released -- -- -- (30) -- 532 502
Change in unearned compensation - MRP -- 570 (246) -- -- -- 324
Change in unearned compensation - ESOP -- 100 119 -- -- -- 219
------ --------- --------- --------- --------- --------- ---------
Balance at March 31, 2003 $ 77 $ 75,302 $ (9,662) $ 81,129 $ 4,950 $ (32,967) $ 118,829
====== ========= ========= ========= ========= ========= =========
Balance at December 31, 2001 $ 77 $ 74,146 $ (11,101) $ 80,657 $ 18,836 $ (23,292) $ 139,323
Comprehensive income:
Net Income -- -- -- 1,758 -- -- 1,758
Change in net unrealized gain on
securities available for sale, net of re-
classification adjustments and tax effects -- -- -- -- (80) -- (80)
---------
Total comprehensive income -- -- -- -- -- 1,678
Cash dividends declared ($.12 per share ) -- -- -- (705) -- -- (705)
Treasury stock purchased -- -- -- -- -- (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) $ 81,710 $ 18,756 $ (26,545) $ 137,594
====== ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
3
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 1,822 $ 1,758
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 325 1,510
Net amortization of securities 523 167
Depreciation and amortization expense 552 598
Amortization of other intangibles 51 51
Management Rewards Plan Expense 256 347
ESOP Plan Expense 219 204
(Gain) loss on sales and dispositions of securities, net (840) 20
Deferred tax provision 254 (1)
Loss on sale of OREO property 44 --
Net change in loans held for sale -- 2,370
Minority interest (98) (167)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (1,995) 474
Accrued expenses and other liabilities 5,165 (436)
-------- --------
Net cash provided by operating activities 6,278 6,895
-------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales 8,510 1,215
Maturities 55,490 7,985
Principal payments 8,673 6,687
Purchases (52,700) (18,073)
Activity in held to maturity securities:
Maturities 6,000 2,222
Principal payments 12,790 7,213
Purchases (30,585) (8,766)
Purchase of Federal Home Loan Bank stock -- (75)
Loan originations, net of principal payments (67,159) 10,909
Additions to banking premises and equipment (392) (385)
Proceeds from sales of foreclosed real estate 1,456 --
Purchase of common stock in connection with stock awards plan 68 --
-------- --------
Net cash provided by investing activities (57,849) 8,932
-------- --------
(continued)
4
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Unaudited
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits $ 8,760 $ (1,287)
Net decrease in securities sold under agreements to repurchase (700) (300)
Proceeds from Federal Home Loan Bank advances with maturities 25,000 30,000
in excess of three months
Repayments of Federal Home Loan Bank advances with maturities (21,219) (21,934)
in excess of three months
Net decrease in loans sold with recourse (236) --
Treasury stock purchased (3,341) (3,253)
Exercise of officer stock options and non-employee Directors benefit
programs 502 --
Dividends (673) (705)
-------- --------
Net cash provided by financing activities 8,093 2,521
-------- --------
Net change in cash and cash equivalents (43,478) 18,348
Cash and cash equivalents at beginning of period 60,655 42,123
-------- --------
Cash and cash equivalents at end of period $ 17,177 $ 60,471
======== ========
Supplemental cash flow information:
Interest paid on deposits $ 3,761 $ 4,754
Interest paid on borrowed funds 1,055 1,479
Income taxes paid (refunded) (1,467) 781
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, 2003 and 2002
(Unaudited)
Note 1. Basis of Presentation
The consolidated interim financial statements of Berkshire Hills Bancorp,
Inc. ("Berkshire Hills" or the "Company") and its wholly owned subsidiaries,
Berkshire Bank (the "Bank"), Berkshire Hills Funding Corp., and Berkshire Hills
Technology, Inc. herein presented are intended to be read in conjunction with
the consolidated financial statements presented in the Company's 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, 2002. The consolidated financial information at March 31, 2003 and
for the three month periods ended March 31, 2003 and 2002 are derived from
unaudited consolidated financial statements but, in the opinion of management,
reflect all adjustments necessary to present fairly the results for these
interim periods in accordance with accounting principles generally accepted in
the United States of America. These adjustments consist only of normal recurring
adjustments. The interim results are not necessarily indicative of the results
of operations that may be expected for the entire year.
Note 2. Commitments
At March 31, 2003, the Company had outstanding commitments to originate
new residential and commercial loans totaling $34.3 million, which are not
reflected on the consolidated balance sheet. In addition, unadvanced funds on
home equity lines totaled $42.8 million and unadvanced commercial lines,
including unadvanced construction loan funds, totaled $65.1 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 months ended March 31, 2003
and 2002, respectively.
Basic earnings per share equaled $0.34 for the quarter ending March 31,
2003, based on 5,356,912 average shares outstanding as compared to $0.32 for the
quarter ending March 31, 2002 based on 5,540,348 average shares outstanding.
Diluted earnings per share equaled $0.32 for the quarter ending March 31, 2003,
based on 5,731,003 average shares outstanding as compared to $0.29 for the
quarter ending March 31, 2002 based on 5,963,230 average shares outstanding.
Note 4. Tangible Book Value
The tangible book value per share of Berkshire Hills' common stock at
March 31, 2003 was $18.07, based on tangible stockholders' equity of $108.4
million and outstanding shares of 6,000,862. The tangible book value at December
31, 2002 was $18.00 based on tangible stockholders' equity of $110.1 million and
total outstanding shares of 6,117,134.
Note 5. Dividend
On January 22, 2003, the Company's Board of Directors declared a cash
dividend of $0.12 per share, which was paid on February 21, 2003, to
stockholders of record on February 6, 2003.
6
Note 6. Stock Repurchase Program
During the first quarter of 2003, the Company continued its fifth 5% stock
repurchase program purchasing 146,200 shares at a cost of $3.3 million. The
Company had 16,216 shares available at May 12, 2003 for repurchase under this
program.
Note 7. Goodwill and Other Intangibles
Goodwill and other intangibles includes goodwill associated with the
acquisition of EastPoint Technologies, LLC ("EastPoint") as well as the
Company's purchase of two branches from another financial institution in 1991
and three branches in 1998, which are evaluated for impairment on an annual
basis. Intangible assets refer to customer relationships acquired in association
with the EastPoint purchase, which are being amortized on a straight-line basis
over three years. The carrying amount of goodwill as of March 31, 2003 and
December 31, 2002 was $10.1 million.
A summary of other intangible assets as of March 31, 2003 and December 31,
2002 is as follows:
At March 31, 2003 At December 31, 2002
---------------------------- ---------------------------------
(In thousands)
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------- ------------------------------
Customer Relationships $ 253 $ 355 $ 304 $ 304
The amortization expense and other intangible assets amounted to $51,000
for the three month periods ended March 31, 2003 and March 31, 2002. The
remaining amortization of $253,000 will be expensed by the year ended December
31, 2004.
7
Note 8. Stock Compensation Plans
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Company's stock-based incentive plan have no intrinsic value at the grant date,
and under Opinion No. 25, no compensation cost is recognized for them.
At March 31, 2003 and December 31, 2002 the Company had a stock-based
incentive plan and has elected to continue with the accounting methodology in
Opinion No. 25, and as a result, has provided pro forma disclosures of net
income and earnings per share, as if the fair value based method of accounting
has been applied. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
Quarters Ended March 31,
-------------------------
2003 2002
--------- ---------
(In thousands, except
per share data)
Net income, as reported $ 1,822 $ 1,758
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 104 81
--------- ---------
Pro forma net income $ 1,718 $ 1,677
========= =========
Earnings per share
Basic - as reported $ 0.34 $ 0.32
========= =========
Basic - pro forma $ 0.32 $ 0.30
========= =========
Diluted - as reported $ 0.32 $ 0.29
========= =========
Diluted - pro forma $ 0.30 $ 0.28
========= =========
Note 9. Real Estate Investment Trust (REIT)
On March 5, 2003, legislation was enacted in Massachusetts eliminating the
state tax deduction on dividends received from a REIT, retroactive to tax years
beginning in 1999. As a result, the Company ceased recording tax benefits
associated with the dividends received deduction effective for the 2003 tax year
and accrued $515,000 during the first quarter of 2003, representing the amount
of tax benefits realized by the Company through the dividends received deduction
through December 31, 2002, plus interest, partially offset by the estimated
impact of the expected deductibility for federal income tax purposes of these
amounts. The Company has appealed the state's assessment.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended March 31, 2003 and 2002,
and should be read in conjunction with Berkshire Hills Bancorp, Inc.'s
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Forward-Looking Statements
This report contains forward-looking statements that are based on
assumptions and may describe future plans, strategies, and expectations of
Berkshire Hills and Berkshire Bank. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Berkshire Hills'
and Berkshire Bank's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations of Berkshire Hills and its subsidiaries
include, but are not limited to, changes in interest rates, national and
regional economic conditions, legislative and regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality and composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in Berkshire Hills' and Berkshire Bank's market
area, changes in real estate market values in Berkshire Hills' and Berkshire
Bank's market area, and changes in relevant accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Except as required by applicable law or regulation, Berkshire Hills
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of the statements
or to reflect the occurrence of anticipated or unanticipated events.
General
Berkshire Hills is a Delaware corporation and the holding company for
Berkshire Bank, a state-chartered savings bank headquartered in Pittsfield,
Massachusetts. Established in 1846, Berkshire Bank is one of Massachusetts'
oldest and largest independent banks. With eleven full service branch offices
serving communities throughout Berkshire County, Berkshire Bank is the largest
banking institution based in western Massachusetts. The Bank is a
community-based financial institution that originates a variety of loan products
including real estate loans, commercial loans, and consumer loans primarily in
Berkshire County, Massachusetts and its surrounding areas. The Bank offers a
wide variety of deposit products and other investment products and financial
services to its customers, including asset management and trust services and
municipal finance. Berkshire Hills, through its wholly owned subsidiary
Berkshire Hills Technology, Inc., owns a 60.3% interest in EastPoint
Technologies, LLC ("EastPoint"), a data and financial services provider for
financial institutions.
Comparison of Financial Condition at March 31, 2003 and December 31, 2002
Total assets at March 31, 2003 were $1.06 billion, an increase of $14.9
million, or 1.4%, from $1.05 billion at December 31, 2002. The increase was
primarily due to an increase of $66.9 million, or 9.2%, in loans, which totaled
$789.9 million at March 31, 2003 compared to $723.0 million at December 31,
2002. The increase in loans was funded by the proceeds from the maturities and
sales of $41.3 million in short-term investments and $9.6 million in securities,
and an increase of $12.5 million in deposits and borrowings.
Loans
The increase in loans was primarily due to the purchase of $59.4 million
in residential one-to four-family mortgage loans in the first quarter of this
year, of which $15.2 million was purchased in January and $44.2 million in
March. These purchased loans consist primarily of adjustable rate mortgages that
have a fixed rate of interest for the first three or seven years, adjusting
annually thereafter, and to a lesser extent, 15 year fixed rate mortgages. Due
in large part to the loan purchases, residential one-to four-family real estate
loans totaled $300.1 million at March 31, 2003, an increase of $65.1 million, or
27.7%, from December 31, 2002. Other real estate loans also increased due to a
$4.0 million, or 36.0%, increase in commercial land development and construction
loans, which totaled $15.0 million at March 31, 2003 compared to $11.1 million
at December 31, 2002.
9
Automobile loans totaled $107.0 million at March 31, 2003, a decrease of
$6.3 million, or 5.6%, from December 31, 2002. Specifically, sub-prime
automobile loans decreased $2.3 million, or 11.9%, to $17.2 million at March 31,
2003, as the Company continued to exit the sub-prime automobile loan business,
allowing existing balances to run-off and be reinvested in loans and securities
with better credit quality.
Commercial loans increased $3.9 million, or 2.4%, to $169.2 million at
March 31, 2003 from $165.3 million at December 31, 2002.
At March 31, 2003 At December 31, 2002
--------------------- ---------------------
Percent Percent
Balance of total Balance of total
-------- -------- -------- --------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $300,077 37.99% $235,020 32.50%
Residential land development
and construction 6,230 0.79% 6,576 0.91%
Commercial real estate 131,422 16.64% 131,130 18.14%
Commercial land development
and construction 15,030 1.90% 11,051 1.53%
Multi-family 15,564 1.97% 14,920 2.06%
-------- -------- -------- --------
Total real estate loans 468,323 59.29% 398,697 55.14%
Commercial loans 169,220 21.42% 165,274 22.86%
Consumer loans:
Automobile 106,986 13.55% 113,321 15.68%
Home equity loans 41,473 5.25% 40,713 5.63%
Other 3,895 0.49% 5,017 0.69%
-------- -------- -------- --------
Total consumer loans 152,354 19.29% 159,051 22.00%
Total loans 789,897 723,022
Less: Allowance for loan losses (10,349) 1.31% (10,308) 1.43%
-------- --------
Loans, net $ 779,548 $ 712,714
========= =========
Allowance for Loan Losses
All banks that manage loan portfolios will experience losses to varying
degrees. The allowance for loan losses is the amount available to absorb these
losses and represents management's evaluation of the risks inherent in the
portfolio including the collectibility of the loans, changing collateral values,
past loan loss history, specific borrower situations, and general economic
conditions. Management continually assesses the adequacy of the allowance for
loan losses and makes monthly provisions in an amount considered adequate to
cover losses in the loan portfolio. Because future events affecting the loan
portfolio cannot be predicted with complete accuracy, there can be no assurances
that management's estimates are correct and that the existing allowance for loan
losses is adequate. However, management believes that based on the information
available to it on March 31, 2003, the Company's allowance for loan losses is
sufficient to cover losses inherent in the Company's current loan portfolio.
The allowance consists of allocated, general and unallocated components.
The allocated component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also 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.
10
On March 31, 2003, the allowance for loan losses totaled $10.3 million, or
1.31% of total loans outstanding, as compared to $10.3 million, or 1.43% of
total loans outstanding, at December 31, 2002. Charged-off loans totaled $1.1
million during the first three months this year, a decline of $2.0 million from
$3.1 million for the same three months last year. In particular, consumer loan
charge-offs decreased $1.6 million, or 58.9%, to $1.1 million at March 31, 2003
from $2.7 million at March 31, 2002 as the Bank benefited from the sale of
sub-prime automobile loans in the fourth quarter of last year, which have had
historically higher charge-offs than other types of loans. In addition, the Bank
charged off no loans in the commercial real estate portfolio versus one loan
totaling $360,000 that was charged off last year. Recoveries totaled $827,000
for the three months this year compared to $1.3 million for the same three
months last year as the Bank continued to aggressively pursue the collection of
previously charged-off loans. Commercial recoveries totaled $402,000 as the Bank
collected on two previously charged-off loans. On March 31, 2003, the allowance
expressed as a percentage of nonperforming loans was 266.59%; on December 31,
2002 and March 31, 2002 it was 275.54% and 329.12%, respectively.
The following table sets forth information regarding the allowance for
loan losses for the three month periods ended March 31, 2003 and 2002.
Three Months Ended
------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Allowance for loan losses, beginning of period $ 10,308 $ 11,034
Charge-offs:
Residential one-to four-family -- --
Residential land development and construction -- --
Commercial real estate -- 360
Commercial land development and construction -- --
Multi-family -- --
Commercial 3 30
Consumer (1) 1,108 2,699
---------- ----------
Total charge-offs 1,111 3,089
---------- ----------
Recoveries:
Residential one-to four-family -- --
Residential land development and construction -- --
Commercial real estate -- --
Commercial land development and construction -- --
Multi-family -- --
Commercial 402 22
Consumer (1) 425 1,282
---------- ----------
Total recoveries 827 1,304
---------- ----------
Net charge-offs 284 1,785
Provision 325 1,510
---------- ----------
Allowance for loan losses, end of period $ 10,349 $ 10,759
========== ==========
Net loans charged-off to total loans 0.04% 0.23%
Allowance for loan losses to total loans 1.31% 1.37%
Allowance for loan losses to nonperforming loans 266.59% 329.12%
Recoveries to charge-offs 74.44% 42.21%
(1) Consists primarily of automobile loans
11
Nonperforming Assets
The following table sets forth information regarding nonperforming assets
as of March 31, 2003 and December 31, 2002.
At March 31, 2003 At December 31, 2002
----------------- --------------------
(Dollars in thousands)
Nonaccruing loans:
Residential one-to four-family $ 220 $ 230
Residential land development and construction -- --
Commercial real estate 167 --
Commercial land development and construction -- --
Multi-family -- --
Commercial 2,641 2,850
Automobile 854 661
Home equity -- --
Other consumer -- --
-------- --------
Total 3,882 3,741
-------- --------
Other real estate owned -- 1,500
-------- --------
Total nonperforming assets $ 3,882 $ 5,241
======== ========
Total nonperforming loans to total loans 0.49% 0.52%
Total nonperforming assets to total assets 0.37% 0.50%
Generally, the Company ceases accruing interest on all loans, except
automobile loans, when principal or interest payments are 90 days or more past
due unless management determines the principal and interest to be fully secured
and in the process of collection. Once management determines that interest is
uncollectible and ceases accruing interest on a loan, all previously accrued
interest is reversed against current interest income. The Company initiated a
policy in 2001 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, 2003, the Company had $354,000 in
automobile loans that were 90 days past due and still accruing as compared to
$590,000 at December 31, 2002.
Total nonaccruing loans amounted to $3.9 million, an increase of $141,000,
or 3.8%, from $3.7 million at December 31, 2002. This increase in nonaccruals
was primarily due to a $193,000 increase in total consumer loan nonaccruals,
most of which were from the balance of sub-prime automobile loans that were held
at December 31, 2002. The ratio of nonperforming loans as a percentage of total
loans decreased to 0.49% at March 31, 2003 from 0.52% as of December 31, 2002.
The Bank held no foreclosed real estate at March 31, 2003 compared to $1.5
million at December 31, 2002 as the Bank sold one commercial property in the
first quarter.
Investment Securities
Securities, including Federal Home Loan Bank stock and Savings Bank Life
Insurance stock, totaled $217.3 million at March 31, 2003, a decrease of $9.6
million, or 4.2%, from $226.9 million at December 31, 2002. This decrease
occurred as proceeds from called agency securities and bond maturities were
partially used to fund the loan purchases that occurred in the first quarter.
The net unrealized gain in the portfolio decreased by $592,000 to $5.0 million
at March 31, 2003, primarily due to the sale of $1.6 million in equity
securities, and general market conditions. This change was recognized in
accumulated other comprehensive income on the consolidated statement of changes
in stockholders' equity. The Bank also sold $3.9 million of corporate bonds with
credit ratings of BBB- or below, at a nominal gain, to further improve the
Bank's credit risk profile.
12
Other Assets
Other assets increased $1.8 million, or 13.4%, to $15.1 million at March
31, 2003, primarily due to security transactions that had yet to settle as of
March 31, 2003.
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 March 31, 2003 and December 31, 2002.
At March 31, 2003 At December 31, 2002
----------------------------- -----------------------------
Percent Percent
Balance of deposits Balance of deposits
------------- -------------- ------------- -------------
(Dollars in thousands)
Demand deposits $ 81,486 10.30% $ 87,148 11.14%
NOW accounts 84,869 10.73% 92,245 11.79%
Savings accounts 165,954 20.98% 158,469 20.26%
Money market accounts 123,530 15.61% 114,309 14.61%
Certificates of deposit 335,281 42.38% 330,189 42.20%
--------- ---------
Total deposits $ 791,120 $ 782,360
========= =========
Total deposits were $791.1 million on March 31, 2003, an increase of $8.8
million for the first three months of the year as the Bank saw modest growth in
what is traditionally a seasonally slow quarter. Savings accounts and
certificates of deposit accounts increased $12.6 million in the quarter as
customers moved money out of demand deposit and NOW accounts, which decreased
$13.0 million. Money market accounts increased $9.2 million as the Bank has
aggressively looked to increase its volume of municipal deposits.
Borrowings
Borrowings from the Federal Home Loan Bank of Boston totaled $136.8
million at March 31, 2003, a $3.8 million, or 2.8%, increase from $133.0 million
at December 31, 2002. The Company had additional borrowing capacity of $209.9
million at the Federal Home Loan Bank of Boston at March 31, 2003.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities totaled $11.0 million at March 31,
2003, an increase of $5.2 million from December 31, 2002. This increase was
primarily due to security transactions that had yet to settle as of March 31,
2003.
Stockholders' Equity
At March 31, 2003, the Company had $118.8 million in stockholders' equity
compared to $120.6 million at December 31, 2002. The decrease was primarily due
to the purchase of 146,200 shares of the Company's common stock at a cost of
$3.3 million, the declaration and payment of cash dividends of $0.12 per common
share amounting to $673,000, and a decrease of $592,000 in net unrealized gain
on securities, which was recognized in accumulated other comprehensive income.
Partially offsetting these decreases was net income of $1.8 million.
Comparison of Operating Results for the Three Months Ended March 31, 2003 and
2002
Net Interest Income. Net interest income is the largest component of the
Company's revenue and is the difference between the interest and dividends
earned on loans and securities and interest paid on the Company's funding
sources, primarily deposits and advances from the Federal Home Loan Bank of
Boston. Net interest income decreased $1.4 million, or 15.4%, to $9.1 million
for the first quarter of 2003 from $10.5 million for the first quarter of 2002.
This decrease occurred as the average yield on earning assets decreased 148
basis points to 5.62% for the quarter ended March 31, 2003 from the same period
last year, while the rates paid on interest-bearing liabilities decreased 68
basis points to 2.10% for the first quarter this year compared to the first
quarter last year.
13
Total interest and dividend income decreased $2.7 million, or 16.1%, to
$13.9 million for the quarter ended March 31, 2003 as compared to the same
quarter last year. Loan interest declined to $12.0 million in the current
quarter, a decrease of $3.0 million, or 19.9%, of which approximately $1.4
million was attributable to the sale of $69.7 million of sub-prime automobile
loans in the fourth quarter of 2002. These loans carried an average yield of
approximately 10.0%, while the sale proceeds were reinvested throughout the
current quarter at a yield of approximately 4.0%. The remainder of the decline,
or approximately $1.6 million, was attributed to the impact of a general market
decline in interest rates, as prepayment of principal on mortgage loans were
reinvested at lower yields. Bond interest income increased $316,000 or 25.2%, to
$1.6 million at March 31, 2003 as higher average balances more than offset a
lower average rate earned.
Total interest expense fell $1.3 million, or 20.8%, to $4.8 million for
the first quarter due to lower rates paid on all interest-bearing liabilities.
Deposit expense totaled $3.8 million for the quarter ended March 31, 2003, a
decrease of $906,000, or 19.4%, from $4.7 million for the quarter ended March
31, 2002. Interest paid on Federal Home Loan Bank of Boston advances and other
borrowings decreased $359,000, or 25.2%, to $1.1 million as higher cost advances
were replaced by advances at lower rates.
The Company's provision for loan losses was $325,000 in the first quarter
of this year as compared to $1.5 million in the same quarter last year. In
assessing the provision for the first quarter of 2003, management took into
consideration a $99.7 million decrease in sub-prime automobile loans from the
first quarter of last year. The Company also considered loan charge-offs, which
decreased $2.0 million to $1.1 million in the first quarter of this year from
$3.1 million last year. Foremost in this decrease was consumer loan charge-offs
which decreased $1.6 million to $1.1 million at March 31, 2003. Additionally,
management considered the level of delinquent loans, which declined from 1.75%
of total loans at March 31, 2002 to 0.94% at March 31, 2003, current recoveries
and evaluated the likelihood for recoveries of previously charged-off loans,
among other factors.
Noninterest Income. For the quarter ended March 31, 2003, noninterest
income totaled $3.6 million, an $817,000, or 29.8%, increase from $2.7 million
for the same quarter last year. The primary reason for this increase was an
$840,000 gain on the sale of securities, net, compared to a loss of $20,000 in
the same quarter last year. This gain resulted from the sale of equity
securities, as the Bank continued to reduce its exposure to the equity markets,
and to a lesser extent, the sale of lower grade corporate bonds.
Customer service fees increased $109,000, or 24.4%, to $556,000 due
primarily to a higher level of deposit transaction activity, specifically in ATM
and debit card usage. Trust Department fees declined $51,000, or 10.5%, to
$436,000, impacted by the performance of the equity markets, as certain fees are
directly tied to market performance, and lower estate settlement fees. Loan fees
declined $152,000, or 76.0%, to $48,000 due to lower mortgage loan sales as
management decided to retain mortgage loan originations in the portfolio. The
decline of $129,000, or 68.3%, in other income was largely due to lower
municipal finance fees, which can fluctuate quarter to quarter.
License maintenance and processing fees and license sales and other fees,
which represent revenue from Eastpoint, increased a total of $180,000 to $1.6
million for the current quarter as compared to the same quarter last year.
Expenses for Eastpoint, which are recorded in various noninterest expense
categories, were up $75,000 to $1.8 million for the current quarter. Eastpoint's
financial condition improved as the operating loss declined $105,000 in the
current quarter.
Noninterest Expenses. Noninterest (operating) expenses decreased $451,000,
or 5.0%, to $8.7 million for the three months ended March 31, 2003 from $9.1
million for the same three months last year. Salaries and benefits expense
totaled $5.3 million for the first quarter of 2003, a decline of $242,000, or
4.4%, from the first quarter last year, primarily due to the management
reorganization that occurred in the fourth quarter of 2002. Also contributing to
the decrease in operating expenses was a $362,000 decrease in foreclosed real
estate and other loans, net, as expenses associated with repossessed automobiles
declined $325,000 due primarily to the December sale of sub-prime automobile
loans. Partially offsetting these decreases was an increase in other expenses of
$103,000, which consisted mainly of a $44,000 interest charge related to the
taxes owed in the disallowance of the state tax deduction on dividends received
from the REIT, and a $69,000 lower minority interest credit, as Eastpoint's loss
was lower this quarter compared to the first quarter last year.
14
Income Taxes. Income taxes were $1.8 million in the first quarter of 2003
compared to $848,000 for the first quarter last year. The increase in taxes was
due to an increase in the effective tax rate to 37.0% in the first quarter this
year versus 32.5% for the first quarter last year, which was due to higher
income before taxes and a $487,000 charge due to the elimination of the state
tax deduction for the dividend received from the Company's REIT. The effective
tax rate of 37.0% is expected to remain throughout 2003 as the result of the
elimination of the dividend received deduction from the REIT.
On March 5, 2003, legislation was passed in Massachusetts, which prohibits
use of a state tax deduction on dividends received from a REIT, effective for
the tax years beginning in 1999. As a result, the Company ceased recording tax
benefits associated with the dividends received deduction effective for the 2003
tax year and accrued $515,000, representing the amount of tax benefits, adjusted
for the expected deduction of federal taxes, realized by the Company through the
dividends received deduction through the 2002 tax year. Such amount includes
interest assessed by the Massachusetts Department of Revenue, adjusted for the
expected deduction of federal taxes, through December 31, 2002. The Company has
appealed the assessment and intends to challenge the retroactive nature of the
legislation.
Regulatory Capital
The Company's capital to assets ratios for March 31, 2003 and December 31,
2002 were 11.20% and 11.53%, respectively. The various regulatory capital ratios
for the Bank at March 31, 2003 and December 31, 2002 were as follows:
At March 31, 2003 At December 31, 2002
-------------------- --------------------
Total capital to risk weighted assets:
Berkshire Bank 13.38% 13.60%
Tier 1 capital to risk weighted assets:
Berkshire Bank 11.74 11.85
Tier 1 capital to average assets:
Berkshire Bank 9.00 8.81
As of March 31, 2003, the 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 overall credit risk to the Bank,
management has determined to maintain capital levels in an amount in excess of
the regulatory requirements, which consider the amount of lower quality
sub-prime automobile loans in the loan portfolio.
Liquidity
Liquidity is the ability to meet current and future financial obligations
of a short term nature. The Bank further defines liquidity as the ability to
respond to the needs of depositors and borrowers as well as maintaining the
flexibility to take advantage of investment opportunities.
The Bank's primary investing activities are: (1) originating residential
one-to four-family mortgage loans, commercial business and real estate loans,
multi-family loans, home equity loans and lines of credit, and consumer 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 $142.2 million at March 31, 2003. The Company's
investments in mortgage-and asset-backed securities, U.S. Government and agency
obligations, corporate debt obligations and corporate equity securities totaled
$217.3 million at March 31, 2003. 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. The Bank closely monitors its liquidity
position on a daily basis. If the Bank requires funds beyond its ability to
generate them internally, additional sources of funds are available through
15
advances or a line of credit with the Federal Home Loan Bank of Boston and
through a repurchase agreement with the Depositors Insurance Fund, the Bank's
excess deposit insurer.
The Bank relies primarily on competitive rates, customer service, and
long-standing relationships with customers to retain deposits. Occasionally, the
Bank will also offer special competitive promotions to its customers to increase
retention and promote deposit growth. Based upon the Bank's historical
experience with deposit retention, management believes that, although it is not
possible to predict future terms and conditions upon renewal, a significant
portion of such deposits will remain with the Bank. Certificates of deposit that
were scheduled to mature in one year or less from March 31, 2003 were
approximately $213.3 million.
The primary source of funding for Berkshire Hills is dividend payments
from the Bank, and to a lesser extent, earnings on deposits held by Berkshire
Hills. Dividend payments by the Bank have primarily been used to pay dividends
and fund 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.
16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Aspects of Market Risk. The Bank's most significant form of
market risk is interest rate risk. The principal objectives of the Bank's
interest rate risk management are to evaluate the interest rate risk inherent in
certain balance sheet accounts, determine the level of risk appropriate given
its business strategy, operating environment, capital and liquidity requirements
and performance objectives, and manage the risk consistent with its established
policies. The Bank maintains an Asset/Liability Committee that is responsible
for reviewing its asset/liability policies and interest rate risk position,
which meets quarterly and reports to the Executive Committee of the Bank and the
Board of Directors. The Asset/Liability Committee consists of the Bank's
President and Chief Executive Officer; Senior Vice President and Chief Financial
Officer; Senior Vice President-Retail Banking and Operations; Senior Vice
President-Commercial Lending; Senior Vice President-Retail Lending; Vice
President and Controller; and Financial Analyst. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Bank.
The Bank manages interest rate risk by:
o emphasizing the origination of adjustable rate loans and, from time
to time, selling a portion of its longer term fixed rate loans as
market interest rate conditions dictate;
o originating shorter term commercial and consumer loans;
o investing in high quality, liquid securities that provide the
flexibility to take advantage of opportunities that may arise from
fluctuations in market interest rates, the overall maturity and
duration of which is monitored in relation to the repricing of its
loan portfolio;
o promoting lower cost core deposits; and
o using Federal Home Loan Bank of Boston advances to better structure
maturities of its interest rate sensitive liabilities.
For the Bank, market risk also includes price risk, primarily security
price risk. The securities portfolio had unrealized gains before taxes of $7.5
million at March 31, 2003. Changes in this figure are reflected, net of taxes,
in accumulated other comprehensive income as a separate component of Berkshire
Hills' stockholders' equity. Since December 31, 2002, this component has
decreased $592,000. It is not possible to predict with complete accuracy the
direction and magnitude of market value changes in the securities portfolio.
Unfavorable market conditions or other factors could cause price declines in the
securities portfolio.
Quantitative Aspects of Market Risk. Berkshire 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, Fannie Mae and other
market sources 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.
17
The tables below set forth, as of March 31, 2003 and December 31, 2002,
estimated net interest income and the estimated changes in the Company's net
interest income for the next twelve month period which may result given
instantaneous increases or decreases in market interest rates of 100 and 200
basis points.
Increase/
(decrease)
in market At March 31, 2003 At December 31, 2002
interest rates ------------------------------------------ -------------------------------------------
in basis points Dollar Percent Dollar Percent
(rate shock) Amount Change change Amount change change
- ----------------- ------------ ------------ ------------ ------------- ------------- -------------
200 $ 37,322 $ 527 1.43% $ 34,583 $ (1,027) (2.88)%
100 37,430 635 1.73 34,741 (869) (2.44)
Static 36,795 -- -- 35,610 -- --
(100) 35,670 (1,125) (3.06) 35,162 (448) (1.26)
(200) 34,052 (2,743) (7.46) 32,908 (2,702) (7.59)
In the event of a sudden and sustained decline in prevailing market
interest rates of 100 basis points, the March 31, 2003 chart indicates a
decrease in net interest income of $1.1 million while the December 31, 2002
chart indicates a decrease of $448,000. Likewise, in the event of a sudden and
sustained 200 basis point decline in market interest rates, the March 31, 2003
table indicates a decrease of $2.7 million, consistent with the decrease of $2.7
million indicated by the December 31, 2002 chart. Both of these charts reflect
that in a declining interest rate environment, the rates paid on deposit
accounts would reach assumed floors and that prepayment of principal on
mortgage-backed loans and securities would accelerate, resulting in these
principal payments being reinvested at lower yields.
In the event of a sudden and sustained increase in prevailing market
interest rates of 100 and 200 basis points, the March 31, 2003 chart indicates
that net interest income would increase by $635,000 and $527,000, respectively.
This differs from the December 31, 2002 chart which indicates that a sudden and
sustained increase of 100 and 200 basis points would decrease net interest
income by $869,000 and $1.0 million, respectively. This change in the Company's
interest rate risk profile resulted primarily from management's reevaluation of
the repricing assumptions on certain non-maturity deposits. After examining the
past repricing history and considering expectations for future repricing,
management determined that for every 100 basis point rise in prevailing market
interest rates the rates paid on savings, municipal money market and money
market accounts would be expected to rise by 50 basis points, down from an
expected increase of 100 basis points at December 31, 2002. NOW accounts and
commercial money market accounts would be expected to increase by 25 and 75
basis points, respectively, down from an expected increase of 100 basis points
at December 31, 2002.
Computation of prospective effects of hypothetical interest rate changes
are based on a number of assumptions including the level of market interest
rates, the degree to which certain assets and liabilities with similar
maturities or periods to repricing react to changes in market interest rates,
the expected prepayment rates on loans and investments, the degree to which
early withdrawals occur on certificates of deposit, and other deposit flows. As
a result, these computations should not be relied upon as indicative of actual
results. Further, the computations do not reflect any actions that management
may undertake in response to changes in interest rates.
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.
18
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this
report, the chief executive officer and the chief financial officer
of the Company concluded that the Company's disclosure controls and
procedures were 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. (2)
4.0 Stock Certificate of Berkshire Hills Bancorp, Inc. (1)
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350
- ----------
(1) Incorporated herein by reference into this document from the
Exhibits filed with the Registration Statement on Form S-1, and any
amendments thereto, Registration No. 333-32146.
(2) Incorporated herein by reference into this document from the
Exhibits to the Form 10-Q as filed on November 14, 2002.
20
(b) Reports on Form 8-K
On January 17, 2003, the Company filed a Form 8-K in which it
announced under Item 9 its expected fourth quarter earnings per share and
the net charges related to its management and operations restructuring.
The press release announcing these items was attached by exhibit.
On January 23, 2003, the Company filed a Form 8-K in which it
announced under Item 9 its fourth quarter and year-end earnings and the
declaration of a quarterly dividend of $0.12 per share. The Company also
announced that its 2003 annual meeting of stockholders would be held on
May 1, 2003. The press release announcing these items was attached by
exhibit.
On January 27, 2003, the Company filed a Form 8-K in which it
announced under Item 9 earnings guidance for 2003. The press release
announcing the earnings guidance was attached by exhibit.
On February 10, 2003, the Company filed a Form 8-K in which it
announced under Item 9 that Wayne F. Patenaude would begin as Senior Vice
President, Chief Financial Officer and Treasurer of the Company and the
Bank on or about March 1, 2003. The press release announcing Mr.
Patenaude's appointment was attached by exhibit.
On March 6, 2003, the Company filed a Form 8-K in which it announced
under Item 9 that a law was passed eliminating the availability of a
deduction for dividends received from a real estate investment trust,
effective for the tax years beginning in 1999. As a result, the Company
ceased recording tax benefits it had received through the dividends
received deduction effective for the 2003 tax year and accrued $513,000
during the first quarter of 2003. The accrual amount represents the amount
of tax benefits realized by the Company through the dividends received
deduction through December 31, 2002, offset by the estimated impact of the
expected deductibility for federal income tax purposes of any amounts
assessed by the Department of Revenue. The accrued amount includes
interest that was assessed by the Department of Revenue.
21
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 12, 2003 By: /s/ Michael P. Daly
--------------------------------------------
Michael P. Daly
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: May 12, 2003 By: /s/ Wayne F. Patenaude
--------------------------------------------
Wayne F. Patenaude
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
22
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
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 internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Michael P. Daly
-----------------------------------------
Michael P. Daly
President and Chief Executive Officer
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CERTIFICATION
I, Wayne F. Patenaude, 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
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 internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Wayne F. Patenaude
------------------------------------------
Wayne F. Patenaude
Senior Vice President, Chief Financial
Officer and Treasurer
24