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, 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 5,878,920 shares of common stock, par value $0.01 per
share, outstanding as of November 10, 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
September 30, 2003 and December 31, 2002
Consolidated Statements of Income for the Three and Nine 2
Months Ended September 30, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity 3
for the Nine Months Ended September 30, 2003 and 2002
Consolidated Statements of Cash Flows for the 4
Nine Months Ended September 30, 2003 and 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
September 30, December 31,
2003 2002
----------- -----------
(In thousands)
Assets:
Cash and due from banks $ 17,803 $ 17,258
Short term investments 9,262 43,397
----------- -----------
Total cash and cash equivalents 27,065 60,655
Securities available for sale, at fair value 243,451 173,169
Securities held to maturity, at amortized cost 41,380 44,267
Federal Home Loan Bank stock, at cost 11,416 7,440
Savings Bank Life Insurance stock, at cost 2,043 2,043
Loans 800,280 723,022
Allowance for loan losses (10,097) (10,308)
----------- -----------
Net loans 790,183 712,714
Premises and equipment, net 12,816 13,267
Foreclosed real estate -- 1,500
Accrued interest receivable 5,096 5,125
Goodwill and other intangibles (1) 10,284 10,435
Net deferred tax assets 2,843 2,185
Bank owned life insurance 7,626 --
Other assets 13,703 13,315
----------- -----------
Total assets $ 1,167,906 $ 1,046,115
=========== ===========
Liabilities and Stockholders' Equity:
Deposits 827,782 782,360
Federal Home Loan Bank advances 191,318 133,002
Securities sold under agreements to repurchase -- 700
Loans sold with recourse 598 1,201
Due to broker 20,019 --
Accrued expenses and other liabilities (1) 5,632 5,846
----------- -----------
Total liabilities 1,045,349 923,109
----------- -----------
Minority interests 2,300 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 September 30, 2003 and
December 31, 2002; shares outstanding: 5,878,920 at
September 30, 2003 and 6,117,134 at December 31, 2002) 77 77
Additional paid-in capital 75,605 74,632
Unearned compensation (8,892) (9,535)
Retained earnings (1) 84,362 80,010
Accumulated other comprehensive income 5,427 5,542
Treasury stock, at cost (1,794,841 shares at September 30, 2003
and 1,556,627 shares at December 31, 2002) (36,322) (30,158)
----------- -----------
Total stockholders' equity 120,257 120,568
----------- -----------
Total liabilities and stockholders' equity $ 1,167,906 $ 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, deferred taxes of $169,000, and $328,000 to retained earnings.
See accompanying notes to unaudited consolidated financial statements.
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except per share amounts)
Interest and dividend income:
Bond interest $ 1,676 $ 1,368 $ 4,799 $ 3,940
Stock dividends 269 411 747 1,031
Short term investment interest 5 121 103 326
Loan interest 11,908 14,551 36,249 44,282
-------- -------- -------- --------
Total interest and dividend income 13,858 16,451 41,898 49,579
-------- -------- -------- --------
Interest expense:
Interest on deposits 3,343 4,425 10,714 13,556
Interest on FHLB advances and other borrowings 1,206 1,467 3,362 4,325
-------- -------- -------- --------
Total interest expense 4,549 5,892 14,076 17,881
-------- -------- -------- --------
Net interest income 9,309 10,559 27,822 31,698
Provision for loan losses 575 1,050 1,685 3,875
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,734 9,509 26,137 27,823
-------- -------- -------- --------
Noninterest income:
Customer service fees 568 557 1,743 1,666
Trust department fees 573 411 1,563 1,365
Loan fees 142 79 337 394
Gain(loss) on securities, net 356 (29) 1,513 (37)
Gain on sale of loans 102 -- 240 --
License maintenance and processing fees 1,060 1,098 3,337 3,268
License sales and other fees 661 1,075 2,131 1,984
Other income 171 69 352 450
-------- -------- -------- --------
Total noninterest income 3,633 3,260 11,216 9,090
-------- -------- -------- --------
Operating expenses:
Salaries and benefits 5,132 5,411 16,380 16,261
Occupancy and equipment 1,191 1,236 3,794 3,932
Marketing and advertising 137 177 379 389
Data processing 283 148 743 494
Professional services 292 337 834 942
Office supplies 164 154 525 531
Foreclosed real estate and other loans, net 333 581 740 1,821
Amortization of other intangibles (1) 51 51 151 151
Minority interests (2) (43) (138) (300)
Other general and administrative expenses 1,014 1,268 3,605 3,344
-------- -------- -------- --------
Total operating expenses 8,595 9,320 27,013 27,565
-------- -------- -------- --------
Income before taxes 3,772 3,449 10,340 9,348
Provision for income taxes (1) 1,358 1,123 3,966 3,043
-------- -------- -------- --------
Net income $ 2,414 $ 2,326 $ 6,374 $ 6,305
======== ======== ======== ========
Earnings per share:
Basic $ 0.46 $ 0.43 $ 1.20 $ 1.16
Diluted $ 0.43 $ 0.40 $ 1.12 $ 1.07
Weighted average shares outstanding:
Basic 5,196 5,378 5,301 5,457
Diluted 5,655 5,850 5,711 5,907
(1) For the three and nine months ended September 30, 2002, the information
reflects the adoption of SFAS 147. For the three months ended September 30,
2002, there was a decrease of $124,000 in amortization expense, and an increase
of $42,000 in the provision for income taxes. For the nine months ended
September 30, 2002, the amortization expense decreased $372,000 and the
provision for income taxes increased $126,000.
See accompanying notes to unaudited consolidated financial statements.
2
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Unaudited
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
------ ---------- ------------ --------- ------------- --------- ---------
(In thousands)
Balance at December 31, 2002 $77 $74,632 $ (9,535) $ 80,010 $ 5,542 $(30,158) $ 120,568
Comprehensive income :
Net income -- -- -- 6,374 -- -- 6,374
Change in net unrealized gain on
securities available for sale, net of re-
classification adjustments and tax effects -- -- -- -- (115) -- (115)
---------
Total comprehensive income 6,259
Cash dividends declared ($.36 per share) -- -- -- (1,981) -- -- (1,981)
Treasury stock purchased -- -- -- -- -- (6,885) (6,885)
Treasury stock released -- -- -- (41) -- 721 680
Change in unearned compensation - MRP -- 570 287 -- -- -- 857
Change in unearned compensation - ESOP -- 403 356 -- -- -- 759
--- ------- -------- -------- -------- -------- ---------
Balance at September 30, 2003 $77 $75,605 $ (8,892) $ 84,362 $ 5,427 $(36,322) $ 120,257
=== ======= ======== ======== ======== ======== =========
Balance at December 31, 2001 $77 $74,146 $(11,101) $ 80,657 $ 18,836 $(23,292) $ 139,323
Comprehensive income:
Net Income -- -- -- 6,305 -- -- 6,305
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 -- -- -- -- -- -- 1,290
Cash dividends declared ($0.36 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) $ 84,899 $ 13,821 $(30,204) $ 133,190
=== ======= ======== ======== ======== ======== =========
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,
-------------------------------
2003 2002
----------- -----------
(In thousands)
Cash flows from operating activities:
Net income $ 6,374 $ 6,305
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,685 3,875
Net amortization of securities 1,500 593
Depreciation and amortization expense 1,603 1,797
Amortization of other intangibles 151 151
Management Rewards Plan Expense 857 892
ESOP Plan Expense 759 660
Increase in cash surrender value of Bank Owned Life Insurance (126) --
Gain on sales and dispositions of securities, net (1,513) (310)
Gain on sale of loans (240) --
Loss on impairment of securities -- 347
Deferred tax provision 239 --
Loss on sale of foreclosed real estate 44 --
Minority interest (138) (300)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (126) 2,088
Accrued expenses and other liabilities (214) 1,107
--------- ---------
Net cash provided by operating activities 10,855 17,205
--------- ---------
Cash flows from investing activities:
Activity in available for sale securities:
Sales 10,430 9,067
Maturities 106,800 43,123
Principal payments 23,823 17,963
Purchases (192,064) (105,046)
Activity in held to maturity securities:
Maturities 12,016 9,431
Principal payments 35,368 17,693
Purchases (44,981) (36,049)
Purchase of Federal Home Loan Bank stock (3,976) (413)
Purchase of Bank Owned Life Insurance (7,500) --
Loan origination's, net of principal payments and purchases (124,527) 10,034
Proceeds from sale of loans from portfolio 45,613 --
Additions to banking premises and equipment (1,152) (1,062)
Proceeds from sale of foreclosed real estate 1,456 --
--------- ---------
Net cash used by investing activities (138,694) (35,259)
--------- ---------
(continued)
4
BERKSHIRE HILLS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Unaudited
Nine Months Ended September 30,
-------------------------------
2003 2002
----------- -----------
(In thousands)
Cash flows from financing activities:
Net increase in deposits $ 45,422 $ 31,992
Net decrease in securities sold under agreements
to repurchase (700) (640)
Proceeds from Federal Home Loan Bank advances with maturities
in excess of three months 92,000 75,172
Repayments of Federal Home Loan Bank advances with maturities
in excess of three months (71,684) (62,189)
Proceeds of borrowings with maturities of three months or less, net of
repayments 38,000 --
Net decrease in loans sold with recourse (603) --
Treasury stock purchased (6,886) (6,912)
Re-issuance of treasury stock in connection with
stock benefit programs 681 --
Dividends (1,981) (2,063)
-------- --------
Net cash provided by financing activities 94,249 35,360
-------- --------
Net change in cash and cash equivalents (33,590) 17,306
Cash and cash equivalents at beginning of period 60,655 42,123
-------- --------
Cash and cash equivalents at end of period $ 27,065 $ 59,429
======== ========
Supplemental cash flow information:
Interest paid on deposits $ 10,732 $ 13,551
Interest paid on borrowed funds 3,318 4,352
Income taxes paid, net 1,111 1,675
Transfers from loans to foreclosed real estate -- 2,000
Due to broker 20,019 --
See accompanying notes to unaudited consolidated financial statements.
5
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
(Unaudited)
Note 1. Basis of Presentation
The consolidated interim financial statements of Berkshire Hills
Bancorp, Inc. ("Berkshire Hills" or the "Company") and its wholly owned
subsidiaries, Berkshire Bank (the "Bank"), Berkshire Hills Funding Corp., and
Berkshire Hills Technology, Inc. herein presented are intended to be read in
conjunction with the consolidated financial statements presented in the
Company's Securities and Exchange Commission Form 10-K and accompanying notes to
the Consolidated Financial Statements filed by the Company for the year ended
December 31, 2002. The consolidated financial information at September 30, 2003
and for the three- and nine-month periods ended September 30, 2003 and 2002 are
derived from unaudited consolidated financial statements but, in the opinion of
management, reflect all adjustments necessary to present fairly the results for
these interim periods in accordance with accounting principles generally
accepted in the United States of America. These adjustments consist only of
normal recurring adjustments. The interim results are not necessarily indicative
of the results of operations that may be expected for the entire year.
Note 2. Commitments
At September 30, 2003, the Company had outstanding commitments to
originate new residential and commercial loans totaling $41.9 million, which are
not reflected on the consolidated balance sheet. In addition, unadvanced funds
on home equity lines totaled $44.2 million and unadvanced commercial lines,
including unadvanced construction loan funds, totaled $57.1 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 and nine months
ended September 30, 2003 and 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands, except per share amounts)
Net income $2,414 $2,326 $6,374 $6,305
====== ====== ====== ======
Weighted Average common shares 5,196 5,378 5,301 5,457
Dilutive effect of potential common shares
related to stock compensation plans 459 472 410 450
------ ------ ------ ------
Weighted average common shares
including potential dilution 5,655 5,850 5,711 5,907
====== ====== ====== ======
Basic earnings per share $ 0.46 $ 0.43 $ 1.20 $ 1.16
Diluted earnings per share $ 0.43 $ 0.40 $ 1.12 $ 1.07
6
Note 4. Tangible Book Value
The tangible book value per share of Berkshire Hills' common stock
at September 30, 2003 was $18.71, based on tangible stockholders' equity of
$110.0 million and outstanding shares of 5,878,920. The book value at December
31, 2002 was $18.00, based on tangible stockholders' equity of $110.1 million
and total outstanding shares of 6,117,134.
Note 5. Dividend
On July 23, 2003, the Company's Board of Directors declared a cash
dividend of $0.12 per share, which was paid on August 22, 2003, to stockholders
of record on August 7, 2003.
Note 6. 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 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 September 30, 2003 and December 31, 2002 was $10.1 million.
A summary of other intangible assets as of September 30, 2003 and
December 31, 2002 is as follows:
At September 30, 2003 At December 31, 2002
------------------------------- -------------------------------
(In thousands)
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------- -------------------------------
Customer Relationships $ 151 $ 457 $ 304 $ 304
The amortization expense and other intangible assets amounted to
$151,000 for the nine-month periods ended September 30, 2003. The remaining
amortization of $151,000 will be expensed by the year ending December 31, 2004.
7
Note 7. 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 September 30, 2003 and December 31, 2002 the Company had a
stock-based incentive plan and has elected to continue with the accounting
methodology in Opinion No. 25, and as a result, the following table provides pro
forma disclosures of net income and earnings per share, if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands, except per share amounts)
Net income, as reported $ 2,414 $ 2,326 $ 6,374 $ 6,305
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects 104 81 312 243
--------- --------- --------- ---------
Pro forma net income $ 2,310 $ 2,245 $ 6,062 $ 6,062
========= ========= ========= =========
Earnings per share
Basic - as reported $ 0.46 $ 0.43 $ 1.20 $ 1.16
========= ========= ========= =========
Basic - pro forma $ 0.44 $ 0.42 $ 1.14 $ 1.11
========= ========= ========= =========
Diluted - as reported $ 0.43 $ 0.40 $ 1.12 $ 1.07
========= ========= ========= =========
Diluted - pro forma $ 0.41 $ 0.38 $ 1.06 $ 1.03
========= ========= ========= =========
Note 8. Real Estate Investment Trust ("REIT")
Effective August 31, 2003, the Bank's REIT subsidiary, GoldLeaf Capital
Corporation, was dissolved due to changes in Massachusetts state law, which
significantly decreased the tax advantage that the Bank received for having the
REIT.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis discusses changes in the financial condition
and results of operations at and for the three and nine months ended September
30, 2003 and 2002, and should be read in conjunction with Berkshire Hills
Bancorp, Inc.'s Consolidated Financial Statements and the notes thereto,
appearing in Part I, Item 1 of this document.
Forward-Looking Statements
This report contains forward-looking statements that are based on
assumptions and may describe future plans, strategies, and expectations of
Berkshire Hills and Berkshire Bank. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Berkshire Hills'
and Berkshire Bank's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations of Berkshire Hills and its subsidiaries
include, but are not limited to, changes in interest rates, national and
regional economic conditions, legislative and regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality and composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in Berkshire Hills' and Berkshire Bank's market
area, changes in real estate market values in Berkshire Hills' and Berkshire
Bank's market area, and changes in relevant accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Except as required by applicable law or regulation, Berkshire Hills
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of the statements
or to reflect the occurrence of anticipated or unanticipated events.
General
Berkshire Hills is a Delaware corporation and the holding company
for Berkshire Bank, a state-chartered savings bank headquartered in Pittsfield,
Massachusetts. Established in 1846, Berkshire Bank is one of Massachusetts'
oldest and largest independent banks. With eleven full service branch offices
serving communities throughout Berkshire County, Berkshire Bank is the largest
banking institution based in western Massachusetts. The Bank is a
community-based financial institution that originates a variety of loan products
including real estate loans, commercial loans, and consumer loans primarily in
Berkshire County, Massachusetts and its surrounding areas. The Bank offers a
wide variety of deposit products and other investment products and financial
services to its customers, including asset management and trust services and
municipal financing. 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 September 30, 2003 and December 31, 2002
Total assets at September 30, 2003 were $1.17 billion, an increase
of $121.8 million, or 11.6%, from December 31, 2002. The increase in assets was
primarily due to growth in the loan portfolio, which increased $77.3 million, or
10.7%, to $800.3 million, an increase of $70.3 million, or 40.6%, in securities
available for sale, and an increase of $4.0 million, or 53.4%, in Federal Home
Loan Bank stock. These increases were largely funded by a $45.4 million increase
in deposits, a $58.3 million increase in Federal Home Loan Bank advances, and a
$33.6 million decrease in cash and cash equivalents.
Loans
Residential real estate loans increased $43.6 million during the
first nine months of 2003. This increase was primarily the result of the
purchase of $69.0 million in one-to four-family loans and net organic growth of
$20.2 million, partially offset by the sale of $45.6 million in one-to
four-family loans. The purchased loans consisted 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 and were funded by the proceeds from the sale of sub-prime automobile
loans in December 2002. The sold loans consisted primarily of 15 through 30 year
one-to four-family fixed rate residential mortgages, as the Bank continued to
reduce its exposure to loans and investments with longer maturities. Commercial
real estate and multi-family loans, increased $20.9 million, commercial land
development and construction loans increased $6.1 million and commercial loans
increased $3.3 million during the first nine months of 2003. The Bank
9
continued to expand into new commercial loan markets during the first nine
months of 2003, primarily in the Eastern New York area. The Bank originated
$81.5 million in commercial and commercial real estate loans, of which 28.6%
were originated in Eastern New York. The automobile loan portfolio decreased
$524,000 during the first nine months of 2003, but was up $3.7 million, or 3.4%,
from June 30, 2003, as marketing efforts aimed at generating high quality loans
with FICO scores above 700 continue to gain momentum. Sub-prime automobile loans
continued to decline as the Bank allows these loans to run-off. The balance of
these loans on September 30, 2003 was $13.0 million as compared to $19.6 million
at December 31, 2002. The allowance for sub-prime automobile loans to total
sub-prime automobile loans at quarter end September 30, 2003 was 15.75%,
compared to 15.83% at December 31, 2002. Home Equity loans increased $4.9
million, or 10.7%, primarily due to a promotional program initiated late in the
second quarter of 2003.
At September 30, 2003 At December 31, 2002
---------------------- -----------------------
Percent Percent
Balance of total Balance of total
--------- -------- --------- --------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 275,648 34.44% $ 235,020 32.50%
Residential land development
and construction 9,537 1.19% 6,576 0.91%
Commercial real estate 152,742 19.09% 131,130 18.14%
Commercial land development
and construction 17,192 2.15% 11,051 1.53%
Multi-family 14,189 1.77% 14,920 2.06%
--------- -------- --------- -------
Total real estate loans 469,308 58.64% 398,697 55.14%
Commercial loans 168,549 21.06% 165,274 22.86%
Consumer loans:
Automobile 112,797 14.09% 113,321 15.68%
Home equity loans 45,584 5.70% 40,713 5.63%
Other 4,042 0.51% 5,017 0.69%
--------- -------- --------- -------
Total consumer loans 162,423 20.30% 159,051 22.00%
Total loans 800,280 100.00% 723,022 100.00%
======== =======
Less: Allowance for loan losses (10,097) 1.26% (10,308) 1.43%
--------- ---------
Loans, net $ 790,183 $ 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 to maintain the allowance at a level
considered adequate to cover losses in the loan portfolio. Because future events
affecting the loan portfolio cannot be predicted with complete accuracy, there
can be no assurances that management's estimates are correct and that the
existing allowance for loan losses is adequate. However, management believes
that based on the information available on September 30, 2003, the Company's
allowance for loan losses is sufficient to cover losses inherent in the
Company's loan portfolio as of such date.
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
At September 30, 2003, the allowance for loan losses totaled $10.1
million, or 1.26% of total loans outstanding and 276.55% of nonperforming loans,
as compared to $10.3 million, or 1.43% of total loans outstanding and 275.54% of
nonperforming loans at December 31, 2002. Charged-off loans totaled $3.3 million
during the first nine months this year, a decline of $3.6 million compared to
the same nine months last year. This improvement was fueled by a $2.9 million,
or 46.9%, decrease in consumer loan charge-offs which totaled $3.2 million for
the nine months ended September 30, 2003, compared to the same period last year,
as the Bank's credit risk profile benefited from the December 2002 sale of $69.7
million in sub-prime automobile loans. Recoveries totaled $1.4 million for the
first nine months of this year, decreasing $1.2 million for the same period last
year, consistent with the decline in the level of charge-offs, while recoveries
to loan charge-offs increased from 38.24% to 42.37%.
The following table sets forth information regarding the allowance
for loan losses for the nine-month periods ended September 30, 2003 and 2002.
Nine Months Ended
----------------------------------
September 30, September 30,
2003 2002
------------- -------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $10,308 $11,034
Charge-offs:
Residential one-to four-family -- --
Residential land development and construction -- --
Commercial real estate -- 510
Commercial land development and construction -- --
Multi-family -- --
Commercial 43 228
Consumer (1) 3,247 6,116
------- -------
Total charge-offs 3,290 6,854
------- -------
Recoveries:
Residential one-to four-family -- --
Residential land development and construction -- --
Commercial real estate -- --
Commercial land development and construction -- --
Multi-family -- --
Commercial 437 158
Consumer (1) 957 2,463
------- -------
Total recoveries 1,394 2,621
------- -------
Net charge-offs 1,896 4,233
Provision 1,685 3,875
------- -------
Allowance for loan losses, end of period $10,097 $10,676
======= =======
Net loans charged-off to total loans 0.24% 0.54%
Allowance for loan losses to total loans 1.26% 1.36%
Allowance for loan losses to nonperforming loans 276.55% 424.66%
Recoveries to charge-offs 42.37% 38.24%
(1) Consists primarily of automobile loans
11
Nonperforming Assets
The following table sets forth information regarding nonperforming
assets as of September 30, 2003 and December 31, 2002.
At September 30, 2003 At December 31, 2002
--------------------- --------------------
(Dollars in thousands)
Nonaccruing loans:
Residential one-to four-family $ 221 $ 230
Residential land development and construction -- --
Commercial real estate 154 --
Commercial land development and construction -- --
Multi-family -- --
Commercial 2,578 2,850
Automobile 696 593
Home equity -- --
Other consumer 2 68
------ ------
Total 3,651 3,741
------ ------
Other real estate owned -- 1,500
------ ------
Total nonperforming assets $3,651 $5,241
====== ======
Total nonperforming loans to total loans 0.46% 0.52%
Total nonperforming assets to total assets 0.31% 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. With regard to automobile
loans, 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, 2003, the Company had $321,000 in automobile loans that were 90
days past due and still accruing as compared to $590,000 at December 31, 2002.
Nonaccruing loans totaled $3.7 million at September 30, 2003, a
decrease of $90,000, or 2.4%, from December 31, 2002. Commercial nonaccruing
loans decreased $272,000 as loans returned to accrual status and payments were
received. Partially offsetting this decrease was one commercial real estate loan
placed on nonaccrual in the amount of $154,000. Automobile nonaccruals increased
$103,000 from December 31, 2002, but decreased $14,000 from June 30, 2003. The
ratio of nonperforming loans as a percentage of total loans decreased to 0.46%
at September 30, 2003, from 0.52% at December 31, 2002. The Bank held no
foreclosed real estate at September 30, 2003 compared to $1.5 million at
December 31, 2002.
Investment Securities
Securities, including Federal Home Loan Bank stock and Savings Bank
Life Insurance stock, totaled $298.3 million at September 30, 2003, an increase
of $71.4 million, or 31.5%, from December 31, 2002. The increase was primarily
due to the purchase of pass-through mortgage-backed securities with average
maturities of three years with limited risk of average life extension. The Bank
continued its strategy of exiting the equities market by selling equities
totaling $391,000 in the current quarter for a net gain of $356,000. The net
unrealized gain in the securities portfolio decreased $115,000 to $5.4 million
at September 30, 2003, which was recognized in accumulated other comprehensive
income on the consolidated statement of changes in stockholders' equity.
12
Bank Owned Life Insurance ("BOLI")
The Bank executed a single premium BOLI contract in June 2003,
totaling $7.5 million. This transaction is expected to earn a tax-equivalent
return in excess of other earning assets with similar risk characteristics. The
income earned on BOLI is recorded as an increase in the asset and noninterest
income.
Deposits
Customers' deposits have always been the primary funding vehicle for
the Company's asset base. The following table sets forth the Company's deposit
stratification as of September 30, 2003 and December 31, 2002.
At September 30, 2003 At December 31, 2002
---------------------- -----------------------
Percent Percent
Balance of deposits Balance of deposits
--------- ----------- --------- -----------
(Dollars in thousands)
Demand deposits $ 96,475 11.65% $ 87,148 11.14%
NOW accounts 91,673 11.07% 92,245 11.79%
Savings accounts 173,775 20.99% 158,469 20.26%
Money Market accounts 138,457 16.73% 114,309 14.61%
Certificates of Deposit 327,402 39.56% 330,189 42.20%
--------- ------ --------- ------
Total deposits $ 827,782 100.00% $ 782,360 100.00%
========= ====== ========= ======
Total deposits increased $45.4 million, or 5.8%, for the first nine
months of the year. Core deposits, which the Company considers to be all but
certificates of deposit, were 60.4% of total deposits at September 30, 2003 as
compared to 57.8% at December 31, 2002, an increase of $48.2 million, or 10.7%.
The Bank had the largest increase in money market accounts, which increased
$24.1 million, or 21.1%. Savings accounts increased $15.3 million, or 9.7%, and
demand deposits increased $9.3 million, or 10.7%. The Bank continues to
aggressively pursue deposits through customer cross-selling efforts and other
marketing campaigns.
Borrowings
Borrowings from the Federal Home Loan Bank of Boston totaled $191.3
million at September 30, 2003, a $58.3 million, or 43.8%, increase from December
31, 2002, as the Company has been using Federal Home Loan Bank borrowings
primarily to fund security purchases as management has sought to take advantage
of steep yield curves during the current quarter. The Company had additional
borrowing capacity of $128.6 million at the Federal Home Loan Bank of Boston at
September 30, 2003.
Due to Broker
Due to broker totaled $20.0 million as the Bank executed several
security transactions in September 2003 that had not yet settled by September
30, 2003.
Stockholders' Equity
At September 30, 2003, the Company had $120.3 million in
stockholders' equity compared to $120.6 million at December 31, 2002. The
purchase of 278,816 shares of treasury stock, at an average price of $24.70 per
share, less exercised stock options of 48,602 shares reduced stockholder's
equity by $6.2 million. The Company also declared and paid cash dividends of
$0.36 per common share amounting to $2.0 million. Partially offsetting these
decreases in stockholders' equity were net income of $6.4 million and changes
related to stock compensation plans of $1.6 million.
Comparison of Operating Results for the Three and Nine Months Ended September
30, 2003 and 2002
Net Interest Income. Net interest income is the largest component of
the Company's revenue stream and is the difference between the interest and
dividends earned on the loan and investment portfolios and the interest paid on
the Company's funding sources, primarily customer deposits and advances from the
Federal Home Loan Bank of Boston. Net interest income decreased $1.3 million, or
11.8%, to $9.3 million for the three months ended September 30, 2003, and $3.9
million, or 12.2%, to $27.8 million, for the nine months ended September 30,
2003. The decreases occurred as an increase in earning assets was more than
offset by a decrease in the average yield on earning assets. Average earning
13
assets increased $57.4 million for the three months ended September 30, 2003 and
$38.6 million for the nine months ended September 30, 2003, while the average
yield on earning assets for the same periods decreased by 133 and 126 basis
points, respectively. The yield on average earning assets declined from 6.55% to
5.22% for the three month period ended September 30, 2003 and from 6.75% to
5.49% for the nine-month period ended September 30, 2003. Partially offsetting
the decline in the yield on average earning assets was a 78 basis point decrease
and a 72 basis point decrease in the rate paid on funding liabilities from the
same periods last year. As a result, the Company's net interest margin was 3.51%
for the three-month period ended September 30, 2003 and 3.64% for the nine month
period ended September 30, 2003 compared to 4.21% and 4.32% for the same periods
last year.
Total interest and dividend income decreased $2.6 million, or 15.8%,
for the three months ended September 30, 2003 and $7.7 million, or 15.5%, for
the nine months ended September 30, 2003, compared to the same periods last
year. Loan interest declined $2.6 million, or 18.2%, this quarter compared to
the same period last year and decreased $8.0 million, or 18.1%, for the nine
months ended September 30, 2003, due to the sale of higher rate sub-prime
automobile loans in December 2002 and the impact of lower market interest rates
resulting from comparatively stronger loan refinance activity. Interest earned
on the Company's investment portfolio increased $50,000, and $352,000 for the
three and nine months ended September 30, 2003, respectively, as higher average
balances were able to offset lower average rates earned.
In connection with the lower interest rate environment, and
increases in lower cost core deposits, total interest expense fell $1.3 million,
or 22.8%, and $3.8 million, or 21.3%, for the three and nine months ended
September 30, 2003, respectively, compared to the same periods last year.
Interest expense on deposits fell by $1.1 million, or 24.5%, and $2.8 million,
or 21.0%, for the three- and nine-month periods ended September 30, 2003
compared to the same periods last year, as higher average balances were offset
by lower rates paid. Interest paid on Federal Home Loan Bank of Boston advances
and other borrowings decreased $261,000, or 17.8%, and $963,000, or 22.3%, for
the three and nine months ended September 30, 2003 compared to the same periods
last year, due to lower rates as new lower-cost borrowings replaced maturing
higher cost advances and as a result of the Bank's pre-payment of higher cost
advances in December 2002.
Provision for Loan Losses. The Company's provision for loan losses
was $575,000 and $1.7 million for the three and nine months ended September 30,
2003 as compared to $1.1 million and $3.9 million for the same periods last
year. In assessing the provision for the three and nine months ended September
30, 2003, management took into consideration a $75.2 million decrease in
sub-prime automobile loans from the third quarter of last year. The Company also
considered net loan charge-offs, which decreased $2.3 million to $1.9 million
for the first nine months of this year compared to last year. Foremost in this
decrease were net consumer loan charge-offs, which decreased $1.4 million,
consisting mainly of sub-prime automobile loans. Additional factors management
considered were the level of delinquent loans, which declined from 1.60% of
total loans at September 30, 2002, to 0.98% at September 30, 2003, and the
increase of 51 points in average FICO scores for the consumer loan portfolio, to
674 at September 30, 2003, from 623 at September 30, 2002.
Noninterest Income. For the three and nine months ended September
30, 2003, noninterest income increased $373,000, or 11.4%, and $2.1 million, or
23.4%, respectively, compared to the same periods last year. Gains on the sale
of securities increased $385,000 and $1.6 million for the three and nine months
ended September 30, 2003, respectively, compared to the same periods last year.
EastPoint's license maintenance and processing fees and license sales and other
fees decreased a total of $452,000 for the three months ended September 30, 2003
and increased $216,000 for the nine months ended September 30, 2003 as compared
to the same periods last year. Expenses for EastPoint, which are recorded in
various noninterest expense categories, were down $481,000 for the current
quarter and essentially flat year to date from 2002. Excluding security gains
and EastPoint revenues, noninterest income increased $440,000, or 39.4%, and
$360,000, or 9.3%, respectively, for the three- and nine-month periods ended
September 30, 2003 compared to the same periods last year. The increase in the
current quarter was largely attributed to increases in Trust department fees,
gains on the sale of loans and loan fees, partially offset by lower other
income. The increase for the current nine month period was largely attributed to
higher Trust department fees and gain on the sale of loans.
Trust department fees increased $162,000 and $198,000 for the three
and nine months ended September 30, 2003, compared to the same periods last
year, primarily due to revenue generated from new account relationships during
the first nine months of 2003. Gain on the sale of loans was $102,000 and
$240,000, respectively, for the three and nine month periods ended September 30,
2003 compared to no gain on the sale of loans in the same periods last year.
These gains resulted from management's decision to sell longer term fixed rate
1-4 family residential mortgage loans to better position the balance sheet for a
potential rise in interest rates. The increase of $102,000 in other income for
the
14
three months ended September 30, 2003 was primarily due to income earned on Bank
Owned Life Insurance. The decrease of $98,000 in other income for the nine
months ended September 30, 2003 was largely due to lower municipal finance fees,
which can fluctuate quarter to quarter, and deposit insurance fund dividends.
Operating Expenses. Operating (noninterest) expenses decreased
$725,000 and $552,000 for the three and nine months ended September 30, 2003
compared to the same periods last year. Salaries and benefits expense declined
$279,000 and rose $119,000 for the three and nine months ended September 30,
2003, respectively, as compared to the same periods last year. The increase in
the nine month period was due to a non-recurring charge of $800,000 taken in the
second quarter of 2003 related to Mr. Wells' retirement. Exclusive of this
charge, salaries and benefits would have decreased $681,000, or 4.2%, for the
nine month period ended September 30, 2003, due to the management restructuring
that occurred in 2002. Data processing expenses increased $135,000 and $249,000
for the three and nine months ended September 30, 2003, due to the Bank's
increased ATM network, debit card services, internet banking applications, and
miscellaneous software license fees. Other expenses decreased $255,000 for the
three months ended September 30, 2003, and increased $260,000 for the nine
months ended September 30, 2003, consistent with changes in EastPoint's revenue
for the respective periods. EastPoint's expenses correspond closely with its
changes in revenue. Foreclosed real estate and other loans, net, decreased
$248,000 and $1.1 million for the three and nine months ended September 30,
2003, as compared to the same periods last year, primarily due to a decrease in
the expenses associated with repossessed automobiles.
Income Taxes. The provision for income taxes for the third quarter
of 2003 was $1.4 million compared to $1.1 million for the third quarter of 2002,
due to increased income before taxes as well as an increase in the effective tax
rate to 36.0% for the three months ended September 30, 2003 from 32.6% for the
three months ended September 30, 2002. For the nine months ended September 30,
2003, the provision for income taxes totaled $4.0 million as compared to $3.0
million for 2002. This increase was due to the assessment of $243,000 resulting
from the State's disallowance of a dividend received deduction paid to the Bank
by the Bank's REIT, increased income before taxes and the aforementioned
increase in the effective tax rate. The increase in the effective tax rate was
largely due to the disallowance of the dividend received deduction on the Bank's
REIT.
Regulatory Capital
The Company's capital to assets ratios for September 30, 2003 and
December 31, 2002 were 10.30% and 11.53%, respectively. The various regulatory
capital ratios for the Bank at September 30, 2003 and December 31, 2002 were as
follows:
FDIC Minimums
At September 30, 2003 At December 31, 2002 to be Well Capitalized
--------------------- -------------------- ----------------------
Total capital to risk weighted assets:
Berkshire Bank 12.58% 13.60% 10.00%
Tier I capital to risk weighted assets:
Berkshire Bank 10.90 11.85 6.00
Tier I capital to average assets:
Berkshire Bank 8.15 8.81 5.00
As of September 30, 2003, Berkshire Bank met the conditions to be
classified as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios. As part of management's revised strategy to address the overall credit
risk to the Bank, management has determined to maintain capital levels in an
amount in excess of the regulatory requirements. Such determination considers
the amount of lower quality sub-prime automobile loans in the loan portfolio.
15
Liquidity
Liquidity is the ability to meet current and future financial
obligations of a short term nature. Berkshire Bank further defines its liquidity
requirements as the ability to respond to the needs of depositors and borrowers
as well as maintaining the flexibility to take advantage of investment
opportunities.
Berkshire Bank's primary investing activities are: (1) originating
residential one-to four-family mortgage loans, commercial business and real
estate loans, multi-family loans, home equity loans and lines of credit, and
consumer loans; and (2) investing in mortgage-and asset-backed securities, U.S.
Government and agency obligations, and debt obligations. These activities are
funded primarily by principal and interest payments on loans, maturities of
securities, deposits and Federal Home Loan Bank of Boston advances. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by interest rates, economic conditions, and competition. Berkshire Bank closely
monitors its liquidity position on a daily basis. If the Bank requires funds
beyond its ability to generate them internally, additional sources of funds are
available through advances or a line of credit with the Federal Home Loan Bank
and through a repurchase agreement with the Depositors Insurance Fund, the
Bank's excess deposit insurer.
Berkshire Bank relies primarily on competitive rates, customer
service, and long-standing relationships with customers to retain deposits.
Occasionally, the Bank will also offer special competitive promotions to its
customers to increase retention and promote deposit growth. Based upon the
Bank's historical experience with deposit retention, management believes that,
although it is not possible to predict future terms and conditions upon renewal,
a significant portion of such deposits will remain with the Bank. Certificates
of deposit that were scheduled to mature in one year or less from September 30,
2003 were approximately $220.4 million.
The primary source of funding for the Company is dividend payments
from the Bank, and to a lesser extent, earnings on deposits held by the Company.
Dividend payments by the Bank have primarily been used to pay holding company
obligations, including the payment of dividends and the funding of stock
repurchase programs. The Bank's ability to pay dividends and other capital
distributions to the Company is generally limited by the Massachusetts banking
regulations and the regulations of the Federal Deposit Insurance Corporation.
Additionally, the Massachusetts Banking Commissioner and Federal Deposit
Insurance Corporation may prohibit the payment of dividends which are otherwise
permissible by regulation for safety and soundness reasons.
16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Qualitative Aspects of Market Risk. The Bank's most significant form
of market risk is interest rate risk. The principal objectives of the Bank's
interest rate risk management are to evaluate the interest rate risk inherent in
certain balance sheet accounts, determine the level of risk appropriate given
its business strategy, operating environment, capital and liquidity requirements
and performance objectives, and manage the risk consistent with its established
policies. The Bank maintains an Asset/Liability Committee consisting of six
members of senior management and the Senior Financial Analyst, and are
responsible for reviewing its asset/liability policies and interest rate risk
position, which meets quarterly and reports to the Executive Committee of the
Bank and the Board of Directors. The Asset/Liability Committee consists of the
Bank's President and Chief Executive Officer; Senior Vice President and Chief
Financial Officer; Senior Vice President-Retail Banking and Operations; Senior
Vice President-Commercial Lending; Senior Vice President-Retail Lending; First
Vice President and Controller; and Senior Financial Analyst. The extent of the
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of the Bank.
The Bank manages interest rate risk by:
o emphasizing the origination and purchase of adjustable rate loans
and, from time to time, selling a portion of its longer term fixed
rate loans as market interest rate conditions dictate;
o originating shorter term commercial and consumer loans;
o investing in high credit quality, liquid securities that provide the
flexibility to take advantage of opportunities that may arise from
fluctuations in market interest rates, the overall maturity and
duration of which is monitored in relation to the repricing of its
loan portfolio;
o promoting lower cost core deposits; and
o using Federal Home Loan Bank of Boston advances to better structure
maturities of its interest rate sensitive liabilities.
For the Bank, market risk also includes price risk, primarily security
price risk. The securities portfolio had unrealized gains before taxes of $8.3
million at September 30, 2003. Changes in this figure are reflected, net of
taxes, in accumulated other comprehensive income as a separate component of
Berkshire Hills' stockholders' equity. Since December 31, 2002, this component
has decreased $115,000. It is not possible to predict with complete accuracy the
direction and magnitude of market value changes in the securities portfolio.
Unfavorable market conditions or other factors could cause price declines in the
securities portfolio.
Quantitative Aspects of Market Risk. Berkshire Bank uses a
simulation model to measure the potential change in net interest income,
incorporating various assumptions regarding the shape of the yield curve, the
pricing characteristics of loans, deposits and borrowings, prepayments on loans
and securities and changes in the balance sheet mix. The model assumes the yield
curve is derived from the interpolated Treasury yield curve and that an
instantaneous increase or decrease of market interest rates would cause a
simultaneous parallel shift along the entire yield curve. Loans, deposits and
borrowings are expected to reprice at the new market rate on the contractual
review or maturity date. The Bank closely monitors its loan prepayment trends
and uses prepayment guidelines set forth by Freddie Mac, Fannie Mae and other
market sources as well as Bank generated figures where applicable. All
prepayments are assumed to roll over into new loans originated in the same loan
category at the new market rate. Berkshire Bank further assumes that its
securities' cash flows, especially its mortgage-backed securities cash flows,
are such that they will generally follow industry standards and that prepayments
will be reinvested in the same category at the prevailing market rate. Finally,
the model assumes that the balance sheet size and mix will remain relatively
unchanged throughout the next calendar year.
17
The tables below set forth, as of September 30, 2003 and December 31,
2002, estimated net interest income and the estimated changes in the Company's
net interest income for the next twelve month period which may result given
instantaneous increases or decreases in market interest rates of 100 and 200
basis points.
Increase/
(decrease)
in market At September 30, 2003 At December 31, 2002
interest rates ------------------------------------- ------------------------------------
in basis points Dollar Percent Dollar Percent
(rate shock) Amount Change change Amount change change
--------------- -------- -------- ------ -------- -------- ------
200 $ 36,290 $ (1,016) (2.72)% $ 34,583 $ (1,027) (2.88)%
100 36,946 (360) (0.96) 34,741 (869) (2.44)
Static 37,306 -- -- 35,610 -- --
(100) 37,919 613 1.64 35,162 (448) (1.26)
(200) 35,424 (1,882) (5.04) 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 September 30, 2003 chart indicates an
increase in net interest income of $613,000 while the December 31, 2002 chart
indicates a decrease of $448,000. The primary reason for this difference was
that in the September 30, 2003 chart, the Bank-determined floors on certain
money market accounts had been lowered from where they were at the end of last
year. In the event of a sudden and sustained 200 basis point decline in market
interest rates, the September 30, 2003 table indicates a decrease of $1.9
million, somewhat less than with the decrease of $2.7 million indicated by the
December 31, 2002 chart, again reflecting the deposit floors.
In the event of a sudden and sustained increase in prevailing market
interest rates of 100 and 200 basis points, the September 30, 2003 chart
indicates that net interest income would decrease by $360,000 and $1.0 million,
respectively. This is similar to 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. The primary
reason for the difference in the plus 100 basis point scenario is that, in the
first quarter of 2003, management reevaluated the repricing assumptions on
certain non-maturity deposits and slowed the pace at which these non-maturity
deposits would increase following an increase in general market interest rates.
The impact of this change in repricing assumptions on the 200 basis point
scenario was offset by balance sheet management strategies that have been
implemented throughout 2003.
Computation of prospective effects of hypothetical interest rate
changes are based on a number of assumptions including the level of market
interest rates, the degree to which certain assets and liabilities with similar
maturities or periods to repricing react to changes in market interest rates,
the expected prepayment rates on loans and investments, the degree to which
early withdrawals occur on certificates of deposit, and other deposit flows. As
a result, these computations should not be relied upon as indicative of actual
results. Further, the computations do not reflect any actions that management
may undertake in response to changes in interest rates.
18
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended September 30, 2003
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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)
31.1 Rule 13a - 14(a)/15d - 14(a) Certification of Chief
Executive Officer
31.2 Rule 13a - 14(a)/15d - 14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
- ----------
(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.
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(b) Reports on Form 8-K
On July 11, 2003, the Company furnished a Form 8-K in which it
announced it expected to issue its second quarter earnings release on July
22, 2003 and conduct a conference call at 2:00 p.m. on July 23, 2003 to
discuss second quarter results. The press release announcing these items
was attached by exhibit.
On July 24, 2003, the Company filed a Form 8-K related to a press
release announcing earnings, the declaration of a quarterly dividend of
$0.12 per share and a conference call discussing such second quarter
earnings that took place previously. The press release announcing these
items was attached by exhibit.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BERKSHIRE HILLS BANCORP, INC.
Dated: November 10, 2003 By: /s/ Michael P. Daly
-------------------
Michael P. Daly
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: November 10, 2003 By: /s/ Wayne F. Patenaude
----------------------
Wayne F. Patenaude
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
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