UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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 incorporation or (I.R.S. Employer
organization) Identification No.)
24 North Street, Pittsfield, Massachusetts 01201
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 443-5601
-----------------------------------------------------------------------------
(Registrant 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 Registrant had 5,871,261 shares of common stock, par value $0.01 per
share, outstanding as of August 3, 2004.
BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of 1
June 30, 2004 and December 31, 2003
Consolidated Statements of Income for the Three and Six 2
Months Ended June 30, 2004 and 2003
Consolidated Statements of Changes in Stockholders' Equity 3
for the Six Months Ended June 30, 2004 and 2003
Consolidated Statements of Cash Flows for the 4
Six Months Ended June 30, 2004 and 2003
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 16
Item 4. Controls and Procedures
18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
June 30, December 31,
2004 2003
----------- -----------
(In thousands)
Assets:
Cash and due from banks $ 15,981 $ 15,583
Short-term investments 5,167 1,859
----------- -----------
Total cash and cash equivalents 21,148 17,442
Securities available-for-sale, at fair value 394,469 307,425
Securities held-to-maturity, at amortized cost 27,435 36,903
Federal Home Loan Bank stock, at cost 16,898 12,923
Savings Bank Life Insurance stock, at cost 2,043 2,043
Loans 795,365 792,227
Allowance for loan losses (9,248) (8,969)
----------- -----------
Net loans 786,117 783,258
Premises and equipment, net 13,137 12,626
Foreclosed real estate, net 25 --
Accrued interest receivable 5,292 5,080
Goodwill and other intangibles 5,763 10,233
Net deferred tax assets 3,999 1,725
Bank owned life insurance 7,912 7,721
Due from broker 458 7,089
Other assets 11,391 14,080
----------- -----------
Total assets $ 1,296,087 $ 1,218,548
=========== ===========
Liabilities:
Deposits 847,403 830,244
Federal Home Loan Bank advances 321,722 251,465
Loans sold with recourse 191 473
Due to broker -- 5,646
Accrued expenses and other liabilities 4,716 5,293
----------- -----------
Total liabilities 1,174,032 1,093,121
----------- -----------
Minority interests -- 2,252
----------- -----------
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding) -- --
Common stock ($.01 par value; 26,000,000 shares authorized; and 7,673,761
shares issued at June 30, 2004 and December 31, 2003; shares
outstanding 5,871,261 at June 30, 2004 and 5,903,082 at December 31, 2003) 77 77
Additional paid-in capital 76,921 75,764
Unearned compensation (8,251) (8,507)
Retained earnings 90,114 86,276
Accumulated other comprehensive income 1,080 5,559
Treasury stock, at cost (1,802,500 shares at June 30, 2004
and 1,770,679 shares at December 31, 2003) (37,886) (35,994)
----------- -----------
Total stockholders' equity 122,055 123,175
----------- -----------
Total liabilities and stockholders' equity $ 1,296,087 $ 1,218,548
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
1
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share data)
Interest and dividend income:
Bond interest $ 4,148 $ 1,551 $ 7,986 $ 3,123
Stock dividends 211 214 608 478
Short-term investment interest 1 14 17 98
Loan interest 10,377 12,360 21,116 24,341
-------- -------- -------- --------
Total interest and dividend income 14,737 14,139 29,727 28,040
-------- -------- -------- --------
Interest expense:
Interest on deposits 3,026 3,613 6,112 7,371
Interest on FHLB advances and other borrowings 1,959 1,093 3,699 2,156
-------- -------- -------- --------
Total interest expense 4,985 4,706 9,811 9,527
-------- -------- -------- --------
Net interest income 9,752 9,433 19,916 18,513
Provision for loan losses 425 785 775 1,110
-------- -------- -------- --------
Net interest income, after provision for loan losses 9,327 8,648 19,141 17,403
Noninterest income:
Customer service fees 634 619 1,158 1,175
Trust department fees 648 554 1,225 990
Loan fees 103 147 182 195
Gain on sale of securities, net 377 317 702 1,157
Gain (loss) on sale of loans, net (6) 138 84 138
Other income 209 121 489 181
-------- -------- -------- --------
Total noninterest income 1,965 1,896 3,840 3,836
-------- -------- -------- --------
Operating expenses:
Salaries and benefits 3,890 4,712 8,493 8,700
Occupancy and equipment 975 913 2,034 1,962
Marketing and advertising 270 139 427 242
Data processing 331 281 725 546
Professional services 357 261 785 482
Office supplies 124 140 262 327
Foreclosed real estate and other loans, net 171 286 254 407
Other general and administrative expenses 815 850 1,517 1,797
-------- -------- -------- --------
Total operating expenses 6,933 7,582 14,497 14,463
-------- -------- -------- --------
Income from continuing operations before taxes 4,359 2,962 8,484 6,776
Provision for income taxes 1,402 786 2,728 2,678
-------- -------- -------- --------
Income from continuing operations 2,957 2,176 5,756 4,098
-------- -------- -------- --------
Loss from discontinued operations (including loss on sale of $75,000) (386) (57) (653) (208)
Income tax benefit (131) (19) (222) (70)
-------- -------- -------- --------
Net loss from discontinued operations (255) (38) (431) (138)
-------- -------- -------- --------
Net income $ 2,702 $ 2,138 $ 5,325 $ 3,960
======== ======== ======== ========
Earnings per share:
Basic $ 0.51 $ 0.40 $ 1.01 $ 0.74
Diluted $ 0.47 $ 0.38 $ 0.93 $ 0.69
Weighted average shares outstanding:
Basic 5,292 5,291 5,291 5,355
Diluted 5,725 5,687 5,742 5,733
See accompanying notes to unaudited consolidated financial statements.
2
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Unaudited
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings Income Stock Total
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
Balance at December 31, 2003 $ 77 $ 75,764 $ (8,507) $ 86,276 $ 5,559 $ (35,994) $ 123,175
---------
Comprehensive income:
Net income -- -- -- 5,325 -- -- 5,325
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment and
tax effects -- -- -- -- (4,479) -- (4,479)
---------
Total comprehensive income 846
---------
Reversals from discontinued operations -- 142 -- (142) -- -- --
Cash dividends paid ($0.24 per share) -- -- -- (1,314) -- -- (1,314)
Treasury stock purchased -- -- -- -- -- (2,666) (2,666)
Treasury stock released -- 358 -- -- -- 238 596
Reissuance of Treasury stock under -- -- -- (31) -- 536 505
Stock Option Plan (30,113 shares)
Change in unearned compensation - MRP -- 219 19 -- -- -- 238
Change in unearned compensation - ESOP -- 438 237 -- -- -- 675
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2004 $ 77 $ 76,921 $ (8,251) $ 90,114 $ 1,080 $ (37,886) $ 122,055
========= ========= ========= ========= ========= ========= ==========
Balance at December 31, 2002 $ 77 $ 74,632 $ (9,535) $ 80,011 $ 5,542 $ (30,158) $ 120,569
---------
Comprehensive income:
Net income -- -- -- 3,960 -- -- 3,960
Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment and
tax effects -- -- -- -- 328 -- 328
---------
Total comprehensive income 4,288
---------
Cash dividends paid ($0.24 per share) -- -- -- (1,333) -- -- (1,333)
Treasury stock purchased -- -- -- -- -- (6,885) (6,885)
Treasury stock released -- -- -- (34) -- 586 552
Change in unearned compensation - MRP -- 570 25 -- -- -- 595
Change in unearned compensation - ESOP -- 228 237 -- -- -- 465
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2003 $ 77 $ 75,430 $ (9,273) $ 82,604 $ 5,870 $ (36,457) $ 118,251
========= ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
3
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30,
------------------------------
2004 2003
---------- ---------
(In thousands)
Cash flows from operating activities:
Continuing operations:
Net income $ 5,756 $ 4,098
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 775 1,110
Net amortizaton of securities 811 917
Depreciation and amortization expense 824 829
Management Awards Plan Expense 620 595
Employee Stock Ownership Plan Expense 675 465
Increase in cash surrender value of Bank Owned Life Insurance (191) (29)
Gain on sales and dispositions of securities, net (702) (1,157)
(Gain) on sale of loans, net (84) -
Loss on sale/write-down of foreclosed real estate, net - 44
Deferred tax provision 69 269
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 2,477 973
Accrued expenses and other liabilities (577) 868
---------- ---------
Net cash provided by continuing operations 10,453 8,982
Discontinued operations:
Net loss (431) (138)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 188 260
Amortization of goodwill and other intangibles 94 101
Minority interest -- (137)
Proceeds from sale of discontinued operations 2,049 --
Loss on sale of discontinued operations 75 --
---------- ---------
Net cash provided by discontinued operations 1,975 86
Total net cash provided by operating activities: 12,428 9,068
---------- ---------
Cash flows from investing activities:
Continuing operations:
Activity in available-for-sale securities:
Sales 3,781 9,600
Maturities 21,444 85,247
Principal payments 29,092 14,231
Purchases (147,012) (98,315)
Activity in held-to-maturity securities:
Maturities 8,313 11,788
Principal payments 7,265 23,771
Purchases (6,405) (38,079)
Purchase of Federal Home Loan Bank stock (3,975) (418)
Purchase of Bank Owned Life Insurance -- (7,500)
(continued)
4
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Unaudited
Six Months Ended
June 30,
------------------------
2004 2003
--------- ---------
(In thousands)
Loan originations, net of principal payments and purchases $ (55,300) $(100,987)
Proceeds from sale of loans from portfolio 51,725 --
Additions to banking premises and equipment (2,068) (927)
Proceeds from sale of foreclosed real estate -- 1,456
Purchase of common stock in connection with stock awards plan 214 --
--------- ---------
Net cash used by continuing operating investing activities (92,926) (100,133)
Discontinued operations:
Additions to banking premises and equipment (76) (27)
Proceeds from sale of equipment 621 --
--------- ---------
Net cash provided (used) by discontinued investing activities 545 (27)
Total net cash provided by investing operations: (92,381) (100,160)
--------- ---------
Cash flows from financing activities:
Net increase in deposits $ 17,159 $ 34,412
Net decrease in securities sold under agreements to repurchase -- (700)
Proceeds from Federal Home Loan Bank advances with maturities
in excess of three months 184,000 55,000
Repayments of Federal Home Loan Bank advances with maturities
in excess of three months (113,743) (57,846)
Proceeds of borrowings with maturiites of three months or
less, net of repayments -- 27,000
Net decrease in loans sold with recourse (282) (436)
Treasury stock purchased (2,666) (6,885)
Exercise of officer stock options and non-employee Director benefit programs 505 552
Dividends (1,314) (1,333)
--------- ---------
Net cash provided by financing activities 83,659 49,764
--------- ---------
Net change in cash and cash equivalents 3,706 (41,328)
Cash and cash equivalents at beginning of period 17,442 60,655
--------- ---------
Cash and cash equivalents at end of period $ 21,148 $ 19,327
========= =========
Supplemental cash flow information:
Interest paid on deposits $ 6,101 $ 7,379
Interest paid on borrowed funds 3,587 2,153
Income taxes paid (refunded) 887 (209)
Transfer from loans to foreclosed real estate 25 --
Due to broker -- 16,411
Due from broker 458 --
See accompanying notes to unaudited consolidated financial statements.
5
BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(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, 2003. The consolidated financial information at June 30, 2004 and
for the three- and six-month periods ended June 30, 2004 and 2003 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.
On June 18, 2004 the Company announced the sale of the business assets of
EastPoint Technologies, LLC ("EastPoint"), a software and data processing
provider for financial institutions, to a subsidiary of Open Solutions Inc.
(NASDAQ: OPEN). The Company owned 60.3 percent of EastPoint and recognized
approximately $2.8 million on the sale. The transaction resulted in a net loss
of $75,000 to the Company ($49,500 net of taxes). This loss, in addition to a
current quarter net operating loss of $311,000 ($211,500, net of taxes) from
EastPoint through June 18, 2004, was recorded as a loss from discontinued
operations. The Company also has the potential to receive up to an additional
$750,000 in two years. Prior periods presented have been adjusted to reflect the
sale of EastPoint and the discontinued operations.
Note 2. Commitments
At June 30, 2004, the Company had outstanding commitments to originate new
residential and commercial loans totaling $34.0 million, which are not reflected
on the consolidated balance sheet. In addition, unadvanced funds on home equity
lines totaled $49.7 million and unadvanced commercial lines, including
unadvanced construction loan funds, totaled $69.4 million. The Company
anticipates it will have sufficient funds to meet these commitments.
6
Note 3. Earnings Per Share
Basic earnings per share represent 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 are not
included in the weighted average number of common shares outstanding for either
basic or diluted earnings per share calculations. Earnings per share data is
presented for the three and six months ended June 30, 2004 and 2003.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(In thousands, except per share amounts)
Net income from continuing operations $ 2,957 $ 2,176 $ 5,756 $ 4,098
Net loss from discontinued operations (255) (38) (431) (138)
--------- --------- --------- ---------
Net income $ 2,702 $ 2,138 $ 5,325 $ 3,960
========= ========= ========= =========
Weighted average common shares 5,292 5,291 5,291 5,355
Dilutive effect of potential common shares
related to stock compensation plans 433 396 451 378
--------- --------- --------- ---------
Weighted average common shares
including potential dilution 5,725 5,687 5,742 5,733
========= ========= ========= =========
Continuing operations:
Basic earnings per share $ 0.56 $ 0.41 $ 1.09 $ 0.77
Diluted earnings per share $ 0.52 $ 0.39 $ 1.00 $ 0.71
Discontinued operations:
Basic loss per share $ (0.05) $ (0.01) $ (0.08) $ (0.03)
Diluted loss per share $ (0.05) $ (0.01) $ (0.08) $ (0.03)
Net income:
Basic earnings per share $ 0.51 $ 0.40 $ 1.01 $ 0.74
Diluted earnings per share $ 0.47 $ 0.38 $ 0.93 $ 0.69
Note 4. Tangible Book Value
The tangible book value per share of Berkshire Hills' common stock at June
30, 2004 was $19.81, based on tangible stockholders' equity of $116.3 million
and outstanding shares of 5,871,261. The tangible book value per share at
December 31, 2003 was $19.13 based on tangible stockholders' equity of $112.9
million and total outstanding shares of 5,903,082.
Note 5. Dividend
On April 28, 2004, the Company's Board of Directors declared a cash
dividend of $0.12 per share, which was paid on May 24, 2004, to stockholders of
record on May 10, 2004.
Note 6. Goodwill and Other Intangibles
Goodwill and other intangibles include goodwill associated with the
acquisition by Berkshire Hills Technology of a majority interest in 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 were included in the
sale of business assets of EastPoint on June 18, 2004. The carrying amount of
goodwill and other intangibles as of June 30, 2004 was $5.8 million and $10.2
million on December 31, 2003. As of December 31, 2003, the gross carrying amount
and accumulated amortization of these customer relationships were $101,000 and
$507,000, respectively. The amortization expense and other intangible assets
amounted to $94,000 for the six-month period ended June 30, 2004 and $102,000
for the six-month period ending June 30, 2003.
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 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 plans have no intrinsic value at the grant date, and under
Opinion No. 25, no compensation cost is recognized for them.
At June 30, 2004 and December 31, 2003, the Company had stock option plans
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.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
2004 2003 2004 2003
------- ------- ------- ---------
(In thousands, except per share amounts)
Net income, as reported $ 2,702 $ 2,138 $ 5,325 $ 3,960
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 133 104 266 208
------- ------- ------- ---------
Pro forma net income $ 2,569 $ 2,034 $ 5,059 $ 3,752
======= ======= ======= =========
Earnings per share
Basic - as reported $ 0.51 $ 0.40 $ 1.01 $ 0.74
======= ======= ======= =========
Basic - pro forma $ 0.49 $ 0.38 $ 0.96 $ 0.70
======= ======= ======= =========
Diluted - as reported $ 0.47 $ 0.38 $ 0.93 $ 0.69
======= ======= ======= =========
Diluted - pro forma $ 0.45 $ 0.36 $ 0.88 $ 0.65
======= ======= ======= =========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended June 30, 2004
and 2003, 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 release
publicly 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, and a representative office in
Albany, New York, 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, including asset management and trust
services and municipal finance.
Recent Developments
On July 21, 2004, the Company announced that Berkshire Bank had entered
into an agreement to purchase assets and assume liabilities with The National
Bank of Vernon for its Oriskany Falls, New York branch office, including the
premises. As of June 30, 2004, the deposits to be purchased from The National
Bank of Vernon totaled approximately $7.8 million. Berkshire Bank has agreed to
pay a premium of 11.5% of the deposits on the acquisition date. The transaction
is subject to certain conditions being satisfied prior to closing, including
receipt of all required regulatory approvals. This acquisition will provide the
opportunity to seek regulatory approval to open full-service branches in the
Albany, New York area.
Comparison of Financial Condition at June 30, 2004 and December 31, 2003
Total assets at June 30, 2004 were $1.30 billion, an increase of $77.5
million, or 6.4%, from December 31, 2003. The increase in assets was primarily
due to an increase of $87.0 million, or 28.3%, in securities available for sale.
This increase was largely funded by a $70.3 million increase in Federal Home
Loan Bank advances, and an increase of $17.2 million in deposits.
Loans
Loans increased $3.1 million from December 31, 2003. Residential real
estate loans decreased $45.6 million during the first six months of 2004 due to
the securitization of $38.7 million of one- to four-family longer-term
9
fixed rate mortgages and the sale of $6.5 million of one- to four-family
longer-term fixed rate mortgages, as the Bank continued to reduce its exposure
to loans and investments with longer maturities. Commercial real estate loans
increased $45.9 million, as the Bank has been successful in soliciting new
relationships and as the commercial real estate market in Berkshire County has
been selected as a viable investment alternative for many investors. However,
commercial loans decreased $9.3 million as our market experienced weak demand
for commercial and industrial financing during the first six months of 2004. The
automobile loan portfolio increased $13.5 million during the first six months of
2004, as increased marketing efforts aimed at generating high quality loans with
FICO scores above 700 continued to gain momentum. Home equity loans increased
$2.4 million, or 5.3%.
At June 30, 2004 At December 31, 2003
------------------------- -------------------------
Percent Percent
Balance of total Balance of total
--------- --------- --------- ---------
(Dollars in thousands)
Real estate loans:
Residential one- to four-family $ 205,907 25.89% $ 254,939 32.18%
Residential land development
and construction 13,974 1.76% 10,583 1.34%
Commercial real estate 212,670 26.74% 166,796 21.05%
Commercial land development
and construction 20,518 2.58% 24,136 3.05%
Multi-family 15,521 1.95% 15,514 1.96%
--------- --------- --------- ---------
Total real estate loans 468,590 58.92% 471,968 59.58%
Commercial loans 157,010 19.74% 166,296 20.99%
Consumer loans:
Automobile 117,179 14.73% 103,674 13.09%
Home equity loans 48,218 6.06% 45,783 5.78%
Other 4,368 0.55% 4,506 0.56%
--------- --------- --------- ---------
Total consumer loans 169,765 21.34% 153,963 19.43%
Total loans 795,365 100.00% 792,227 100.00%
========= =========
Less: Allowance for loan losses (9,248) 1.16% (8,969) 1.13%
--------- ---------
Loans, net $ 786,117 $ 783,258
========= =========
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 based on 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 June 30, 2004, 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 June 30, 2004, the allowance for loan losses totaled $9.2 million, or
1.16%, of total loans outstanding and 291.74% of nonperforming loans, as
compared to $9.0 million, or 1.13%, of total loans outstanding and 280.37% of
nonperforming loans at December 31, 2003. Charged-off loans totaled $1.0 million
during the first six months of this year as compared to $2.3 million for the
same six month period last year. The improvement was almost exclusively from
indirect automobile loans, as the Bank's credit risk profile for these loans has
improved greatly since June 30, 2003.
The following table sets forth information regarding the allowance for loan
losses for the six-month periods ended June 30, 2004 and 2003.
Six Months Ended
-------------------------------
June 30, 2004 June 30, 2003
------------- -------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $ 8,969 $10,308
Charge-offs:
Residential one- to four-family -- --
Residential land development and construction -- --
Commercial real estate 34 --
Commercial land development and construction -- --
Multi-family -- --
Commercial -- 43
Consumer (1) 984 2,232
------- -------
Total charge-offs 1,018 2,275
------- -------
Recoveries:
Residential one- to four-family -- --
Residential land development and construction -- --
Commercial real estate -- --
Commercial land development and construction -- --
Multi-family -- --
Commercial 153 416
Consumer (1) 369 723
------- -------
Total recoveries 522 1,139
------- -------
Net charge-offs 496 1,136
Provision 775 1,110
------- -------
Allowance for loan losses, end of period $ 9,248 $10,282
======= =======
Net loans charged-off to total loans 0.07% 0.14%
Allowance for loan losses to total loans 1.16% 1.25%
Allowance for loan losses to nonperforming loans 291.74% 286.57%
Recoveries to charge-offs 51.28% 50.07%
(1) Consists primarily of automobile loans
11
Nonperforming Assets
The following table sets forth information regarding nonperforming assets
as of June 30, 2004 and December 31, 2003.
At June 30, 2004 At December 31, 2003
---------------- --------------------
(Dollars in thousands)
Nonaccruing loans:
Residential one- to four-family $ 266 $ 348
Residential land development and construction -- --
Commercial real estate 934 496
Commercial land development and construction -- --
Multi-family -- --
Commercial 1,609 1,887
Automobile 350 451
Home equity -- --
Other consumer 11 17
------ ------
Total 3,170 3,199
------ ------
Other real estate owned 25 --
------ ------
Total nonperforming assets $3,195 $3,199
====== ======
Total nonperforming loans to total loans 0.40% 0.40%
Total nonperforming assets to total assets 0.25% 0.26%
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 June 30, 2004, the Company had $82,000 in automobile loans that were 90 days
past due and still accruing as compared to $306,000 at December 31, 2003.
Nonaccruing loans totaled $3.2 million at June 30, 2004, a decrease of
$29,000, from December 31, 2003. Commercial real estate nonaccruing loans
increased $438,000, from December 31, 2003, primarily due to the addition of two
adequately reserved loans which are current with their payments. Partially
offsetting the increase was a decrease of $278,000 in commercial loans and a
decrease of $101,000 in automobile loans due to collections and loan
amortizations received. The ratio of nonperforming loans as a percentage of
total loans was 0.40%, at June 30, 2004 and December 31, 2003. The Bank held
$25,000 in foreclosed real estate at June 30, 2004, compared to none at December
31, 2003.
Investment Securities
Securities, including Federal Home Loan Bank stock and Savings Bank Life
Insurance stock, totaled $440.8 million at June 30, 2004, an increase of $81.6
million, or 22.7%, from December 31, 2003. The increase was primarily due to the
securitization of $38.7 million of the Bank's one- to four-family fixed rate
mortgages and the purchase of pass-through mortgage-backed securities with
average maturities of 3.5 years with limited risk of average life extension.
These securities were purchased to leverage the Bank's capital, reduce interest
rate risk exposure to longer-term investments while taking advantage of a steep
yield curve. The Bank sold securities totaling $458,000 in the second quarter
for a net gain of $377,000. The net unrealized gain in the securities portfolio,
net of taxes, decreased $4.5 million to $1.1 million at June 30, 2004, primarily
due to a decline in the market value of the debt portfolio, which was recognized
in accumulated other comprehensive income on the consolidated statement of
changes in stockholders' equity.
12
Bank Owned Life Insurance ("BOLI")
The single premium BOLI contract executed in May 2003 totaled $7.9 million
at June 30, 2004, an increase of $191,000 from December 31, 2003. The income
earned on BOLI is recorded as an increase in the asset and noninterest income.
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
June 30, 2004 and December 31, 2003.
At June 30, 2004 At December 31, 2003
--------------------------- ---------------------------
Percent Percent
Balance of deposits Balance of deposits
------- ----------- ------- -----------
(Dollars in thousands)
Demand deposits $103,028 12.16% $102,788 12.38%
NOW accounts 98,796 11.66% 94,606 11.39%
Savings accounts 166,449 19.64% 171,603 20.67%
Money Market accounts 153,789 18.15% 139,897 16.85%
Certificates of Deposit 325,341 38.39% 321,350 38.71%
-------- --------
Total deposits $847,403 $830,244
======== ========
Core deposits (represented by demand, NOW, savings and money market
accounts) were $522.1 million at June 30, 2004, an increase of $13.2 million, or
2.6%, from December 31, 2003. Certificates of deposit increased $4.0 million, or
1.2%, from December 31, 2003, as the Bank continued to actively pursue
relationships through the Trusted Solutions /sm/ brand campaign initiated in
early 2004.
Borrowings
Borrowings from the Federal Home Loan Bank of Boston totaled $321.7 million
at June 30, 2004, a $70.3 million, or 27.9%, increase from $251.5 million at
December 31, 2003. This increase represented new borrowings with terms ranging
from one month to three years. The Company had an additional borrowing capacity
of $56.8 million at the Federal Home Loan Bank of Boston at June 30, 2004.
Stockholders' Equity
At June 30, 2004, the Company had $122.1 million in stockholders' equity
compared to $123.2 million at December 31, 2003, a decrease of $1.2 million. The
decrease was primarily due to the repurchase of 64,900 shares at a cost of $2.2
million, a decrease of $4.5 million in net unrealized gain on securities, net of
taxes, which was recognized in accumulated other comprehensive income and the
payment of cash dividends of $0.24 per common share amounting to $1.3 million.
Partially offsetting these decreases in stockholders' equity was net income of
$5.3 million and increases to additional paid-in capital of $1.2 million.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2004
and 2003
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 increased $319,000, or
3.4%, for the three months ended June 30, 2004, and increased $1.4 million, or
7.6%, for the six months ended June 30, 2004, primarily due to an increase in
average assets and a lower cost of funds was offset by a decrease in the yield
on average interest-earning assets. The yield on average earning assets declined
from 5.59% for the three months ended June 30, 2004 compared to 4.83% for the
three months ended June 30, 2003 and declined from 5.61% for the six-month
period ended June 30, 2004, and to 4.95% for the six-month period ended June 30,
2003, respectively, due primarily to the lower interest rate environment. The
Company's net interest margin was 3.19%
13
for the three-month period and 3.32% for the six-month period ended June 30,
2004, compared to 3.73% for the six months ended June 30, 2004 and 3.70% for the
six months ended June 30, 2003. The decreases in net interest margin were
attributable to heavy prepayment activity during the second quarter of 2004,
coupled with loan originations and bond purchases at lower yields. The Company
expects the net interest margin to stabilize over the next six months based on
scenarios where general market interest rates either remain stable or rise or
fall gradually by approximately 100 basis points.
Total interest and dividend income increased $598,000, or 4.2%, for the
three months ended June 30, 2004 and $1.7 million, or 6.0%, for the six months
ended June 30, 2004, compared to the same periods last year. The increases
occurred primarily due to an increase of $40.0 million in average earning assets
for the three months ended June 30, 2004 and an increase of $82.7 million in
average earning assets for the six-month period ended June 30, 2004. Interest
earned on the Company's investment portfolio increased $2.6 million for the
three months ended June 30, 2004, and $4.9 million for the six months ended June
30, 2004, as higher average balances were able to offset lower average rates
earned. Loan interest declined $2.0 million, or 16.1%, for the three months
ended June 30, 2004 and declined $3.2 million, or 13.3%, for the six months
ended June 30, 2004 as compared to the same periods last year. The decline was
due to the sale of higher rate sub-prime automobile loans in December 2003, the
securitization of $55.0 million of one- to four- family fixed-rate mortgages and
the impact of lower market interest rates.
An increase in average funding liabilities of $213.2 million for the three
months ended June 30, 2004, and $197.0 million for the six months ended June 30,
2004, resulted in increases in interest expense of $279,000 for the three-month
period and $284,000 for the six months ended June 30, 2004, compared to the same
periods last year. Interest expense on deposits fell by $587,000 for the
three-month period and $1.3 million for the six-month period ended June 30, 2004
compared to the same periods last year, as higher average balances were offset
by lower interest rates and increases in lower cost core deposits. Interest paid
on Federal Home Loan Bank of Boston advances and other borrowings increased
$866,000 for the three months ended June 30, 2004 and $1.5 million for the six
months ended June 30, 2004 compared to the same period last year, consistent
with the average increase of $174.2 million in borrowings from June 30, 2003.
Provision for Loan Losses. The Company's provision for loan losses was
$425,000 for the three months ended June 30, 2004 and $775,000 for the six
months ended June 30, 2004 as compared to $785,000 and $1.1 million for the same
periods last year. In assessing the provision for the three and six months ended
June 30, 2004, management took into consideration a $14.3 million decrease in
sub-prime automobile loans from June 30, 2003. The Company also considered net
loan charge-offs, which decreased $640,000 to $496,000 for the first six months
of this year compared to the same period last year. Foremost in this decrease
were consumer loan net charge-offs which decreased $894,000, consisting mainly
of sub-prime automobile loans. Additional factors management considered were the
level of delinquent loans, which declined from 1.06% of total loans at June 30,
2003, to 0.55% at June 30, 2004, and nonaccrual loans which declined $418,000,
or 11.7%, from June 30, 2003.
Noninterest Income. For the three and six months ended June 30, 2004,
noninterest income increased $69,000 and $4,000, respectively, as compared to
the same periods last year. Included in these increases were increases of
$94,000 and $235,000 in trust department fees during the three and six months
ended June 30, 2004, due to an increase of $42.0 million in assets under
management from June 30, 2003. Also, increases of $88,000 and $308,000 in other
income during the three and six months ended June 30, 2004, resulted primarily
from increases in the cash surrender value on life insurance policies due to a
$7.5 million BOLI contract executed in May 2003. These increases were partially
offset by decreases of $144,000 and $54,000 in gains on loan sales during the
three and six months ended June 30, 2004, compared to the same period last year.
Gain on sale of securities increased $60,000 for the three months ended June 30,
2004 and decreased $455,000 for the six months ended June 30, 2004, as compared
to the same periods last year.
Operating Expenses. Operating (noninterest) expenses decreased $649,000, or
8.6%, for the three months ended June 30, 2004 and increased $34,000, for the
six months ended June 30, 2004, compared to the same periods last year. Due to
$800,000 of non-recurring retirement benefit charges in June 2003, salaries and
benefits decreased $822,000, or 17.5%, and $207,000, or 2.4%, for the three- and
six-month periods ended June 30, 2004, respectively, compared to the same
periods last year. The implementation of the Trusted Solutions /sm/ advertising
campaign increased marketing expenses $131,000 and $185,000 for the three and
six months ended June 30, 2004, respectively. An increase in internet and debit
card usage led to data processing expense increasing $50,000 and $179,000 for
the three and six months ended June 30, 2004, respectively. Professional
services fees increased $96,000 and $303,000 for the three and six months ended
June 30, 2004, respectively, primarily due to the implementation of Six Sigma, a
productivity improvement program, and due to the additional costs of complying
with the Sarbanes-Oxley Act. These increases were partially offset by a
reduction in foreclosed real estate and other loan expenses, which are primarily
14
driven by repossessed automobile expenses, which declined $115,000 and $153,000
for the three and six months ended June 30, 2004 due to the reduction in lower
quality automobile loans. Also, decreases in FDIC insurance premiums of $63,000
and $124,000 for the three and six months ended June 30, 2004, resulted from
efforts made by management to improve the Bank's risk and earnings profile.
Income Taxes. The Company's effective tax rate was 32.0% for the three and
six months ended June 30, 2004. Excluding the income tax and associated charges
relating to the Bank's REIT disallowance in March 2003 and subsequent settlement
in June 2003 the Company's effective tax rate was 36.0% for the three and six
months ended June 30, 2003. The lower effective tax rate in 2004 was due in part
to an increase in securities purchased in the Bank's subsidiary securities
corporations, as the income generated from these corporations is taxed at a
lower rate. The Company expects its effective tax rate will be approximately
32.0% for the remainder of 2004.
Regulatory Capital
The Company's capital to assets ratios for June 30, 2004 and December 31,
2003 were 9.42% and 10.11%, respectively. The various regulatory capital ratios
for the Bank at June 30, 2004 and December 31, 2003 were as follows:
FDIC Minimums
At June 30, 2004 At December 31, 2003 to be Well Capitalized
---------------- -------------------- ----------------------
Total capital to risk weighted assets:
Berkshire Bank 12.50% 12.57% 10.00%
Tier 1 capital to risk weighted assets:
Berkshire Bank 11.12 11.07 6.00
Tier 1 capital to average assets:
Berkshire Bank 7.84 7.87 5.00
As of June 30, 2004, 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.
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 obligation, 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 repurchase agreements with the Depositors Insurance Fund, the Bank's
excess deposit insurer, and Lehman Brothers.
Certificates of deposit scheduled to mature in one year or less from June
30, 2004 were approximately $201.8 million. 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.
15
Funding for the Company is provided by dividend payments from the Bank.
These dividend payments 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.
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, who are
responsible for reviewing the Bank's asset/liability policies and interest rate
risk position. The Asset/Liability Committee meets quarterly and reports to the
Loan and Investment Committee of the Bank and the Board of Directors. 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 securitizing a portion of the Bank's long-term, fixed rate mortgages;
o originating shorter-term commercial and consumer loans;
o investing in high quality liquid investment securities that provide
adequate liquidity and flexibility to take advantage of opportunities
that may arise from fluctuations in market interest rates, the overall
maturity and duration of which is monitored in relation to the
repricing of its loan and funding portfolios;
o promoting lower cost liability accounts such as core deposits; and
o using Federal Home Loan Bank advances to better structure maturities
of its interest rate sensitive liabilities.
For the Bank, market risk also includes price risk, primarily security
price risk. The securities portfolio had unrealized gains before taxes of $1.7
million at June 30, 2004. 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, 2003, this component has
decreased by $4.5 million. 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 and maturities are assumed
to roll over into the types of loans with the maturity or repricing
characteristics that management believes will be generated going forward.
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.
16
The table below sets forth, as of June 30, 2004 and December 31, 2003,
estimated net interest income and the estimated changes in the Company's net
interest income for the next twelve-month period, which may result given
instantaneous increases or decreases in market interest rates of 100 and 200
basis points.
Increase/
(decrease)
in market At June 30, 2004 At December 31, 2003
interest rates ---------------------------------------------- ---------------------------------------------
in basis points Dollar Percent Dollar Percent
(rate shock) Amount Change change Amount Change change
------------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
200 $40,238 $ (64) (0.16)% $37,144 $(1,757) (4.52)%
100 40,096 (206) (0.51) 38,162 (739) (1.90)
Static 40,302 -- -- 38,901 -- --
(100) 41,152 850 2.11 39,478 577 1.48
(200) 39,814 (488) (1.21) 37,116 (1,785) (4.59)
In the event of a sudden and sustained decline in prevailing market
interest rates of 100 basis points, the June 30, 2004 table indicates an
increase in net interest income of $850,000, while the December 31, 2003 table
indicates an increase of $577,000. The increase in this scenario is because the
Bank's non-maturity deposit accounts would shift down from current rates to a
rate of just above zero percent in such a scenario. The improvement shown in the
most recent scenario results from the lowering the Bank determined rate floors
from the end of last year. In the event of a sudden and sustained 200 basis
point decline in market interest rates, the June 30, 2004 table indicates a
decrease of $488,000, less than the decrease of $1.8 million indicated by the
December 31, 2003 table, again reflecting the Bank's lowering of rate floors on
certain deposit accounts.
In the event of a sudden and sustained increase in prevailing market
interest rates of 100 and 200 basis points, the June 30, 2004 table indicates
that net interest income would decrease by $206,000 and $64,000, respectively.
The December 31, 2003 table indicates that a sudden and sustained increase of
100 and 200 basis points would decrease net interest income by $739,000 and $1.8
million, respectively. The primary reason for the increased net interest income
at June 30, 2004 under theses interest rate scenarios is the Bank's continued
strategy of selling longer-term, fixed rate residential mortgages, emphasizing
the origination of adjustable rate commercial and residential loans and a
decision by management to decrease the sensitivity of rates on certificates of
deposit to changes in prevailing market interest rates.
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.
17
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.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings other than routine
legal proceedings occurring in the normal course of business. Such routine
proceedings, in the aggregate, are believed by management to be immaterial to
the Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides certain information with regard to shares
repurchased by the Company in the second quarter of 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
(d)
(c) Maximium Number
Total Number of (or Approximate
(a) (b) Shares (or Units) Dollar Value) of
Total Number Average Price Purchased as Part Shares (or Units)
of Shares Paid Per of Publicly That May Yet Be
(or Units) Share Announced Plans Purchased Under the
Period Purchased (or Unit) or Programs (1) Plans or Programs
- ------------------------------------------------------------------------------------------------------------------------------------
April 1 -
April 30, 2004 2,100 $34.11 2,100 173,641
- ------------------------------------------------------------------------------------------------------------------------------------
May 1 -
May 31, 2004 45,700 32.68 45,700 127,941
- ------------------------------------------------------------------------------------------------------------------------------------
June 1 -
June 30, 2004 17,100 34.64 17,100 110,841
- ------------------------------------------------------------------------------------------------------------------------------------
Total 64,900 $33.24 64,900 110,841
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The Company has purchased all shares in open market purchases pursuant
to a repurchase plan announced on June 3, 2003. In accordance with
this plan, the Company intends to purchase up to 298,886 shares, from
time to time, subject to market conditions. The plan will continue
until it is completed or terminated by the Board of Directors. No
plans expired during the three months ended June 30, 2004. The Company
has no plans that it has elected to terminate prior to expiration or
under which it does not intend to make further purchases.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the Stockholders of the Company was held on
May 6, 2004.
1. The following individuals were elected as directors, each for a
three-year term by the following vote:
FOR WITHHELD
--- --------
Edward G. McCormick 5,048,383 103,570
Ann H. Trabulsi 5,090,527 61,426
Robert A. Wells 5,072,746 79,207
2. The appointment of Wolf & Company, P.C. as independent auditors of
Berkshire Hills Bancorp, Inc. for the fiscal year ending December 31,
2004 was ratified by the stockholders by the following vote:
FOR AGAINST ABSTENTIONS
--- ------- -----------
5,092,562 50,320 9,071
19
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON 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 Securities and Exchange Commission on 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 with the Securities and Exchange Commission
on May 7, 2004.
(b) Reports on Form 8-K
On April 29, 2004, the Company furnished a Form 8-K in which it
announced under Item 12, its financial results for the quarter ended
March 31, 2004 and the declaration of a quarterly dividend of $0.12
per share. A copy of the press release dated April 28, 2004 announcing
these items was attached by exhibit.
On June 18, 2004, the Company filed a Form 8-K in which it
announced under Item 5, the sale of the business assets of EastPoint
Technologies, LLC ("EastPoint") to EP Acquisition Corp., an
acquisition subsidiary of Open Solutions Inc. The Company owned 60.3
percent of EastPoint, a software and data processing provider for
financial institutions. The press release announcing this item was
attached by exhibit.
On June 24, 2004, the Company furnished a Form 8-K in which it
announced under Item 9, that it expected to issue its second quarter
earnings release on July 22, 2004 and conduct a conference call to
discuss the results for the second quarter ended June 30, 2004.
Instructions on how to access the call and an investor presentation to
supplement the call were contained in the press release. A copy of the
Company's press release announcing this item and dated June 24, 2004
was attached by exhibit.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BERKSHIRE HILLS BANCORP, INC.
Dated: August 6, 2004 By: /s/ Michael P. Daly
-----------------------------
Michael P. Daly
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: August 6, 2004 By: /s/ Wayne F. Patenaude
-----------------------------
Wayne F. Patenaude
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
21