-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kwj8M5qVAsBu8VZoka1xPzb0S0LEezKRuNnM02gMPGqJq9CGRtkJE+nvmDBrXffY 9dJ298RuonMMhMPoDrNdgw== 0000914317-03-002413.txt : 20030813 0000914317-03-002413.hdr.sgml : 20030813 20030813172937 ACCESSION NUMBER: 0000914317-03-002413 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKSHIRE HILLS BANCORP INC CENTRAL INDEX KEY: 0001108134 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 043510455 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15781 FILM NUMBER: 03842618 BUSINESS ADDRESS: STREET 1: 24 NORTH ST. CITY: PITTSFIELD STATE: MA ZIP: 01201 BUSINESS PHONE: 4134435601 MAIL ADDRESS: STREET 1: 24 NORTH ST CITY: PITTSFIELD STATE: MA ZIP: 01201 10-Q 1 form10q-53530_berkhills.txt 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, 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 (I.R.S. Employer of 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 5,871,316 shares of common stock, par value $0.01 per share, outstanding as of August 11, 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 June 30, 2003 and December 31, 2002 Consolidated Statements of Income for the Three and Six 2 Months Ended June 30, 2003 and 2002 Consolidated Statements of Changes in Stockholders' Equity 3 for the Six Months Ended June 30, 2003 and 2002 Consolidated Statements of Cash Flows for the 4 Six Months Ended June 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 21 Signatures 22 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Unaudited
June 30, December 31, 2003 2002 ----------- ------------ (In thousands) Assets: Cash and due from banks $ 11,303 $ 17,258 Short term investments 8,024 43,397 ----------- ----------- Total cash and cash equivalents 19,327 60,655 Securities available for sale, at fair value 179,011 173,169 Securities held to maturity, at amortized cost 46,476 44,267 Federal Home Loan Bank stock, at cost 7,858 7,440 Savings Bank Life Insurance stock, at cost 2,043 2,043 Loans 822,873 723,022 Allowance for loan losses (10,282) (10,308) ----------- ----------- Net loans 812,591 712,714 Premises and equipment, net 13,132 13,267 Foreclosed real estate -- 1,500 Accrued interest receivable 5,256 5,125 Goodwill and other intangibles (1) 10,334 10,435 Net deferred tax assets 2,601 2,185 Bank owned life insurance 7,529 -- Other assets 12,211 13,315 ----------- ----------- Total assets $ 1,118,369 $ 1,046,115 =========== =========== Liabilities and Stockholders' Equity: Deposits 816,772 782,360 Federal Home Loan Bank advances 157,156 133,002 Securities sold under agreements to repurchase -- 700 Loans sold with recourse 765 1,201 Due to broker 16,411 -- Accrued expenses and other liabilities (1) 6,714 5,846 ----------- ----------- Total liabilities 997,818 923,109 ----------- ----------- Minority interests 2,301 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 June 30, 2003 and December 31, 2002; shares outstanding: 5,871,316 at June 30, 2003 and 6,117,134 at December 31, 2002) 77 77 Additional paid-in capital 75,430 74,632 Unearned compensation (9,273) (9,535) Retained earnings (1) 82,603 80,010 Accumulated other comprehensive income 5,870 5,542 Treasury stock, at cost (1,802,445 shares at June 30, 2003 and 1,556,627 shares at December 31, 2002) (36,457) (30,158) ----------- ----------- Total stockholders' equity 118,250 120,568 ----------- ----------- Total liabilities and stockholders' equity $ 1,118,369 $ 1,046,115 =========== ===========
(1) For the period ended December 31, 2002, the information reflects the adoption of SFAS 147. The impact resulted in increases to goodwill of $497,000, to deferred taxes of $169,000, and to retained earnings of $328,000. See accompanying notes to unaudited consolidated financial statements. 1 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (In thousands, except per share amounts) Interest and dividend income: Bond interest $ 1,551 $ 1,316 $ 3,123 $ 2,572 Stock dividends 214 330 478 620 Short term investment interest 14 148 98 205 Loan interest 12,360 14,774 24,341 29,731 -------- -------- -------- -------- Total interest and dividend income 14,139 16,568 28,040 33,128 -------- -------- -------- -------- Interest expense: Interest on deposits 3,613 4,467 7,371 9,131 Interest on FHLB advances and other borrowings 1,093 1,436 2,156 2,858 -------- -------- -------- -------- Total interest expense 4,706 5,903 9,527 11,989 -------- -------- -------- -------- Net interest income 9,433 10,665 18,513 21,139 Provision for loan losses 785 1,315 1,110 2,825 -------- -------- -------- -------- Net interest income, after provision for loan losses 8,648 9,350 17,403 18,314 -------- -------- -------- -------- Noninterest income: Customer service fees 619 592 1,175 1,039 Trust department fees 554 467 990 954 Loan fees 147 185 195 385 Gain(loss) on securities, net 317 12 1,157 (8) Gain on sale of loans 138 -- 138 -- License maintenance and processing fees 1,136 1,093 2,277 2,170 License sales and other fees 990 545 1,470 909 Other income 121 192 181 381 -------- -------- -------- -------- Total noninterest income 4,022 3,086 7,583 5,830 -------- -------- -------- -------- Operating expenses: Salaries and benefits 5,962 5,322 11,248 10,850 Occupancy and equipment 1,222 1,278 2,603 2,696 Marketing and advertising 139 124 242 212 Data processing 239 156 460 346 Professional services 294 306 542 605 Office supplies 155 194 361 377 Foreclosed real estate and other loans, net 286 757 407 1,240 Amortization of other intangibles (1) 51 51 102 102 Minority interests (38) (90) (137) (257) Other general and administrative expenses 1,457 1,046 2,590 2,075 -------- -------- -------- -------- Total operating expenses 9,767 9,144 18,418 18,246 -------- -------- -------- -------- Income before taxes 2,903 3,292 6,568 5,898 Provision for income taxes (1) 765 1,070 2,608 1,918 -------- -------- -------- -------- Net income $ 2,138 $ 2,222 $ 3,960 $ 3,980 ======== ======== ======== ======== Earnings per share: Basic $ 0.40 $ 0.41 $ 0.74 $ 0.72 Diluted $ 0.38 $ 0.38 $ 0.69 $ 0.67 Weighted average shares outstanding: Basic 5,291 5,455 5,355 5,497 Diluted 5,687 5,906 5,733 5,935
(1) For the quarter and six months ended June 30, 2002, the information reflects the adoption of SFAS 147. The impact for the quarter, and every quarter in 2002, resulted in a decrease of $124,000 in amortization expense, and an increase of $42,000 in the provision for income taxes. For the six months ended, the amortization expense decreased $248,000 and the provision for income taxes increased $84,000. See accompanying notes to unaudited consolidated financial statements. 2 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 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 -- -- -- 3,960 -- -- 3,960 Change in net unrealized gain on securities available for sale, net of re-classification adjustments and tax effects -- -- -- -- 328 -- 328 --------- Total comprehensive income 4,288 Cash dividends declared ($.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) $ 83,603 $ 5,870 $(36,457) $ 118,250 ======= ======= ======== ======== ======== ======== ========= Balance at December 31, 2001 $ 77 $74,146 $(11,101) $ 80,657 $ 18,836 $(23,292) $ 139,323 Comprehensive income: Net Income -- -- -- 3,980 -- -- 3,980 Change in net unrealized gain on securities available for sale, net of re-classification adjustments and tax effects -- -- -- -- (1,547) -- (1,547) --------- Total comprehensive income -- -- -- -- -- -- 2,433 Cash dividends declared ($0.24 per share) -- -- -- (1,391) -- -- (1,391) Treasury stock purchased -- -- -- -- -- (6,294) (6,294) Change in unearned compensation - MRP -- 74 545 -- -- -- 619 Change in unearned compensation - ESOP -- 190 238 -- -- -- 428 ------- ------- -------- -------- -------- -------- --------- Balance at June 30, 2002 $ 77 $74,410 $(10,318) $ 83,246 $ 17,289 $(29,586) $ 135,118 ======= ======= ======== ======== ======== ======== =========
See accompanying notes to unaudited consolidated financial statements. 3 BERKSHIRE HILLS BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Six Months Ended June 30, -------------------------- 2003 2002 --------- -------- (In thousands) Cash flows from operating activities: Net income $ 3,960 $ 3,980 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,110 2,825 Net amortization of securities 917 335 Depreciation and amortization expense 1,089 1,204 Amortization of other intangibles 101 102 Management Rewards Plan Expense 595 619 ESOP Plan Expense 465 428 Increase in cash surrender value of Bank Owned Life Insurance (29) -- (Gain) loss on sales and dispositions of securities, net (1,157) 8 Deferred tax provision (benefit) 269 (2) Loss on sale of foreclosed real estate 44 -- Net change in loans held for sale -- 2,540 Minority interest (137) (257) Changes in operating assets and liabilities: Accrued interest receivable and other assets 973 (903) Accrued expenses and other liabilities 868 (251) --------- -------- Net cash provided by operating activities 9,068 10,628 --------- -------- Cash flows from investing activities: Activity in available for sale securities: Sales 9,600 5,785 Maturities 85,247 23,441 Principal payments 14,231 12,190 Purchases (98,315) (58,425) Activity in held to maturity securities: Maturities 11,788 9,057 Principal payments 23,771 12,297 Purchases (38,079) (16,810) Purchase of Federal Home Loan Bank stock (418) (286) Purchase of Bank Owned Life Insurance (7,500) -- Loan originations, net of principal payments and purchases (100,987) (6,342) Additions to banking premises and equipment (954) (530) Proceeds from sale of foreclosed real estate 1,456 -- --------- -------- Net cash (used) by investing activities (100,160) (19,623) --------- --------
(continued) 4 BERKSHIRE HILLS BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded) Unaudited
Six Months Ended June 30, ------------------------- 2003 2002 -------- -------- (In thousands) Cash flows from financing activities: Net increase in deposits $ 34,412 $ 7,382 Net decrease in securities sold under agreements to repurchase (700) (850) Proceeds from Federal Home Loan Bank advances with maturities in excess of three months 55,000 55,172 Repayments of Federal Home Loan Bank advances with maturities in excess of three months (57,846) (44,410) Proceeds of borrowings with maturities of three months or less, net of repayments 27,000 -- Net decrease in loans sold with recourse (436) -- Treasury stock purchased (6,885) (6,294) Re-issuance of treasury stock in connection with stock benefit programs 552 -- Dividends (1,333) (1,391) -------- -------- Net cash provided by financing activities 49,764 9,609 -------- -------- Net change in cash and cash equivalents (41,328) 614 Cash and cash equivalents at beginning of period 60,655 42,123 -------- -------- Cash and cash equivalents at end of period $ 19,327 $ 42,737 ======== ======== Supplemental cash flow information: Interest paid on deposits $ 7,379 $ 9,176 Interest paid on borrowed funds 2,153 2,968 Income taxes paid (refunded), net (209) 1,065 Transfers from loans to foreclosed real estate -- 2,000 Due to broker 16,411 --
See accompanying notes to unaudited consolidated financial statements. 5 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 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 June 30, 2003 and for the three- and six-month periods ended June 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 June 30, 2003, the Company had outstanding commitments to originate new residential and commercial loans totaling $38.0 million, which are not reflected on the consolidated balance sheet. In addition, unadvanced funds on home equity lines totaled $43.9 million and unadvanced commercial lines, including unadvanced construction loan funds, totaled $64.4 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 six months ended June 30, 2003 and 2002.
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2003 2002 2003 2002 ---- ---- ---- ---- (In thousands, except per share amounts) Net income $ 2,138 $ 2,222 $ 3,960 $ 3,980 ======= ======= ======= ======= Weighted Average common shares 5,291 5,455 5,355 5,497 Dilutive effect of potential common shares related to stock compensation plans 396 451 378 438 ------- ------- ------- ------- Weighted average common shares including potential dilution 5,687 5,906 5,733 5,935 ======= ======= ======= ======= Basic earnings per share $ 0.40 $ 0.41 $ 0.74 $ 0.72 Diluted earnings per share $ 0.38 $ 0.38 $ 0.69 $ 0.67
6 Note 4. Tangible Book Value The tangible book value per share of Berkshire Hills' common stock at June 30, 2003 was $18.38, based on tangible stockholders' equity of $107.9 million and outstanding shares of 5,871,316. 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 April 23, 2003, the Company's Board of Directors declared a cash dividend of $0.12 per share, which was paid on May 23, 2003, to stockholders of record on May 8, 2003. Note 6. Stock Repurchase Program During the second quarter of 2003, the Company completed its fifth stock repurchase program, purchasing 26,216 shares at a cost of $653,084, and initiated a sixth 5% stock repurchase program, purchasing 106,400 shares at a cost of $2.9 million. The Company has 193,486 shares available as of August 11, 2003 under this program. Note 7. Goodwill and Other Intangibles Goodwill and other intangibles includes goodwill associated with the acquisition of EastPoint Technologies, LLC ("EastPoint") as well as the Company's purchase of two branches from another financial institution in 1991 and three branches in 1998, which are evaluated for impairment on an annual basis. Intangible assets refer to customer relationships acquired in association with the EastPoint purchase, which are being amortized on a straight-line basis over three years. The carrying amount of goodwill as of June 30, 2003 and December 31, 2002 was $10.1 million. A summary of other intangible assets as of June 30, 2003 and December 31, 2002 is as follows:
At June 30, 2003 At December 31, 2002 ----------------------- ------------------------- (In thousands) Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ----------------------- ------------------------- Customer Relationships $ 202 $ 406 $ 304 $ 304
The amortization expense and other intangible assets amounted to $102,000 for the six-month periods ended June 30, 2003 and June 30, 2002. The remaining amortization of $202,000 will be expensed by the year ending December 31, 2004. Note 8. Stock Compensation Plans Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock-based incentive plan have no intrinsic value at the grant date, and under Opinion No. 25, no compensation cost is recognized for them. 7 At June 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 Six Months Ended June 30, June 30, ---------------------------- -------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- (In thousands, except per share amounts) Net income, as reported $ 2,138 $ 2,222 $ 3,960 $ 3,980 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 104 81 208 162 ----------- ----------- ------------ ------------ Pro forma net income $ 2,034 $ 2,141 $ 3,752 $ 3,818 =========== =========== ============ ============ Earnings per share Basic - as reported $ 0.40 $ 0.41 $ 0.74 $ 0.72 =========== =========== ============ ============ Basic - pro forma $ 0.38 $ 0.39 $ 0.70 $ 0.69 =========== =========== ============ ============ Diluted - as reported $ 0.38 $ 0.38 $ 0.69 $ 0.67 =========== =========== ============ ============ Diluted - pro forma $ 0.36 $ 0.36 $ 0.65 $ 0.64 =========== =========== ============ ============
Note 9. Real Estate Investment Trust On June 24, 2003, the Company announced it had reached a settlement agreement with the Massachusetts Department of Revenue ("DOR") with respect to the tax assessment resulting from the DOR's disallowance of the Company's deduction for state tax purposes of certain dividend distributions received by the Bank from its real estate investment trust ("REIT"). The Company reversed charges during the second quarter of 2003 totaling $259,000, representing a partial reversal of the $515,000 charge, net of taxes, taken in the first quarter of 2003 associated with the DOR's disallowance. 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, 2003 and 2002, and should be read in conjunction with Berkshire Hills Bancorp, Inc.'s Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document. Forward-Looking Statements This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies, and expectations of Berkshire Hills and Berkshire Bank. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Berkshire Hills' and Berkshire Bank's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of Berkshire Hills and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in Berkshire Hills' and Berkshire Bank's market area, changes in real estate market values in Berkshire Hills' and Berkshire Bank's market area, and changes in relevant accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Berkshire Hills does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. General Berkshire Hills is a Delaware corporation and the holding company for Berkshire Bank, a state-chartered savings bank headquartered in Pittsfield, Massachusetts. Established in 1846, Berkshire Bank is one of Massachusetts' oldest and largest independent banks. With eleven full service branch offices serving communities throughout Berkshire County, Berkshire Bank is the largest banking institution based in western Massachusetts. The Bank is a community-based financial institution that originates a variety of loan products including real estate loans, commercial loans, and consumer loans primarily in Berkshire County, Massachusetts and its surrounding areas. The Bank offers a wide variety of deposit products and other investment products and financial services to its customers, including asset management and trust services and municipal finance. Berkshire Hills, through its wholly owned subsidiary Berkshire Hills Technology, Inc., owns a 60.3% interest in EastPoint Technologies, LLC ("EastPoint"), a data and financial services provider for financial institutions. Recent Developments On July 22, 2003, the Company announced that Robert A. Wells will retire as Chairman of the Boards of the Company and the Bank as of December 31, 2003. Mr. Wells will continue to serve as a director of the Company and the Bank. Mr. Wells also announced that he will retire as Chairman of Berkshire Hills Foundation and the Greater Berkshire Foundation, Inc., on December 31, 2003, and will remain a director of those organizations. Michael P. Daly will succeed him as Chairman of each foundation. Comparison of Financial Condition at June 30, 2003 and December 31, 2002 Total assets at June 30, 2003 were $1.12 billion, an increase of $72.3 million, or 6.9%, from December 31, 2002. The increase in assets was primarily due to growth in the loan portfolio, which increased $99.9 million, or 13.8%, to $822.9 million. Securities, including Federal Home Loan Bank stock and Savings Bank Life Insurance stock, totaled $235.4 million at June 30, 2003, an increase of $8.5 million, or 3.7%, from December 31, 2002. These increases were largely funded by a $34.4 million increase in deposits, a $24.2 million increase in Federal Home Loan Bank advances, and a $41.3 million decrease in cash and cash equivalents. 9 Loans Residential one-to four-family loans increased $80.7 million during the first six months of 2003 as the Bank purchased $69.0 million in one-to four-family loans, $59.0 million of which were purchased in the first quarter. These purchased loans consist primarily of adjustable rate mortgages that have a fixed rate of interest for the first three or seven years, adjusting annually thereafter, and to a lesser extent, 15-year fixed rate mortgages. These loans were funded by the proceeds from the sale of sub-prime automobile loans in December 2002. Commercial land development and construction loans increased $4.5 million in the first half of 2003 and commercial real estate loans increased $7.0 million as several new loans were added to the portfolio. Commercial loans increased $8.9 million, or 5.4%, in the first half of 2003. The majority of this increase occurred in the second quarter and was comprised of a number of new relationships with an average loan size of approximately $350,000. The automobile loan portfolio decreased $4.3 million, or 3.8%, during the first half of 2003, but was up $2.1 million, or 1.9%, from the first quarter, as marketing efforts aimed at generating high quality loans with FICO scores above 700 are gaining momentum. Sub-prime automobile loans decreased from $19.6 million at December 31, 2002 to $15.1 million at June 30, 2003. The allowance for sub-prime automobile loans to total sub-prime automobile loans at quarter end June 30, 2003 was 15.79%, compared to 15.83% at December 31, 2002.
At June 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 $ 315,677 38.36% $ 235,020 32.50% Residential land development and construction 7,887 0.96% 6,576 0.91% Commercial real estate 138,160 16.79% 131,130 18.14% Commercial land development and construction 15,547 1.89% 11,051 1.53% Multi-family 14,580 1.77% 14,920 2.06% --------- ------ --------- ------ Total real estate loans 491,851 59.77% 398,697 55.14% Commercial loans 174,151 21.16% 165,274 22.86% Consumer loans: Automobile 109,070 13.26% 113,321 15.68% Home equity loans 43,712 5.31% 40,713 5.63% Other 4,089 0.50% 5,017 0.69% --------- ------ --------- ------ Total consumer loans 156,871 19.07% 159,051 22.00% Total loans 822,873 100.00% 723,022 100.00% ====== ====== Less: Allowance for loan losses (10,282) 1.25% (10,308) 1.43% --------- --------- Loans, net $ 812,591 $ 712,714 ========= =========
Allowance for Loan Losses All banks that manage loan portfolios will experience losses to varying degrees. The allowance for loan losses is the amount available to absorb these losses and represents management's evaluation of the risks inherent in the portfolio including the collectibility of the loans, changing collateral values, past loan loss history, specific borrower situations, and general economic conditions. Management continually assesses the adequacy of the allowance for loan losses and makes monthly provisions in an amount considered adequate to cover losses in the loan portfolio. Because future events affecting the loan portfolio cannot be predicted with complete accuracy, there can be no assurances that management's estimates are correct and that the existing allowance for loan losses is adequate. However, management believes that based on the information available on June 30, 2003, the Company's allowance for loan losses is sufficient to cover losses inherent in the Company's current loan portfolio. The allowance consists of allocated, general and unallocated components. The allocated component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also 10 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. At June 30, 2003, the allowance for loan losses totaled $10.3 million, or 1.25% of total loans outstanding and 286.57% 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 $2.3 million during the first six months this year, a decline of $2.7 million compared to the same six months last year. Consumer loan charge-offs totaled $2.2 million for the six months ended June 30, 2003, a decrease of $2.2 million, or 49.6%, 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 $1.1 million for the first six months this year, decreasing $978,000 for the same period last year, consistent with the decline in the level of charge-offs, while recoveries to loan charge-offs increased from 42.22% to 50.07%. The following table sets forth information regarding the allowance for loan losses for the six-month periods ended June 30, 2003 and 2002.
Six Months Ended ------------------------------ June 30, 2003 June 30, 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 -- 360 Commercial land development and construction -- -- Multi-family -- -- Commercial 43 226 Consumer (1) 2,232 4,428 ------- ------- Total charge-offs 2,275 5,014 ------- ------- Recoveries: Residential one-to four-family -- -- Residential land development and construction -- -- Commercial real estate -- -- Commercial land development and construction -- -- Multi-family -- -- Commercial 416 138 Consumer (1) 723 1,979 ------- ------- Total recoveries 1,139 2,117 ------- ------- Net charge offs 1,136 2,897 Provision 1,110 2,825 ------- ------- Allowance for loan losses, end of period $10,282 $10,962 ======= ======= Net loans charged-off to total loans 0.14% 0.36% Allowance for loan losses to total loans 1.25% 1.37% Allowance for loan losses to nonperforming loans 286.57% 459.82% Recoveries to charge-offs 50.07% 42.22%
(1) Consists primarily of automobile loans 11 Nonperforming Assets The following table sets forth information regarding nonperforming assets as of June 30, 2003 and December 31, 2002.
At June 30, 2003 At December 31, 2002 ---------------- -------------------- (Dollars in thousands) Nonaccruing loans: Residential one-to four-family $ 213 $ 230 Residential land development and construction -- -- Commercial real estate 165 -- Commercial land development and construction -- -- Multi-family -- -- Commercial 2,490 2,850 Automobile 710 593 Home equity -- -- Other consumer 10 68 ------ ------ Total 3,588 3,741 ------ ------ Other real estate owned -- 1,500 ------ ------ Total nonperforming assets $3,588 $5,241 ====== ====== Total nonperforming loans to total loans 0.44% 0.52% Total nonperforming assets to total assets 0.32% 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. However, in 2001, the Company initiated a policy for automobile loans whereby all delinquent automobile loans remain on accrual status until they are 120 days past due at which time they are charged off, except for loans to customers in bankruptcy proceedings, which are transferred to nonaccrual status. At June 30, 2003, the Company had $249,000 in automobile loans that were 90 days past due and still accruing as compared to $590,000 at December 31, 2002. Nonaccruing loans totaled $3.6 million at June 30, 2003, a decrease of $153,000, or 4.1%, from December 31, 2002. Commercial nonaccruing loans decreased $360,000 as more loans returned to accrual status or were paid down than new loans placed on nonaccrual. Automobile nonaccruals increased $117,000 from December 31, 2002, but decreased $144,000 from March 31, 2003. The ratio of nonperforming loans as a percentage of total loans decreased to 0.44% at June 30, 2003, from 0.52% at December 31, 2002. The Bank held no foreclosed real estate at June 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 $235.4 million at June 30, 2003, an increase of $8.5 million, or 3.7%, from December 31, 2002. Security purchases consisted of primarily 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 $572,000 for a net gain of $312,000. The net unrealized gain in the securities portfolio increased $328,000 to $5.9 million at June 30, 2003, which was recognized in accumulated other comprehensive income on the consolidated statement of changes in stockholders' equity. 12 Bank Owned Life Insurance The Bank executed a single premium bank owned life insurance 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. 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 June 30, 2003 and December 31, 2002.
At June 30, 2003 At December 31, 2002 ------------------------ ------------------------- Percent Percent Balance of deposits Balance of deposits ------- ----------- ------- ----------- (Dollars in thousands) Demand deposits $ 90,125 11.03% $ 87,148 11.14% NOW accounts 91,637 11.22% 92,245 11.79% Savings accounts 176,792 21.65% 158,469 20.26% Money Market accounts 125,656 15.38% 114,309 14.61% Certificates of Deposit 332,562 40.72% 330,189 42.20% -------- ------ -------- ------ Total deposits $816,772 100.00% $782,360 100.00% ======== ====== ======== ======
Total deposits were $816.8 million at June 30, 2003, an increase of $34.4 million, or 4.4%, for the first six months of the year. Core deposits, which the Company considers to be all but certificates of deposit, were 59.3% of total deposits at June 30, 2003 as compared to 57.8% at December 31, 2002, an increase of $32.0 million. The Bank had the largest increase in savings accounts, which increased $18.3 million, or 11.6%, in part, attributable to the Bank's cross-selling efforts. Money market accounts increased $11.3 million, or 9.9%, as the Bank has aggressively pursued municipal deposits. Borrowings Borrowings from the Federal Home Loan Bank of Boston totaled $157.2 million at June 30, 2003, a $24.2 million, or 18.2%, increase from December 31, 2002. The Company had additional borrowing capacity of $347 million at the Federal Home Loan Bank of Boston at June 30, 2003. Due to Broker Due to broker totaled $16.4 million as the Bank executed several security transactions in June 2003 that had not yet settled by June 30, 2003. Stockholders' Equity At June 30, 2003, the Company had $118.2 million in stockholders' equity compared to $120.6 million at December 31, 2002. The decrease was primarily due to the net increase in treasury stock of 245,818 shares at a net cost of $6.3 million. This was primarily due to the purchase of 278,816 shares, partially offset by the exercise of 32,998 shares of stock options. The Company also declared and paid cash dividends of $0.24 per common share amounting to $1.3 million. Partially offsetting these decreases in stockholders' equity was net income of $4.0 million and an increase of $328,000 in net unrealized gains in the securities portfolio. Comparison of Operating Results for the Three and Six Months Ended June 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 $1.2 million, or 11.6%, to $9.4 million for the three months ended June 30, 2003, and $2.6 million, or 12.4%, to $18.5 million, for the six months ended June 30, 2003. The decreases occurred as an increase of $33.2 million in average earning assets for the three months ended June 30, 2003 and $30.2 million for the six months ended June 30, 2003 were not enough to offset a 118 basis point decrease for the three 13 months ended June 30, 2003 and a 123 basis point decrease for the six months ended June 30, 2003 in the yield earned on earning assets. The yield average earning assets declined from 6.77% to 5.59% for the three month period ended June 30, 2003 and from 6.83% to 5.60% for the six month period ended June 30, 2003. Partially offsetting the decline in the yield on average earning assets was a 64 basis point decrease and a 70 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 3.73% for the three month period ended June 30, 2003 and 3.70% for the six month period ended June 30, 2003 compared to 4.36% and 4.38% for the same periods last year. Total interest and dividend income decreased $2.4 million, or 14.7%, for the three months ended June 30, 2003 and $5.1 million, or 15.4%, for the six months ended June 30, 2003, compared to the same periods last year. Loan interest declined to $12.4 million in the current quarter, a decrease of $2.4 million, or 16.3%, from the same period last year and decreased $5.4 million, or 18.1%, for the six months ended June 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 remained flat for the three months ended June 30, 2003 increasing $302,000 for the six months ended June 30, 2003, 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 $1.2 million, or 20.3%, and $2.5 million, or 20.5%, for the three and six months ended June 30, 2003, respectively, compared to the same periods last year. Interest expense on deposits fell by $854,000, or 19.1%, and $1.8 million, or 19.3%, for the three- and six-month periods ended June 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 $343,000, or 23.9%, and $702,000, or 24.5%, for the three and six months ended June 30, 2003 compared to the same periods last year, as lower rates paid on new borrowings replaced maturing higher cost advances. Provision for Loan Losses. The Company's provision for loan losses was $785,000 and $1.1 million for the three and six months ended June 30, 2003 as compared to $1.3 million and $2.8 million for the same periods last year. Although up from the first quarter of 2003, the provision for the current quarter was consistent with the growth in the loan portfolio and net charge-offs associated with the remaining level of sub-prime automobile loans. In assessing the provision for the three and six months ended June 30, 2003, management took into consideration a $91.4 million decrease in indirect automobile loans, most of which were sub-prime automobile loans, from the second quarter of last year. The Company also considered loan charge-offs, which decreased $761,000 to $1.2 million in the second quarter of this year compared to last year. Foremost in this decrease were consumer loan charge-offs, which decreased $605,000, consisting mainly of sub-prime automobile loans. Additionally, management considered the level of delinquent loans, which declined from 1.49% of total loans at June 30, 2002, to 1.06% at June 30, 2003, current recoveries and evaluated the likelihood for recoveries of previously charged-off loans, among other factors. Noninterest Income. For the three and six months ended June 30, 2003, noninterest income increased $936,000, or 30.3%, and $1.8 million, or 30.1%, respectively, from the same periods last year. The primary reason for these increases was a $455,000 and a $1.3 million gain on the sale of securities and loans during the three and six months ended June 30, 2003 compared to a net gain of $12,000 and a net loss of $8,000 on the sale of securities for the same periods last year. Additionally, Eastpoint's license maintenance and processing fees and license sales and other fees increased a total of $488,000 and $668,000 for the three and six months ended June 30, 2003 as compared to the same periods last year. Expenses for Eastpoint, which are recorded in various noninterest expense categories, were up $400,000 for the current quarter and $475,000 year to date from 2002. Customer service fees increased $27,000 and $136,000 for the three and six months ended June 30, 2003, primarily due to a higher level of deposit transaction activity, specifically in ATM and debit card usage. Trust department fees increased $87,000 and $36,000 for the three and six months ended June 30, 2003, compared to the same periods last year, primarily due to 28 new relationships with assets totaling $18.9 million that were added to the portfolio during the first quarter of 2003. Loan fees declined $38,000 and $190,000 for the three and six months ended June 30, 2003 due to the residual effects of the December 2002 indirect automobile loan sale. The decline of $71,000 and $200,000 for the three and six months ended June 30, 2003 in other income was largely due to lower municipal finance fees, which can fluctuate quarter to quarter. Operating Expenses. Operating (noninterest) expenses increased $623,000 and $172,000 for the three and six months ended June 30, 2003 compared to the same periods last year. Salaries and benefits expense rose $640,000 and $398,000 for the three and six months ended June 30, 2003, as compared to the same periods last year, primarily due 14 to a non-recurring charge of $800,000 taken in the current quarter related to Mr. Wells' retirement. Exclusive of this charge, salaries and benefits would have decreased $160,000 for the three month period ended June 30, 2003 and $402,000 for the six month period ended June 30, 2003 primarily due to the management reorganization that occurred in December 2002. Data processing expenses increased $83,000 and $114,000 for the three and six months ended June 30, 2003, primarily due to the Bank's increased ATM, debit card services and internet banking applications, the majority of which occurred in the first quarter. Increases in other expenses of $411,000, and $515,000 for the three and six months ended June 30, 2003 were primarily due to an increase in expenses attributed to EastPoint, which was consistent with the increase in EastPoint's revenue. Partially offsetting these increases, foreclosed real estate and other loans, net, decreased $471,000 and $833,000 for the three and six months ended June 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 second quarter of 2003 was $765,000 compared to $1.1 million for the second quarter of 2002. This difference was primarily due to the settlement and a partial recovery of $244,000 of the first quarter's state tax assessment resulting from legislation which retroactively prohibited, for state tax purposes, the dividend received deductions previously taken through the Bank's REIT. For the six months ended June 30, 2003, the provision for income taxes totaled $2.6 million as compared to $1.9 million for 2002. This increase was due to the unrecovered portion of the DOR's assessment to the Company, as well as, an increase in the effective tax rate to 36.0% in 2003 from 32.5% in 2002. Regulatory Capital The Company's capital to assets ratios for June 30, 2003 and December 31, 2002 were 10.57% and 11.53%, respectively. The various regulatory capital ratios for the Bank at June 30, 2003 and December 31, 2002 were as follows:
FDIC Minimums At June 30, 2003 At December 31, 2002 to be Well Capitalized ---------------- -------------------- ---------------------- Total capital to risk weighted assets: Berkshire Bank 12.10% 13.60% 10.00% Tier I capital to risk weighted assets: Berkshire Bank 10.41 11.85 6.00 Tier I capital to average assets: Berkshire Bank 8.37 8.81 5.00
As of June 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, which consider the amount of lower quality sub-prime automobile loans in the loan portfolio. Liquidity Liquidity is the ability to meet current and future financial obligations of a short term nature. Berkshire Bank further defines liquidity as the ability to respond to the needs of depositors and borrowers as well as maintaining the flexibility to take advantage of investment opportunities. Berkshire Bank's primary investing activities are: (1) originating residential one-to four-family mortgage loans, commercial business and real estate loans, multi-family loans, home equity loans and lines of credit, and consumer loans; and (2) investing in mortgage-and asset-backed securities, U.S. Government and agency obligations, and debt obligations. These activities are funded primarily by principal and interest payments on loans, maturities of securities, deposits and Federal Home Loan Bank of Boston advances. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions, and competition. Additionally, deposit flows are affected by the overall level of interest rates, 15 the interest rates and products offered by the Bank and its local competitors, and other factors. 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 June 30, 2003 were approximately $206.9 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 payments of dividends and fund 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 that is responsible for reviewing its asset/liability policies and interest rate risk position, which meets quarterly and reports to the Executive Committee of the Bank and the Board of Directors. The Asset/Liability Committee consists of the Bank's President and Chief Executive Officer; Senior Vice President and Chief Financial Officer; Senior Vice President-Retail Banking and Operations; Senior Vice President-Commercial Lending; Senior Vice President-Retail Lending; 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 $9.0 million at June 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 increased $328,000. 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 presumes that the balance sheet mix will remain relatively unchanged throughout the next calendar year. 17 The tables below set forth, as of June 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 June 30, 2003 At December 31, 2002 interest rates ---------------------------------- ----------------------------------- in basis points Dollar Percent Dollar Percent (rate shock) Amount Change change Amount change change --------------- ------- ------- ------- ------ ------- ------- 200 $38,220 $ 302 0.80% $34,583 $(1,027) (2.88)% 100 38,471 553 1.46 34,741 (869) (2.44) Static 37,918 -- -- 35,610 -- -- (100) 37,994 76 0.20 35,162 (448) (1.26) (200) 35,354 (2,564) (6.76) 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 June 30, 2003 chart indicates an increase in net interest income of $76,000 while the December 31, 2002 chart indicates a decrease of $448,000. In the event of a sudden and sustained 200 basis point decline in market interest rates, the June 30, 2003 table indicates a decrease of $2.6 million, consistent with the decrease of $2.7 million indicated by the December 31, 2002 chart. In the event of a sudden and sustained increase in prevailing market interest rates of 100 and 200 basis points, the June 30, 2003 chart indicates that net interest income would increase by $553,000 and $302,000, respectively. This differs from the December 31, 2002 chart which indicates that a sudden and sustained increase of 100 and 200 basis points would decrease net interest income by $869,000 and $1.0 million, respectively. This change in the Company's interest rate risk profile resulted primarily from management's re-evaluation, in the first quarter of 2003, of the repricing assumptions on certain non-maturity deposits, and due to a higher level of core deposits, the rates on which are assumed to increase less than an increase in prevailing market interest rates . After examining the past repricing history and considering expectations for future repricing, management determined that for every 100 basis point rise in prevailing market interest rates, the rates paid on savings and money market accounts would be expected to rise by 50 basis points, down from an expected increase of 100 basis points at December 31, 2002. Municipal money market accounts and commercial money market accounts would be expected to increase 75 basis points while NOW accounts would be expected to increase by 25 basis points, all down from an expected increase of 100 basis points at December 31, 2002. Computation of prospective effects of hypothetical interest rate changes are based on a number of assumptions including the level of market interest rates, the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates, the expected prepayment rates on loans and investments, the degree to which early withdrawals occur on certificates of deposit, and other deposit flows. As a result, these computations should not be relied upon as indicative of actual results. Further, the computations do not reflect any actions that management may undertake in response to changes in interest rates. 18 ITEM 4. CONTROLS AND PROCEDURES. (a) Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company's disclosure controls and procedures were effective. (b) Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and chief financial officer. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is not involved in any legal proceedings other than routine legal proceedings occurring in the normal course of business. Such routine proceedings, in the aggregate, are believed by management to be immaterial to the Company's financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The annual meeting of the Stockholders of the Company was held on May 1, 2003. 1. The following individuals were elected as directors, each for a three-year term by the following vote: FOR WITHHELD --- -------- Lawrence A. Bossidy 4,872,206 198,061 Thomas R. Dawson 4,854,589 215,678 Peter J. Lafayette 4,853,803 216,464 Corydon L. Thurston 4,889,758 180,509 The following individual was elected as a director, for a two-year term by the following vote: FOR WITHHELD --- -------- Michael P. Daly 4,891,729 178,538 2. The Berkshire Hills Bancorp, Inc. 2003 Equity Compensation Plan was approved by the stockholders by the following vote: FOR AGAINST ABSTENTIONS --- ------- ----------- 4,022,682 1,004,556 43,029 3. The appointment of Wolf & Company, P.C. as independent auditors of Berkshire Hills Bancorp, Inc. for the fiscal year ending December 31, 2003 was ratified by the stockholders by the following vote: FOR AGAINST ABSTENTIONS --- ------- ----------- 4,951,102 107,316 11,848 ITEM 5. OTHER INFORMATION. None. 20 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) 10.1 Employment Agreement between Berkshire Hills Bancorp, Inc. and Michael P. Daly 10.2 Employment Agreement between Berkshire Bank and Michael P. Daly 10.3 Letter Agreement, dated June 26, 2003, by and among Berkshire Hills Bancorp, Inc., Berkshire Bank and Robert A. Wells 10.4 Berkshire Hills Bancorp, Inc., 2003 Equity Compensation Plan (3) 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. (3) Incorporated herein by reference into this document from the Proxy Statement as filed on March 27, 2003. (b) Reports on Form 8-K On April 10, 2003, the Company furnished a Form 8-K in which it announced it expected to issue its first quarter earnings release on April 23, 2003 and conduct a conference call at 10:00 a.m. on April 24, 2003 to discuss first quarter results and full-year earnings projections. The press release announcing these items was attached by exhibit. On April 24, 2003, the Company filed a Form 8-K in which it announced under Item 9 its first quarter earnings and the declaration of a quarterly dividend of $0.12 per share. The press release announcing these items was attached by exhibit. Additionally, the Company updated its 2003 earnings guidance as the result of recent legislation in Massachusetts that eliminated the state tax deduction of dividends Berkshire Bank received from its real estate investment subsidiary. On June 3, 2003, the Company furnished a Form 8-K in which it announced under Item 9 the completion of a 312,516 share repurchase program at an average cost of $23.08 per share, and the authorization of an additional repurchase program of 300,000 shares, or approximately 5%, of the Company's outstanding shares. The press release announcing these items was attached by exhibit. On June 24, 2003, the Company furnished a Form 8-K in which it announced under Item 9 that it had reached a settlement agreement with the Massachusetts Department of Revenue with respect to taxes owed on dividends received from Berkshire Bank's real estate investment trust subsidiary. The press release announcing this was attached by exhibit. 21 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BERKSHIRE HILLS BANCORP, INC. Dated: August 11, 2003 By: /s/ Michael P. Daly -------------------------- Michael P. Daly President, Chief Executive Officer and Director (principal executive officer) Dated: August 11, 2003 By: /s/ Wayne F. Patenaude ------------------------------------- Wayne F. Patenaude Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) 22 EX-10.1 3 exhibit10-1.txt BERKSHIRE HILLS BANCORP, INC. EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") by and between Berkshire Hills Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of Delaware, with its principal offices at 24 North Street, Pittsfield, Massachusetts, 01202, and Michael P. Daly ("Executive") was entered into on June 27, 2000, and amended and restated in its entirety effective as of June 1, 2003 (the "Effective Time"). Any reference to the "Bank" herein shall mean Berkshire Bank or any successor to Berkshire Bank. WHEREAS, the Holding Company believes that the assurance of Executive's employment by the Holding Company for the term of this Agreement and the benefit of his business experience are of material importance; and WHEREAS, Executive desires to serve in the employ of the Holding Company on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties to this Agreement hereby agree as follows: 1. POSITIONS AND RESPONSIBILITIES (a) During the term of this Agreement Executive agrees to serve as President and Chief Executive Officer of the Holding Company. Executive shall render administrative and management services to the Holding Company such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve, if elected or appointed, as a director of the Holding Company and as an officer and/or director of any subsidiary of the Holding Company and in such capacity will carry out such duties and responsibilities reasonably appropriate to that office. In performing his services as President and Chief Executive Officer and carrying out his duties and responsibilities as a director, Executive shall conform to the policies and codes of conduct and ethics of the Bank and the Holding Company, now or hereafter in effect. (b) During the term of Executive's employment under this Agreement, except for periods of absence occasioned by illness, vacation, and other reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties under this Agreement, including activities and services related to the organization, operation and management of the Holding Company and its subsidiaries, as well as participation in community, professional and civic organizations; provided, however, that, with the approval of the Board of Directors of the Holding Company (the "Board of Directors"), as evidenced by a resolution of the Board of Directors, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the judgment of the Board of Directors, will not present any conflict of interest with the Holding Company or its subsidiaries, or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything contained in this Agreement to the contrary, either Executive or the Holding Company may terminate Executive's employment with the Holding Company at any time during the term of this Agreement, with or without cause, subject to the terms and conditions of this Agreement. Termination without cause by the Bank shall require a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the independent members of the Board of Directors, at a meeting of the Board of Directors called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors). Upon such termination, Executive shall be entitled to receive all compensation and benefits for the remainder of the term of the Agreement, or as set forth in Section 4 hereof, as shall be applicable. As used herein, "termination without cause" shall mean termination of Executive's employment for any reason other than those as defined as a Termination for Cause in Section 7 hereof. 2. TERM OF EMPLOYMENT Executive's employment under this Agreement shall be deemed to have commenced as of the Effective Time and shall continue for a period of twenty-four (24) full calendar months from the Effective Time. Commencing on the date of execution of this Agreement, the term of this Agreement shall extend for one day each day until such time as the Board of Directors or Executive elects not to extend the term of the Agreement by giving written notice to the other party, in which case the term of this Agreement shall become fixed and shall end on the second anniversary of the date of such written notice. 3. COMPENSATION, BENEFITS AND REIMBURSEMENT (a) Base Salary. The Holding Company shall pay Executive an annual salary of not less than $310,000 ("Base Salary"). Executive's Base Salary shall be payable in accordance with the normal payroll practices of the Holding Company. Whenever used in this Agreement, Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Holding Company or the Bank. During the term of this Agreement, the Board of Directors or a committee appointed by the Board of Directors shall review Executive's Base Salary at least annually and the Board of Directors or the committee may increase Executive's Base Salary at any time. Any increase in Executive's Base Salary shall become a term of this Agreement and shall be the new "Base Salary" for purposes of this Agreement. Executive shall not receive any additional compensation for his service as a director. (b) Incentive Compensation. In addition to his Base Salary, Executive shall be entitled to participate in any incentive compensation bonus program sponsored by the Holding Company or the Bank. Executive's incentive compensation shall be determined by the Board of Directors or a committee appointed by the Board of Directors at a level appropriate for executive officers. -2- (c) Club Dues. In addition to any other compensation provided for under this Agreement, the Bank shall pay Executive an amount sufficient, on an after-tax basis, to maintain his membership at the Country Club of Pittsfield. (d) Automobile. The Bank shall provide Executive with, and Executive shall have the primary use of, an automobile owned or leased by the Bank and the Bank shall pay (or reimburse Executive) for all expenses of insurance, registration, operation and maintenance of the automobile. Executive shall comply with reasonable reporting and expense limitations on the use of such automobile, as the Board of Directors may establish from time to time, and the Holding Company or the Bank shall annually include on Executive's Form W-2 any amount attributable to Executive's personal use of such automobile. (e) Vacation; Holidays; Sick Time. Executive shall be entitled to vacation in accordance with the standard vacation policies of the Holding Company or the Bank for senior executive officers, but in no event less than four (4) weeks vacation during each year of employment. Executive shall take vacation at a time mutually agreed upon by the Holding Company or the Bank and Executive. Executive shall receive his Base Salary and other benefits during periods of vacation. Executive shall also be entitled to paid legal holidays in accordance with the policies of the Holding Company or the Bank. Executive shall also be entitled to sick leave in accordance with the policies of the Holding Company or the Bank for senior executive officers, but in no event less than the number of days of sick leave per year to which Executive was entitled at the Effective Time. (f) Other Employee Benefits. In addition to any other compensation or benefits provided for under this Agreement, Executive shall be entitled to continue to participate in any employee benefit plans, arrangements and perquisites of the Holding Company or the Bank in which he participates or is eligible to participate at the Effective Time. Executive shall also be entitled to participate in any employee benefits or perquisites the Holding Company or the Bank offers to full-time employees or executive management in the future. The Holding Company or the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse effect, unless such change in general in nature and applies in a nondiscriminatory manner to all employees covered by the Plan. Without limiting the generality of the foregoing provisions of this paragraph, Executive shall be entitled to participate in or receive benefits under all plans relating to stock options, restricted stock awards, stock purchases, pension, profit sharing, employee stock ownership, group life insurance, medical and other health and welfare coverage that are made available by the Holding Company or the Bank at the Effective Time or at any time in the future during the term of this Agreement, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation to which Executive is entitled under this Agreement. -3- 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION (a) Upon the occurrence of an Event of Termination (as defined herein below) during Executive's term of employment under this Agreement, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination of Executive's full-time employment under this Agreement by the Holding Company for any reason other than a termination governed by Section 7 of this Agreement; or (ii) Executive's resignation from his employment with the Holding Company upon, any (A) failure to re-appoint Executive to his positions set forth in Section 1 of this Agreement, unless Executive consents to such event, or a termination without cause of Executive's employment as set forth in Section 1(c) of this Agreement, (B) material change in Executive's functions, duties, or responsibilities with the Holding Company or its subsidiaries, which change would cause Executive's position(s) to become one of lesser responsibility, importance, or scope, unless Executive consents to such event, (C) relocation of Executive's principal place of employment by more than twenty-five (25) miles from its location at the Effective Time, unless Executive consents to such event, (D) material reduction (except to the extent provided for in Section 3(f) of this Agreement) in the benefits and perquisites provided to Executive from those being provided as of the Effective Time of this Agreement, unless Executive consents to such event, (E) liquidation or dissolution of the Holding Company or the Bank, or (F) breach of this Agreement by the Holding Company. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E) or (F), above, Executive shall have the right to terminate his employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within six (6) full calendar months after the applicable event giving rise to Executive's right to elect to terminate his employment. (b) Upon Executive's termination from employment in accordance with paragraph (a) of this Section 4, on the Date of Termination, as defined in Section 8 of the Agreement, the Holding Company shall be obligated to pay Executive, or, in the event of his death following the Date of Termination, his beneficiary or beneficiaries, or his estate, as the case may be, an amount equal to the sum of: (i) the Base Salary and incentive compensation that would have been paid to Executive for the remaining term of this Agreement had the Event of Termination not occurred (based on Executive's then current Base Salary and most recently paid or accrued bonus at the time of the Event of Termination); plus (ii) the value, as calculated by a recognized firm customarily performing such valuation, of any stock options which as of the Date of Termination, have been granted to Executive but are not exercisable by Executive and the value of any restricted stock awards which have been granted to Executive, but in which Executive does not have a non-forfeitable or fully-vested interest as of the Date of Termination; plus (iii) the value of all employee benefits (other than those set forth in Section 3(c) and (d) hereof) that would have been provided to Executive for the remaining term of this Agreement had an Event of Termination not occurred, based on the most recent level of contribution, accrual or other participation by or on behalf of Executive. At the election of Executive, which election is to be made prior to the Date of Termination, such payments shall be made in a lump sum. In the event that no election is made, payment to Executive will be made on a monthly basis in approximately equal installments during the remaining unexpired term of the Agreement. Such payments shall -4- not be reduced in the event Executive obtains other employment following termination of employment. (c) In addition to the payments provided for in paragraph (b) of this Section 4, upon Executive's termination of employment in accordance with the provisions of paragraph (a) of this Section 4, to the extent that the Holding Company or the Bank continues to offer any life, medical, health, disability or dental insurance plan or arrangement in which Executive participates in on the last day of his employment (each being a "Welfare Plan"), Executive and his covered dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event of Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. If the Holding Company or Bank does not offer the Welfare Plans at any time after the Event of Termination, then the Holding Company shall provide Executive with a payment equal to the premiums for such benefits for the period which runs until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. 5. CHANGE IN CONTROL (a) For purposes of this Agreement, a "Change in Control" shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Holding Company within the meaning of the Bank Change in Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company, as in effect on the date hereof; or (iii) results in a transaction requiring prior FRB approval under the Bank Holding Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding Company's acquisition of the Bank; or (iv) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Holding Company representing 20% or more of the Bank's or the Holding Company's outstanding securities except for any securities of the Bank purchased by the Holding Company in connection with the conversion of the Bank to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Bank; or (B) individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the -5- Holding Company or similar transaction occurs in which the Bank or Holding Company is not the resulting entity; or (D) solicitations of shareholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Bank or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Bank or the Holding Company. (b) If any of the events described in paragraph (a) of this Section 5, constituting a Change in Control, have occurred or the Board of Directors determines that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f) and (g) of this Section 5 upon his termination of employment at any time during the term of this Agreement on or after the date the Change in Control occurs due to (1) Executive's dismissal or (2) Executive's resignation following any demotion, loss of title, office or significant authority or responsibility, reduction in annual compensation or benefits or relocation of his principal place of employment by more than twenty-five (25) miles from its location immediately prior to the Change in Control, unless such termination is because of his death or Termination for Cause; provided, however, that such payments shall be reduced by any payment made under Section 4 of this Agreement. (c) Upon the occurrence of a Change in Control followed by Executive's termination of employment, as provided in paragraph (b) of this Section 5, the Holding Company shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of: 1) the payments and benefits due for the remaining term of the Agreement or 2) three (3) times Executive's average annual compensation from the Holding Company, the Bank or their affiliates for the five (5) preceding taxable years or such lesser number of years in the event that Executive shall have actually been employed by the Holding Company or the Bank for less than five (5) years. In determining Executive's average annual compensation, annual compensation shall include Base Salary and any other taxable income, including but not limited to amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses (whether paid or accrued for the applicable period), as well as, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive of such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the sixty (60) months following Executive's termination. In the event that no election is made, payment to Executive will be made on a monthly basis during the sixty (60) months following Executive's termination. -6- (d) Upon the occurrence of a Change in Control, Executive will be entitled to receive benefits due him under or contributed by the Bank or the Holding Company on his behalf pursuant to any retirement, incentive, profit sharing or other retirement, bonus, performance, disability or other employee benefit plan maintained by the Holding Company or the Bank on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Bank or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (e) Upon the occurrence of a Change in Control and Executive's termination of employment in connection therewith, the Holding Company will cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Holding Company or the Bank for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's participation in any such plan or program is barred, the Holding Company shall arrange to provide Executive and his dependents with benefits substantially similar to those of which Executive and his dependents would otherwise have been entitled to receive under such plans and programs from which their continued participation is barred or provide their economic equivalent. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will, at the end of the term of this Agreement, no longer be available to Executive, Executive will have the option to purchase all rights then held by the Holding Company or the Bank to such item for a price equal to the then fair market value of the item. (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall elect whether the balance of the amount payable under the Agreement at that time shall be paid in a lump sum or on a pro rata basis pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 6. CHANGE IN CONTROL RELATED PROVISIONS (a) Notwithstanding the preceding provisions of Section 5 of this Agreement, for any taxable year in which Executive shall be liable for the payment of an excise tax under Section 4999 of the Code (or any successor provision thereto), with respect to any payment in the nature of the compensation made by the Holding Company or its subsidiaries to (or for the benefit of) Executive pursuant to this Agreement or otherwise, the Holding Company (or any successor thereto) shall pay to Executive an amount determined under the following formula: -7- An amount equal to: (E x P) + X WHERE: X = E x P ---------------------------------------- 1 - [(FI x (1 - SLI)) + SLI + E + M + PO] E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 6; FI = the highest marginal rate of federal income, employment, and other taxes (other than taxes imposed under Section 4999 of the Code) applicable to Executive for the taxable year in question (including any effective increase in Executive's tax rate attributable to the disallowance of any deduction); SLI = the sum of the highest marginal rates of income and payroll tax applicable to Executive under applicable state and local laws for the taxable year in question (including any effective increase in Executive's tax rate attributable to the disallowance of any deduction); M = highest marginal rate of Medicare tax; and PO = adjustment for phase out of or loss of deduction, personal exemption or other similar items. With respect to any payment in the nature of compensation that is made to (or for the benefit of) Executive under the terms of this Agreement or otherwise and on which an excise tax under Section 4999 of the Code may or will be assessed, the payment determined under this Section 6 shall be made to Executive on the earliest of (i) the date the Holding Company is required to withhold such tax, (ii) the date the tax is required to be paid by Executive, or (iii) at the time of the Change in Control. It is the intention of the parties that the Holding Company provide Executive with a full tax gross-up under the provisions of this Section 6, so that on a net after-tax basis, the result to Executive shall be the same as if the excise tax under Section 4999 (or any successor provisions) of the Code had not been imposed. The payment may be adjusted, as appropriate, if alternative minimum tax rules under the Code are applicable to Executive. (b) Notwithstanding the foregoing, if it is (i) initially determined by the Holding Company's tax advisors that no excise tax under Section 4999 is due with respect to any payment or benefit described in the first paragraph of Section 6(a) and, thereafter, it is determined in a final judicial determination or a final administrative settlement that the Section 4999 excise tax is due with respect to such payments or benefits or (ii) subsequently determined in a final judicial determination or a final administrative settlement to which Executive is a party that the excise tax under Section 4999 is due or that the excess parachute payment as defined in Section 4999 of -8- the Code is more than the amount determined as "P", above (such revised determination under (i) or (ii) above being thereafter referred to as the "Determinative Excess Parachute Payment"), then the tax advisors of the Holding Company (or any successor thereto) shall determine the amount (the "Adjustment Amount"), the Holding Company (or its successor) must pay to Executive, in order to put Executive in the same position as Executive would have been if the amount determined as "P" above had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the tax advisors shall take into account any and all taxes (including any penalties of any nature and interest) paid or payable by Executive in connection with such final judicial determination or final administrative settlement. As soon as practicable after the Adjustment Amount has been so determined, the Holding Company shall pay the Adjustment Amount to Executive. (c) The Holding Company (or its successor) shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, reasonable accountant's fees, interest, fines and penalties of any kind) which Executive incurs as a result of any administrative or judicial review of Executive's liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of Executive's liability for the Section 4999 excise tax or otherwise relating to the classification for purposes of Section 280G of the Code of any payment or benefit in the nature of compensation made or provided to Executive by the Holding Company or any successor thereto. Executive shall promptly notify the Holding Company in writing whenever Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Agreement is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of Executive's liability under Section 4999). The Holding Company (or its successor) may assume control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this contract) and Executive shall cooperate fully with the Holding Company in any such proceeding. Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Holding Company (or its successor) may have in connection therewith without prior consent to the Holding Company (or its successor). In the event that the Holding Company (or any successor thereto) elects not to assume control over such matters, the Holding Company (or any successor thereto) shall promptly reimburse Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto. 7. TERMINATION FOR CAUSE The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a Notice -9- of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the independent members of the Board of Directors at a meeting of the Board of Directors called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. During the period beginning on the date of the Notice of Termination pursuant to Section 8 hereof through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested awards granted to Executive under any stock benefit plan of the Bank, the Holding Company or any subsidiary or affiliate thereof, vest. At the Date of Termination, such stock options and any such unvested awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause. 8. NOTICE (a) Any purported termination by the Holding Company or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination. 9. POST-TERMINATION OBLIGATIONS All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for one (1) full year after the earlier of the expiration of this Agreement or termination of Executive's employment with the Holding Company. Executive shall, upon reasonable notice, furnish such information and assistance to the Holding Company as may reasonably be required by the Holding Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. 10. NON-COMPETITION AND NON-DISCLOSURE (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 hereof, Executive agrees not to compete with the Holding Company or its subsidiaries for a period of one (1) year following such termination in any city, town or county in which Executive's normal business office is located and the Holding Company or any of its subsidiaries has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business -10- activities of the Holding Company or its subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Holding Company or its subsidiaries, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Holding Company or its subsidiaries, will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 of this Agreement, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Holding Company or its subsidiaries, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Holding Company or its subsidiaries from pursuing any other remedies available to the Holding Company or its subsidiaries for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company and its subsidiaries as it may exist from time to time, is a valuable, special and unique asset of the business of the Holding Company and its subsidiaries. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Holding Company and subsidiaries thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company. In the event of a breach or threatened breach by Executive of the provisions of this Section 10, the Holding Company will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Holding Company or its subsidiaries or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company from pursuing any other remedies available to the Holding Company for such breach or threatened breach, including the recovery of damages from Executive. 11. DEATH AND DISABILITY (a) Death. Notwithstanding any other provision of this Agreement to the contrary, in the event of Executive's death during the term of this Agreement, the Holding Company shall immediately pay his estate any salary and bonus accrued but unpaid as of the date of his death, and, for a period of six (6) months after Executive's death, the Holding Company shall continue to provide medical insurance benefits existing on the date of his death and shall pay Executive's designated beneficiary the Base Salary that would otherwise be payable to him pursuant to Section 3 of this Agreement. This provision shall not negate any rights Executive or his beneficiaries may have to death benefits under any employee benefit plan of the Holding Company or the Bank. -11- (b) Disability (i) Disability. If during the term of Executive's employment Executive begins to receive disability benefits under the long-term disability insurance policy maintained by the Bank (the "Disability Policy"), then the Holding Company's obligation to pay Executive his Base Salary shall, as of the date such benefits first become payable under the Disability Policy on account of Executive's disability, be reduced to equal the difference between Executive's Base Salary and amounts received under all long-term disability policies, to the extent that such salary payments do not result in a reduction in disability payments. (ii) Incapacity. If, as a result of Disability, Executive is determined by a physician chosen by the Holding Company or the Bank and reasonably acceptable to Executive or Executive's personal representatives not to be capable of fulfilling Executive's responsibilities as an officer of the Holding Company ("Incapacity Determination"), (1) Executive shall continue to be covered by the Bank's medical insurance and life insurance policies until the second anniversary of the Incapacity Determination, and (2) the Holding Company's or the Bank's obligation to provide Executive with other employment-related fringe benefits hereunder shall cease as of the date of such Incapacity Determination ("Incapacity Determination Date"). Prior to the Incapacity Determination Date, the Holding Company shall continue to pay Executive his annual salary in usual installments and Executive shall continue to receive all other employment-related fringe benefits due to Executive in accordance with this Agreement, as same may have been reduced by disability insurance payments under paragraph (i) above. (iii) Termination of Employment by Reason of Incapacity. At any time from and after the Incapacity Determination Date, the Board of Directors, in its discretion, may elect to terminate Executive's employment by reason of such incapacity. Any such termination as a result of incapacity shall be considered to be an Event of Termination in accordance with Section 4 of this Agreement. In such event, payments due Executive shall not include any of the fringe benefits set forth in Section 3(c) and (d). 12. SOURCE OF PAYMENTS (a) All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Holding Company or subject to Section 12(b). (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under an employment agreement in effect between Executive and the Bank, such compensation payments and benefits paid by the Bank will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. Payments pursuant to this Agreement and the Bank agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Bank. -12- 13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Holding Company or any predecessor of the Holding Company and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 14. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Holding Company and their respective successors and assigns. 15. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 16. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. -13- 17. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW This Agreement shall be governed by the laws of the State of Delaware without regard to principles of conflicts of law of that state. 19. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Holding Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. A termination without cause of Executive's employment pursuant to Section 1(c) hereof, shall not be subject to arbitration except to the extent that there is a dispute as to the amount of payments due Executive hereunder. 20. PAYMENT OF COSTS AND LEGAL FEES All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company, if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 21. INDEMNIFICATION (a) The Holding Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he -14- may be involved by reason of his having been a director or officer of the Holding Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. (b) Any payments made to Executive pursuant to this Section 21 are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R. Part 359 and any rules or regulations promulgated thereunder. 22. SUCCESSOR TO THE HOLDING COMPANY The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Holding Company, to expressly and unconditionally assume and agree to perform the Holding Company's obligations under this Agreement, in the same manner and to the same extent that the Holding Company would be required to perform such obligations if no such succession or assignment had taken place. -15- SIGNATURES IN WITNESS WHEREOF, Berkshire Hills Bancorp, Inc. has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer and Executive has signed this Agreement, on the 1st day of June, 2003. ATTEST: BERKSHIRE HILLS BANCORP, INC. /s/ Gerald A. Denmark By: /s/ Catherine B. Miller - --------------------- ----------------------- Corporate Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE /s/ Gerald A. Denmark By: /s/ Michael P. Daly - --------------------- ------------------- Corporate Secretary Michael P. Daly -16- EX-10.2 4 exhibit10-2.txt BERKSHIRE BANK EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") by and between Berkshire Bank (the "Bank"), a state-chartered savings institution, with its principal offices at 24 North Street, Pittsfield, Massachusetts 01202, Berkshire Hills Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the state of Delaware and the holding company of the Bank, and Michael P. Daly ("Executive") was entered into on June 27, 2000, and amended and restated in its entirety effective as of June 1, 2003 (the "Effective Time"). WHEREAS, the Bank believes that the assurance of Executive's employment by the Bank for the term of this Agreement and the benefit of his business experience are of material importance; and WHEREAS, Executive desires to serve in the employ of the Bank on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties to this Agreement hereby agree as follows: 1. POSITIONS AND RESPONSIBILITIES (a) During the term of this Agreement Executive agrees to serve as President and Chief Executive Officer of the Bank. Executive shall render administrative and management services to the Bank such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve, if elected, as a director of the Bank and in such capacity will carry out such duties and responsibilities reasonably appropriate to that office. In performing his services as President and Chief Executive Officer and carrying out his duties and responsibilities as a director, Executive shall conform to the policies and codes of conduct and ethics of the Bank and the Holding Company, now or hereafter in effect. (b) During the term of Executive's employment under this Agreement, except for periods of absence occasioned by illness, vacation, and other reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties under this Agreement, including activities and services related to the organization, operation and management of the Bank, as well as participation in community, professional and civic organizations; provided, however, that, with the approval of the Board of Directors of the Bank (the "Board of Directors"), as evidenced by a resolution of the Board of Directors, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the judgment of the Board of Directors, will not present any conflict of interest with the Bank or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything contained in this Agreement to the contrary, either Executive or the Bank may terminate Executive's employment with the Bank at any time during the term of this Agreement, with or without cause, subject to the terms and conditions of this Agreement. Termination without cause by the Bank shall require a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the independent members of the Board of Directors, at a meeting of the Board of Directors called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors). Upon such termination, Executive shall be entitled to receive all compensation and benefits for the remainder of the term of the Agreement, or as set forth in Section 4 hereof, as shall be applicable. As used herein, "termination without cause" shall mean termination of Executive's employment for any reason other than those as defined as a Termination for Cause in Section 7 hereof. 2. TERM OF EMPLOYMENT Executive's employment under this Agreement shall be deemed to have commenced as of the Effective Time and shall continue for a period of twenty-four (24) full calendar months from the Effective Time. Commencing on the date of execution of this Agreement, the term of this Agreement shall extend for one day each day until such time as the Board of Directors or Executive elects not to extend the term of the Agreement by giving written notice to the other party, in which case the term of this Agreement shall become fixed and shall end on the second anniversary of the date of such written notice. 3. COMPENSATION, BENEFITS AND REIMBURSEMENT (a) Base Salary. The Holding Company shall pay Executive an annual salary of not less than $310,000 ("Base Salary"). Executive's Base Salary shall be payable in accordance with the normal payroll practices of the Bank. Whenever used in this Agreement, Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Bank. During the term of this Agreement, the Board of Directors or a committee appointed by the Board of Directors shall review Executive's Base Salary at least annually and the Board of Directors or the committee may increase Executive's Base Salary at any time. Any increase in Executive's Base Salary shall become a term of this Agreement and shall be the new "Base Salary" for purposes of this Agreement. Executive shall not receive any additional compensation for his service as a director. (b) Incentive Compensation. In addition to his Base Salary, Executive shall be entitled to participate in any incentive compensation bonus program sponsored by the Bank. Executive's incentive compensation shall be determined by the Board of Directors or a committee appointed by the Board of Directors at a level appropriate for executive officers. (c) Club Dues. In addition to any other compensation provided for under this Agreement, the Bank shall pay Executive an amount sufficient, on an after-tax basis, to maintain his membership at the Country Club of Pittsfield. 2 (d) Automobile. The Bank shall provide Executive with, and Executive shall have the primary use of, an automobile owned or leased by the Bank and the Bank shall pay (or reimburse Executive) for all expenses of insurance, registration, operation and maintenance of the automobile. Executive shall comply with reasonable reporting and expense limitations on the use of such automobile, as the Board of Directors may establish from time to time, and the Holding Company or the Bank shall annually include on Executive's Form W-2 any amount attributable to Executive's personal use of such automobile. (e) Vacation; Holidays; Sick Time. Executive shall be entitled to vacation in accordance with the standard vacation policies of the Bank for senior executive officers, but in no event less than four (4) weeks vacation during each year of employment. Executive shall take vacation at a time mutually agreed upon by the Bank and Executive. Executive shall receive his Base Salary and other benefits during periods of vacation. Executive shall also be entitled to paid legal holidays in accordance with the policies of the Bank. Executive shall also be entitled to sick leave in accordance with the policies of the Bank for senior executive officers, but in no event less than the number of days of sick leave per year to which Executive was entitled at the Effective Time. (f) Other Employee Benefits. In addition to any other compensation or benefits provided for under this Agreement, Executive shall be entitled to continue to participate in any employee benefit plans, arrangements and perquisites of the Bank in which he participates or is eligible to participate at the Effective Time. Executive shall also be entitled to participate in any employee benefits or perquisites the Bank offers to full-time employees or executive management in the future. The Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse effect, unless such change is general in nature and applies in a nondiscriminatory manner to all employees covered by the plan, arrangement or perquisite. Without limiting the generality of the foregoing provisions of this paragraph, Executive shall be entitled to participate in or receive benefits under all plans relating to stock options, restricted stock awards, stock purchases, pension, profit sharing, employee stock ownership, group life insurance, medical and other health and welfare coverage that are made available by the Bank at the Effective Time or at any time in the future during the term of this Agreement, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation to which Executive is entitled under this Agreement. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION (a) Upon the occurrence of an Event of Termination (as defined herein below) during Executive's term of employment under this Agreement, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination of Executive's full-time employment under this Agreement by the Bank for any reason other than a termination governed by Section 7 of this Agreement; or (ii) Executive's resignation from his employment with the Bank upon, any (A) 3 failure to re-appoint Executive to his positions set forth in Section 1 of this Agreement, unless Executive consents to such event, or a termination without cause of Executive's employment as set forth in Section 1(c) of this Agreement, (B) material change in Executive's functions, duties, or responsibilities with the Bank or its subsidiaries, which change would cause Executive's position(s) to become one of lesser responsibility, importance, or scope, unless Executive consents to such event, (C) relocation of Executive's principal place of employment by more than twenty-five (25) miles from its location at the Effective Time, unless Executive consents to such event, (D) material reduction (except to the extent provided for in Section 3(f) of this Agreement) in the benefits and perquisites provided to Executive from those being provided as of the Effective Time of this Agreement, unless Executive consents to such event, (E) liquidation or dissolution of the Holding Company or the Bank, or (F) breach of this Agreement by the Bank or the Holding Company. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E) or (F), above, Executive shall have the right to terminate his employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within six (6) full calendar months after the applicable event giving rise to Executive's right to elect to terminate his employment. (b) Upon Executive's termination from employment in accordance with paragraph (a) of this Section 4, on the Date of Termination, as defined in Section 8 of the Agreement, the Bank shall be obligated to pay Executive, or, in the event of his death following the Date of Termination, his beneficiary or beneficiaries, or his estate, as the case may be, an amount equal to the sum of: (i) the Base Salary and incentive compensation that would have been paid to Executive for the remaining term of this Agreement had the Event of Termination not occurred (based on Executive's then current Base Salary and most recently paid or accrued bonus at the time of the Event of Termination); plus (ii) the value, as calculated by a recognized firm customarily performing such valuation, of any stock options which as of the Date of Termination, have been granted to Executive but are not exercisable by Executive and the value of any restricted stock awards which have been granted to Executive, but in which Executive does not have a non-forfeitable or fully-vested interest as of the Date of Termination; plus (iii) the value of all employee benefits (other than those set forth in Section 3 (c) and (d) hereof) that would have been provided to Executive for the remaining term of this Agreement had an Event of Termination not occurred, based on the most recent level of contribution, accrual or other participation by or on behalf of Executive. At the election of Executive, which election is to be made prior to the Date of Termination, such payments shall be made in a lump sum. In the event that no election is made, payment to Executive will be made on a monthly basis in approximately equal installments during the remaining unexpired term of the Agreement. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (c) In addition to the payments provided for in paragraph (b) of this Section 4, upon Executive's termination of employment in accordance with the provisions of paragraph (a) of this Section 4, to the extent that the Holding Company or the Bank continues to offer any life, medical, health, disability or dental insurance plan or arrangement in which Executive participates in on the last day of his employment (each being a "Welfare Plan"), Executive and his covered dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event 4 of Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. If the Holding Company or Bank does not offer the Welfare Plans at any time after the Event of Termination, then the Bank shall provide Executive with a payment equal to the premiums for such benefits for the period which runs until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. 5. CHANGE IN CONTROL (a) For purposes of this Agreement, a "Change in Control" shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Holding Company within the meaning of the Bank Change in Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company, as in effect on the date hereof; or (iii) results in a transaction requiring prior FRB approval under the Bank Holding Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding Company's acquisition of the Bank; or (iv) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Holding Company representing 20% or more of the Bank's or the Holding Company's outstanding securities except for any securities of the Bank purchased by the Holding Company in connection with the conversion of the Bank to the stock form and any securities purchased by any tax-qualified employee benefit plan of the Bank; or (B) individuals who constitute the Board of Directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs in which the Bank or Holding Company is not the resulting entity; or (D) solicitations of shareholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Bank or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Bank or the Holding Company. 5 (b) If any of the events described in paragraph (a) of this Section 5, constituting a Change in Control, have occurred or the Board of Directors determines that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f) and (g) of this Section 5 upon his termination of employment at any time during the term of this Agreement on or after the date the Change in Control occurs due to (1) Executive's dismissal or (2) Executive's resignation following any demotion, loss of title, office or significant authority or responsibility, reduction in annual compensation or benefits or relocation of his principal place of employment by more than twenty-five (25) miles from its location immediately prior to the Change in Control, unless such termination is because of his death or Termination for Cause; provided, however, that such payments shall be reduced by any payment made under Section 4 of this Agreement. (c) Upon the occurrence of a Change in Control followed by Executive's termination of employment, as provided in paragraph (b) of this Section 5, the Bank shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of: 1) the payments and benefits due for the remaining term of the Agreement or 2) three (3) times Executive's average annual compensation from the Holding Company, the Bank or their affiliates for the five (5) preceding taxable years or such lesser number of years in the event that Executive shall have actually been employed by the Bank for less than five (5) years. In determining Executive's average annual compensation, annual compensation shall include Base Salary and any other taxable income, including but not limited to amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses (whether paid or accrued for the applicable period), as well as, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive of such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the sixty (60) months following Executive's termination. In the event that no election is made, payment to Executive will be made on a monthly basis during the sixty (60) months following Executive's termination. (d) Upon the occurrence of a Change in Control, Executive will be entitled to receive benefits due him under or contributed by the Bank on his behalf pursuant to any retirement, incentive, profit sharing or other retirement, bonus, performance, disability or other employee benefit plan maintained by the Bank on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Bank or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. 6 (e) Upon the occurrence of a Change in Control and Executive's termination of employment in connection therewith, the Bank will cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Bank for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's participation in any such plan or program is barred by reason of his not being an employee, the Bank shall arrange to provide Executive and his dependents with benefits substantially similar to those of which Executive and his dependents would otherwise have been entitled to receive under such plans and programs from which their continued participation is barred or provide their economic equivalent. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will, at the end of the term of this Agreement, no longer be available to Executive, Executive will have the option to purchase all rights then held by the Bank to such item for a price equal to the then fair market value of the item. (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall elect whether the balance of the amount payable under the Agreement at that time shall be paid in a lump sum or on a pro rata basis pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 6. CHANGE IN CONTROL RELATED PROVISIONS Notwithstanding the provisions of Section 5, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the "Termination Benefits") constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended, or any successor thereto, and in order to avoid such a result, Termination Benefits will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G. The allocation of the reduction required hereby among the Termination Benefits provided by Section 5 shall be determined by Executive. 7. TERMINATION FOR CAUSE The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the independent members of the Board of Directors at a meeting 7 of the Board of Directors called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. During the period beginning on the date of the Notice of Termination pursuant to Section 8 hereof through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested awards granted to Executive under any stock benefit plan of the Bank, vest. At the Date of Termination, such stock options and any such unvested awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause. 8. NOTICE (a) Any purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination. 9. POST-TERMINATION OBLIGATIONS All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for one (1) full year after the earlier of the expiration of this Agreement or termination of Executive's employment with the Bank. Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. 10. NON-COMPETITION AND NON-DISCLOSURE (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 hereof, Executive agrees not to compete with the Bank for a period of one (1) year following such termination in any city, town or county in which Executive's normal business office is located and the Bank has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Bank. The parties hereto, recognizing that irreparable injury will result to the Bank, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Bank will be entitled, in addition to any other remedies and damages available, to 8 an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 of this Agreement, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Holding Company or its subsidiaries from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank. In the event of a breach or threatened breach by Executive of the provisions of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 11. DEATH AND DISABILITY (a) Death. Notwithstanding any other provision of this Agreement to the contrary, in the event of Executive's death during the term of this Agreement, the Bank shall immediately pay his estate any salary and bonus accrued but unpaid as of the date of his death, and, for a period of six (6) months after Executive's death, the Bank shall continue to provide medical insurance benefits existing on the date of his death and shall pay Executive's designated beneficiary the Base Salary that would otherwise be payable to him pursuant to Section 3 of this Agreement. This provision shall not negate any rights Executive or his beneficiaries may have to death benefits under any employee benefit plan of the Bank. (b) Disability (i) Disability. If during the term of Executive's employment Executive begins to receive disability benefits under the long-term disability insurance policy maintained by the Bank (the "Disability Policy"), then the Bank's obligation to pay Executive his Base Salary shall, as of the date such benefits first become payable under the Disability Policy on account of Executive's disability, be reduced to equal the difference between Executive's Base Salary and amounts 9 received under all long-term disability policies, to the extent that such salary payments do not result in a reduction in disability payments. (ii) Incapacity. If, as a result of Disability, Executive is determined by a physician chosen by the Bank and reasonably acceptable to Executive or Executive's personal representatives not to be capable of fulfilling Executive's responsibilities as an officer of the Bank ("Incapacity Determination"), (1) Executive shall continue to be covered by the Bank's medical insurance and life insurance policies until the second anniversary of the Incapacity Determination, and (2) the Bank's obligation to provide Executive with other employment-related fringe benefits hereunder shall cease as of the date of such Incapacity Determination ("Incapacity Determination Date"). Prior to the Incapacity Determination Date, the Bank shall continue to pay Executive his annual salary in usual installments and Executive shall continue to receive all other employment-related fringe benefits due to Executive in accordance with this Agreement, as same may have been reduced by disability insurance payments under paragraph (i) above. (iii) Termination of Employment by Reason of Incapacity. At any time from and after the Incapacity Determination Date, the Board of Directors, in its discretion, may elect to terminate Executive's employment by reason of such incapacity. Any such termination as a result of incapacity shall be considered to be an Event of Termination in accordance with Section 4 of this Agreement. In such event, payments due Executive shall not include any of the fringe benefits set forth in Section 3(c) and (d). 12. SOURCE OF PAYMENTS (a) All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank or subject to Section 12(b). The Holding Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amount and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Holding Company. (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under an employment agreement in effect between Executive and the Holding Company, such compensation payments and benefits paid by the Holding Company will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. Payments pursuant to this Agreement and the Holding Company agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Bank. 13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be 10 interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 14. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 15. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 16. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. 17. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 11 18. GOVERNING LAW This Agreement shall be governed by the laws of the Commonwealth of Massachusetts, without regard to principles of conflicts of law of that state. 19. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. A termination without cause of Executive's employment pursuant to Section 1(c) hereof, shall not be subject to arbitration except to the extent that there is a dispute as to the amount of payments due Executive hereunder. 20. PAYMENT OF COSTS AND LEGAL FEES All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 21. INDEMNIFICATION (a) The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. (b) Any payments made to Executive pursuant to this Section 21 are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R. Part 359 and any rules or regulations promulgated thereunder. 12 22. SUCCESSOR TO THE BANK The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Holding Company, to expressly and unconditionally assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform such obligations if no such succession or assignment had taken place. 13 SIGNATURES IN WITNESS WHEREOF, Berkshire Bank has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer and Executive has signed this Agreement, on the 1st day of June, 2003. ATTEST: BERKSHIRE BANK /s/ Gerald A. Denmark By: /s/ Catherine B. Miller - --------------------- ----------------------- Corporate Secretary For the Entire Board of Directors ATTEST: BERKSHIRE HILLS BANCORP, INC. (Guarantor) /s/ Gerald A. Denmark By: /s/ Catherine B. Miller - --------------------- ----------------------- Corporate Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE /s/ Gerald A. Denmark By: /s/ Michael P. Daly - --------------------- ----------------------- Corporate Secretary Michael P. Daly 14 EX-10.3 5 exhibit10-3.txt [LETTERHEAD OF BERKSHIRE HILLS BANCORP, INC.] As of June 26, 2003 Mr. Robert A. Wells 76 Lime Kiln Road Lenox, MA 01240 Dear Bob: As we have discussed, this is to confirm that you have decided to retire as Chairman of the Board of Berkshire Hills Bancorp, Inc. (the "Holding Company") and Berkshire Bank ("Berkshire Bank") (collectively, "Berkshire") and as Chairman and Principal Executive of each of Berkshire Hills Foundation and Greater Berkshire Foundation, Inc. (the "Foundations") effective on the earlier of (a) December 31, 2003 or (b) such other date as you shall elect upon notice to me ("Your Retirement Date"). In recognition of your years of service, Berkshire agrees to the following: 1. You shall be a director of the Holding Company and Berkshire Bank until the expiration of your current term in 2004, and thereafter as you are re-nominated and re-elected. So long as you are a director, you will be a member of various Berkshire committees to which you are appointed and a director of each of the Foundations. 2. After Your Retirement Date, and so long as you are a director of the Holding Company, you will receive stock awards and options, if any, on the same basis that they are granted to all other independent directors. 3. Within 30 days after Your Retirement Date, but in any event no later than December 31, 2003, you will receive a lump sum payment of $200,000.00, less all required and necessary deductions and withholdings. All salary and other payments from Berkshire and the Foundations, other than as set forth in this letter, will cease as of Your Retirement Date. You will retain all of your presently vested and unvested stock options and awards. If you are not re-elected to the Holding Company's Board, you will be appointed to its Advisory Board for a term sufficient to vest all of your unvested stock options and awards. If you are not re-elected to the Holding Company's Board of Directors and if, for any reason, the Advisory Board does not exist at that time, then all of your unvested stock options and awards will immediately vest. 4. You are entitled to certain benefits under the executive supplemental compensation agreement with Berkshire Bank dated November 7, 1995 and a trust agreement dated May 31, 1996 between Berkshire Bank and State Street Bank and Trust Company. Berkshire Bank will hire, at its expense, a mutually agreeable, independent pension actuarial firm (the "Actuary") to calculate, within 30 days of Your Retirement Date, all benefits due to you under the agreements. If appropriate, the amounts heretofore funded by Berkshire Bank and held under said agreements at State Street Bank and Trust Company will be further funded to satisfy Mr. Robert A. Wells As of June 26, 2003 Page 2 Berkshire Bank's obligations to you thereunder, or, if overfunded, the amount by which it is overfunded will be retained by Berkshire Bank. Said calculation by the Actuary will be final and binding on the parties, but each party will have the right to review all assumptions and methods of calculation prior to said calculation becoming final. 5. Until November 22, 2005, you shall have: A. Use of your automobile, with Berkshire Bank paying all automobile expenses on the same basis that it presently does; and on or about that date, Berkshire Bank will transfer title of that vehicle to you. B. Use of your current office until December 31, 2003; and thereafter, use of either your existing office or the second floor Board Room. C. Continued coverage under Berkshire Bank's existing regular, or upon you and/or your spouse attaining age 65, MEDEX group medical and dental insurance plans, as those plans shall hereafter be modified for all eligible employees. You will continue to be responsible for your premium co-payments, the amount of which will be billed by Berkshire to you periodically. 6. Your employment by Berkshire and your engagement as an independent contractor by the Foundations shall be deemed terminated as of Your Retirement Date. 7. You will continue to own the Royal Macabees (now Reassure America) Policy (No. 4052-202). You will refund payments made by Berkshire on your behalf by making a payment to Berkshire of $20,500.00 on or before Your Retirement Date. 2 Mr. Robert A. Wells As of June 26, 2003 Page 3 Please sign below to signify your agreement with the foregoing, and I will then ask the Boards of Directors of Berkshire to affirm this agreement. Very truly yours, BERKSHIRE HILLS BANCORP, INC. and BERKSHIRE BANK By: /s/ Michael P. Daly ------------------------------------- Michael P. Daly, President and CEO AGREED TO: /s/ Robert A. Wells ------------------------------------- Robert A. Wells THIS LETTER AGREEMENT IS AFFIRMED: BERKSHIRE HILLS BANCORP, INC. By: /s/ Catherine B. Miller ------------------------------------- On behalf of its Board of Directors BERKSHIRE BANK By: /s/ Catherine B. Miller ------------------------------------- On behalf of its Board of Directors 3 EX-31.1 6 d56541_ex31-1.txt Exhibit 31.1 CERTIFICATION I, Michael P. Daly, certify that: 1. I have reviewed this Form 10-Q of Berkshire Hills Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer[s] and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer[s] and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 /s/ Michael P. Daly ------------------- Michael P. Daly President and Chief Executive Officer EX-31.2 7 d56541_ex31-2.txt Exhibit 31.2 CERTIFICATION I, Wayne F. Patenaude, certify that: 1. I have reviewed this Form 10-Q of Berkshire Hills Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer[s] and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer[s] and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 /s/ Wayne F. Patenaude ---------------------- Wayne F. Patenaude Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 8 d56541_ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Berkshire Hills Bancorp, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, Michael P. Daly, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ Michael P. Daly ------------------- Michael P. Daly Chief Executive Officer August 11, 2003 A signed original of this written statement required by Section 906 has been provided to Berkshire Hills Bancorp, Inc. and will be retained by Berkshire Hills Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 9 d56541_ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Berkshire Hills Bancorp, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, Wayne F. Patenaude, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ Wayne F. Patenaude ---------------------- Wayne F. Patenaude Chief Financial Officer August 11, 2003 A signed original of this written statement required by Section 906 has been provided to Berkshire Hills Bancorp, Inc. and will be retained by Berkshire Hills Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----