form10q-93756_berk.htm
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, 2008
 
 
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 0-51584

BERKSHIRE HILLS BANCORP, INC.
 (Exact name of registrant as specified in its charter)

Delaware
04-3510455
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
24 North Street, Pittsfield, Massachusetts
01201
(Address of principal executive offices)
(Zip Code)

 
(413) 443-5601
(Registrant’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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)
 
Large Accelerated Filer ¨
Accelerated Filer x
   
Non-Accelerated Filer ¨
Smaller Reporting Company ¨
(Do not check if a smaller reporting company)
 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [  ]  No [X]

 The Registrant had 10,390,554 shares of common stock, par value $0.01 per share, outstanding as of August 5, 2008.



 
- 1 -

 

BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q

INDEX

   
Page
 
     
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
20
     
 
22
     
 
23
     
28
     
28
     
     
 
     
29
     
29
     
29
     
30
     
30
     
30
     
31
     
 
31
     
 

- 2 -


PART I
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED  BALANCE SHEETS

   
June 30,
   
December 31,
 
(In thousands, except share data)
 
2008
   
2007
 
Assets
           
Cash and cash equivalents
  $ 31,470     $ 33,259  
Federal funds sold and short-term investments
    2,247       7,883  
Total cash and cash equivalents       33,717        41,142  
Trading securities
    14,959       -  
Securities available for sale, at fair value
    200,133       197,964  
Securities held to maturity
    26,485       39,456  
Federal Home Loan Bank stock
    21,077       21,077  
Loans held for sale
    9,865       3,445  
                 
Residential mortgages
    664,581       657,045  
Commercial mortgages
    768,365       704,764  
Commercial business loans
    197,580       203,564  
Consumer loans
    347,515       378,643  
Total loans
    1,978,041       1,944,016  
Less:  Allowance for loan losses
    (22,581 )     (22,116 )
Net loans
    1,955,460       1,921,900  
                 
Premises and equipment, net
    38,054       38,806  
Goodwill
    161,526       161,632  
Other intangible assets
    19,379       20,820  
Cash surrender value of life insurance policies
    35,007       35,316  
Other assets
    31,213       31,874  
Total assets
  $ 2,546,875     $ 2,513,432  
                 
Liabilities and Stockholders' Equity
               
Liabilities
               
Demand deposits
  $ 225,001     $ 231,994  
NOW deposits
    193,551       213,150  
Money market deposits
    457,694       439,341  
Savings deposits
    217,605       210,186  
Total non-maturity deposits
    1,093,851       1,094,671  
Brokered time deposits
    3,008       21,497  
Other time deposits
    714,371       706,395  
Total time deposits
    717,379       727,892  
Total deposits
    1,811,230       1,822,563  
Borrowings
    379,376       334,474  
Junior subordinated debentures
    15,464       15,464  
Other liabilities
    10,769       14,094  
Total liabilities
    2,216,839       2,186,595  
                 
Stockholders' equity
               
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)
    -       -  
Common stock ($.01 par value; 26,000,000 shares authorized; 12,513,825 shares issued)
    125       125  
Additional paid-in capital
    265,904       266,134  
Unearned compensation
    (2,571 )     (2,009 )
Retained earnings
    121,743       113,387  
Accumulated other comprehensive income (loss)
    (403 )     1,217  
Treasury stock, at cost (2,129,200 shares at June 30, 2008
               
and 2,021,120 at December 31, 2007)
    (54,762 )     (52,017 )
Total stockholders' equity
    330,036       326,837  
Total liabilities and stockholders' equity
  $ 2,546,875     $ 2,513,432  
See accompanying notes to consolidated financial statements.

- 3 -


BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
         
June 30,
       
(In thousands, except per share data)
 
2008
   
2007
   
2008
   
2007
 
Interest and dividend income
                       
Loans
  $ 29,823     $ 29,152     $ 61,146     $ 57,674  
Securities and other
    3,011       2,842       6,211       5,790  
Total interest and dividend income
    32,834       31,994       67,357       63,464  
Interest expense
                               
Deposits
    10,521       12,318       22,809       24,267  
Borrowings and junior subordinated debentures
    3,666       4,638       7,607       8,969  
Total interest expense
    14,187       16,956       30,416       33,236  
Net interest income
    18,647       15,038       36,941       30,228  
Non-interest income
                               
Insurance commissions and fees
    3,694       3,786       8,840       8,777  
Deposit service fees
    2,486       1,788       4,641       3,302  
Wealth management fees
    1,567       968       3,195       1,887  
Loan service fees
    228       48       465       357  
Total fee income
    7,975       6,590       17,141       14,323  
Other
    562       303       868       726  
Gain (loss) on sale of securities, net
    (26 )     -       (26 )     81  
Total non-interest income
    8,511       6,893       17,983       15,130  
Total net revenue
    27,158       21,931       54,924       45,358  
Provision for loan losses
    1,105       100       1,930       850  
Non-interest expense
                               
Salaries and employee benefits
    9,842       8,230       19,498       16,741  
Occupancy and equipment
    2,774       2,385       5,742       4,871  
Marketing, data processing, and professional services
    2,181       2,116       4,302       4,063  
Non-recurring expense
    683       -       683       153  
Amortization of intangible assets
    1,019       662       2,103       1,324  
Other
    2,133       1,710       4,378       3,360  
Total non-interest expense
    18,632       15,103       36,706       30,512  
                                 
Income before income taxes
    7,421       6,728       16,288       13,996  
Income tax expense
    1,708       2,152       4,526       4,478  
Net income
  $ 5,713     $ 4,576     $ 11,762     $ 9,518  
                                 
Basic earnings per share
  $ 0.55     $ 0.52     $ 1.14     $ 1.09  
                                 
Diluted earnings per share
  $ 0.55     $ 0.52     $ 1.13     $ 1.07  
                                 
Weighted average shares outstanding
                               
Basic
    10,302       8,732       10,344       8,697  
Diluted
    10,384       8,875       10,420       8,855  

See accompanying notes to consolidated financial statements.

- 4 -


BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

   
Six Months Ended June 30,
 
(In thousands except per share data)
 
2008
   
2007
 
             
Total stockholders' equity at beginning of period
  $ 326,837     $ 258,161  
Comprehensive income:
               
Net income
    11,762       9,518  
Change in net unrealized loss on securities available-for-sale,
               
  net of reclassification adjustments and tax effects
    (1,733 )     (1,437 )
Net gain on derivative instruments
    113       71  
Total comprehensive income
    10,142       8,152  
Cash dividends declared ($0.31 per share in 2008 and $0.28 per share in 2007)
    (3,078 )     (2,456 )
Treasury stock purchased
    (5,731 )     (385 )
Exercise of stock options
    1,112       1,457  
Reissuance of treasury stock-other
    1,375       1,641  
Stock-based compensation
    824       807  
Tax benefit (loss) from stock compensation
    (69 )     615  
Other equity changes, net
    (1,376 )     (1,640 )
Total stockholders' equity at end of period
  $ 330,036     $ 266,352  

See accompanying notes to consolidated financial statements.


- 5 -


BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended June 30,
 
(In thousands)
 
2008
   
2007
 
Cash flows from operating activities:
           
Net income
  $ 11,762     $ 9,518  
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
    1,930       850  
Depreciation, amortization, and deferrals, net
    3,896       2,833  
Stock-based compensation
    824       807  
Excess tax effects from stock-based payment arrangements
    69       (615 )
Increase in cash surrender value of bank-owned life insurance policies
    (794 )     (498 )
Net loss (gains) on sales of securities, net
    26       (81 )
Net change in loans held for sale
    (6,420 )     -  
Loss from sale of premises
    36       -  
Writedowns of other real estate owned
    136       -  
Net change in all other assets
    (3,195 )     (3,731 )
Net change in other liabilities
    2,261       (1,214 )
Net cash provided by operating activities
    10,531       7,869  
                 
Cash flows from investing activities:
               
Sales of securities available for sale
    7,684       2,046  
Proceeds from maturities, calls and prepayments - securities available for sale
    14,166       15,982  
Purchases of securities available for sale
    (26,765 )     (10,169 )
Proceeds from maturities, calls and prepayments - securities held to maturity
    22,495       5,736  
Purchases of securities held to maturity
    (9,526 )     (5,411 )
Purchase of trading security
    (15,000 )     -  
Increase in loans, net
    (36,098 )     (31,004 )
Capital expenditures
    (1,276 )     (4,006 )
Proceeds from surrender of life insurance
    1,103       -  
Payment for acquisition
    (1,030 )     -  
Proceeds from sale of other real estate owned
    287       -  
Proceeds from sale of premises and equipment
    74       -  
Total net cash used by investing activities
    (43,886 )     (26,826 )
                 
Cash flows from financing activities:
               
Net (decrease) increase in deposits
    (11,334 )     6,576  
Proceeds from Federal Home Loan Bank ("FHLB") advances
    179,835       79,325  
Repayments of Federal Home Loan Bank advances and other borrowings
    (134,805 )     (71,247 )
Treasury stock purchased
    (5,731 )     (385 )
Proceeds from reissuance of treasury stock
    1,112       1,457  
Excess tax effects from stock-based payment arrangements
    (69 )     615  
Cash dividends paid
    (3,078 )     (2,456 )
Net cash provided by financing activities
    25,930       13,885  
                 
Net change in cash and cash equivalents
    (7,425 )     (5,072 )
Cash and cash equivalents at beginning of period
    41,142       30,985  
Cash and cash equivalents at end of period
  $ 33,717     $ 25,913  
                 
Supplemental cash flow information:
               
Interest paid on deposits
  $ 22,896     $ 24,472  
Interest paid on borrowed funds
    7,671       8,917  
Income taxes paid, net
    3,511       5,006  

See accompanying notes to consolidated financial statements.



- 6 -



BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.           GENERAL

 
Basis of Presentation and Consolidation, and Use of Estimates
 
The consolidated financial statements include the accounts of Berkshire Hills Bancorp, Inc. ("Berkshire" or the "Company") and its wholly-owned subsidiaries: Berkshire Bank (the "Bank") and Berkshire Insurance Group, but exclude its wholly-owned subsidiary Berkshire Hills Capital Trust I, which is accounted for using the equity method.  The consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. The results of operations for the six months ended June 30, 2008 are not necessarily indicative of the results which may be expected for the year.
 
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are susceptible to near-term changes include the determination of the allowance for loan losses, tax related assets and liabilities, and the carrying value of goodwill and other intangible assets.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
Business
 
Through its wholly-owned subsidiaries, the Company provides a variety of financial services to individuals, municipalities and businesses through its offices in Western Massachusetts, Vermont and Northeastern New York. Its primary deposit products are checking, NOW, money market, savings, and time deposit accounts.  Its primary lending products are residential mortgage, commercial mortgage, commercial business loans and consumer loans. The Company offers electronic banking, cash management, and other transaction and reporting services. The Company offers wealth management services including trust, financial planning, and investment services. The Company is the agent for complete lines of property and casualty, life, disability, and health insurance.
 
Acquisitions
 
In January 2008, the Company acquired the Center for Financial Planning (“CFP”) in Albany, New York. This acquisition provides a foundation for the Bank’s New York region wealth management and investment services. The acquisition was accounted for as a purchase transaction with all cash consideration funded through internal sources. The operating results of CFP are included with the Company's results of operations since the date of acquisition. The purchase of CFP did not significantly impact the Company's consolidated financial statements.


- 7 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On September 21, 2007, the Company completed its acquisition of Factory Point Bancorp, Inc. and its subsidiary, Factory Point National Bank of Manchester Center, Vermont (collectively “Factory Point”) for $79.4 million, including the assumption of Factory Point stock options. Under the terms of the agreement, the Company issued 1,913,353 shares of the Company’s common stock and paid $16.0 million in cash in exchange for all outstanding Factory Point shares and also assumed all outstanding Factory Point stock options. Concurrent with the merger of Berkshire Hills Bancorp and Factory Point Bancorp, the Bank and Factory Point National Bank merged with the Bank as the surviving entity.  The operating results of Factory Point are included with the Company's results of operations since the date of acquisition. See footnote 2 in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2007 for additional information for this acquisition.

Earnings Per Common Share
 
Earnings per common share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(In thousands, except per share data)
 
2008
   
2007
   
2008
   
2007
 
Net income applicable to common stock
  $ 5,713     $ 4,576     $ 11,762     $ 9,518  
                                 
Average number of common shares outstanding
    10,425       8,831       10,466       8,791  
Less: average number of unvested stock award shares
    (123 )     (99 )     (122 )     (94 )
Average number of basic shares outstanding
    10,302       8,732       10,344       8,697  
Plus: average number of dilutive unvested stock award shares
    6       99       7       94  
Plus: average number of dilutive shares based on stock options
    76       44       69       64  
Average number of diluted shares outstanding
    10,384       8,875       10,420       8,855  
                                 
Basic earnings per share
  $ 0.55     $ 0.52     $ 1.14     $ 1.09  
Diluted earnings per share
  $ 0.55     $ 0.52     $ 1.13     $ 1.07  

Statements of Financial Accounting Standards
 
SFAS No. 141, "Business Combinations (Revised 2007)." SFAS 141R replaces SFAS 141, "Business Combinations," and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities," would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, "Accounting for Contingencies." The allowance for loan losses related to loans acquired will not be included in the Company’s allowance for loan losses, but will be reflected in the fair value of loans acquired. SFAS 141R is expected to have a significant impact on the Company's accounting for business combinations closing on or after January 1, 2009.

- 8 -




BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements (see Note 10 - Fair Value Measurements).

SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115." SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates (see Note 2 – Securities and Note 10 - Fair Value Measurements).

SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51." SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company's financial statements.

SFAS No. 161, "Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133." SFAS 161 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company's financial statements.

SEC Staff Accounting Bulletins

SAB No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings." SAB No. 109 supersedes SAB 105, "Application of Accounting Principles to Loan Commitments," and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The guidance in SAB 109 became effective on January 1, 2008 and did not have a material impact on the Company's financial statements.

 

- 9 -



BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2.           SECURITIES

 
A summary of securities follows:
 
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
 
June 30, 2008
           
Trading - municipal bond
  $ 15,000     $ 14,959  
                 
Securities Available for Sale
               
Debt securities:
               
Municipal bonds and obligations
  $ 72,084     $ 71,553  
Mortgage-backed securities, other
    108,814       109,864  
Other bonds and obligations
    17,640       16,190  
Total debt securities
    198,538       197,607  
Total equity securities
    2,384       2,526  
Total securities available for sale
    200,922       200,133  
                 
Securities Held to Maturity
               
Municipal bonds and obligations
    25,522       25,734  
Mortgage-backed securities
    963       960  
Total securities held to maturity
    26,485       26,694  
Total securities
  $ 242,407     $ 241,786  
 
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
 
December 31, 2007
               
Securities Available for Sale
               
Debt securities:
               
Municipal bonds and obligations
  $ 74,223     $ 75,186  
Mortgage-backed securities
    103,387       104,518  
Other bonds and obligations
    15,601       15,265  
Total debt securities
    193,211       194,969  
Total equity securities
    2,836       2,995  
Total securities available for sale
    196,047       197,964  
                 
Securities Held to Maturity
               
Municipal bonds and obligations
    36,981       37,233  
Mortgage-backed securities
    2,475       2,456  
Total securities held to maturity
    39,456       39,689  
Total securities
  $ 235,503     $ 237,653  
 
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principals, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of SFAS 159 on January 1, 2008 did not have a significant impact on the Company's financial statements.

- 10 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company elected to account for one security at fair value under SFAS No. 159 acquired during the second quarter of 2008. This security is classified as trading on the condolidated balance sheet. The Company has the intent and ability to hold this security to maturity and will report the purchase of this security in the investing section on the consolidated statement of cash flows. The investment security accounted for at fair value has an amortized cost of $15.0 million and a fair value of $14.96 million at June 30, 2008. See note 9 – Derivative Financial Instruments for additional information related to this investment security and related interest rate swap.

The unrealized losses on the other bonds and obligations available for sale increased to $1.5 million at June 30, 2008. This portfolio consists of investment grade corporate trust preferred securities and corporate debt. The unrealized losses on the portfolio are due to an increase in credit spreads and liquidity issues in the marketplace. The Company has concluded these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost and will ultimately recover its cost at maturity (i.e. these investments have contractual maturities that, absent credit default, ensure the Company will ultimately recover its cost).

3.           LOANS

 
Loans consisted of the following:
 
   
June 30, 2008
   
December 31, 2007
 
(Dollars in millions)
 
Balance
   
Balance
 
Residential mortgages:
           
1 - 4 Family
  $ 630     $ 610  
Construction
    35       47  
Total residential mortgages
    665       657  
                 
Commercial mortgages:
               
Construction
    132       125  
Single and multi-family
    76       69  
Other commercial mortgages
    560       510  
Total commercial mortgages
    768       704  
                 
Commercial business loans
    198       204  
Total commercial loans
    966       908  
                 
Consumer loans:
               
Auto and other
    173       211  
Home equity
    174       168  
Total consumer loans
    347       379  
Total loans
  $ 1,978     $ 1,944  
 

- 11 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.           LOAN LOSS ALLOWANCE

 
Activity in the allowance for loan losses was as follows:
 
   
Six Months Ended June 30,
 
(In thousands)
 
2008
   
2007
 
Balance at beginning of period
  $ 22,116     $ 19,370  
Provision for loan losses
    1,930       850  
Loans charged-off
    (1,637 )     (1,305 )
Recoveries
    172       236  
Balance at end of period
  $ 22,581     $ 19,151  
 

5.           DEPOSITS

 
A summary of period end time deposits is as follows:
   
June 30, 2008
   
December 31, 2007
 
(Dollars in millions)
 
Balance
   
Balance
 
Time less than $100,000
  $ 390     $ 409  
Time $100,000 or more
    324       298  
Brokered time
    3       21  
Total time deposits
  $ 717     $ 728  


6.        REGULATORY CAPITAL

 
The Bank’s actual and required capital ratios were as follows:
                 
FDIC Minimum
 
June 30, 2008
 
December 31, 2007
to be Well Capitalized
                       
Total capital to risk weighted assets
 
       10.2
%
   
        10.4
%
   
        10.0
 %
                       
Tier 1 capital to risk weighted assets
 
         9.1
     
          9.3
     
          6.0
 
                       
Tier 1 capital to average assets
 
         7.7
     
          8.0
     
          5.0
 

At each date shown, 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 set forth in the table above.



- 12 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.            STOCK-BASED COMPENSATION PLANS

 
A combined summary of activity in the Company’s stock award and stock option plans for the six months ended June 30, 2008 is presented in the following table:
 
   
Non-vested Stock Awards
Outstanding
   
Stock Options Outstanding
 
         
Weighted-
         
Weighted-
 
         
Average
         
Average
 
   
Number of
   
Grant Date
   
Number of
   
Exercise
 
(Shares in thousands)
 
Shares
   
Fair Value
   
Shares
   
Price
 
Balance, December 31, 2007
    105     $ 31.88       644     $ 21.90  
Granted
    62       22.29       -       -  
Stock options exercised
    -       -       (63 )     17.56  
Stock awards vested
    (42 )     29.92       -       -  
Forfeited
    (1 )     33.07       -       -  
Balance, June 30, 2008
    124     $ 27.46       581     $ 22.64  
 
During the six months ended June 30, 2008 and 2007, proceeds from stock option exercises totaled $1.1 million and $1.5 million, respectively. During the six months ended June 30, 2008, there were 125,000 shares issued in connection with stock option exercises and non-vested stock awards.  All of these shares were issued from available treasury stock.  Stock-based compensation expense totaled $824 thousand and $807 thousand during the six months ended June 30, 2008 and 2007. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.
 

8.            OPERATING SEGMENTS

 
The Company has two reportable operating segments, Banking and Insurance, which are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp.  Banking includes the activities of Berkshire Bank and its subsidiaries, which provide commercial and consumer banking services.  Insurance includes the activities of Berkshire Insurance Group, which provides commercial and consumer insurance services.  The only other consolidated financial activity of the Company is the Parent, which consists of the transactions of Berkshire Hills Bancorp. Management fees for corporate services provided by the Bank to Berkshire Insurance Group and the Parent are eliminated.

The accounting policies of each reportable segment are the same as those of the Company.  The Insurance segment and the Parent reimburse the Bank for administrative services provided to them.  Income tax expense for the individual segments is calculated based on the activity of the segments, and the Parent records the tax expense or benefit necessary to reconcile to the consolidated total.  The Parent does not allocate capital costs.  Average assets include securities available-for-sale based on amortized cost.


- 13 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company’s operating segments was as follows:

                           
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Eliminations
 
Consolidated
 
 Three months ended June 30, 2008
                             
 Net interest income
  $ 19,007     $ -     $ 14,040     $ (14,400 )   $ 18,647  
 Provision for loan losses
    1,105       -       -       -       1,105  
 Net interest income after provision for loan losses
    17,902       -       14,040       (14,400 )     17,542  
 Non-interest income
    4,807       3,703       (8,195 )     8,196       8,511  
 Non-interest expense
    15,676       2,455       501       -       18,632  
 Income before income taxes
    7,033       1,248       5,344       (6,204 )     7,421  
 Income tax expense (benefit)
    1,592       485       (369 )     -       1,708  
 Net income
  $ 5,441     $ 763     $ 5,713     $ (6,204 )   $ 5,713  
                                         
 Average assets (in millions)
  $ 2,489     $ 31     $ 341     $ (339 )   $ 2,522  
                                         
                                   
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Eliminations
 
Consolidated
 
 Three months ended June 30, 2007
                                       
 Net interest income
  $ 15,495     $ -     $ (457 )   $ -     $ 15,038  
 Provision for loan losses
    100       -       -       -       100  
 Net interest income after provision for loan losses
    15,395       -       (457 )     -       14,938  
 Non-interest income
    3,100       3,793       4,975       (4,975 )     6,893  
 Non-interest expense
    12,303       2,581       219       -       15,103  
 Income before income taxes
    6,192       1,212       4,299       (4,975 )     6,728  
 Income tax expense (benefit)
    1,932       497       (277 )     -       2,152  
 Net income
  $ 4,260     $ 715     $ 4,576     $ (4,975 )   $ 4,576  
                                         
 Average assets (in millions)
  $ 2,153     $ 31     $ 279     $ (276 )   $ 2,187  
 
 
- 14 -

 
BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.            OPERATING SEGMENTS  (continued)

 
                           
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Eliminations
 
Consolidated
 
 Six months ended June 30, 2008
                             
 Net interest income
  $ 37,909     $ -     $ 16,532     $ (17,500 )   $ 36,941  
 Provision for loan losses
    1,930       -       -       -       1,930  
 Net interest income after provision for loan losses
    35,979       -       16,532       (17,500 )     35,011  
 Non-interest income
    9,121       8,860       (4,803 )     4,805       17,983  
 Non-interest expense
    31,081       4,949       676       -       36,706  
 Income before income taxes
    14,019       3,911       11,053       (12,695 )     16,288  
 Income tax expense (benefit)
    3,688       1,547       (709 )     -       4,526  
 Net income
  $ 10,331     $ 2,364     $ 11,762     $ (12,695 )   $ 11,762  
                                         
 Average assets (in millions)
  $ 2,477     $ 32     $ 340     $ (338 )   $ 2,511  
                                         
                                   
Total
 
 (In thousands)
 
Banking
   
Insurance
   
Parent
   
Eliminations
 
Consolidated
 
 Six months ended June 30, 2007
                                       
 Net interest income
  $ 31,225     $ -     $ (997 )   $ -     $ 30,228  
 Provision for loan losses
    850       -       -       -       850  
 Net interest income after provision for loan losses
    30,375       -       (997 )     -       29,378  
 Non-interest income
    6,200       8,854       10,355       (10,279 )     15,130  
 Non-interest expense
    25,062       5,081       369       -       30,512  
 Income before income taxes
    11,513       3,773       8,989       (10,279 )     13,996  
 Income tax expense (benefit)
    3,460       1,547       (529 )     -       4,478  
 Net income
  $ 8,053     $ 2,226     $ 9,518     $ (10,279 )   $ 9,518  
                                         
 Average assets (in millions)
  $ 2,137     $ 31     $ 278     $ (275 )   $ 2,171  

9.            DERIVATIVE FINANCIAL INSTRUMENTS

 
The fair value of derivative positions outstanding is included in accrued interest payable and other liabilities in the accompanying consolidated balance sheets. At June 30, 2008, the Company had outstanding interest rate swaps with a total notional amount of $125.0 million that are designated as hedges of FHLB advances and junior subordinated debentures. The swaps effectively convert the debt from floating rate to fixed rate and qualify for cash flow hedge accounting under SFAS No. 133 with the objective of protecting the overall cash flows from the Company’s monthly interest payments for the $125.0 million in floating rate FHLB advances and junior subordinated dentures.

During the second quarter of 2008, the Company initiated a program to provide derivative financial instruments to certain customers, acting as an intermediary in the transaction.  All of these customer derivatives, however, are immediately hedged upon issuance by executing a mirror image derivative with a dealer counterparty such that the Company has no net interest rate risk exposure resulting from the transactions. Exposure with respect to these derivatives is largely limited to nonperformance by either the customer or the other counterparty. The notional amount of customer derivatives and the related counterparty derivatives each totaled $11.0 million at June 30, 2008. The customer derivatives and the related counterparty derivatives are marked to market and any difference is reflected in noninterest income.

- 15 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company executed an economic hedge in the second quarter and entered into a transaction whereby the Company elected to account for a $15.0 million fixed-rate internal revenue bond security at fair value under FAS 159 and entered into a $15.0 million pay-fixed and receive-floating interest rate swap with a counterparty and has accounted for the derivative at fair value under SFAS No. 133. The changes in the fair value of the investment security and interest rate swap are expected to offset each other with any differences reflected in non-interest income. The Company elected the fair value option for this municipal obligation security due to several factors such as the large dollar amount of the obligation in relation to other municipal obligation securities in the Company’s held to maturity portfolio as well as the term of the obligation which was 21.5 years at origination. The intent of the economic hedge was to improve the Company’s asset sensitivity to changing interest rates.

Interest Rate Derivatives. The notional amounts and estimated fair values of interest rate derivative positions outstanding at June 30, 2008 are presented in the following table (amounts in thousands). The Company utilizes independent third party valuation models with observable market data inputs to estimate fair values of interest rate swaps. The Company also obtains dealer quotations for these derivatives for comparative purposes to assess the reasonableness of the model valuations.

A summary of Interest rate derivatives at June 30, 2008, follows:
 
Notional
Amount
   
Estimated
Fair Value
 
  Interest rate swaps on variable-rate borrowings
  $ 125,000     $ 312  
  Customer related interest rate swaps
               
      Receive floating/pay fixed
    11,050       (18 )
      Receive fixed/pay floating
    11,050       27  
  Receive floating/pay fixed interest rate swap related to the IRB Security 
     15,000        (65
                 
The weighted average rate paid and received for interest rate swaps outsandings
         
  as of June 30, 2008 were as follows:
               
   
Weighted Average
 
   
Fixed
Interest Rate
Paid
   
Floating
Interest Rate
Received
 
Cash flow hedge interest rate swaps on variable-rate borrowings
    4.38 %     2.97 %

Interest rate contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Risk Management Committee. The Company's credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counterparties was not material at June 30, 2008. Collateral levels for upstream financial institution counterparties are monitored and adjusted on a regular basis for changes in interest rate swap values.


- 16 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.            FAIR VALUE MEASUREMENT

 
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, "Fair Value Measurements," for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board Staff Position (FSP) No. 157-2, "Effective Date of FASB Statement No. 157," the Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 
·
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 
·
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 
·
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

- 17 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value effective January 1, 2008.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

Trading  Securities at Fair Value. Securities accounted for at fair value are reported utilizing Level 2 inputs obtained from third parties.

Derivatives. Currently, the Company uses swaps to manage its interest rate risk.   The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities.

To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of June 30, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.




- 18 -


BERKSHIRE HILLS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
Inputs
   
Inputs
   
Inputs
   
Fair Value
 
Securities available for sale
  $ -     $ 200,133     $ -     $ 200,133  
Trading securities
    -       14,959       -       14,959  
Net derivative asset
    -       256       -       256  

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2008.

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets and liabilities measured at fair value on a non-recurring basis include those measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009.


- 19 -



ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with Management’s Discussion and Analysis included in the 2007 Annual Report on Form 10-K.  In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted.  Operating results discussed herein are not necessarily indicative of the results for the year ending December 31, 2008 or any future period.   In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. Tax-equivalent adjustments are the result of increasing income from tax-advantaged securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 35% federal income tax rate.

Berkshire Hills Bancorp, Inc. is the holding company for Berkshire Bank. Established in 1846, Berkshire Bank is one of Massachusetts' oldest and largest independent banks and the largest banking institution based in Western Massachusetts. The Bank is headquartered in Pittsfield, Massachusetts with branches serving communities throughout Western Massachusetts, Northeastern New York and Southern Vermont. The Bank is transitioning into a regional financial services company and is positioning itself as the financial institution of choice in its retail and commercial markets, delivering exceptional customer service and a broad array of competitively priced deposit, loan, insurance, wealth management and trust services, and investment products.  Berkshire Hills Bancorp is also the holding company for Berkshire Insurance Group, which sells all lines of insurance (personal, commercial, employee benefits, and life insurance) in ten locations in Massachusetts and in affiliation with the branch offices of Berkshire Bank.

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 Bancorp, Inc. and subsidiaries. This document may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by use of the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “seek,” “strive,” “try,” or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Although we believe that our plans, intentions and expectations, as reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or realized. Our ability to predict results or the actual effects of our plans and strategies are inherently uncertain. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Form 10-Q. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth under Item 1A. - “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2007 and in Form 10-Q, and in other reports filed with the Securities and Exchange Commission. There are a number of factors, many of which are beyond our control, that could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to: general economic conditions, either nationally or locally in some or all of the areas in which we conduct our business; conditions in the securities markets or the banking industry; changes in interest rates and energy prices, which may affect our net income or future

- 20 -


cash flows; changes in deposit flows, and in demand for deposit, loan, and investment products and other financial services in our local markets; changes in real estate values, which could impact the quality of the assets securing our loans; changes in the quality or composition of the loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; the ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames; our timely development of new and competitive products or services in a changing environment, and the acceptance of such products or services by our customers; the outcome of pending or threatened litigation or of other matters before regulatory agencies, whether currently existing or commencing in the future; changes in accounting principles, policies, practices, or guidelines; changes in legislation and regulation; operational issues and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which we are highly dependent; changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; war or terrorist activities; and other economic, competitive, governmental, regulatory, and geopolitical factors affecting the Company’s operations, pricing, and services. Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control. You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this report. We do not assume any obligation to revise forward-looking statements except as may be required by law.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND NEW ACCOUNTING PRONOUNCEMENTS

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in the 2007 Form 10-K. Please see those policies in conjunction with this discussion.   The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements.

Accounting policies related to the allowance for loan losses, income taxes, and goodwill and identifiable intangible assets are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.   For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies in the notes to consolidated financial statements and the sections captioned "Critical Accounting Policies" and "Loan Loss Allowance" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2007 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since year-end 2007. Please refer to the note on Recent Accounting Pronouncements in Note 1 to the financial statements of this report for a detailed discussion of new accounting pronouncements. The Company performs an annual impairment test of goodwill in the fourth quarter of its fiscal year end. As of June 30, 2008, there have been no events requiring the Company to perform an interim impairment test of goodwill.

- 21 -


Selected Financial Data
 
The following summary data is based in part on the consolidated financial statements and accompanying notes, and other information appearing elsewhere in this Form 10-Q.
 
   
At or for the Three Months Ended
   
At or for the Six Months Ended
 
 
June 30,
   
June 30,
 
 
2008
   
2007
   
2008
   
2007
 
Performance Ratios:
                       
Return on average assets
    0.91 %     0.84 %     0.94 %     0.88 %
Return on average equity
    6.89       6.86       7.15       7.27  
Net interest margin
    3.45       3.15       3.43       3.19  
Stockholders' equity/total assets
    12.96       12.28       12.96       12.28  
                                 
Financial Data:  (In millions)
                               
Total assets
  $ 2,547     $ 2,170     $ 2,547     $ 2,170  
Total loans
    1,978       1,730       1,978       1,730  
Other earning assets
    275       227       275       227  
Total intangible assets
    181       121       181       121  
Deposits
    1,811       1,529       1,811       1,529  
Borrowings and debentures
    395       369       395       369  
Stockholders' equity
    330       266       330       266  
                                 
Asset Quality Ratios:
                               
Net charge-offs annualized/average loans
    0.13 %     0.14 %     0.15 %     0.12 %
Loan loss allowance/total loans
    1.14       1.11       1.14       1.11  
Nonperforming assets/total assets
    0.42       0.42       0.42       0.42  
                                 
Per Share Data:
                               
Earnings - diluted
  $ 0.55     $ 0.52     $ 1.13     $ 1.07  
Dividends declared
    0.16       0.14       0.31       0.28  
Book value
    31.78       30.12       31.78       30.12  
Common stock price:
                               
High
    26.94       34.00       26.94       34.82  
Low
    22.52       31.43       20.61       31.43  
Close
    23.65       31.51       23.65       31.51  
                                 
For the Period: (In thousands)
                               
Net interest income
  $ 18,647     $ 15,038     $ 36,941     $ 30,228  
Provision for loan losses
    1,105       100       1,930       850  
Non-interest income
    8,511       6,893       17,983       15,130  
Non-interest expense
    18,632       15,103       36,706       30,512  
Net income
    5,713       4,576       11,762       9,518  
                                 
(1) All performance ratios are annualized and based on average balance sheet amounts where applicable.
 
 

- 22 -


Average Balances and Average Yields/Rate
 
The following table presents average balances and an analysis of average rates and yields on an annualized fully taxable equivalent basis for the periods included.
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2008
         
2007
         
2008
         
2007
       
   
Average
   
Yield /
   
Average
   
Yield /
   
Average
   
Yield /
   
Average
   
Yield /
 
(Dollars in millions)
 
Balance
   
Rate
   
Balance
   
Rate
   
Balance
   
Rate
   
Balance
   
Rate
 
Assets
                                               
Loans
                                               
Residential mortgages
  $ 665       5.66 %   $ 612       5.36 %   $ 662