berkshire_hills10q-85812.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 30, 2007
OR
o
|
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 ý No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ý Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)Yes ¨ No ý
The
Registrant had 8,855,308 shares of common stock, par value $0.01 per share,
outstanding as of August 7, 2007.
BERKSHIRE
HILLS BANCORP, INC.
FORM
10-Q
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Page
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28
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ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED BALANCE
SHEETS
|
|
June
30,
|
|
|
December
31,
|
|
(In
thousands, except share data)
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
$ |
25,913
|
|
|
$ |
30,985
|
|
Securities
available for sale, at fair value
|
|
|
184,122
|
|
|
|
194,206
|
|
Securities
held to maturity, at amortized cost
|
|
|
39,642
|
|
|
|
39,968
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
|
618,442
|
|
|
|
599,273
|
|
Commercial
mortgages
|
|
|
594,974
|
|
|
|
567,074
|
|
Commercial
business loans
|
|
|
172,299
|
|
|
|
189,758
|
|
Consumer
loans
|
|
|
344,527
|
|
|
|
342,882
|
|
Total
loans
|
|
|
1,730,242
|
|
|
|
1,698,987
|
|
Less: Allowance
for loan losses
|
|
|
(19,151 |
) |
|
|
(19,370 |
) |
Net
loans
|
|
|
1,711,091
|
|
|
|
1,679,617
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
31,537
|
|
|
|
29,130
|
|
Goodwill
|
|
|
105,051
|
|
|
|
104,531
|
|
Other
intangible assets
|
|
|
15,474
|
|
|
|
16,810
|
|
Cash
surrender value of life insurance policies
|
|
|
30,836
|
|
|
|
30,338
|
|
Other
assets
|
|
|
25,966
|
|
|
|
24,057
|
|
Total
assets
|
|
$ |
2,169,632
|
|
|
$ |
2,149,642
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
178,673
|
|
|
$ |
178,109
|
|
NOW
deposits
|
|
|
134,978
|
|
|
|
153,087
|
|
Money
market deposits
|
|
|
323,838
|
|
|
|
297,155
|
|
Savings
deposits
|
|
|
195,439
|
|
|
|
202,213
|
|
Total
non-maturity deposits
|
|
|
832,928
|
|
|
|
830,564
|
|
Brokered
time deposits
|
|
|
29,098
|
|
|
|
41,741
|
|
Other
time deposits
|
|
|
666,488
|
|
|
|
649,633
|
|
Total
time deposits
|
|
|
695,586
|
|
|
|
691,374
|
|
Total
deposits
|
|
|
1,528,514
|
|
|
|
1,521,938
|
|
Borrowings
|
|
|
353,083
|
|
|
|
345,005
|
|
Junior
subordinated debentures
|
|
|
15,464
|
|
|
|
15,464
|
|
Other
liabilities
|
|
|
6,219
|
|
|
|
9,074
|
|
Total
liabilities
|
|
|
1,903,280
|
|
|
|
1,891,481
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock ($.01 par value; 1,000,000 shares authorized; none
issued)
|
|
|
-
|
|
|
|
-
|
|
Common
stock ($.01 par value; 26,000,000 shares authorized; 10,600,472
shares
issued)
|
|
|
106
|
|
|
|
106
|
|
Additional
paid-in capital
|
|
|
202,441
|
|
|
|
200,975
|
|
Unearned
compensation
|
|
|
(2,805 |
) |
|
|
(1,896 |
) |
Retained
earnings
|
|
|
112,621
|
|
|
|
105,731
|
|
Accumulated
other comprehensive (loss) income
|
|
|
(1,274 |
) |
|
|
92
|
|
Treasury
stock, at cost (1,758,149 shares at June 30, 2007
|
|
|
|
|
|
|
|
|
and
1,887,068 at December 31, 2006)
|
|
|
(44,737 |
) |
|
|
(46,847 |
) |
Total
stockholders' equity
|
|
|
266,352
|
|
|
|
258,161
|
|
Total
liabilities and stockholders' equity
|
|
$ |
2,169,632
|
|
|
$ |
2,149,642
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(In
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
29,152
|
|
|
$ |
24,017
|
|
|
$ |
57,674
|
|
|
$ |
46,373
|
|
Securities
and other
|
|
|
2,842
|
|
|
|
4,195
|
|
|
|
5,790
|
|
|
|
8,909
|
|
Total
interest and dividend income
|
|
|
31,994
|
|
|
|
28,212
|
|
|
|
63,464
|
|
|
|
55,282
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,318
|
|
|
|
9,843
|
|
|
|
24,267
|
|
|
|
18,599
|
|
Borrowings
and junior subordinated debenture
|
|
|
4,638
|
|
|
|
3,911
|
|
|
|
8,969
|
|
|
|
7,617
|
|
Total
interest expense
|
|
|
16,956
|
|
|
|
13,754
|
|
|
|
33,236
|
|
|
|
26,216
|
|
Net
interest income
|
|
|
15,038
|
|
|
|
14,458
|
|
|
|
30,228
|
|
|
|
29,066
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
commissions and fees
|
|
|
3,786
|
|
|
|
581
|
|
|
|
8,777
|
|
|
|
1,489
|
|
Deposit
service fees
|
|
|
1,788
|
|
|
|
1,383
|
|
|
|
3,302
|
|
|
|
2,669
|
|
Wealth
management fees
|
|
|
968
|
|
|
|
772
|
|
|
|
1,887
|
|
|
|
1,528
|
|
Loan
service fees
|
|
|
48
|
|
|
|
125
|
|
|
|
357
|
|
|
|
351
|
|
Total
fee income
|
|
|
6,590
|
|
|
|
2,861
|
|
|
|
14,323
|
|
|
|
6,037
|
|
Other
|
|
|
303
|
|
|
|
520
|
|
|
|
726
|
|
|
|
938
|
|
Gain
on sale of securities, net
|
|
|
-
|
|
|
|
529
|
|
|
|
81
|
|
|
|
1,026
|
|
Total
non-interest income
|
|
|
6,893
|
|
|
|
3,910
|
|
|
|
15,130
|
|
|
|
8,001
|
|
Total
net revenue
|
|
|
21,931
|
|
|
|
18,368
|
|
|
|
45,358
|
|
|
|
37,067
|
|
Provision
for loan losses
|
|
|
100
|
|
|
|
600
|
|
|
|
850
|
|
|
|
890
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
8,230
|
|
|
|
5,758
|
|
|
|
16,741
|
|
|
|
11,411
|
|
Occupancy
and equipment
|
|
|
2,385
|
|
|
|
1,822
|
|
|
|
4,871
|
|
|
|
3,753
|
|
Marketing,
data processing, and professional services
|
|
|
2,116
|
|
|
|
1,595
|
|
|
|
4,063
|
|
|
|
3,225
|
|
Non-recurring
expense
|
|
|
-
|
|
|
|
385
|
|
|
|
153
|
|
|
|
385
|
|
Amortization
of intangible assets
|
|
|
662
|
|
|
|
478
|
|
|
|
1,324
|
|
|
|
956
|
|
Other
|
|
|
1,710
|
|
|
|
1,600
|
|
|
|
3,360
|
|
|
|
3,133
|
|
Total
non-interest expense
|
|
|
15,103
|
|
|
|
11,638
|
|
|
|
30,512
|
|
|
|
22,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
6,728
|
|
|
|
6,130
|
|
|
|
13,996
|
|
|
|
13,314
|
|
Income
tax expense
|
|
|
2,152
|
|
|
|
1,888
|
|
|
|
4,478
|
|
|
|
4,254
|
|
Net
income from continuing operations
|
|
|
4,576
|
|
|
|
4,242
|
|
|
|
9,518
|
|
|
|
9,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
|
-
|
|
|
|
359
|
|
|
|
-
|
|
|
|
359
|
|
Income
tax expense
|
|
|
-
|
|
|
|
138
|
|
|
|
-
|
|
|
|
138
|
|
Net
income from discontinued operations
|
|
|
-
|
|
|
|
221
|
|
|
|
-
|
|
|
|
221
|
|
Net
income
|
|
$ |
4,576
|
|
|
$ |
4,463
|
|
|
$ |
9,518
|
|
|
$ |
9,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.52
|
|
|
$ |
0.50
|
|
|
$ |
1.09
|
|
|
$ |
1.07
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
0.02
|
|
|
|
-
|
|
|
|
0.02
|
|
Total
|
|
$ |
0.52
|
|
|
$ |
0.52
|
|
|
$ |
1.09
|
|
|
$ |
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.52
|
|
|
$ |
0.48
|
|
|
$ |
1.07
|
|
|
$ |
1.03
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
0.03
|
|
|
|
-
|
|
|
|
0.03
|
|
Total
|
|
$ |
0.52
|
|
|
$ |
0.51
|
|
|
$ |
1.07
|
|
|
$ |
1.06
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,732
|
|
|
|
8,513
|
|
|
|
8,697
|
|
|
|
8,492
|
|
Diluted
|
|
|
8,875
|
|
|
|
8,760
|
|
|
|
8,855
|
|
|
|
8,758
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
Six
Months Ended June 30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at beginning of period
|
|
$ |
258,161
|
|
|
$ |
246,066
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
9,518
|
|
|
|
9,281
|
|
Change
in net unrealized loss on securities available-for-sale,
|
|
|
|
|
|
|
|
|
net
of reclassification adjustments and tax effects
|
|
|
(1,437 |
) |
|
|
(4,152 |
) |
Net
gain (loss) on derivative instruments
|
|
|
71
|
|
|
|
(36 |
) |
Total
comprehensive income
|
|
|
8,152
|
|
|
|
5,093
|
|
Cash
dividends declared ($0.28 per share in 2007 and $0.42 per share
in
2006)
|
|
|
(2,456 |
) |
|
|
(3,613 |
) |
Treasury
stock purchased
|
|
|
(385 |
) |
|
|
(2,279 |
) |
Exercise
of stock options
|
|
|
1,457
|
|
|
|
1,655
|
|
Reissuance
of treasury stock-other
|
|
|
1,641
|
|
|
|
1,608
|
|
Stock-based
compensation
|
|
|
76
|
|
|
|
120
|
|
Tax
benefit from stock compensation
|
|
|
615
|
|
|
|
574
|
|
Change
in unearned compensation
|
|
|
(909 |
) |
|
|
(974 |
) |
Total
stockholders' equity at end of period
|
|
$ |
266,352
|
|
|
$ |
248,250
|
|
See
accompanying notes to consolidated financial statements.
BERKSHIRE
HILLS BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Six
Months Ended June 30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,518
|
|
|
$ |
9,281
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
850
|
|
|
|
890
|
|
Depreciation,
amortization, and deferrals, net
|
|
|
2,833
|
|
|
|
2,830
|
|
Stock-based
compensation
|
|
|
807
|
|
|
|
756
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
|
(615 |
) |
|
|
(574 |
) |
Increase
in cash surrender value of bank-owned life insurance
policies
|
|
|
(498 |
) |
|
|
(540 |
) |
Net
gains on sales of securities and loans, net
|
|
|
(81 |
) |
|
|
(1,026 |
) |
Net
change in all other assets
|
|
|
(3,731 |
) |
|
|
(2,550 |
) |
Net
change in other liabilities
|
|
|
(2,855 |
) |
|
|
1,530
|
|
Net
cash provided by continuing operating activities
|
|
|
6,228
|
|
|
|
10,597
|
|
Net
cash provided by discontinued operating activities
|
|
|
-
|
|
|
|
359
|
|
Net
cash provided by operating activities
|
|
|
6,228
|
|
|
|
10,956
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Sales
of securities available for sale
|
|
|
2,046
|
|
|
|
17,243
|
|
Proceeds
from maturities, calls, and prepayments - securities available
for
sale
|
|
|
15,982
|
|
|
|
28,961
|
|
Purchases
of securities available for sale
|
|
|
(10,169 |
) |
|
|
(14,209 |
) |
Proceeds
from maturities, calls, and prepayments - securities held to
maturity
|
|
|
5,736
|
|
|
|
7,700
|
|
Purchases
of securities held to maturity
|
|
|
(5,411 |
) |
|
|
(20,318 |
) |
Increase
in loans, net
|
|
|
(31,004 |
) |
|
|
(135,803 |
) |
Capital
expenditures
|
|
|
(4,006 |
) |
|
|
(3,617 |
) |
Proceeds
from sale of fixed assets
|
|
|
-
|
|
|
|
370
|
|
Total
net cash used by investing activities
|
|
|
(26,826 |
) |
|
|
(119,673 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
6,576
|
|
|
|
92,285
|
|
Proceeds
from Federal Home Loan Bank ("FHLB") advances
|
|
|
79,325
|
|
|
|
177,014
|
|
Repayments
of Federal Home Loan Bank advances
|
|
|
(66,247 |
) |
|
|
(161,766 |
) |
Repayment
of bank note
|
|
|
(5,000 |
) |
|
|
-
|
|
Treasury
stock purchased
|
|
|
(385 |
) |
|
|
(2,279 |
) |
Proceeds
from reissuance of treasury stock
|
|
|
3,098
|
|
|
|
3,263
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
|
615
|
|
|
|
574
|
|
Cash
dividends paid
|
|
|
(2,456 |
) |
|
|
(2,406 |
) |
Net
cash provided by financing activities
|
|
|
15,526
|
|
|
|
106,685
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(5,072 |
) |
|
|
(2,032 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
30,985
|
|
|
|
31,087
|
|
Cash
and cash equivalents at end of period
|
|
$ |
25,913
|
|
|
$ |
29,055
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
$ |
24,472
|
|
|
$ |
18,550
|
|
Interest
paid on borrowed funds
|
|
|
8,917
|
|
|
|
7,765
|
|
Income
taxes paid, net
|
|
|
5,006
|
|
|
|
1,239
|
|
See
accompanying notes to consolidated financial statements.
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, 2007 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, 2006.
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 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.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income applicable to common stock
|
|
$ |
4,576
|
|
|
$ |
4,463
|
|
|
$ |
9,518
|
|
|
$ |
9,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
8,831
|
|
|
|
8,613
|
|
|
|
8,791
|
|
|
|
8,596
|
|
Less:
average number of unvested stock award shares
|
|
|
(99 |
) |
|
|
(100 |
) |
|
|
(94 |
) |
|
|
(104 |
) |
Average
number of basic shares outstanding
|
|
|
8,732
|
|
|
|
8,513
|
|
|
|
8,697
|
|
|
|
8,492
|
|
Plus:
average number of unvested stock award shares
|
|
|
99
|
|
|
|
100
|
|
|
|
94
|
|
|
|
104
|
|
Plus:
average number of dilutive shares based on stock options
|
|
|
44
|
|
|
|
147
|
|
|
|
64
|
|
|
|
162
|
|
Average
number of diluted shares outstanding
|
|
|
8,875
|
|
|
|
8,760
|
|
|
|
8,855
|
|
|
|
8,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.52
|
|
|
$ |
0.52
|
|
|
$ |
1.09
|
|
|
$ |
1.09
|
|
Diluted
earnings per share
|
|
$ |
0.52
|
|
|
$ |
0.51
|
|
|
$ |
1.07
|
|
|
$ |
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
Statements
of Financial Accounting Standards (“SFAS”)
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.
SFAS 157 is effective for the Company on January 1, 2008 and is not expected
to
have a significant impact on the Company’s financial statements.
SFAS
No. 159, “The Fair Value Option for FinancialAssets and
Financial Liabilities.” SFAS 159 permits all entities to choose to elect to
measure eligible financial instruments at fair value. A business entity shall
report unrealized gains and losses on items for which the fair value option
has
been elected in earnings. Eligible items include any recognized financial assets
and liabilities with certain exceptions including but not limited to, deposit
liabilities, investments in subsidiaries, and certain deferred compensation
arrangements. The decision about whether to elect the fair value option is
generally applied on an instrument -by-instrument basis, is generally
irrevocable, and is applied only to an entire instrument and not to only
specified risks, specific cash flows, or portions of that instrument. This
Statement is effective as of the beginning of each reporting entity’s first
fiscal year that begins after November 15, 2007. Management is currently
analyzing the impact of making this election for any of the Company’s eligible
financial assets or liabilities.
Financial
Accounting Standards Board (“FASB”) Interpretation and Task Force
Issue
FASB
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109.” The Company adopted
the provisions of FIN 48 effective January 1, 2007. FIN 48 prescribes
a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will
be
sustained upon examination by the appropriate taxing authority that would have
full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount
of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. FIN 48 also provides
guidance on the accounting for and disclosure of unrecognized tax benefits,
interest and penalties. Adoption of FIN 48 did not have a significant impact
on
the Company's financial statements. The Company files income tax
returns in the U.S. federal jurisdiction. The Company is no longer
subject to U.S. federal income tax examinations by tax authorities for years
before 2004. The Company accounts for interest and
penalties related to uncertain tax positions as part of its provision for
federal and state income taxes.
EITF
No. 06-10, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Collateral Assignment Split-Dollar Life Insurance
Arrangements.” In March 2007, the EITF reached a final
consensus on Issue No. 06-10 (“EITF 06-10”), “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Collateral Assignment
Split-Dollar Life Insurance Arrangements.” EITF 06-10 requires employers to
recognize a liability for the post-retirement benefit related to collateral
assignment split-dollar life insurance arrangements in accordance with SFAS
No. 106 or APB Opinion No. 12. EITF 06-10 also requires employers to
recognize and measure an asset based on the nature and substance of the
collateral assignment split-dollar life insurance arrangement. The
provisions of EITF 06-10
are
effective for the Company on January 1, 2008, with earlier application
permitted, and are to be applied as a change in accounting principle either
through a cumulative-effect adjustment to retained earnings or other components
of equity or net assets in the statement of financial position as of the
beginning of the year of adoption; or as a change in accounting principle
through retrospective application to all prior periods. The Company is in the
process of evaluating the potential impacts of adopting EITF 06-10 on its
financial statements.
2. PENDING
MERGER
On May
14, 2007, the Company entered into a
definitive merger agreement with Factory Point
Bancorp, Inc., the parent company of The Factory Point National Bank
of Manchester Center, Vermont, pursuant to which Factory Point Bancorp
will merge with and into Berkshire Hills Bancorp, with the Company
being the surviving entity. Under the terms of the agreement, the
stockholders of Factory Point Bancorp will be entitled to elect to receive
either $19.50 in cash or 0.5844 shares of the Company's common stock in exchange
for each Factory Point Bancorp share held by them, subject to procedures to
ensure that 80% of the total shares of Factory Point common stock will be
exchanged for Berkshire Hills common stock and that the remainder will be
exchanged for cash. The completion of the merger is
subject to approval by
the stockholders of both companies and customary
regulatory approvals. The merger is expected to close in
the third quarter or early in the fourth quarter of 2007. This merger
agreement had no significant effect on the Company's financial statements for
the periods presented.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES
A
summary
of securities follows:
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
June
30, 2007
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
62,331
|
|
|
$ |
61,740
|
|
Mortgage-backed
securities, other
|
|
|
87,905
|
|
|
|
86,392
|
|
Other
bonds and obligations
|
|
|
13,124
|
|
|
|
13,039
|
|
Total
debt securities
|
|
|
163,360
|
|
|
|
161,171
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
19,720
|
|
|
|
19,720
|
|
Other
equity securities
|
|
|
2,549
|
|
|
|
3,231
|
|
Total
equity securities
|
|
|
22,269
|
|
|
|
22,951
|
|
Total
securities available for sale
|
|
|
185,629
|
|
|
|
184,122
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
35,940
|
|
|
|
35,402
|
|
Mortgage-backed
securities
|
|
|
3,702
|
|
|
|
3,626
|
|
Total
securities held to maturity
|
|
|
39,642
|
|
|
|
39,028
|
|
Total
securities
|
|
$ |
225,271
|
|
|
$ |
223,150
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
$ |
63,788
|
|
|
$ |
64,503
|
|
Mortgage-backed
securities
|
|
|
85,102
|
|
|
|
84,334
|
|
Other
bonds and obligations
|
|
|
20,392
|
|
|
|
20,439
|
|
Total
debt securities
|
|
|
169,282
|
|
|
|
169,276
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
21,766
|
|
|
|
21,766
|
|
Other
equity securities
|
|
|
2,921
|
|
|
|
3,164
|
|
Total
equity securities
|
|
|
24,687
|
|
|
|
24,930
|
|
Total
securities available for sale
|
|
|
193,969
|
|
|
|
194,206
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal
bonds and obligations
|
|
|
35,572
|
|
|
|
35,286
|
|
Mortgage-backed
securities
|
|
|
4,396
|
|
|
|
4,400
|
|
Total
securities held to maturity
|
|
|
39,968
|
|
|
|
39,686
|
|
Total
securities
|
|
$ |
233,937
|
|
|
$ |
233,892
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS
Loans
consisted of the
following:
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
(Dollars
in millions)
|
|
Balance
|
|
|
Balance
|
|
Residential
mortgages:
|
|
|
|
|
|
|
1
-
4 Family
|
|
$ |
578
|
|
|
$ |
567
|
|
Construction
|
|
|
40
|
|
|
|
32
|
|
Total
residential mortgages
|
|
|
618
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
129
|
|
|
|
130
|
|
Single
and multi-family
|
|
|
62
|
|
|
|
65
|
|
Other
commercial mortgages
|
|
|
404
|
|
|
|
372
|
|
Total
commercial mortgages
|
|
|
595
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
172
|
|
|
|
190
|
|
Total
commercial loans
|
|
|
767
|
|
|
|
757
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
Auto
|
|
|
204
|
|
|
|
196
|
|
Home
equity and other
|
|
|
141
|
|
|
|
147
|
|
Total
consumer loans
|
|
|
345
|
|
|
|
343
|
|
Total
loans
|
|
$ |
1,730
|
|
|
$ |
1,699
|
|
5. LOAN
LOSS ALLOWANCE
Activity
in the allowance for loan
losses was as follows:
|
|
Six
Months Ended June 30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of period
|
|
$ |
19,370
|
|
|
$ |
13,001
|
|
Provision
for loan losses
|
|
|
850
|
|
|
|
890
|
|
Loans
charged-off
|
|
|
(1,305 |
) |
|
|
(695 |
) |
Recoveries
|
|
|
236
|
|
|
|
341
|
|
Balance
at end of period
|
|
$ |
19,151
|
|
|
$ |
13,537
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEPOSITS
A
summary
of period end time deposits is as follows:
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
(Dollars
in millions)
|
|
Balance
|
|
|
Balance
|
|
Time
less than $100,000
|
|
$ |
376
|
|
|
$ |
370
|
|
Time
$100,000 or more
|
|
|
291
|
|
|
|
280
|
|
Brokered
time
|
|
|
29
|
|
|
|
42
|
|
Total
time deposits
|
|
$ |
696
|
|
|
$ |
692
|
|
7. REGULATORY
CAPITAL
The
Bank’s actual and required capital ratios were as follows:
|
|
|
|
|
|
|
|
FDIC
Minimum
|
|
|
June
30, 2007
|
|
December
31, 2006
|
|
to
be Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
|
|
10.5 |
% |
|
|
10.3 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets
|
|
|
9.4
|
|
|
|
9.1
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
8.0
|
|
|
|
7.7
|
|
|
|
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.
8. 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, 2007 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, 2006
|
|
|
93
|
|
|
$ |
30.98
|
|
|
|
586
|
|
|
$ |
20.62
|
|
Granted
|
|
|
49
|
|
|
|
33.72
|
|
|
|
20
|
|
|
|
33.46
|
|
Stock
options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(92 |
) |
|
|
15.90
|
|
Stock
awards vested
|
|
|
(41 |
) |
|
|
30.80
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(2 |
) |
|
|
34.15
|
|
|
|
(1 |
) |
|
|
22.30
|
|
Balance,
June 30, 2007
|
|
|
99
|
|
|
$ |
32.35
|
|
|
|
513
|
|
|
$ |
21.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2007 and 2006, proceeds from stock option
exercises totaled $1.5 million and $1.7 million, respectively. During the six
months ended June 30, 2007, there were 141,000 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 $807 thousand and $756 thousand during the six
months ended June 30, 2007 and 2006. Stock-based compensation expense is
recognized ratably over the requisite service period for all
awards.
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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. There are no
income statement eliminations. The total consolidated average assets
are net of eliminations of $269 million and $225 million for the three months
ended June 30, 2007 and 2006, respectively and $272 million and $266 million
for
the six months ended June 30, 2007 and 2006, respectively.
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.
A
summary
of the Company’s operating segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
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
|
|
|
|
-
|
|
|
|
6,893
|
|
Non-interest
expense
|
|
|
12,303
|
|
|
|
2,581
|
|
|
|
219
|
|
|
|
15,103
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
6,192
|
|
|
|
1,212
|
|
|
|
(676 |
) |
|
|
6,728
|
|
Income
tax expense (benefit)
|
|
|
1,892
|
|
|
|
497
|
|
|
|
(237 |
) |
|
|
2,152
|
|
Net
income (loss)
|
|
$ |
4,300
|
|
|
$ |
715
|
|
|
$ |
(439 |
) |
|
$ |
4,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,151
|
|
|
$ |
32
|
|
|
$ |
273
|
|
|
$ |
2,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Consolidated
|
|
Three
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
14,717
|
|
|
$ |
-
|
|
|
$ |
(259 |
) |
|
$ |
14,458
|
|
Provision
for loan losses
|
|
|
600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600
|
|
Net
interest income after provision for loan losses
|
|
|
14,117
|
|
|
|
-
|
|
|
|
(259 |
) |
|
|
13,858
|
|
Non-interest
income
|
|
|
3,326
|
|
|
|
584
|
|
|
|
-
|
|
|
|
3,910
|
|
Non-interest
expense
|
|
|
10,913
|
|
|
|
510
|
|
|
|
215
|
|
|
|
11,638
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
6,530
|
|
|
|
74
|
|
|
|
(474 |
) |
|
|
6,130
|
|
Income
tax expense (benefit)
|
|
|
2,024
|
|
|
|
30
|
|
|
|
(166 |
) |
|
|
1,888
|
|
Net
income (loss) from continuing operations
|
|
|
4,506
|
|
|
|
44
|
|
|
|
(308 |
) |
|
|
4,242
|
|
Net
income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
221
|
|
|
|
221
|
|
Net
income (loss)
|
|
$ |
4,506
|
|
|
$ |
44
|
|
|
$ |
(87 |
) |
|
$ |
4,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,043
|
|
|
$ |
5
|
|
|
$ |
266
|
|
|
$ |
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BERKSHIRE
HILLS BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9. OPERATING
SEGMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
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
|
|
|
|
76
|
|
|
|
15,130
|
|
Non-interest
expense
|
|
|
25,062
|
|
|
|
5,081
|
|
|
|
369
|
|
|
|
30,512
|
|
Income
(loss) before income taxes
|
|
|
11,513
|
|
|
|
3,773
|
|
|
|
(1,290 |
) |
|
|
13,996
|
|
Income
tax expense (benefit)
|
|
|
3,383
|
|
|
|
1,547
|
|
|
|
(452 |
) |
|
|
4,478
|
|
Net
income (loss)
|
|
$ |
8,130
|
|
|
$ |
2,226
|
|
|
$ |
(838 |
) |
|
$ |
9,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,137
|
|
|
$ |
31
|
|
|
$ |
275
|
|
|
$ |
2,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Parent
|
|
|
Consolidated
|
|
Six
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
29,567
|
|
|
$ |
-
|
|
|
$ |
(501 |
) |
|
$ |
29,066
|
|
Provision
for loan losses
|
|
|
890
|
|
|
|
-
|
|
|
|
-
|
|
|
|
890
|
|
Net
interest income after provision for loan losses
|
|
|
28,677
|
|
|
|
-
|
|
|
|
(501 |
) |
|
|
28,176
|
|
Non-interest
income
|
|
|
6,508
|
|
|
|
1,493
|
|
|
|
-
|
|
|
|
8,001
|
|
Non-interest
expense
|
|
|
21,516
|
|
|
|
973
|
|
|
|
374
|
|
|
|
22,863
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
13,669
|
|
|
|
520
|
|
|
|
(875 |
) |
|
|
13,314
|
|
Income
tax expense (benefit)
|
|
|
4,347
|
|
|
|
213
|
|
|
|
(306 |
) |
|
|
4,254
|
|
Net
income (loss) from continuing operations
|
|
|
9,322
|
|
|
|
307
|
|
|
|
(569 |
) |
|
|
9,060
|
|
Net
income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
221
|
|
|
|
221
|
|
Net
income (loss)
|
|
$ |
9,322
|
|
|
$ |
307
|
|
|
$ |
(348 |
) |
|
$ |
9,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
assets (in millions)
|
|
$ |
2,061
|
|
|
$ |
5
|
|
|
$ |
266
|
|
|
$ |
2,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2006 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, 2007 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 - AMERICA'S MOST
EXCITING BANK(SM). 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 and
Northeastern New York. The Company is a diversified regional financial services
company, delivering exceptional customer service and a broad array of
competitively priced deposit, loan, insurance, wealth management and trust
services and investment products. The Company has entered into a definitive
merger agreement to acquire Factory Point Bancorp, Inc., which is located in
Southern Vermont.
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,
2006 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
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 2006 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 2006 Form 10-K. There have been no significant
changes in the Company’s application of critical accounting policies since
year-end 2006, except for the implementation of FIN 48, which did not have
a
significant impact on the Company’s financial statements.
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
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,
|
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
0.84 |
% |
|
|
0.85 |
% |
|
|
0.88 |
% |
|
|
0.90 |
% |
Return
on average equity
|
|
|
6.86
|
|
|
|
7.00
|
|
|
|
7.27
|
|
|
|
7.36
|
|
Net
interest margin
|
|
|
3.15
|
|
|
|
3.16
|
|
|
|
3.19
|
|
|
|
3.21
|
|
Stockholders'
equity/total assets
|
|
|
12.28
|
|
|
|
11.56
|
|
|
|
12.28
|
|
|
|
11.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Growth (annualized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
- |
% |
|
|
28 |
% |
|
|
4 |
% |
|
|
19 |
% |
Total
deposits
|
|
|
(2 |
) |
|
|
4
|
|
|
|
1
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Data: (In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,170
|
|
|
$ |
2,148
|
|
|
$ |
2,170
|
|
|
$ |
2,148
|
|
Total
loans
|
|
|
1,730
|
|
|
|
1,551
|
|
|
|
1,730
|
|
|
|
1,551
|
|
Other
earning assets
|
|
|
227
|
|
|
|
397
|
|
|
|
227
|
|
|
|
397
|
|
Total
intangible assets
|
|
|
121
|
|
|
|
99
|
|
|
|
121
|
|
|
|
99
|
|
Deposits
|
|
|
1,529
|
|
|
|
1,464
|
|
|
|
1,529
|
|
|
|
1,464
|
|
Borrowings
and debentures
|
|
|
369
|
|
|
|
428
|
|
|
|
369
|
|
|
|
428
|
|
Stockholders'
equity
|
|
|
266
|
|
|
|
248
|
|
|
|
266
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs annualized/average loans
|
|
|
0.14 |
% |
|
|
0.04 |
% |
|
|
0.12 |
% |
|
|
0.05 |
% |
Loan
loss allowance/total loans
|
|
|
1.11
|
|
|
|
0.87
|
|
|
|
1.11
|
|
|
|
0.87
|
|
Nonperforming
assets/total assets
|
|
|
0.42
|
|
|
|
0.04
|
|
|
|
0.42
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
- diluted
|
|
$ |
0.52
|
|
|
$ |
0.51
|
|
|
$ |
1.07
|
|
|
$ |
1.06
|
|
Dividends
declared
|
|
|
0.14
|
|
|
|
0.28
|
|
|
|
0.28
|
|
|
|
0.42
|
|
Book
value
|
|
|
30.12
|
|
|
|
28.79
|
|
|
|
30.12
|
|
|
|
28.79
|
|
Common
stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
34.00
|
|
|
|
36.39
|
|
|
|
34.82
|
|
|
|
36.39
|
|
Low
|
|
|
31.43
|
|
|
|
32.77
|
|
|
|
31.43
|
|
|
|
32.37
|
|
Close
|
|
|
31.51
|
|
|
|
35.48
|
|
|
|
31.51
|
|
|
|
35.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Period: (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
15,038
|
|
|
$ |
14,458
|
|
|
$ |
30,228
|
|
|
$ |
29,066
|
|
Provision
for loan losses
|
|
|
100
|
|
|
|
600
|
|
|
|
850
|
|
|
|
890
|
|
Non-interest
income
|
|
|
6,893
|
|
|
|
3,910
|
|
|
|
15,130
|
|
|
|
8,001
|
|
Non-interest
expense
|
|
|
15,103
|
|
|
|
11,638
|
|
|
|
30,512
|
|
|
|
22,863
|
|
Net
income
|
|
|
4,576
|
|
|
|
4,463
|
|
|
|
9,518
|
|
|
|
9,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) All
performance ratios are annualized and based on average balance
sheet
amounts where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
|
Average
|
|
|
Yield
/
|
|
(Dollars
in millions)
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
612
|
|
|
|
5.36 |
% |
|
$ |
561
|
|
|
|
5.19 |
% |
|
$ |
608
|
|
|
|
5.33 |
% |
|
$ |
558
|
|
|
|
5.14 |
% |
Commercial
mortgages
|
|
|
593
|
|
|
|
7.55
|
|
|
|
450
|
|
|
|
7.32
|
|
|
|
586
|
|
|
|
7.51
|
|
|
|
440
|
|
|
|
7.28
|
|
Commercial
business loans
|
|
|
192
|
|
|
|
7.81
|
|
|
|
162
|
|
|
|
8.07
|
|
|
|
190
|
|
|
|
7.95
|
|
|
|
157
|
|
|
|
7.78
|
|
Consumer
loans
|
|
|
344
|
|
|
|
6.98
|
|
|
|
313
|
|
|
|
6.74
|
|
|
|
342
|
|
|
|
6.98
|
|
|
|
305
|
|
|
|
6.68
|
|
Total
loans
|
|
|
1,741
|
|
|
|
6.71
|
|
|
|
1,486
|
|
|
|
6.46
|
|
|
|
1,726
|
|
|
|
6.74
|
|
|
|
1,460
|
|
|
|
6.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and
other
|
|
|
234
|
|
|
|
5.91
|
|
|
|
409
|
|
|
|
4.59
|
|
|
|
235
|
|
|
|
5.99
|
|
|
|
415
|
|
|
|
4.75
|
|
Total
earning assets
|
|
|
1,975
|
|
|
|
6.63
|
|
|
|
1,895
|
|
|
|
6.07
|
|
|
|
1,961
|
|
|
|
6.63
|
|
|
|
1,875
|
|
|
|
6.03
|
|
Other
assets
|
|
|
212
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
Total
assets
|
|
$ |
2,187
|
|
|
|
|
|
|
$ |
2,089
|
|
|
|
|
|
|
$ |
2,171
|
|
|
|
|
|
|
$ |
2,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
deposits
|
|
$ |
140
|
|
|
|
1.50 |
% |
|
$ |
140
|
|
|
|
1.02 |
% |
|
$ |
141
|
|
|
|
1.52 |
% |
|
$ |
141
|
|
|
|
1.01 |
% |
Money
market deposits
|
|
|
310
|
|
|
|
3.73
|
|
|
|
284
|
|
|
|
3.36
|
|
|
|
302
|
|
|
|
3.68
|
|
|
|
277
|
|
|
|
3.24
|
|
Savings
deposits
|
|
|
196
|
|
|
|
1.08
|
|
|
|
208
|
|
|
|
0.78
|
|
|
|
198
|
|
|
|
1.07
|
|
|
|
213
|
|
|
|
0.77
|
|
Time
deposits
|
|
|
704
|
|
|
|
4.78
|
|
|
|
644
|
|
|
|
4.17
|
|
|
|
703
|
|
|
|
4.78
|
|
|
|
627
|
|
|
|
4.02
|
|
Total
interest-bearing deposits
|
|
|
1,350
|
|
|
|
3.66
|
|
|
|
1,276
|
|
|
|
3.09
|
|
|
|
1,344
|
|
|
|
3.64
|
|
|
|
1,258
|
|
|
|
2.96
|
|
Borrowings
and debentures
|
|
|
386
|
|
|
|
4.82
|
|
|
|
380
|
|
|
|
4.13
|
|
|
|
381
|
|
|
|
4.75
|
|
|
|
380
|
|
|
|
4.04
|
|
Total
interest-bearing liabilities
|
|
|
1,736
|
|
|
|
3.92
|
|
|
|
1,656
|
|
|
|
3.33
|
|
|
|
1,725
|
|
|
|
3.89
|
|
|
|
1,638
|
|
|
|
3.23
|
|
Non-interest-bearing
demand deposits
|
|
|
178
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
Other
liabilities
|
|
|
7
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Total
liabilities
|
|
|
1,921
|
|
|
|
|
|
|
|
1,834
|
|
|
|
|
|
|
|
1,907
|
|
|
|
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
266
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
264
|
|
|
|
|
|
|
|
252
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
2,187
|
|
|
|
|
|
|
$ |
2,089
|
|
|
|
|
|
|
$ |
2,171
|
|
|
|
|
|
|
$ |
2,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
2.71 |
% |
|
|
|
|
|
|
2.74
|
% |
|
|
|
|
|
|
2.74 |
% |
|
|
|
|
|
|
2.80 |
% |
Net
interest margin
|
|
|
|
|
|
|
3.15 |
% |
|
|
|
|
|
|
3.16
|
% |
|
|
|
|
|
|
3.19 |
% |
|
|
|
|
|
|
3.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits (in millions)
|
|
$ |
1,528
|
|
|
|
|
|
|
$ |
1,448
|
|
|
|
|
|
|
$ |
1,519
|
|
|
|
|
|
|
$ |
1,428
|
|
|
|
|
|
Fully
taxable equivalent income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
(in thousands)
|
|
|
540
|
|
|
|
|
|
|
|
506
|
|
|
|
|
|
|
|
1,093
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
___________________________________________
(1) The
average balances of loans include nonaccrual loans, loans held
for sale,
and deferred fees and costs.
|
(2) The
average balance of investment securities is based on amortized
cost.
|
|
SUMMARY
Berkshire’s
second quarter 2007 net income was $4.6 million ($0.52 per diluted share),
compared to $4.5 million ($0.51 per diluted share) in 2006. Second
quarter net income from continuing operations increased by 8% to $4.6 million
in
2007 from $4.2 million in 2006. For the first half of the year,
Berkshire reported 2007 net income of $9.5 million ($1.07 per diluted share)
compared to $9.3 million ($1.06 per diluted share) in 2006. Six month
income from continuing operations increased by 5% to $9.5 million in 2007 from
$9.1 million in 2006.
Recent
highlights include the following (income comparisons are for the second quarter
compared to prior year, balance sheet comparisons are to prior
quarter):
|
·
|
Announced
agreement to acquire Factory Point Bancorp in Manchester Center,
Vermont
|
|
·
|
Announced
planned 7% increase in quarterly cash dividend to 15 cents per
share
|
|
·
|
552%
increase in insurance commissions and
fees
|
|
·
|
28%
increase in deposit and wealth management
fees
|
|
·
|
18%
annualized growth in average demand
deposits
|
|
·
|
7%
annualized growth in average loans, with 10% growth in average commercial
loans
|
|
·
|
The
new credit commitment pipeline rose to a record quarter-end level
of $127
million
|
|
·
|
7%
annualized growth in average deposits excluding $13 million in planned
runoff of brokered time deposits; 5% annualized growth in total average
deposits
|
|
·
|
Nonperforming
assets were 0.42% of assets at
quarter-end
|
|
·
|
Annualized
net charge-offs were 0.14% of average loans for the
quarter
|
|
·
|
Opened
the tenth New York region branch, in the town of
Glenville
|
Berkshire
produced a 19% increase in second quarter revenues, which contributed to an
8%
increase in earnings from continuing operations and higher earnings per share,
which totaled $0.52 for the quarter. Non-interest income rose to 31%
of revenue, primarily due to the benefit from recent insurance agency
acquisitions. Berkshire’s diversified fee income growth has more than
offset the ongoing impact of tighter interest margins, which had been
anticipated. Growth in average loans and deposits continued in the
second quarter, benefiting from Berkshire Bank’s new branding as “America’s Most
Exciting BankSM”. The
Bank also opened four new branches this year in its New York
region. Reflecting the momentum of Berkshire’s growth, Berkshire
announced a 7% increase in the quarterly cash dividend to
stockholders.
During
the second quarter, Berkshire announced that it had entered into a definitive
merger agreement with Factory Point Bancorp of Manchester Center, Vermont,
which
merger is subject to the receipt of stockholder and regulatory
approvals. The addition of these seven branches in the attractive
Southern Vermont market will bring Berkshire’s total bank branch count to 38,
and its total office count to 48 including its 10 insurance
offices. This is an increase from 11 offices just a little more than
two years ago and results from a balanced approach to acquisitions along with
organic and de novo growth. While the costs of its de novo New York
branch region constrain the Company’s current earnings growth, the Company views
this as a valuable investment in its franchise in New York’s growing Capital
region and Tech Valley.
The
Company’s asset quality remained well controlled in 2007. Berkshire does not
engage in subprime lending programs and does not purchase investment securities
backed by subprime mortgages. Berkshire manages its risk
profile to maintain a high quality loan portfolio in order to support steady
long run earnings growth. Berkshire’s continuing long run performance
was recognized by the Boston Globe in May when, for the seventh year in a row,
Berkshire was recognized as one of the 100 top performing Massachusetts-based
public companies.
COMPARISON
OF FINANCIAL CONDITION AT JUNE 30, 2007 AND DECEMBER 31,
2006
Balance
Sheet Summary. Total assets grew
at a 2% annualized rate to $2.17 billion from $2.15 billion during the first
half of 2007. Asset growth resulted primarily from loans which grew
at a 4% annualized rate to $1.73 billion from $1.70 billion. Before
the outplacement of $23 million in commercial loan balances just prior to
mid-year, the annualized growth rate of total loans was 6%. Total
deposits grew at a 1% annualized rate to $1.53 billion from $1.52
billion. Adjusting for $13 million in planned run-off of brokered
time deposits, deposits grew at a 3% annualized rate. Stockholders’
equity grew at a 6% annualized rate to $266 million from $258
million.
Assets. The
$20 million increase in total assets was due to $31 million in net loan growth,
offset by a $10 million decrease in investment securities due primarily to
run-off of the investment in trust preferred securities.
Loan
growth included $28 million in commercial mortgages (10% annualized) and $19
million in residential mortgages (6% annualized). While commercial
construction loans declined slightly, this net change included new construction
loans offset in part by existing construction loans converting to closed-end
mortgages at the completion of construction. Commercial business
loans decreased by $18 million. Near the end of the second quarter,
the Company reduced its commercial business loans by $23 million due to the
outplacement of certain balances which had grown to require fully monitored
asset based lending which is outside of the Company’s current risk management
parameters. The change in loan composition also contributed to the
lower loan loss provision during the quarter. Indirect auto loans
increased by $8 million (8% annualized) in the first half of 2007; originations
of these loans have been slowed due to tighter lending margins. Home
equity and other loans were down 8% for the first half of the year,
reflecting lower market demand for these loans following recent prime rate
increases.
Berkshire’s
commitments for new credit originations more than doubled during the quarter,
climbing to a record quarter-end total of $127 million as of June 30,
2007. This included an increase in residential mortgage commitments
from $12 million to $42 million, and an increase in commercial credit
commitments from $42 million to $85 million. A portion of the
increased residential mortgage commitments may be sold. Commercial
credit commitments include lines and letters of credit. Berkshire had
$219 million in outstanding commercial construction commitments at mid-year,
including $31 million related to subdivision and single family residential
construction, $39 million related to condominium construction, and $45 million
related to hotel construction. The Company had $129 million
outstanding against these commitments at mid-year.
Asset
quality remained well controlled at mid-year. Berkshire does not
offer subprime lending programs. The average FICO scores on its
consumer auto loans have increased in each of the last four quarters, reaching
an average of 730 in the most recent quarter. The annualized rate of
net loan charge-offs was 0.12% during the first half of the
year. Nonperforming assets measured 0.42% of total assets at
mid-year, compared to 0.35% at the prior year-end. Nonperforming
assets totaled $9.1 million at mid-year, and included one $6.0 million
commercial relationship which has an improving outlook based on recent
developments. All other nonperforming assets were 0.14% of total
assets. Accruing delinquent loans were 0.36% of total loans at
mid-year, compared to 0.26% six months ago and 0.40% twelve months
ago. The loan loss allowance measured 1.11% of total loans at
mid-year, compared to 1.14% at the start of the year. This change
included the impact of the previously noted outplacement of commercial business
loans, which had a higher allowance component. The allowance included
a $1.0 million impaired loan reserve on the above mentioned nonperforming
commercial relationship. The Company had no foreclosed real estate at
mid-year. All other impaired loans totaled $17 million at mid-year
2007, compared to $8 million at the prior year-end. The reserve on
all other impaired loans was $0.4 million at mid-year, which was little changed
from $0.3 million at the prior-year end. The increase in impaired
loans was generally due to several well collateralized performing loans where
no
loss is expected and balances were conservatively downgraded based on recent
financial information.
Liabilities. The
$7 million increase in total deposits in the first half of 2007 included a
$20
million increase offset by a $13 million decrease due to planned run-off of
brokered time deposits. The increase in deposits included a $27
million increase in money market deposits and an $11 million increase in time
deposits over $100 thousand. Berkshire has emphasized its promotion
of money market deposits, which offer more relationship cross-sale opportunities
than time deposits. During the second quarter, Berkshire also
adjusted its time deposit pricing due to some competitive conditions which
it
viewed as uneconomic. As a result, time deposits under $100 thousand
decreased during the second quarter, but remained up by $6 million for the
first
half of the year. Demand deposits increased slightly in the first
half of the year, and NOW accounts decreased. Average demand deposits
increased at an 18% annualized rate during the second
quarter. Berkshire emphasizes promotion of transaction deposit
accounts which have a lower cost and which provide the most opportunities for
other relationship cross-sales. The total number of demand deposit
accounts increased at a 3% annualized rate during the first half of
2007. Total borrowings increased by $8 million during the first half
of the year to provide additional funds to support loan
growth. Growth in borrowings included $10 million in new borrowings
with a duration over five years to reduce the gap between assets and liabilities
contractually repricing over five years.
Equity. During
the first half of 2007, total stockholders’ equity increased by $8 million (6%
annualized) to $266 million due primarily to the benefit of retained
earnings. Total book value per share increased at a 3% annualized
rate to $30.12, while the ratio of total equity to assets increased to 12.3%
from 12.0%. During the first half of the year, the Company
repurchased 11,405 shares of common stock for an aggregate amount of $385
thousand. The Company expects to resume purchases of its common stock
after the shareholder meeting to vote on the Factory Point acquisition, subject
to market conditions and other factors. Berkshire has 273,595 in
shares available to repurchase based on its current approved stock repurchase
plan. After the end of the second quarter, Berkshire announced that
it is increasing its quarterly cash dividend on common stock by 7% to 15 cents
from 14 cents, beginning with the third quarter dividend. During the
first quarter, the Bank received permission from its regulators to pay dividends
to the Company in an aggregate amount of $10 million in 2007 subject to various
conditions, including that the Bank maintain its “well capitalized”
classification after factoring in the payments. There were no
dividends declared to the Company from the Bank during the first half of the
year.
COMPARISON
OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND
2006
Net
Income. Net income increased for both the three and six
months ended June 30, 2007 compared to the same periods in 2006. Net
income from continuing operations increased by $0.3 million (8%) and $0.5
million (5%) for these periods, respectively. Net income increased in
the insurance segment, which reported a $0.7 million second quarter income
increase and a $1.9 million increase in first half income in 2007 due to the
insurance agency acquisitions in the fourth quarter of 2006. This
more than offset the impact on bank earnings of the higher costs related to
the
expansion of the de novo branch program. These costs increased by
$0.5 million and $1.1 million for the second quarter and first half of 2007
compared to the same periods in 2006. Earnings in 2007 also benefited
from growth in the Bank’s net interest income and non-interest income, along
with the impact of a lower loan loss provision in the second
quarter. The first half return on assets was 0.88% and return on
equity was 7.3% in 2007, compared to 0.90% and 7.4% in 2006. Net
interest income in the second quarter of 2006 did not include a $0.4 million
FHLB dividend, which was received in the third quarter of 2006.
Total
Net Revenue. Net revenue increased by $3.6 million
(19%) and $8.3 million (22%) in the second quarter and first half of 2007
compared to the same periods in 2006. These increases were primarily
due to higher insurance revenue of $3.2 million and $7.3
million. Results in 2006 included net securities gains of $0.5
million in the second quarter and $1.0 million in the first half of the
year. Excluding securities gains, first half net revenue per diluted
share increased by 24% to $5.11 in 2007 from $4.12 in 2006.
Net
Interest Income. Net interest income increased by $0.6
million (4%) and $1.2 million (4%) in the second quarter and first half of
2007,
compared to the same periods in 2006. This increase included the $0.4
million impact of the delayed FHLB dividend for the second quarter of 2006
which
was not paid until the third quarter of 2006. The increase also
reflected the benefit of growth in average earning assets which was due to
loan
growth. Average earning assets increased by $80 million (4%) and $86
million (5%) in the second quarter and first half of 2007, compared to
2006.
The
benefit of earning asset growth was partially offset by the impact of a lower
net interest margin. The year-to-year second quarter net interest
margin declined to 3.15% from 3.16%, and the decrease would have been to 3.15%
from 3.24% if the FHLB dividend had not been delayed. This tightening
reflected the Company’s modest liability sensitivity during a time of rising
interest rates, along with shifts in consumer preferences for higher cost money
market and time deposit accounts. Additionally, the Company has been
adversely impacted by the inversion of the yield curve, which has reduced the
spread between loan yields and deposit costs.
Net
interest income had risen from $14.6 million in the first quarter of 2006 to
$15.6 million in the fourth quarter, and then declined to $15.2 million in
the
first quarter of 2007 and $15.0 million in second quarter. Both asset
yields and liability costs had increased in each quarter since the first quarter
of 2006 due to the lagged impact of interest rate increases which were primarily
related to seventeen consecutive hikes in the federal funds interest rate by
the
Federal Reserve Bank over a two year period which ended at mid-year in
2006. Asset yields remained unchanged in the most recent quarter,
compared to the trailing quarter. For these periods, liability costs
continued to increase due primarily to scheduled repricings of
borrowings.
Berkshire
is promoting lower cost transaction accounts to help offset margin pressures
and
to provide increased cross-selling opportunities. The Company is also
benefiting from its commercial lending activities, which are the fastest growing
and highest yielding component of the loan portfolio. The benefit
from the higher loan commitment pipeline and from deposit pricing changes is
expected to contribute to net interest income in the second half of
2007. The net interest margin in 2007 included a negative impact of
about 0.05% due to the cost of borrowings to finance the insurance agency
acquisitions in the fourth quarter of 2006. The margin benefited from
the securities restructuring at the beginning of that same quarter, which
initially generated a benefit of 0.20 – 0.25% towards the net interest
margin.
Non-Interest
Income. Total second quarter fee income increased by
$3.7 million (130%) in 2007 compared to 2006, and first half fee income
increased by $8.3 million (137%). These increases were primarily due
to the insurance agency acquisitions, which produced fee income growth of $3.2
million and $7.3 million in the above periods,
respectively. Insurance fee income is seasonal, with approximately 60
– 65% of total insurance fees received in the first half of the
year. This seasonality includes contingent fee income, which
represents 25-30% of total annual insurance fee income. For the first
half of the year, deposit fee income increased by 24% due primarily to
additional convenience services which were introduced in the third quarter
of
2006. Wealth management fees grew by 24%, reflecting growth in total
assets under management which increased at a 20% annualized rate to $544 million
in the first half of 2007. Net securities gains decreased in 2007 due
to the liquidation of most marketable equity securities in 2006.
Provision
for Loan Losses. The provision for loan
losses is a charge to earnings in an amount sufficient to maintain the allowance
for loan losses at a level deemed adequate by the Company. The level of the
allowance is a critical accounting estimate, which is subject to uncertainty.
The level of the allowance was included in the discussion of financial
condition. The second quarter provision for loan losses was $100 thousand
in 2007 compared to $600 thousand in 2006. For the first six months,
the provision was $850 thousand in 2007 compared to $890 thousand in
2006. The provision for the most recent quarter included the impact
of the outplacement of certain commercial loan balances and the change in loan
composition as previously discussed. For the first half of the year,
the Company recorded higher net charge-offs and lower loan growth in 2007
compared to 2006.
Non-Interest
Expense. Non-interest expense increased by $3.5 million
(30%) in the second quarter and by $7.6 million (33%) in the first half of
2007
compared to 2006. For the first half of the year, additional expense
from the acquired insurance agencies totaled $4.1 million, and expenses related
to the de novo branch program increased by $1.1 million due to new
branches. The remaining $2.4 million increase (10%) in total
non-interest expense was in all other non-interest expense related to higher
overhead for the Company’s transition into a regional bank, together with
initiatives to develop sales, products, and new branding. Marketing
costs increased by $0.7 million, primarily due to the costs of the new branding
campaign, along with additional branch openings. The total
non-interest expense related to the de novo branch program was $1.8 million
in
the first half of 2007 ($0.12 per diluted share after-tax), compared to $0.7
million in the first half of 2006 ($0.05 per diluted share
after-tax). Berkshire views these costs as an investment in franchise
expansion in the attractive Albany and Tech Valley New York
area. Estimated FDIC premium expense of $0.4 million in the first
half of 2007 was offset by a transitional credit which was estimated to be
approximately $1.1 million as of year-end 2006. First quarter 2007
non-interest expense included nonrecurring charges totaling $153 thousand on
the
sale of swaps related to brokered time deposits.
Income
from Discontinued Operations and Income Tax Expense. Results for
the second quarter of 2006 included $359 thousand of pretax income from
discontinued operations from the sale of the Company’s data processing
subsidiary in June 2004. This amount represented the balance of
certain contingent sale proceeds held in escrow relating to liabilities which
were assumed by the purchaser. The effective tax rate in the second
quarter and first half of 2007 was 32%, compared to 31% and 32% in the same
periods of 2006.
Results
of Segment Operations. The Company acquired five
affiliated insurance agencies in the fourth quarter of 2006. The
Company had not previously established operating segments for the purposes
of
financial statement disclosure. Due to the change in the composition
of the Company’s business as a result of the insurance agency acquisitions, the
Company has designated two operating segments for financial statement
disclosure: banking and insurance. Additional information about the
Company’s accounting for segment operations is contained in Note 9 to the
financial statements.
One
of
the Company's strategies is to emphasize fee income growth to diversify
revenues, enhance customer benefit, and reduce reliance on net interest income
where margins are under pressure. The Company's acquisition of
insurance agencies in the fourth quarter of 2006 was a significant step in
implementing this strategy. The first half net profit of the
insurance segment increased by $1.9 million due to the impact of the acquired
insurance agencies. Additionally, the acquired agencies have a
significant seasonality to revenues and earnings due to the impact of annual
contingency revenues which are received in the first half of the
year. The increase in insurance segment income more than offset the
$1.2 million decrease in earnings from the banking segment. This
change included after-tax impacts of $0.7 million related to higher costs of
the
expanded de novo program, $0.6 million due to lower net securities
gains/losses, and $0.4 million in higher marketing costs related
primarily to branding related costs.
Comprehensive
Income. Accumulated other comprehensive income is a component of
total stockholders’ equity on the balance sheet. Comprehensive income
includes changes in accumulated other comprehensive income, which consists
principally of changes (after-tax) in the unrealized market gains and losses
of
investment securities available for sale. The change in accumulated
other comprehensive income was a loss of $1.4 million in the first half of
2007,
compared to a loss of $4.2 million in the first half of 2006 primarily due
to
changes in bond prices as a result of interest rate changes. The
Company recorded first half total comprehensive income of $8.2 million in 2007,
compared to $5.1 million in 2006.
Liquidity
and Cash Flows. The Company’s primary
sources of funds were deposit growth and borrowings in the first half of
2007. The primary use of funds was loan growth. Net
deposit and loan growth are expected to continue to be significant sources
and
uses of funds. Borrowings from the Federal Home Loan Bank are a significant
source of liquidity for daily operations and for borrowings targeted for
specific asset/liability purposes. Berkshire Hills Bancorp’s primary routine
sources of funds are expected to be dividends from Berkshire Bank and Berkshire
Insurance Group. The holding company also receives cash from the
exercise of stock options and uses cash for dividends, stock repurchases and
debt service. Additional discussion about the Company’s liquidity and
cash flows is contained in the Company’s 2006 Form 10-K in Item
7. The Company has entered into a definitive agreement to purchase
Factory Point Bancorp for consideration comprised 80% of stock and 20% of
cash. The cash component is expected to total approximately $16
million. Additionally, direct costs of the merger are expected to
total about $7 million. The cash for these expenditures is expected
to be provided primarily from borrowings, with dividends from subsidiaries
also
providing a potential liquidity source.
Capital
Resources. Please see the “Equity” section
of the Comparison of Financial Condition for a discussion of stockholders’
equity. At June 30, 2007, Berkshire Bank continued to be classified
as “well capitalized.” Additional information about regulatory
capital is contained in the notes to the consolidated financial statements
and
in the 2006 Form 10-K. As noted above, the Company expects to issue
stock in exchange for 80% of the shares of Factory Point Bancorp according
to
the terms of the pending merger agreement.
Off-Balance
Sheet Arrangements and Contractual Obligations. In the
normal course of operations, the Company engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in the Company’s financial instruments. These transactions
involve, to varying degrees, elements of credit, interest rate and liquidity
risk. Such transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments and lines of credit.
A further presentation of the Company’s off-balance sheet arrangements is
presented in the Company’s 2006 Form 10-K. For the six months ended June 30,
2007, the Company did not engage in any off-balance sheet transactions
reasonably likely to have a material effect on the Company’s financial
condition, results of operations or cash flows. Information relating
to payments due under contractual obligations is presented in the 2006 Form
10-K. Except for the definitive merger agreement with Factory Point
Bancorp, there were no material changes in the Company’s payments due under
contractual obligations during the first six months of 2007. The
impact of the Factory Point acquisition is discussed further in the Company’s
SEC filings related to this transaction.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There
has
not been any material change in the market risk disclosure from that contained
in the Company’s 2006 10-K for the fiscal year ended December 31,
2006.
ITEM
4. CONTROLS
AND PROCEDURES
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including its Chief Executive Officer and its Chief Financial Officer, of the
design and operation of the Company’s disclosure controls and procedures. Based
on this evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective for gathering, analyzing, and disclosing the information the Company
is required to disclose in the reports it files under the Securities Exchange
Act of 1934, within the time periods specified in the SEC’s rules and forms. As
of August 1, 2007, Kevin P. Riley joined Berkshire Hills Bancorp as Executive
Vice President, Chief Financial Officer, and Treasurer. Prior to this
date, the Controller also carried the duties of Interim Chief Financial Officer
while the Company was acting to fill a vacancy in the position of Chief
Financial Officer. This change was not a response to an identified
significant deficiency or material weakness. There was no other
change in the Company’s internal control over financial reporting that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
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.
During
the second quarter of 2007, the Company entered into a definitive merger
agreement with Factory Point Bancorp which includes the issuance of additional
shares of the Company’s common stock. Risk factors related to this
transaction are described in the Company’s SEC filing on Form S-4/A dated July
17, 2007. There have been no other material changes to the risk
factors previously disclosed in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2006. In addition to the other information
set forth in this report, you should carefully consider the factors discussed
in
Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2006, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report
on Form 10-K are not the only risks that we face. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
|
No
Company unregistered securities were sold by the Company during the
quarter ended June 30, 2007.
|
(c)
|
The
following table provides certain information with regard to shares
repurchased by the Company in the second quarter of
2007.
|
|
|
|
|
|
|
|
|
Total
number of shares
|
|
|
Maximum
number of
|
|
|
|
Total
number
|
|
|
Average
|
|
|
purchased
as part of
|
|
|
shares
that may yet
|
|
|
|
of
shares
|
|
|
price
paid
|
|
|
publicly
announced
|
|
|
be
purchased under
|
|
Period
|
|
purchased
|
|
|
per
share
|
|
|
plans
or programs
|
|
|
the
plans or programs
|
|
April
1-30, 2007
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
|
273,784
|
|
May
1-31, 2007
|
|
|
189
|
|
|
|
33.65
|
|
|
|
189
|
|
|
|
273,595
|
|
June
1-30, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
273,595
|
|
Total
|
|
|
189
|
|
|
$ |
33.65
|
|
|
|
189
|
|
|
|
273,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
February 23, 2006, the Company authorized a new plan to purchase up to 300,000
shares from time to time, subject to market conditions. This
repurchase plan will continue until it is completed or terminated by the Board
of Directors. There were no other stock purchase plans in effect at
June 30, 2007, and the Company has no plans that it has elected to terminate
prior to expiration or under which it does not intend to make further
purchases. As of June 30, 2007, there have been 26,405 shares
purchased pursuant to the current plan. The shares purchased in the
second quarter represent outstanding shares delivered to pay for the taxes
upon
the vesting of stock awards.
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
3,
2007.
|
|
|
|
|
|
|
|
|
|
|
1.
|
The
following individuals were elected as directors, each for a three-year
term by the following vote:
|
|
|
|
|
|
FOR
|
|
WITHHELD
|
|
|
|
John
B. Davies
|
|
7,946,729
|
|
127,155
|
|
|
|
Rodney
C. Dimock
|
|
7,945,637
|
|
128,247
|
|
|
|
Edward
G. McCormick
|
7,896,434
|
|
177,450
|
|
|
|
David
E. Phelps
|
|
7,915,416
|
|
158,468
|
|
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|
|
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2.
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The
appointment of Wolf and Company, P.C. as independent auditors of
Berkshire
Hills Bancorp, Inc. for
the fiscal year ending December 31, 2007 was ratified by the stockholders
by the following vote:
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|
|
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FOR
|
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AGAINST
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ABSTENTIONS
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8,025,437
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45,426
|
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3,021
|
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ITEM
5. OTHER
INFORMATION
None.
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2.1
|
Agreement
and Plan of Merger, dated May 14, 2007 by and between Berkshire Hills
Bancorp, Inc. and Factory Point Bancorp, Inc.
(1)
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3.1
|
Certificate
of Incorporation of Berkshire Hills Bancorp, Inc.(2)
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3.2
|
Bylaws
of Berkshire Hills Bancorp, Inc.(3)
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4.1
|
Draft
Stock Certificate of Berkshire Hills Bancorp, Inc.(2)
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Rule
13a-14(a) Certification of Chief Executive
Officer
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Rule
13a-14(a) Certification of Chief Financial
Officer
|
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Section
1350 Certification of Chief Executive
Officer
|
|
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Section
1350 Certification of Chief Financial
Officer
|
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___________________________________________
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(1)
|
Incorporated
herein by reference from Annex A of the Form S-4, Registration Statement
and amendments thereto, initially filed on June 26, 2007, Registration
No.
333-144062.
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|
(2)
|
Incorporated
herein by reference from the Exhibits to Form S-1, Registration Statement
and amendments thereto, initially filed on March 10, 2000, Registration
No. 333-32146.
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(3)
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Incorporated
herein by reference from the Exhibits to the Form 10-K as filed on
March
16, 2006.
|
Pursuant
to the requirements of the Securities 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.
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Dated:
August 8, 2007
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By:
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/s/ Michael
P. Daly
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Michael
P. Daly
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President,
Chief Executive Officer
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and
Director
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Dated:
August 8, 2007
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By:
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/s/ Kevin
P. Riley
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Kevin
P. Riley
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Executive
Vice President, Chief Financial Officer
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and
Treasurer
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28