Edgar Filing: BERKSHIRE HILLS BANCORP INC

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

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

INDEX

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2007 and 2006	5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

	Selected Financial Data	17

	Average Balances and Average Yields/Rate	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Submission of Matters to a Vote of Security Holders	27

Item 5.	Other Information	27

Item 6.	Exhibits	27

Signatures		28

Index

PART I

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.

Index

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.

Index

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.

Index

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.

Index

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.

Index

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.

Index

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.

Index

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

Index

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

Index

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.

Index

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

Index

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

Index

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.

Index

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.

Index

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,
	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