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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2017
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: 001-15781
391028689_newlogoa03.jpg  
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)
 
Registrant’s telephone number, including area code: (413) 236-3149
 
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filers,” “accelerated filers,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer     ý        Accelerated filer     o     
Non-accelerated filer    o     (Do not check if a smaller reporting company)    
Smaller reporting company    o
Emerging growth company    o


Table of Contents

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No ý
 
The Registrant had 45,267,321 shares of common stock, par value $0.01 per share, outstanding as of November 7, 2017.
 


Table of Contents

BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
 
INDEX 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3

Table of Contents

PART I
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
 
 
September 30,
2017

December 31,
2016
(In thousands, except share data)
 

Assets
 
 

 
 

Cash and due from banks
 
$
62,827

 
$
71,494

Short-term investments
 
29,219

 
41,581

Total cash and cash equivalents
 
92,046

 
113,075

Trading security, at fair value
 
12,603

 
13,229

Securities available for sale, at fair value
 
1,341,013

 
1,209,537

Securities held to maturity (fair values of $402,799 and $337,680)
 
395,065

 
334,368

Federal Home Loan Bank stock and other restricted securities
 
75,117

 
71,112

Total securities
 
1,823,798

 
1,628,246

Loans held for sale, at fair value
 
143,745

 
120,673

Commercial real estate
 
2,671,237

 
2,616,438

Commercial and industrial loans
 
1,254,947

 
1,062,038

Residential mortgages
 
1,983,126

 
1,893,131

Consumer loans
 
1,038,096

 
978,180

Total loans
 
6,947,406

 
6,549,787

Less: Allowance for loan losses
 
(49,004
)
 
(43,998
)
Net loans
 
6,898,402

 
6,505,789

Premises and equipment, net
 
94,729

 
93,215

Other real estate owned
 
288

 
151

Goodwill
 
403,106

 
403,106

Other intangible assets
 
17,136

 
19,445

Cash surrender value of bank-owned life insurance policies
 
161,290

 
139,257

Deferred tax assets, net
 
39,467

 
41,128

Other assets
 
92,696

 
98,457

Total assets
 
$
9,766,703

 
$
9,162,542

 
 
 
 
 
Liabilities
 
 

 
 

Demand deposits
 
$
1,221,043

 
$
1,278,875

NOW deposits
 
573,607

 
570,583

Money market deposits
 
1,751,190

 
1,781,605

Savings deposits
 
670,683

 
657,486

Time deposits
 
2,573,623

 
2,333,543

Total deposits
 
6,790,146

 
6,622,092

Short-term debt
 
1,061,300

 
1,082,044

Long-term Federal Home Loan Bank advances
 
338,054

 
142,792

Subordinated borrowings
 
89,295

 
89,161

Total borrowings
 
1,488,649

 
1,313,997

Other liabilities
 
203,381

 
133,155

Total liabilities
 
$
8,482,176

 
$
8,069,244

(continued)
 
 
 
 
Shareholders’ equity
 
 

 
 

Common stock ($.01 par value; 50,000,000 shares authorized and 41,369,819 shares issued and 40,423,777 shares outstanding in 2017; 36,732,129 shares issued and 35,672,817 shares outstanding in 2016)
 
412

 
366

Additional paid-in capital
 
1,053,509

 
898,989

Unearned compensation
 
(7,770
)
 
(6,374
)
Retained earnings
 
251,835

 
217,494

Accumulated other comprehensive income
 
11,187

 
9,766

Treasury stock, at cost (946,042 shares in 2017 and 1,059,312 shares in 2016)
 
(24,646
)
 
(26,943
)
Total shareholders’ equity
 
1,284,527

 
1,093,298

Total liabilities and shareholders’ equity
 
$
9,766,703

 
$
9,162,542

The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands, except per share data)
 
2017
 
2016
 
2017
 
2016
Interest and dividend income
 
 

 
 

 
 

 
 

Loans
 
$
76,024

 
$
61,571

 
$
216,950

 
$
179,716

Securities and other
 
13,036

 
8,940

 
37,485

 
28,289

Total interest and dividend income
 
89,060

 
70,511

 
254,435

 
208,005

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
10,984

 
7,790

 
30,053

 
22,327

Borrowings
 
6,078

 
4,750

 
15,953

 
12,569

Total interest expense
 
17,062

 
12,540

 
46,006

 
34,896

Net interest income
 
71,998

 
57,971

 
208,429

 
173,109

Non-interest income
 
 

 
 

 
 

 
 

Mortgage banking originations
 
13,374

 
1,862

 
42,333

 
4,018

Loan related income
 
6,081

 
5,102

 
15,535

 
11,046

Deposit related fees
 
6,445

 
6,278

 
19,294

 
18,678

Insurance commissions and fees
 
2,581

 
2,601

 
8,305

 
8,154

Wealth management fees
 
2,315

 
2,269

 
7,127

 
7,006

Total fee income
 
30,796

 
18,112

 
92,594

 
48,902

Other, net
 
(2,255
)
 
188

 
(2,438
)
 
(440
)
(Loss) Gain on sale of securities, net
 
(1
)
 
78

 
12,568

 
101

Gain on sale of business operations, net
 
296

 
563

 
296

 
563

Loss on termination of hedges
 

 

 
(6,629
)
 

Total non-interest income
 
28,836

 
18,941

 
96,391

 
49,126

Total net revenue
 
100,834

 
76,912

 
304,820

 
222,235

Provision for loan losses
 
4,900

 
4,734

 
14,884

 
13,262

Non-interest expense
 
 

 
 

 
 

 
 

Compensation and benefits
 
37,643

 
26,119

 
110,759

 
76,497

Occupancy and equipment
 
8,267

 
6,650

 
25,971

 
19,900

Technology and communications
 
6,644

 
4,902

 
19,614

 
14,573

Marketing and promotion
 
2,128

 
671

 
7,304

 
2,081

Professional services
 
2,247

 
1,744

 
6,888

 
4,533

FDIC premiums and assessments
 
1,651

 
1,208

 
4,537

 
3,644

Other real estate owned and foreclosures
 
(23
)
 
46

 
35

 
702

Amortization of intangible assets
 
739

 
749

 
2,310

 
2,355

Acquisition, restructuring, and other expenses
 
1,420

 
2,170

 
16,005

 
3,828

Other
 
5,104

 
4,585

 
16,246

 
14,099

Total non-interest expense
 
65,820

 
48,844

 
209,669

 
142,212

 
 
 
 
 
 
 
 
 
Income before income taxes
 
30,114

 
23,334

 
80,267

 
66,761

Income tax expense
 
7,211

 
6,953

 
22,210

 
18,422

Net income
 
$
22,903

 
$
16,381

 
$
58,057

 
$
48,339

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.57

 
$
0.53

 
$
1.55

 
$
1.58

Diluted
 
$
0.57

 
$
0.53

 
$
1.54

 
$
1.57

Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
39,984

 
30,621

 
37,547

 
30,584

Diluted
 
40,145

 
30,811

 
37,708

 
30,757

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
22,903

 
$
16,381

 
$
58,057

 
$
48,339

Other comprehensive income, before tax:
 
 

 
 

 
 

 
 

Changes in unrealized gain on securities available-for-sale
 
1,461

 
(5,654
)
 
(4,044
)
 
21,639

Changes in unrealized gains and losses on derivative hedges
 

 
2,730

 
6,573

 
(2,660
)
Income taxes related to other comprehensive income:
 
 

 
 

 
 
 
 

Changes in unrealized gain on securities available-for-sale
 
(605
)
 
2,218

 
1,481

 
(8,330
)
Changes in unrealized gains and losses on derivative hedges

 

 
(1,096
)
 
(2,589
)
 
1,067

Total other comprehensive income/(loss)
 
856

 
(1,802
)
 
1,421

 
11,716

Total comprehensive income
 
$
23,759

 
$
14,579

 
$
59,478

 
$
60,055

The accompanying notes are an integral part of these consolidated financial statements.


6

Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Accumulated
other
 
 
 
 
 
 
Common stock
 
paid-in
 
Unearned
 
Retained
 
comprehensive
 
Treasury
 
 
(In thousands)
 
Shares
 
Amount
 
capital
 
compensation
 
earnings
 
income
 
stock
 
Total
Balance at December 31, 2015
 
30,974

 
$
322

 
$
742,619

 
$
(6,997
)
 
$
183,885

 
$
(3,305
)
 
$
(29,335
)
 
$
887,189

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 

 

 

 

 
48,339

 

 

 
48,339

Other comprehensive income
 

 

 

 

 

 
11,716

 

 
11,716

Total comprehensive income
 

 

 

 

 
48,339

 
11,716

 

 
60,055

Acquisition of 44 Business Capital
 
45

 

 

 

 

 

 
1,217

 
1,217

Cash dividends declared ($0.60 per share)
 

 

 

 

 
(18,675
)
 

 

 
(18,675
)
Treasury stock adjustment (1)
 

 

 
4,632

 

 

 

 
(4,632
)
 

Forfeited shares
 
(63
)
 

 
106

 
1,592

 

 

 
(1,698
)
 

Exercise of stock options
 
9

 

 

 

 
(96
)
 

 
238

 
142

Restricted stock grants
 
185

 

 
504

 
(5,052
)
 

 

 
4,548

 

Stock-based compensation
 

 

 

 
3,466

 

 

 

 
3,466

Net tax benefit related to stock-based compensation
 

 

 
(1
)
 

 

 

 

 
(1
)
Other, net
 
(28
)
 

 
(16
)
 

 

 

 
(784
)
 
(800
)
Balance at September 30, 2016
 
31,122

 
$
322

 
$
747,844

 
$
(6,991
)
 
$
213,453

 
$
8,411

 
$
(30,446
)
 
$
932,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
35,673

 
$
366

 
$
898,989

 
$
(6,374
)
 
$
217,494

 
$
9,766

 
$
(26,943
)
 
$
1,093,298

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 

 

 

 

 
58,057

 

 

 
58,057

Other comprehensive income
 

 

 

 

 

 
1,421

 

 
1,421

Total comprehensive income
 

 

 

 

 
58,057

 
1,421

 

 
59,478

Common stock issued
 
4,638

 
46

 
152,879

 

 

 

 

 
152,925

Cash dividends declared ($0.63 per share)
 

 

 

 

 
(23,515
)
 

 

 
(23,515
)
Treasury stock adjustment
 

 

 

 

 

 

 

 

Forfeited shares
 
(10
)
 

 
63

 
304

 

 

 
(367
)
 

Exercise of stock options
 
11

 

 

 

 
(132
)
 

 
293

 
161

Restricted stock grants
 
156

 

 
1,582

 
(5,565
)
 

 

 
3,983

 

Stock-based compensation
 

 

 

 
3,865

 

 

 

 
3,865

Net tax benefit related to stock-based compensation
 

 

 

 

 

 

 

 

Other, net
 
(44
)
 

 
(4
)
 

 
(69
)
 

 
(1,612
)
 
(1,685
)
Balance at September 30, 2017
 
40,424

 
$
412

 
$
1,053,509

 
$
(7,770
)
 
$
251,835

 
$
11,187

 
$
(24,646
)
 
$
1,284,527

(1) Treasury stock adjustment represents the extinguishment of 168,931 shares of Berkshire Hills common stock held by the Company's subsidiary.

The accompanying notes are an integral part of these consolidated financial statements.

7

Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Nine Months Ended
September 30,
(In thousands)
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income
 
$
58,057

 
$
48,339

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for loan losses
 
14,884

 
13,262

Net amortization of securities
 
2,103

 
3,476

Change in unamortized net loan costs and premiums
 
1,388

 
(3,825
)
Premises and equipment depreciation and amortization expense
 
7,448

 
6,226

Stock-based compensation expense
 
3,865

 
3,466

Accretion of purchase accounting entries, net
 
(11,837
)
 
(7,266
)
Amortization of other intangibles
 
2,310

 
2,355

Write down of other real estate owned
 
10

 
395

Excess tax loss from stock-based payment arrangements
 

 
(105
)
Income from cash surrender value of bank-owned life insurance policies
 
(2,343
)
 
(2,905
)
Gain on sales of securities, net
 
(12,568
)
 
(101
)
Net decrease (increase) in loans held for sale
 
(23,072
)
 
(7,280
)
Loss on disposition of assets
 
912

 
32

(Gain) loss on sale of real estate
 
(54
)
 
62

Amortization of interest in tax-advantaged projects
 
6,129

 
4,454

Net change in other
 
8,845

 
(1,089
)
Net cash provided by operating activities
 
56,077

 
59,496

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Net decrease in trading security
 
468

 
446

Proceeds from sales of securities available for sale
 
57,308

 
283,755

Proceeds from maturities, calls and prepayments of securities available for sale
 
139,434

 
128,566

Purchases of securities available for sale
 
(323,292
)
 
(186,392
)
Proceeds from maturities, calls and prepayments of securities held to maturity
 
8,094

 
5,946

Purchases of securities held to maturity
 
(70,153
)
 
(5,969
)
Net change in loans
 
(330,869
)
 
(284,440
)
Purchases of bank owned life insurance
 
(20,000
)
 

Proceeds from surrender of bank-owned life insurance
 
310

 
258

Proceeds from sale of Federal Home Loan Bank stock
 
72,820

 
18,544

Purchase of Federal Home Loan Bank stock
 
(76,646
)
 
(8,803
)
Net investment in limited partnership tax credits
 
(4,742
)
 
(5,189
)
Proceeds from the sale of premises and equipment
 

 
226

Purchase of premises and equipment, net
 
(9,740
)
 
(4,314
)
Acquisitions, net of cash (paid) acquired
 

 
(55,542
)
Payment to terminate cash flow hedges
 
6,573

 

Proceeds from sale of other real estate
 
352

 
1,483

Net cash (used) by investing activities
 
(550,083
)
 
(111,425
)
(continued)

8

Table of Contents

 
 
Nine Months Ended
September 30,
(In thousands)
 
2017
 
2016
Cash flows from financing activities:
 
 

 
 

Net increase in deposits
 
170,381

 
161,114

Proceeds from Federal Home Loan Bank advances and other borrowings
 
5,291,601

 
7,264,120

Repayments of Federal Home Loan Bank advances and other borrowings
 
(5,116,876
)
 
(7,389,048
)
Exercise of stock options
 
161

 
141

Common stock cash dividends paid
 
(23,515
)
 
(18,675
)
Common stock issued, net
 
152,925

 

Acquisition contingent consideration paid
 
(1,700
)
 

Net cash provided by financing activities
 
472,977

 
17,652

 
 
 
 
 
Net change in cash and cash equivalents
 
(21,029
)
 
(34,277
)
Cash and cash equivalents at beginning of period
 
113,075

 
103,562

Cash and cash equivalents at end of period
 
$
92,046

 
$
69,285

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid on deposits
 
$
29,822

 
$
21,954

Interest paid on borrowed funds
 
15,775

 
12,166

Income taxes paid, net
 
9,467

 
10,995

 
 
 
 
 
Acquisition of non-cash assets and liabilities:
 
 

 
 

Assets acquired
 

 
56,976

Liabilities assumed
 

 
(109
)
 
 
 
 
 
Other non-cash changes:
 
 

 
 

Other net comprehensive income
 
1,421

 
11,716

Real estate owned acquired in settlement of loans
 
444

 
295

The accompanying notes are an integral part of these consolidated financial statements.

9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.           BASIS OF PRESENTATION

The consolidated financial statements (the “financial statements”) of Berkshire Hills Bancorp, Inc. and its subsidiaries (the “Company” or “Berkshire”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company is a Delaware corporation and the holding company for Berkshire Bank (the “Bank”), a Massachusetts-chartered trust company headquartered in Pittsfield, Massachusetts, and Berkshire Insurance Group, Inc. These financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Bank’s consolidated subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. All material wholly-owned and majority-owned subsidiaries are consolidated unless GAAP requires otherwise.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to GAAP have been omitted.

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for Berkshire Hills Bancorp, Inc. previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In management’s opinion, all adjustment’s necessary for a fair statement are reflected in the interim periods presented.

Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current presentation.

Recently Adopted Accounting Principles
Effective January 1, 2017, the following new accounting guidance was adopted by the Company:
ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships;
ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments;
ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting
ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments; and
ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities

The adoption of these accounting standards did not have a material impact on the Company's financial statements.

Future Application of Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, ASU No. 2015-14, “Deferral of the Effective Date” was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. While the assessment of the provisions of ASU No. 2014-09 is not complete, the timing of the Company’s revenue recognition is not expected to materially change. This ASU impacts the Company’s wealth management services, administrative services for customer deposit accounts, interchange fees, and sale of owned real estate properties. The extent of this ASU on these revenue lines is being evaluated by the Company. The Company intends to adopt the ASU for the first quarter of 2018. Adoption is not anticipated to have a material impact on the Company’s financial statements.


10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to: i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The guidance provides an election to subsequently measure certain non-marketable equity investments at cost less any impairment and adjusted for certain observable price changes. The guidance also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is only permitted for the provision related to instrument specific credit risk. While the Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01, the effect of the adoption will depend on the Company’s portfolio at the time of transition.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The new pronouncement improves the transparency and comparability of financial reporting around leasing transactions and more closely aligns accounting for leases with the recently issued International Financial Reporting Standard.  The pronouncement affects all entities that are participants to leasing agreements. From a lessee accounting perspective, the ASU requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. The ASU includes a short-term lease exception for leases with a term of twelve months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. From a lessor accounting perspective, the guidance is largely unchanged, except for targeted improvements to align with new terminology under lessee accounting and with the updated revenue recognition guidance in Topic 606. For sale-leaseback transactions, for a sale to occur the transfer must meet the sale criteria under the new revenue standard, ASC 606. Entities will not be required to reassess transactions previously accounted under then existing guidance.

Additionally, the ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply as well as transition guidance specific to nonstandard leasing transactions. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company's consolidated financial statements. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position. The Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. The ASU requires companies to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Forward-looking information will now be used in credit loss estimates. The ASU requires enhanced disclosures to provide better understanding surrounding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Most debt instruments will require a cumulative-effect adjustment to retained earnings on the statement of financial position as of the beginning of the first reporting

11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

period in which the guidance is adopted (modified retrospective approach). However, there is instrument-specific transition guidance. ASU No. 2016-13 is effective for interim and annual periods beginning after December 15, 2019. Early application will be permitted for interim and annual periods beginning after December 15, 2018. The Company is evaluating the provisions of ASU No. 2016-13, and will closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements. The Company expects the primary changes to be the application of the expected credit loss model to the financial statements. In addition, the Company expects the guidance to change the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines. The Company is in the process of identifying and implementing required changes to loan loss estimation models and processes and evaluating the impact of this new accounting guidance, which at the date of adoption is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU No. 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.

12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.           TRADING SECURITY

The Company holds a tax advantaged economic development bond accounted for at fair value. The security had an amortized cost of $10.9 million and $11.4 million, and a fair value of $12.6 million and $13.2 million, at September 30, 2017 and December 31, 2016, respectively. As discussed further in Note 11 - Derivative Financial Instruments and Hedging Activities, the Company entered into a swap contract to swap-out the fixed rate of the security in exchange for a variable rate. The Company does not purchase securities with the intent of selling them in the near term, and there were no other securities in the trading portfolio at September 30, 2017.

13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

The following is a summary of securities available for sale and held to maturity:
(In thousands)
 
Amortized  Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
September 30, 2017
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
114,365

 
$
4,828

 
$
(433
)
 
$
118,760

Agency collateralized mortgage obligations
 
807,772

 
2,538

 
(2,874
)
 
807,436

Agency mortgage-backed securities
 
217,626

 
911

 
(1,470
)
 
217,067

Agency commercial mortgage-backed securities
 
64,296

 
126

 
(1,378
)
 
63,044

Corporate bonds
 
66,321

 
1,059

 
(146
)
 
67,234

Trust preferred securities
 
11,350

 
442

 

 
11,792

Other bonds and obligations
 
10,095

 
204

 
(8
)
 
10,291

Total debt securities
 
1,291,825

 
10,108

 
(6,309
)
 
1,295,624

Marketable equity securities
 
36,054

 
9,645

 
(310
)
 
45,389

Total securities available for sale
 
1,327,879

 
19,753

 
(6,619
)
 
1,341,013

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
268,990

 
6,196

 
(1,300
)
 
273,886

Agency collateralized mortgage obligations
 
74,277

 
1,679

 
(356
)
 
75,600

Agency mortgage-backed securities
 
8,080

 

 
(142
)
 
7,938

Agency commercial mortgage-backed securities
 
10,497

 

 
(180
)
 
10,317

Tax advantaged economic development bonds
 
32,899

 
1,837

 

 
34,736

Other bonds and obligations
 
322

 

 

 
322

Total securities held to maturity
 
395,065

 
9,712

 
(1,978
)
 
402,799

Total
 
$
1,722,944

 
$
29,465

 
$
(8,597
)
 
$
1,743,812

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
117,910

 
$
2,955

 
$
(1,049
)
 
$
119,816

Agency collateralized mortgage obligations
 
652,680

 
2,522

 
(3,291
)
 
651,911

Agency mortgage-backed securities
 
230,308

 
557

 
(2,181
)
 
228,684

Agency commercial mortgage-backed securities
 
65,673

 
229

 
(1,368
)
 
64,534

Corporate bonds
 
56,320

 
408

 
(722
)
 
56,006

Trust preferred securities
 
11,578

 
368

 
(59
)
 
11,887

Other bonds and obligations
 
10,979

 
195

 
(16
)
 
11,158

Total debt securities
 
1,145,448

 
7,234

 
(8,686
)
 
1,143,996

Marketable equity securities
 
47,858

 
19,296

 
(1,613
)
 
65,541

Total securities available for sale
 
1,193,306

 
26,530

 
(10,299
)
 
1,209,537

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
203,463

 
3,939

 
(2,416
)
 
204,986

Agency collateralized mortgage obligations
 
75,655

 
1,281

 
(411
)
 
76,525

Agency mortgage-backed securities
 
9,102

 

 
(243
)
 
8,859

Agency commercial mortgage-backed securities
 
10,545

 

 
(434
)
 
10,111

Tax advantaged economic development bonds
 
35,278

 
1,596

 

 
36,874

Other bonds and obligations
 
325

 

 

 
325

Total securities held to maturity
 
334,368

 
6,816

 
(3,504
)
 
337,680

Total
 
$
1,527,674

 
$
33,346

 
$
(13,803
)
 
$
1,547,217


14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities, segregated by contractual maturity at September 30, 2017 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable. Equity securities have no maturity and are also shown in total.
 
 
Available for sale
 
Held to maturity
 
 
Amortized
 
Fair
 
Amortized
 
Fair
(In thousands)
 
Cost
 
Value
 
Cost
 
Value
Within 1 year
 
$
623

 
$
626

 
$
2,640

 
$
2,642

Over 1 year to 5 years
 
31,653

 
32,254

 
26,324

 
27,305

Over 5 years to 10 years
 
56,336

 
57,943

 
8,467

 
8,925

Over 10 years
 
113,519

 
117,254

 
264,780

 
270,072

Total bonds and obligations
 
202,131

 
208,077

 
302,211

 
308,944

 
 
 
 
 
 
 
 
 
Marketable equity securities
 
36,054

 
45,389

 

 

Mortgage-backed securities
 
1,089,694

 
1,087,547

 
92,854

 
93,855

Total
 
$
1,327,879

 
$
1,341,013

 
$
395,065

 
$
402,799


15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
 
 
Less Than Twelve Months
 
Over Twelve Months
 
Total
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
 
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
(In thousands)
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
Value
September 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
52

 
$
3,046

 
$
381

 
$
8,828

 
$
433

 
$
11,874

Agency collateralized mortgage obligations
 
2,547

 
466,132

 
327

 
15,320

 
2,874

 
481,452

Agency mortgage-backed securities
 
1,121

 
106,495

 
349

 
12,654

 
1,470

 
119,149

Agency commercial mortgage-backed securities
 
681

 
32,357

 
697

 
20,678

 
1,378

 
53,035

Corporate bonds
 

 

 
146

 
15,859

 
146

 
15,859

Other bonds and obligations
 
8

 
2,109

 

 

 
8

 
2,109

Total debt securities
 
4,409

 
610,139

 
1,900

 
73,339

 
6,309

 
683,478

Marketable equity securities
 
310

 
4,950

 

 

 
310

 
4,950

Total securities available for sale
 
4,719

 
615,089

 
1,900

 
73,339

 
6,619

 
688,428

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
856

 
64,187

 
444

 
12,362

 
1,300

 
76,549

Agency collateralized mortgage obligations
 
356

 
13,557

 

 

 
356

 
13,557

Agency mortgage-backed securities
 
142

 
7,938

 

 

 
142

 
7,938

Agency commercial mortgage-backed securities
 
180

 
10,317

 

 

 
180

 
10,317

Total securities held to maturity
 
1,534

 
95,999

 
444

 
12,362

 
1,978

 
108,361

Total
 
$
6,253

 
$
711,088

 
$
2,344

 
$
85,701

 
$
8,597

 
$
796,789

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
1,049

 
$
13,839

 
$

 
$

 
$
1,049

 
$
13,839

Agency collateralized mortgage obligations
 
3,291

 
319,448

 

 

 
3,291

 
319,448

Agency mortgage-backed securities
 
2,153

 
130,766

 
28

 
2,061

 
2,181

 
132,827

Agency commercial mortgage-backed securities
 
1,368

 
44,860

 

 

 
1,368

 
44,860

Corporate bonds
 
11

 
4,780

 
711

 
19,655

 
722

 
24,435

Trust preferred securities
 

 

 
59

 
1,204

 
59

 
1,204

Other bonds and obligations
 
15

 
3,014

 
1

 
27

 
16

 
3,041

Total debt securities
 
7,887

 
516,707

 
799

 
22,947

 
8,686

 
539,654

Marketable equity securities
 
157

 
6,600

 
1,456

 
5,927

 
1,613

 
12,527

Total securities available for sale
 
8,044

 
523,307

 
2,255

 
28,874

 
10,299

 
552,181

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
2,416

 
69,308

 

 

 
2,416

 
69,308

Agency collateralized mortgage obligations
 
411

 
14,724

 

 

 
411

 
14,724

Agency mortgage-backed securities
 
243

 
8,859

 

 

 
243

 
8,859

Agency commercial mortgage-backed securities
 
434

 
10,111

 

 

 
434

 
10,111

Total securities held to maturity
 
3,504

 
103,002

 

 

 
3,504

 
103,002

Total
 
$
11,548

 
$
626,309

 
$
2,255

 
$
28,874

 
$
13,803

 
$
655,183


16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Securities
The Company expects to recover its amortized cost basis on all debt securities in its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of September 30, 2017, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS and HTM portfolios were not other-than-temporarily impaired at September 30, 2017:

AFS municipal bonds and obligations
At September 30, 2017, 7 of the total 263 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.5% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

AFS collateralized mortgage obligations
At September 30, 2017, 99 out of the total 241 securities in the Company’s portfolios of AFS collateralized mortgage obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.6% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”) guarantee the contractual cash flows of all of the Company’s collateralized mortgage obligations. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS commercial and residential mortgage-backed securities
At September 30, 2017