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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: March 31, 2018
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
393440067_newlogoa04.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.)
 
 
 
60 State Street, Boston, Massachusetts
 
02109
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (800) 773-5601, ext. 133773

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 45,423,597 shares of common stock, par value $0.01 per share, outstanding as of May 7, 2018.
 


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
 
 
March 31,
2018

December 31,
2017
(In thousands, except share data)
 

Assets
 
 

 
 

Cash and due from banks
 
$
88,193

 
$
91,122

Short-term investments
 
35,694

 
157,641

Total cash and cash equivalents
 
123,887

 
248,763

Trading security, at fair value
 
11,795

 
12,277

Securities available for sale and other, at fair value
 
1,460,660

 
1,426,099

Securities held to maturity (fair values of $394,296 and $405,276)
 
395,337

 
397,103

Federal Home Loan Bank stock and other restricted securities
 
64,038

 
63,085

Total securities
 
1,931,830

 
1,898,564

Loans held for sale, at fair value
 
98,440

 
153,620

Commercial real estate
 
3,266,737

 
3,264,742

Commercial and industrial loans
 
1,818,974

 
1,803,939

Residential mortgages
 
2,181,807

 
2,102,807

Consumer loans
 
1,108,899

 
1,127,850

Total loans
 
8,376,417

 
8,299,338

Less: Allowance for loan losses
 
(53,859
)
 
(51,834
)
Net loans
 
8,322,558

 
8,247,504

Premises and equipment, net
 
111,237

 
109,352

Goodwill
 
519,128

 
519,287

Other intangible assets
 
37,085

 
38,296

Cash surrender value of bank-owned life insurance policies
 
192,379

 
191,221

Deferred tax assets, net
 
51,679

 
47,061

Other assets
 
131,024

 
117,083

Total assets
 
$
11,519,247

 
$
11,570,751

 
 
 
 
 
Liabilities
 
 

 
 

Demand deposits
 
$
1,575,243

 
$
1,606,656

NOW and other deposits
 
715,581

 
734,558

Money market deposits
 
2,749,763

 
2,776,157

Savings deposits
 
756,711

 
741,954

Time deposits
 
2,885,969

 
2,890,205

Total deposits
 
8,683,267

 
8,749,530

Short-term debt
 
835,891

 
667,300

Long-term Federal Home Loan Bank advances
 
289,969

 
380,436

Subordinated borrowings
 
89,384

 
89,339

Total borrowings
 
1,215,244

 
1,137,075

Other liabilities
 
123,079

 
187,882

Total liabilities
 
$
10,021,590

 
$
10,074,487

(continued)
 
 
 
 
Shareholders’ equity
 
 

 
 

Preferred Stock (Series B non-voting convertible preferred stock - $0.01 par value; 1,000,000 shares authorized, 521,607 shares issued and outstanding in 2018; 1,000,000 shares authorized, 521,607 shares issued and outstanding in 2017
 
40,633

 
40,633

Common stock ($.01 par value; 50,000,000 shares authorized and 46,211,894 shares issued and 45,360,369 shares outstanding in 2018; 50,000,000 shares authorized, 46,211,894 shares issued and 45,290,433 shares outstanding in 2017)
 
460

 
460

Additional paid-in capital - common stock
 
1,243,590

 
1,242,487

Unearned compensation
 
(8,476
)
 
(6,531
)
Retained earnings
 
259,499

 
239,179

Accumulated other comprehensive (loss) income
 
(15,427
)
 
4,161

Treasury stock, at cost (851,525 shares in 2018 and 921,461 shares in 2017)
 
(22,622
)
 
(24,125
)
Total shareholders’ equity
 
1,497,657

 
1,496,264

Total liabilities and shareholders’ equity
 
$
11,519,247

 
$
11,570,751

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
March 31,
(In thousands, except per share data)
 
2018
 
2017
Interest and dividend income
 
 

 
 

Loans
 
$
92,835

 
$
68,943

Securities and other
 
14,405

 
11,766

Total interest and dividend income
 
107,240

 
80,709

Interest expense
 
 

 
 

Deposits
 
15,325

 
9,098

Borrowings
 
6,445

 
4,725

Total interest expense
 
21,770

 
13,823

Net interest income
 
85,470

 
66,886

Non-interest income
 
 

 
 

Mortgage banking originations
 
10,147

 
12,678

Loan related income
 
5,438

 
4,179

Deposit related fees
 
8,066

 
6,204

Insurance commissions and fees
 
3,025

 
3,136

Wealth management fees
 
2,597

 
2,526

Total fee income
 
29,273

 
28,723

Other, net
 
1,268

 
93

(Loss)/gain on securities, net
 
(1,502
)
 
12,570

Gain on sale of business operations and other assets, net
 
481

 

Loss on termination of hedges
 

 
(6,629
)
Total non-interest income
 
29,520

 
34,757

Total net revenue
 
114,990

 
101,643

Provision for loan losses
 
5,575

 
5,095

Non-interest expense
 
 

 
 

Compensation and benefits
 
42,184

 
36,119

Occupancy and equipment
 
10,082

 
9,026

Technology and communications
 
6,830

 
6,087

Marketing and promotion
 
2,612

 
1,999

Professional services
 
2,053

 
2,451

FDIC premiums and assessments
 
1,195

 
1,298

Other real estate owned and foreclosures
 
67

 
28

Amortization of intangible assets
 
1,268

 
801

Acquisition, restructuring, and other expenses
 
5,093

 
11,682

Other
 
5,485

 
4,835

Total non-interest expense
 
76,869

 
74,326

 
 
 
 
 
Income before income taxes
 
32,546

 
22,222

Income tax expense
 
7,298

 
6,762

Net income
 
$
25,248

 
$
15,460

Preferred stock dividend
 
230

 

Income available to common shareholders
 
25,018

 
15,460

 
 
 
 
 
Earnings per share:
 
 

 
 

Basic
 
$
0.55

 
$
0.44

Diluted
 
$
0.55

 
$
0.44

Weighted average shares outstanding:
 
 

 
 

Basic
 
45,966

 
35,280

Diluted
 
46,200

 
35,452

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
March 31,
(In thousands)
 
2018
 
2017
Net income
 
$
25,248

 
$
15,460

Other comprehensive income, before tax:
 
 

 
 

Changes in unrealized loss on debt securities available-for-sale
 
(19,162
)
 
(9,433
)
Changes in unrealized loss on derivative hedges
 

 
6,573

Income taxes related to other comprehensive income:
 
 

 
 

Changes in unrealized loss on debt securities available-for-sale
 
4,931

 
3,540

Changes in unrealized gains on derivative hedges
 

 
(2,588
)
Total other comprehensive loss
 
(14,231
)
 
(1,908
)
Total comprehensive income
 
$
11,017

 
$
13,552

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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
Preferred stock
 
Common stock
 
Additional
paid-in
 
Unearned
 
Retained
 
other
comprehensive
 
Treasury
 
 
(In thousands)
 
Shares
 
Amount
 
Shares
 
Amount
 
capital
 
compensation
 
earnings
 
income/(loss)
 
stock
 
Total
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
 

 

 

 

 

 

 
15,460

 

 

 
15,460

Other comprehensive loss
 

 

 

 

 

 

 

 
(1,908
)
 

 
(1,908
)
Total comprehensive income
 

 

 

 

 

 

 
15,460

 
(1,908
)
 

 
13,552

Cash dividends declared ($0.21 per share)
 

 

 

 

 

 

 
(7,506
)
 

 

 
(7,506
)
Forfeited shares
 

 

 
(2
)
 

 
20

 
60

 

 

 
(80
)
 

Exercise of stock options
 

 

 
6

 

 

 

 
(71
)
 

 
152

 
81

Restricted stock grants
 

 

 
81

 

 
807

 
(2,859
)
 

 

 
2,052

 

Stock-based compensation
 

 

 

 

 

 
1,202

 

 

 

 
1,202

Other, net
 

 

 
(29
)
 

 
15

 

 
(70
)
 

 
(1,019
)
 
(1,074
)
Balance at March 31, 2017
 

 

 
35,729

 
$
366

 
$
899,831

 
$
(7,971
)
 
$
225,307

 
$
7,858

 
$
(25,838
)
 
$
1,099,553

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
522

 
$
40,633

 
45,290

 
$
460

 
$
1,242,487

 
$
(6,531
)
 
$
239,179

 
$
4,161

 
$
(24,125
)
 
$
1,496,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 

 

 

 

 

 

 
25,248

 

 

 
25,248

Other comprehensive loss
 

 

 

 

 

 

 

 
(14,231
)
 

 
(14,231
)
Total comprehensive income
 

 

 

 

 

 

 
25,248

 
(14,231
)
 

 
11,017

Adoption of ASU No 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Liabilities
 

 

 

 

 

 

 
6,253

 
(6,253
)
 

 

Adoption of ASU No 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 

 

 

 

 

 

 
(896
)
 
896

 

 

Cash dividends declared on common shares ($0.22 per share)
 

 

 

 

 

 

 
(9,982
)
 

 

 
(9,982
)
Cash dividends declared on preferred shares ($0.44 per share)
 

 

 

 

 

 

 
(230
)
 

 

 
(230
)
Forfeited shares
 

 

 
(4
)
 

 
31

 
125

 

 

 
(156
)
 

Exercise of stock options
 

 

 
5

 

 

 

 
(73
)
 

 
149

 
76

Restricted stock grants
 

 

 
92

 

 
1,056

 
(3,452
)
 

 

 
2,396

 

Stock-based compensation
 

 

 

 

 

 
1,382

 

 

 

 
1,382

Other, net
 

 

 
(23
)
 

 
16

 

 

 

 
(886
)
 
(870
)
Balance at March 31, 2018
 
522

 
$
40,633

 
45,360

 
$
460

 
$
1,243,590

 
$
(8,476
)
 
$
259,499

 
$
(15,427
)
 
$
(22,622
)
 
$
1,497,657

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
 
 
 
Three Months Ended
March 31,
(In thousands)
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net income
 
$
25,248

 
$
15,460

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

 
 

Provision for loan losses
 
5,575

 
5,095

Net amortization of securities
 
743

 
626

Change in unamortized net loan costs and premiums
 
577

 
1,227

Premises and equipment depreciation and amortization expense
 
2,556

 
2,467

Stock-based compensation expense
 
1,382

 
1,202

Accretion of purchase accounting entries, net
 
(3,838
)
 
(4,597
)
Amortization of other intangibles
 
1,268

 
801

Income from cash surrender value of bank-owned life insurance policies
 
(1,158
)
 
(967
)
Securities losses (gains), net
 
1,502

 
(12,570
)
Originations of loans held for sale
 
(479,692
)
 
(429,181
)
Proceeds from sale of loans held for sale
 
545,019

 
472,791

Net gain on sale of loans and other mortgage banking income
 
(10,147
)
 
(12,678
)
Loss on disposition of assets
 

 
662

Loss on sale of real estate
 

 
13

Amortization of interest in tax-advantaged projects
 
506

 
1,329

Net change in other
 
(3,908
)
 
6,965

Net cash provided by operating activities
 
85,633

 
48,645

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Net decrease in trading security
 
165

 
157

Proceeds from sales of securities available for sale
 

 
26,085

Proceeds from maturities, calls, and prepayments of securities available for sale
 
44,069

 
44,794

Purchases of securities available for sale and other
 
(116,423
)
 
(151,731
)
Purchases of marketable equity securities
 
(12,688
)
 

Proceeds from sales of marketable equity securities
 
26,096

 

Proceeds from maturities, calls, and prepayments of securities held to maturity
 
2,885

 
3,791

Purchases of securities held to maturity
 
(1,618
)
 
(1,037
)
Net change in loans
 
(149,774
)
 
(82,329
)
Proceeds from surrender of bank-owned life insurance
 

 
310

Proceeds from sale of Federal Home Loan Bank stock
 
16,661

 
1,636

Purchase of Federal Home Loan Bank stock
 
(17,614
)
 
(6,931
)
Net investment in limited partnership tax credits
 

 
(354
)
Purchase of premises and equipment, net
 
(4,376
)
 
(5,070
)
Payment to terminate cash flow hedges
 

 
6,573

Proceeds from sale of other real estate
 

 
102

Net cash (used) by investing activities
 
(212,617
)
 
(164,004
)
(continued)

8

Table of Contents

 
 
Three Months Ended
March 31,
(In thousands)
 
2018
 
2017
Cash flows from financing activities:
 
 

 
 

Net (decrease) increase in deposits
 
(65,870
)
 
34,757

Proceeds from Federal Home Loan Bank advances and other borrowings
 
1,235,892

 
2,291,600

Repayments of Federal Home Loan Bank advances and other borrowings
 
(1,157,778
)
 
(2,221,603
)
Exercise of stock options
 
76

 
81

Common and preferred stock cash dividends paid
 
(10,212
)
 
(7,506
)
Acquisition contingent consideration paid
 

 
(1,700
)
Net cash provided by financing activities
 
2,108

 
95,629

 
 
 
 
 
Net change in cash and cash equivalents
 
(124,876
)
 
(19,732
)
Cash and cash equivalents at beginning of period
 
248,763

 
113,075

Cash and cash equivalents at end of period
 
$
123,887

 
$
93,343

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid on deposits
 
$
15,345

 
$
9,253

Interest paid on borrowed funds
 
6,725

 
5,084

Income taxes paid (refund), net
 
1,065

 
(3,685
)
 
 
 
 
 
Other non-cash changes:
 
 

 
 

Other net comprehensive income
 
(14,231
)
 
(1,908
)
Real estate owned acquired in settlement of loans
 

 
35

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 Boston, 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 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, 2017. 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.

Prior Period Acquisition
The Company completed the acquisition of Commerce Bancshares Corp. (“Commerce”), the parent company of Commerce Bank & Trust Company (“Commerce Bank”), at the close of business on October 13, 2017. With this acquisition, the Company established a market position in Worcester, New England’s second largest city. Additionally, this acquisition was a catalyst for the Company’s decision to relocate its corporate headquarters to Boston and to expand its Greater Boston market initiatives. This acquisition also increased the Company’s total assets over the $10 billion Dodd Frank Act threshold for additional regulatory requirements.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Due to the complexity in valuing the acquired loans and the significant amount of data inputs required, the valuation of the loans is not yet final. Fair value estimates are based on the information available, and are subject to change up to one year after the closing date of the acquisition as additional information relative to the closing date fair values become available. In the first quarter of 2018 the Company did not recognize a material measurement period adjustment. Management continues to review initial estimates on certain areas such as loan valuations and the deferred tax asset.

Recently Adopted Accounting Principles
Effective January 1, 2018, the following new accounting guidance was adopted by the Company:
ASU No. 2014-09, Revenue from Contracts with Customers (additional information is disclosed in Note 14 - Revenue of the Consolidated Financial Statements);
ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

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

In February 2018, the FASB issued ASU No. 2018-02, “Income statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which will allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects

10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

resulting from the Tax Cuts and Jobs Act of 2017. These amendments are effective for all entities for fiscal years beginning after December 15, 2018. For interim periods within those fiscal years, early adoption of the amendment is permitted including public business entities for reporting periods for which financial statements have not yet been issued. The Company elected to early adopt ASU 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Cuts and Jobs Act of 2017 from AOCI to retained earnings. The reclassification increased AOCI and decreased retained earnings by $896 thousand, with no net effect on total shareholders’ equity.

Future Application of Accounting Pronouncements
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 identify a complete inventory of arrangements containing a lease and accumulating the lease data necessary to apply the guidance. We will continue to review contracts up through the effective date and may identify additional leases or leases embedded in arrangements that will be within the scope of the new guidance.

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 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

11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 January 2017, the FASB issued ASU No. 2017-04, “Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.” The ASU simplifies the test for goodwill impairment by eliminating the second step of the current two-step method. Under the new accounting guidance, entities will compare the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, the entity is required to recognize an impairment charge for this amount. Current guidance requires an entity to proceed to a second step, whereby the entity would determine the fair value of its assets and liabilities. The new method applies to all reporting units. The performance of a qualitative assessment is still allowable. This accounting guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect adoption to have a material effect on our consolidated financial statements.

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 $10.6 million and $10.8 million, and a fair value of $11.8 million and $12.3 million, at March 31, 2018 and December 31, 2017, 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 March 31, 2018.

13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. SECURITIES AVAILABLE FOR SALE, HELD TO MATURITY, AND OTHER

As the Company adopted ASU-2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" during the current period, all changes in the fair value of marketable equity securities, including other-than-temporary impairment, are immediately recognized in earnings.

The following is a summary of securities available for sale, held to maturity, and other:
(In thousands)
 
Amortized  Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
March 31, 2018
 
 

 
 

 
 

 
 

Securities available for sale and other
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
112,857

 
$
2,784

 
$
(721
)
 
$
114,920

Agency collateralized mortgage obligations
 
932,723

 
29

 
(19,816
)
 
912,936

Agency mortgage-backed securities
 
195,526

 
95

 
(5,523
)
 
190,098

Agency commercial mortgage-backed securities
 
63,561

 

 
(3,003
)
 
60,558

Corporate bonds
 
100,963

 
861

 
(32
)
 
101,792

Trust preferred securities
 
11,297

 
266

 

 
11,563

Other bonds and obligations
 
9,473

 
104

 
(45
)
 
9,532

Total debt securities
 
1,426,400

 
4,139

 
(29,140
)
 
1,401,399

Other securities:
 
 
 
 
 
 
 
 
Marketable equity securities
 
59,261

 

 

 
59,261

Total securities available for sale and other
 
1,485,661

 
4,139

 
(29,140
)
 
1,460,660

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
269,636

 
4,251

 
(2,980
)
 
270,907

Agency collateralized mortgage obligations
 
73,207

 
433

 
(1,078
)
 
72,562

Agency mortgage-backed securities
 
7,712

 

 
(316
)
 
7,396

Agency commercial mortgage-backed securities
 
10,465

 

 
(509
)
 
9,956

Tax advantaged economic development bonds
 
33,996

 
361

 
(1,203
)
 
33,154

Other bonds and obligations
 
321

 

 

 
321

Total securities held to maturity
 
395,337

 
5,045

 
(6,086
)
 
394,296

Total
 
$
1,880,998

 
$
9,184

 
$
(35,226
)
 
$
1,854,956


14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)
 
Amortized  Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
December 31, 2017
 
 

 
 

 
 

 
 

Securities available for sale and other
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
113,427

 
$
5,012

 
$
(206
)
 
$
118,233

Agency collateralized mortgage obligations
 
859,705

 
397

 
(8,944
)
 
851,158

Agency mortgage-backed securities
 
218,926

 
279

 
(2,265
)
 
216,940

Agency commercial mortgage-backed securities
 
64,025

 
41

 
(1,761
)
 
62,305

Corporate bonds
 
110,076

 
882

 
(237
)
 
110,721

Trust preferred securities
 
11,334

 
343

 

 
11,677

Other bonds and obligations
 
9,757

 
154

 
(31
)
 
9,880

Total debt securities
 
1,387,250

 
7,108

 
(13,444
)
 
1,380,914

Other securities:
 
 
 
 
 
 
 
 
Marketable equity securities
 
36,483

 
9,211

 
(509
)
 
45,185

Total securities available for sale and other
 
1,423,733

 
16,319

 
(13,953
)
 
1,426,099

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
270,310

 
8,675

 
(90
)
 
278,895

Agency collateralized mortgage obligations
 
73,742

 
1,045

 
(486
)
 
74,301

Agency mortgage-backed securities
 
7,892

 

 
(164
)
 
7,728

Agency commercial mortgage-backed securities
 
10,481

 

 
(268
)
 
10,213

Tax advantaged economic development bonds
 
34,357

 
596

 
(1,135
)
 
33,818

Other bonds and obligations
 
321

 

 

 
321

Total securities held to maturity
 
397,103

 
10,316

 
(2,143
)
 
405,276

Total
 
$
1,820,836

 
$
26,635

 
$
(16,096
)
 
$
1,831,375


The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities segregated by contractual maturity at March 31, 2018 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.
 
 
Available for sale
 
Held to maturity
 
 
Amortized
 
Fair
 
Amortized
 
Fair
(In thousands)
 
Cost
 
Value
 
Cost
 
Value
Within 1 year
 
$
387

 
$
388

 
$
15,013

 
$
15,336

Over 1 year to 5 years
 
33,130

 
33,297

 
13,189

 
13,174

Over 5 years to 10 years
 
75,568

 
76,746

 
7,999

 
8,079

Over 10 years
 
125,505

 
127,376

 
267,752

 
267,793

Total bonds and obligations
 
234,590

 
237,807

 
303,953

 
304,382

Mortgage-backed securities
 
1,191,810

 
1,163,592

 
91,384

 
89,914

Total
 
$
1,426,400

 
$
1,401,399

 
$
395,337

 
$
394,296


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
March 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
128

 
$
4,399

 
$
593

 
$
8,582

 
$
721

 
$
12,981

Agency collateralized mortgage obligations
 
16,667

 
816,169

 
3,149

 
78,858

 
19,816

 
895,027

Agency mortgage-backed securities
 
2,715

 
123,776

 
2,808

 
62,093

 
5,523

 
185,869

Agency commercial mortgage-backed securities
 
268

 
13,647

 
2,735

 
46,911

 
3,003

 
60,558

Corporate bonds
 
32

 
7,544

 

 

 
32

 
7,544

Other bonds and obligations
 
18

 
1,084

 
27

 
1,997

 
45

 
3,081

Total securities available for sale
 
19,828

 
966,619

 
9,312

 
198,441

 
29,140

 
1,165,060

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
2,779

 
112,585

 
201

 
1,915

 
2,980

 
114,500

Agency collateralized mortgage obligations
 
444

 
32,112

 
634

 
12,317

 
1,078

 
44,429

Agency mortgage-backed securities
 

 

 
316

 
7,397

 
316

 
7,397

Agency commercial mortgage-backed securities
 

 

 
509

 
9,956

 
509

 
9,956

Tax advantaged economic development bonds
 
1,203

 
15,712

 

 

 
1,203

 
15,712

Total securities held to maturity
 
4,426

 
160,409

 
1,660

 
31,585

 
6,086

 
191,994

Total
 
$
24,254

 
$
1,127,028

 
$
10,972

 
$
230,026

 
$
35,226

 
$
1,357,054

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$

 
$

 
$
206

 
$
8,985

 
$
206

 
$
8,985

Agency collateralized mortgage obligations
 
6,849

 
655,479

 
2,095

 
80,401

 
8,944

 
735,880

Agency mortgage-backed securities
 
765

 
95,800

 
1,500

 
65,323

 
2,265

 
161,123

Agency commercial mortgage-backed securities
 
334

 
17,379

 
1,427

 
39,268

 
1,761

 
56,647

Corporate bonds
 
1

 
328

 
236

 
15,769

 
237

 
16,097

Trust preferred securities
 

 

 

 

 

 

Other bonds and obligations
 
11

 
1,096

 
20

 
2,004

 
31

 
3,100

Total securities available for sale
 
7,960

 
770,082

 
5,484

 
211,750

 
13,444

 
981,832

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
35

 
10,213

 
55

 
2,059

 
90

 
12,272

Agency collateralized mortgage obligations
 

 

 
486

 
12,946

 
486

 
12,946

Agency mortgage-backed securities
 

 

 
164

 
7,728

 
164

 
7,728

Agency commercial mortgage-backed securities
 

 

 
268

 
10,213

 
268

 
10,213

Tax advantaged economic development bonds
 
1,135

 
7,305

 

 

 
1,135

 
7,305

Total securities held to maturity
 
1,170

 
17,518

 
973

 
32,946

 
2,143

 
50,464

Total
 
$
9,130

 
$
787,600

 
$
6,457

 
$
244,696

 
$
15,587

 
$
1,032,296


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 March 31, 2018, 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 March 31, 2018:

AFS municipal bonds and obligations
At March 31, 2018, 13 of the total 258 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 5.3% 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 March 31, 2018, 229 out of the total 243 securities in the Company’s portfolio of AFS collateralized mortgage obligations were in unrealized loss positions. Aggregate unrealized losses represented 2.2% 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 March 31, 2018, 73 out of the total 101 securities in the Company’s portfolio of AFS mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 3.3% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of all of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS corporate bonds
At March 31, 2018, 4 out of the total 20 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 0.2% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.

AFS other bonds and obligations
At March 31, 2018, 6 out of the total 9 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 1.5% of the amortized cost of securities in unrealized loss positions. The securities are all investment grade rated, and there were no material underlying credit downgrades during the quarter. All securities are performing.

17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HTM Municipal bonds and obligations
At March 31, 2018, 73 of the 227 securities in the Company’s portfolio of municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 2.5% 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.

HTM collateralized mortgage obligations
At March 31, 2018, 4 of the 9 securities in the Company’s portfolio of HTM collateralized mortgage obligations were in unrealized loss positions. Aggregate unrealized losses represented 4.1% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of all of the Company's collateralized residential mortgage obligations. The securities are investment grade rated, and there were no material underlying credit downgrades during the quarter. All securities are performing.
 
HTM commercial and residential mortgage-backed securities
At March 31, 2018, 2 out of a total of 2 securities in the Company’s portfolio of HTM mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 4.5% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of the Company’s residential mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

HTM tax-advantaged economic development bonds
At March 31, 2018, 3 out of the total 7 securities in the Company’s portfolio of tax advantaged economic development bonds were in an unrealized loss position. Aggregate unrealized losses represented 7.1% of the amortized cost of the security in an unrealized loss position. One of the above mentioned tax advantaged economic bond was downgraded to special mention during 2017. The Company believes that more likely than not all the principal outstanding will be collected. All securities are performing.



18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. LOANS

The Company’s loan portfolio is segregated into the following segments: commercial real estate, commercial and industrial, residential mortgage, and consumer. Commercial real estate loans include construction, single and multi-family, and other commercial real estate classes. Residential mortgage loans include classes for 1-4 family owner occupied and construction loans. Consumer loans include home equity, direct and indirect auto, and other. These portfolio segments each have unique risk characteristics that are considered when determining the appropriate level for the allowance for loan losses. A substantial portion of the loan portfolio is secured by real estate in Massachusetts, southern Vermont, northeastern New York, New Jersey and in the Bank’s other New England lending areas. The ability of many of the Bank’s borrowers to honor their contracts is dependent, among other things, on the specific economy and real estate markets of these areas.

Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from Commerce Bank and Trust Company, First Choice Bank, Parke Bank, Firestone Financial Corp., Hampden Bancorp, Inc., the New York branch acquisition, Beacon Federal Bancorp, Inc., The Connecticut Bank and Trust Company, Legacy Bancorp, Inc., and Rome Bancorp, Inc. Acquired loans that are refinanced are transferred to business activity loans. Business activity and acquired loans are serviced, managed, and accounted for under the Company's same control environment. The following is a summary of total loans:
 
March 31, 2018
 
December 31, 2017
(In thousands)
Business
Activities Loans
Acquired
Loans
Total
 
Business
Activities Loans
Acquired
Loans
Total
Commercial real estate:
 

 

 

 
 

 

 

Construction
$
255,835

$
91,468

$
347,303

 
$
269,206

$
84,965

$
354,171

Single and multi-family
345,180

197,040

542,220

 
217,083

206,082

423,165

Other commercial real estate
1,680,488

696,726

2,377,214

 
1,731,418

755,988

2,487,406

Total commercial real estate
2,281,503

985,234

3,266,737

 
2,217,707

1,047,035

3,264,742

 
 
 
 
 
 
 
 
Commercial and industrial loans:
1,195,642

623,332

1,818,974

 
1,182,569

621,370

1,803,939

 
 
 
 
 
 
 
 
Total commercial loans
3,477,145

1,608,566

5,085,711

 
3,400,276

1,668,405

5,068,681

 
 
 
 
 
 
 
 
Residential mortgages:
 

 

 

 
 

 

 

1-4 family
1,900,592

274,890

2,175,482

 
1,808,024

289,373

2,097,397

Construction
6,121

204

6,325

 
5,177

233

5,410

Total residential mortgages
1,906,713

275,094

2,181,807

 
1,813,201

289,606

2,102,807

 
 
 
 
 
 
 
 
Consumer loans:
 

 
 

 
 

 

 

Home equity
291,094