Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document
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: June 30, 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
394586611_newlogoa05.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 45,423,719 shares of common stock, par value $0.01 per share, outstanding as of August 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
 
 
June 30,
2018

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

Assets
 
 

 
 

Cash and due from banks
 
$
90,964

 
$
91,122

Short-term investments
 
48,093

 
157,641

Total cash and cash equivalents
 
139,057

 
248,763

Trading security, at fair value
 
11,483

 
12,277

Marketable equity securities, at fair value
 
59,726

 
45,185

Securities available for sale, at fair value
 
1,393,250

 
1,380,914

Securities held to maturity (fair values of $377,486 and $405,276)
 
379,905

 
397,103

Federal Home Loan Bank stock and other restricted securities
 
75,530

 
63,085

Total securities
 
1,919,894

 
1,898,564

Loans held for sale, at fair value
 
149,182

 
153,620

Commercial real estate loans
 
3,319,323

 
3,264,742

Commercial and industrial loans
 
1,875,118

 
1,803,939

Residential mortgages
 
2,397,192

 
2,102,807

Consumer loans
 
1,118,333

 
1,127,850

Total loans
 
8,709,966

 
8,299,338

Less: Allowance for loan losses
 
(55,925
)
 
(51,834
)
Net loans
 
8,654,041

 
8,247,504

Premises and equipment, net
 
112,217

 
109,352

Goodwill
 
519,128

 
519,287

Other intangible assets
 
35,838

 
38,296

Cash surrender value of bank-owned life insurance policies
 
193,121

 
191,221

Deferred tax assets, net
 
53,679

 
47,061

Other assets
 
125,806

 
117,083

Total assets
 
$
11,901,963

 
$
11,570,751

 
 
 
 
 
Liabilities
 
 

 
 

Demand deposits
 
$
1,553,039

 
$
1,606,656

NOW and other deposits
 
858,014

 
734,558

Money market deposits
 
2,619,943

 
2,776,157

Savings deposits
 
747,722

 
741,954

Time deposits
 
3,060,034

 
2,890,205

Total deposits
 
8,838,752

 
8,749,530

Short-term debt
 
1,002,000

 
667,300

Long-term Federal Home Loan Bank advances
 
272,342

 
380,436

Subordinated borrowings
 
89,429

 
89,339

Total borrowings
 
1,363,771

 
1,137,075

Other liabilities
 
183,199

 
187,882

Total liabilities
 
$
10,385,722

 
$
10,074,487

(continued)
 
 
 
 
 
June 30,
2018
 
December 31,
2017
 
 
 
Shareholders’ equity
 
 

 
 

Preferred Stock (Series B non-voting convertible preferred stock - $0.01 par value; 2,000,000 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; 100,000,000 shares authorized and 46,211,894 shares issued and 45,420,276 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
 
1,244,691

 
1,242,487

Unearned compensation
 
(10,096
)
 
(6,531
)
Retained earnings
 
283,256

 
239,179

Accumulated other comprehensive (loss) income
 
(21,266
)
 
4,161

Treasury stock, at cost (791,618 shares in 2018 and 921,461 shares in 2017)
 
(21,437
)
 
(24,125
)
Total shareholders’ equity
 
1,516,241

 
1,496,264

Total liabilities and shareholders’ equity
 
$
11,901,963

 
$
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
June 30,
 
Six Months Ended
June 30,
(In thousands, except per share data)
 
2018
 
2017
 
2018
 
2017
Interest and dividend income
 
 

 
 

 
 

 
 

Loans
 
$
101,649

 
$
71,983

 
$
194,484

 
$
140,926

Securities and other
 
15,230

 
12,683

 
29,635

 
24,449

Total interest and dividend income
 
116,879

 
84,666

 
224,119

 
165,375

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
17,768

 
9,971

 
33,093

 
19,069

Borrowings
 
7,990

 
5,150

 
14,435

 
9,875

Total interest expense
 
25,758

 
15,121

 
47,528

 
28,944

Net interest income
 
91,121

 
69,545

 
176,591

 
136,431

Non-interest income
 
 

 
 

 
 

 
 

Mortgage banking originations
 
10,195

 
16,281

 
20,342

 
28,959

Loan related income
 
6,549

 
5,275

 
11,987

 
9,454

Deposit related fees
 
7,605

 
6,645

 
15,671

 
12,849

Insurance commissions and fees
 
2,549

 
2,588

 
5,574

 
5,724

Wealth management fees
 
2,280

 
2,286

 
4,877

 
4,812

Total fee income
 
29,178

 
33,075

 
58,451

 
61,798

Other, net
 
155

 
(276
)
 
1,423

 
(183
)
(Loss)/gain on securities, net
 
718

 
(1
)
 
(784
)
 
12,569

(Loss)/gain on sale of business operations and other assets, net
 
(21
)
 

 
460

 

Loss on termination of hedges
 

 

 

 
(6,629
)
Total non-interest income
 
30,030

 
32,798

 
59,550

 
67,555

Total net revenue
 
121,151

 
102,343

 
236,141

 
203,986

Provision for loan losses
 
6,532

 
4,889

 
12,107

 
9,984

Non-interest expense
 
 

 
 

 
 

 
 

Compensation and benefits
 
41,134

 
36,997

 
83,318

 
73,116

Occupancy and equipment
 
10,230

 
8,678

 
20,312

 
17,704

Technology and communications
 
7,359

 
6,883

 
14,189

 
12,970

Marketing and promotion
 
2,369

 
3,177

 
4,981

 
5,176

Professional services
 
1,139

 
2,190

 
3,192

 
4,641

FDIC premiums and assessments
 
1,411

 
1,588

 
2,606

 
2,886

Other real estate owned and foreclosures
 
1

 
30

 
68

 
58

Amortization of intangible assets
 
1,246

 
770

 
2,514

 
1,571

Acquisition, restructuring, and other expenses
 
847

 
2,903

 
5,940

 
14,585

Other
 
6,601

 
6,307

 
12,086

 
11,142

Total non-interest expense
 
72,337

 
69,523

 
149,206

 
143,849

 
 
 
 
 
 
 
 
 
Income before income taxes
 
42,282

 
27,931

 
74,828

 
50,153

Income tax expense
 
8,251

 
8,237

 
15,549

 
14,999

Net income
 
$
34,031

 
$
19,694

 
$
59,279

 
$
35,154

Preferred stock dividend
 
229

 

 
459

 

Income available to common shareholders
 
33,802


19,694


58,820


35,154

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 

 
 

 
 

 
 

Basic
 
$
0.74

 
$
0.53

 
$
1.29

 
$
0.97

Diluted
 
$
0.74

 
$
0.53

 
$
1.28

 
$
0.96

Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
46,032

 
37,324

 
45,999

 
36,305

Diluted
 
46,215

 
37,474

 
46,206

 
36,466

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
June 30,
 
Six Months Ended
June 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
34,031

 
$
19,694

 
$
59,279

 
$
35,154

Other comprehensive income, before tax:
 
 

 
 

 
 

 
 

Changes in unrealized loss on debt securities available-for-sale
 
(7,840
)
 
3,927

 
(27,002
)
 
(5,505
)
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
 
2,001

 
(1,455
)
 
6,932

 
2,086

Changes in unrealized gains on derivative hedges
 

 

 

 
(2,589
)
Total other comprehensive (loss)/income
 
(5,839
)
 
2,472

 
(20,070
)
 
565

Total comprehensive income
 
$
28,192

 
$
22,166

 
$
39,209

 
$
35,719

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
 

 

 

 

 

 

 
35,154

 

 

 
35,154

Other comprehensive loss
 

 

 

 

 

 

 

 
565

 

 
565

Total comprehensive income
 

 

 

 

 

 

 
35,154

 
565

 

 
35,719

Common stock issued
 

 

 
4,638

 
46

 
152,879

 

 

 

 

 
152,925

Cash dividends declared ($0.42 per share)
 

 

 

 

 

 

 
(15,024
)
 

 

 
(15,024
)
Forfeited shares
 

 

 
(10
)
 

 
63

 
304

 

 

 
(367
)
 

Exercise of stock options
 

 

 
7

 

 

 

 
(85
)
 

 
196

 
111

Restricted stock grants
 

 

 
154

 

 
1,566

 
(5,505
)
 

 

 
3,939

 

Stock-based compensation
 

 

 

 

 

 
2,524

 

 

 

 
2,524

Other, net
 

 

 
(34
)
 

 
(4
)
 

 
(69
)
 

 
(1,286
)
 
(1,359
)
Balance at June 30, 2017
 

 

 
40,428

 
$
412

 
$
1,053,493

 
$
(9,051
)
 
$
237,470

 
$
10,331

 
$
(24,461
)
 
$
1,268,194

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 

 

 

 
59,279

 

 

 
59,279

Other comprehensive loss
 

 

 

 

 

 

 

 
(20,070
)
 

 
(20,070
)
Total comprehensive income
 

 

 

 

 

 

 
59,279

 
(20,070
)
 

 
39,209

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 ($0.44 per share)
 

 

 

 

 

 

 
(19,977
)
 

 

 
(19,977
)
Cash dividends declared on preferred shares ($0.88 per share)
 

 

 

 

 

 

 
(459
)
 

 

 
(459
)
Forfeited shares
 

 

 
(15
)
 

 
88

 
478

 

 

 
(566
)
 

Exercise of stock options
 

 

 
8

 

 

 

 
(123
)
 

 
224

 
101

Restricted stock grants
 

 

 
181

 

 
2,100

 
(6,841
)
 

 

 
4,741

 

Stock-based compensation
 

 

 

 

 

 
2,798

 

 

 

 
2,798

Other, net
 

 

 
(44
)
 

 
16

 

 

 

 
(1,711
)
 
(1,695
)
Balance at June 30, 2018
 
522

 
$
40,633

 
45,420

 
$
460

 
$
1,244,691

 
$
(10,096
)
 
$
283,256

 
$
(21,266
)
 
$
(21,437
)
 
$
1,516,241

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
 
 
 
Six Months Ended
June 30,
(In thousands)
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net income
 
$
59,279

 
$
35,154

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

 
 

Provision for loan losses
 
12,107

 
9,984

Net amortization of securities
 
1,460

 
1,332

Change in unamortized net loan costs and premiums
 
(1,520
)
 
(158
)
Premises and equipment depreciation and amortization expense
 
5,215

 
4,961

Stock-based compensation expense
 
2,798

 
2,524

Accretion of purchase accounting entries, net
 
(11,114
)
 
(7,971
)
Amortization of other intangibles
 
2,514

 
1,571

Income from cash surrender value of bank-owned life insurance policies
 
(2,359
)
 
(1,188
)
Securities losses (gains), net
 
784

 
(12,571
)
Originations of loans held for sale
 
(1,106,100
)
 
(1,105,114
)
Proceeds from sale of loans held for sale
 
1,130,880

 
1,108,264

Net gain on sale of loans and other mortgage banking income
 
(20,342
)
 
(28,959
)
Loss on disposition of assets
 

 
912

Loss on sale of real estate
 

 
(12
)
Amortization of interest in tax-advantaged projects
 
2,100

 
2,782

Net change in other
 
(9,748
)
 
4,374

Net cash provided by operating activities
 
65,954

 
15,885

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Net decrease in trading security
 
329

 
311

Proceeds from sales of securities available for sale
 

 
3,444

Proceeds from maturities, calls, and prepayments of securities available for sale
 
93,049

 
88,821

Purchases of securities available for sale
 
(165,312
)
 
(227,484
)
Proceeds from sales of marketable equity securities
 
26,096

 
38,575

Purchases of marketable equity securities
 
(12,688
)
 
(14,230
)
Proceeds from maturities, calls, and prepayments of securities held to maturity
 
23,981

 
6,076

Purchases of securities held to maturity
 
(7,781
)
 
(23,582
)
Net change in loans
 
(413,717
)
 
(279,723
)
Proceeds from surrender of bank-owned life insurance
 
459

 
310

Proceeds from sale of Federal Home Loan Bank stock
 
28,673

 
68,672

Purchase of Federal Home Loan Bank stock
 
(41,118
)
 
(76,433
)
Net investment in limited partnership tax credits
 
2,464

 
(756
)
Purchase of premises and equipment, net
 
(7,958
)
 
(6,921
)
Payment to terminate cash flow hedges
 

 
6,573

Proceeds from sale of other real estate
 
1,600

 
274

Net cash (used) by investing activities
 
(471,923
)
 
(416,073
)
(continued)

8

Table of Contents

 
 
Six Months Ended
June 30,
(In thousands)
 
2018
 
2017
Cash flows from financing activities:
 
 

 
 

Net increase in deposits
 
90,009

 
94,324

Proceeds from Federal Home Loan Bank advances and other borrowings
 
2,287,896

 
3,841,600

Repayments of Federal Home Loan Bank advances and other borrowings
 
(2,061,307
)
 
(3,683,292
)
Exercise of stock options
 
101

 
111

Common and preferred stock cash dividends paid
 
(20,436
)
 
(15,023
)
Common stock issued, net
 

 
152,925

Acquisition contingent consideration paid
 

 
(1,700
)
Net cash provided by financing activities
 
296,263

 
388,945

 
 
 
 
 
Net change in cash and cash equivalents
 
(109,706
)
 
(11,243
)
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
248,763

 
113,075

 
 
 
 
 
Cash and cash equivalents at end of period
 
$
139,057

 
$
101,832

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid on deposits
 
$
32,160

 
$
19,398

Interest paid on borrowed funds
 
14,202

 
10,021

Income taxes paid (refund), net
 
(2,446
)
 
6,339

 
 
 
 
 
Other non-cash changes:
 
 

 
 

Other net comprehensive income
 
(20,070
)
 
565

Real estate owned acquired in settlement of loans
 
(1,600
)
 
390

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 adjustments 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 second 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 and the review will be completed in the third quarter of 2018.

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.


10


NOTES TO CONSOLIDATED 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 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 immaterial 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

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 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 do not expect adoption to have a material 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 $10.4 million and $10.8 million, and a fair value of $11.5 million and $12.3 million, at June 30, 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 June 30, 2018.

13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company adopted ASU-2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" in the first quarter of 2018. 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 marketable equity securities:
(In thousands)
 
Amortized  Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
June 30, 2018
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
110,381

 
$
2,475

 
$
(719
)
 
$
112,137

Agency collateralized mortgage obligations
 
940,130

 
10

 
(24,923
)
 
915,217

Agency mortgage-backed securities
 
190,872

 
45

 
(6,247
)
 
184,670

Agency commercial mortgage-backed securities
 
62,930

 

 
(3,417
)
 
59,513

Corporate bonds
 
100,985

 
534

 
(457
)
 
101,062

Trust preferred securities
 
11,266

 
348

 

 
11,614

Other bonds and obligations
 
9,042

 
44

 
(49
)
 
9,037

Total securities available for sale
 
1,425,606

 
3,456

 
(35,812
)
 
1,393,250

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
268,529

 
3,928

 
(3,066
)
 
269,391

Agency collateralized mortgage obligations
 
72,754

 
169

 
(1,392
)
 
71,531

Agency mortgage-backed securities
 
7,457

 

 
(351
)
 
7,106

Agency commercial mortgage-backed securities
 
10,449

 

 
(532
)
 
9,917

Tax advantaged economic development bonds
 
20,395

 
19

 
(1,194
)
 
19,220

Other bonds and obligations
 
321

 

 

 
321

Total securities held to maturity
 
379,905

 
4,116

 
(6,535
)
 
377,486

 
 
 
 
 
 
 
 
 
Marketable equity securities
 
55,618

 
6,024

 
(1,916
)
 
59,726

Total
 
$
1,861,129

 
$
13,596

 
$
(44,263
)
 
$
1,830,462


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
 
 

 
 

 
 

 
 

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 securities available for sale
 
1,387,250

 
7,108

 
(13,444
)
 
1,380,914

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

 
 
 
 
 
 
 
 
 
Marketable equity securities
 
36,483

 
9,211

 
(509
)
 
45,185

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 June 30, 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
 
$
265

 
$
266

 
$
2,251

 
$
2,251

Over 1 year to 5 years
 
32,662

 
32,794

 
14,496

 
14,425

Over 5 years to 10 years
 
76,018

 
76,647

 
6,701

 
6,780

Over 10 years
 
122,729

 
124,143

 
265,797

 
265,476

Total bonds and obligations
 
231,674

 
233,850

 
289,245

 
288,932

Mortgage-backed securities
 
1,193,932

 
1,159,400

 
90,660

 
88,554

Total
 
$
1,425,606

 
$
1,393,250

 
$
379,905

 
$
377,486


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
June 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
162

 
$
5,805

 
$
557

 
$
8,600

 
$
719

 
$
14,405

Agency collateralized mortgage obligations
 
20,590

 
800,936

 
4,333

 
97,803

 
24,923

 
898,739

Agency mortgage-backed securities
 
3,074

 
119,032

 
3,173

 
62,416

 
6,247

 
181,448

Agency commercial mortgage-backed securities
 
351

 
13,421

 
3,066

 
46,092

 
3,417

 
59,513

Corporate bonds
 
457

 
61,521

 

 

 
457

 
61,521

Other bonds and obligations
 
20

 
987

 
29

 
2,085

 
49

 
3,072

Total securities available for sale
 
24,654

 
1,001,702

 
11,158

 
216,996

 
35,812

 
1,218,698

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
2,885

 
117,250

 
181

 
1,936

 
3,066

 
119,186

Agency collateralized mortgage obligations
 
720

 
31,773

 
672

 
11,882

 
1,392

 
43,655

Agency mortgage-backed securities
 

 

 
351

 
7,106

 
351

 
7,106

Agency commercial mortgage-backed securities
 

 

 
532

 
9,917

 
532

 
9,917

Tax advantaged economic development bonds
 
1,194

 
15,514

 

 

 
1,194

 
15,514

Total securities held to maturity
 
4,799

 
164,537

 
1,736

 
30,841

 
6,535

 
195,378

Total
 
$
29,453

 
$
1,166,239

 
$
12,894

 
$
247,837

 
$
42,347

 
$
1,414,076

 
 
 
 
 
 
 
 
 
 
 
 
 
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

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