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Section 1: 10-Q (10-Q)

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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, 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
395709409_newlogoa06.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 every Interactive Data File required to be submitted 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     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 45,416,443 shares of common stock, par value $0.01 per share, outstanding as of November 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
 
 
September 30,
2018

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

Assets
 
 

 
 

Cash and due from banks
 
$
93,038

 
$
91,122

Short-term investments
 
42,696

 
157,641

Total cash and cash equivalents
 
135,734

 
248,763

Trading security, at fair value
 
11,179

 
12,277

Marketable equity securities, at fair value
 
59,734

 
45,185

Securities available for sale, at fair value
 
1,391,373

 
1,380,914

Securities held to maturity (fair values of $371,775 and $405,276)
 
379,404

 
397,103

Federal Home Loan Bank stock and other restricted securities
 
76,184

 
63,085

Total securities
 
1,917,874

 
1,898,564

Loans held for sale, at fair value
 
91,639

 
153,620

Commercial real estate loans
 
3,371,773

 
3,264,742

Commercial and industrial loans
 
1,902,228

 
1,803,939

Residential mortgages
 
2,509,324

 
2,102,807

Consumer loans
 
1,121,188

 
1,127,850

Total loans
 
8,904,513

 
8,299,338

Less: Allowance for loan losses
 
(58,457
)
 
(51,834
)
Net loans
 
8,846,056

 
8,247,504

Premises and equipment, net
 
111,130

 
109,352

Goodwill
 
518,325

 
519,287

Other intangible assets
 
34,620

 
38,296

Cash surrender value of bank-owned life insurance policies
 
194,369

 
191,221

Deferred tax assets, net
 
56,708

 
47,061

Other assets
 
123,604

 
117,083

Total assets
 
$
12,030,059

 
$
11,570,751

 
 
 
 
 
Liabilities
 
 

 
 

Demand deposits
 
$
1,563,845

 
$
1,606,656

NOW and other deposits
 
844,210

 
734,558

Money market deposits
 
2,447,184

 
2,776,157

Savings deposits
 
737,682

 
741,954

Time deposits
 
3,173,180

 
2,890,205

Total deposits
 
8,766,101

 
8,749,530

Short-term debt
 
1,187,944

 
667,300

Long-term Federal Home Loan Bank advances
 
262,709

 
380,436

Subordinated borrowings
 
89,473

 
89,339

Total borrowings
 
1,540,126

 
1,137,075

Other liabilities
 
191,517

 
187,882

Total liabilities
 
$
10,497,744

 
$
10,074,487

(continued)
 
 
 
 
 
September 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 45,420,478 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
 
1,244,748

 
1,242,487

Unearned compensation
 
(8,661
)
 
(6,531
)
Retained earnings
 
305,259

 
239,179

Accumulated other comprehensive (loss) income
 
(28,647
)
 
4,161

Treasury stock, at cost (791,416 shares in 2018 and 921,461 shares in 2017)
 
(21,477
)
 
(24,125
)
Total shareholders’ equity
 
1,532,315

 
1,496,264

Total liabilities and shareholders’ equity
 
$
12,030,059

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

 
 

 
 

 
 

Loans
 
$
104,273

 
$
76,024

 
$
298,757

 
$
216,950

Securities and other
 
14,918

 
13,036

 
44,553

 
37,485

Total interest and dividend income
 
119,191

 
89,060

 
343,310

 
254,435

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
21,460

 
10,984

 
54,553

 
30,053

Borrowings
 
8,390

 
6,078

 
22,825

 
15,953

Total interest expense
 
29,850

 
17,062

 
77,378

 
46,006

Net interest income
 
89,341

 
71,998

 
265,932

 
208,429

Non-interest income
 
 

 
 

 
 

 
 

Mortgage banking originations
 
8,971

 
13,374

 
29,313

 
42,333

Loan related income
 
7,537

 
6,081

 
19,524

 
15,535

Deposit related fees
 
7,004

 
6,445

 
22,675

 
19,294

Insurance commissions and fees
 
2,930

 
2,581

 
8,504

 
8,305

Wealth management fees
 
2,283

 
2,315

 
7,160

 
7,127

Total fee income
 
28,725

 
30,796

 
87,176

 
92,594

Other, net
 
468

 
(2,255
)
 
1,891

 
(2,438
)
Gain/(loss) on securities, net
 
88

 
(1
)
 
(696
)
 
12,568

Gain on sale of business operations and other assets, net
 

 
296

 
460

 
296

Loss on termination of hedges
 

 

 

 
(6,629
)
Total non-interest income
 
29,281

 
28,836

 
88,831

 
96,391

Total net revenue
 
118,622

 
100,834

 
354,763

 
304,820

Provision for loan losses
 
6,628

 
4,900

 
18,735

 
14,884

Non-interest expense
 
 

 
 

 
 

 
 

Compensation and benefits
 
39,923

 
37,643

 
123,241

 
110,759

Occupancy and equipment
 
10,144

 
8,267

 
30,456

 
25,971

Technology and communications
 
7,949

 
6,644

 
22,138

 
19,614

Marketing and promotion
 
1,484

 
2,128

 
6,465

 
7,304

Professional services
 
1,867

 
2,247

 
5,059

 
6,888

FDIC premiums and assessments
 
1,640

 
1,651

 
4,246

 
4,537

Other real estate owned and foreclosures
 
(1
)
 
(23
)
 
67

 
35

Amortization of intangible assets
 
1,218

 
739

 
3,732

 
2,310

Acquisition, restructuring, and other expenses
 
198

 
1,420

 
6,138

 
16,005

Other
 
6,555

 
5,104

 
18,641

 
16,246

Total non-interest expense
 
70,977

 
65,820

 
220,183

 
209,669

 
 
 
 
 
 
 
 
 
Income before income taxes
 
41,017

 
30,114

 
115,845

 
80,267

Income tax expense
 
8,790

 
7,211

 
24,339

 
22,210

Net income
 
$
32,227

 
$
22,903

 
$
91,506

 
$
58,057

Preferred stock dividend
 
230

 

 
689

 

Income available to common shareholders
 
31,997


22,903


90,817


58,057

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 

 
 

 
 

 
 

Basic
 
$
0.70

 
$
0.57

 
$
1.99

 
$
1.55

Diluted
 
$
0.70

 
$
0.57

 
$
1.98

 
$
1.54

Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
46,030

 
39,984

 
46,009

 
37,547

Diluted
 
46,263

 
40,145

 
46,226

 
37,708

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)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
32,227

 
$
22,903

 
$
91,506

 
$
58,057

Other comprehensive income, before tax:
 
 

 
 

 
 

 
 

Changes in unrealized loss on debt securities available-for-sale
 
(9,929
)
 
1,461

 
(36,931
)
 
(4,044
)
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
 
2,548

 
(605
)
 
9,480

 
1,481

Changes in unrealized gains on derivative hedges
 

 

 

 
(2,589
)
Total other comprehensive (loss)/income
 
(7,381
)
 
856

 
(27,451
)
 
1,421

Total comprehensive income
 
$
24,846

 
$
23,759

 
$
64,055

 
$
59,478

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
 

 

 

 

 

 

 
58,057

 

 

 
58,057

Other comprehensive loss
 

 

 

 

 

 

 

 
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
)
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

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 

 

 

 
91,506

 

 

 
91,506

Other comprehensive loss
 

 

 

 

 

 

 

 
(27,451
)
 

 
(27,451
)
Total comprehensive income
 

 

 

 

 

 

 
91,506

 
(27,451
)
 

 
64,055

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 ($0.66 per share)
 

 

 

 

 

 

 
(29,972
)
 

 

 
(29,972
)
Cash dividends declared on preferred shares ($1.32 per share)
 

 

 

 

 

 

 
(689
)
 

 

 
(689
)
Forfeited shares
 

 

 
(18
)
 

 
88

 
600

 

 

 
(688
)
 

Exercise of stock options
 

 

 
8

 

 

 

 
(122
)
 

 
224

 
102

Restricted stock grants
 

 

 
185

 

 
2,157

 
(7,011
)
 

 

 
4,854

 

Stock-based compensation
 

 

 

 

 

 
4,281

 

 

 

 
4,281

Other, net
 

 

 
(45
)
 

 
16

 

 

 

 
(1,742
)
 
(1,726
)
Balance at September 30, 2018
 
522

 
$
40,633

 
45,420

 
$
460

 
$
1,244,748

 
$
(8,661
)
 
$
305,259

 
$
(28,647
)
 
$
(21,477
)
 
$
1,532,315

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)
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net income
 
$
91,506

 
$
58,057

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

 
 

Provision for loan losses
 
18,735

 
14,884

Net amortization of securities
 
2,166

 
2,103

Change in unamortized net loan costs and premiums
 
(1,963
)
 
1,388

Premises and equipment depreciation and amortization expense
 
8,047

 
7,448

Stock-based compensation expense
 
4,281

 
3,865

Accretion of purchase accounting entries, net
 
(15,735
)
 
(11,837
)
Amortization of other intangibles
 
3,732

 
2,310

Write down of other real estate owned
 

 
10

Income from cash surrender value of bank-owned life insurance policies
 
(3,607
)
 
(2,343
)
Securities losses (gains), net
 
696

 
(12,568
)
Originations of loans held for sale
 
(1,604,993
)
 
(1,769,385
)
Proceeds from sale of loans held for sale
 
1,696,287

 
1,788,646

Net gain on sale of loans and other mortgage banking income
 
(29,313
)
 
(42,333
)
Loss on disposition of assets
 

 
912

Gain on sale of real estate
 

 
(54
)
Amortization of interest in tax-advantaged projects
 
3,212

 
6,129

Net change in other
 
8,640

 
3,602

Net cash provided by operating activities
 
181,691

 
50,834

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Net decrease in trading security
 
495

 
468

Proceeds from sales of securities available for sale
 
499

 
44,446

Proceeds from maturities, calls, and prepayments of securities available for sale
 
142,314

 
139,434

Purchases of securities available for sale
 
(223,337
)
 
(329,385
)
Proceeds from sales of marketable equity securities
 
32,137

 
44,994

Purchases of marketable equity securities
 
(18,649
)
 
(20,618
)
Proceeds from maturities, calls, and prepayments of securities held to maturity
 
29,069

 
8,094

Purchases of securities held to maturity
 
(12,865
)
 
(70,153
)
Net change in loans
 
(609,637
)
 
(330,869
)
Purchases of bank owned life insurance
 

 
(20,000
)
Proceeds from surrender of bank-owned life insurance
 
459

 
310

Proceeds from sale of Federal Home Loan Bank stock
 
49,793

 
72,642

Purchase of Federal Home Loan Bank stock
 
(62,892
)
 
(76,646
)
Net investment in limited partnership tax credits
 
(3,815
)
 
(4,742
)
Purchase of premises and equipment, net
 
(9,648
)
 
(9,740
)
Payment to terminate cash flow hedges
 

 
6,573

Proceeds from sale of other real estate
 
1,600

 
352

Net cash (used) by investing activities
 
(684,477
)
 
(544,840
)

8

Table of Contents

 
 
Nine Months Ended
September 30,
(In thousands)
 
2018
 
2017
(continued)
Cash flows from financing activities:
 
 

 
 

Net increase in deposits
 
17,419

 
170,381

Proceeds from Federal Home Loan Bank advances and other borrowings
 
3,673,840

 
5,291,601

Repayments of Federal Home Loan Bank advances and other borrowings
 
(3,270,943
)
 
(5,116,876
)
Exercise of stock options
 
102

 
161

Common and preferred stock cash dividends paid
 
(30,661
)
 
(23,515
)
Common stock issued, net
 

 
152,925

Acquisition contingent consideration paid
 

 
(1,700
)
Net cash provided by financing activities
 
389,757

 
472,977

 
 
 
 
 
Net change in cash and cash equivalents
 
(113,029
)
 
(21,029
)
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
248,763

 
113,075

 
 
 
 
 
Cash and cash equivalents at end of period
 
$
135,734

 
$
92,046

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid on deposits
 
$
52,539

 
$
29,822

Interest paid on borrowed funds
 
22,824

 
15,775

Income taxes paid (refund), net
 
758

 
9,467

 
 
 
 
 
Other non-cash changes:
 
 

 
 

Other net comprehensive income
 
(27,451
)
 
1,421

Real estate owned acquired in settlement of loans
 
(1,600
)
 
444

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.


10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the nine months ended September 30, 2018, immaterial adjustments were made to the preliminary valuation of the assets acquired and liabilities assumed. These adjustments affect goodwill, other assets, and deferred tax assets. As of September 30, 2018, the Company finalized its valuation of all assets acquired and liabilities assumed, resulting in no material change to acquisition accounting adjustments. A summary of the fair values of the acquired assets, liabilities assumed, and resulting goodwill follows:
 
 
 
Fair Value
As Recorded by
(In thousands)
 
As Acquired
Adjustments
the Company
Consideration Paid:
 
 
 
 
Company common stock issued to Commerce common shareholders
 
 
 
$
188,599

Company preferred stock issued to certain Commerce shareholders
 
 
 
40,633

Cash in lieu paid to Commerce shareholders
 
 
 
1

Total consideration paid
 
 
 
229,233

Recognized amounts of identifiable assets acquired and (liabilities) assumed, at fair value:
 
 
Cash and short-term investments
 
$
374,611


$
374,611

Investment securities
 
115,274

(1,427
)
113,847

Loans, net
 
1,327,256

(86,505
)
1,240,751

Premises and equipment
 
8,931

5,346

14,277

Core deposit intangibles
 

22,400

22,400

Deferred tax assets, net
 
7,956

27,060

35,016

Goodwill and other intangibles
 
11,233

(11,233
)

Other assets
 
52,709

(3,182
)
49,527

Deposits
 
(1,710,872
)
(1,180
)
(1,712,052
)
Borrowings
 
(19,542
)

(19,542
)
Other liabilities
 
(5,086
)
265

(4,821
)
Total identifiable net assets
 
$
162,470

(48,456
)
114,014

 
 
 
 
 
Goodwill
 
 
 
115,219


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 (Topic 606) (additional information is disclosed in Note 14 - Revenue of the consolidated financial statements);
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): 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 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.


11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Future Application of Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. 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, Topic 606. Entities will not be required to reassess transactions previously accounted under then existing guidance.

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. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU No. 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. As the Company expects to elect the transition option provided in ASU No. 2018-11, the modified retrospective approach will be applied on January 1, 2019 (as opposed to January 1, 2017). The Company also expects to elect certain practical expedients provided under ASU No. 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company continues to evaluate 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 is nearing completion of its effort 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 "Financial Instruments - Credit Losses (Topic 326): 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

12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. A cross-functional working group has been formed and is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. We are working through our implementation plan which includes assessment and documentation of processes and internal controls; model development and documentation; and system configuration. We are also in the process of implementing a third-party vendor solution to assist us in the application of ASU No. 2016-13. The Company expects the primary changes to be the application of the new expected credit loss model from the incurred model. 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 (Topic 350): 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 (Topic 815): 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 No. 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.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Entities are also allowed to elect early adoption for the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on our consolidated financial statements.




13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2018, the FASB issued ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. As ASU No. 2018-14 only revises disclosure requirements, it will not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU No. 2018-15 clarifies certain aspects of ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU No. 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU No. 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after 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.


14


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 $10.3 million and $10.8 million, and a fair value of $11.2 million and $12.3 million, at September 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 September 30, 2018.

15


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
September 30, 2018
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
109,583

 
$
1,447

 
$
(1,111
)
 
$
109,919

Agency collateralized mortgage obligations
 
950,496

 
4

 
(31,021
)
 
919,479

Agency mortgage-backed securities
 
182,301

 
38

 
(7,583
)
 
174,756

Agency commercial mortgage-backed securities
 
62,526

 

 
(3,862
)
 
58,664

Corporate bonds
 
108,507

 
402

 
(456
)
 
108,453

Trust preferred securities
 
11,143

 
283

 

 
11,426

Other bonds and obligations
 
8,780

 
13

 
(117
)
 
8,676

Total securities available for sale
 
1,433,336

 
2,187

 
(44,150
)
 
1,391,373

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
269,076

 
2,711

 
(6,254
)
 
265,533

Agency collateralized mortgage obligations
 
72,195

 
2

 
(2,076
)
 
70,121

Agency mortgage-backed securities
 
7,322

 

 
(428
)
 
6,894

Agency commercial mortgage-backed securities
 
10,433

 

 
(566
)
 
9,867

Tax advantaged economic development bonds
 
20,078

 
12

 
(1,030
)
 
19,060

Other bonds and obligations
 
300

 

 

 
300

Total securities held to maturity
 
379,404

 
2,725

 
(10,354
)
 
371,775

 
 
 
 
 
 
 
 
 
Marketable equity securities
 
55,545

 
6,069

 
(1,880
)
 
59,734

Total
 
$
1,868,285

 
$
10,981

 
$
(56,384
)
 
$
1,822,882


16


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 September 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
 
$
1,331

 
$
1,335

 
$
5,625

 
$
5,625

Over 1 year to 5 years
 
32,129

 
32,099

 
14,330

 
14,232

Over 5 years to 10 years
 
75,661

 
75,882

 
12,286

 
12,319

Over 10 years
 
128,892

 
129,158

 
257,213

 
252,717

Total bonds and obligations
 
238,013

 
238,474

 
289,454

 
284,893

Mortgage-backed securities
 
1,195,323

 
1,152,899

 
89,950

 
86,882

Total
 
$
1,433,336

 
$
1,391,373

 
$
379,404

 
$
371,775


17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities available for sale and held to maturity 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, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
404

 
$
18,792

 
$
707

 
$
8,434

 
$
1,111

 
$
27,226

Agency collateralized mortgage obligations
 
12,063

 
474,842

 
18,958

 
434,009

 
31,021

 
908,851

Agency mortgage-backed securities
 
2,244

 
69,578

 
5,339

 
102,865

 
7,583

 
172,443

Agency commercial mortgage-backed securities
 
362

 
9,107

 
3,500

 
49,557

 
3,862

 
58,664

Corporate bonds
 
456

 
53,366

 

 

 
456

 
53,366

Other bonds and obligations
 
66

 
3,537

 
51

 
3,065

 
117

 
6,602

Total securities available for sale
 
15,595

 
629,222

 
28,555

 
597,930

 
44,150

 
1,227,152

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
6,037

 
147,443

 
217

 
1,901

 
6,254

 
149,344

Agency collateralized mortgage obligations
 
1,347

 
58,734

 
729

 
11,325

 
2,076

 
70,059

Agency mortgage-backed securities
 

 

 
428

 
6,894

 
428

 
6,894

Agency commercial mortgage-backed securities
 

 

 
566

 
9,867

 
566

 
9,867

Tax advantaged economic development bonds
 
1,030

 
17,165

 

 

 
1,030

 
17,165

Total securities held to maturity
 
8,414

 
223,342

 
1,940

 
29,987

 
10,354

 
253,329

Total
 
$
24,009

 
$
852,564

 
$
30,495

 
$
627,917

 
$
54,504

 
$
1,480,481

 
 
 
 
 
 
 
 
 
 
 
 
 
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