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
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.
 


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

2

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3

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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

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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

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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

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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)

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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
T he 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

109,019

400,113

 
294,954

115,227

410,181

Auto and other
607,726

101,060

708,786

 
603,767

113,902

717,669

Total consumer loans
898,820

210,079

1,108,899

 
898,721

229,129

1,127,850

 
 
 
 
 
 
 
 
Total loans
$
6,282,678

$
2,093,739

$
8,376,417

 
$
6,112,198

$
2,187,140

$
8,299,338


19


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying amount of the acquired loans at March 31, 2018 totaled $2.1 billion . A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $93.6 million (and a note balance of $202.8 million ). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not credit-impaired at acquisition date had a carrying amount of $2.0 billion .

At December 31, 2017, acquired loans maintained a carrying value of $2.2 billion and purchased credit-impaired loans totaled $97.3 million (note balance of $208.7 million). Loans considered not credit-impaired at acquisition date had a carrying amount of $2.1 billion .

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality :
 
 
Three Months Ended March 31,
(In thousands)
 
2018
 
2017
Balance at beginning of period
 
$
11,561

 
$
8,738

Reclassification from nonaccretable difference for loans with improved cash flows
 
1,742

 
418

Change in cash flows that do not affect nonaccretable difference
 
(188
)
 
(747
)
Accretion
 
(2,723
)
 
(1,046
)
Balance at end of period
 
$
10,392

 
$
7,363




20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of past due loans at March 31, 2018 and December 31, 2017:

Business Activities Loans
(In thousands)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90
Days or Greater Past
Due
 
Total Past
Due
 
Current
 
Total Loans
 
Past Due >
90 days and
Accruing
March 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction
 
$

 
$

 
$

 
$

 
$
255,835

 
$
255,835

 
$

Single and multi-family
 

 

 
443

 
443

 
344,737

 
345,180

 
10

Other commercial real estate
 
1,673

 
15,305

 
5,580

 
22,558

 
1,657,930

 
1,680,488

 
64

Total
 
1,673

 
15,305

 
6,023

 
23,001

 
2,258,502

 
2,281,503

 
74

Commercial and industrial loans:
 
 

 
 

 
 

 
 

 
 
 
 
 
 

Total
 
1,492

 
1,275

 
5,876

 
8,643

 
1,186,999

 
1,195,642

 
4

Residential mortgages:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

1-4 family
 
861

 
543

 
2,465

 
3,869

 
1,896,723

 
1,900,592

 
425

Construction
 

 

 

 

 
6,121

 
6,121

 

Total
 
861

 
543

 
2,465

 
3,869

 
1,902,844

 
1,906,713

 
425

Consumer loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Home equity
 
161

 
99

 
2,695

 
2,955

 
288,139

 
291,094

 
97

Auto and other
 
2,174

 
695

 
1,774

 
4,643

 
603,083

 
607,726

 
112

Total
 
2,335

 
794

 
4,469

 
7,598

 
891,222

 
898,820

 
209

Total
 
$
6,361

 
$
17,917

 
$
18,833

 
$
43,111

 
$
6,239,567

 
$
6,282,678

 
$
712


Business Activities Loans
(In thousands)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90
Days or Greater Past
Due
 
Total Past
Due
 
Current
 
Total Loans
 
Past Due >
90 days and
Accruing
December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction
 
$

 
$

 
$

 
$

 
$
269,206

 
$
269,206

 
$

Single and multi-family
 

 

 
451

 
451

 
216,632

 
217,083

 

Other commercial real estate
 
1,925

 
48

 
5,023

 
6,996

 
1,724,422

 
1,731,418

 
457

Total
 
1,925

 
48

 
5,474

 
7,447

 
2,210,260

 
2,217,707

 
457

Commercial and industrial loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total
 
4,031

 
1,912

 
6,023

 
11,966

 
1,170,603

 
1,182,569

 
128

Residential mortgages:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

1-4 family
 
2,412

 
242

 
2,186

 
4,840

 
1,803,184

 
1,808,024

 
520

Construction
 

 

 

 

 
5,177

 
5,177

 

Total
 
2,412

 
242

 
2,186

 
4,840

 
1,808,361

 
1,813,201

 
520

Consumer loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Home equity
 
444

 
1,235

 
1,747

 
3,426

 
291,528

 
294,954

 
120

Auto and other
 
3,389

 
599

 
1,597

 
5,585

 
598,182

 
603,767

 
143

Total
 
3,833

 
1,834

 
3,344

 
9,011

 
889,710

 
898,721

 
263

Total
 
$
12,201

 
$
4,036

 
$
17,027

 
$
33,264

 
$
6,078,934

 
$
6,112,198

 
$
1,368


21


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans
(In thousands)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90
Days or Greater Past
Due
 
Total Past
Due
 
Acquired
Credit
Impaired
 
Total Loans
 
Past Due >
90 days and
Accruing
March 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction
 
$

 
$

 
$

 
$

 
$
7,651

 
$
91,468

 
$

Single and multi-family
 
185

 

 
228

 
413

 
2,530

 
197,040

 

Other commercial real estate
 
225

 

 
4,958

 
5,183

 
37,704

 
696,726

 
1,050

Total
 
410

 

 
5,186

 
5,596

 
47,885

 
985,234

 
1,050

Commercial and industrial loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total
 
822

 
107

 
1,906

 
2,835

 
36,461

 
623,332

 
348

Residential mortgages:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

1-4 family
 
434

 
396

 
3,736

 
4,566

 
6,903

 
274,890

 

Construction
 

 

 

 

 

 
204

 

Total
 
434

 
396

 
3,736

 
4,566

 
6,903

 
275,094

 

Consumer loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Home equity
 
216

 
81

 
1,251

 
1,548

 
1,965

 
109,019

 

Auto and other
 
277

 
57

 
500

 
834

 
431

 
101,060

 
15

Total
 
493

 
138

 
1,751

 
2,382

 
2,396

 
210,079

 
15

Total
 
$
2,159

 
$
641

 
$
12,579

 
$
15,379

 
$
93,645

 
$
2,093,739

 
$
1,413


Acquired Loans
(In thousands)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90
Days or Greater Past
Due
 
Total Past
Due
 
Acquired
Credit
Impaired
 
Total Loans
 
Past Due >
90 days and
Accruing
December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate:
 
 

 
 

 
 

 

 
 

 
 

 
 

Construction
 
$

 
$

 
$

 
$

 
$
7,655

 
$
84,965

 
$

Single and multi-family
 
671

 

 
203

 
874

 
2,846

 
206,082

 

Other commercial real estate
 
816

 
1,875

 
2,156

 
4,847

 
42,801

 
755,988

 
109

Total
 
1,487

 
1,875

 
2,359

 
5,721

 
53,302

 
1,047,035

 
109

Commercial and industrial loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total
 
1,252

 
268

 
1,439

 
2,959

 
34,629

 
621,370

 
23

Residential mortgages:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

1-4 family
 
957

 
2,581

 
1,247

 
4,785

 
6,974

 
289,373

 
30

Construction
 

 

 

 

 

 
233

 

Total
 
957

 
2,581

 
1,247

 
4,785

 
6,974

 
289,606

 
30

Consumer loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Home equity
 
286

 
40

 
1,965

 
2,291

 
1,956

 
115,227

 

Auto and other
 
346

 
135

 
430

 
911

 
483

 
113,902

 
38

Total
 
632

 
175

 
2,395

 
3,202

 
2,439

 
229,129

 
38

Total
 
$
4,328

 
$
4,899

 
$
7,440

 
$
16,667

 
$
97,344

 
$
2,187,140

 
$
200



22


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is summary information pertaining to non-accrual loans at March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
December 31, 2017
(In thousands)
 
Business
Activities Loans
 
Acquired
Loans (1)
 
Total
 
Business
Activities Loans
 
Acquired
Loans (2)
 
Total
Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction
 
$

 
$

 
$

 
$

 
$

 
$

Single and multi-family
 
433

 
228

 
661

 
451

 
203

 
654

Other commercial real estate
 
5,516

 
3,908

 
9,424

 
4,566

 
2,047

 
6,613

Total
 
5,949

 
4,136

 
10,085

 
5,017

 
2,250

 
7,267

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial loans:
 
 

 
 

 
 

 
 

 
 

 
 

Total
 
5,872

 
1,558

 
7,430

 
5,895

 
1,333

 
7,228

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages:
 
 

 
 

 
 

 
 

 
 

 
 

1-4 family
 
2,040

 
3,736

 
5,776

 
1,666

 
1,217

 
2,883

Construction
 

 

 

 

 

 

Total
 
2,040

 
3,736

 
5,776

 
1,666

 
1,217

 
2,883

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans:
 
 

 
 

 
 

 
 

 
 

 
 

Home equity
 
2,598

 
1,251

 
3,849

 
1,627

 
1,965

 
3,592

Auto and other
 
1,662

 
485

 
2,147

 
1,454

 
392

 
1,846

Total
 
4,260

 
1,736

 
5,996

 
3,081

 
2,357

 
5,438

Total non-accrual loans
 
$
18,121

 
$
11,166

 
$
29,287

 
$
15,659

 
$
7,157

 
$
22,816

_______________________________________
(1)  At quarter end March 31, 2018 , there were no acquired credit impaired loans greater than 90 days past due.
(2)  At December 31, 2017, acquired credit impaired loans accounted for $83 thousand of loans greater than 90 days past due that are not presented in the above table.

23


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans evaluated for impairment as of March 31, 2018 and December 31, 2017 were as follows:

Business Activities Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
March 31, 2018
 
 

 
 

 
 

 
 

 
 

Loans receivable:
 
 

 
 

 
 

 
 

 
 

Balance at end of period
 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
33,094

 
$
6,913

 
$
2,466

 
$
1,845

 
$
44,318

Collectively evaluated for impairment
 
2,248,409

 
1,188,729

 
1,904,247

 
896,975

 
6,238,360

Total
 
$
2,281,503

 
$
1,195,642

 
$
1,906,713

 
$
898,820

 
$
6,282,678


Business Activities Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
December 31, 2017
 
 

 
 

 
 

 
 

 
 

Loans receivable:
 
 

 
 

 
 

 
 

 
 

Balance at end of year
 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
33,732

 
$
5,761

 
$
3,872

 
$

 
$
43,365

Collectively evaluated for impairment
 
2,183,975

 
1,176,808

 
1,809,329

 
898,721

 
6,068,833

Total
 
$
2,217,707

 
$
1,182,569

 
$
1,813,201

 
$
898,721

 
$
6,112,198


Acquired Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
March 31, 2018
 
 

 
 

 
 

 
 

 
 

Loans receivable:
 
 

 
 

 
 

 
 

 
 

Balance at end of Period
 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
5,424

 
$
745

 
$
2,695

 
$
1,094

 
$
9,958

Purchased credit-impaired loans
 
47,885

 
36,461

 
6,903

 
2,396

 
93,645

Collectively evaluated for impairment
 
931,925

 
586,126

 
265,496

 
206,589

 
1,990,136

Total
 
$
985,234

 
$
623,332

 
$
275,094

 
$
210,079

 
$
2,093,739


Acquired Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
December 31, 2017
 
 

 
 

 
 

 
 

 
 

Loans receivable:
 
 

 
 

 
 

 
 

 
 

Balance at end of year
 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
4,244

 
$
421

 
$
2,617

 
$
27

 
$
7,309

Purchased credit-impaired loans
 
53,302

 
34,629

 
6,974

 
2,439

 
97,344

Collectively evaluated for impairment
 
989,489

 
586,320

 
280,015

 
226,663

 
2,082,487

Total
 
$
1,047,035

 
$
621,370

 
$
289,606

 
$
229,129

 
$
2,187,140


24


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of impaired loans at March 31, 2018 and December 31, 2017:

Business Activities Loans
 
 
March 31, 2018
(In thousands)
 
Recorded Investment (1)
 
Unpaid Principal
Balance (2)
 
Related Allowance
With no related allowance:
 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$

 
$

 
$

Other commercial real estate loans
 
20,286

 
23,042

 

Commercial and industrial loans
 
3,091

 
3,846

 

Residential mortgages - 1-4 family
 
1,011

 
1,433

 

Consumer - home equity
 
1,784

 
2,415

 

Consumer - other
 

 

 

 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
309

 
$
323

 
$
1

Other commercial real estate loans
 
12,835

 
15,762

 
173

Commercial and industrial loans
 
3,915

 
4,494

 
296

Residential mortgages - 1-4 family
 
1,478

 
1,580

 
137

Consumer - home equity
 
45

 
53

 
1

Consumer - other
 
16

 
16

 
1

 
 
 
 
 
 
 
Total
 
 

 
 

 
 

Commercial real estate
 
$
33,430

 
$
39,127

 
$
174

Commercial and industrial loans
 
7,006

 
8,340

 
296

Residential mortgages
 
2,489

 
3,013

 
137

Consumer
 
1,845

 
2,484

 
2

Total impaired loans
 
$
44,770

 
$
52,964

 
$
609

(1) The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on the Consolidated Balance Sheet.
(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.


25


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Activities Loans
 
 
December 31, 2017
(In thousands)
 
Recorded Investment (1)
 
Unpaid Principal
Balance (2)
 
Related Allowance
With no related allowance:
 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
1,077

 
$
3,607

 
$

Other commercial real estate loans
 
18,285

 
18,611

 

Commercial and industrial loans
 
2,060

 
2,629

 

Residential mortgages - 1-4 family
 
660

 
1,075

 

Consumer - home equity
 
867

 
1,504

 

 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

Commercial real estate - construction
 
$
159

 
$
159

 
$
1

Commercial real estate - single and multifamily
 
159

 
171

 
1

Other commercial real estate loans
 
14,321

 
15,235

 
227

Commercial and industrial loans
 
3,716

 
4,249

 
66

Residential mortgages - 1-4 family
 
1,344

 
1,446

 
130

Consumer - home equity
 
1,014

 
999

 
34

Consumer - other
 
17

 
17

 
1

 
 
 
 
 
 
 
Total
 
 

 
 

 
 

Commercial real estate
 
$
34,001

 
$
37,783

 
$
229

Commercial and industrial loans
 
5,776

 
6,878

 
66

Residential mortgages
 
2,004

 
2,521

 
130

Consumer
 
1,898

 
2,520

 
35

Total impaired loans
 
$
43,679

 
$
49,702

 
$
460

(1) The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on the Consolidated Balance Sheet.
(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.


26


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans
 
 
March 31, 2018
(In thousands)
 
Recorded Investment (1)
 
Unpaid Principal
Balance (2)
 
Related Allowance
With no related allowance:
 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
185

 
$
276

 
$

Other commercial real estate loans
 
2,400

 
5,192

 

Commercial and industrial loans
 
574

 
1,618

 

Residential mortgages - 1-4 family
 
697

 
709

 

Consumer - home equity
 
754

 
1,303

 

Consumer - other
 
17

 
18

 

 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
766

 
$
763

 
$
12

Other commercial real estate loans
 
2,082

 
2,093

 
29

Commercial and industrial loans
 
178

 
176

 
3

Residential mortgages - 1-4 family
 
2,004

 
2,385

 
506

Consumer - home equity
 
323

 
362

 
30

 
 
 
 
 
 
 
Total
 
 

 
 

 
x

Commercial real estate
 
$
5,433

 
$
8,324

 
$
41

Commercial and industrial loans
 
752

 
1,794

 
3

Residential mortgages
 
2,701

 
3,094

 
506

Consumer
 
1,094

 
1,683

 
30

Total impaired loans
 
$
9,980

 
$
14,895

 
$
580

(1) The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on the Consolidated Balance Sheet.
(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.


27


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans
 
 
December 31, 2017
(In thousands)
 
Recorded Investment (1)
 
Unpaid Principal
Balance (2)
 
Related Allowance
With no related allowance:
 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
204

 
$
290

 
$

Other commercial real estate loans
 
1,123

 
2,794

 

Other commercial and industrial loans
 
255

 
310

 

Residential mortgages - 1-4 family
 
658

 
671

 

Consumer - home equity
 
1,374

 
1,654

 

Consumer - other
 
27

 
27

 

 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
887

 
$
880

 
$
18

Other commercial real estate loans
 
2,043

 
1,661

 
38

Commercial and industrial loans
 
165

 
166

 
1

Residential mortgages - 1-4 family
 
166

 
185

 
9

Consumer - home equity
 
433

 
540

 
45

 
 
 
 
 
 
 
Total
 
 

 
 

 
 

Commercial real estate
 
$
4,257

 
$
5,625

 
$
56

Commercial and industrial loans
 
420

 
476

 
1

Residential mortgages
 
824

 
856

 
9

Consumer
 
1,834

 
2,221

 
45

Total impaired loans
 
$
7,335

 
$
9,178

 
$
111

(1) The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on the Consolidated Balance Sheet.
(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.


28


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the average recorded investment and interest income recognized on impaired loans as of March 31, 2018 and 2017:

Business Activities Loans
 
 
Three Months Ended
March 31, 2018
 
Three Months Ended
March 31, 2017
(In thousands)
 
Average 
Recorded
Investment
 
Cash Basis 
Interest
Income 
Recognized
 
Average 
Recorded
Investment
 
Cash Basis 
Interest
Income 
Recognized
With no related allowance:
 
 

 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$

 
$

 
$
153

 
$

Other commercial real estate loans
 
20,272

 
91

 
20,756

 
217

Commercial and industrial loans
 
2,625

 
62

 
1,350

 
5

Residential mortgages - 1-4 family
 
807

 
14

 
2,025

 
18

Consumer - home equity
 
1,730

 
2

 
1,574

 
19

Consumer - other
 

 

 

 

 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
311

 
$
2

 
$
181

 
$

Other commercial real estate loans
 
12,887

 
167

 
7,011

 
71

Commercial and industrial loans
 
3,933

 
64

 
5,876

 
143

Residential mortgages - 1-4 family
 
1,484

 
17

 
939

 
14

Consumer - home equity
 
46

 
1

 
1,149

 
8

Consumer - other
 
17

 

 

 

 
 
 
 
 
 
 
 
 
Total
 
 

 
 

 
 

 
 

Commercial real estate
 
$
33,470

 
$
260

 
$
28,101

 
$
288

Commercial and industrial loans
 
6,558

 
126

 
7,226

 
148

Residential mortgages
 
2,291

 
31

 
2,964

 
32

Consumer loans
 
1,793

 
3

 
2,723

 
27

Total impaired loans
 
$
44,112

 
$
420

 
$
41,014

 
$
495


29


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans
 
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
(In thousands)
 
Average 
Recorded
Investment
 
Cash Basis 
Interest
Income 
Recognized
 
Average 
Recorded
Investment
 
Cash Basis 
Interest
Income 
Recognized
With no related allowance:
 
 

 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
191

 
$
5

 
$
721

 
$
31

Other commercial real estate loans
 
2,157

 
41

 
1,272

 
21

Commercial and industrial loans
 
425

 
9

 
403

 

Residential mortgages - 1-4 family
 
700

 
4

 
409

 
6

Consumer - home equity
 
953

 

 

 

Consumer - other
 
19

 
1

 

 

 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 

 
 

 
 

 
 

Commercial real estate - single and multifamily
 
$
769

 
$
10

 
$
915

 
$
12

Other commercial real estate loans
 
2,107

 
27

 
1,494

 
19

Commercial and industrial loans
 
61

 
2

 
362

 
13

Residential mortgages - 1-4 family
 
1,520

 
1

 
98

 
1

Consumer - home equity
 
324

 
4

 
743

 
4

Consumer - other
 

 

 

 

 
 
 
 
 
 
 
 
 
Total
 
 

 
 

 
 

 
 

Other commercial real estate loans
 
$
5,224

 
$
83

 
$
4,402

 
$
83

Commercial and industrial loans
 
486

 
11

 
765

 
13

Residential mortgages
 
2,220

 
5

 
507

 
7

Consumer loans
 
1,296

 
5

 
743

 
4

Total impaired loans
 
$
9,226

 
$
104

 
$
6,417

 
$
107


30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Troubled Debt Restructuring Loans
The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months . TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.

The following tables include the recorded investment and number of modifications identified during the three months ended March 31, 2018 and March 31, 2017. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. The modifications for the three months ended March 31, 2018 and 2017 were attributable to interest rate concessions, principal concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity. 
 
 
Three Months Ended March 31, 2018
(Dollars in thousands)
 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings
 
 

 
 

 
 

Commercial and industrial
 
4

 
$
1,995

 
$
1,924

Residential - 1-4 Family
 
1

 
118

 
118

Consumer - Home Equity
 

 

 

Total
 
5

 
$
2,113

 
$
2,042

 
 
Three Months Ended March 31, 2017
(Dollars in thousands)
 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings
 
 

 
 

 
 

Commercial - Other
 
6

 
$
2,832

 
$
2,333

Commercial and industrial - Other
 
1

 
24

 
24

Residential - 1-4 Family
 
2

 
205

 
188

Consumer Home Equity
 
1

 
53

 
53

Total
 
10

 
$
3,114

 
$
2,598


The following table discloses the recorded investments and numbers of modifications for TDRs where a concession has been made within the previous 12 months, that then defaulted in the respective reporting period. For the three months ended March 31, 2018, there were no loans that were restructured that had subsequently defaulted during the period. For the three months ended March 31, 2017, there were two loans that were restructured that had subsequently defaulted during the period.
 
Modifications that Subsequently Defaulted
 
Three Months Ended March 31, 2017
(Dollars in thousands)
Number of Contracts
 
Recorded Investment
Troubled Debt Restructurings
 

 
 

Commercial - Other
1

 
$
113

Commercial and industrial
1

 
$
101



31


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s TDR activity for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
(In thousands)
 
2018
 
2017
Balance at beginning of the period
 
$
41,990

 
$
33,829

Principal payments
 
(639
)
 
(888
)
TDR status change (1)
 

 

Other reductions/increases (2)
 
(288
)
 
(840
)
Newly identified TDRs
 
2,042

 
2,598

Balance at end of the period
 
$
43,105

 
$
34,699

_________________________________
(1) TDR status change classification represents TDR loans with a specified interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk and  the loan was on current payment status and not impaired based on the terms specified by the restructuring agreement.
(2) Other reductions classification consists of transfer to other real estate owned and charge-offs and advances to loans.

The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

As of March 31, 2018 , the Company maintained no foreclosed residential real estate property. Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of March 31, 2018 and December 31, 2017 totaled $7.2 million and $4.9 million , respectively.

32


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.               LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for the three months ended March 31, 2018 and 2017 was as follows:
 
 
At or for the three months ended March 31, 2018
Business Activities Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Balance at beginning of period
 
$
16,843

 
$
13,850

 
$
9,420

 
$
5,807

 
$
45,920

Charged-off loans
 
106

 
890

 

 
940

 
1,936

Recoveries on charged-off loans
 
23

 
44

 

 
74

 
141

Provision/(releases) for loan losses
 
1,081

 
225

 
(822
)
 
2,668

 
3,152

Balance at end of period
 
$
17,841

 
$
13,229

 
$
8,598

 
$
7,609

 
$
47,277


 
 
At or for the three months ended March 31, 2017
Business Activities Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Balance at beginning of period
 
$
16,498

 
$
9,447

 
$
7,805

 
$
5,479

 
$
39,229

       Charged-off loans
 
124

 
1,270

 
235

 
687

 
2,316

Recoveries on charged-off loans
 
58

 
16

 
15

 
86

 
175

Provision/(releases) for loan losses
 
(152
)
 
3,657

 
278

 
592

 
4,375

Balance at end of period
 
$
16,280

 
$
11,850

 
$
7,863

 
$
5,470

 
$
41,463


 
 
At or for the three months ended March 31, 2018
Acquired Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Balance at beginning of period
 
$
3,856

 
$
1,125

 
$
598

 
$
335

 
$
5,914

Charged-off loans
 
740

 
155

 
431

 
529

 
1,855

Recoveries on charged-off loans
 
6

 
29

 
25

 
40

 
100

Provision for loan losses
 
873

 
244

 
854

 
452

 
2,423

Balance at end of period
 
$
3,995

 
$
1,243

 
$
1,046

 
$
298

 
$
6,582



 
 
At or for the three months ended March 31, 2017
Acquired Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Balance at beginning of period
 
$
2,303

 
$
1,164

 
$
766

 
$
536

 
$
4,769

Charged-off loans
 
577

 
436

 
143

 
151

 
1,307

Recoveries on charged-off loans
 
10

 
55

 
39

 
55

 
159

Provision for loan losses
 
392

 
271

 
44

 
13

 
720

Balance at end of period
 
$
2,128

 
$
1,054

 
$
706

 
$
453

 
$
4,341



33


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present a summary of the allowance for loan losses as of March 31, 2018 and December 31, 2017:
 
 
At March 31, 2018
Business Activities Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Individually evaluated for impairment
 
174

 
296

 
137

 
2

 
609

Collectively evaluated for impairment
 
17,667

 
12,933

 
8,461

 
7,607

 
46,668

Total
 
$
17,841

 
$
13,229

 
$
8,598

 
$
7,609

 
$
47,277


 
 
At December 31, 2017
Business Activities Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Individually evaluated for impairment
 
229

 
66

 
130

 
35

 
460

Collectively evaluated for impairment
 
16,614

 
13,784

 
9,290

 
5,772

 
45,460

Total
 
16,843

 
13,850

 
9,420

 
5,807

 
45,920


 
 
At March 31, 2018
Acquired Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Individually evaluated for impairment
 
41

 
3

 
506

 
30

 
580

Collectively evaluated for impairment
 
3,954

 
1,240

 
540

 
268

 
6,002

Total
 
$
3,995

 
$
1,243

 
$
1,046

 
$
298

 
$
6,582


 
 
At December 31, 2017
Acquired Loans
(In thousands)
 
Commercial
real estate
 
Commercial and
industrial loans
 
Residential
mortgages
 
Consumer
 
Total
Individually evaluated for impairment
 
56

 
1

 
9

 
45

 
111

Collectively evaluated for impairment
 
3,800

 
1,124

 
589

 
290

 
5,803

Total
 
3,856

 
1,125

 
598

 
335

 
5,914



Credit Quality Information
Business Activities Loans Credit Quality Analysis
The Company monitors the credit quality of its portfolio by using internal risk ratings that are based on regulatory guidance. Loans that are given a Pass rating are not considered a problem credit. Loans that are classified as Special Mention loans are considered to have potential credit problems and are evaluated closely by management. Substandard and non-accruing loans are loans for which a definitive weakness has been identified and which may make full collection of contractual cash flows questionable. Doubtful loans are those with identified weaknesses that make full collection of contractual cash flows, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 

For commercial credits, the Company assigns an internal risk rating at origination and reviews the rating annually, semiannually or quarterly depending on the risk rating. The rating is also reassessed at any point in time when management becomes aware of information that may affect the borrower’s ability to fulfill their obligations.

The Company risk rates its residential mortgages, including 1-4 family and residential construction loans, based on a three rating system: Pass, Special Mention and Substandard. Loans that are current within 59 days are rated Pass. Residential mortgages that are 60 - 89 days delinquent are rated Special Mention. Loans delinquent for 90 days or greater are rated Substandard and generally placed on non-accrual status. Home equity loans are risk rated based on the same rating system as the Company’s residential mortgages.

34


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Ratings for other consumer loans, including auto loans, are based on a two rating system. Loans that are current within 119 days are rated Performing while loans delinquent for 120 days or more are rated Non-performing. Other consumer loans are placed on non-accrual at such time as they become Non-performing.

Acquired Loans Credit Quality Analysis
Upon acquiring a loan portfolio, the Company's internal loan review function assigns risk ratings to the acquired loans, utilizing the same methodology as it does with business activities loans. This may differ from the risk rating policy of the predecessor bank. Loans which are rated Substandard or worse according to the rating process outlined below are deemed to be credit impaired loans accounted for under ASC 310-30, regardless of whether they are classified as performing or non-performing.

The Bank utilizes an eleven grade internal loan rating system for each of its acquired commercial real estate, construction and commercial loans as outlined in the Credit Quality Information section of this Note. The ratings system is similar to loans originated through business activities.

The Company subjects loans that do not meet the ASC 310-30 criteria to ASC 450-20 ( Loss Contingencies ) by collectively evaluating these loans for an allowance for loan loss. The Company applies a methodology similar to the methodology prescribed for business activities loans, which includes the application of environmental factors to each category of loans. The methodology to collectively evaluate the acquired loans outside the scope of ASC 310-30 includes the application of a number of environmental factors that reflect management’s best estimate of the level of incremental credit losses that might be recognized given current conditions. This is reviewed as part of the allowance for loan loss adequacy analysis. As the loan portfolio matures and environmental factors change, the loan portfolio will be reassessed each quarter to determine an appropriate reserve allowance.

Additionally, the Company considers the need for a reserve for acquired loans accounted for outside of the scope of ASC 310-30 under ASC 310-20. At acquisition date, the Bank determined a fair value mark with credit and interest rate components. Under the Company’s model, the impairment evaluation process involves comparing the carrying value of acquired loans, including the entire unamortized premium or discount, to the calculated reserve allowance. If necessary, the Company books a reserve to account for shortfalls identified through this calculation. Fair value marks are not bifurcated when evaluating for impairment.

A decrease in the expected cash flows in subsequent periods requires the establishment of an allowance for loan losses at that time for ASC 310-30 loans. At March 31, 2018 , the allowance for loan losses related to acquired loans under ASC 310-30 and ASC 310-20 was $6.6 million using the above mentioned criteria.

35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the Company’s loans by risk rating at March 31, 2018 and December 31, 2017:

Business Activities Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
 
 
Construction
 
Single and multi-family
 
Real Estate
 
Total commercial real estate
(In thousands)
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Grade:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Pass
 
$
255,835

 
$
269,206

 
$
342,683

 
$
214,289

 
$
1,627,063

 
$
1,687,256

 
$
2,225,581

 
$
2,170,751

Special mention
 

 

 
2,064

 
504

 
47,909

 
12,999

 
49,973

 
13,503

Substandard
 

 

 
433

 
2,290

 
5,516

 
31,163

 
5,949

 
33,453

Total
 
$
255,835

 
$
269,206

 
$
345,180

 
$
217,083

 
$
1,680,488

 
$
1,731,418

 
$
2,281,503

 
$
2,217,707


Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
 
 
 
Total comm. and industrial loans
(In thousands)
 
 
March 31, 2018
 
December 31, 2017
Grade:
 
 
 

 
 

Pass
 
 
$
1,168,102

 
$
1,156,240

Special mention
 
 
21,668

 
12,806

Substandard
 
 
3,517

 
11,123

Doubtful
 
 
2,355

 
2,400

Total
 
 
$
1,195,642

 
$
1,182,569


Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
 
 
1-4 family
 
Construction
 
Total residential mortgages
(In thousands)
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Grade:
 
 

 
 

 
 

 
 

 
 

 
 

Pass
 
$
1,897,584

 
$
1,805,596

 
$
6,121

 
$
5,177

 
$
1,903,705

 
$
1,810,773

Special mention
 
968

 
242

 

 

 
968

 
242

Substandard
 
2,040

 
2,186

 

 

 
2,040

 
2,186

Total
 
$
1,900,592

 
$
1,808,024

 
$
6,121

 
$
5,177

 
$
1,906,713

 
$
1,813,201


Consumer Loans
Credit Risk Profile Based on Payment Activity
 
 
Home equity
 
Auto and other
 
Total consumer loans
(In thousands)
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Performing
 
$
288,496

 
$
293,327

 
$
606,064

 
$
602,313

 
$
894,560

 
$
895,640

Nonperforming
 
2,598

 
1,627

 
1,662

 
1,454

 
4,260

 
3,081

Total
 
$
291,094

 
$
294,954

 
$
607,726

 
$
603,767

 
$
898,820

 
$
898,721


36


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
 
 
Construction
 
Single and multi-family
 
Real Estate
 
Total commercial real estate
(In thousands)
 
March 31,2018
 
December 31, 2017
 
March 31,2018
 
December 31, 2017
 
March 31,2018
 
December 31, 2017
 
March 31,2018
 
December 31, 2017
Grade:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Pass
 
$
83,117

 
$
76,611

 
$
191,691

 
$
203,624

 
$
628,186

 
$
684,846

 
$
902,994

 
$
965,081

Special mention
 
8,351

 

 
5,121

 
603

 
64,632

 
22,070

 
78,104

 
22,673

Substandard
 

 
8,354

 
228

 
1,855

 
3,908

 
49,072

 
4,136

 
59,281

Total
 
$
91,468

 
$
84,965

 
$
197,040

 
$
206,082

 
$
696,726

 
$
755,988

 
$
985,234

 
$
1,047,035


Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
 
 
 
Total comm. and industrial loans
(In thousands)
 
 
March 31, 2018
 
December 31, 2017
Grade:
 
 
 

 
 

Pass
 
 
$
604,890

 
$
606,922

Special mention
 
 
16,884

 
1,241

Substandard
 
 
1,558

 
13,207

Total
 
 
$
623,332

 
$
621,370


Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
 
 
1-4 family
 
Construction
 
Total residential mortgages
(In thousands)
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Grade:
 
 

 
 

 
 

 
 

 
 

 
 

Pass
 
$
266,514

 
$
281,160

 
$
204

 
$
233

 
$
266,718

 
$
281,393

Special mention
 
4,640

 
2,704

 

 

 
4,640

 
2,704

Substandard
 
3,736

 
5,509

 

 

 
3,736

 
5,509

Total
 
$
274,890

 
$
289,373

 
$
204

 
$
233

 
$
275,094

 
$
289,606


Consumer Loans
Credit Risk Profile Based on Payment Activity
 
 
Home equity
 
Auto and other
 
Total consumer loans
(In thousands)
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Performing
 
$
107,768

 
$
113,262

 
$
100,575

 
$
113,510

 
$
208,343

 
$
226,772

Nonperforming
 
1,251

 
1,965

 
485

 
392

 
1,736

 
2,357

Total
 
$
109,019

 
$
115,227

 
$
101,060

 
$
113,902

 
$
210,079

 
$
229,129


37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about total loans rated Special Mention or lower as of March 31, 2018 and December 31, 2017. The table below includes consumer loans that are special mention and substandard accruing that are classified in the above table as performing based on payment activity.
 
 
March 31, 2018
 
December 31, 2017
(In thousands)
 
Business
Activities Loans
 
Acquired Loans
 
Total
 
Business
Activities Loans
 
Acquired Loans
 
Total
Non-Accrual
 
$
18,121

 
$
11,166

 
$
29,287

 
$
15,659

 
$
7,240

 
$
22,899

Substandard Accruing
 
39,344

 
81,849

 
121,193

 
36,846

 
73,412

 
110,258

Total Classified
 
57,465

 
93,015

 
150,480

 
52,505

 
80,652

 
133,157

Special Mention
 
34,267

 
18,210

 
52,477

 
28,387

 
26,802

 
55,189

Total Criticized
 
$
91,732

 
$
111,225

 
$
202,957

 
$
80,892

 
$
107,454

 
$
188,346


38


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.               DEPOSITS

A summary of time deposits is as follows:
(In thousands)
 
March 31,
2018
 
December 31,
2017
Time less than $100,000
 
$
718,470

 
$
733,785

Time $100,000 through $250,000
 
1,734,402

 
1,717,050

Time more than $250,000
 
433,097

 
439,370

Total time deposits
 
$
2,885,969

 
$
2,890,205


Included in total deposits are brokered deposits of $1.3 billion and $1.2 billion at March 31, 2018 and December 31, 2017 , respectively. Included in total brokered deposits are reciprocal deposits of $102.7 million and $99.8 million at March 31, 2018 and December 31, 2017 , respectively.


NOTE 7.               BORROWED FUNDS

Borrowed funds at March 31, 2018 and December 31, 2017 are summarized, as follows:
 
 
March 31, 2018
 
December 31, 2017
 
 
 
 
Weighted
 
 
 
Weighted
 
 
 
 
Average
 
 
 
Average
(Dollars in thousands)
 
Principal
 
Rate
 
Principal
 
Rate
Short-term borrowings:
 
 

 
 

 
 

 
 

Advances from the FHLB
 
$
835,891

 
1.93
%
 
$
667,300

 
1.48
%
Total short-term borrowings:
 
835,891

 
1.93

 
667,300

 
1.48

Long-term borrowings:
 
 

 
 

 
 

 
 

Advances from the FHLB and other borrowings
 
289,969

 
1.66

 
380,436

 
1.54

Subordinated borrowings
 
73,920

 
7.00

 
73,875

 
7.00

Junior subordinated borrowings
 
15,464

 
3.77

 
15,464

 
3.30

Total long-term borrowings:
 
379,353

 
2.79

 
469,775

 
2.46

Total
 
$
1,215,244

 
2.19
%
 
$
1,137,075

 
1.88
%

Short-term debt includes Federal Home Loan Bank (“FHLB”) advances with an original maturity of less than one year and a short-term line-of-credit drawdown through a correspondent bank. The Bank also maintains a $3.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended March 31, 2018 and December 31, 2017 .

The Bank is approved to borrow on a short-term basis from the Federal Reserve Bank of Boston as a non-member bank. The Bank has pledged certain loans and securities to the Federal Reserve Bank to support this arrangement.  No borrowings with the Federal Reserve Bank took place for the periods ended March 31, 2018 and December 31, 2017 .

Long-term FHLB advances consist of advances with an original maturity of more than one year. The advances outstanding at March 31, 2018 include no callable advances and amortizing advances totaling $1.4 million . The advances outstanding at December 31, 2017 include no callable advances and amortizing advances totaling $1.4 million . All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of maturities of FHLB advances as of March 31, 2018 is as follows:
 
 
March 31, 2018
 
 
 
 
Weighted Average
(In thousands, except rates)
 
Principal
 
Rate
Fixed rate advances maturing:
 
 

 
 

2018
 
$
914,874

 
1.88
%
2019
 
150,080

 
1.64

2020
 
53,737

 
2.04

2021
 
216

 
2.96

2022 and beyond
 
6,953

 
2.64

Total FHLB advances
 
$
1,125,860

 
1.86
%

The Company did not have variable-rate FHLB advances for the periods ended March 31, 2018 and December 31, 2017 .

In September 2012, the Company issued fifteen year subordinated notes in the amount of $75.0 million at a discount of 1.15% . The interest rate is fixed at 6.875% for the first ten years. After ten years , the notes become callable and convert to an interest rate of three-month LIBOR rate plus 5.113% . The subordinated note includes reduction to the note principal balance of $553 thousand and $583 thousand for unamortized debt issuance costs as of March 31, 2018 and December 31 2017, respectively.

The Company holds 100% of the common stock of Berkshire Hills Capital Trust I (“Trust I”) which is included in other assets with a cost of $0.5 million . The sole asset of Trust I is $15.5 million of the Company’s junior subordinated debentures due in 2035. These debentures bear interest at a variable rate equal to LIBOR plus 1.85% and had a rate of 3.77% and 3.30% at March 31, 2018 and December 31, 2017 , respectively. The Company has the right to defer payments of interest for up to five years on the debentures at any time, or from time to time, with certain limitations, including a restriction on the payment of dividends to shareholders while such interest payments on the debentures have been deferred. The Company has not exercised this right to defer payments. The Company has the right to redeem the debentures at par value. Trust I is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, Trust I is not consolidated into the Company’s financial statements.

40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios were as follows:
 
 
March 31,
2018
 
Regulatory
Minimum to be
Well Capitalized
 
December 31,
2017
 
Regulatory
Minimum to be
Well Capitalized
Company (consolidated)
 
 

 
 

 
 

 
 

Total capital to risk weighted assets
 
12.8
%
 
N/A

 
12.4
%
 
N/A

Common equity tier 1 capital to risk weighted assets
 
11.3

 
N/A

 
11.0

 
N/A

Tier 1 capital to risk weighted assets
 
11.5

 
N/A

 
11.2

 
N/A

Tier 1 capital to average assets
 
9.0

 
N/A

 
9.0

 
N/A

 
 
 
 
 
 
 
 
 
Bank
 
 

 
 
 
 

 
 

Total capital to risk weighted assets
 
12.0
%
 
8.0
%
 
11.2
%
 
8.0
%
Common equity tier 1 capital to risk weighted assets
 
11.1

 
4.5

 
10.3

 
4.5

Tier 1 capital to risk weighted assets
 
11.1

 
6.0

 
10.3

 
6.0

Tier 1 capital to average assets
 
8.7

 
4.0

 
8.3

 
4.0


At each date shown, the Bank met the conditions to be classified as “well capitalized” under the relevant regulatory framework. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.

Effective January 1, 2015, the Company and the Bank became subject to the Basel III rule that requires the Company and the Bank to assess their Common equity Tier 1 capital to risk weighted assets. The Bank's Common equity Tier 1 capital to risk weighted assets exceeds the minimum to be well capitalized. In addition, the final capital rules added a requirement to maintain a minimum conservation buffer, composed of Common equity Tier 1 capital, of  2.5%  of risk-weighted assets, to be phased in over three years and applied to the Common equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio, and the Total risk-based capital ratio. Accordingly, banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity Tier 1 risk-based capital ratio of  7.0% , a minimum Tier 1 risk-based capital ratio of  8.5% , and a minimum Total risk-based capital ratio of  10.5% .

The required minimum conservation buffer began to be phased in incrementally, starting at  0.625%  on January 1, 2016, increased to 1.25%  on January 1, 2017, increased to  1.875%  on January 1, 2018 and will increase to  2.5%  on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At  March 31, 2018 , the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and the Bank's regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at March 31, 2018 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of  1.875% .

41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accumulated other comprehensive income (loss)
Components of accumulated other comprehensive income is as follows:
(In thousands)
 
March 31,
2018
 
December 31,
2017
Other accumulated comprehensive income, before tax:
 
 

 
 

Net unrealized holding loss on AFS securities
 
$
(17,507
)
 
$
10,034

Net unrealized holding loss on pension plans
 
(3,048
)
 
(3,048
)
 
 
 
 
 
Income taxes related to items of accumulated other comprehensive income:
 
 

 
 

Net unrealized holding gain on AFS securities
 
4,325

 
(4,026
)
Net unrealized holding loss on pension plans
 
803

 
1,201

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


The following table presents the components of other comprehensive income for the three months ended March 31, 2018 and 2017 :
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Three Months Ended March 31, 2018
 
 

 
 

 
 

Net unrealized holding (loss) on AFS securities:
 
x

 
 
 
 

Net unrealized (losses) arising during the period
 
$
(19,162
)
 
$
4,931

 
$
(14,231
)
Less: reclassification adjustment for losses realized in net income
 

 

 

Net unrealized holding (loss) on AFS securities
 
(19,162
)
 
4,931

 
(14,231
)
Other comprehensive (loss)
 
$
(19,162
)
 
$
4,931

 
$
(14,231
)
Less: reclassification related to adoption of ASU 2016-01
 
8,379

 
(2,126
)
 
6,253

Less: reclassification related to adoption of ASU 2018-02
 

 
(896
)
 
(896
)
Total change to accumulated other comprehensive (loss)
 
(27,541
)
 
7,953

 
(19,588
)
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 

 
 

 
 

Net unrealized holding gain on AFS securities:
 
 
 
 

 
 

Net unrealized gains arising during the period
 
$
3,137

 
$
(1,173
)
 
$
1,964

Less: reclassification adjustment for gains realized in net income
 
12,570

 
(4,713
)
 
7,857

Net unrealized holding (loss) on AFS securities
 
(9,433
)
 
3,540

 
(5,893
)
 
 
 
 
 
 
 
Net unrealized loss on cash flow hedging derivatives:
 
 

 
 
 
 

Net unrealized (loss) arising during the period
 
(449
)
 
180

 
(269
)
Less: reclassification adjustment for (losses) realized in net income
 
(7,022
)
 
2,768

 
(4,254
)
Net unrealized gain on cash flow hedging derivatives
 
6,573

 
(2,588
)
 
3,985

Other comprehensive (loss)
 
$
(2,860
)
 
$
952

 
$
(1,908
)

42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the changes in each component of accumulated other comprehensive income (loss), for the three months ended March 31, 2018 and 2017 :
(In thousands)
 
Net unrealized
holding gain
on AFS Securities
 
Net loss on
effective cash
flow hedging derivatives
 
Net unrealized
holding loss
on pension plans
 
Total
Three Months Ended March 31, 2018
 
 

 
 

 
 

 
 

Balance at Beginning of Period
 
$
6,008

 
$

 
$
(1,847
)
 
$
4,161

Other comprehensive loss before reclassifications
 
(14,231
)
 

 

 
(14,231
)
Less: amounts reclassified from accumulated other comprehensive income (loss)
 

 

 

 

Total other comprehensive loss
 
(14,231
)
 

 

 
(14,231
)
Less: amounts reclassified from accumulated other comprehensive income (loss) related to adoption of ASU 2016-01 and ASU 2018-02
 
$
4,959

 
$

 
$
398

 
$
5,357

Balance at End of Period
 
$
(13,182
)
 
$

 
$
(2,245
)
 
$
(15,427
)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 

 
 

 
 

 
 

Balance at Beginning of Period
 
$
15,541

 
$
(3,985
)
 
$
(1,790
)
 
$
9,766

Other comprehensive (loss) gain before reclassifications
 
1,964

 
(269
)
 

 
1,695

Less: amounts reclassified from accumulated other comprehensive income (loss)
 
7,857

 
(4,254
)
 

 
3,603

Total other comprehensive (loss) income
 
(5,893
)
 
3,985

 

 
(1,908
)
Balance at End of Period
 
$
9,648

 
$

 
$
(1,790
)
 
$
7,858


The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2018 and 2017 :
 
 
 
 
 
 
Affected Line Item in the
 
 
Three Months Ended March 31,
 
Statement where Net Income
(In thousands)
 
2018
 
2017
 
is Presented
Realized gains on AFS securities:
 
 

 
 

 
 
 
 
$

 
$
12,570

 
Non-interest income
 
 

 
(4,713
)
 
Tax expense
 
 

 
7,857

 
Net of tax
   
 
 
 
 
 
 
Realized (losses) on cash flow hedging derivatives:
 
 

 
 

 
 
 
 

 
(393
)
 
Interest expense
 
 

 
(6,629
)
 
Non-interest expense
 
 

 
2,768

 
Tax benefit
 
 

 
(4,254
)
 
Net of tax
 
 
 
 
 
 
 
Realized gains on pension plans:
 
 

 
 

 
 
 
 

 

 
Non-interest income
 
 

 

 
Tax expense
 
 

 

 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$

 
$
3,603

 
Net of tax


43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. EARNINGS PER SHARE

Earnings per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
 
Three Months Ended March 31,
(In thousands, except per share data)
2018
 
2017
Net income
$
25,248

 
$
15,460

 
 
 
 
Average number of common shares issued
46,212

 
36,732

Less: average number of treasury shares
869

 
1,020

Less: average number of unvested stock award shares
420

 
432

Plus: average participating preferred shares
1,043

 

Average number of basic shares outstanding
45,966

 
35,280

Plus: dilutive effect of unvested stock award shares
202

 
126

Plus: dilutive effect of stock options outstanding
32

 
46

Average number of diluted shares outstanding
46,200

 
35,452

 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.55

 
$
0.44

Diluted
$
0.55

 
$
0.44


For the three months ended March 31, 2018 , 219 thousand shares of restricted stock and 36 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. For the three months ended March 31, 2017 , 306 thousand shares of restricted stock and 55 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.

44


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. STOCK-BASED COMPENSATION PLANS

A combined summary of activity in the Company’s stock award and stock option plans for the three months ended March 31, 2018 is presented in the following table:
 
 
 
Non-Vested Stock Awards Outstanding
 
Stock Options Outstanding
(Shares in thousands)
 
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
Number of Shares
 
Weighted-Average Exercise Price
December 31, 2017
 
 
418

 
$
29.68

 
76

 
$
13.59

Granted
 
 
92

 
37.67

 

 

Stock options exercised
 
 

 

 
(5
)
 
14.27

Stock awards vested
 
 
(87
)
 
27.92

 

 

Forfeited
 
 
(4
)
 
30.50

 

 

Expired
 
 

 

 
(11
)
 
22.61

March 31, 2018
 
 
419

 
$
32.41

 
60

 
$
10.56

Exercisable options at March 31, 2018
 
60

 
$
10.56


During the three months ended March 31, 2018 and 2017 , proceeds from stock option exercises totaled $76 thousand and $81 thousand , respectively. During the three months ended March 31, 2018 , there were 87 thousand shares issued in connection with vested stock awards. During the three months ended March 31, 2017 , there were 101 thousand shares issued in connection with vested stock awards. All of these shares were issued from available treasury stock. Stock-based compensation expense totaled $1.4 million and $1.2 million during the three months ended March 31, 2018 and 2017 , respectively. Stock-based compensation expense is recognized over the requisite service period for all awards.

45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As of March 31, 2018 , the Company held derivatives with a total notional amount of $2.8 billion . The Company had economic hedges and non-hedging derivatives totaling $2.5 billion and $0.3 billion , respectively, which are not designated as hedges for accounting purposes with changes in fair value recorded directly through earnings. Economic hedges included interest rate swaps totaling $2.0 billion , risk participation agreements with dealer banks of $0.2 billion , and $0.3 billion in forward commitment contracts.

As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities. Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. The derivatives program is overseen by the Risk Management/Capital Committee of the Company’s Board of Directors. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at March 31, 2018 .

The Company pledged collateral to derivative counterparties in the form of cash totaling $2.6 million and securities with an amortized cost of $14.5 million and a fair value of $14.5 million as of March 31, 2018 . The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back economic hedges. However certain language is written into the International Swaps Dealers Association, Inc. (“ISDA”) and loan documents where, in default situations, the Bank is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

Information about derivative assets and liabilities at March 31, 2018 , follows:
 
 
 
Weighted
 
Weighted Average Rate
 
Estimated
 
Notional
 
Average
 
 
 
Contract
 
Fair Value
 
Amount
 
Maturity
 
Received
 
pay rate
 
Asset (Liability)
 
(In thousands)
 
(In years)
 
 
 
 
 
(In thousands)
Cash flow hedges:
 

 
 
 
 

 
 

 
 

Interest rate swaps on FHLB borrowings
$

 
0
 
%
 
%
 
$

Total cash flow hedges

 
 
 
 

 
 

 

 
 
 
 
 
 
 
 
 
 
Economic hedges:
 

 
 
 
 

 
 

 
 

Interest rate swap on tax advantaged economic development bond
10,590

 
11.7
 
2.03
%
 
5.09
%
 
(1,338
)
Interest rate swaps on loans with commercial loan customers
1,006,921

 
5.8
 
3.54
%
 
4.33
%
 
11,474

Reverse interest rate swaps on loans with commercial loan customers
1,006,921

 
5.8
 
4.33
%
 
3.54
%
 
(11,228
)
Risk participation agreements with dealer banks
167,795

 
7.0
 
 

 
 

 
(10
)
Forward sale commitments
309,493

 
0.2
 
 

 
 

 
(909
)
Total economic hedges
2,501,720

 
 
 
 

 
 

 
(2,011
)
 
 
 
 
 
 
 
 
 
 
Non-hedging derivatives:
 

 
 
 
 

 
 

 
 

Commitments to lend
296,247

 
0.2
 
 

 
 

 
6,531

Total non-hedging derivatives
296,247

 
 
 
 

 
 

 
6,531

 
 
 
 
 
 
 
 
 
 
Total
$
2,797,967

 
 
 
 

 
 

 
$
4,520


46


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information about derivative assets and liabilities at December 31, 2017 , follows:
 
 
 
Weighted
 
Weighted Average Rate
 
Estimated
 
Notional
 
Average
 
 
 
Contract
 
Fair Value
 
Amount
 
Maturity
 
Received
 
pay rate
 
Asset (Liability)
 
(In thousands)
 
(In years)
 
 
 
 
 
(In thousands)
Cash flow hedges:
 

 
 
 
 

 
 

 
 

Interest rate swaps on FHLB borrowings
$

 
0
 
%
 
%
 
$

Total cash flow hedges

 
 
 
 

 
 

 

 
 
 
 
 
 
 
 
 
 
Economic hedges:
 

 
 
 
 

 
 

 
 

Interest rate swap on tax advantaged economic development bond
10,755

 
11.9
 
1.73
%
 
5.09
%
 
(1,649
)
Interest rate swaps on loans with commercial loan customers
943,795

 
5.9
 
3.26
%
 
4.25
%
 
(3,195
)
Reverse interest rate swaps on loans with commercial loan customers
943,795

 
5.9
 
4.25
%
 
3.26
%
 
3,204

Risk participation agreements with dealer banks
142,054

 
8.4
 
 

 
 

 
(26
)
Forward sale commitments
276,572

 
0.2
 
 

 
 

 
(123
)
Total economic hedges
2,316,971

 
 
 
 

 
 

 
(1,789
)
 
 
 
 
 
 
 
 
 
 
Non-hedging derivatives:
 

 
 
 
 

 
 

 
 

Commitments to lend
193,966

 
0.2
 
 

 
 

 
5,259

Total non-hedging derivatives
193,966

 
 
 
 

 
 

 
5,259

 
 
 
 
 
 
 
 
 
 
Total
$
2,510,937

 
 
 
 

 
 

 
$
3,470


47


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash flow hedges
In the first quarter of 2017, the Company maintained six interest rate swap contracts with an aggregate notional value of $300 million with original durations of three years. This hedge strategy converted one month rolling FHLB borrowings based on the FHLB’s one month fixed interest rate to fixed interest rates, thereby protecting the Company from floating interest rate variability.

On February 7, 2017, the Company initiated and subsequently terminated all of its interest rate swaps associated with FHLB advances with 1-month LIBOR based floating interest rates of an aggregate notional amount of $300 million. As of March 31, 2017, the Company no longer held the FHLB advances associated with the interest rate swaps. As a result, the Company reclassified $6.6 million of losses from the effective portion of the unrealized changes in the fair value of the terminated derivatives from other comprehensive income to non-interest income as the forecasted transactions to the related FHLB advances will not occur.

For the periods presented prior to the termination, the effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges was reported in other comprehensive income. Each quarter, the Company assessed the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. Hedge ineffectiveness on interest rate swaps designated as cash flow hedges was immaterial to the Company’s financial statements during the three months ended March 31, 2017 .

Amounts included in the Consolidated Statements of Income and in the other comprehensive income section of the Consolidated Statements of Comprehensive Income (related to interest rate derivatives designated as hedges of cash flows), were as follows:
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
Interest rate swaps on FHLB borrowings:
 

 
 

Unrealized (loss) recognized in accumulated other comprehensive loss
$

 
$
(449
)
Less: reclassification of unrealized (loss) from accumulated other comprehensive income to interest expense

 
(393
)
Less: reclassification of unrealized (loss) from accumulated other comprehensive income to other non-interest expense

 
(6,629
)
Net tax (expense) benefit on items recognized in accumulated other comprehensive income

 
(2,589
)
Other comprehensive gain (loss) recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects
$

 
$
3,984


48


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Economic hedges
As of March 31, 2018 , the Company has an interest rate swap with a $10.6 million notional amount to swap out the fixed rate of interest on an economic development bond bearing a fixed rate of 5.09% , currently within the Company’s trading portfolio under the fair value option, in exchange for a LIBOR-based floating rate. The intent of the economic hedge is to improve the Company’s asset sensitivity to changing interest rates in anticipation of favorable average floating rates of interest over the 21 -year life of the bond. The fair value changes of the economic development bond are mostly offset by fair value changes of the related interest rate swap.

The Company also offers certain derivative products directly to qualified commercial borrowers. The Company economically hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with third-party financial institutions. The transaction allows the Company’s customer to convert a variable-rate loan to a fixed rate loan. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts mostly offset each other in earnings. Credit valuation adjustments arising from the difference in credit worthiness of the commercial loan and financial institution counterparties totaled $237 thousand as of March 31, 2018 . The interest income and expense on these mirror image swaps exactly offset each other.

The Company has risk participation agreements with dealer banks. Risk participation agreements occur when the Company participates on a loan and a swap where another bank is the lead. The Company gets paid a fee to take on the risk associated with having to make the lead bank whole on Berkshire’s portion of the pro-rated swap should the borrower default. Changes in fair value are recorded in current period earnings.

The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings.

The Company uses the following types of forward sale commitments contracts:
Best efforts loan sales,
Mandatory delivery loan sales, and
To Be Announced (“TBA”) mortgage-backed securities sales.

A best efforts contract refers to a loan sale agreement where the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. The Company may enter into a best efforts contract once the price is known, which is shortly after the potential borrower’s interest rate is locked.

A mandatory delivery contract is a loan sale agreement where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer.

The Company may sell TBA mortgage-backed securities to hedge the changes in fair value of interest rate lock commitments and held for sale loans, which do not have corresponding best efforts or mandatory delivery contracts. These security sales transactions are closed once mandatory contracts are written. On the closing date the price of the security is locked-in, and the sale is paired-off with a purchase of the same security. Settlement of the security purchase/sale transaction is done with cash on a net-basis.

49


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-hedging derivatives
The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in noninterest income in the Company’s consolidated statements of income. Changes in the fair value of IRLCs subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

Amounts included in the Consolidated Statements of Income related to economic hedges and non-hedging derivatives were as follows:
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
Economic hedges
 

 
 

Interest rate swap on industrial revenue bond:
 

 
 

Unrealized gain recognized in other non-interest income
$
311

 
$
122

 
 
 
 
Interest rate swaps on loans with commercial loan customers:
 

 
 

Unrealized gain recognized in other non-interest income
14,669

 
1,098

 
 
 
 
Reverse interest rate swaps on loans with commercial loan customers:
 

 
 

Unrealized gain recognized in other non-interest income
(14,669
)
 
(1,098
)
(Unfavorable) Favorable change in credit valuation adjustment recognized in other non-interest income
237

 
(162
)
 
 
 
 
Risk participation agreements:
 

 
 

Unrealized gain recognized in other non-interest income
16

 
(18
)
 
 
 
 
Forward commitments:
 

 
 

Unrealized gain (loss) recognized in other non-interest income
(909
)
 
(1,251
)
Realized gain (loss) in other non-interest income
3,922

 
(2,906
)
 
 
 
 
Non-hedging derivatives
 

 
 

Commitments to lend
 

 
 

Unrealized gain recognized in other non-interest income
$
6,531

 
$
8,061

Realized gain in other non-interest income
603

 
8,774


50


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets and Liabilities Subject to Enforceable Master Netting Arrangements
Interest Rate Swap Agreements (“Swap Agreements”)
The Company enters into swap agreements to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated statements of condition. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of marketable securities is received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds.

The Company had net asset positions with its financial institution counterparties totaling $12.2 million and $1.1 million as of March 31, 2018 and December 31, 2017 , respectively. The Company had net asset positions with its commercial banking counterparties totaling $4.1 million and $8.6 million as of March 31, 2018 and December 31, 2017 , respectively. The Company had net liability positions with its financial institution counterparties totaling $2.1 million and $5.9 million as of March 31, 2018 and December 31, 2017 , respectively. The Company had net liability positions with its commercial banking counterparties totaling $15.3 million and $5.4 million as of March 31, 2018 and December 31, 2017 . The collateral posted by the Company that covered liability positions was $2.1 million and $5.9 million as of March 31, 2018 and December 31, 2017 , respectively.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of March 31, 2018 and December 31, 2017 :

Offsetting of Financial Assets and Derivative Assets
 
 
Gross
Amounts of
 
Gross Amounts
Offset in the
 
Net Amounts
of Assets
Presented in the
 
Gross Amounts Not Offset in
the Statements of Condition
 
 
 
 
Recognized
 
Statements of
 
Statements of
 
Financial
 
Cash
 
 
(In thousands)
 
Assets
 
Condition
 
Condition
 
Instruments
 
Collateral Received
 
Net Amount
March 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Interest Rate Swap Agreements:
 
 

 
 

 
 

 
 

 
 

 
 

Institutional counterparties
 
$
14,510

 
$
(2,286
)
 
$
12,224

 
$

 
$

 
$
12,224

Commercial counterparties
 
4,067

 

 
4,067

 

 

 
4,067

Total
 
$
18,577

 
$
(2,286
)
 
$
16,291

 
$

 
$

 
$
16,291


Offsetting of Financial Liabilities and Derivative Liabilities
 
 
Gross
Amounts of
 
Gross Amounts
Offset in the
 
Net Amounts
of Liabilities
Presented in the
 
Gross Amounts Not Offset in
the Statements of Condition
 
 
 
 
Recognized
 
Statements of
 
Statements of
 
Financial
 
Cash
 
 
(In thousands)
 
Liabilities
 
Condition
 
Condition
 
Instruments
 
Collateral Pledged
 
Net Amount
March 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Interest Rate Swap Agreements:
 
 

 
 

 
 

 
 

 
 

 
 

Institutional counterparties
 
$
(3,359
)
 
$
1,262

 
$
(2,097
)
 
$

 
$
2,097

 
$

Commercial counterparties
 
(15,453
)
 
157

 
(15,296
)
 

 

 
(15,296
)
Total
 
$
(18,812
)
 
$
1,419

 
$
(17,393
)
 
$

 
$
2,097

 
$
(15,296
)

51


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Offsetting of Financial Assets and Derivative Assets
 
 
Gross
Amounts of
 
Gross Amounts
Offset in the
 
Net Amounts
of Assets
Presented in the
 
Gross Amounts Not Offset in
the Statements of Condition
 
 
 
 
Recognized
 
Statements of
 
Statements of
 
Financial
 
Cash
 
 
(In thousands)
 
Assets
 
Condition
 
Condition
 
Instruments
 
Collateral Received
 
Net Amount
December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Interest Rate Swap Agreements:
 
 

 
 

 
 

 
 

 
 

 
 

Institutional counterparties
 
$
2,692

 
$
(1,622
)
 
$
1,070

 
$

 
$

 
$
1,070

Commercial counterparties
 
8,577

 

 
8,577

 

 

 
8,577

Total
 
$
11,269

 
$
(1,622
)
 
$
9,647

 
$

 
$

 
$
9,647


Offsetting of Financial Liabilities and Derivative Liabilities
 
 
Gross
Amounts of
 
Gross Amounts
Offset in the
 
Net Amounts
of Liabilities
Presented in the
 
Gross Amounts Not Offset in
the Statements of Condition
 
 
 
 
Recognized
 
Statements of
 
Statements of
 
Financial
 
Cash
 
 
(In thousands)
 
Liabilities
 
Condition
 
Condition
 
Instruments
 
Collateral Pledged
 
Net Amount
December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Interest Rate Swap Agreements:
 
 

 
 

 
 

 
 

 
 

 
 

Institutional counterparties
 
$
(8,777
)
 
$
2,835

 
$
(5,942
)
 
$
3,982

 
$
1,960

 
$

Commercial counterparties
 
(5,375
)
 
2

 
(5,373
)
 

 

 
(5,373
)
Total
 
$
(14,152
)
 
$
2,837

 
$
(11,315
)
 
$
3,982

 
$
1,960

 
$
(5,373
)

52


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. FAIR VALUE MEASUREMENTS

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.

Recurring Fair Value Measurements
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 , segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
(In thousands)
Inputs
 
Inputs
 
Inputs
 
Fair Value
Trading security
$

 
$

 
$
11,795

 
$
11,795

Securities available for sale and other:
 
 
 
 
 
 
 

Municipal bonds and obligations

 
114,920

 

 
114,920

Agency collateralized mortgage obligations

 
912,936

 

 
912,936

Agency residential mortgage-backed securities

 
190,098

 

 
190,098

Agency commercial mortgage-backed securities

 
60,558

 

 
60,558

Corporate bonds

 
101,792

 

 
101,792

Trust preferred securities

 
11,563

 

 
11,563

Other bonds and obligations

 
9,532

 

 
9,532

Marketable equity securities
58,630

 
631

 

 
59,261

Loans held for sale

 
98,440

 

 
98,440

Derivative assets

 
19,949

 
6,531

 
26,480

Capitalized servicing rights

 

 
5,705

 
5,705

Derivative liabilities
909

 
21,051

 

 
21,960

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
(In thousands)
Inputs
 
Inputs
 
Inputs
 
Fair Value
Trading security
$

 
$

 
$
12,277

 
$
12,277

Securities available for sale and other:
 
 
 
 
 
 
 
Municipal bonds and obligations

 
118,233

 

 
118,233

Agency collateralized mortgage obligations

 
851,158

 

 
851,158

Agency residential mortgage-backed securities

 
216,940

 

 
216,940

Agency commercial mortgage-backed securities

 
62,305

 

 
62,305

Corporate bonds

 
110,721

 

 
110,721

Trust preferred securities

 
11,677

 

 
11,677

Other bonds and obligations

 
9,880

 

 
9,880

Marketable equity securities
44,851

 
334

 

 
45,185

Loans held for sale

 
153,620

 

 
153,620

Derivative assets

 
14,049

 
5,259

 
19,308

Capitalized servicing rights

 

 
3,834

 
3,834

Derivative liabilities
104

 
15,715

 
19

 
15,838

 

53


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no transfers between levels during the three months ended March 31, 2018 .

Trading Security at Fair Value. The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security. The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.

Securities Available for Sale and Other . AFS and other securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. AFS and other securities classified as Level 2 include most of the Company’s debt securities. The pricing on Level 2 was primarily sourced from third party pricing services, overseen by management, and is based on models that consider standard input factors such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and condition, among other things.

March 31, 2018
 
 
 
 
 
 
(In thousands)
 
Fair Value
 
Amortized Cost
 
Gains
Marketable equity securities
 
$
59,261

 
$
55,719

 
$
3,542


December 31, 2017
 
 
 
 
 
 
(In thousands)
 
Fair Value
 
Amortized Cost
 
Gains
Marketable equity securities
 
$
45,185

 
$
36,483

 
$
8,702


Loans Held for Sale. The Company elected the fair value option for all loans held for sale (HFS) originated for sale on or after May 1, 2012. Loans HFS are classified as Level 2 as the fair value is based on input factors such as quoted prices for similar loans in active markets.
 
 
 
 
 
 
Aggregate Fair Value
March 31, 2018
 
Aggregate
 
Aggregate
 
Less Aggregate
(In thousands)
 
Fair Value
 
Unpaid Principal
 
Unpaid Principal
Loans Held for Sale
 
$
98,440

 
$
96,300

 
$
2,140


 
 
 
 
 
 
Aggregate Fair Value
December 31, 2017
 
Aggregate
 
Aggregate
 
Less Aggregate
(In thousands)
 
Fair Value
 
Unpaid Principal
 
Unpaid Principal
Loans Held for Sale
 
$
153,620

 
$
149,022

 
$
4,598


The changes in fair value of loans held for sale for the three months ended March 31, 2018 and March 31, 2017, were losses of $2.5 million and $593 thousand , respectively. The changes in fair value are included in mortgage banking originations in the Consolidated Statements of Income.

Interest Rate Swaps.  The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.

54


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2018 , the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Commitments to Lend. The Company enters into commitments to lend for residential mortgage loans intended for sale, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time.  The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close, and by the non-refundable costs of originating the loan. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. The costs to originate are primarily based on the Company’s internal commission rates that are not observable. As such, these commitments are classified as Level 3 measurements.

Forward Sale Commitments . The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the commitments to lend and loans originated for sale. To Be Announced (“TBA”) mortgage-backed securities forward commitment sales are used as the hedging instrument, are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of the Company’s best efforts and mandatory delivery loan sale commitments are determined similarly to the commitments to lend using quoted prices in the market place that are observable. However, costs to originate and closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable. As such, best efforts and mandatory forward commitments are classified as Level 3 measurements.

Capitalized Servicing Rights. The Company accounts for certain capitalized servicing rights at fair value in its Consolidated Financial Statements, as the Company is permitted to elect the fair value option for each specific instrument. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. These capitalized servicing rights are included in other assets on the consolidated balance sheet.

55


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three months ended March 31, 2018 and 2017 .
 
Assets (Liabilities)
 
 
 
 
 
 
 
Capitalized
 
Trading
 
Commitments
 
Forward
 
Servicing
(In thousands)
Security
 
to Lend
 
Commitments
 
Rights
Three Months Ended March 31, 2018
 

 
 

 
 

 
 
December 31, 2017
$
12,277

 
$
5,259

 
$
19

 
$
3,834

Unrealized (loss) gain, net recognized in other non-interest income
(317
)
 
12,213

 
(19
)
 
465

Paydown of trading security
(165
)
 

 

 

Transfers to held for sale loans

 
(10,941
)
 

 

Additions to servicing rights

 

 

 
1,406

March 31, 2018
$
11,795

 
$
6,531

 
$

 
$
5,705

 
 
 
 
 
 
 
 
Unrealized gains (losses) relating to instruments still held at March 31, 2018
$
1,205

 
$
6,531

 
$

 

Three Months Ended March 31, 2017
 

 
 

 
 

 
 
December 31, 2016
$
13,229

 
$
4,738

 
$
100

 
$
798

Unrealized gain, net recognized in other non-interest income
(106
)
 
17,302

 
(122
)
 
(2
)
Paydown of trading security
(157
)
 

 

 

Transfers to held for sale loans

 
(13,979
)
 

 

Additions to servicing rights
$

 
$

 
$

 
$
180

March 31, 2017
$
12,966

 
$
8,061

 
$
(22
)
 
$
976

 
 
 
 
 
 
 
 
Unrealized gains (losses) relating to instruments still held at March 31, 2017
$
1,736

 
$
8,061

 
$
(22
)
 
$


Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:
 
 
Fair Value
 
 
 
 
 
Significant
Unobservable Input
(In thousands)
 
March 31, 2018
 
Valuation Techniques
 
Unobservable Inputs
 
Value
Assets (Liabilities)
 
 

 
 
 
 
 
 

Trading Security
 
$
11,795

 
Discounted Cash Flow
 
Discount Rate
 
3.15
%
 
 
 
 
 
 
 
 
 
Commitments to Lend
 
6,531

 
Historical Trend
 
Closing Ratio
 
80.65
%
 
 
 

 
Pricing Model
 
Origination Costs, per loan
 
$
3,063

Forward Commitments
 

 
Historical Trend
 
Closing Ratio
 
80.65
%
 
 
 

 
Pricing Model
 
Origination Costs, per loan
 
$
3,063

Capitalized Servicing Rights
 
5,705

 
Discounted cash flow
 
Constant Prepayment Rate (CPR)
 
8.30
%
 
 
 
 
 
 
Discount Rate
 
9.96
%
Total
 
$
24,031

 
 
 
 
 
 


56


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Fair Value
 
 
 
 
 
Significant
Unobservable Input
(In thousands)
 
December 31, 2017
 
Valuation Techniques
 
Unobservable Inputs
 
Value
Assets (Liabilities)
 
 

 
 
 
 
 
 

Trading Security
 
$
12,277

 
Discounted Cash Flow
 
Discount Rate
 
2.74
%
 
 
 
 
 
 
 
 
 
Commitments to Lend
 
5,259

 
Historical Trend
 
Closing Ratio
 
81.53
%
 
 
 

 
Pricing Model
 
Origination Costs, per loan
 
$
3,692

Forward Commitments
 
19

 
Historical Trend
 
Closing Ratio
 
81.53
%
 
 
 

 
Pricing Model
 
Origination Costs, per loan
 
$
3,692

Capitalized Servicing Rights
 
3,834

 
Discounted Cash Flow
 
Constant Prepayment Rate (CPR)
 
10.00
%
 
 
 
 
 
 
Discount Rate
 
10.95
%
Total
 
$
21,389

 
 
 
 
 
 



57


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-Recurring Fair Value Measurements
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured at fair value on a non-recurring basis.
 
 
March 31, 2018
 
December 31, 2017
 
Fair Value Measurement Date as of March 31, 2018
 
 
Level 3
 
Level 3
 
Level 3
(In thousands)
 
Inputs
 
Inputs
 
Inputs
Assets
 
 

 
 

 
 
Impaired loans
 
$
22,766

 
$
23,853

 
March 2018
Capitalized servicing rights
 
12,400

 
12,527

 
March 2018
Total
 
$
35,166

 
$
36,380

 
 

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:
 
 
Fair Value
 
 
 
 
 
 
(In thousands)
 
March 31, 2018
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Average) (a)
Assets
 
 

 
 
 
 
 
 
Impaired Loans
 
$
22,766

 
Fair Value of Collateral
 
Discounted Cash Flow - Loss Severity
 
38.43% to 0.08% (2.41%)
 
 
 

 
 
 
Appraised Value
 
$10.6 to $5,944 ($2,143)
Capitalized Servicing Rights
 
12,400

 
Discounted Cash Flow
 
Constant Prepayment Rate (CPR)
 
7.51% to 11.22% (9.65%)
 
 
 

 
 
 
Discount Rate
 
10.00% to 13.12% (11.64%)
Total
 
$
35,166

 
 
 
 
 
 
(a) 
Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.

 
 
Fair Value
 
 
 
 
 
 
(In thousands)
 
December 31, 2017
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Average) (a)
Assets
 
 

 
 
 
 
 
 
Impaired Loans
 
$
23,853

 
Fair Value of Collateral
 
Discounted Cash Flow - loss severity
 
38.72% to 0.21% (3.40%)
 
 
 

 
 
 
Appraised Value
 
$10.9 to $5,967 ($2,197)
Capitalized Servicing Rights
 
12,527

 
Discounted Cash Flow
 
Constant Prepayment Rate (CPR)
 
7.78% to 12.78% (10.38%)
 
 
 

 
 
 
Discount Rate
 
10.00% to 13.28% (11.72%)
Total
 
$
36,380

 
 
 
 
 
 
(a) 
Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.

There were no Level 1 or Level 2 nonrecurring fair value measurements for the periods ended March 31, 2018 and December 31, 2017 .

58


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, nonrecurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. 

Capitalized loan servicing rights A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including comparable sales and appraisals.

59


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Estimated Fair Values of Financial Instruments
The following tables summarize the estimated fair values, and related carrying amounts, of the Company’s financial instruments. Certain financial instruments and all non-financial instruments are excluded. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
 
 
March 31, 2018
 
 
Carrying
 
Fair
 
 
 
 
 
 
(In thousands)
 
Amount
 
Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
123,887

 
$
123,887

 
$
123,887

 
$

 
$

Trading security
 
11,795

 
11,795

 

 

 
11,795

Securities available for sale and other
 
1,460,660

 
1,460,660

 
58,630

 
1,402,030

 

Securities held to maturity
 
395,337

 
394,296

 

 
361,142

 
33,154

FHLB bank stock and restricted securities
 
64,038

 
N/A

 
N/A

 
N/A

 
N/A

Net loans
 
8,322,558

 
8,451,273

 

 

 
8,451,273

Loans held for sale
 
98,440

 
98,440

 

 
98,440

 

Accrued interest receivable
 
30,585

 
30,585

 

 
30,585

 

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

 
192,379

 

 
192,379

 

Derivative assets
 
26,480

 
26,480

 

 
19,949

 
6,531

Assets held for sale
 
1,392

 
1,392

 

 
1,392

 

Financial Liabilities
 
 

 
 

 
 

 
 

 
 

Total deposits
 
$
8,683,267

 
$
8,652,801

 
$

 
$
8,652,801

 
$

Short-term debt
 
835,892

 
836,095

 

 
836,095

 

Long-term Federal Home Loan Bank advances
 
289,969

 
285,102

 

 
285,102

 

Subordinated borrowings
 
89,384

 
96,794

 

 
96,794

 

Derivative liabilities
 
21,960

 
21,960

 
909

 
21,051

 

 
 
December 31, 2017
 
 
Carrying
 
Fair
 
 
 
 
 
 
(In thousands)
 
Amount
 
Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
248,763

 
$
248,763

 
$
248,763

 
$

 
$

Trading security
 
12,277

 
12,277

 

 

 
12,277

Securities available for sale and other
 
1,426,099

 
1,426,099

 
44,850

 
1,381,249

 

Securities held to maturity
 
397,103

 
405,276

 

 
371,458

 
33,818

FHLB bank stock and restricted securities
 
63,085

 
N/A

 
N/A

 
N/A

 
N/A

Net loans
 
8,247,504

 
8,422,034

 

 

 
8,422,034

Loans held for sale
 
153,620

 
153,620

 

 
153,620

 

Accrued interest receivable
 
33,739

 
33,739

 

 
33,739

 

Derivative assets
 
19,308

 
19,308

 


 
14,049

 
5,259

Assets held for sale
 
1,392

 
1,392

 

 
1,392

 

Financial Liabilities
 
 

 
 

 
 

 
 

 
 

Total deposits
 
$
8,749,530

 
$
8,731,527

 
$

 
$
8,731,527

 
$

Short-term debt
 
667,300

 
667,246

 

 
667,246

 

Long-term Federal Home Loan Bank advances
 
380,436

 
378,766

 

 
378,766

 

Subordinated borrowings
 
89,339

 
97,414

 

 
97,414

 

Derivative liabilities
 
15,838

 
15,838

 
104

 
15,715

 
19


60


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.

Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.

FHLB bank stock and restricted securities. It is not practical to determine fair value due to the restricted nature of the security.

Cash surrender value of life insurance policies. Carrying value approximates fair value.

Loans, net. In accordance with recent accounting guidance, the fair value of loans as of March 31, 2018 was measured using the exit price valuation method, determined primarily by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or cash flows, while incorporating liquidity and credit assumptions.

Accrued interest receivable. Carrying value approximates fair value.

Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings.  Such funds include all categories of debt and debentures in the table above.

Subordinated borrowings. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.

Off-balance-sheet financial instruments. Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.


NOTE 13. NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

Presented below is net interest income after provision for loan losses for the three months ended March 31, 2018 and 2017, respectively.
 
 
Three Months Ended March 31,
(In thousands)
 
2018
 
2017
Net interest income
 
$
85,470

 
$
66,886

Provision for loan losses
 
5,575

 
5,095

Net interest income after provision for loan losses
 
$
79,895

 
$
61,791


61


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.           REVENUE

The Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers,” and all subsequent ASU’s that modified Topic 606 on January 1, 2018. A cumulative effect adjustment to opening retained earnings was not deemed necessary as the implementation of the new standard did not have a material impact on the measurement or recognition of revenue.

Topic 606 requires the Company to follow a five step process: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Revenue recognition under Topic 606 depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The Company does not have any material significant payment terms as payment is received at or shortly after the satisfaction of the performance obligation. The value of unsatisfied performance obligations for contracts with an original expected length of one year or less are not disclosed. The Company recognizes incremental costs of obtaining contracts as an expense when incurred for contracts with a term of one year or less.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new standard. Topic 606 is applicable to non-interest revenue streams such as wealth management fees, insurance commissions and fees, administrative services for customer deposit accounts, interchange fees, and sale of owned real estate properties.

Non-interest income streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts. Service charges on deposit accounts consist of monthly service fees (i.e. business analysis fees and consumer service charges) and other deposit account related fees. The Company's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. The Company may, from time to time, waive certain fees (e.g., NSF fee) for customers but generally do not reduce the transaction price to reflect variability for future reversals due to the insignificance of the amounts. Waiver of fees reduces the revenue in the period the waiver is granted to the customer.

Insurance Commissions and Fees. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later, net of return commissions related to policy cancellations. Policy cancellation is a variable consideration that is not deemed significant and thus, does not impact the amount of revenue recognized.

In addition, the Company may receive additional performance commissions based on achieving certain sales and loss experience measures. Such commissions are recognized when determinable, which is generally when such commissions are received or when the Company receives data from the insurance companies that allows the reasonable estimation of these amounts.

Wealth Management Fees. Wealth management fees is primarily comprised of fees earned from consultative investment management, trust administration, tax return preparation, and financial planning. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based on the daily accrual of the market value of the investment accounts and the applicable fee rate.

Interchange Fees. Interchange fees are transaction fees paid to the card-issuing bank to cover handling costs, fraud and bad debt costs, and the risk involved in approving the payment. Due to the day to day nature of these fees they are settled on a daily basis and are accounted for as they are received.

62


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Gains/Losses on Sales of OREO. The sale of OREO and other nonfinancial assets are accounted for with the derecognition of the asset in question once a contract exists and control of the asset has been transferred to the buyer. The gain or loss on the sale is calculated as the difference between the carrying value of the asset and the transaction price.

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2018 and 2017.
 
 
Three months ended March 31,
(In thousands)
 
2018
 
2017
Non-interest income
 
 
 
 
In-scope of Topic 606:
 
 
 
 
Service charges on deposit accounts
 
$
5,415

 
$
4,040

Insurance revenue
 
3,025

 
3,136

Wealth management fees
 
2,597

 
2,526

Interchange income
 
152

 
129

Non-interest income (in-scope of Topic 606)
 
11,189

 
9,831

Non-interest income (out-of-scope of Topic 606)
 
18,331

 
24,926

Total non-interest income
 
$
29,520

 
$
34,757


63


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA
The following summary data is based in part on the consolidated financial statements and accompanying notes and other information appearing elsewhere in this or prior Forms 10-Q.
 
At or for the
Three Months Ended March 31,
 
2018
 
2017
PER SHARE DATA (1)
 

 
 

Net earnings, diluted
$
0.55

 
$
0.44

Adjusted earnings, diluted (1)
0.65

 
0.55

Total book value per common share
32.12

 
30.77

Tangible book value per common share (2)
19.86

 
18.97

Dividend per common share
0.22

 
0.21

Dividend per preferred share
0.44

 

Common stock price:
 

 
 

High
40.10

 
37.45

Low
35.80

 
32.90

Close
37.95

 
36.05

PERFORMANCE RATIOS  (3)
 
 
 
Return on assets
0.88
 %
 
0.68
 %
Adjusted return on assets (1)
1.04

 
0.85

Return on equity
6.69

 
5.71

Adjusted return on equity (1)
7.92

 
7.17

Adjusted return on tangible equity (1)
13.43

 
12.05

Net interest margin, fully taxable equivalent (FTE) (4)
3.36

 
3.33

Fee income/Net interest and fee income
25.51

 
30.04

Efficiency ratio (2)
59.54

 
61.94

GROWTH RATIOS
 
 
 
Total commercial loans, (annualized)
1
 %
 
15
 %
Total loans, (annualized)
4

 
6

Total deposits, (annualized)
(3
)
 
2

Total net revenues, (compared to prior year)
13

 
39

Earnings per share, (compared to prior year)
25

 
(15
)
Adjusted earnings per share, (compared to prior year) (2)
18

 
2

FINANCIAL DATA:   (In millions)
 

 
 

Total assets
$
11,519

 
$
9,298

Total earning assets
10,442

 
8,486

Total securities
1,932

 
1,714

Total borrowings
1,215

 
1,384

Total loans
8,376

 
6,656

Allowance for loan losses
54

 
46

Total intangible assets
556

 
422

Total deposits
8,683

 
6,656

Total common stockholders’ equity
1,498

 
1,100

Net Income
25.2

 
15.5

Adjusted income (2)
29.9

 
19.4


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Table of Contents

 
At or for the
Three Months Ended March 31,
 
2018
 
2017
ASSET QUALITY AND CONDITION RATIOS   (5)
 
 
 
Net charge-offs (annualized)/average loans
0.17
%
 
0.20
%
Allowance for loan losses/total loans
0.64

 
0.69

Loans/deposits
96

 
100

Shareholders' equity to total assets
13.00

 
11.83

Tangible shareholders' equity to tangible assets (2)
8.59

 
7.64

 
 
 
 
FOR THE PERIOD:   (In thousands)
 

 
 

Net interest income
$
85,470

 
$
66,886

Non-interest income
29,520

 
34,757

Provision for loan losses
5,575

 
5,095

Non-interest expense
76,869

 
74,326

Net income
25,248

 
15,460

Adjusted Income (1)
29,881

 
19,400

____________________________________________________________________________________________
(1)  Adjusted measurements are non-GAAP financial measures that are adjusted to exclude net non-operating charges primarily related to acquisitions and restructuring activities. Refer to the Reconciliation of Non-GAAP Financial Measures for additional information.
(2)
Non-GAAP financial measure.
(3)  All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(4) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.
(5)  Generally accepted accounting principles require that loans acquired in a business combination be recorded at fair value, whereas loans from business activities are recorded at cost. The fair value of loans acquired in a business combination includes expected loan losses, and there is no loan loss allowance recorded for these loans at the time of acquisition. Accordingly, the ratio of the loan loss allowance to total loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally reduced for loans acquired in a business combination since these loans are recorded net of expected loan losses. Therefore, the ratio of net loan charge-offs to average loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Other institutions may have loans acquired in a business combination, and therefore there may be no direct comparability of these ratios between and among other institutions.

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AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following table presents average balances and an analysis of average rates and yields on an annualized fully taxable equivalent basis for the periods included:
 
Three Months Ended March 31,
 
2018
2017
($ In millions)
Average
Balance
Yield/Rate
(FTE basis)
Average
Balance
Yield/Rate
(FTE basis)
Assets
Loans:
 

 

 

 

Commercial real estate
$
3,251

4.76
%
$
2,631

4.58
%
Commercial and industrial loans
1,811

5.19

1,072

4.86

Residential mortgages
2,139

3.56

1,907

3.56

Consumer loans
1,115

4.01

979

3.62

Total loans (1)
8,316

4.45

6,589

4.19

Investment securities (2)
1,933

3.26

1,626

3.38

Short term investments & loans held for sale (3)
139

3.43

118

2.40

Total interest-earning assets
10,388

4.21

8,333

4.00

Intangible assets
557

 

422

 

Other non-interest earning assets
522

 

389

 

Total assets
$
11,467

 

$
9,144

 

 
 
 
 
 
Liabilities and shareholders’ equity
Deposits:
 

 

 

 

NOW
$
712

0.28
%
$
575

0.22
%
Money market
2,519

0.73

1,805

0.52

Savings
744

0.14

649

0.13

Time
2,914

1.40

2,351

1.08

Total interest-bearing deposits
6,889

0.90

5,380

0.69

Borrowings and notes (4)
1,286

2.02

1,386

1.38

Total interest-bearing liabilities
8,175

1.08

6,766

0.83

Non-interest-bearing demand deposits
1,656

 

1,179

 

Other non-interest earning liabilities
127

 

117

 

Total liabilities
9,958

 

8,062

 

 
 
 
 
 
Total preferred shareholders' equity
41

 

 
Total common shareholders' equity
1,468

 
1,082

 
Total shareholders’ equity (2)
1,509

 

1,082

 

Total liabilities and stockholders’ equity
$
11,467

 

$
9,144

 



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Three Months Ended March 31,
 
2018
2017
 
Average
Balance
Yield/Rate
(FTE basis)
Average
Balance
Yield/Rate
(FTE basis)
Net interest spread
 

3.13
%
 

3.17
%
Net interest margin (5)
 

3.36

 

3.33

Cost of funds
 

0.90

 

0.70

Cost of deposits
 

0.73

 

0.56

 
 
 
 
 
Supplementary data
 

 

 

 

Total deposits (In millions)
$
8,545

 

$
6,558

 

Fully taxable equivalent income adj. (In thousands)  (6)
1,820

 

2,511

 

____________________________________
(1) 
The average balances of loans include nonaccrual loans and deferred fees and costs.
(2) 
The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.
(3) 
Interest income on loans held for sale is included in loan interest income on the income statement.
(4) 
The average balances of borrowings includes the capital lease obligation presented under other liabilities on the consolidated balance sheet.
(5) 
Purchased loan accretion totaled $3.4 million and $3.7 million for the three months ended March 31, 2018 and 2017, respectively.
(6)
Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.

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Table of Contents

NON-GAAP FINANCIAL MEASURES
This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP adjusted earnings information set forth is not necessarily comparable to non- GAAP information which may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company’s GAAP financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations, including securities gains/losses, gains on the sale of business operations and assets, losses recorded for hedge terminations, merger costs, restructuring costs, legal settlements, systems conversion costs, and out-of-period adjustments. Securities gains/losses include unrealized gains/losses on equity securities beginning in the first quarter of 2018. Non-GAAP adjustments are presented net of an adjustment for income tax expense.

The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to merger and acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company’s performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry.

Charges related to merger and acquisition activity consist primarily of severance/benefit related expenses, contract termination costs, system conversion costs, variable compensation expenses, and professional fees. Systems conversion costs relate primarily to the Company’s core systems conversion and related systems conversions costs. Restructuring costs primarily consist of the Company's continued effort to create efficiencies in operations through calculated adjustments to the branch banking and office footprint. Expense adjustments include variable rate compensation related to non-operating items.

The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

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Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items recorded for the periods indicated:
 
 
At or for the Three Months Ended March 31,
(in thousands)
 
2018
2017
GAAP Net income
 
$
25,248

$
15,460

Adj: Losses/(gains) on securities, net (1)
 
1,502

(12,570
)
Adj: Loss on termination of hedges
 

6,629

Adj: Net (gains) on sale of business operations and assets
 
(481
)

Adj: Merger and acquisition expense
 
5,093

5,947

Adj: Restructuring and other expense
 

5,735

Adj: Income taxes
 
(1,481
)
(1,801
)
Total adjusted income (non-GAAP) (2)
(A)
$
29,881

$
19,400

 
 
 
 
GAAP Total revenue
 
$
114,990

$
101,643

Adj: Losses/(gains) on securities, net
 
1,502

(12,570
)
Adj: Net (gains) on sale of business operations and assets
 
(481
)

Adj. Loss on termination of hedges
 

6,629

Total operating revenue (non-GAAP) (2)
(B)
$
116,011

$
95,702

 
 
 
 
GAAP Total non-interest expense
 
$
76,869

$
74,326

Less: Total non-operating expense (see above)
 
(5,093
)
(11,682
)
Operating non-interest expense (non-GAAP) (2)
(C)
$
71,776

$
62,644

 
 
 
 
(in millions, except per share data)
 
 

 

Total average assets
(D)
$
11,467

$
9,144

Total average shareholders’ equity
(E)
1,509

1,082

Total average tangible shareholders’ equity (2)
(F)
951

660

Total average tangible common shareholders' equity (2)
(G)
911

660

Total tangible shareholders’ equity, period-end (2)(3)
(H)
941

678

Total tangible common shareholders' equity, period-end (2)(3)
(I)
901

678

Total tangible assets, period-end (2)(3)
(J)
10,963

8,876

Total common shares outstanding, period-end (thousands)
(K)
45,360

35,729

Average diluted shares outstanding (thousands)
(L)
46,200

35,452

 
 
 
 
Earnings per share, diluted
 
$
0.55

$
0.44

Adjusted earnings per share, diluted (2)
(A/L)
0.65

0.55

Book value per common share, period-end
 
32.12

30.77

Tangible book value per common share, period-end (2)
(I/K)
19.86

18.97

Total shareholders' equity/total assets
 
13.00

11.83

Total tangible shareholder's equity/total tangible assets (2)
(H/J)
8.59

7.64

 
 
 
 
Performance ratios   (4)
 
 

 

GAAP return on assets
 
0.88
%
0.68
%
Adjusted return on assets (2)
(A/D)
1.04

0.85

GAAP return on equity
 
6.69

5.71

Adjusted return on equity (2)
(A/E)
7.92

7.17

Adjusted return on tangible common equity (2)(5)
(A+O)/(J)
13.43

12.05

Efficiency ratio (2)
(C-O)/(B+M+P)
59.54

61.94

 
 
 
 

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Supplementary data   (in thousands)
 
 

 

Tax benefit on tax-credit investments (6)
(M)
$
596

$
1,624

Non-interest income charge on tax-credit investments (7)
(N)
(506
)
(1,329
)
Net income on tax-credit investments
(M+N)
90

295

Intangible amortization
(O)
1,268

801

Fully taxable equivalent income adjustment
(P)
1,820

2,511

__________________________________________________________________________________________
(1) 
Net securities losses/(gains) for the period ending March 31, 2018 includes the change in fair value of the Company's equity securities in compliance with the Company's adoption of ASU 2016-01. There were no non-equity securities sold during the period ending March 31, 2018.
(2)
Non-GAAP financial measure.
(3)
Total tangible shareholders’ equity is computed by taking total shareholders’ equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end.
(4) 
Ratios are annualized and based on average balance sheet amounts, where applicable.
(5) 
Adjusted return on tangible common equity is computed by dividing the total adjusted income adjusted for the tax-affected amortization of intangible assets, assuming a 27.32% marginal rate for March 31, 2018 and a 40% marginal rate for March 31, 2017, by tangible equity.
(6) 
The tax benefit is the direct reduction to the income tax provision due to tax credits and deductions generated from investments in historic rehabilitation and low-income housing.
(7) 
The non-interest income charge is the reduction to the tax-advantaged commercial project investments, which are incurred as the tax credits are generated.

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GENERAL
Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2017 Annual Report on Form 10-K. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the year 2018 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. Tax-equivalent adjustments during the current period are the result of increasing income from tax-advantaged securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 27.3% marginal rate (including state income taxes), which is reduced from 39.4% prior to the federal tax reform enacted at the end of 2017 and effective beginning in 2018. In the discussion, references to earnings per share refer to diluted earnings per share unless otherwise specified.

Berkshire Hills Bancorp, Inc. (“Berkshire” or “the Company”) is a Delaware corporation headquartered in Boston and the holding company for Berkshire Bank (“the Bank”) and Berkshire Insurance Group. Established in 1846, the Bank operates as a commercial bank under a Massachusetts trust company charter. Berkshire Bank operates under the brand America’s Most Exciting Bank®.

Berkshire is a regional financial services company that seeks to distinguish itself over the long term based on the following attributes:

Strong earnings momentum and improving profitability
Boston-based regional banking company delivering franchise value in attractive markets
Distinctive culture drives results
Disciplined regional consolidator
Focused on profitability goals and building shareholder value

Shown below is a profile of the Company:
BHLBPROFILE.JPG

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Table of Contents

FORWARD-LOOKING STATEMENTS
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that Berkshire Hills Bancorp files with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and the Risk Factors in Item 1A of this report. Because of these and other uncertainties, Berkshire’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, Berkshire’s past results of operations do not necessarily indicate Berkshire’s combined future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. Berkshire is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Berkshire qualifies all of its forward-looking statements by these cautionary statements.

SUMMARY
The first quarter of 2018 was the first full quarter of operations including the Commerce Bancshares Corp. operations acquired on October 13, 2017. Shown below are highlights of the year-over-year improvement in first quarter performance metrics:

63% increase in net income
13% increase in net revenue
25% improvement in earnings per share
29% improvement in return on assets
17% improvement in return on equity

These improvements reflect the benefit of Berkshire’s expansion initiatives including acquisitions and organic growth. They were accomplished while Berkshire was taking on the additional overhead expenses related to crossing the $10 billion asset threshold for increased regulatory scrutiny. Profitability also benefited from a lower tax rate related to federal income tax reform beginning in 2018, and expense savings following hedge terminations and restructuring actions undertaken in the first quarter of 2017. In recognition of improved earnings, Berkshire increased its quarterly shareholder dividend by 5% to $0.22 per common share beginning in the most recent quarter.

Additional highlights of the most recent quarter are as follows (income statement comparisons are year over year and balance sheet growth is compared to prior quarter-end):

FINANCIAL HIGHLIGHTS
30% increase in loan and deposit related fee income
4% annualized loan growth; 3% annualized C&I loan growth
3% increase in average deposits
3.36% net interest margin
59.5% efficiency ratio
0.27% non-performing assets/assets
0.17% net loan charge-offs/average loans

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OPERATING HIGHLIGHTS
Completed systems integration of acquired Commerce operations in March
Formally opened the new corporate headquarters at 60 State Street in Boston
Expanded the commercial market teams in Greater Boston and the Princeton NJ area
Opened new branch in Simsbury CT featuring virtual teller technology
Expanded the MyBanker program for priority service to committed customer relationships

Market conditions remained good in the Company’s markets during the quarter, and the Company maintains a focus on Greater Boston, Albany, and the Mid-Atlantic as its strongest regional markets. Short term interest rates continued to increase during the quarter, with a 25 basis point increase in the Fed Funds target rate in March, following a similar increase in December 2017. The yield curve continued to flatten, although increases in long term rates included a ten year treasury yield of 3% reached after quarter-end, which was the highest level for this rate in several years.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2018 AND DECEMBER 31, 2017
Summary: Total assets ended the first quarter of 2018 at $11.5 billion. Both commercial and industrial loans and residential mortgages contributed to the 4% annualized increase in total loans during the quarter. Average deposits increased by 3% compared to the prior quarter. Asset quality metrics remained strong. Metrics related to capital, liquidity, and book value per share were generally stable compared to the start of the year.

Securities: Total securities remained at $1.9 billion in the first quarter, with a modest mix shift towards agency mortgage backed securities. The portfolio yield decreased to 3.26% in the first quarter from 3.55% in the prior quarter. This was primarily due to the reduction in the fully taxable equivalent yield adjustment based on the lower federal tax rate beginning in 2018. This reduction primarily reduced the yield on municipal securities, which continue to meet the Company’s investment objectives. The six year weighted average life of the portfolio was not significantly changed from the start of the year. The unrealized loss on the securities portfolio measured 1.4% of cost at quarter-end, compared to a 0.6% gain at the start of the quarter, reflecting lower bond prices stemming from the increase in interest rates during the quarter.

Loans: The $77 million increase in total loans was due primarily to a $79 million increase in residential mortgages. The $17 million increase in commercial loans mostly offset the $19 million decrease in consumer loans. Commercial loans benefited from an increase in asset based lending outstandings including higher seasonal usage. The Company expanded its commercial teams in Greater Boston and New Jersey based on growth opportunities in those markets.

The decrease in consumer loans was due to paydowns on home equity loans and lower originations of indirect auto loans as a result of higher interest rates. Despite the rise in interest rates, the average portfolio yield decreased slightly to 4.45% in the most recent quarter from 4.47% in the prior quarter. This was primarily due to the decrease in the residential mortgage yield to 3.56% from 3.76% for these periods. This reflected a combination of higher prepayments on premium loans, lower purchased loan accretion, and the roll-off of some higher coupon balances in recent periods. While scheduled repricing did not change significantly during the quarter, the expected average loan lives lengthened due to expected slower prepayments tied to rising rates.

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Asset Quality: Asset quality metrics generally remained favorable in the most recent quarter. Annualized net loan charge-offs for this period were 0.17% and non-performing assets were 0.27% of assets at period-end. Accruing delinquent loans increased to 0.62% of loans from 0.55% during the quarter due to one commercial loan which was well secured and in the process of collection. At period-end, the total contractual balance of purchased credit impaired loans was $209 million, with a $97 million carrying value. The contractual balance included Boston area taxi medallion loans acquired from Commerce, which accounted for less than half of this net carrying value. Criticized loans increased slightly to 1.8% of total assets at period-end, compared to 1.6% at the start of the year. There were no significant changes in the balance of loans individually evaluated for impairment or in the balance of troubled debt restructurings. The ratio of the allowance to total loans increased to 0.64% from 0.62% during the quarter. At period-end, this ratio measured 0.75% for business activities loans and 0.31% for acquired loans.

Deposits and Borrowings: Total deposits decreased by $66 million during the first quarter of 2018 due primarily to a decrease in payroll processing related deposits to $460 million. This processing service was part of the Commerce acquisition and the related demand deposit and money market balances fluctuate daily depending on payroll cycles. A $27 million increase in brokered balances and a $15 million increase in savings deposits partially offset decreases in other account types as of period-end. The cost of deposits increased to 0.73% in the most recent quarter compared to 0.66% in the prior quarter due to increases in market interest rates. Total borrowings increased by $78 million during the quarter as short term FHLB borrowings were used primarily to offset changes in payroll related balances. Borrowing costs also increased due to higher rates and a widening of LIBOR spreads. The category of “other liabilities” decreased by $65 million due to a decrease in broker settlement payables from year-end.

Derivative Financial Instruments: The notional balance of derivative financial instruments increased to $2.8 billion at period-end from $2.5 billion at the start of the year. This was due to commercial loan interest rate swaps recorded during the quarter, together with a seasonal increase in residential mortgage interest rate lock commitments.

Shareholders’ Equity: Shareholders’ equity was flat in the most recent quarter, as retained earnings were offset by a reduction in accumulated other comprehensive income resulting from the unrealized bond losses discussed previously in the Securities section. As a result, there was little change in capital metrics. At period-end, the ratio of equity to assets measured 13.0% and the non-GAAP measure of tangible equity to tangible assets was 8.6%. Book value per common share was $32.12 and the non-GAAP measure of tangible book value per common share was $19.86. Based on earnings growth, the return on equity improved to 6.7% in the most recent quarter, while the non-GAAP measure of adjusted return on tangible equity improved to 13.4%. The Company focuses on this measure in assessing internal capital generation to support dividends and organic growth.

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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND MARCH 31, 2017
Summary: First quarter revenue and expense in 2018 included the full quarter impact of the Commerce operations acquired on October 13, 2017. As a result, most categories of revenue and expense increased over the first quarter of 2017. Additionally, 2018 operations included the benefit of First Choice cost saves and hedge terminations and restructuring actions which affected 2017 results. Based on its pro forma analysis in the Company’s Form 10-K, the Company expected the Commerce acquisition to be accretive to earnings and earnings per share, and that cost saves to be achieved in 2018 would provide further accretive benefit to earnings. Operations in 2018 also benefited from the lower federal income tax rate, which reduced the marginal tax rate to approximately 27% in 2018 from approximately 39% in prior periods.

2018 first quarter net income totaled $25 million, which was a 63% increase over 2017 first quarter results of $15 million. Earnings per share increased by 25% to $0.55, including the impact of additional shares issued in 2017. The first quarter non-GAAP measure of adjusted earnings per share improved by 18% to $0.65 per share in 2018 compared $0.55 in 2017. The measure of adjusted earnings per share excludes amounts viewed as not related to normalized operations. In the most recent quarter these were primarily related to the integration of the Commerce operations.

The first quarter return on assets improved to 0.88% in 2018 from 0.68% in 2017. The non-GAAP measure of adjusted return on assets improved to 1.04% from 0.85%. This is the first quarter in several years that management has exceeded 1.0% for this measure of operating profitability. The efficiency ratio measured 59.5% in the latest quarter, and was in line with management’s long term goal to maintain this measure below 60%.

Revenue: Quarterly net revenue totaled $115 million in the most recent quarter, increasing by 13% year-over-year. The first quarter non-GAAP measure of operating revenue increased by 21% year-over-year. Much of this increase was attributed to the Commerce acquisition. The Company’s pro forma analysis in its 10-K estimated that the Commerce acquisition would increase revenue by 27% in the first full year of combined operations, based on 2016 revenue levels and based on the assumptions of that analysis. On an annualized basis, operating revenue totaled $10.04 per share in the most recent quarter, compared to $10.80 in the same quarter of 2017.

Net Interest Income: Net interest income increased by 28% year-over year, largely due to a 25% increase in average earning assets, including approximately 22% based on assets contributed at the time of the Commerce acquisition. The net interest margin increased slightly year-over-year to 3.36% from 3.33%. The contribution from purchased loan accretion decreased to 0.13% from 0.18%. Additionally, the contribution of taxable equivalent securities yields decreased by 0.05% in the most recent quarter as a result of lower taxes resulting from federal income tax reform. The net interest margin increased by 13 basis points, or 4%, before these impacts - including the benefit of the positive sensitivity of the asset liability mix to higher interest rates, as well as the Commerce acquisition.

Non-Interest Income: Total fee income increased by 2% year-over-year. Loan related income and deposit related fees each increased by 30% year-over-year as a result of organic growth and the Commerce acquisition. This growth offset a 20% decrease in mortgage banking revenue primarily due to lower margins in 2018 reflecting industry competitive conditions. First quarter loans originated for sale totaled $480 million in 2018, compared to $429 million in 2017. Securities losses in 2018 were primarily related to unrealized losses on equity securities available for sale which are now recorded to non-interest income beginning in 2018 as a result of a change in accounting principles adopted by FASB. The category of “Other Non-Interest Income” consists primarily of accrued income on bank owned life insurance. This category improved year-over-year due to lower amortization charges on tax credit related investment projects, which decreased to $0.5 million from $1.3 million. With the crossing of the $10 billion asset threshold, the Company will receive lower card related revenue in deposit related fees due to the Durbin Amendment. This revenue totaled $2.4 million in the most recent quarter. The Company anticipates that this revenue will decrease by a quarterly amount of approximately $1.25 million beginning in the third quarter of 2018.

Loan Loss Provision: The first quarter 2018 loan loss provision was $5.6 million and exceeded the net loan charge-offs recorded during the period, as the allowance increased due to loan growth and changes in mix. The

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provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. It is an estimate of the probable and estimable loan losses in the portfolio as of period-end. The level of the allowance is a critical accounting estimate and the level of the allowance was included in the discussion of financial condition.

Non- Interest Expense: Total first quarter non-interest expense increased by 3% year-over-year, and benefited from lower non-operating charges in 2018. The non-GAAP measure of operating non-interest expense increased by 15% due to the Commerce acquisition and organic growth. Management views the year-over-year results as indicating positive operating leverage, as the 21% increase in operating revenue exceeded the growth of operating non-interest expense. This positive result was achieved while the Company also added overhead costs for increased regulatory compliance related to crossing the $10 billion asset threshold. The Company also increased its investment in employees and its communities as part of the reinvestment of benefits resulting from federal tax reform. Most of the decrease in mortgage revenue was offset by decreases in mortgage banking related expense in order to minimize the bottom line impact of tighter margins. Total full-time equivalent staff measured 1,941 positions at quarter-end, compared to 1,992 positions at the start of the year. As a consequence of crossing the $10 billion asset threshold, management anticipates that FDIC insurance expense will increase by approximately $1.3 million per year beginning in the fourth quarter of 2018.

Income Tax Expense: The first quarter effective income tax rate was 22% in 2018 compared to 30% in 2017, reflecting the benefit of federal income tax reform which became effective in 2018.

Total Comprehensive Income: Total comprehensive income includes net income together with other comprehensive income. First quarter comprehensive income totaled $11 million in 2018 compared to $14 million in 2017. The year-over-year increase in net income was more than offset by the higher unrealized bond losses recorded to other comprehensive income as a result of the larger rate increases in 2018.

Liquidity and Cash Flows: There were no major changes in liquidity and cash flows in the first quarter of 2018. Loan growth was funded from liquid assets including a seasonal decline in held for sale residential mortgages. Borrowings offset daily fluctuations in payroll processing deposits. The loans/deposits ratio increased slightly to 96%. Brokered time deposits totaled $1.1 billion at period-end. The Company uses this funding source as an alternative to short term borrowing. At period-end, the Bank had $951 million in borrowing availability with the FHLBB. The holding company downstreamed $50 million in cash into the Bank as paid in capital to support further bank growth. At period-end, the holding company had cash and liquid investments totaling $70 million. Additional information about liquidity and cash flows is contained in the related section of the most recent Form 10-K.

Capital Resources: Please see the “Shareholders’ Equity” section of the Comparison of Financial Condition for a discussion of shareholders’ equity together with the note on Shareholders' Equity in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in the most recent Form 10-K. There were no major changes in equity and capital metrics in the first quarter of 2018. The increase in earnings and profitability have increased the Company’s internal generation of tangible equity which the Company views as supportive of dividends, organic growth, and long term strengthening of capital metrics.

The Commerce acquisition has resulted in the Company crossing the $10 billion asset threshold under Dodd-Frank, which includes more rigorous capital modeling and stress testing. The Company has been enhancing its capital management function in recent years in anticipation of this cross. It currently conducts informal stress test analysis and expects to meet all regulatory requirements related to crossing over $10 billion in assets.

Off-Balance Sheet Arrangements and Contractual Obligations: In the normal course of operations, Berkshire engages in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. Further information about the Company’s off-balance sheet arrangements and information relating to payments due under contractual obligations is presented in

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the most recent Form 10-K. Changes in the fair value of derivative financial instruments and hedging activities are included on the balance sheet and information related to these matters is reported in the related footnote to the consolidated financial statements, and was included in management’s discussion of changes in financial condition. There were no major changes in off-balance sheet arrangements and contractual obligations during the first quarter of 2018.

Fair Value Measurements: The most significant fair value measurements recorded by the Company are those related to assets and liabilities acquired in business combinations. The premium or discount value of acquired loans has historically been the most significant element of these measurements. Berkshire provides a summary of estimated fair values of financial instruments at each quarter-end. The premium or discount value of loans has historically been the most significant element of this quarter-end presentation. This premium or discount is a Level 3 estimate and reflects management’s subjective judgments. At period-end, the premium value of the loan portfolio was $129 million, or 1.5% of the carrying value, compared to $175 million, or 2.1% of carrying value at year-end 2017. This reflects the lower value of the longer duration loans based on the increase in interest rates, partially offset by the longer lives related to slower prepayment speeds expected due to the increase in rates. The Company makes further measurements of fair value of certain assets and liabilities, as described in the related note in the financial statements. The most significant measurements of recurring fair values of financial instruments primarily relate to securities available for sale, loans held for sale, and derivative instruments. These measurements were generally based on Level 2 market based inputs.

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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND RECENT ACCOUNTING PRONOUNCEMENTS
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Please see those policies in conjunction with this discussion. Management believes that the following policies would be considered critical under the SEC’s definition:

Allowance for Loan Losses. The allowance for loan losses represents probable credit losses that are inherent in the loan portfolio at the financial statement date and which may be estimated. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although management believes that it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. Conditions in the local economy and real estate values could require the Company to increase provisions for loan losses, which would negatively impact earnings.

Acquired Loans. Loans that the Company acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Company estimates the fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.

Income Taxes. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable ordinary income, taxable capital gain income, and the existence of prior years' taxable income, to which "carry back" refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. In determining the valuation allowance, the Company uses historical and forecasted future operating results, including a review of the eligible carry-forward periods, tax planning opportunities and other relevant considerations. In particular, income tax benefits and deferred tax assets generated from tax-advantaged commercial development projects are based on management's assessment and interpretation of applicable tax law as it currently stands. These underlying assumptions can change from period to period. For example, tax law changes or variances in projected taxable ordinary income or taxable capital gain income could result in a change in the deferred tax asset or the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of

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its net deferred tax asset in the future, an adjustment to the deferred tax asset in excess of the valuation allowance would be charged to income tax expense in the period such determination is made.

Goodwill and Identifiable Intangible Assets. Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and analysis of market pricing multiples. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

Determination of Other-Than-Temporary Impairment of Securities. The Company evaluates debt securities within the Company's available for sale and held to maturity portfolios for other-than-temporary impairment ("OTTI"), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is "more likely than not" that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes.

Fair Value of Financial Instruments. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.

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ITEM 3.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the way that the Company measures market risk in the first quarter of 2018.
For further discussion about the Company’s Quantitative and Qualitative Aspects of Market Risk, please review Item 7A of the most recent report on Form 10-K which sets forth the methodologies employed by the Company and the various aspects of its analysis of its interest rate sensitivity. Berkshire’s objective is to maintain a neutral or asset sensitive interest rate risk profile, as measured by the sensitivity of net interest income to market interest rate changes.

There were no significant changes in interest rate sensitivity in the first quarter of 2018. In the prior quarter, interest sensitivity had improved with the addition of the Commerce balance sheet. In the most recent quarter, some of this increased sensitivity was reversed due to the lengthening of expected loan lives, and the increase in wholesale funding. At period-end, net interest income was modeled to increase by 1.3% in the second year of an up 200 basis point ramp. The loss representing the economic value of equity at risk increased modestly to 6% in a 200 basis point upward move in interest rates. Of note, while deposit costs have risen, deposit interest rate sensitivity remains below the 40% beta level utilized in the Company’s modeling. Estimated net income at risk under the forward curve scenario also remained positive and was viewed as improved during the most recent quarter. This positive sensitivity is compared to a baseline of flat interest rates; this baseline scenario demonstrates medium term pressure on the net interest margin from the roll-down of long term assets resulting from scheduled repricing.



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ITEM 4.           CONTROLS AND PROCEDURES
a)  Disclosure controls and procedures.
The principal executive officers, including the principal financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures were effective.

b)  Changes in internal control over financial reporting.
There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
 
ITEM 1.            LEGAL PROCEEDINGS
As of March 31, 2018, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. However, other than the items noted below, neither the Company nor the Bank is a defendant party to any pending legal proceedings that it believes, in the aggregate, would have a material adverse effect on the financial condition or operations of the Company. Additionally, an estimate of future, probable losses cannot be estimated as of March 31, 2018.

On April 28, 2016, Berkshire Hills and Berkshire Bank were served with a complaint filed in the United States District Court, District of Massachusetts, Springfield Division. The complaint was filed by an individual Berkshire Bank depositor, who claims to have filed the complaint on behalf of a purported class of Berkshire Bank depositors, and alleges violations of the Electronic Funds Transfer Act and certain regulations thereunder, among other matters. On July 15, 2016, the complaint was amended to add purported claims under the Massachusetts Consumer Protection Act. The complaint seeks, in part, compensatory, consequential, statutory, and punitive damages. Berkshire Hills and Berkshire Bank deny the allegations contained in the complaint and are vigorously defending this lawsuit.

On January 29, 2018, the Bank was served with an amended complaint filed nominally against Berkshire Hills in the Business Litigation Session of the Massachusetts Superior Court sitting in Suffolk County. The amended complaint was filed by two residuary beneficiaries of an estate planning trust that was administered by the Bank as successor trustee following the death of the trust donor, and alleges the Bank breached its fiduciary duty and violated the Massachusetts Consumer Protection Act in the course of performing its duties as trustee. The complaint seeks compensatory, statutory, and punitive damages. Berkshire Hills and Berkshire Bank deny the allegations contained in the complaint and are vigorously defending this lawsuit.

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ITEM 1A.               RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and in Part I, “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K, which could materially affect the Company's business, financial condition, or future operating results. The risks described in this form are not the only risks presently facing the Company. Additional risks and uncertainties not currently known to the Company, or currently deemed to be immaterial, also may materially adversely affect the Company's business, financial condition, and/or operating results. There were no major changes in risk factors in the first quarter of 2018.


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ITEM 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)                Recent Sales of Unregistered Securities
The Company occasionally engages in the practice of transferring unregistered securities for the purpose of completing business transactions. These shares are issued to vendors or other organizations as consideration for services performed in accordance with each contract. During the three months ended March 31, 2018 and March 31, 2017, the Company transferred 1,437 and 1,520 shares, respectively.

(b)                 Not applicable.

(c)                 The following table provides certain information with regard to shares repurchased by the Company in the first quarter of 2018:
 
 
Total number of
 
Average price
 
Total number of shares
purchased as part of
publicly announced
 
Maximum number of
shares that may yet
be purchased under
Period 
 
shares purchased
 
paid per share
 
plans or programs
 
the plans or programs
January 1-31, 2018
 

 
$

 

 
500,000

February 1-28, 2018
 

 

 

 
500,000

March 1-31, 2018
 

 

 

 
500,000

Total
 

 
$

 

 
500,000


On December 2, 2015, the Company announced that its Board of Directors authorized a new stock repurchase program, pursuant to which the Company may repurchase up to 500 thousand shares of the Company's common stock, representing approximately 1.6% of the Company’s then outstanding shares. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions or pursuant to a trading plan adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will be recorded as treasury shares. The repurchase plan will continue until it is completed or terminated by the Board of Directors. As of March 31, 2018, no shares had been purchased under this program.


ITEM 3.                DEFAULTS UPON SENIOR SECURITIES
None.


ITEM 4.                  MINE SAFETY DISCLOSURES
Not applicable.


ITEM 5.                OTHER INFORMATION
None.

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ITEM 6.                   EXHIBITS
3.1
 
3.2
 
3.3
 
4.1
 
10.1
 
31.1
 
31.2
 
32.1
 
32.2
 
101
 
_______________________________________
(1) 
Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement and amendments thereto, initially filed on March 10, 2000, Registration No. 333-32146.
(2) 
Incorporated herein by reference from the Exhibits to the Form 8-K as filed on June 26, 2017.
(3)
Incorporated herein by reference from the Exhibits to the Form 10-Q as filed on November 9, 2017.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
BERKSHIRE HILLS BANCORP, INC.
 
 
 
 
 
Dated: May 10, 2018
By:
/s/ Michael P. Daly
 
Michael P. Daly
 
Chief Executive Officer
 
 
 
 
 
Dated: May 10, 2018
By:
/s/ James M. Moses
 
James M. Moses
 
Senior Executive Vice President, Chief Financial Officer


86


Exhibit 10.1

    
    









BERKSHIREBANKLOGO.JPG


Senior Executive
Short Term Incentive Plan (STIP)






As Adopted by the Compensation Committee on March 22, 2018
Objectives
The Senior Executive Short-Term Incentive Plan (the “Plan”) is designed to align executives’ interests with Berkshire Bank’s (the “Bank”) and Berkshire Hill Bancorp, Inc.’s (the “Company”) strategic plan and critical annual performance goals by providing meaningful “pay-at-risk” that is earned each year based on performance results. The Plan is intended to motivate, recognize and reward senior executives for their individual and collective contributions to the growth and profitability of the Company and Bank. The Plan serves as a component of a competitive total compensation package that enables the Company and the Bank to attract and retain talent needed to drive the Company and the Bank’s future success.
Participants
Participants are executives of the Bank who are recommended by the Chief Executive Officer and approved by the Compensation Committee of the Company (the “Committee”) to participate in the Plan. The Chief Executive Officer, President, Chief Operating Officer and Senior EVPs are eligible to participate in the Plan, and such other executives as may be approved by the Committee.
Performance Period
The performance period and the Plan operate on a calendar year basis (January 1 through December 31) (the “Plan Year”).
Incentive Opportunity
Each participant will have an annual target incentive opportunity. At the start of each Plan Year, the Committee will define the corporate measures and goals which will serve as the basis for funding the incentive pool. Additionally, the Committee will approve the individual goals which will be used to determine the individual annual cash award (the “Award”).
Trigger/Performance Gate
The Committee may determine, in its sole discretion, that bonuses will not be paid to some or all Participants under the Plan for a particular Plan Year if certain corporate performance metrics are not satisfied by setting a trigger/performance gate. Once the trigger/performance gate is achieved, the plan payouts will be determined based on performance measures (corporate and individual) as outlined below.
Performance Measures
Payment of Awards in any Plan Year is contingent upon the performance objectives specified by the Committee for any Participant being met by that Participant. The specific goals are determined annually by the Committee and are subject to change by the Committee, and will be based on any one or more of the following, unless the Committee elects other criteria:

(1)
basic earnings per share;
(2)
basic cash earnings per share;
(3)
diluted earnings per share;
(4)
core earnings per share;
(5)
diluted cash earnings per share;
(6)
net income or core net income;
(7)
cash earnings or dividend generation;
(8)
net interest income;
(9)
non-interest income;
(10)
general and administrative expense to average assets ratio;
(11)
cash general and administrative expense to average assets ratio;
(12)
efficiency ratio;
(13)
cash efficiency ratio;
(14)
return on average assets or return on assets;
(15)
return on tangible average assets or return on tangible assets;
(16)
core return on average assets;





(17)
cash return on average assets;
(18)
return on average stockholders’ equity (total, common or preferred);
(19)
cash return on average stockholders’ equity;
(20)
core return on stockholders’ equity;
(21)
return on average tangible stockholders’ equity;
(22)
cash return on average tangible stockholders’ equity;
(23)
core earnings;
(24)
operating income;
(25)
operating efficiency;
(26)
core operating efficiency ratio;
(27)
net interest margin (which may be with purchased loan accretion and FTE adjustments);
(28)
growth in assets, loans (including home equity lines of credit), or deposits;
(29)
loan production volume;
(30)
non-performing loans, non-accruing loans to total loans, non-accruing and delinquent loans to total loans, all loans to total loans;
(31)
cash flow;
(32)
capital preservation (core or risk-based);
(33)
interest rate risk exposure-net portfolio value;
(34)
interest rate risk-sensitivity;
(35)
liquidity parameters, loans to deposits, excess borrowing capacity;
(36)
strategic business objectives, consisting of one or more objectives based upon meeting specified cost targets, business/product expansion goals, and goals relating to acquisitions or divestitures, or goals relating to capital raising and capital management;
(37)
stock price (including, but not limited to, growth measures and total shareholder return);
(38)
operating expense as a percentage of average assets;
(39)
core deposits as a percentage of total deposits;
(40)
net charge-off percentage;
(41)
average percentage past due;
(42)
classified assets to total assets;
(43)
compliance/audit exam findings;
(44)
capital ratio, total capital to risk-weighted assets, common equity tier 1 to risk weighted assets, tier 1 capital to risk weighted assets, tier 1 capital to assets;
(45)      management achievement of strategic plan goals;
(46)
system knowledge & utilization of core applications;
(47)
customer service survey;
(48)
expense management;
(49)
asset quality;
(50)
book value per share;
(51)
tangible book value per share;
(52)
non-performing loans to loans;
(53)
non-performing assets to assets;
(54)
net-charge off to average loans;
(55)
fee income to net interest and fee income;
(56)
fee income to revenue;
(57)
total revenue;
(58)
yield to cost by product;
(59)
yield to cost by asset/liability class;
(60)
net interest spread;
(61)
cost of funds;
(62)
dividend payout ratio; or
(63)
any combination of the foregoing.






Performance measures may be based on the performance of the Company as a whole or on any one or more subsidiaries or business units of the Company or a subsidiary or business unit of the Bank, and may be measured relative to a peer group, an index or a business plan. The terms of an Award may provide that partial achievement of corporate and/or individual performance goals may result in partial payment. The Committee may provide for the exclusion of the effects of the following items: (i) extraordinary, unusual, and/or nonrecurring items of gain or loss; (ii) gains or losses on the disposition of a business; (iii) changes in tax or accounting principles, regulations or laws; or (iv) expenses incurred in connection with a merger, branch acquisition or similar transaction.
If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company or the manner in which the Company or its subsidiaries conducts its business or other events or circumstances render current performance measures and/or goals to be unsuitable, the Committee may modify such performance measures and/or goals, in whole or in part, as the Committee deems appropriate. If a Participant is promoted, demoted or transferred to a different business unit during a performance period, the Committee may determine that the selected performance goals or applicable performance period are no longer appropriate, in which case, the Committee, in its sole discretion, may (i) adjust, change or eliminate the performance measures or change the applicable performance period; or (ii) cause a cash payment to be made to the Participant in an amount determined by the Committee.
Incentive Award Formula
Incentive awards paid reflect a combination of the corporate financial performance, strategic plan implementation and individual performance. This approach supports our desire to foster a collaborative team-oriented culture among our senior leadership team. Corporate financial results and achievement of the strategic business plan funds the incentive awards as follows, unless determined otherwise by the Committee, and the following formula may be used at the sole discretion of the Committee:

 Incentive Target Opportunities for all Participants
X
Corporate Financial Performance
Scorecard
(0% - 150%)
X
Strategic Plan Multiplier
(85% - 115%)
=
 Funded Incentive Pool

The Committee will establish the Corporate Financial Performance Scorecard measures which will be used to determine the executive incentive pool on an annual basis. Each corporate performance measure is treated independently and performance between threshold, target and stretch will be interpolated to reward incremental performance. Performance below threshold will result in no award for that component. Unless determined otherwise by the Committee, the Corporate Financial Performance Scorecard result will be determined formulaically based on achievement of predefined performance goals.

Strategic Plan Multiplier
The Committee has the discretion to modify the pool +/- 15% based on its assessment of the level of achievement of corporate strategic goals during the year. In addition, the Committee will consider and discuss overall risk and can adjust the pool downward to reflect any risk or regulatory issues.
Individual performance is measured in a “holistic” approach based on each participant’s individual scorecard, overall achievements and manager discretion.
Once the pool is determined, the individual awards are allocated to reflect individual performance provided total awards do not exceed the Funded Pool and Individual awards do not exceed 200% of target.





Payout
Awards will be calculated based on actual performance at the end of the year. Results of the Corporate Financial Performance Scorecard and Strategic Plan Multiplier will be used to determine the incentive pool funding. Achievement of strategic goals and overall risk are assessed and determined by the Committee.
The Committee (with input from the Chief Executive Officer for his reports) will determine the incentive awards to reflect individual performance based on achievements of individual goals and a holistic assessment of overall performance.
Total awards should not exceed the pool and individual awards should not exceed 200% of the executive’s original target. Payouts will be made in cash no later than March 15 after the closing of the Bank’s financials each year.

EXAMPLE     

For the illustration, we assume an executive with $100k target incentive opportunity.
1.
The first step will evaluate performance based on the Corporate Scorecard and Strategic Plan achievement. The result of the Corporate Scorecard and Strategic Plan Modifier determines the pool of incentives available for distribution to all executives.

In the illustration below the funding is calculated as:

Core Net Income (25% x 100% performance) + Efficiency Ratio (25% x 115%) + Criticized Assets (25% x130%) + Core ROA (25% x 100%) = 111.25% funding for Corporate Financial Performance.

Upon the Committee’s review of strategic plan achievements and in consideration of overall risk, a Strategic Plan Multiplier is determined to be 108%.

As a result, he total funding of the incentive pool is 111.25% x 108% = 120%.

Corporate Financial Performance Scorecard
x
Strategic Plan Multiplier
=
120%
Total Incentive Pool
Performance Measure
Performance Goal
Weight
Actual Performance
Pool Allocation
Total Core Net Income
TBD
25%
Target
100%

Upon the Committee’s evaluation of strategic goals achievement and overall risk
(85% - 115%)
 
Annual Core Efficiency Ratio
TBD
25%
Above target
115%
Criticized Assets
(Tier 1 + ALLL)
TBD
25%
Near Stretch
130%
Core ROA
TBD
25%
Target
100%
TOTAL
100%
111.25%
108%

The pool is the sum of all the total incentives for the top executives.

2.
Individual performance is considered to determine the actual award. Individual performance can adjust the incentive award up or down, although total awards cannot exceed the pool and no single award should exceed 200% of target (e.g. $200k for our example).

If the senior executive did not meet all goals, the award may be less than target.
If the senior executive exceeded all goals, the award may be higher than target.
The senior executive’s award cannot exceed $200k (200% of $100,000 target incentive opportunity)






TERMS AND CONDITIONS

Eligibility/Participation
Participants must be employed or promoted by October 1st of the Plan Year and actively employed on the payout date to receive an award. In the event that an individual, who is due an incentive payout under the plan terminates his employment with the Bank between January 1 of a Plan Year and the date the incentive is paid, that individual’s incentive will be included in the pool and may be allocated to other participants of the plan.
Payouts
Once the plan funding is known, actual awards will be determined based on individual performance. Awards are scheduled to be paid no later than March 15 after determining the Company’s financial results for the previous year. Payouts are pro-rated based on date of hire or promotion after March 31.
    
Effective Date
The Plan is effective for fiscal years beginning on and after January 1, 2018 and shall continue thereafter until modified by the Committee. The Committee retains the right as described below to amend, modify or discontinue the Plan at any time during the specified period. The Plan will remain in effect until earned incentive compensation is paid to participants.
Plan Authorization and Oversight
The Plan is authorized by the Committee of the Board of Directors. The Committee has the sole authority to interpret the Plan and to make or nullify any rules and procedures, as necessary, for proper administration. Any determination by the Committee and/or Board of Directors will be final and binding. The Committee may, in its sole discretion, terminate or modify any aspect of the Plan. However, no Plan amendment or termination will adversely affect an outstanding award.
Plan Changes or Discontinuance
Berkshire has developed the Plan on the basis of existing business, market and economic conditions; current philosophy and staff assignments. If substantial changes occur that affect these conditions, philosophy, assignments, or forecasts, Berkshire may add to, amend, modify or discontinue any of the terms or conditions of the Plan at any time. The Committee may, at its sole discretion, waive, change or amend any of the Plan features as it deems appropriate.
Termination of Employment
If a Plan participant is terminated by the Company or resigns, no incentive award will be paid. (See exception for death, disability and retirement below.)
Death, Disability, Retirement and Change in Control
In the event of death, disability and retirement, the Committee may, in its sole discretion, approve a pro rata payout to such Participant. Unless the Committee determines otherwise, in the event of a Participant’s termination of employment on or after a change in control, as defined in the Company’s 2018 Equity Incentive Plan, such Participant’s Award will be paid pro-rata based on the portion of the Plan Year occurring and at the actual level of the performance measures that have been achieved; however, if the performance measurements are not reasonably determinable as of the date of a change in control, such Participant’s Award will be paid pro-rata based on the “target” level.





Ethics and Interpretation
If there is any ambiguity as to the meaning of any terms or provisions of the Plan or any questions as to the correct interpretation of any information contained therein, the interpretation expressed by the Committee will be final and binding.
The altering, inflating, and/or inappropriate manipulation of performance/financial results or any other infraction of recognized ethical business standards will subject a participant to disciplinary action up to and including termination of employment. In addition, any incentive compensation under the Plan to which the participant would otherwise be entitled will be revoked.
Participants who have willfully engaged in any activity, injurious to the Bank or Company, will upon termination of employment, death, or retirement, forfeit any incentive award or payment earned during the Plan year in which the termination occurred.
Withholding of Taxes
Incentive awards will be subject to applicable federal (including FICA), state and local tax withholding requirements. The Bank shall have the right to deduct from the incentive awards paid in cash or from other wages paid to the participant any federal, state or local taxes required by law to be withheld with respect to such incentive awards. In the case of incentive awards paid in Bank stock, the Bank may require the participant or other person receiving such shares to pay to the Bank the amount of any such taxes that the Bank is required to withhold with respect to such awards, or the Bank may deduct from other wages paid by the Bank the amount of any withholding taxes due with respect to such awards. If the Compensation Committee so permits, a participant may elect to satisfy the Bank’s income tax withholding obligation, with respect to awards paid, in Bank stock by having shares withheld up to an amount that does not exceed the participant’s minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee.
CLAWBACK POLICY ON RECOUPMENT OF INCENTIVE COMPENSATION
The Committee may, in its sole discretion, subject to the terms of this Policy set forth below and to the extent legally permitted, require the return, repayment or forfeiture of any annual or long-term incentive compensation payment or award made or granted to any current or former Executive Officer during the 3-year period preceding a Triggering Event (as defined below). This policy is applicable to awards made or granted only after the effective date.
A “Triggering Event” is defined as restatement of previously reported financial statements due to the material noncompliance with any financial reporting requirement under the securities laws (a “Restatement”) is filed by the Company with the Securities and Exchange Commission (the “SEC”); or misconduct by an “Executive Officer”.
In the case of a Triggering Event, the amount to be returned, repaid or forfeited shall be limited to the excess of (i) the amount of the Executive Officer’s payment or award for the relevant period which was predicated upon achieving certain financial results that were subsequently the subject of the Restatement, correction or adjustment, over (ii) any lower payment or award that would have been made to the Executive Officer based upon the financial results of the Company contained in the Restatement or corrected or adjusted financial results. If the Triggering Event results from misconduct without a Restatement of financial statements, the amount to be repaid or forfeited shall be determined by the Committee and approved by the full Board,
For purposes of this Policy, (i) the term “Executive Officer” means those persons designated by resolution of the Board of Directors of the Company as executive officers as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended, and all participants that are designated at or above the executive level, and (ii) “Misconduct” means fraud, commission of a felony, material violation of any written agreement with or policies of the Company, or any other material breach of fiduciary duty injurious to the Company.
The Committee shall make all determinations regarding the application and operation of this policy in its sole discretion, and all such determinations shall be final and binding for purposes of the application of this policy. Notwithstanding the foregoing, the Committee may amend or change the terms of this Policy at any time for any reason, including as required to comply with the rules of the SEC and the New York Stock Exchange implementing Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Further, the exercise by the Committee of any rights pursuant to this policy shall be without prejudice to any other rights that the Company or the Committee may have with respect to any Executive Officer subject to this policy.





Risk
In order to help insure the Company's safety and soundness, the Committee reserves the right to modify or adjust payments to reflect material regulatory findings and/or asset quality deterioration. A portion of the Company's strategic plan modifier concerns asset quality soundness. A review/comparison of the Company's asset quality results vs. trends, tolerance level ranges and the peer group will be provided to the Committee prior to payout.
Miscellaneous
The Plan will not be deemed to give any participant the right to be retained in the employ of the Bank or Company, nor will the Plan interfere with the right of the Bank or Company to discharge any participant at any time.
In the absence of an authorized, written employment contract, the relationship between executives and the Bank or Company is one of at-will employment. The Plan does not alter the relationship.
The Plan and the transactions and payouts hereunder shall, in all respect, be governed by, and construed and enforced in accordance with the laws of the State of Massachusetts.





Exhibit 31.1
 
CERTIFICATION
 
I, Michael P. Daly, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Berkshire Hills Bancorp, Inc.;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant have:
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a.
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
May 10, 2018
/s/ Michael P. Daly
 
Michael P. Daly
 
Chief Executive Officer





Exhibit 31.2
 
CERTIFICATION
 
I, James M. Moses, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Berkshire Hills Bancorp, Inc.;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant have:
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a.
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
May 10, 2018
/s/ James M. Moses
 
James M. Moses
 
Senior Executive Vice President, Chief Financial Officer





Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the quarterly report of Berkshire Hills Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission (the “Report”), I, Michael P. Daly, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
 
 
May 10, 2018
/s/ Michael P. Daly
 
Michael P. Daly
 
Chief Executive Officer





Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the quarterly report of Berkshire Hills Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission (the “Report”), I, James M. Moses, Senior Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
 
 
May 10, 2018
/s/ James M. Moses
 
James M. Moses
 
Senior Executive Vice President, Chief Financial Officer