Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2013

 

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

 

 

BERKSHIRE HILLS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3510455

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

24 North Street, Pittsfield, Massachusetts

 

01201

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (413) 443-5601

 

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 x     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 x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company 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 x

 

The Registrant had 25,037,291 shares of common stock, par value $0.01 per share, outstanding as of August 5, 2013.

 

 

 



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

FORM 10-Q

 

INDEX

 

 

 

 

Page

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

 

4

 

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012

 

 

 

 

 

5

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012

 

6

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2013 and 2012

 

7

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012

 

8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

Note 1

Basis of Presentation

 

10

 

Note 2

Recent Accounting Pronouncements

 

10

 

Note 3

Trading Account Security

 

11

 

Note 4

Securities Available for Sale and Held to Maturity

 

12

 

Note 5

Loans

 

16

 

Note 6

Deposits

 

32

 

Note 7

Borrowed Funds

 

32

 

Note 8

Stockholders’ Equity

 

34

 

Note 9

Earnings per Share

 

39

 

Note 10

Stock-Based Compensation Plans

 

40

 

Note 11

Operating Segments

 

40

 

Note 12

Derivative Financial Instruments and Hedging Activities

 

41

 

Note 13

Fair Value Measurements

 

47

 

Note 14

Net Interest Income after Provision for Loan Losses

 

55

 

Note 15

Subsequent Events

 

55

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

56

 

 

 

 

 

Selected Financial Data

 

60

 

 

 

 

 

Average Balances and Average Yields/Rates

 

61

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

70

 

 

 

 

Item 4.

Controls and Procedures

 

71

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

72

 

2



Table of Contents

 

Item 1A.

Risk Factors

 

72

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

73

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

74

 

 

 

 

Item 4.

Mine Safety Disclosures

 

74

 

 

 

 

Item 5.

Other Information

 

74

 

 

 

 

Item 6.

Exhibits

 

75

 

 

 

 

Signatures

 

 

76

 

3



Table of Contents

 

PART I

 

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

(In thousands, except share data)

 

2013

 

2012

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

56,623

 

$

63,382

 

Short-term investments

 

23,482

 

34,862

 

Total cash and cash equivalents

 

80,105

 

98,244

 

 

 

 

 

 

 

Trading security

 

15,566

 

16,893

 

Securities available for sale, at fair value

 

568,268

 

466,169

 

Securities held to maturity (fair values of $50,056 and $52,490)

 

49,604

 

51,024

 

Federal Home Loan Bank stock and other restricted securities

 

37,667

 

39,785

 

Total securities

 

671,105

 

573,871

 

 

 

 

 

 

 

Loans held for sale, at fair value

 

64,101

 

85,368

 

 

 

 

 

 

 

Residential mortgages

 

1,232,488

 

1,324,251

 

Commercial mortgages

 

1,352,913

 

1,413,544

 

Commercial business loans

 

643,924

 

600,126

 

Consumer loans

 

641,350

 

650,733

 

Total loans

 

3,870,675

 

3,988,654

 

Less: Allowance for loan losses

 

(33,248

)

(33,208

)

Net loans

 

3,837,427

 

3,955,446

 

 

 

 

 

 

 

Premises and equipment, net

 

88,644

 

86,461

 

Other real estate owned

 

2,713

 

1,929

 

Goodwill

 

256,118

 

255,199

 

Other intangible assets

 

16,337

 

19,059

 

Cash surrender value of bank-owned life insurance policies

 

89,592

 

88,198

 

Deferred tax assets, net

 

60,410

 

57,729

 

Other assets

 

57,579

 

75,305

 

Total assets

 

$

5,224,131

 

$

5,296,809

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Demand deposits

 

$

644,059

 

$

673,921

 

NOW deposits

 

356,695

 

379,880

 

Money market deposits

 

1,295,771

 

1,439,632

 

Savings deposits

 

444,586

 

436,387

 

Time deposits

 

1,074,112

 

1,170,589

 

Total deposits

 

3,815,223

 

4,100,409

 

Short-term debt

 

415,720

 

163,150

 

Long-term Federal Home Loan Bank advances

 

175,106

 

195,321

 

Subordinated notes

 

89,647

 

89,617

 

Total borrowings

 

680,473

 

448,088

 

Other liabilities

 

55,465

 

81,047

 

Total liabilities

 

4,551,161

 

4,629,544

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock ($.01 par value; 50,000,000 shares authorized and 26,525,466 shares issued and 25,095,578 shares outstanding in 2013; 26,525,466 shares issued and 25,148,522 shares outstanding in 2012)

 

265

 

265

 

Additional paid-in capital

 

586,401

 

585,360

 

Unearned compensation

 

(5,385

)

(3,035

)

Retained earnings

 

132,930

 

122,014

 

Accumulated other comprehensive loss

 

(6,210

)

(2,979

)

Treasury stock, at cost (1,429,888 shares in 2013 and 1,376,944 shares in 2012)

 

(35,031

)

(34,360

)

Total stockholders’ equity

 

672,970

 

667,265

 

Total liabilities and stockholders’ equity

 

$

5,224,131

 

$

5,296,809

 

 

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

 

4



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands, except per share data)

 

2013

 

2012

 

2013

 

2012

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

Loans

 

$

45,443

 

$

38,787

 

$

92,524

 

$

73,838

 

Securities and other

 

4,254

 

3,869

 

8,054

 

7,490

 

Total interest and dividend income

 

49,697

 

42,656

 

100,578

 

81,328

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

5,052

 

5,482

 

10,415

 

10,984

 

Borrowings and junior subordinated notes

 

3,541

 

2,121

 

7,122

 

4,146

 

Total interest expense

 

8,593

 

7,603

 

17,537

 

15,130

 

Net interest income

 

41,104

 

35,053

 

83,041

 

66,198

 

Non-interest income

 

 

 

 

 

 

 

 

 

Loan related income

 

2,644

 

1,479

 

5,361

 

2,650

 

Mortgage banking income

 

2,129

 

2,045

 

4,346

 

2,247

 

Deposit related fees

 

4,805

 

3,963

 

9,064

 

7,463

 

Insurance commissions and fees

 

2,407

 

2,768

 

5,404

 

5,514

 

Wealth management fees

 

2,070

 

1,757

 

4,334

 

3,657

 

Total fee income

 

14,055

 

12,012

 

28,509

 

21,531

 

Other

 

546

 

269

 

890

 

510

 

Gain on sale of securities, net

 

1,005

 

7

 

1,005

 

7

 

Non-recurring gain

 

 

 

 

42

 

Total non-interest income

 

15,606

 

12,288

 

30,404

 

22,090

 

Total net revenue

 

56,710

 

47,341

 

113,445

 

88,288

 

Provision for loan losses

 

2,700

 

2,250

 

5,100

 

4,250

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

18,151

 

15,638

 

35,892

 

29,227

 

Occupancy and equipment

 

5,737

 

4,490

 

11,505

 

8,885

 

Technology and communications

 

3,480

 

2,258

 

6,471

 

4,216

 

Marketing and promotion

 

603

 

778

 

1,241

 

1,129

 

Professional services

 

1,764

 

1,493

 

3,254

 

2,858

 

FDIC premiums and assessments

 

890

 

870

 

1,718

 

1,551

 

Other real estate owned and foreclosures

 

284

 

(6

)

307

 

173

 

Amortization of intangible assets

 

1,345

 

1,357

 

2,722

 

2,668

 

Merger and conversion related expenses

 

775

 

4,085

 

5,839

 

8,308

 

Other

 

4,906

 

3,221

 

8,469

 

5,363

 

Total non-interest expense

 

37,935

 

34,184

 

77,418

 

64,378

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

16,075

 

10,907

 

30,927

 

19,660

 

Income tax expense

 

4,038

 

2,921

 

8,425

 

5,193

 

Net income from continuing operations

 

12,037

 

7,986

 

22,502

 

14,467

 

Loss from discontinued operations before income taxes (including gain on disposal of $63 in 2012)

 

 

 

 

(261

)

Income tax expense

 

 

 

 

376

 

Net loss from discontinued operations

 

 

 

 

(637

)

Net income

 

$

12,037

 

$

7,986

 

$

22,502

 

$

13,830

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.49

 

$

0.37

 

$

0.91

 

$

0.68

 

Discontinued operations

 

 

 

 

(0.03

)

Total basic earnings per share

 

$

0.49

 

$

0.37

 

$

0.91

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.37

 

$

0.90

 

$

0.68

 

Discontinued operations

 

 

 

 

(0.03

)

Total diluted earnings per share

 

$

0.48

 

$

0.37

 

$

0.90

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

24,779

 

21,742

 

24,863

 

21,349

 

Diluted

 

24,956

 

21,806

 

25,049

 

21,434

 

 

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

 

5



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

12,037

 

$

7,986

 

$

22,502

 

$

13,830

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

Changes in unrealized gains and losses on securities available-for-sale

 

(13,431

)

1,394

 

(12,698

)

2,687

 

Changes in unrealized gains and losses on derivative hedges

 

6,155

 

(2,488

)

7,598

 

(2,204

)

Changes in unrealized gains and losses on terminated swaps

 

236

 

235

 

471

 

471

 

Changes in unrealized gains and losses on pension

 

 

(256

)

 

(256

)

Income taxes related to other comprehensive income:

 

 

 

 

 

 

 

 

 

Changes in unrealized gains and losses on securities available-for-sale

 

5,077

 

(450

)

4,758

 

(964

)

Changes in unrealized gains and losses on derivative hedges

 

(2,481

)

1,152

 

(3,057

)

946

 

Changes in unrealized gains and losses on terminated swaps

 

(95

)

(31

)

(303

)

(131

)

Total other comprehensive (loss) income

 

(4,539

)

(444

)

(3,231

)

549

 

Total comprehensive income

 

$

7,498

 

$

7,542

 

$

19,271

 

$

14,379

 

 

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

 

6



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

other

 

 

 

 

 

 

 

Common stock

 

paid-in

 

Unearned

 

Retained

 

comprehensive

 

Treasury

 

 

 

(In thousands)

 

Shares

 

Amount

 

capital

 

compensation

 

earnings

 

loss

 

stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

21,148

 

$

229

 

$

494,304

 

$

(2,790

)

$

109,477

 

$

(4,885

)

$

(42,970

)

$

553,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

13,830

 

 

 

13,830

 

Other comprehensive income

 

 

 

 

 

 

549

 

 

549

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,379

 

Acquisition of The Connecticut Bank and Trust Company

 

965

 

9

 

21,981

 

 

 

 

 

21,990

 

Cash dividends declared ($0.34 per share)

 

 

 

 

 

(7,372

)

 

 

(7,372

)

Forfeited shares

 

(8

)

 

11

 

169

 

 

 

(180

)

 

Exercise of stock options

 

13

 

 

 

 

(64

)

 

335

 

271

 

Restricted stock grants

 

64

 

 

(148

)

(1,476

)

 

 

1,624

 

 

Stock-based compensation

 

 

 

 

897

 

 

 

 

897

 

Net tax benefit related to stock-based compensation

 

 

 

35

 

 

 

 

 

35

 

Other, net

 

(13

)

 

 

 

 

 

(295

)

(295

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2012

 

22,169

 

$

238

 

$

516,183

 

$

(3,200

)

$

115,871

 

$

(4,336

)

$

(41,486

)

$

583,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

25,148

 

$

265

 

$

585,360

 

$

(3,035

)

$

122,014

 

$

(2,979

)

$

(34,360

)

$

667,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

22,502

 

 

 

22,502

 

Other comprehensive loss

 

 

 

 

 

 

(3,231

)

 

(3,231

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,271

 

Cash dividends declared ($0.36 per share)

 

 

 

 

 

(9,068

)

 

 

(9,068

)

Treasury stock purchased

 

(348

)

 

 

 

 

 

(8,868

)

(8,868

)

Forfeited shares

 

(6

)

 

10

 

140

 

 

 

(150

)

 

Exercise of stock options

 

195

 

 

 

 

(2,518

)

 

5,100

 

2,582

 

Restricted stock grants

 

155

 

 

(690

)

(3,717

)

 

 

4,407

 

 

Stock-based compensation

 

 

 

585

 

1,227

 

 

 

 

1,812

 

Net tax benefit related to stock-based compensation

 

 

 

1,150

 

 

 

 

 

1,150

 

Other, net

 

(48

)

 

(14

)

 

 

 

(1,160

)

(1,174

)

Balance at June 30, 2013

 

25,096

 

$

265

 

$

586,401

 

$

(5,385

)

$

132,930

 

$

(6,210

)

$

(35,031

)

$

672,970

 

 

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

 

7



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six months ended June 30,

 

(In thousands)

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

22,502

 

$

13,830

 

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

 

 

 

 

 

Provision for loan losses

 

5,100

 

4,250

 

Net amortization of securities

 

739

 

986

 

Change in unamortized net loan costs and premiums

 

(2,890

)

(461

)

Premises and equipment depreciation and amortization expense

 

3,610

 

2,921

 

Stock-based compensation expense

 

1,812

 

895

 

Accretion of purchase accounting entries, net

 

(8,884

)

(3,541

)

Amortization of other intangibles

 

2,722

 

2,668

 

Excess tax loss from stock-based payment arrangements

 

(1,150

)

(35

)

Income from cash surrender value of bank-owned life insurance policies

 

(1,394

)

(1,281

)

Gain on sales of securities, net

 

(1,005

)

(48

)

Net decrease (increase) in loans held for sale

 

21,267

 

(9,561

)

Loss on disposition of assets

 

1,596

 

1,527

 

(Gain) loss on sale of real estate

 

(67

)

28

 

Net change in other

 

(938

)

3,925

 

Net cash provided by operating activities

 

43,020

 

16,103

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net decrease in trading security

 

253

 

240

 

Proceeds from sales of securities available for sale

 

4,591

 

32,440

 

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

 

66,176

 

47,006

 

Purchases of securities available for sale

 

(185,300

)

(89,843

)

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

 

2,493

 

25,775

 

Purchases of securities held to maturity

 

(1,073

)

(8,685

)

Net decrease (increase) in loans

 

120,860

 

(200,668

)

Net cash used for Divestiture

 

 

(48,890

)

Proceeds from sale of Federal Home Loan Bank stock

 

2,118

 

1,861

 

Purchase of premises and equipment, net

 

1,472

 

1,872

 

Acquisitions, net of cash paid

 

 

(58,150

)

Proceeds from sale of other real estate

 

(7,280

)

(11,604

)

Net cash provided by (used in) investing activities

 

4,310

 

(308,646

)

 

(continued)

 

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

 

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BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)

 

 

 

Six months ended June 30,

 

(In thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net (decrease) increase in deposits

 

(283,650

)

98,609

 

Proceeds from Federal Home Loan Bank advances and other borrowings

 

491,360

 

231,595

 

Repayments of Federal Home Loan Bank advances and other borrowings

 

(258,975

)

(39,891

)

Net proceeds from reissuance of treasury stock

 

 

271

 

Purchase of treasury stock

 

(8,868

)

 

Exercise of stock options

 

2,582

 

 

Excess tax loss from stock-based payment arrangements

 

1,150

 

35

 

Common stock cash dividends paid

 

(9,068

)

(7,372

)

Net cash (used in) provided by financing activities

 

(65,469

)

283,247

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(18,139

)

(9,296

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

98,244

 

75,782

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

80,105

 

$

66,486

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid on deposits

 

$

10,411

 

$

10,984

 

Interest paid on borrowed funds

 

7,018

 

4,146

 

Income taxes paid (refunded), net

 

978

 

(965

)

 

 

 

 

 

 

Acquisition of non-cash assets and liabilities:

 

 

 

 

 

Assets acquired

 

 

342,786

 

Liabilities assumed

 

(919

)

(253,155

)

 

 

 

 

 

 

Other non-cash changes:

 

 

 

 

 

Other net comprehensive income

 

(3,231

)

549

 

Real estate owned acquired in settlement of loans

 

2,189

 

320

 

 

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

 

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NOTE 1.               BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and contain all adjustments, consisting solely of normal, recurring adjustments, necessary for a fair presentation of results for such periods.

 

In addition, 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 U.S. GAAP have been omitted.

 

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for Berkshire Hills Bancorp, Inc. (“the Company”) previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Reclassifications

 

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

 

NOTE 2.               RECENT ACCOUNTING PRONOUNCEMENTS

 

Offsetting Assets and Liabilities

 

In December 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures About Offsetting Assets and Liabilities.”  This project began as an attempt to converge the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). However, as the FASB and International Accounting Standards Board were not able to reach a converged solution with regards to offsetting requirements, they each developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”  The provisions of ASU No. 2013-01 limit the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions. The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impacted the disclosure requirements related to the offsetting of assets and liabilities and information about instruments and transactions eligible for offset in the statement of financial position, the adoption had no impact on the Company’s consolidated statements of income and condition. See Note 12 to the Consolidated Financial Statements for the disclosures required by ASU No. 2011-11 and ASU No. 2013-01.

 

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Reclassifications Out of Accumulated Other Comprehensive Income

 

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income,” to improve the transparency of reporting these reclassifications. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also require that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line item affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, entities would instead cross reference to the related note to the financial statements for additional information.  The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. As the Company provided these required disclosures in the notes to the Consolidated Financial Statements, the adoption of ASU No. 2013-02 had no impact on the Company’s consolidated statements of income and condition. See Note 8 to the Consolidated Financial Statements for the disclosures required by ASU No. 2013-02.

 

NOTE 3.               TRADING ACCOUNT SECURITY

 

The Company holds a tax advantaged economic development bond that is being accounted for at fair value. The security had an amortized cost of $13.4 million and $13.6 million, and a fair value of $15.6 million and $16.9 million, at June 30, 2013 and December 31, 2012, respectively. As discussed further in Note 12 - Derivative Financial Instruments and Hedging Activities, the Company has 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 are no other securities in the trading portfolio at June 30, 2013.

 

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NOTE 4.               SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

 

The following is a summary of securities available for sale and held to maturity:

 

(In thousands)

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

June 30, 2013

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

81,855

 

$

2,908

 

$

(1,732

)

$

83,031

 

Government guaranteed residential mortgage-backed securities

 

38,473

 

395

 

(216

)

38,652

 

Government-sponsored residential mortgage-backed securities

 

358,175

 

2,049

 

(5,495

)

354,729

 

Corporate bonds

 

41,001

 

55

 

(1,821

)

39,235

 

Trust preferred securities

 

16,990

 

1,533

 

(1,766

)

16,757

 

Other bonds and obligations

 

3,364

 

1

 

(139

)

3,226

 

Total debt securities

 

539,858

 

6,941

 

(11,169

)

535,630

 

Equity securities:

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

30,390

 

2,763

 

(515

)

32,638

 

Total securities available for sale

 

570,248

 

9,704

 

(11,684

)

568,268

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

7,779

 

 

 

7,779

 

Government-sponsored residential mortgage-backed securities

 

75

 

4

 

 

79

 

Tax advantaged economic development bonds

 

40,974

 

1,123

 

(675

)

41,422

 

Other bonds and obligations

 

776

 

 

 

776

 

Total securities held to maturity

 

49,604

 

1,127

 

(675

)

50,056

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

619,852

 

$

10,831

 

$

(12,359

)

$

618,324

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

79,498

 

$

5,359

 

$

(100

)

$

84,757

 

Government guaranteed residential mortgage-backed securities

 

42,305

 

805

 

(18

)

43,092

 

Government-sponsored residential mortgage-backed securities

 

275,940

 

2,732

 

(79

)

278,593

 

Corporate bonds

 

9,998

 

117

 

(108

)

10,007

 

Trust preferred securities

 

21,784

 

1,089

 

(1,916

)

20,957

 

Other bonds and obligations

 

3,459

 

17

 

(4

)

3,472

 

Total debt securities

 

432,984

 

10,119

 

(2,225

)

440,878

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

22,467

 

3,187

 

(363

)

25,291

 

Total securities available for sale

 

455,451

 

13,306

 

(2,588

)

466,169

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

8,295

 

 

 

8,295

 

Government-sponsored residential mortgage-backed securities

 

76

 

7

 

 

83

 

Tax advantaged economic development bonds

 

41,678

 

1,837

 

(378

)

43,137

 

Other bonds and obligations

 

975

 

 

 

975

 

Total securities held to maturity

 

51,024

 

1,844

 

(378

)

52,490

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

506,475

 

$

15,150

 

$

(2,966

)

$

518,659

 

 

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The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities, segregated by contractual maturity at June 30, 2013 are presented below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Mortgage-backed securities are shown in total, as their maturities are highly variable.  Equity securities have no maturity and are also shown in total.

 

 

 

Available for sale

 

Held to maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

$

3,099

 

$

3,153

 

$

4,718

 

$

4,718

 

Over 1 year to 5 years

 

7,180

 

7,224

 

3,703

 

3,749

 

Over 5 years to 10 years

 

53,538

 

52,174

 

27,441

 

27,821

 

Over 10 years

 

79,393

 

79,698

 

13,667

 

13,689

 

Total bonds and obligations

 

143,210

 

142,249

 

49,529

 

49,977

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

30,390

 

32,638

 

 

 

Residential mortgage-backed securities

 

396,648

 

393,381

 

75

 

79

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

570,248

 

$

568,268

 

$

49,604

 

$

50,056

 

 

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Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:

 

 

 

Less Than Twelve Months

 

Over Twelve Months

 

Total

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

(In thousands)

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

1,732

 

$

15,261

 

$

 

$

 

$

1,732

 

$

15,261

 

Government-guaranteed residential mortgage-backed securities

 

216

 

8,932

 

 

 

216

 

8,932

 

Government-sponsored residential mortgage-backed securities

 

5,495

 

234,176

 

 

 

5,495

 

234,176

 

Corporate bonds

 

1,776

 

29,227

 

45

 

6,955

 

1,821

 

36,182

 

Trust preferred securities

 

36

 

1,506

 

1,730

 

1,872

 

1,766

 

3,378

 

Other bonds and obligations

 

139

 

2,871

 

 

 

139

 

2,871

 

Total debt securities

 

9,394

 

291,973

 

1,775

 

8,827

 

11,169

 

300,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

187

 

6,312

 

328

 

1,672

 

515

 

7,984

 

Total securities available for sale

 

9,581

 

298,285

 

2,103

 

10,499

 

11,684

 

308,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax advantaged economic development bonds

 

675

 

8,825

 

 

 

675

 

8,825

 

Total securities held to maturity

 

675

 

8,825

 

 

 

675

 

8,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10,256

 

$

307,110

 

$

2,103

 

$

10,499

 

$

12,359

 

$

317,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

100

 

$

4,140

 

$

 

$

 

$

100

 

$

4,140

 

Government guaranteed residential mortgage-backed securities

 

18

 

5,108

 

 

 

18

 

5,108

 

Government-sponsored residential mortgage-backed securities

 

69

 

31,433

 

10

 

5,366

 

79

 

36,799

 

Corporate bonds

 

 

 

108

 

6,892

 

108

 

6,892

 

Trust preferred securities

 

1

 

2,754

 

1,915

 

1,686

 

1,916

 

4,440

 

Other bonds and obligations

 

4

 

2,055

 

 

 

4

 

2,055

 

Total debt securities

 

192

 

45,490

 

2,033

 

13,944

 

2,225

 

59,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

90

 

1,410

 

273

 

1,727

 

363

 

3,137

 

Total securities available for sale

 

$

282

 

$

46,900

 

$

2,306

 

$

15,671

 

$

2,588

 

$

62,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax advantaged economic development bonds

 

378

 

8,129

 

 

 

378

 

8,129

 

Total securities held to maturity

 

378

 

8,129

 

 

 

378

 

8,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

660

 

$

55,029

 

$

2,306

 

$

15,671

 

$

2,966

 

$

70,700

 

 

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 June 30, 2013, 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 June 30, 2013:

 

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Table of Contents

 

AFS municipal bonds and obligations

 

At June 30, 2013, 24 of the total 140 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 10.2% 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 second quarter of 2013.  All securities are performing.

 

AFS residential mortgage-backed securities

 

At June 30, 2013, 59 out of the total 191 securities in the Company’s portfolios of AFS residential mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 2.3% of the amortized cost of securities in unrealized loss positions within the AFS portfolio. 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 residential mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the past quarter. All securities are performing.

 

AFS corporate bonds

 

At June 30, 2013, 8 out of the total 9 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represented 4.8% of the amortized cost of the securities. All 8 securities remain investment grade rated and the market value of the securities supports the Company’s amortized value. All securities are performing.

 

AFS trust preferred securities

 

At June 30, 2013, 3 out of the total 6 securities in the Company’s portfolio of AFS trust preferred securities were in unrealized loss positions. Aggregate unrealized losses represented 34.3% of the amortized cost of securities in unrealized loss positions. The Company’s evaluation of the present value of expected cash flows on these securities supports its conclusions about the recoverability of the securities’ amortized cost basis. 4 of the 6 securities contain at least one below investment grade ratings by the three major rating agencies.  The Company reviews the financial strength of all of the single issue trust issuers and has concluded that the amortized cost remains supported by the market value of these securities and they are performing.

 

At June 30, 2013, $1.6 million of the total unrealized losses was attributable to a $2.8 million investment in a Mezzanine Class B tranche of a $360 million pooled trust preferred security collateralized by banking and insurance entities. The Company evaluated the security, with a Level 3 fair value of $1 million, for potential other-than-temporary-impairment (“OTTI”) at June 30, 2013 and determined that OTTI was not evident based on both the Company’s ability and intent to hold the security until the recovery of its remaining amortized cost and the protection from credit loss afforded by $46 million in excess subordination above current and projected losses. The security is performing.

 

AFS other bonds and obligations

 

At June 30, 2013, 2 of the total 9 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 4.6% of the amortized cost of securities in unrealized loss positions. The securities are investment grade rated and there were no material underlying credit downgrades during the second quarter of 2013. All securities are performing.

 

HTM tax advantaged economic development bonds

 

At June 30, 2013, 2 of the total 8 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

 

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securities in unrealized loss positions. The Company has the intent of maintaining these bonds to recovery. All securities are performing.

 

Marketable Equity Securities

 

In evaluating its marketable equity securities portfolio for OTTI, the Company considers its ability to more likely than not hold an equity security to recovery.  The Company additionally considers other various factors including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI is recognized immediately through earnings.

 

At June 30, 2013, 5 out of the total 23 securities in the Company’s portfolio of marketable equity securities were in an unrealized loss position. The unrealized loss represented 6.1% of the amortized cost of the securities. The Company has the ability and intent to hold the securities until a recovery of their cost basis and does not consider the securities other-than-temporarily impaired at June 30, 2013. As new information becomes available in future periods, changes to the Company’s assumptions may be warranted and could lead to a different conclusion regarding the OTTI of these securities.

 

NOTE 5.               LOANS

 

The Company’s loan portfolio is segregated into the following segments: residential mortgage, commercial mortgage, commercial business, and consumer. Residential mortgage loans include classes for 1- 4 family owner occupied and construction loans.  Commercial mortgage loans include construction, single and multi-family, and commercial real estate classes.  Commercial business loans include asset based lending loans, lease financing and other commercial business loan classes.  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 western Massachusetts, southern Vermont, northeastern New York, and in the Bank’s New England lending areas. The ability of many of the Bank’s debtors to honor their contracts is dependent, among other things, on the economies and real estate markets in these areas.

 

Total loans include business loans and acquired loans. Acquired loans are those loans acquired from the acquisitions of Beacon Federal Bancorp, Inc., The Connecticut Bank and Trust Company, Legacy Bancorp, Inc., and Rome Bancorp, Inc. The following is a summary of total loans:

 

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June 30, 2013

 

(In thousands)

 

Business Loans

 

Acquired Loans

 

Total

 

 

 

 

 

 

 

 

 

Residential mortgages

 

 

 

 

 

 

 

1-4 family

 

$

836,575

 

$

369,946

 

$

1,206,521

 

Construction

 

20,268

 

5,699

 

25,967

 

Total residential mortgages

 

856,843

 

375,645

 

1,232,488

 

 

 

 

 

 

 

 

 

Commercial mortgages:

 

 

 

 

 

 

 

Construction

 

110,609

 

17,750

 

128,359

 

Single and multi-family

 

57,520

 

71,318

 

128,838

 

Commercial real estate

 

785,828

 

309,888

 

1,095,716

 

Total commercial mortgages

 

953,957

 

398,956

 

1,352,913

 

 

 

 

 

 

 

 

 

Commercial business loans:

 

 

 

 

 

 

 

Asset based lending

 

263,132

 

3,935

 

267,067

 

Other commercial business loans

 

292,746

 

84,111

 

376,857

 

Total commercial business loans

 

555,878

 

88,046

 

643,924

 

 

 

 

 

 

 

 

 

Total commercial loans

 

1,509,835

 

487,002

 

1,996,837