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: September 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 25,037,224 shares of common stock, par value $0.01 per share, outstanding as of November 6, 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 September 30, 2013 and December 31, 2012

4

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012

6

 

 

 

 

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

7

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

 

 

 

 

 

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

33

 

Note 7

Borrowed Funds

33

 

Note 8

Stockholders’ Equity

35

 

Note 9

Earnings per Share

40

 

Note 10

Stock-Based Compensation Plans

41

 

Note 11

Operating Segments

41

 

Note 12

Derivative Financial Instruments and Hedging Activities

42

 

Note 13

Fair Value Measurements

48

 

Note 14

Net Interest Income after Provision for Loan Losses

56

 

Note 15

Subsequent Events

56

 

 

 

Item 2.

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

57

 

 

 

 

Selected Financial Data

61

 

 

 

 

Average Balances and Average Yields/Rates

62

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

71

 

 

 

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

 

 

 

September 30,

 

December 31,

 

(In thousands, except share data)

 

2013

 

2012

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

61,149

 

$

63,382

 

Short-term investments

 

15,710

 

34,862

 

Total cash and cash equivalents

 

76,859

 

98,244

 

 

 

 

 

 

 

Trading security

 

15,330

 

16,893

 

Securities available for sale, at fair value

 

684,716

 

466,169

 

Securities held to maturity (fair values of $48,080 and $52,490)

 

46,925

 

51,024

 

Federal Home Loan Bank stock and other restricted securities

 

42,342

 

39,785

 

Total securities

 

789,313

 

573,871

 

 

 

 

 

 

 

Loans held for sale, at fair value

 

27,064

 

85,368

 

 

 

 

 

 

 

Residential mortgages

 

1,313,609

 

1,324,251

 

Commercial mortgages

 

1,366,104

 

1,413,544

 

Commercial business loans

 

668,983

 

600,126

 

Consumer loans

 

675,147

 

650,733

 

Total loans

 

4,023,843

 

3,988,654

 

Less: Allowance for loan losses

 

(33,248

)

(33,208

)

Net loans

 

3,990,595

 

3,955,446

 

 

 

 

 

 

 

Premises and equipment, net

 

83,136

 

86,461

 

Other real estate owned

 

3,561

 

1,929

 

Goodwill

 

256,871

 

255,199

 

Other intangible assets

 

15,030

 

19,059

 

Cash surrender value of bank-owned life insurance policies

 

100,299

 

88,198

 

Deferred tax assets, net

 

61,617

 

57,729

 

Other assets

 

45,911

 

75,305

 

Total assets

 

$

5,450,256

 

$

5,296,809

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Demand deposits

 

$

669,878

 

$

673,921

 

NOW deposits

 

352,762

 

379,880

 

Money market deposits

 

1,357,201

 

1,439,632

 

Savings deposits

 

438,135

 

436,387

 

Time deposits

 

1,064,049

 

1,170,589

 

Total deposits

 

3,882,025

 

4,100,409

 

Short-term debt

 

590,000

 

163,150

 

Long-term Federal Home Loan Bank advances

 

150,022

 

195,321

 

Subordinated notes

 

89,663

 

89,617

 

Total borrowings

 

829,685

 

448,088

 

Other liabilities

 

65,351

 

81,047

 

Total liabilities

 

4,777,061

 

4,629,544

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock ($.01 par value; 50,000,000 shares authorized and 26,525,466 shares issued and 24,952,204 shares outstanding in 2013; 26,525,466 shares issued and 25,148,522 shares outstanding in 2012)

 

265

 

265

 

Additional paid-in capital

 

587,041

 

585,360

 

Unearned compensation

 

(4,211

)

(3,035

)

Retained earnings

 

135,991

 

122,014

 

Accumulated other comprehensive loss

 

(7,029

)

(2,979

)

Treasury stock, at cost (1,573,262 shares in 2013 and 1,376,944 shares in 2012)

 

(38,862

)

(34,360

)

Total stockholders’ equity

 

673,195

 

667,265

 

Total liabilities and stockholders’ equity

 

$

5,450,256

 

$

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except per share data)

 

2013

 

2012

 

2013

 

2012

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

Loans

 

$

50,025

 

$

39,497

 

$

142,549

 

$

113,335

 

Securities and other

 

4,479

 

3,626

 

12,533

 

11,116

 

Total interest and dividend income

 

54,504

 

43,123

 

155,082

 

124,451

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

5,278

 

5,628

 

15,693

 

16,612

 

Borrowings and junior subordinated notes

 

3,357

 

2,270

 

10,479

 

6,416

 

Total interest expense

 

8,635

 

7,898

 

26,172

 

23,028

 

Net interest income

 

45,869

 

35,225

 

128,910

 

101,423

 

Non-interest income

 

 

 

 

 

 

 

 

 

Loan related income

 

1,308

 

1,340

 

6,669

 

3,990

 

Mortgage banking income

 

444

 

4,306

 

4,790

 

6,553

 

Deposit related fees

 

4,559

 

3,775

 

13,623

 

11,238

 

Insurance commissions and fees

 

2,473

 

2,742

 

7,877

 

8,256

 

Wealth management fees

 

2,137

 

1,774

 

6,471

 

5,431

 

Total fee income

 

10,921

 

13,937

 

39,430

 

35,468

 

Other

 

832

 

375

 

1,722

 

885

 

Gain on sale of securities, net

 

361

 

 

1,366

 

7

 

Non-recurring gain

 

 

1

 

 

43

 

Total non-interest income

 

12,114

 

14,313

 

42,518

 

36,403

 

Total net revenue

 

57,983

 

49,538

 

171,428

 

137,826

 

Provision for loan losses

 

3,178

 

2,500

 

8,278

 

6,750

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

18,506

 

15,992

 

54,398

 

45,219

 

Occupancy and equipment

 

5,614

 

4,599

 

17,119

 

13,484

 

Technology and communications

 

3,304

 

2,302

 

9,775

 

6,518

 

Marketing and promotion

 

590

 

419

 

1,831

 

1,548

 

Professional services

 

1,757

 

1,327

 

5,011

 

4,185

 

FDIC premiums and assessments

 

856

 

907

 

2,574

 

2,458

 

Other real estate owned and foreclosures

 

138

 

42

 

445

 

215

 

Amortization of intangible assets

 

1,307

 

1,314

 

4,029

 

3,982

 

Merger, restructuring and conversion related expenses

 

6,516

 

2,214

 

12,355

 

10,522

 

Other

 

4,196

 

3,046

 

12,665

 

8,409

 

Total non-interest expense

 

42,784

 

32,162

 

120,202

 

96,540

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

12,021

 

14,876

 

42,948

 

34,536

 

Income tax expense

 

3,917

 

4,847

 

12,342

 

10,040

 

Net income from continuing operations

 

8,104

 

10,029

 

30,606

 

24,496

 

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

 

$

8,104

 

$

10,029

 

$

30,606

 

$

23,859

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.33

 

$

0.46

 

$

1.23

 

$

1.14

 

Discontinued operations

 

 

 

 

(0.03

)

Total basic earnings per share

 

$

0.33

 

$

0.46

 

$

1.23

 

$

1.11

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.33

 

$

0.46

 

$

1.22

 

$

1.13

 

Discontinued operations

 

 

 

 

(0.03

)

Total diluted earnings per share

 

$

0.33

 

$

0.46

 

$

1.22

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

24,748

 

21,921

 

24,835

 

21,541

 

Diluted

 

24,873

 

22,031

 

25,001

 

21,635

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,104

 

$

10,029

 

$

30,606

 

$

23,859

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

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

 

(443

)

2,103

 

(13,141

)

4,790

 

Changes in unrealized gains and losses on derivative hedges

 

(1,152

)

(1,015

)

6,446

 

(3,219

)

Changes in unrealized gains and losses on terminated swaps

 

236

 

235

 

707

 

706

 

Changes in unrealized gains and losses on pension

 

 

 

 

(257

)

Income taxes related to other comprehensive income:

 

 

 

 

 

 

 

 

 

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

 

163

 

(765

)

4,920

 

(1,729

)

Changes in unrealized gains and losses on derivative hedges

 

472

 

413

 

(2,584

)

1,358

 

Changes in unrealized gains and losses on terminated swaps

 

(95

)

(97

)

(398

)

(226

)

Total other comprehensive (loss) income

 

(819

)

874

 

(4,050

)

1,423

 

Total comprehensive income

 

$

7,285

 

$

10,903

 

$

26,556

 

$

25,282

 

 

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

 

Unearned

 

 

 

other comp-

 

 

 

 

 

 

 

Common stock

 

paid-in

 

compen-

 

Retained

 

rehensive

 

Treasury

 

 

 

(In thousands)

 

Shares

 

Amount

 

capital

 

sation

 

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

 

 

 

 

 

23,859

 

 

 

23,859

 

Other comprehensive income

 

 

 

 

 

 

1,423

 

 

1,423

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,282

 

Acquisition of The Connecticut Bank and Trust Company

 

965

 

9

 

21,981

 

 

 

 

 

21,990

 

Cash dividends declared ($0.34 per share)

 

 

 

 

 

(11,147

)

 

 

(11,147

)

Forfeited shares

 

(8

)

 

11

 

169

 

 

 

(180

)

 

Exercise of stock options

 

18

 

 

 

 

(82

)

 

458

 

376

 

Restricted stock grants

 

108

 

 

(280

)

(2,434

)

 

 

2,714

 

 

Stock-based compensation

 

 

 

 

1,410

 

 

 

 

1,410

 

Net tax benefit related to stock-based compensation

 

 

 

40

 

 

 

 

 

40

 

Other, net

 

(18

)

 

 

 

 

 

(395

)

(395

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2012

 

22,213

 

$

238

 

$

516,056

 

$

(3,645

)

$

122,107

 

$

(3,462

)

$

(40,373

)

$

590,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

25,148

 

$

265

 

$

585,360

 

$

(3,035

)

$

122,014

 

$

(2,979

)

$

(34,360

)

$

667,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

30,606

 

 

 

30,606

 

Other comprehensive loss

 

 

 

 

 

 

(4,050

)

 

(4,050

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,556

 

Cash dividends declared ($0.54 per share)

 

 

 

 

 

(13,587

)

 

 

(13,587

)

Treasury stock purchased

 

(480

)

 

 

 

 

 

(12,249

)

(12,249

)

Forfeited shares

 

(55

)

 

218

 

1,256

 

 

 

(1,474

)

 

Exercise of stock options

 

235

 

 

 

 

(3,042

)

 

6,063

 

3,021

 

Restricted stock grants

 

159

 

 

(677

)

(3,817

)

 

 

4,494

 

 

Stock-based compensation

 

 

 

726

 

1,385

 

 

 

 

2,111

 

Net tax benefit related to stock-based compensation

 

 

 

1,428

 

 

 

 

 

1,428

 

Other, net

 

(55

)

 

(14

)

 

 

 

(1,336

)

(1,350

)

Balance at September 30, 2013

 

24,952

 

$

265

 

$

587,041

 

$

(4,211

)

$

135,991

 

$

(7,029

)

$

(38,862

)

$

673,195

 

 

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

 

7



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine months ended September 30,

 

(In thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

30,606

 

$

23,859

 

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

 

 

 

 

 

Provision for loan losses

 

8,278

 

6,750

 

Net amortization of securities

 

1,199

 

1,496

 

Change in unamortized net loan costs and premiums

 

(7,152

)

(849

)

Premises and equipment depreciation and amortization expense

 

5,382

 

4,553

 

Stock-based compensation expense

 

2,111

 

1,410

 

Accretion of purchase accounting entries, net

 

(17,732

)

(5,303

)

Amortization of other intangibles

 

4,029

 

4,182

 

Excess tax loss from stock-based payment arrangements

 

(1,428

)

(40

)

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

 

(2,101

)

(1,895

)

Gain on sales of securities, net

 

(1,366

)

(50

)

Net decrease (increase) in loans held for sale

 

58,304

 

(64,979

)

Loss on disposition of assets

 

3,880

 

1,753

 

(Gain) loss on sale of real estate

 

(48

)

197

 

Net change in other

 

21,640

 

16,924

 

Net cash provided by (used in) operating activities

 

105,602

 

(11,992

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net decrease in trading security

 

381

 

361

 

Proceeds from sales of securities available for sale

 

8,592

 

32,473

 

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

 

91,153

 

70,499

 

Purchases of securities available for sale

 

(331,269

)

(108,281

)

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

 

6,857

 

28,569

 

Purchases of securities held to maturity

 

(2,758

)

(20,384

)

Net increase in loans

 

(23,930

)

(255,657

)

Net cash used for divestiture

 

 

(48,890

)

Purchase of bank owned life insurance

 

(10,000

)

 

Proceeds from sale of Federal Home Loan Bank stock

 

2,361

 

1,900

 

Purchase of Federal Home Loan Bank stock

 

(4,918

)

 

Purchase of premises and equipment, net

 

(8,916

)

(15,542

)

Acquisitions, net of cash paid

 

 

(58,150

)

Proceeds from sale of other real estate

 

1,790

 

2,265

 

Net cash used in investing activities

 

(270,657

)

(370,837

)

 

(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)

 

 

 

Nine months ended September 30,

 

(In thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net (decrease) increase in deposits

 

(216,539

)

139,265

 

Proceeds from Federal Home Loan Bank advances and other borrowings

 

935,656

 

433,618

 

Issuance of long-term debt, net

 

 

74,138

 

Repayments of Federal Home Loan Bank advances and other borrowings

 

(554,060

)

(247,195

)

Net proceeds from reissuance of treasury stock

 

 

376

 

Purchase of treasury stock

 

(12,249

)

 

Exercise of stock options

 

3,021

 

 

Excess tax loss from stock-based payment arrangements

 

1,428

 

40

 

Common stock cash dividends paid

 

(13,587

)

(11,147

)

Net cash provided by financing activities

 

143,670

 

389,095

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(21,385

)

6,266

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

98,244

 

75,782

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

76,859

 

$

82,048

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid on deposits

 

$

15,707

 

$

17,113

 

Interest paid on borrowed funds

 

10,550

 

5,664

 

Income taxes (refunded) paid, net

 

(4,023

)

4,761

 

 

 

 

 

 

 

Acquisition of non-cash assets and liabilities:

 

 

 

 

 

Assets acquired

 

 

343,114

 

Liabilities assumed

 

(1,672

)

(253,155

)

 

 

 

 

 

 

Other non-cash changes:

 

 

 

 

 

Other net comprehensive (loss) income

 

(4,050

)

1,423

 

Real estate owned acquired in settlement of loans

 

3,374

 

(1,453

)

 

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.

 

Out of Period Adjustments

 

For the quarter ended September 30, 2013, the Company recorded a correction of an error to recognize $2.2 million in prior period interest income earned on loans acquired in bank acquisitions, of which $1.3 million relates to prior years.  Additionally, the Company recorded a correction of an error related to its accounting for a state income tax credit.  The correction increased other income by $613 thousand and increased the income tax provision by $1.2 million during the quarter.  The adjustment relating to prior years included $505 thousand in other income and $998 thousand in the income tax provision.  After evaluating the quantitative and qualitative aspects of these adjustments, the Company concluded that its prior period financial statements were not materially misstated and, therefore, no restatement was required.

 

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.

 

Future Application of Accounting Pronouncements

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

NOTE 3.                                              TRADING 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 $13.2 million and $13.6 million, and a fair value of $15.3 million and $16.9 million, at September 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 September 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

 

September 30, 2013

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

80,961

 

$

2,328

 

$

(1,901

)

$

81,388

 

Government-guaranteed residential mortgage-backed securities

 

74,261

 

452

 

(458

)

74,255

 

Government-sponsored residential mortgage-backed securities

 

443,058

 

2,415

 

(5,732

)

439,741

 

Corporate bonds

 

40,973

 

50

 

(1,791

)

39,232

 

Trust preferred securities

 

16,946

 

1,124

 

(1,766

)

16,304

 

Other bonds and obligations

 

3,257

 

 

(131

)

3,126

 

Total debt securities

 

659,456

 

6,369

 

(11,779

)

654,046

 

Equity securities:

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

27,683

 

3,367

 

(380

)

30,670

 

Total securities available for sale

 

687,139

 

9,736

 

(12,159

)

684,716

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

5,885

 

 

 

5,885

 

Government-sponsored residential mortgage-backed securities

 

74

 

4

 

 

78

 

Tax advantaged economic development bonds

 

40,620

 

1,463

 

(312

)

41,771

 

Other bonds and obligations

 

346

 

 

 

346

 

Total securities held to maturity

 

46,925

 

1,467

 

(312

)

48,080

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

734,064

 

$

11,203

 

$

(12,471

)

$

732,796

 

 

 

 

 

 

 

 

 

 

 

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 September 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

 

$

2,999

 

$

3,038

 

$

2,606

 

$

2,606

 

Over 1 year to 5 years

 

7,681

 

7,728

 

3,485

 

3,532

 

Over 5 years to 10 years

 

53,747

 

52,338

 

27,256

 

28,196

 

Over 10 years

 

77,710

 

76,946

 

13,504

 

13,668

 

Total bonds and obligations

 

142,137

 

140,050

 

46,851

 

48,002

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

27,683

 

30,670

 

 

 

Residential mortgage-backed securities

 

517,319

 

513,996

 

74

 

78

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

687,139

 

$

684,716

 

$

46,925

 

$

48,080

 

 

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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

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

1,901

 

$

15,076

 

$

 

$

 

$

1,901

 

$

15,076

 

Government-guaranteed residential mortgage-backed securities

 

458

 

51,678

 

 

 

458

 

51,678

 

Government-sponsored residential mortgage-backed securities

 

5,732

 

262,285

 

 

 

5,732

 

262,285

 

Corporate bonds

 

1,791

 

29,183

 

 

 

1,791

 

29,183

 

Trust preferred securities

 

 

 

1,766

 

1,837

 

1,766

 

1,837

 

Other bonds and obligations

 

131

 

2,937

 

 

 

131

 

2,937

 

Total debt securities

 

10,013

 

361,159

 

1,766

 

1,837

 

11,779

 

362,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

66

 

1,704

 

314

 

1,686

 

380

 

3,390

 

Total securities available for sale

 

10,079

 

362,863

 

2,080

 

3,523

 

12,159

 

366,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax advantaged economic development bonds

 

33

 

9,513

 

279

 

8,042

 

312

 

17,555

 

Total securities held to maturity

 

33

 

9,513

 

279

 

8,042

 

312

 

17,555

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10,112

 

$

372,376

 

$

2,359

 

$

11,565

 

$

12,471

 

$

383,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 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 September 30, 2013:

 

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Table of Contents

 

AFS municipal bonds and obligations

 

At September 30, 2013, 24 of the total 139 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 11.2% 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 third quarter of 2013.  All securities are performing.

 

AFS residential mortgage-backed securities

 

At September 30, 2013, 65 out of the total 207 securities in the Company’s portfolios of AFS residential mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 1.93% 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 September 30, 2013, 6 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 5.8% of the amortized cost of the securities. All 6 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 September 30, 2013, 2 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 49% 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. Of the 6 securities, 4 securities contain at least one below investment grade rating 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 September 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 September 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 September 30, 2013, 4 of the total 8 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 4.3% 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 September 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 1.7% of the

 

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amortized cost of securities in unrealized loss positions. The Company has the intent of maintaining these bonds to recovery. These 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 September 30, 2013, 3 out of the total 21 securities in the Company’s portfolio of marketable equity securities were in an unrealized loss position. The unrealized loss represented 10.1% 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 September 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 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 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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Table of Contents

 

 

 

September 30, 2013

 

(In thousands)

 

Business Activity Loans

 

Acquired Loans

 

Total

 

 

 

 

 

 

 

 

 

Residential mortgages

 

 

 

 

 

 

 

1-4 family

 

$

940,626

 

$

347,788

 

$

1,288,414

 

Construction

 

19,813

 

5,382

 

25,195

 

Total residential mortgages

 

960,439

 

353,170

 

1,313,609

 

 

 

 

 

 

 

 

 

Commercial mortgages:

 

 

 

 

 

 

 

Construction

 

89,240

 

15,298

 

104,538

 

Single and multi-family

 

63,718

 

67,987

 

131,705

 

Commercial real estate

 

842,163

 

287,698

 

1,129,861

 

Total commercial mortgages

 

995,121

 

370,983

 

1,366,104

 

 

 

 

 

 

 

 

 

Commercial business loans:

 

 

 

 

 

 

 

Asset based lending

 

275,776

 

3,341

 

279,117

 

Other commercial business loans

 

312,572

 

77,294

 

389,866

 

Total commercial business loans

 

588,348

 

80,635

 

668,983

 

 

 

 

 

 

 

 

 

Total commercial loans

 

1,583,469

 

451,618

 

2,035,087

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

Home equity

 

228,345

 

76,181

 

304,526

 

Other

 

169,901

 

200,720

 

370,621

 

Total consumer loans

 

398,246

 

276,901

 

675,147

 

 

 

 

 

 

 

 

 

Total loans

 

$

2,942,154