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: March 31, 2014

 

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 25,108,296 shares of common stock, par value $0.01 per share, outstanding as of May 6, 2014.

 

 

 


 


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 March 31, 2014 and December 31, 2013

4

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013

6

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 and 2013

7

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013

8

 

 

 

 

Notes to Consolidated Financial Statements

 

 

Note 1

Basis of Presentation

10

 

Note 2

Acquisition

10

 

Note 3

Trading Account Security

12

 

Note 4

Securities Available for Sale and Held to Maturity

13

 

Note 5

Loans

17

 

Note 6

Loan Loss Allowance

27

 

Note 7

Deposits

32

 

Note 8

Borrowed Funds

32

 

Note 9

Stockholders’ Equity

33

 

Note 10

Earnings per Share

36

 

Note 11

Stock-Based Compensation Plans

36

 

Note 12

Operating Segments

37

 

Note 13

Derivative Financial Instruments and Hedging Activities

37

 

Note 14

Fair Value Measurements

43

 

Note 15

Net Interest Income after Provision for Loan Losses

50

 

Note 16

Subsequent Events

50

 

 

 

Item 2.

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

51

 

 

 

 

Selected Financial Data

55

 

 

 

 

Average Balances and Average Yields/Rates

56

 

 

 

 

Non-GAAP Financial Measures

58

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

66

 

 

 

Item 4.

Controls and Procedures

66

 

2



Table of Contents

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

67

 

 

 

Item 1A.

Risk Factors

67

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

 

 

 

Item 3.

Defaults Upon Senior Securities

68

 

 

 

Item 4.

Mine Safety Disclosures

68

 

 

 

Item 5.

Other Information

68

 

 

 

Item 6.

Exhibits

68

 

 

 

Signatures

 

70

 

3


 


Table of Contents

 

PART I

 

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

(In thousands, except share data)

 

2014

 

2013

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

60,023

 

$

56,841

 

Short-term investments

 

12,650

 

18,698

 

Total cash and cash equivalents

 

72,673

 

75,539

 

 

 

 

 

 

 

Trading security

 

14,923

 

14,840

 

Securities available for sale, at fair value

 

1,033,637

 

760,048

 

Securities held to maturity (fair values of $44,191 and $45,764)

 

43,159

 

44,921

 

Federal Home Loan Bank stock and other restricted securities

 

53,124

 

50,282

 

Total securities

 

1,144,843

 

870,091

 

 

 

 

 

 

 

Loans held for sale, at fair value

 

7,669

 

15,840

 

 

 

 

 

 

 

Residential mortgages

 

1,377,771

 

1,384,274

 

Commercial real estate

 

1,456,976

 

1,417,120

 

Commercial and industrial loans

 

696,895

 

687,293

 

Consumer loans

 

710,985

 

691,836

 

Total loans

 

4,242,627

 

4,180,523

 

Less: Allowance for loan losses

 

(33,602

)

(33,323

)

Net loans

 

4,209,025

 

4,147,200

 

 

 

 

 

 

 

Premises and equipment, net

 

87,805

 

84,459

 

Other real estate owned

 

2,418

 

2,758

 

Goodwill

 

264,770

 

256,871

 

Other intangible assets

 

15,035

 

13,791

 

Cash surrender value of bank-owned life insurance policies

 

102,343

 

101,530

 

Deferred tax assets, net

 

40,202

 

50,711

 

Other assets

 

63,548

 

54,009

 

Total assets

 

$

6,010,331

 

$

5,672,799

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Demand deposits

 

$

770,841

 

$

677,917

 

NOW deposits

 

434,833

 

353,612

 

Money market deposits

 

1,459,062

 

1,383,856

 

Savings deposits

 

478,107

 

431,496

 

Time deposits

 

1,075,740

 

1,001,648

 

Total deposits

 

4,218,583

 

3,848,529

 

Short-term debt

 

914,950

 

872,510

 

Long-term Federal Home Loan Bank advances

 

21,797

 

101,918

 

Subordinated borrowings

 

89,696

 

89,679

 

Total borrowings

 

1,026,443

 

1,064,107

 

Other liabilities

 

87,715

 

82,101

 

Total liabilities

 

5,332,741

 

4,994,737

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock ($.01 par value; 50,000,000 shares authorized and 26,525,466 shares issued and 25,105,207 shares outstanding in 2014; 26,525,466 shares issued and 25,036,169 shares outstanding in 2013)

 

265

 

265

 

Additional paid-in capital

 

585,342

 

587,247

 

Unearned compensation

 

(7,811

)

(5,563

)

Retained earnings

 

135,498

 

141,958

 

Accumulated other comprehensive loss

 

(631

)

(9,057

)

Treasury stock, at cost (1,420,259 shares in 2014 and 1,489,297 shares in 2013)

 

(35,073

)

(36,788

)

Total stockholders’ equity

 

677,590

 

678,062

 

Total liabilities and stockholders’ equity

 

$

6,010,331

 

$

5,672,799

 

 

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

 

4



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands, except per share data)

 

2014

 

2013

 

Interest and dividend income

 

 

 

 

 

Loans

 

$

42,494

 

$

47,081

 

Securities and other

 

7,301

 

3,800

 

Total interest and dividend income

 

49,795

 

50,881

 

Interest expense

 

 

 

 

 

Deposits

 

4,721

 

5,363

 

Borrowings

 

2,308

 

3,581

 

Total interest expense

 

7,029

 

8,944

 

Net interest income

 

42,766

 

41,937

 

Non-interest income

 

 

 

 

 

Loan related income

 

1,248

 

2,717

 

Mortgage banking income

 

372

 

2,217

 

Deposit related fees

 

5,439

 

4,259

 

Insurance commissions and fees

 

3,049

 

2,997

 

Wealth management fees

 

2,549

 

2,264

 

Total fee income

 

12,657

 

14,454

 

Other

 

524

 

344

 

Gain on sale of securities, net

 

34

 

 

Loss on termination of hedges

 

(8,792

)

 

Total non-interest income

 

4,423

 

14,798

 

Total net revenue

 

47,189

 

56,735

 

Provision for loan losses

 

3,396

 

2,400

 

Non-interest expense

 

 

 

 

 

Compensation and benefits

 

19,859

 

17,741

 

Occupancy and equipment

 

6,814

 

5,768

 

Technology and communications

 

3,778

 

2,991

 

Marketing and promotion

 

521

 

638

 

Professional services

 

1,152

 

1,490

 

FDIC premiums and assessments

 

1,009

 

828

 

Other real estate owned and foreclosures

 

523

 

23

 

Amortization of intangible assets

 

1,306

 

1,377

 

Acquisition, restructuring and conversion related expenses

 

6,301

 

5,064

 

Other

 

4,097

 

3,563

 

Total non-interest expense

 

45,360

 

39,483

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(1,567

)

14,852

 

Income tax (benefit) expense

 

(461

)

4,387

 

Net (loss) income

 

$

(1,106

)

$

10,465

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

Basic

 

$

(0.04

)

$

0.42

 

Diluted

 

$

(0.04

)

$

0.42

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

24,698

 

24,948

 

Diluted

 

24,698

 

25,143

 

 

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

 

 

 

March 31,

 

(In thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,106

)

$

10,465

 

Other comprehensive income, before tax:

 

 

 

 

 

Changes in unrealized gains on securities available-for-sale

 

6,021

 

733

 

Changes in unrealized gains on derivative hedges

 

4,533

 

1,443

 

Changes in unrealized gains on terminated swaps

 

3,237

 

236

 

Income taxes related to other comprehensive income:

 

 

 

 

 

Changes in unrealized gains on securities available-for-sale

 

(2,221

)

(321

)

Changes in unrealized gains on derivative hedges

 

(1,832

)

(575

)

Changes in unrealized gains on terminated swaps

 

(1,312

)

(208

)

Total other comprehensive income

 

8,426

 

1,308

 

Total comprehensive income

 

$

7,320

 

$

11,773

 

 

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, 2012

 

25,148

 

$

265

 

$

585,360

 

$

(3,035

)

$

122,014

 

$

(2,979

)

$

(34,360

)

$

667,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

10,465

 

 

 

10,465

 

Other comprehensive income

 

 

 

 

 

 

1,308

 

 

1,308

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,773

 

Cash dividends declared ($0.18 per share)

 

 

 

 

 

(4,561

)

 

 

(4,561

)

Treasury stock purchased

 

(98

)

 

 

 

 

 

(2,434

)

(2,434

)

Forfeited shares

 

(4

)

 

8

 

90

 

 

 

(98

)

 

Exercise of stock options

 

118

 

 

 

 

(1,488

)

 

3,315

 

1,827

 

Restricted stock grants

 

146

 

 

(691

)

(3,485

)

 

 

4,176

 

 

Stock-based compensation

 

 

 

296

 

585

 

 

 

 

881

 

Net tax benefit related to stock-based compensation

 

 

 

479

 

 

 

 

 

479

 

Other, net

 

(56

)

 

 

 

 

 

(1,348

)

(1,348

)

Balance at March 31, 2013

 

25,254

 

$

265

 

$

585,452

 

$

(5,845

)

$

126,430

 

$

(1,671

)

$

(30,749

)

$

673,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

25,036

 

$

265

 

$

587,247

 

$

(5,563

)

$

141,958

 

$

(9,057

)

$

(36,788

)

$

678,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(1,106

)

 

 

(1,106

)

Other comprehensive income

 

 

 

 

 

 

8,426

 

 

8,426

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,320

 

Cash dividends declared ($0.18 per share)

 

 

 

 

 

(4,561

)

 

 

(4,561

)

Treasury stock purchased

 

(100

)

 

 

 

 

 

(2,467

)

(2,467

)

Forfeited shares

 

(1

)

 

1

 

5

 

 

 

(6

)

 

Exercise of stock options

 

61

 

 

 

 

(793

)

 

1,512

 

719

 

Restricted stock grants

 

126

 

 

37

 

(3,144

)

 

 

3,107

 

 

Stock-based compensation

 

 

 

41

 

891

 

 

 

 

932

 

Net tax benefit related to stock-based compensation

 

 

 

(1,984

)

 

 

 

 

(1,984

)

Other, net

 

(17

)

 

 

 

 

 

(431

)

(431

)

Balance at March 31, 2014

 

25,105

 

$

265

 

$

585,342

 

$

(7,811

)

$

135,498

 

$

(631

)

$

(35,073

)

$

677,590

 

 

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)

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(1,106

)

$

10,465

 

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

 

 

 

 

 

Provision for loan losses

 

3,396

 

2,400

 

Net amortization of securities

 

604

 

354

 

Change in unamortized net loan costs and premiums

 

64

 

(511

)

Premises and equipment depreciation and amortization expense

 

1,944

 

1,725

 

Stock-based compensation expense

 

932

 

881

 

Accretion of purchase accounting entries, net

 

(1,999

)

(4,659

)

Amortization of other intangibles

 

1,306

 

1,377

 

Write down of other real estate owned

 

125

 

 

Excess tax loss from stock-based payment arrangements

 

(89

)

(479

)

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

 

(813

)

(695

)

Gain on sales of securities, net

 

(34

)

(1

)

Net decrease in loans held for sale

 

8,171

 

13,020

 

Loss on disposition of assets

 

834

 

1,596

 

Loss (gain) on sale of real estate

 

208

 

(115

)

Loss on termination of hedges

 

3,237

 

 

Net change in other

 

238

 

(3,072

)

Net cash provided by operating activities

 

17,018

 

22,286

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net decrease in trading security

 

135

 

128

 

Proceeds from sales of securities available for sale

 

3,171

 

 

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

 

25,440

 

37,481

 

Purchases of securities available for sale

 

(291,662

)

(129,806

)

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

 

1,762

 

882

 

Purchases of securities held to maturity

 

 

(329

)

Net change in loans

 

(59,851

)

100,676

 

Proceeds from sale of Federal Home Loan Bank stock

 

78

 

1,915

 

Purchase of Federal Home Loan Bank stock

 

(2,920

)

 

Net investment in limited partnership tax credits

 

(2,500

)

 

Purchase of premises and equipment, net

 

(3,130

)

(5,094

)

Acquisitions, net of cash paid

 

423,416

 

 

Proceeds from sale of other real estate

 

483

 

449

 

Net cash provided by in investing activities

 

94,422

 

6,302

 

 

(continued)

 

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

 

8



Table of Contents

 

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net (decrease) increase in deposits

 

(70,422

)

1,049

 

Proceeds from Federal Home Loan Bank advances and other borrowings

 

900,018

 

90,015

 

Repayments of Federal Home Loan Bank advances and other borrowings

 

(937,682

)

(138,873

)

Purchase of treasury stock

 

(2,467

)

(2,434

)

Exercise of stock options

 

719

 

1,827

 

Excess tax (gain) loss from stock-based payment arrangements

 

89

 

479

 

Common stock cash dividends paid

 

(4,561

)

(4,564

)

Net cash used in financing activities

 

(114,306

)

(52,501

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(2,866

)

(23,913

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

75,539

 

98,244

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

72,673

 

$

74,331

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid on deposits

 

$

4,718

 

$

5,330

 

Interest paid on borrowed funds

 

3,145

 

3,440

 

Income taxes paid, net

 

146

 

638

 

 

 

 

 

 

 

Acquisition of non-cash assets and liabilities:

 

 

 

 

 

Assets acquired

 

18,064

 

 

Liabilities assumed

 

(441,550

)

(330

)

 

 

 

 

 

 

Other non-cash changes:

 

 

 

 

 

Other net comprehensive loss

 

5,189

 

 

Real estate owned acquired in settlement of loans

 

476

 

918

 

 

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

 

9


 


Table of Contents

 

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, 2013.

 

Reclassifications

 

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

 

Out of Period Adjustments

 

For the quarter ended March 31, 2014, the Company recorded a correction of an error to adjust ($1.4) million in prior period interest income earned on loans acquired in bank acquisitions all of which relates to prior periods.  After evaluating the quantitative and qualitative aspects of these adjustments, the Company concluded that its prior period financial statements were not materially misstated.

 

Recently Adopted Accounting Principles

 

On January 1, 2014 we adopted Accounting Standards Update (“ASU”) ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” to eliminate diversity in practice. This ASU requires that companies net their unrecognized tax benefits against all same-jurisdiction net operating losses or tax credit carryforwards that would be used to settle the position with a tax authority. The adoption of this ASU did not have a material effect on our consolidated financial statements.

 

NOTE 2.               ACQUISITION

 

New York Branch Acquisition

 

On January 17, 2014, Berkshire Bank purchased twenty branch banking offices located in central and eastern New York State, from Bank of America, National Association. Berkshire Bank received $423.1 million in cash, which was net of $17.4 million cash consideration paid and acquisition costs, and assumed certain related deposit liabilities associated with these branches (the “branch acquisition”).  Consideration paid included a 2.25% premium on deposits received. The branch acquisition increased the Bank’s customer base and lending opportunities, and enhanced the Bank’s geographical market presence between Albany and Syracuse, New York.  In addition, the acquired deposits augmented the Bank’s sources of liquidity.

 

On the acquisition date, the acquired branches had assets with a carrying value of approximately $8.9 million, including loans outstanding with a carrying value of approximately $4.5 million, as well as deposits with a carrying value of approximately $440.5 million. The results from the acquired branch operations are included in the Company’s Consolidated Statement of Operations from the date of acquisition.

 

The assets and liabilities obtained and assumed in the branch acquisition were recorded at fair value based on management’s best estimate using information available at the date of acquisition.  Consideration paid, and fair values of the assets acquired and liabilities assumed are summarized in the following table:

 

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Table of Contents

 

 

 

 

 

Fair Value

 

As Recorded at

 

(in thousands)

 

As Acquired

 

Adjustments

 

Acquisition

 

Consideration paid:

 

 

 

 

 

 

 

Cash consideration paid to Bank of Amercia

 

 

 

 

 

$

17,105

 

Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value:

 

 

 

 

 

 

 

Cash and short-term investments

 

$

440,521

 

$

 

$

440,521

 

Loans

 

4,541

 

(533

)(a)

4,008

 

Premises and equipment

 

4,381

 

(710

)(b)

3,671

 

Core deposit intangibles

 

 

2,550

(c)

2,550

 

Other intangibles

 

 

(79

)(d)

(79

)

Deposits

 

(440,507

)

(15

)(e)

(440,522

)

Other liabilities

 

 

(944

)(f)

(944

)

Total identifiable net assets

 

$

8,936

 

$

269

 

$

9,205

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

$

7,900

 

 


Explanation of Certain Fair Value Adjustments

 

(a)

The adjustment represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. Loans that met the criteria and are being accounted for in accordance with ASC 310-30 had a carrying amount of $201 thousand. Non-impaired loans not accounted for under 310-30 had a carrying value of $4.3 million.

(b)

The amount represents the adjustment of the book value of buildings, and furniture and equipment, to their estimated fair value based on appraisals and other methods. The adjustments will be depreciated over the estimated economic lives of the assets.

(c)

The adjustment represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized over the estimated useful life of the deposit base.

(d)

Represents an intangible liability related to assumed leases, which was recorded as an identifiable intangible and will be amortized over the remaining life of the leases.

(e)

The adjustment is necessary because the weighted average interest rate of deposits exceeded the cost of similar funding at the time of acquisition.

(f)

Represents an establishment of a reserve on certain acquired lines of credit, which were determined to have specific credit risk at the time of acquisition.

 

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired were estimated using cash flow projections based on the remaining maturity and repricing terms.  Cash flows were adjusted by estimating future credit losses and the rate of prepayments.  Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.  For collateral dependent loans with deteriorated credit quality, to estimate the fair value we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral.  Those values were 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.  There was no carryover of the seller’s allowance for credit losses associated with the loans that were acquired in the branch acquisition as the loans were initially recorded at fair value.

 

Information about the acquired loan portfolio subject to ASC 310-30 as of January 17, 2014 is as follows (in thousands):

 

 

 

ASC 310-30 Loans

 

Contractually required principal and interest at acquisition

 

$

201

 

Contractual cash flows not expected to be collected (nonaccretable discount)

 

(100

)

Expected cash flows at acquisition

 

101

 

Interest component of expected cash flows (accretable premium)

 

20

 

Fair value of acquired loans

 

$

121

 

 

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately nine years utilizing a straight-line method.  Other intangibles consist of leasehold intangible liability, which is amortized over the remaining life of three years using a straight-line method.

 

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The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is not deductible for tax purposes.

 

The fair value of savings and transaction deposit accounts acquired in the branch acquisition was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

 

Direct acquisition and integration costs of the branch acquisition were expensed as incurred, and totaled $3.6 million during the three months ending March 31, 2014, and none during the same period of 2013.

 

The following table presents selected unaudited pro forma financial information reflecting the branch acquisition assuming it was completed as of January 1, 2013.   The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and acquired branches had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.   Pro forma basic and diluted earnings per common share were calculated using Berkshire’s actual weighted-average shares outstanding for the periods presented.  The unaudited pro forma information is based on the actual financial statements of Berkshire for the periods shown, and on the calculated results of the acquired branches for the 2013 period shown and in 2014 until the date of acquisition, at which time their operations became included in Berkshire’s financial statements.

 

The unaudited pro forma information, for the three months ended March 31, 2014 and 2013, set forth below reflects adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest income and expense due to additional investments and borrowing reductions as a result of the branch acquisition.  Direct acquisition and integration-related costs incurred by the Company during 2014 are reversed; as those expenses are assumed to have occurred prior to 2013.  Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities beyond investment of cash received from deposits, or anticipated cost-savings.

 

Information in the following table is shown in thousands, except earnings per share:

 

 

 

Pro Forma (unaudited)

 

 

 

Three ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net interest income

 

$

43,892

 

$

43,631

 

Non-interest income

 

4,632

 

16,053

 

Net income

 

1,487

 

10,229

 

 

 

 

 

 

 

Pro forma earnings per share:

 

 

 

 

 

Basic

 

$

0.06

 

$

0.41

 

Diluted

 

$

0.06

 

$

0.41

 

 

NOTE 3.               TRADING SECURITY

 

The Company holds a tax advantaged economic development bond that is accounted for at fair value. The security had an amortized cost of $13.0 million and $13.1 million, and a fair value of $14.9 million and $14.8 million, at March 31, 2014 and December 31, 2013, respectively. As discussed further in Note 14 - 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 March 31, 2014.

 

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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

 

March 31, 2014

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

135,382

 

$

2,949

 

$

(1,139

)

$

137,192

 

Government-guaranteed residential mortgage-backed securities

 

83,299

 

704

 

(317

)

83,686

 

Government-sponsored residential mortgage-backed securities

 

726,195

 

2,217

 

(9,514

)

718,898

 

Corporate bonds

 

40,917

 

116

 

(912

)

40,121

 

Trust preferred securities

 

15,799

 

1,320

 

(1,361

)

15,758

 

Other bonds and obligations

 

3,244

 

1

 

(116

)

3,129

 

Total debt securities

 

1,004,836

 

7,307

 

(13,359

)

998,784

 

Marketable equity securities

 

32,073

 

3,136

 

(356

)

34,853

 

Total securities available for sale

 

1,036,909

 

10,443

 

(13,715

)

1,033,637

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

3,881

 

 

 

3,881

 

Government-sponsored residential mortgage-backed securities

 

72

 

3

 

 

75

 

Tax advantaged economic development bonds

 

38,865

 

1,310

 

(281

)

39,894

 

Other bonds and obligations

 

341

 

 

 

341

 

Total securities held to maturity

 

43,159

 

1,313

 

(281

)

44,191

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,080,068

 

$

11,756

 

$

(13,996

)

$

1,077,828

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

77,852

 

$

1,789

 

$

(1,970

)

$

77,671

 

Government-guaranteed residential mortgage-backed securities

 

78,885

 

544

 

(658

)

78,771

 

Government-sponsored residential mortgage-backed securities

 

531,441

 

2,000

 

(10,783

)

522,658

 

Corporate bonds

 

40,945

 

157

 

(1,822

)

39,280

 

Trust preferred securities

 

16,927

 

1,249

 

(1,565

)

16,611

 

Other bonds and obligations

 

3,250

 

 

(166

)

3,084

 

Total debt securities

 

749,300

 

5,739

 

(16,964

)

738,075

 

Marketable equity securities

 

20,042

 

2,266

 

(335

)

21,973

 

Total securities available for sale

 

769,342

 

8,005

 

(17,299

)

760,048

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

4,244

 

 

 

4,244

 

Government-sponsored residential mortgage-backed securities

 

73

 

2

 

 

75

 

Tax advantaged economic development bonds

 

40,260

 

1,255

 

(414

)

41,101

 

Other bonds and obligations

 

344

 

 

 

344

 

Total securities held to maturity

 

44,921

 

1,257

 

(414

)

45,764

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

814,263

 

$

9,262

 

$

(17,713

)

$

805,812

 

 

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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 March 31, 2014 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

 

$

8,070

 

$

8,072

 

$

1,047

 

$

1,047

 

Over 1 year to 5 years

 

7,279

 

7,382

 

17,482

 

18,323

 

Over 5 years to 10 years

 

54,031

 

53,397

 

11,389

 

11,292

 

Over 10 years

 

125,962

 

127,349

 

13,169

 

13,454

 

Total bonds and obligations

 

195,342

 

196,200

 

43,087

 

44,116

 

Marketable equity securities

 

32,073

 

34,853

 

 

 

Residential mortgage-backed securities

 

809,494

 

802,584

 

72

 

75

 

Total

 

$

1,036,909

 

$

1,033,637

 

$

43,159

 

$

44,191

 

 

14


 


Table of Contents

 

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, 2014 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

433

 

$

17,198

 

$

706

 

$

8,798

 

$

1,139

 

$

25,996

 

Government-guaranteed residential mortgage-backed securities

 

130

 

27,758

 

187

 

4,752

 

317

 

32,510

 

Government-sponsored residential mortgage-backed securities

 

6,890

 

446,031

 

2,624

 

72,307

 

9,514

 

518,338

 

Corporate bonds

 

535

 

14,552

 

377

 

15,453

 

912

 

30,005

 

Trust preferred securities

 

 

 

1,361

 

2,203

 

1,361

 

2,203

 

Other bonds and obligations

 

44

 

1,209

 

72

 

1,916

 

116

 

3,125

 

Total debt securities

 

8,032

 

506,748

 

5,327

 

105,429

 

13,359

 

612,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

136

 

3,459

 

220

 

1,779

 

356

 

5,238

 

Total securities available for sale

 

8,168

 

510,207

 

5,547

 

107,208

 

13,715

 

617,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax advantaged economic development bonds

 

 

 

281

 

7,916

 

281

 

7,916

 

Total securities held to maturity

 

 

 

281

 

7,916

 

281

 

7,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,168

 

$

510,207

 

$

5,828

 

$

115,124

 

$

13,996

 

$

625,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds and obligations

 

$

1,657

 

$

17,776

 

$

313

 

$

1,854

 

$

1,970

 

$

19,630

 

Government guaranteed residential mortgage-backed securities

 

658

 

35,631

 

 

 

658

 

35,631

 

Government-sponsored residential mortgage-backed securities

 

10,783

 

423,203

 

 

 

10,783

 

423,203

 

Corporate bonds

 

1,822

 

29,124

 

 

 

1,822

 

29,124

 

Trust preferred securities

 

 

 

1,565

 

2,039

 

1,565

 

2,039

 

Other bonds and obligations

 

166

 

3,082

 

 

 

166

 

3,082

 

Total debt securities

 

15,086

 

508,816

 

1,878

 

3,893

 

16,964

 

512,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

117

 

1,653

 

218

 

1,782

 

335

 

3,435

 

Total securities available for sale

 

15,203

 

510,469

 

2,096

 

5,675

 

17,299

 

516,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax advantaged economic development bonds

 

57

 

9,429

 

357

 

7,901

 

414

 

17,330

 

Total securities held to maturity

 

57

 

9,429

 

357

 

7,901

 

414

 

17,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

15,260

 

$

519,898

 

$

2,453

 

$

13,576

 

$

17,713

 

$

533,474

 

 

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, 2014, 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, 2014:

 

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Table of Contents

 

AFS municipal bonds and obligations

 

At March 31, 2014, 38 out of the total 198 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 4.2% 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 first quarter of 2014.  All securities are investment grade rated and are performing.

 

AFS residential mortgage-backed securities

 

At March 31, 2014, 87 out of the total 236 securities in the Company’s portfolios of AFS residential mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 1.75% 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 first quarter of 2014. All securities are performing.

 

AFS corporate bonds

 

At March 31, 2014, 6 out of the total 9 bonds in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represented 2.95% of the amortized cost of the bonds in unrealized loss positions. The bonds are investment grade rated, and there are no material underlying credit downgrades during the first quarter of 2014.  All bonds are performing.

 

AFS trust preferred securities

 

At March 31, 2014, 2 out of the total 5 securities in the Company’s portfolio of AFS trust preferred securities were in unrealized loss positions. Aggregate unrealized losses represented 38.19% 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. Except for the security discussed below, the aggregated unrealized loss on the other securities in unrealized loss positions represented 9% of their amortized cost. Again, excluding the security below, all trust preferred securities carry at least one investment grade, and had no material downgrades in the first quarter of 2014 and all are performing.

 

At March 31, 2014, $1.2 million of the total unrealized losses were 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 $1.3 million, for potential other-than-temporary-impairment (“OTTI”) at March 31, 2014 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 $51 million in excess subordination above current and projected losses. The security is performing.

 

AFS other bonds and obligations

 

At March 31, 2014, 6 out of the total 8 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.62% of the amortized cost of securities in unrealized loss positions. The securities are investment grade rated, except one security with a book value of less than $1,000, and there were no material underlying credit downgrades during the first quarter of 2014. All securities are performing.

 

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Table of Contents

 

HTM tax advantaged economic development bonds

 

At March 31, 2014, 1 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 3.41% of the amortized cost of securities in unrealized loss positions. The Company has the intent of maintaining these bonds to recovery. All securities are considered 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 March 31, 2014, 4 out of the total 24 securities in the Company’s portfolio of marketable equity securities were in an unrealized loss position. The unrealized loss represented 6.37% 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 March 31, 2014.  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 real estate, commercial and industrial, and consumer. Residential mortgage loans include classes for 1- 4 family owner occupied and construction loans.  Commercial real estate loans include construction, single and multi-family, and other commercial real estate classes.  Commercial and industrial 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 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 the acquisitions of the 20 acquired branches, 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

 

 

 

March 31, 2014

 

December 31, 2013

 

(In thousands)

 

Business
Activities Loans

 

Acquired
Loans

 

Total

 

Business
Activities Loans

 

Acquired 
Loans

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgages:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

$

1,032,170

 

$

320,848

 

$

1,353,018

 

$

1,027,737

 

$

333,367

 

$

1,361,104

 

Construction

 

19,599

 

5,154

 

24,753

 

18,158

 

5,012

 

23,170

 

Total residential mortgages

 

1,051,769

 

326,002

 

1,377,771

 

1,045,895

 

338,379

 

1,384,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

137,687

 

7,262

 

144,949

 

125,247

 

13,770

 

139,017

 

Single and multi-family

 

62,429

 

63,801

 

126,230

 

63,493

 

64,827

 

128,320

 

Other commercial real estate

 

925,513

 

260,284

 

1,185,797

 

871,271

 

278,512

 

1,149,783

 

Total commercial real estate

 

1,125,629

 

331,347

 

1,456,976

 

1,060,011

 

357,109

 

1,417,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset based lending

 

309,699

 

4,374

 

314,073

 

294,241

 

3,130

 

297,371

 

Other commercial and industrial loans

 

316,451

 

66,371

 

382,822

 

323,196

 

66,726

 

389,922

 

Total commercial and industrial loans

 

626,150

 

70,745

 

696,895

 

617,437

 

69,856

 

687,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial loans

 

1,751,779

 

402,092

 

2,153,871

 

1,677,448

 

426,965

 

2,104,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

233,521

 

71,499

 

305,020

 

232,677

 

74,154

 

306,831

 

Auto and other

 

249,776

 

156,189

 

405,965

 

213,171

 

171,834

 

385,005

 

Total consumer loans

 

483,297

 

227,688

 

710,985

 

445,848

 

245,988

 

691,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

3,286,845

 

$

955,782

 

$

4,242,627

 

$

3,169,191

 

$

1,011,332

 

$

4,180,523

 

 

The carrying amount of the acquired loans at March 31, 2014 totaled $956 million.  These loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Topic 310-30, with a carrying amount of $24.5 million and loans that were considered not impaired at the acquisition date with a carrying amount of $931 million.

 

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2014

 

2013

 

Balance at beginning of period

 

$

2,559

 

$

8,247

 

Reclassification f