SEC Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: March 31, 2016
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) 236-3149
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ý        Accelerated Filer o        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 ý
 
The Registrant had 31,150,657 shares of common stock, par value $0.01 per share, outstanding as of May 4, 2016.
 


Table of Contents

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

2

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3

Table of Contents

PART I
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
 
 
March 31,
2016
 
December 31,
2015
(In thousands, except share data)
 
 
Assets
 
 

 
 

Cash and due from banks
 
$
44,370

 
$
72,918

Short-term investments
 
24,447

 
30,644

Total cash and cash equivalents
 
68,817

 
103,562

Trading security, at fair value
 
14,474

 
14,189

Securities available for sale, at fair value
 
1,171,534

 
1,154,457

Securities held to maturity (fair values of $134,707 and $136,904)
 
128,196

 
131,652

Federal Home Loan Bank stock and other restricted securities
 
60,261

 
71,018

Total securities
 
1,374,465

 
1,371,316

 
 
 
 
 
Loans held for sale
 
15,919

 
13,191

 
 
 
 
 
Commercial real estate
 
2,100,067

 
2,059,767

Commercial and industrial loans
 
1,054,140

 
1,048,263

Residential mortgages
 
1,753,622

 
1,815,035

Consumer loans
 
818,861

 
802,171

Total loans
 
5,726,690

 
5,725,236

Less: Allowance for loan losses
 
(40,055
)
 
(39,308
)
Net loans
 
5,686,635

 
5,685,928

Premises and equipment, net
 
87,840

 
88,072

Other real estate owned
 
1,440

 
1,725

Goodwill
 
323,659

 
323,943

Other intangible assets
 
9,845

 
10,664

Cash surrender value of bank-owned life insurance policies
 
126,136

 
125,233

Deferred tax assets, net
 
36,514

 
42,526

Other assets
 
76,641

 
64,926

Total assets
 
$
7,807,911

 
$
7,831,086

 
 
 
 
 
Liabilities
 
 

 
 

Demand deposits
 
$
1,037,103

 
$
1,081,860

NOW deposits
 
473,556

 
510,807

Money market deposits
 
1,405,361

 
1,408,107

Savings deposits
 
611,556

 
601,761

Time deposits
 
2,056,814

 
1,986,600

Total deposits
 
5,584,390

 
5,589,135

Short-term debt
 
940,700

 
1,071,200

Long-term Federal Home Loan Bank advances
 
140,196

 
103,135

Subordinated borrowings
 
89,027

 
88,983

Total borrowings
 
1,169,923

 
1,263,318

Other liabilities
 
147,761

 
91,444

Total liabilities
 
$
6,902,074

 
$
6,943,897

 
 
Shareholders’ equity
 
 

 
 

Common stock ($.01 par value; 50,000,000 shares authorized and 32,321,962 shares issued and 31,039,017 shares outstanding in 2016; 32,321,962 shares issued, and 30,973,986 shares outstanding in 2015)
 
322

 
322

Additional paid-in capital
 
744,743

 
742,619

Unearned compensation
 
(8,246
)
 
(6,997
)
Retained earnings
 
193,653

 
183,885

Accumulated other comprehensive income / (loss)
 
4,847

 
(3,305
)
Treasury stock, at cost (1,174,014 shares in 2016 and 1,179,045 shares in 2015)
 
(29,482
)
 
(29,335
)
Total shareholders’ equity
 
905,837

 
887,189

Total liabilities and shareholders’ equity
 
$
7,807,911

 
$
7,831,086

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
March 31,
(In thousands, except per share data)
 
2016
 
2015
Interest and dividend income
 
 

 
 

Loans
 
$
58,442

 
$
44,445

Securities and other
 
10,034

 
8,306

Total interest and dividend income
 
68,476

 
52,751

Interest expense
 
 

 
 

Deposits
 
7,159

 
4,949

Borrowings
 
3,620

 
2,309

Total interest expense
 
10,779

 
7,258

Net interest income
 
57,697

 
45,493

Non-interest income
 
 

 
 

Loan related income
 
3,046

 
1,283

Mortgage banking income
 
821

 
1,253

Deposit related fees
 
6,109

 
5,677

Insurance commissions and fees
 
2,893

 
2,967

Wealth management fees
 
2,502

 
2,603

Total fee income
 
15,371

 
13,783

Other
 
223

 
(1,255
)
Gain on sale of securities, net
 
36

 
34

Total non-interest income
 
15,630

 
12,562

Total net revenue
 
73,327

 
58,055

Provision for loan losses
 
4,006

 
3,851

Non-interest expense
 
 

 
 

Compensation and benefits
 
25,714

 
21,811

Occupancy and equipment
 
6,690

 
7,108

Technology and communications
 
4,857

 
3,593

Marketing and promotion
 
673

 
713

Professional services
 
1,280

 
1,272

FDIC premiums and assessments
 
1,233

 
1,129

Other real estate owned and foreclosures
 
263

 
251

Amortization of intangible assets
 
819

 
901

Acquisition, restructuring and conversion related expenses
 
780

 
4,421

Other
 
4,791

 
3,949

Total non-interest expense
 
47,100

 
45,148

 
 
 
 
 
Income before income taxes
 
22,221

 
9,056

Income tax expense
 
6,220

 
297

Net income
 
$
16,001

 
$
8,759

 
 
 
 
 
Earnings per share:
 
 

 
 

Basic
 
$
0.52

 
$
0.35

Diluted
 
$
0.52

 
$
0.35

 
 
 
 
 
Weighted average common shares outstanding:
 
 

 
 

Basic
 
30,511

 
24,803

Diluted
 
30,688

 
24,955

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)
 
2016
 
2015
Net income
 
$
16,001

 
$
8,759

Other comprehensive income, before tax:
 
 

 
 

Changes in unrealized gain on securities available-for-sale
 
17,706

 
9,337

Changes in unrealized loss on derivative hedges
 
(4,506
)
 
(3,901
)
Changes in unrealized loss on pension
 

 
(1,531
)
Income taxes related to other comprehensive income:
 
 

 
 

Changes in unrealized gain on securities available-for-sale
 
(6,856
)
 
(3,605
)
Changes in unrealized loss on derivative hedges
 
1,808

 
1,572

Changes in unrealized loss on pension
 

 
617

Total other comprehensive income (loss)
 
8,152

 
2,489

Total comprehensive income
 
$
24,153

 
$
11,248

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


6

Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Accumulated
other
 
 
 
 
 
 
Common stock (1)
 
paid-in
 
Unearned
 
Retained
 
comprehensive
 
Treasury
 
 
(In thousands)
 
Shares
 
Amount
 
capital
 
compensation
 
earnings
 
(loss) income
 
stock
 
Total
Balance at December 31, 2014
 
25,183

 
$
265

 
$
585,289

 
$
(6,147
)
 
$
156,446

 
$
6,579

 
$
(33,145
)
 
$
709,287

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 

 

 

 

 
8,759

 

 

 
8,759

Other comprehensive income
 

 

 

 

 

 
2,489

 

 
2,489

Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
11,248

Cash dividends declared ($0.19 per share)
 

 

 

 

 
(4,799
)
 

 

 
(4,799
)
Treasury stock purchased
 

 

 

 

 

 

 

 

Forfeited shares
 
(9
)
 

 
22

 
214

 

 

 
(236
)
 

Exercise of stock options
 
11

 

 

 

 
(165
)
 

 
281

 
116

Restricted stock grants
 
92

 

 
19

 
(2,286
)
 

 

 
2,267

 

Stock-based compensation
 

 

 

 
993

 

 

 

 
993

Net tax benefit related to stock-based compensation
 

 

 
(23
)
 

 

 

 

 
(23
)
Other, net
 
(24
)
 

 

 

 

 

 
(592
)
 
(592
)
Balance at March 31, 2015
 
25,253

 
$
265

 
$
585,307

 
$
(7,226
)
 
$
160,241

 
$
9,068

 
$
(31,425
)
 
$
716,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
30,974

 
$
322

 
$
742,619

 
$
(6,997
)
 
$
183,885

 
$
(3,305
)
 
$
(29,335
)
 
$
887,189

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 

 

 

 

 
16,001

 

 

 
16,001

Other comprehensive income
 

 

 

 

 

 
8,152

 

 
8,152

Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
24,153

Cash dividends declared ($0.20 per share)
 

 

 

 

 
(6,216
)
 

 

 
(6,216
)
Treasury stock adjustment (2)
 

 

 
1,645

 

 

 

 
(1,645
)
 

Forfeited shares
 
(22
)
 

 
68

 
526

 

 

 
(594
)
 

Exercise of stock options
 
2

 

 

 

 
(17
)
 

 
42

 
25

Restricted stock grants
 
105

 

 
312

 
(2,931
)
 

 

 
2,619

 

Stock-based compensation
 

 

 

 
1,156

 

 

 

 
1,156

Net tax benefit related to stock-based compensation
 

 

 
99

 

 

 

 

 
99

Other, net
 
(20
)
 

 

 

 

 

 
(569
)
 
(569
)
Balance at March 31, 2016
 
31,039

 
$
322

 
$
744,743

 
$
(8,246
)
 
$
193,653

 
$
4,847

 
$
(29,482
)
 
$
905,837

(1) The Company's common stock includes the elimination of $2.9 million (108,931 shares) of Berkshire Hills Bancorp stock held by a subsidiary.
(2) Treasury stock adjustment represents the sale of 60,000 shares of Berkshire Hills Bancorp stock held by the Company's subsidiary.

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)
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net income
 
$
16,001

 
$
8,759

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

 
 

Provision for loan losses
 
4,006

 
3,851

Net amortization of securities
 
725

 
(317
)
Change in unamortized net loan costs and premiums
 
72

 
398

Premises and equipment depreciation and amortization expense
 
2,155

 
2,096

Stock-based compensation expense
 
1,156

 
993

Accretion of purchase accounting entries, net
 
(2,469
)
 
(367
)
Amortization of other intangibles
 
819

 
901

Excess tax loss from stock-based payment arrangements
 
(99
)
 
23

Income from cash surrender value of bank-owned life insurance policies
 
(1,053
)
 
(714
)
Gain on sales of securities, net
 
(35
)
 
(34
)
Net (increase) in loans held for sale
 
(2,728
)
 
(9,812
)
Loss on disposition of assets
 

 
1,136

Loss on sale of real estate
 
54

 
154

Amortization of interest in tax-advantaged projects
 
991

 

Net change in other
 
(10,285
)
 
(3,263
)
Net cash provided by operating activities
 
9,310

 
3,804

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from payments on trading security
 
148

 
142

Proceeds from sales of securities available for sale
 
7,000

 
4,693

Proceeds from maturities, calls and prepayments of securities available for sale
 
40,832

 
40,552

Purchases of securities available for sale
 
(46,442
)
 
(41,068
)
Proceeds from maturities, calls and prepayments of securities held to maturity
 
3,439

 
729

Purchases of securities held to maturity
 
(52
)
 
(200
)
Net change in loans
 
17,069

 
(68,671
)
Proceeds from surrender of bank-owned life insurance
 
150

 

Proceeds from sale of Federal Home Loan Bank stock
 
11,495

 
103

Purchase of Federal Home Loan Bank stock
 
(739
)
 
(3,117
)
Net investment in limited partnership tax credits
 
(1,803
)
 

Proceeds from the sale of premises and equipment
 
168

 

Purchase of premises and equipment, net
 
(2,383
)
 
(946
)
Proceeds from sale of other real estate
 
446

 
578

Net cash provided by (used in) investing activities
 
29,328

 
(67,205
)
(continued)

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Table of Contents

 
 
Three Months Ended
March 31,
(In thousands)
 
2016
 
2015
Cash flows from financing activities:
 
 

 
 

Net increase in deposits
 
25,961

 
65,007

Proceeds from Federal Home Loan Bank advances and other borrowings
 
2,119,500

 
2,200,000

Repayments of Federal Home Loan Bank advances and other borrowings
 
(2,212,752
)
 
(2,206,440
)
Exercise of stock options
 
25

 
116

Excess tax loss from stock-based payment arrangements
 
99

 
(23
)
Common stock cash dividends paid
 
(6,216
)
 
(4,799
)
Net cash (used in) provided by financing activities
 
(73,383
)
 
53,861

 
 
 
 
 
Net change in cash and cash equivalents
 
(34,745
)
 
(9,540
)
 
 
 
 
 
Cash and cash equivalents at beginning of year
 
103,562

 
71,754

 
 
 
 
 
Cash and cash equivalents at end of year
 
$
68,817

 
$
62,214

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid on deposits
 
$
6,967

 
$
4,902

Interest paid on borrowed funds
 
3,508

 
2,306

Income taxes (refunded) paid, net
 
(370
)
 
274

 
 
 
 
 
Other non-cash changes:
 
 

 
 

Other net comprehensive income
 
8,152

 
2,489

Real estate owned acquired in settlement of loans
 
215

 
127

 
 
 
 
 
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, 2015.

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

Recently Adopted Accounting Principles
In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for reporting periods beginning after December 15, 2015. The Company adopted the provisions of ASU No. 2015-02 effective January 1, 2016, which did not have a material effect on the Company's consolidated financial statements. See Note 7. Borrowed Funds to the Consolidated Financial statements for more information.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs, not including those related to line of credit arrangements, be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Further, the update requires the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. The new guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance must be applied retrospectively. The Company adopted the provisions of ASU No. 2015-03 effective January 1, 2016, which did not have a material effect on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for fiscal years beginning after December 15, 2015. The Company adopted the provisions of ASU No. 2015-05 effective January 1, 2016, which did not have a material effect on the Company's consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” This ASU eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Measurement period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior-period information had been revised. The guidance is effective for annual periods beginning after December 15, 2015 and is to be applied prospectively to adjustments of provisional amounts that occur after the effective date. Early application is permitted. The Company adopted the provisions of ASU No. 2015-16 effective January 1, 2016, which did not have a material effect on the Company's consolidated financial statements.

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Future Application of Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09 related to the recognition of revenue from contracts with customers. The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when each performance obligation is satisfied. The standard is effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption is not permitted. However, in July 2015, the FASB voted to approve deferring the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017), issuing ASU 2015-14 “Revenue from Contracts with Customers -Deferral of the Effective Date.” Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09, and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to: i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. The guidance provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The guidance also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is only permitted for the provision related to instrument specific credit risk, The Company is currently evaluating the impact of the new standard on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The new pronouncement improves the transparency and comparability of financial reporting around leasing transactions and more closely aligns accounting for leases with the recently issued International Financial Reporting Standard.  The pronouncement affects all entities that are participants to leasing agreements. From a lessee accounting perspective, the ASU requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. The ASU includes a short-term lease exception for leases with a term of twelve months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. From a lessor accounting perspective, the guidance is largely unchanged, except for targeted improvements to align with new terminology under lessee accounting and with the updated revenue recognition guidance in Topic 606. For sale-leaseback transactions, for a sale to occur the transfer must meet the sale criteria under the new revenue standard, ASC 606. Entities will not be required to reassess transactions previously accounted under then existing guidance. 

Additionally, the ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply as well as transition guidance specific to nonstandard leasing transactions. The Company is currently evaluating the provision of the ASU No. 2016-02 to determine the potential impact the new standard will have on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”. This ASU clarifies that changes in the counterparty to a derivative instrument designated as a hedge do not alone require it to be de-designated and therefore discontinue the application of hedge accounting. Companies are still required to evaluate whether it is probable that a counterparty will perform under the contract as part of the ongoing effectiveness assessment for hedge accounting. The new guidance is effective for annual periods beginning after December 15, 2016 and

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entities may adopt on a prospective or modified retrospective basis. The adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-06, “Contingent Put and Call Options in Debt Instruments” clarifying the assessment of whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to the economic characteristics and risks of their debt hosts, a criteria in assessing whether to bifurcate an embedded derivative.  The new pronouncement clarifies the exercise contingency and the event triggering the contingency does not need to be evaluated in the clearly and closely analysis relative to interest rates or credit risks. Rather, the call or put would be evaluated as a derivative regardless of the exercise contingency. Further, if an entity is no longer required to bifurcate a put or call option per the new guidance, the entity has a one-time option to irrevocably elect to measure that debt instrument in its entirety at fair value with changes in fair value recognized in earnings. ASU No. 2016-06 is effective for annual periods beginning after December 15, 2016 and early adoption is permitted. The ASU should be applied using the modified retrospective basis to existing instruments as of the beginning of the annual period of adoption.  The adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07 “Simplifying the Transition to the Equity Method of Accounting” which eliminates the requirement to retroactively adjust an investment that becomes subject to the equity method of accounting as a result of an increase ownership interest or degree of influence.  Alternatively, an investor entity adds the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopts the equity method of accounting prospectively as of the qualifying date; no retroactive adjustment is required. Additionally, ASU No. 2016-07 specifies that when an available-for-sale equity security becomes qualified for the equity method of accounting, a company should recognize the unrealized holding gain or loss in accumulated other comprehensive income through earnings at the date the investment becomes qualified for use of the equity method. This guidance is effective for all entities for annual periods beginning after December 15, 2016, with early adoption permitted on a prospective basis. The adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” to improve the usefulness and understandability of the guidance on principal versus agent considerations within the new revenue standard, ASC 606 “Revenue from Contracts with Customers”. The guidance clarified the following: (1) an entity determines if it is a principal or agent for each distinct good or service promised to the customer. If a contract includes multiple specified goods or services, an entity could be a principal for some and an agent for others: (2) for each specified good or service, an entity determines whether it is a good, a service, or a right to a good or service; (3) when another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of: (a) a good from the other party and then transfers it to the customer; (b) the ability to direct that party to provide a service to the customer on the entity’s behalf; or (c) a good or service from the other party and combines it with other goods or services to provide to the customer; and (4) the purpose of the five indicators to determine whether an entity is a principal is to support or assist in the assessment of control. The indicators may be more or less relevant to the control assessment and one or more indicators may be more or less persuasive to the control assessment, depending on the facts and circumstances. The effective date and transition requirements mirror those of ASC 606 and similarly with that pronouncement, the Company is evaluating the provisions of ASU No. 2016-08, and will closely monitor developments and additional guidance to determine the potential impact on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvement to Employee Share-Based Payment Accounting”. This ASU contains targeted amendments to the accounting for shared based payment transactions, including income tax consequences for awards, classification of awards as either equity or liabilities, and classification of activity on the statement of cash flows. Specifically, some of the requirements under the amendments include: (1) excess tax benefits and/or tax deficiencies, determined as the difference between compensation cost recognized for financial reporting purposes and the deduction for tax, be recognized in the income statement as income tax expense or benefit in the period in which they occur, removing historical equity treatment; (2) excess tax benefits are no longer separately classified as a financing activity but rather should be classified with other income tax cash flows as an operating activity on the statement of cash flows; (3) cash paid by an employer when withholding shares for tax withholding purposes should be classified as a financing activity. Additionally, regarding forfeitures, this guidance permits a company to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. If elected, the change to recognize forfeitures when they occur must be applied through a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016. The Company is evaluating the provisions of ASU No. 2016-09, and will closely monitor developments and additional guidance to determine the potential impact on the consolidated financial statements.

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NOTE 2.                                              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 $11.8 million and $12.0 million, and a fair value of $14.5 million and $14.2 million, at March 31, 2016 and December 31, 2015, respectively. As discussed further in Note 11 - 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, 2016.

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NOTE 3. 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, 2016
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
99,126

 
$
5,669

 
$
(53
)
 
$
104,742

Government-guaranteed residential mortgage-backed securities
 
65,456

 
714

 
(81
)
 
66,089

Government-sponsored residential mortgage-backed securities
 
883,749

 
15,779

 
(782
)
 
898,746

Corporate bonds
 
42,878

 

 
(1,876
)
 
41,002

Trust preferred securities
 
11,635

 
89

 
(107
)
 
11,617

Other bonds and obligations
 
3,169

 
34

 
(1
)
 
3,202

Total debt securities
 
1,106,013

 
22,285

 
(2,900
)
 
1,125,398

Marketable equity securities
 
42,356

 
5,709

 
(1,929
)
 
46,136

Total securities available for sale
 
1,148,369

 
27,994

 
(4,829
)
 
1,171,534

 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
91,512

 
4,417

 

 
95,929

Government-sponsored residential mortgage-backed securities
 
67

 
5

 

 
72

Tax advantaged economic development bonds
 
36,290

 
2,089

 

 
38,379

Other bonds and obligations
 
327

 

 

 
327

Total securities held to maturity
 
128,196

 
6,511

 

 
134,707

 
 
 
 
 
 
 
 
 
Total
 
$
1,276,565

 
$
34,505

 
$
(4,829
)
 
$
1,306,241

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
99,922

 
$
4,763

 
$
(124
)
 
$
104,561

Government-guaranteed residential mortgage-backed securities
 
69,866

 
388

 
(396
)
 
69,858

Government-sponsored residential mortgage-backed securities
 
891,041

 
5,111

 
(6,145
)
 
890,007

Corporate bonds
 
42,849

 

 
(1,827
)
 
41,022

Trust preferred securities
 
11,719

 
182

 

 
11,901

Other bonds and obligations
 
3,175

 

 
(34
)
 
3,141

Total debt securities
 
1,118,572

 
10,444

 
(8,526
)
 
1,120,490

Marketable equity securities
 
30,522

 
5,331

 
(1,886
)
 
33,967

Total securities available for sale
 
1,149,094

 
15,775

 
(10,412
)
 
1,154,457

 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
94,642

 
3,359

 
(34
)
 
97,967

Government-sponsored residential mortgage-backed securities
 
68

 
3

 

 
71

Tax advantaged economic development bonds
 
36,613

 
1,924

 

 
38,537

Other bonds and obligations
 
329

 

 

 
329

Total securities held to maturity
 
131,652

 
5,286

 
(34
)
 
136,904

 
 
 
 
 
 
 
 
 
Total
 
$
1,280,746

 
$
21,061

 
$
(10,446
)
 
$
1,291,361


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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, 2016 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
 
$

 
$

 
$
1,256

 
$
1,256

Over 1 year to 5 years
 
3,468

 
3,502

 
17,198

 
18,297

Over 5 years to 10 years
 
22,537

 
22,653

 
14,777

 
15,348

Over 10 years
 
130,803

 
134,408

 
94,898

 
99,734

Total bonds and obligations
 
156,808

 
160,563

 
128,129

 
134,635

 
 
 
 
 
 
 
 
 
Marketable equity securities
 
42,356

 
46,136

 

 

Residential mortgage-backed securities
 
949,205

 
964,835

 
67

 
72

Total
 
$
1,148,369

 
$
1,171,534

 
$
128,196

 
$
134,707


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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
March 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$

 
$

 
$
53

 
$
2,137

 
$
53

 
$
2,137

Government-guaranteed residential mortgage-backed securities
 
23

 
1,613

 
58

 
5,470

 
81

 
7,083

Government-sponsored residential mortgage-backed securities
 
212

 
92,018

 
570

 
72,393

 
782

 
164,411

Corporate bonds
 
233

 
14,816

 
1,643

 
19,187

 
1,876

 
34,003

Trust preferred securities
 
101

 
10,000

 
6

 
1,264

 
107

 
11,264

Other bonds and obligations
 

 

 
1

 
31

 
1

 
31

Total debt securities
 
569

 
118,447

 
2,331

 
100,482

 
2,900

 
218,929

Marketable equity securities
 
724

 
11,939

 
1,205

 
5,454

 
1,929

 
17,393

Total securities available for sale
 
1,293

 
130,386

 
3,536

 
105,936

 
4,829

 
236,322

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 

 

 

 

 

 

Tax advantaged economic development bonds
 

 

 

 

 

 

Total securities held to maturity
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
1,293

 
$
130,386

 
$
3,536

 
$
105,936

 
$
4,829

 
$
236,322

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
9

 
$
1,587

 
$
115

 
$
3,400

 
$
124

 
$
4,987

Government guaranteed residential mortgage-backed securities
 
164

 
23,460

 
232

 
19,262

 
396

 
42,722

Government-sponsored residential mortgage-backed securities
 
3,100

 
315,990

 
3,045

 
153,248

 
6,145

 
469,238

Corporate bonds
 
30

 
6,934

 
1,796

 
21,587

 
1,826

 
28,521

Trust preferred securities
 
1

 
1,269

 

 

 
1

 
1,269

Other bonds and obligations
 

 
108

 
34

 
3,032

 
34

 
3,140

Total debt securities
 
3,304

 
349,348

 
5,222

 
200,529

 
8,526

 
549,877

Marketable equity securities
 
534

 
2,908

 
1,352

 
5,729

 
1,886

 
8,637

Total securities available for sale
 
3,838

 
352,256

 
6,574

 
206,258

 
10,412

 
558,514

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 

 

 
34

 
2,143

 
34

 
2,143

Total securities held to maturity
 

 

 
34

 
2,143

 
34

 
2,143

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
3,838

 
$
352,256

 
$
6,608

 
$
208,401

 
$
10,446

 
$
560,657



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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, 2016, 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, 2016:

AFS municipal bonds and obligations
At March 31, 2016, 3 of the total 118 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 2.4% 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. The bonds are investment grade rated, and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS residential mortgage-backed securities
At March 31, 2016, 55 out of the total 260 securities in the Company’s portfolios of AFS residential mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 0.5% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association (“GNMA”) guarantee the contractual cash flows of all of the Company’s residential mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS corporate bonds
At March 31, 2016, 6 out of 7 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 5.2% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities. 

At March 31, 2016, $1.5 million of the total unrealized losses was attributable to a $17.6 million investment. The Company evaluated this security, with a Level 2 fair value of $16.1 million, for potential other-than-temporary impairment (“OTTI”) at March 31, 2016 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.

AFS trust preferred securities
At March 31, 2016, 2 out of the 3 securities in the Company’s portfolio of AFS trust preferred securities were in an unrealized loss position. Aggregate unrealized losses represented 0.9% of the amortized cost of these securities in an unrealized loss position. The Company’s evaluation of the present value of expected cash flows on these securities supports its conclusions about the recoverability of these securities’ amortized cost basis. These securities are investment grade rated. 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.

AFS other bonds and obligations
At March 31, 2016, 2 of the total 8 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.3% 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 quarter. All securities are performing.

Marketable Equity Securities
In evaluating its marketable equity securities portfolio for OTTI, the Company considers its ability to more likely than not hold an equity security to recovery. The Company additionally considers other various factors including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI is recognized immediately through earnings. At March 31, 2016, 11 out of the total 26 securities in the Company’s portfolio of marketable equity securities were in an unrealized loss position. The unrealized loss represented 10.0% of the amortized cost of the securities. The Company has the ability and intent to hold the securities until recovery of their cost basis and does not consider the securities other-than-temporarily impaired at March 31, 2016. 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.

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NOTE 4. LOANS

The Company’s loan portfolio is segregated into the following segments: commercial real estate, commercial and industrial, residential mortgage, and consumer. Commercial real estate loans include construction, single and multi-family, and other commercial real estate classes. Commercial and industrial loans include asset based lending loans, lease financing and other commercial business loan classes. Residential mortgage loans include classes for 1-4 family owner occupied and construction loans. Consumer loans include home equity, direct and indirect auto, and other. These portfolio segments each have unique risk characteristics that are considered when determining the appropriate level for the allowance for loan losses. A substantial portion of the loan portfolio is secured by real estate in 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 Firestone Financial Corp., Hampden Bancorp, Inc., the New York branch acquisition, Beacon Federal Bancorp, Inc., The Connecticut Bank and Trust Company, Legacy Bancorp, Inc., and Rome Bancorp, Inc. The following is a summary of total loans:
 
March 31, 2016
 
December 31, 2015
(In thousands)
Business
Activities Loans
Acquired
Loans
Total
 
Business
Activities Loans
Acquired
Loans
Total
Commercial real estate:
 

 

 

 
 

 

 

Construction
$
216,745

$
39,542

$
256,287

 
$
210,196

$
43,474

$
253,670

Single and multi-family
224,741

35,664

260,405

 
214,823

36,783

251,606

Other commercial real estate
1,251,087

332,288

1,583,375

 
1,209,008

345,483

1,554,491

Total commercial real estate
1,692,573

407,494

2,100,067

 
1,634,027

425,740

2,059,767

 
 
 
 
 
 
 
 
Commercial and industrial loans:
 

 

 

 
 

 

 

Asset based lending
336,749


336,749

 
331,253


331,253

Other commercial and industrial loans
516,742

200,649

717,391

 
495,979

221,031

717,010

Total commercial and industrial loans
853,491

200,649

1,054,140

 
827,232

221,031

1,048,263

 
 
 
 
 
 
 
 
Total commercial loans
2,546,064

608,143

3,154,207

 
2,461,259

646,771

3,108,030

 
 
 
 
 
 
 
 
Residential mortgages:
 

 

 

 
 

 

 

1-4 family
1,414,338

317,626

1,731,964

 
1,454,233

332,747

1,786,980

Construction
20,319

1,339

21,658

 
26,704

1,351

28,055

Total residential mortgages
1,434,657

318,965

1,753,622

 
1,480,937

334,098

1,815,035

 
 
 
 
 
 
 
 
Consumer loans:
 

 

 

 
 

 

 

Home equity
306,451

51,534

357,985

 
307,159

53,446

360,605

Auto and other
341,127

119,749

460,876

 
311,328

130,238

441,566

Total consumer loans
647,578

171,283

818,861

 
618,487

183,684

802,171

 
 
 
 
 
 
 
 
Total loans
$
4,628,299

$
1,098,391

$
5,726,690

 
$
4,560,683

$
1,164,553

$
5,725,236


The carrying amount of the acquired loans at March 31, 2016 totaled $1.1 billion. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $18.3 million (and a note balance of $33.3 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not impaired at acquisition date had a carrying amount of $1.1 billion.


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At December 31, 2015, acquired loans maintained a carrying value of $1.2 billion and purchased credit-impaired loans totaled $21.4 million (note balance of $40.2 million). Loans considered not impaired at acquisition date had a carrying amount of $1.1 billion.

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
 
 
Three Months Ended March 31,
(In thousands)
 
2016
 
2015
Balance at beginning of period
 
$
6,925

 
$
2,541

Acquisitions
 

 

Reclassification from nonaccretable difference for loans with improved cash flows
 
896

 
1,330

Reclassification to TDR
 
(185
)
 

 Accretion
 
(1,172
)
 
(440
)
Balance at end of period
 
$
6,464

 
$
3,431


The following is a summary of past due loans at March 31, 2016 and December 31, 2015:

Business Activities Loans
(in thousands)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90
Days or Greater Past
Due
 
Total Past
Due
 
Current
 
Total Loans
 
Past Due >
90 days and
Accruing
March 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction
 
$