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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: June 30, 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) 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 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 31,139,213 shares of common stock, par value $0.01 per share, outstanding as of August 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
 
 
June 30,
2016

December 31,
2015
(In thousands, except share data)
 

Assets
 
 

 
 

Cash and due from banks
 
$
58,332

 
$
72,918

Short-term investments
 
16,247

 
30,644

Total cash and cash equivalents
 
74,579

 
103,562

Trading security, at fair value
 
14,479

 
14,189

Securities available for sale, at fair value
 
1,073,370

 
1,154,457

Securities held to maturity (fair values of $141,544 and $136,904)
 
132,010

 
131,652

Federal Home Loan Bank stock and other restricted securities
 
68,242

 
71,018

Total securities
 
1,288,101

 
1,371,316

Loans held for sale
 
22,450

 
13,191

Commercial real estate
 
2,237,582

 
2,059,767

Commercial and industrial loans
 
1,034,559

 
1,048,263

Residential mortgages
 
1,843,600

 
1,815,035

Consumer loans
 
884,560

 
802,171

Total loans
 
6,000,301

 
5,725,236

Less: Allowance for loan losses
 
(41,397
)
 
(39,308
)
Net loans
 
5,958,904

 
5,685,928

Premises and equipment, net
 
86,274

 
88,072

Other real estate owned
 
595

 
1,725

Goodwill
 
339,929

 
323,943

Other intangible assets
 
9,057

 
10,664

Cash surrender value of bank-owned life insurance policies
 
127,000

 
125,233

Deferred tax assets, net
 
32,945

 
42,526

Other assets
 
103,825

 
64,926

Total assets
 
$
8,043,659

 
$
7,831,086

 
 
 
 
 
Liabilities
 
 

 
 

Demand deposits
 
$
1,050,220

 
$
1,081,860

NOW deposits
 
489,734

 
510,807

Money market deposits
 
1,415,041

 
1,408,107

Savings deposits
 
611,627

 
601,761

Time deposits
 
2,090,102

 
1,986,600

Total deposits
 
5,656,724

 
5,589,135

Short-term debt
 
1,110,320

 
1,071,200

Long-term Federal Home Loan Bank advances
 
120,844

 
103,135

Subordinated borrowings
 
89,072

 
88,983

Total borrowings
 
1,320,236

 
1,263,318

Other liabilities
 
143,279

 
91,444

Total liabilities
 
$
7,120,239

 
$
6,943,897

(continued)
 
 
 
Shareholders’ equity
 
 

 
 

Common stock ($.01 par value; 50,000,000 shares authorized and 32,321,962 shares issued and 31,156,292 shares outstanding in 2016; 32,321,962 shares issued and 30,973,986 shares outstanding in 2015)
 
322

 
322

Additional paid-in capital
 
744,810

 
742,619

Unearned compensation
 
(8,798
)
 
(6,997
)
Retained earnings
 
203,382

 
183,885

Accumulated other comprehensive income
 
10,213

 
(3,305
)
Treasury stock, at cost (1,056,739 shares in 2016 and 1,179,045 shares in 2015)
 
(26,509
)
 
(29,335
)
Total Shareholders’ equity
 
923,420

 
887,189

Total liabilities and Shareholders’ equity
 
$
8,043,659

 
$
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
June 30,
 
Six Months Ended
June 30,
(In thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
Interest and dividend income
 
 

 
 

 
 

 
 

Loans
 
$
59,703

 
$
51,504

 
$
118,145

 
$
95,949

Securities and other
 
9,315

 
8,899

 
19,349

 
17,205

Total interest and dividend income
 
69,018

 
60,403

 
137,494

 
113,154

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
7,378

 
5,292

 
14,537

 
10,241

Borrowings
 
4,199

 
2,474

 
7,819

 
4,783

Total interest expense
 
11,577

 
7,766

 
22,356

 
15,024

Net interest income
 
57,441

 
52,637

 
115,138

 
98,130

Non-interest income
 
 

 
 

 
 

 
 

Loan related income
 
2,898

 
2,783

 
5,944

 
4,066

Mortgage banking income
 
1,335

 
1,546

 
2,156

 
2,799

Deposit related fees
 
6,291

 
6,442

 
12,400

 
12,119

Insurance commissions and fees
 
2,660

 
2,486

 
5,553

 
5,453

Wealth management fees
 
2,235

 
2,397

 
4,737

 
5,000

Total fee income
 
15,419

 
15,654

 
30,790

 
29,437

Other
 
(851
)
 
(1,258
)
 
(628
)
 
(2,513
)
(Loss) gain on sale of securities, net
 
(13
)
 
2,384

 
23

 
2,418

Total non-interest income
 
14,555

 
16,780

 
30,185

 
29,342

Total net revenue
 
71,996

 
69,417

 
145,323

 
127,472

Provision for loan losses
 
4,522

 
4,204

 
8,528

 
8,055

Non-interest expense
 
 

 
 

 
 

 
 

Compensation and benefits
 
24,664

 
24,503

 
50,378

 
46,314

Occupancy and equipment
 
6,560

 
7,243

 
13,250

 
14,351

Technology and communications
 
4,814

 
4,090

 
9,671

 
7,683

Marketing and promotion
 
737

 
800

 
1,410

 
1,513

Professional services
 
1,509

 
1,375

 
2,789

 
2,647

FDIC premiums and assessments
 
1,203

 
1,143

 
2,436

 
2,272

Other real estate owned and foreclosures
 
393

 
251

 
656

 
502

Amortization of intangible assets
 
787

 
934

 
1,606

 
1,835

Acquisition, restructuring and conversion related expenses
 
878

 
8,711

 
1,658

 
13,132

Other
 
4,723

 
4,975

 
9,514

 
8,924

Total non-interest expense
 
46,268

 
54,025

 
93,368

 
99,173

 
 
 
 
 
 
 
 
 
Income before income taxes
 
21,206

 
11,188

 
43,427

 
20,244

Income tax expense
 
5,249

 
1,144

 
11,469

 
1,441

Net income
 
$
15,957

 
$
10,044

 
$
31,958

 
$
18,803

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.52

 
$
0.35

 
$
1.05

 
$
0.71

Diluted
 
$
0.52

 
$
0.35

 
$
1.04

 
$
0.70

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
30,605

 
28,301

 
30,561

 
26,557

Diluted
 
30,765

 
28,461

 
30,725

 
26,713

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

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Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Net income
 
$
15,957

 
$
10,044

 
$
31,958

 
$
18,803

Other comprehensive income, before tax:
 
 

 
 

 
 

 
 

Changes in unrealized gain on securities available-for-sale
 
9,586

 
(16,071
)
 
27,293

 
(6,734
)
Changes in unrealized loss on derivative hedges
 
(884
)
 
784

 
(5,390
)
 
(3,117
)
Changes in unrealized loss on pension
 

 
65

 

 
(1,466
)
Income taxes related to other comprehensive income:
 
 

 
 

 
 
 
 

Changes in unrealized gain on securities available-for-sale
 
(3,691
)
 
6,100

 
(10,548
)
 
2,495

Changes in unrealized loss on derivative hedges
 
355

 
(316
)
 
2,163

 
1,256

Changes in unrealized loss on pension
 

 
(26
)
 

 
591

Total other comprehensive income (loss)
 
5,366

 
(9,464
)
 
13,518

 
(6,975
)
Total comprehensive income
 
$
21,323

 
$
580

 
$
45,476

 
$
11,828

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


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Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Accumulated
other
 
 
 
 
 
 
Common stock
 
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
 

 

 

 

 
18,803

 

 

 
18,803

Other comprehensive loss
 

 

 

 

 

 
(6,975
)
 

 
(6,975
)
Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
11,828

Acquisition of Hampden Bancorp, Inc
 
4,186

 
42

 
114,562

 

 

 

 

 
114,604

Cash dividends declared ($0.38 per share)
 

 

 

 

 
(10,440
)
 

 

 
(10,440
)
Treasury stock purchased
 

 

 

 

 

 

 

 

Forfeited shares
 
(11
)
 

 
28

 
254

 

 

 
(282
)
 

Exercise of stock options
 
11

 

 

 

 
(165
)
 

 
281

 
116

Restricted stock grants
 
174

 

 
283

 
(4,579
)
 

 

 
4,296

 

Stock-based compensation
 

 

 

 
2,252

 

 

 

 
2,252

Net tax benefit related to stock-based compensation
 

 

 
26

 

 

 

 

 
26

Other, net
 
(22
)
 

 
5

 

 

 

 
(527
)
 
(522
)
Balance at June 30, 2015
 
29,521

 
$
307

 
$
700,193

 
$
(8,220
)
 
$
164,644

 
$
(396
)
 
$
(29,377
)
 
$
827,151

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
30,974

 
$
322

 
$
742,619

 
$
(6,997
)
 
$
183,885

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 

 

 

 

 
31,958

 

 

 
31,958

Other comprehensive income
 

 

 

 

 

 
13,518

 

 
13,518

Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
45,476

Acquisition of 44 Business Capital
 
45

 

 

 

 

 

 
1,217

 
1,217

Cash dividends declared ($0.40 per share)
 

 

 

 

 
(12,442
)
 

 

 
(12,442
)
Treasury stock adjustment (2)
 

 

 
1,645

 

 

 

 
(1,645
)
 

Forfeited shares
 
(22
)
 

 
68

 
526

 

 

 
(594
)
 

Exercise of stock options
 
2

 

 

 

 
(19
)
 

 
55

 
36

Restricted stock grants
 
180

 

 
496

 
(4,923
)
 

 

 
4,427

 

Stock-based compensation
 

 

 

 
2,596

 

 

 

 
2,596

Net tax benefit related to stock-based compensation
 

 

 
(1
)
 

 

 

 

 
(1
)
Other, net
 
(23
)
 

 
(17
)
 

 

 

 
(634
)
 
(651
)
June 30, 2016 (1)
 
31,156

 
$
322

 
$
744,810

 
$
(8,798
)
 
$
203,382

 
$
10,213

 
$
(26,509
)
 
$
923,420

(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.

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Table of Contents

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Six Months Ended
June 30,
(In thousands)
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net income
 
$
31,958

 
$
18,803

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

 
 

Provision for loan losses
 
8,528

 
8,055

Net amortization of securities
 
2,003

 
863

Change in unamortized net loan costs and premiums
 
(3,268
)
 
836

Premises and equipment depreciation and amortization expense
 
4,237

 
4,282

Stock-based compensation expense
 
2,596

 
2,252

Accretion of purchase accounting entries, net
 
(4,801
)
 
(3,071
)
Amortization of other intangibles
 
1,606

 
1,835

Write down of other real estate owned
 
365

 
75

Excess tax loss from stock-based payment arrangements
 
(105
)
 
(26
)
Income from cash surrender value of bank-owned life insurance policies
 
(2,025
)
 
(1,535
)
Gain on sales of securities, net
 
(23
)
 
(2,418
)
Net (increase) in loans held for sale
 
(9,259
)
 
(28,102
)
Loss on disposition of assets
 
15

 
2,084

Loss on sale of real estate
 
57

 
400

Amortization of interest in tax-advantaged projects
 
2,929

 
5,748

Net change in other
 
(5,134
)
 
(8,384
)
Net cash provided by operating activities
 
29,679

 
1,697

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Net decrease in trading security
 
296

 
282

Proceeds from sales of securities available for sale
 
187,519

 
22,504

Proceeds from maturities, calls and prepayments of securities available for sale
 
83,883

 
94,561

Purchases of securities available for sale
 
(164,943
)
 
(174,992
)
Proceeds from maturities, calls and prepayments of securities held to maturity
 
4,288

 
1,875

Purchases of securities held to maturity
 
(4,786
)
 
(45,520
)
Net change in loans
 
(250,002
)
 
(126,806
)
Proceeds from surrender of bank-owned life insurance
 
258

 
431

Proceeds from sale of Federal Home Loan Bank stock
 
11,578

 
163

Purchase of Federal Home Loan Bank stock
 
(8,803
)
 
(10,706
)
Net investment in limited partnership tax credits
 
(4,122
)
 
(2,500
)
Proceeds from the sale of premises and equipment
 
226

 
541

Purchase of premises and equipment, net
 
(2,839
)
 
(3,070
)
Acquisitions, net of cash (paid) acquired
 
(55,542
)
 
83,134

Proceeds from sale of other real estate
 
933

 
1,476

Net cash used in investing activities
 
(202,056
)
 
(158,627
)
(continued)

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Table of Contents

 
 
Six Months Ended
June 30,
(In thousands)
 
2016
 
2015
Cash flows from financing activities:
 
 

 
 

Net increase (decrease) in deposits
 
98,604

 
206,354

Proceeds from Federal Home Loan Bank advances and other borrowings
 
4,449,120

 
3,896,000

Repayments of Federal Home Loan Bank advances and other borrowings
 
(4,391,925
)
 
(3,801,362
)
Exercise of stock options
 
37

 
116

Excess tax loss from stock-based payment arrangements
 

 
26

Common stock cash dividends paid
 
(12,442
)
 
(10,440
)
Net cash provided by financing activities
 
143,394

 
290,694

 
 
 
 
 
Net change in cash and cash equivalents
 
(28,983
)
 
133,764

 
 
 
 
 
Cash and cash equivalents at beginning of year
 
103,562

 
71,754

 
 
 
 
 
Cash and cash equivalents at end of year
 
$
74,579

 
$
205,518

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid on deposits
 
$
14,573

 
$
10,290

Interest paid on borrowed funds
 
7,497

 
4,555

Income taxes paid, net
 
7,278

 
324

 
 
 
 
 
Acquisition of non-cash assets and liabilities:
 
 

 
 

Assets acquired
 
56,976

 
730,868

Liabilities assumed
 
(108
)
 
(611,601
)
 
 
 
 
 
Other non-cash changes:
 
 

 
 

Other net comprehensive income
 
13,518

 
(6,975
)
Real estate owned acquired in settlement of loans
 
225

 
460

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



9

Table of Contents


NOTE 1.           BASIS OF PRESENTATION

The consolidated financial statements (the “financial statements”) of Berkshire Hills Bancorp, Inc. and its subsidiaries (the “Company” or “Berkshire”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company is a Delaware corporation and the holding company for Berkshire Bank (the “Bank”), a Massachusetts-chartered trust company headquartered in Pittsfield, Massachusetts, and Berkshire Insurance Group, Inc. (“Berkshire Insurance Group” or “BIG”). These financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Bank’s consolidated subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless GAAP requires otherwise.

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. In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

Recently Adopted Accounting Principles
Effective January 1, 2016, the following new accounting guidance was adopted by the Company:
ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis;
ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs;
ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement; and
ASU No. 2015-16, Business Combinations (Topic 805) - Simplifying the Accounting for Measurement - Period Adjustments.

The adoption of these accounting standards did not have a material impact on the Company's 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. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016. The Company adopted ASU No. 2016-09 in April 2016 and the adoption of this accounting standard did not have a material impact on the Company's consolidated financial statements. The Company chose a modified retrospective approach and a policy election to account for forfeitures when they occur. This change resulted in a cumulative adjustment immaterial to all periods presented.

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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 August 2015, Accounting Standards Update No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”) was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. 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.

In March, April and May 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations,” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” respectfully. The updates are not intended to change the core principles of the standard; however, they attempt to clarify important aspects of the guidance and improve its operability. The amendments have the same effective date and transition requirements as the new revenue standard. 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 the Company's 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 Company's 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

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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 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 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 June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. The ASU requires companies to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Forward-looking information will now be used in credit loss estimates. The ASU requires enhanced disclosures to provide better understanding surrounding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s portfolio. These disclosures include qualitative

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and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Most debt instruments will require a cumulative-effect adjustment to retained earnings on the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted (modified retrospective approach). However, there is instrument-specific transition guidance. ASU No. 2016-13 is effective for interim and annual periods beginning after December 15, 2019. Early application will be permitted for interim and annual periods beginning after December 15, 2018. The Company is evaluating the provisions of ASU No. 2016-13, and will closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements.

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NOTE 2.     ACQUISITION

44 Business Capital
On April 29, 2016, the Company acquired and assumed the business model, certain assets, and certain liabilities of 44 Business Capital, along with certain loans and other assets of Parke Bank’s (“Parke”) SBA 7(a) loan program operations. 44 Business Capital was a joint venture of Parke (51%) and a management group (49%), 44 Amigos LLC, located in Blue Bell, Pennsylvania. 44 Business Capital was engaged in originating, servicing, and selling SBA loans using Parke’s SBA PLP preferred lender license.

The transaction includes acquiring assets, key people, systems, and processes necessary for a market participant to run operations as a business. In accordance with ASC 805-10-55, the transaction was recorded as a business combination, resulting in acquisition accounting in which all assets are acquired and liabilities are assumed at fair value.

The loans acquired by the Company were the unguaranteed portions of SBA loans of which $35.6 million were recorded as commercial real estate and $1.2 million were recorded as commercial & industrial. Servicing rights on a notional loan balance of $148 million were also acquired. The Company expects the acquisition to expand its SBA lending program on a super-regional and national basis with the intent of selling many of these loans on the secondary market. Additionally, the acquisition of 44 Business Capital expands the Company’s product lines, creates cross-selling opportunities, and adds niche lending to its portfolio. 44 Business Capital will operate as a direct small business lending division reporting up through the Company’s established small business department.

The following table provides a summary of the assets acquired and liabilities assumed and the associated fair value adjustments as recorded by the Company at acquisition:
(in thousands)
 
As Acquired
 
Fair Value Adjustments
 
 
 
As Recorded at Acquisition
Consideration paid:
 
 
 
 
 
 
 
 
Company common stock issued to certain 44 Business Capital shareholders (44,840 shares)
 
 
 
$
1,217

Cash paid to 44 Business Capital shareholders and Parke
 
 
 
55,649

Total consideration paid
 
 
 
$
56,866

Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value:
 
 
 
 
Cash and short-term investments
 
$
107

 
$

 
 
 
$
107

Loans
 
42,627

 
(5,777
)
 
(a)
 
36,850

Premises and equipment
 
69

 
(36
)
 
(b)
 
$
33

Other assets
 
3,076

 
639

 
(c)
 
3,715

Other liabilities
 
(108
)
 

 
 
 
$
(108
)
Total identifiable net assets
 
$
45,771

 
$
(5,174
)
 
 
 
$
40,597

 
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
 
 
$
16,269

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 book value of $6.3 million and have a fair value $2.6 million. Non-impaired loans accounted for under ASC 310-10 had a book value of $36.4 million and have a fair value of $34.3 million. ASC 310-30 loans have a $708 thousand fair value adjustment discount that is accretable in earnings over an average estimated six-year life using the effective yield as determined on the date of acquisition. The effective yield is periodically adjusted for changes in expected flows. ASC 310-10 loans have a $2.1 million fair value adjustment discount that is amortized into income over the remaining term of the loans using the effective interest method.
(b)
The fair value of the equipment was assumed to approximate the net carrying value based on overall condition and age. The adjustment represents the immediate expensing of equipment not meeting the thresholds for

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capitalization in accordance with Company policy. The recorded amount will be depreciated over the remaining estimated economic lives of the assets.
(c)
The adjustment represents the fair value write up of book value of the loan servicing right asset to its estimated fair value based on current interest rates and expected cash flows, which includes an estimate of cost of service and conditional prepayment rates applied to the underlying unpaid loan pool balance over the remaining life of the loans. The balance includes accrued interest of $221 thousand.

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. There was no carryover of the seller’s allowance for credit losses associated with the loans that were acquired in the acquisition as the loans were initially recorded at fair value.

Information about the acquired loan portfolio subject to ASC 310-30 as of April 29, 2016 is, as follows (in thousands):
 
ASC 310-30 Loans
Gross contractual receivable amounts at acquisition
$
6,265

Contractual cash flows not expected to be collected (nonaccretable discount)
(3,000
)
Expected cash flows at acquisition
3,265

Interest component of expected cash flows (accretable discount)
(708
)
Fair value of acquired loans
$
2,557


Goodwill capitalized, which is not amortized for book purposes, was assigned to the Company's banking reporting unit and is not deductible for tax purposes.

Direct acquisition and integration costs of the 44 Business Capital acquisition were expensed as incurred, and totaled $115 thousand during the six months ending June 30, 2016 and there were none for the same period of 2015. These costs totaled $21 thousand for the three months ended June 30, 2016 and there were none for the same period of 2015.

Pro Forma Information (unaudited)
The following table presents selected unaudited pro forma financial information reflecting the acquisition of 44 Business Capital assuming the acquisition was completed as of January 1, 2015. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the acquisitions. These adjustments would have been different if they had been recorded on January 1, 2015, and they do not include the impact of prepayments. 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 44 Business Capital 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 plus the 45 thousand shares issued as a result of the 44 Business Capital acquisition. The unaudited pro forma information is based on the actual financial statements of Berkshire and 44 Business Capital for the periods shown until the date of acquisition, at which time 44 Business Capital operations became included in Berkshire’s financial statements. For the period from the date of acquisition through June 30, 2016, 44 Business Capital's net revenue was $841 thousand and net income was $59 thousand.

The unaudited pro forma information, for the six months ended June 30, 2016 and 2015, set forth below reflects adjustments related to amortization and accretion of purchase accounting fair value adjustments and an estimated tax rate of 40 percent. Direct acquisition expenses incurred by the Company during 2016, as noted above, are reversed for the purposes of this unaudited pro forma information. The unaudited pro forma information does not include interest income from the unguaranteed portion of acquired loans. Furthermore, the unaudited pro forma

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information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur after June 30, 2016.

Information in the following table is shown in thousands, except earnings per share:
 
 
Pro Forma (unaudited)

 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
 
 
 
Net interest income
 
$
115,269

 
$
98,417

Non-interest income
 
32,338

 
31,650

Net income
 
32,652

 
19,417

 
 
 
 
 
Pro forma earnings per share:
 
 
 
 
Basic
 
$
1.07

 
$
0.73

Diluted
 
$
1.06

 
$
0.73



NOTE 3.           TRADING SECURITY
The Company holds a tax advantaged economic development bond accounted for at fair value. The security had an amortized cost of $11.7 million and $12.0 million, and a fair value of $14.5 million and $14.2 million, at June 30, 2016 and December 31, 2015, respectively. As discussed further in Note 13 - Derivative Financial Instruments and Hedging Activities, the Company has entered into a swap contract to swap-out the fixed rate of the security in exchange for a variable rate. The Company does not purchase securities with the intent of selling them in the near term, and there are no other securities in the trading portfolio at June 30, 2016.

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NOTE 4. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

The following is a summary of securities available for sale and held to maturity:
(In thousands)
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
June 30, 2016
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
103,645

 
$
7,945

 
$

 
$
111,590

Agency collateralized mortgage obligations
 
662,505

 
17,125

 
(124
)
 
679,506

Agency mortgage-backed securities
 
108,056

 
1,587

 
(30
)
 
109,613

Agency commercial mortgage-backed securities
 
62,352

 
899

 

 
63,251

Corporate bonds
 
46,874

 
196

 
(1,367
)
 
45,703

Trust preferred securities
 
11,599

 
192

 
(52
)
 
11,739

Other bonds and obligations
 
3,164

 
58

 

 
3,222

Total debt securities
 
998,195

 
28,002

 
(1,573
)
 
1,024,624

Marketable equity securities
 
42,470

 
7,557

 
(1,281
)
 
48,746

Total securities available for sale
 
1,040,665

 
35,559

 
(2,854
)
 
1,073,370

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
95,663

 
7,337

 

 
103,000

Agency collateralized mortgage obligations
 
67

 
8

 

 
75

Tax advantaged economic development bonds
 
35,954

 
2,189

 

 
38,143

Other bonds and obligations
 
326

 

 

 
326

Total securities held to maturity
 
132,010

 
9,534

 

 
141,544

 
 
 
 
 
 
 
 
 
Total
 
$
1,172,675

 
$
45,093

 
$
(2,854
)
 
$
1,214,914

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
99,922

 
$
4,763

 
$
(124
)
 
$
104,561

Agency collateralized mortgage obligations
 
833,633

 
4,957

 
(5,554
)
 
833,036

Agency mortgage-backed securities
 
127,274

 
542

 
(987
)
 
126,829

Agency commercial mortgage-backed securities
 

 

 

 

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

Agency collateralized mortgage obligations
 
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 June 30, 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
 
$

 
$

 
$
2,799

 
$
2,810

Over 1 year to 5 years
 
4,102

 
4,180

 
17,139

 
18,186

Over 5 years to 10 years
 
32,730

 
33,345

 
13,821

 
14,421

Over 10 years
 
128,450

 
134,729

 
98,184

 
106,052

Total bonds and obligations
 
165,282

 
172,254

 
131,943

 
141,469

 
 
 
 
 
 
 
 
 
Marketable equity securities
 
42,470

 
48,746

 

 

Mortgage-backed securities
 
832,913

 
852,370

 
67

 
75

Total
 
$
1,040,665

 
$
1,073,370

 
$
132,010

 
$
141,544


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Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
 
 
Less Than Twelve Months
 
Over Twelve Months
 
Total
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
 
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
(In thousands)
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
Value
June 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Agency collateralized mortgage obligations
 
$
4

 
$
8,824

 
$
120

 
$
14,854

 
$
124

 
$
23,678

Agency mortgage-backed securities
 
15

 
4,053

 
15

 
734

 
30

 
4,787

Corporate bonds
 
1,160

 
22,536

 
207

 
4,423

 
1,367

 
26,959

Trust preferred securities
 
52

 
1,204

 

 

 
52

 
1,204

Total debt securities
 
1,231

 
36,617

 
342

 
20,011

 
1,573

 
56,628

Marketable equity securities
 
203

 
3,851

 
1,078

 
7,063

 
1,281

 
10,914

Total securities available for sale
 
1,434

 
40,468

 
1,420

 
27,074

 
2,854

 
67,542

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
1,434

 
$
40,468

 
$
1,420

 
$
27,074

 
$
2,854

 
$
67,542

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
9

 
$
1,587

 
$
115

 
$
3,400

 
$
124

 
$
4,987

Agency collateralized mortgage obligations
 
2,958

 
304,907

 
2,596

 
136,988

 
5,554

 
441,895

Agency mortgage-backed securities
 
306

 
34,543

 
681

 
35,522

 
987

 
70,065

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