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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: September 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
 berkshirehillslogoa01.jpg 
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 31,173,020 shares of common stock, par value $0.01 per share, outstanding as of November 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
 
 
September 30,
2016

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

Assets
 
 

 
 

Cash and due from banks
 
$
61,107

 
$
72,918

Short-term investments
 
8,178

 
30,644

Total cash and cash equivalents
 
69,285

 
103,562

Trading security, at fair value
 
14,149

 
14,189

Securities available for sale, at fair value
 
946,853

 
1,154,457

Securities held to maturity (fair values of $139,358 and $136,904)
 
131,467

 
131,652

Federal Home Loan Bank stock and other restricted securities
 
61,277

 
71,018

Total securities
 
1,153,746

 
1,371,316

Loans held for sale
 
20,471

 
13,191

Commercial real estate
 
2,327,044

 
2,059,767

Commercial and industrial loans
 
994,874

 
1,048,263

Residential mortgages
 
1,818,111

 
1,815,035

Consumer loans
 
906,975

 
802,171

Total loans
 
6,047,004

 
5,725,236

Less: Allowance for loan losses
 
(43,105
)
 
(39,308
)
Net loans
 
6,003,899

 
5,685,928

Premises and equipment, net
 
85,794

 
88,072

Other real estate owned
 
80

 
1,725

Goodwill
 
339,975

 
323,943

Other intangible assets
 
8,308

 
10,664

Cash surrender value of bank-owned life insurance policies
 
127,880

 
125,233

Deferred tax assets, net
 
34,616

 
42,526

Other assets
 
87,107

 
64,926

Total assets
 
$
7,931,161

 
$
7,831,086

 
 
 
 
 
Liabilities
 
 

 
 

Demand deposits
 
$
1,113,733

 
$
1,081,860

NOW deposits
 
476,189

 
510,807

Money market deposits
 
1,469,075

 
1,408,107

Savings deposits
 
607,868

 
601,761

Time deposits
 
2,082,889

 
1,986,600

Total deposits
 
5,749,754

 
5,589,135

Short-term debt
 
939,800

 
1,071,200

Long-term Federal Home Loan Bank advances
 
109,114

 
103,135

Subordinated borrowings
 
89,116

 
88,983

Total borrowings
 
1,138,030

 
1,263,318

Other liabilities
 
110,784

 
91,444

Total liabilities
 
$
6,998,568

 
$
6,943,897

(continued)
 
 
 
Shareholders’ equity
 
 

 
 

Common stock ($.01 par value; 50,000,000 shares authorized and 32,321,962 shares issued and 31,121,676 shares outstanding in 2016; 32,321,962 shares issued and 30,973,986 shares outstanding in 2015)
 
322

 
322

Additional paid-in capital
 
747,844

 
742,619

Unearned compensation
 
(6,991
)
 
(6,997
)
Retained earnings
 
213,453

 
183,885

Accumulated other comprehensive income
 
8,411

 
(3,305
)
Treasury stock, at cost (1,200,286 shares in 2016 and 1,179,045 shares in 2015)
 
(30,446
)
 
(29,335
)
Total shareholders’ equity
 
932,593

 
887,189

Total liabilities and Shareholders’ equity
 
$
7,931,161

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

 
 

 
 

 
 

Loans
 
$
61,571

 
$
56,343

 
$
179,716

 
$
152,292

Securities and other
 
8,940

 
9,109

 
28,289

 
26,314

Total interest and dividend income
 
70,511

 
65,452

 
208,005

 
178,606

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
7,790

 
6,046

 
22,327

 
16,287

Borrowings
 
4,750

 
2,435

 
12,569

 
7,218

Total interest expense
 
12,540

 
8,481

 
34,896

 
23,505

Net interest income
 
57,971

 
56,971

 
173,109

 
155,101

Non-interest income
 
 

 
 

 
 

 
 

Loan related income
 
5,102

 
1,537

 
11,046

 
5,603

Mortgage banking income
 
1,862

 
693

 
4,018

 
3,492

Deposit related fees
 
6,278

 
6,549

 
18,678

 
18,668

Insurance commissions and fees
 
2,601

 
2,544

 
8,154

 
7,997

Wealth management fees
 
2,269

 
2,376

 
7,006

 
7,376

Total fee income
 
18,112

 
13,699

 
48,902

 
43,136

Other, net
 
188

 
(1,050
)
 
(440
)
 
(3,563
)
Gain on sale of securities, net
 
78

 
49

 
101

 
2,467

Gain on branch sales, net
 
563

 

 
563

 

Total non-interest income
 
18,941

 
12,698

 
49,126

 
42,040

Total net revenue
 
76,912

 
69,669

 
222,235

 
197,141

Provision for loan losses
 
4,734

 
4,240

 
13,262

 
12,295

Non-interest expense
 
 

 
 

 
 

 
 

Compensation and benefits
 
26,119

 
25,237

 
76,497

 
71,551

Occupancy and equipment
 
6,650

 
6,827

 
19,900

 
21,178

Technology and communications
 
4,902

 
4,645

 
14,573

 
12,328

Marketing and promotion
 
671

 
781

 
2,081

 
2,294

Professional services
 
1,744

 
1,053

 
4,533

 
3,700

FDIC premiums and assessments
 
1,208

 
1,157

 
3,644

 
3,429

Other real estate owned and foreclosures
 
46

 
298

 
702

 
800

Amortization of intangible assets
 
749

 
887

 
2,355

 
2,722

Acquisition, restructuring and conversion related expenses
 
2,170

 
3,361

 
3,828

 
16,493

Other
 
4,585

 
5,132

 
14,099

 
14,056

Total non-interest expense
 
48,844

 
49,378

 
142,212

 
148,551

 
 
 
 
 
 
 
 
 
Income before income taxes
 
23,334

 
16,051

 
66,761

 
36,295

Income tax expense
 
6,953

 
1,350

 
18,422

 
2,791

Net income
 
$
16,381

 
$
14,701

 
$
48,339

 
$
33,504

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.53

 
$
0.49

 
$
1.58

 
$
1.21

Diluted
 
$
0.53

 
$
0.49

 
$
1.57

 
$
1.20

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
30,621

 
29,893

 
30,584

 
27,685

Diluted
 
30,811

 
30,069

 
30,757

 
27,847

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
September 30,
 
Nine Months Ended
September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Net income
 
$
16,381

 
$
14,701

 
$
48,339

 
$
33,504

Other comprehensive income, before tax:
 
 

 
 

 
 

 
 

Changes in unrealized gain on securities available-for-sale
 
(5,654
)
 
8,207

 
21,639

 
1,474

Changes in unrealized loss on derivative hedges
 
2,730

 
(4,369
)
 
(2,660
)
 
(7,486
)
Changes in unrealized loss on pension
 

 
65

 

 
(1,402
)
Income taxes related to other comprehensive income:
 
 

 
 

 
 
 
 

Changes in unrealized gain on securities available-for-sale
 
2,218

 
(3,186
)
 
(8,330
)
 
(692
)
Changes in unrealized loss on derivative hedges
 
(1,096
)
 
1,761

 
1,067

 
3,017

Changes in unrealized loss on pension
 

 
(26
)
 

 
565

Total other comprehensive (loss) income
 
(1,802
)
 
2,452

 
11,716

 
(4,524
)
Total comprehensive income
 
$
14,579

 
$
17,153

 
$
60,055

 
$
28,980

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
 
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
 

 

 

 

 
33,504

 

 

 
33,504

Other comprehensive loss
 

 

 

 

 

 
(4,524
)
 

 
(4,524
)
Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
28,980

Acquisition of Hampden Bancorp, Inc
 
4,186

 
42

 
114,562

 

 

 

 

 
114,604

Acquisition of Firestone Financial
 
1,442

 
15

 
42,092

 

 

 

 

 
42,107

Cash dividends declared ($0.57 per share)
 

 

 

 

 
(16,016
)
 

 

 
(16,016
)
Treasury stock purchased
 

 

 

 

 

 

 

 

Forfeited shares
 
(19
)
 

 
42

 
479

 

 

 
(521
)
 

Exercise of stock options
 
11

 

 

 

 
(165
)
 

 
281

 
116

Restricted stock grants
 
182

 

 
316

 
(4,804
)
 

 

 
4,488

 

Stock-based compensation
 

 

 

 
3,378

 

 

 

 
3,378

Net tax benefit related to stock-based compensation
 

 

 
26

 

 

 

 

 
26

Other, net
 
(36
)
 

 
7

 

 

 

 
(921
)
 
(914
)
Balance at September 30, 2015
 
30,949

 
$
322

 
$
742,334

 
$
(7,094
)
 
$
173,769

 
$
2,055

 
$
(29,818
)
 
$
881,568

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
30,974

 
$
322

 
$
742,619

 
$
(6,997
)
 
$
183,885

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 

 

 

 

 
48,339

 

 

 
48,339

Other comprehensive income
 

 

 

 

 

 
11,716

 

 
11,716

Total comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
60,055

Acquisition of 44 Business Capital
 
45

 

 

 

 

 

 
1,217

 
1,217

Cash dividends declared ($0.60 per share)
 

 

 

 

 
(18,675
)
 

 

 
(18,675
)
Treasury stock adjustment (1)
 

 

 
4,632

 

 

 

 
(4,632
)
 

Forfeited shares
 
(63
)
 

 
106

 
1,592

 

 

 
(1,698
)
 

Exercise of stock options
 
9

 

 

 

 
(96
)
 

 
238

 
142

Restricted stock grants
 
185

 

 
504

 
(5,052
)
 

 

 
4,548

 

Stock-based compensation
 

 

 

 
3,466

 

 

 

 
3,466

Net tax benefit related to stock-based compensation
 

 

 
(1
)
 

 

 

 

 
(1
)
Other, net
 
(28
)
 

 
(16
)
 

 

 

 
(784
)
 
(800
)
Balance at September 30, 2016
 
31,122

 
$
322

 
$
747,844

 
$
(6,991
)
 
$
213,453

 
$
8,411

 
$
(30,446
)
 
$
932,593

(1) Treasury stock adjustment represents the extinguishment of 168,931 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
 
 
 
Nine Months Ended
September 30,
(In thousands)
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net income
 
$
48,339

 
$
33,504

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

 
 

Provision for loan losses
 
13,262

 
12,295

Net amortization of securities
 
3,476

 
2,282

Change in unamortized net loan costs and premiums
 
(3,825
)
 
(716
)
Premises and equipment depreciation and amortization expense
 
6,226

 
6,443

Stock-based compensation expense
 
3,466

 
3,377

Accretion of purchase accounting entries, net
 
(7,266
)
 
(6,383
)
Amortization of other intangibles
 
2,355

 
2,722

Write down of other real estate owned
 
395

 
480

Excess tax loss from stock-based payment arrangements
 
(105
)
 
(26
)
Income from cash surrender value of bank-owned life insurance policies
 
(2,905
)
 
(2,401
)
Gain on sales of securities, net
 
(101
)
 
(2,467
)
Net (increase) in loans held for sale
 
(7,280
)
 
(5,060
)
Loss on disposition of assets
 
32

 
2,208

Loss on sale of real estate
 
62

 
240

Amortization of interest in tax-advantaged projects
 
4,454

 
8,577

Net change in other
 
(1,089
)
 
(4,236
)
Net cash provided by operating activities
 
59,496

 
50,839

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Net decrease in trading security
 
446

 
424

Proceeds from sales of securities available for sale
 
283,755

 
24,389

Proceeds from maturities, calls and prepayments of securities available for sale
 
128,566

 
143,489

Purchases of securities available for sale
 
(186,392
)
 
(236,601
)
Proceeds from maturities, calls and prepayments of securities held to maturity
 
5,946

 
6,889

Purchases of securities held to maturity
 
(5,969
)
 
(62,074
)
Net change in loans
 
(284,440
)
 
(327,813
)
Purchases of bank owned life insurance
 

 
554

Proceeds from surrender of bank-owned life insurance
 
258

 

Proceeds from sale of Federal Home Loan Bank stock
 
18,544

 
306

Purchase of Federal Home Loan Bank stock
 
(8,803
)
 
(10,706
)
Net investment in limited partnership tax credits
 
(5,189
)
 
(2,500
)
Proceeds from the sale of premises and equipment
 
226

 
1,932

Purchase of premises and equipment, net
 
(4,314
)
 
(3,961
)
Acquisitions, net of cash (paid) acquired
 
(55,542
)
 
74,324

Proceeds from sale of other real estate
 
1,483

 
1,705

Net cash used in investing activities
 
$
(111,425
)
 
$
(389,643
)
(continued)

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Table of Contents

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

 
 

Net increase in deposits
 
161,114

 
393,762

Proceeds from Federal Home Loan Bank advances and other borrowings
 
7,264,120

 
6,441,300

Repayments of Federal Home Loan Bank advances and other borrowings
 
(7,389,048
)
 
(6,458,567
)
Exercise of stock options
 
141

 
116

Excess tax loss from stock-based payment arrangements
 

 
26

Common stock cash dividends paid
 
(18,675
)
 
(16,016
)
Net cash provided by financing activities
 
17,652

 
360,621

 
 
 
 
 
Net change in cash and cash equivalents
 
(34,277
)
 
21,817

 
 
 
 
 
Cash and cash equivalents at beginning of year
 
103,562

 
71,754

 
 
 
 
 
Cash and cash equivalents at end of year
 
$
69,285

 
$
93,571

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid on deposits
 
$
21,954

 
$
15,833

Interest paid on borrowed funds
 
12,166

 
7,069

Income taxes paid, net
 
10,995

 
1,125

 
 
 
 
 
Acquisition of non-cash assets and liabilities:
 
 

 
 

Assets acquired
 
56,976

 
948,796

Liabilities assumed
 
(109
)
 
(762,261
)
 
 
 
 
 
Other non-cash changes:
 
 

 
 

Other net comprehensive income (loss)
 
11,716

 
(4,524
)
Real estate owned acquired in settlement of loans
 
295

 
2,747

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 provisions of 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 does 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 or 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.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. The new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU No. 2016-15 is effective for interim and annual periods beginning after December 15, 2017. Early application will be permitted provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendment related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.


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NOTE 2.     ACQUISITION

44 Business Capital
On April 29, 2016, the Bank 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 acquired and liabilities are assumed at fair value.

The loans acquired by the Bank 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. It expands and diversifies the Company's fee revenue sources. 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 department reporting up through the Company’s established specialty lending division.

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 cash 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


Capitalized goodwill, which is not amortized for book purposes, was assigned to the Company.

Direct acquisition and integration costs of the 44 Business Capital acquisition were expensed as incurred, and totaled $164 thousand during the nine months ending September 30, 2016 and $124 thousand for the same period of 2015. These costs totaled $66 thousand for the three months ended September 30, 2016 and $124 thousand 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 September 30, 2016, 44 Business Capital's net revenue was $2.8 million and net income was $593 thousand which includes $164 thousand of acquisition expenses.

The unaudited pro forma information, for the nine months ended September 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. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition.

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Information in the following table is shown in thousands, except earnings per share:
 
 
Pro Forma (unaudited)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
 
 
 
Net interest income
 
$
173,421

 
$
156,812

Non-interest income
 
51,279

 
46,196

Net income
 
49,170

 
35,567

 
 
 
 
 
Pro forma earnings per share:
 
 
 
 
Basic
 
$
1.61

 
$
1.28

Diluted
 
$
1.60

 
$
1.28



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 $11.5 million and $12.0 million, and a fair value of $14.1 million and $14.2 million, at September 30, 2016 and December 31, 2015, respectively. As discussed further in Note 12 - Derivative Financial Instruments and Hedging Activities, the Company has entered into a swap contract to swap-out the fixed rate of the security in exchange for a variable rate. The Company does not purchase securities with the intent of selling them in the near term, and there are no other securities in the trading portfolio at September 30, 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
September 30, 2016
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
114,866

 
$
6,357

 
$
(97
)
 
$
121,126

Agency collateralized mortgage obligations
 
530,548

 
11,567

 
(118
)
 
541,997

Agency mortgage-backed securities
 
103,261

 
1,463

 
(54
)
 
104,670

Agency commercial mortgage-backed securities
 
61,673

 
627

 

 
62,300

Corporate bonds
 
46,869

 
359

 
(706
)
 
46,522

Trust preferred securities
 
11,584

 
275

 
(58
)
 
11,801

Other bonds and obligations
 
3,158

 
42

 

 
3,200

Total debt securities
 
871,959

 
20,690

 
(1,033
)
 
891,616

Marketable equity securities
 
47,825

 
9,148

 
(1,736
)
 
55,237

Total securities available for sale
 
919,784

 
29,838

 
(2,769
)
 
946,853

Securities held to maturity
 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
95,457

 
5,708

 

 
101,165

Agency collateralized mortgage obligations
 
66

 
7

 

 
73

Tax advantaged economic development bonds
 
35,619

 
2,176

 

 
37,795

Other bonds and obligations
 
325

 

 

 
325

Total securities held to maturity
 
131,467

 
7,891

 

 
139,358

 
 
 
 
 
 
 
 
 
Total
 
$
1,051,251

 
$
37,729

 
$
(2,769
)
 
$
1,086,211

 
 
 
 
 
 
 
 
 
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

 

 
(1,826
)
 
41,023

Trust preferred securities
 
11,719

 
182

 
(1
)
 
11,900

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 September 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
 
$

 
$

 
$
2,580

 
$
2,589

Over 1 year to 5 years
 
4,894

 
4,984

 
16,906

 
17,920

Over 5 years to 10 years
 
32,920

 
33,643

 
13,853

 
14,444

Over 10 years
 
138,663

 
144,022

 
98,062

 
104,332

Total bonds and obligations
 
176,477

 
182,649

 
131,401

 
139,285

 
 
 
 
 
 
 
 
 
Marketable equity securities
 
47,825

 
55,237

 

 

Mortgage-backed securities
 
695,482

 
708,967

 
66

 
73

Total
 
$
919,784

 
$
946,853

 
$
131,467

 
$
139,358


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

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Municipal bonds and obligations
 
$
97

 
$
12,160

 
$

 
$

 
$
97

 
$
12,160

Agency collateralized mortgage obligations
 
118

 
43,710

 

 

 
118

 
43,710

Agency mortgage-backed securities
 
30

 
12,901

 
24

 
1,349

 
54

 
14,250

Corporate bonds
 

 

 
706

 
19,998

 
706

 
19,998

Trust preferred securities
 

 

 
58

 
1,200

 
58

 
1,200

Total debt securities
 
245

 
68,771

 
788

 
22,547

 
1,033

 
91,318

Marketable equity securities
 
494

 
9,899

 
1,242

 
6,939

 
1,736

 
16,838

Total securities available for sale
 
739

 
78,670

 
2,030

 
29,486

 
2,769

 
108,156

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
739

 
$
78,670

 
$
2,030

 
$
29,486

 
$
2,769

 
$
108,156

 
 
 
 
 
 
 
 
 
 
 
 
 
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