BBT 10-Q Quarterly Report June 30, 2015 | Alphaminr
BERKSHIRE HILLS BANCORP INC
ALPHAMINR

BBT 10-Q Quarter ended June 30, 2015

Balance Sheet
Cash Flow
Income Statement
Debt
BERKSHIRE HILLS BANCORP INC
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10-Q 1 bhlb-2015630x10q.htm 10-Q BHLB Q2 2015 BHLB-2015.6.30-10Q
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, 2015
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 o Accelerated Filer ý 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 30,895,052 shares of common stock, par value $0.01 per share, outstanding as of August 7, 2015.


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

2



3

PART I
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2015
December 31,
2014
(In thousands, except share data)
Assets


Cash and due from banks
$
177,858

$
54,179

Short-term investments
27,660

17,575

Total cash and cash equivalents
205,518

71,754

Trading security
14,378

14,909

Securities available for sale, at fair value
1,204,756

1,091,818

Securities held to maturity (fair values of $87,512 and $44,997)
86,994

43,347

Federal Home Loan Bank stock and other restricted securities
73,212

55,720

Total securities
1,379,340

1,205,794

Loans held for sale
48,514

19,493

Residential mortgages
1,637,356

1,496,204

Commercial real estate
1,907,237

1,611,567

Commercial and industrial loans
921,190

804,366

Consumer loans
818,831

768,463

Total loans
5,284,614

4,680,600

Less: Allowance for loan losses
(37,197
)
(35,662
)
Net loans
5,247,417

4,644,938

Premises and equipment, net
87,519

87,279

Other real estate owned
674

2,049

Goodwill
308,043

264,742

Other intangible assets
12,473

11,528

Cash surrender value of bank-owned life insurance policies
123,536

104,588

Deferred tax assets, net
39,565

28,776

Other assets
66,148

61,090

Total assets
$
7,518,747

$
6,502,031

Liabilities


Demand deposits
$
1,012,003

$
869,302

NOW deposits
458,570

426,108

Money market deposits
1,477,770

1,407,179

Savings deposits
621,909

496,344

Time deposits
1,751,924

1,455,746

Total deposits
5,322,176

4,654,679

Short-term debt
1,058,001

900,900

Long-term Federal Home Loan Bank advances
118,483

61,676

Subordinated borrowings
89,782

89,747

Total borrowings
1,266,266

1,052,323

Other liabilities
103,154

85,742

Total liabilities
6,691,596

5,792,744

Stockholders’ equity


Common stock ($.01 par value; 50,000,000 shares authorized and 30,879,974 shares issued and 29,521,482 shares outstanding in 2015; 26,525,466 shares issued and 25,182,566 shares outstanding in 2014)
307

265

Additional paid-in capital
700,193

585,289

Unearned compensation
(8,220
)
(6,147
)
Retained earnings
164,644

156,446

Accumulated other comprehensive income (loss)
(396
)
6,579

Treasury stock, at cost (1,189,561 shares in 2015 and 1,342,900 shares in 2014)
(29,377
)
(33,145
)
Total stockholders’ equity
827,151

709,287

Total liabilities and stockholders’ equity
$
7,518,747

$
6,502,031

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

4

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INOMCE
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands, except per share data)
2015
2014
2015
2014
Interest and dividend income




Loans
$
51,504

$
42,309

$
95,949

$
84,803

Securities and other
8,899

8,866

17,205

16,167

Total interest and dividend income
60,403

51,175

113,154

100,970

Interest expense




Deposits
5,292

4,478

10,241

9,199

Borrowings
2,474

2,368

4,783

4,676

Total interest expense
7,766

6,846

15,024

13,875

Net interest income
52,637

44,329

98,130

87,095

Non-interest income




Loan related income
2,783

1,846

4,066

3,094

Mortgage banking income
1,546

691

2,799

1,063

Deposit related fees
6,442

6,610

12,119

12,049

Insurance commissions and fees
2,486

2,460

5,453

5,509

Wealth management fees
2,397

2,294

5,000

4,843

Total fee income
15,654

13,901

29,437

26,558

Other
(1,258
)
402

(2,513
)
926

Gain on sale of securities, net
2,384

203

2,418

237

Loss on termination of hedges
—

—

—

(8,792
)
Total non-interest income
16,780

14,506

29,342

18,929

Total net revenue
69,417

58,835

127,472

106,024

Provision for loan losses
4,204

3,989

8,055

7,385

Non-interest expense




Compensation and benefits
24,503

20,279

46,314

40,138

Occupancy and equipment
7,243

6,656

14,351

13,470

Technology and communications
4,090

3,800

7,683

7,578

Marketing and promotion
800

621

1,513

1,142

Professional services
1,375

1,024

2,647

2,176

FDIC premiums and assessments
1,143

1,029

2,272

2,038

Other real estate owned and foreclosures
251

33

502

556

Amortization of intangible assets
934

1,274

1,835

2,580

Acquisition, restructuring and conversion related expenses
8,711

190

13,132

6,491

Other
4,975

4,357

8,924

8,454

Total non-interest expense
54,025

39,263

99,173

84,623

Income before income taxes
11,188

15,583

20,244

14,016

Income tax expense
1,144

4,119

1,441

3,658

Net income
$
10,044

$
11,464

$
18,803

$
10,358

Earnings per share:




Basic
$
0.35

$
0.46

$
0.71

$
0.42

Diluted
$
0.35

$
0.46

$
0.70

$
0.42

Weighted average common shares outstanding:




Basic
28,301

24,715

26,557

24,707

Diluted
28,461

24,809

26,713

24,821

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

5

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)
2015
2014
2015
2014
Net income
$
10,044

$
11,464

$
18,803

$
10,358

Other comprehensive income, before tax:




Changes in unrealized gain on securities available-for-sale
(16,071
)
11,113

(6,734
)
17,133

Changes in unrealized loss on derivative hedges
784

(3,267
)
(3,117
)
1,266

Changes in unrealized gain on terminated swaps
—

—

—

3,237

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
6,100

(4,261
)
2,495

(6,481
)
Changes in unrealized loss on derivative hedges
(316
)
1,322

1,256

(510
)
Changes in unrealized gain on terminated swaps
—

—

—

(1,312
)
Changes in unrealized loss on pension
(26
)
—

591

—

Total other comprehensive (loss) income
(9,464
)
4,907

(6,975
)
13,333

Total comprehensive income
$
580

$
16,371

$
11,828

$
23,691

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


6

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ 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, 2013
25,036

$
265

$
587,247

$
(5,563
)
$
141,958

$
(9,057
)
$
(36,788
)
$
678,062

Comprehensive income:








Net income
—

—

—

—

10,358

—

—

10,358

Other comprehensive income
—

—

—

—

—

13,333

—

13,333

Total comprehensive income







23,691

Cash dividends declared ($0.36 per share)
—

—

—

—

(9,122
)
—

—

(9,122
)
Treasury stock purchased
(100
)
—

—

—

—

—

(2,467
)
(2,467
)
Forfeited shares
(7
)
—

(6
)
156

—

—

(150
)
—

Exercise of stock options
72

—

—

—

(945
)
—

1,793

848

Restricted stock grants
130

—

44

(3,264
)
—

—

3,220

—

Stock-based compensation
—

—

41

1,783

—

—

—

1,824

Net tax benefit related to stock-based compensation
—

—

(1,980
)
—

—

—

—

(1,980
)
Other, net
(16
)
—

(6
)
—

—

—

(387
)
(393
)
Balance at June 30, 2014
25,115

$
265

$
585,340

$
(6,888
)
$
142,249

$
4,276

$
(34,779
)
$
690,463

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. (1)
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

(1) The Company's common stock includes the elimination of $4.6 million of Berkshire Hills Bancorp stock held by a subsidiary.

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


7

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
(In thousands)
2015
2014
Cash flows from operating activities:


Net income (loss)
$
18,803

$
10,358

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


Provision for loan losses
8,055

7,385

Net amortization of securities
863

1,008

Change in unamortized net loan costs and premiums
836

(1,008
)
Premises and equipment depreciation and amortization expense
4,282

4,037

Stock-based compensation expense
2,252

1,824

Accretion of purchase accounting entries, net
(3,071
)
(3,479
)
Amortization of other intangibles
1,835

2,580

Write down of other real estate owned
75

160

Excess tax loss from stock-based payment arrangements
(26
)
(93
)
Income from cash surrender value of bank-owned life insurance policies
(1,535
)
(1,458
)
Gain on sales of securities, net
(2,418
)
(237
)
Net (increase) decrease in loans held for sale
(28,102
)
(4,345
)
Loss on disposition of assets
2,084

715

Loss on sale of real estate
400

170

Loss on termination of hedges
—

3,237

Amortization of interest in tax-advantaged projects
5,748

825

Net change in other
(8,384
)
3,143

Net cash provided by operating activities
1,697

24,822

Cash flows from investing activities:


Net decrease in trading security
282

268

Proceeds from sales of securities available for sale
22,504

79,550

Proceeds from maturities, calls and prepayments of securities available for sale
94,561

68,342

Purchases of securities available for sale
(174,992
)
(447,063
)
Proceeds from maturities, calls and prepayments of securities held to maturity
1,875

2,764

Purchases of securities held to maturity
(45,520
)
(1,021
)
Net change in loans
(126,806
)
(268,616
)
Purchases of bank owned life insurance
431

—

Proceeds from sale of Federal Home Loan Bank stock
163

379

Purchase of Federal Home Loan Bank stock
(10,706
)
(9,576
)
Net investment in limited partnership tax credits
(2,500
)
(2,884
)
Proceeds from the sale of premises and equipment
541

1,756

Purchase of premises and equipment, net
(3,070
)
(4,302
)
Acquisitions, net of cash paid
83,134

423,416

Proceeds from sale of other real estate
1,476

799

Net cash (used in) provided by investing activities
(158,627
)
(156,188
)
(continued)



8

Six Months Ended
June 30,
(In thousands)
2015
2014
Cash flows from financing activities:


Net increase (decrease) in deposits
206,354

189,568

Proceeds from Federal Home Loan Bank advances and other borrowings
3,896,000

2,935,035

Repayments of Federal Home Loan Bank advances and other borrowings
(3,801,362
)
(2,945,250
)
Purchase of treasury stock
—

(2,467
)
Exercise of stock options
116

848

Excess tax loss from stock-based payment arrangements
26

93

Common stock cash dividends paid
(10,440
)
(9,122
)
Net cash provided (used) by financing activities
290,694

168,705

Net change in cash and cash equivalents
133,764

37,339

Cash and cash equivalents at beginning of year
71,754

75,539

Cash and cash equivalents at end of year
$
205,518

$
112,878

Supplemental cash flow information:


Interest paid on deposits
$
10,290

$
9,177

Interest paid on borrowed funds
4,555

5,533

Income taxes paid, net
324

71

Acquisition of non-cash assets and liabilities:


Assets acquired
730,868

18,064

Liabilities assumed
(611,601
)
(441,550
)
Other non-cash changes:


Other net comprehensive income
(6,975
)
10,096

Real estate owned acquired in settlement of loans
460

816

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



9


NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and contain all adjustments, consisting solely of normal, recurring adjustments, necessary for a fair presentation of results for such periods.
In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to U.S. GAAP have been omitted.
The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for Berkshire Hills Bancorp, Inc. (the “Company”) previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current presentation.
Recently Adopted Accounting Standards

In January 2014, the Financial Accounting Standard Board “FASB” issued Accounting Standard Updated “ASU” ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” ASU No. 2014-01 permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU No. 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that use the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The Company has elected not to adopt the proportional amortization method, which had no impact on our consolidated financial statements.

Also in January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The Company adopted the provisions of ASU No. 2014-04 effective January 1, 2015, which did not have a material effect on our consolidated financial statements. See Note 6. Loan Loss Allowance to the Consolidated Financial Statements for the disclosures required by ASU No. 2014-04.

In June 2014, the FASB issued ASU No. 2014-11 related to repurchase-to-maturity transactions, repurchase financing and disclosures. The pronouncement changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The pronouncement also requires two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The pronouncement is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is not permitted. As of March 31, 2015, the Company did not have any repurchase transactions, and therefore the adoption of this pronouncement did not have an impact on our consolidated financial statements.


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In August 2014, the FASB issued ASU No. 2014-14 related to classification of certain government-guaranteed mortgage loans upon foreclosure. The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The pronouncement is effective for interim and annual reporting periods beginning after December 15, 2014. The Company adopted the provisions of ASU No. 2014-14 effective January 1, 2015, which did not have a material effect on our consolidated financial statements.

Future Application of Accounting Pronouncements

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

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this pronouncement is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this pronouncement is not expected to have a material impact on our consolidated financial statements.

NOTE 2. BANK ACQUISITION
Hampden Bancorp, Inc.

On April 17, 2015, the Company acquired all of the outstanding common shares of Hampden Bancorp, Inc. (“Hampden”). Hampden, as a holding company, had one banking subsidiary (“Hampden Bank”) that had ten branches primarily serving western

11

Massachusetts. As a result of the transaction, Hampden merged into Berkshire Hills Bancorp, and Hampden Bank merged into Berkshire Bank. This business combination increases Berkshire’s market share in its franchise and the goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to Hampden’s operations.

On the acquisition date, Hampden had 5.167 million outstanding common shares, net of 209 thousand shares held by Berkshire Bank. Hampden shareholders received 4.186 million Berkshire common shares based on an exchange ratio of 0.81 shares of Berkshire common stock for each Hampden share. The merger qualifies as a reorganization for federal income tax purposes, and as a result, Hampden common shares exchanged for Berkshire common shares are transferred on a tax-free basis. The 4.355 million shares of Berkshire common stock issued in this exchange were valued at $27.38 per share based on the closing price of Berkshire posted on April 17, 2015. Excluding the 169 thousand shares issued to Berkshire Bank, this resulted in a consideration value of $114.6 million . The Hampden shares held by Berkshire Bank were valued at $4.6 million , and the value in excess of the carrying value was recorded as a $2.2 million non-recurring securities gain in the statement of income.

The results of Hampden’s operations are included in the Company's Consolidated Statement of Income from the date of acquisition. The assets and liabilities in the Hampden acquisition were recorded at their fair value based on management’s best estimate using information available as of the date of acquisition.  Consideration paid, and fair values of Hampden’s assets acquired and liabilities assumed, along with the resulting goodwill, are summarized in the following tables:


Fair Value
As Recorded at
(in thousands)
As Acquired
Adjustments
Acquisition
Consideration paid:
Berkshire Hills Bancorp common stock issued to Hampden common stockholders
$
114,604

Fair value of Hampden shares previously owned by the Company prior to acquisition
4,632

Total consideration paid
$
119,236

Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value:
Cash and short-term investments
$
83,134

$
—

$
83,134

Investment securities
72,439

(224
)
(a)
72,215

Loans
501,870

(8,101
)
(b)
493,769

Premises and equipment
4,449

775

(c)
5,224

Core deposit intangibles
—

2,780

(d)
2,780

Deferred tax assets, net
3,875

3,091

(e)
6,966

Other assets
22,919

560

(f)
23,479

Deposits
(482,130
)
(1,439
)
(g)
(483,569
)
Borrowings
(117,135
)
(2,380
)
(h)
(119,515
)
Other liabilities
(8,395
)
(124
)
(i)
(8,519
)
Total identifiable net assets
$
81,026

$
(5,062
)
$
75,964

Goodwill
$
43,272


Explanation of Certain Fair Value Adjustments
(a)
The adjustment represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition.
(b)
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 $28.5 million and have a fair value $16.7 million . Non-impaired loans accounted for under ASC 310-10 had a book value of $473.4 million and have a fair value of $ 477.1 million . ASC 310-30 loans have a $4.0 million fair value adjustment discount that is accretable in earnings over an estimated five 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

12

have a $0.4 million fair value adjustment premium that is amortized into expense over the remaining term of the loans using the effective interest method, or a straight-line method if the loan is a revolving credit facility.
(c)  The amount represents the adjustment of the book value of buildings and equipment, to their estimated fair value based on appraisals and other methods. The adjustments will be depreciated over the estimated economic lives of the assets.
(d) The adjustment represents the value of the core deposit base assumed in the acquisition.  The core deposit asset was recorded as an identifiable intangible asset and will be amortized using a straight-line method over the average life of the deposit base, which is estimated to be nine years.
(e)   Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.
(f)
The amount consists of a $0.2 million fair value adjustment to write-down other real estate owned based on market report data, a $0.3 million write-down of mortgage servicing assets acquired based on valuation reports, a $0.5 million write-off of prepaid assets due to obsolescence, and a $1.6 million measurement period adjustment increase to current taxes receivable. These adjustments are not accretable into earnings in the statement of income.
(g) The adjustment is necessary because the weighted average interest rate of time deposits exceeded the cost of similar funding at the time of acquisition. The amount will be amortized using an accelerated method over the estimated useful life of two years.
(h)  Adjusts borrowings to their estimated fair value, which is calculated based on the amount of prepayment penalties that would be incurred if the borrowings were exited with the Federal Home Loan Bank of Boston on the date of acquisition.
(i)   Adjusts the book value of other liabilities to their estimated fair value at the acquisition date. The adjustment consists of a $0.4 million write-off of deferred revenue, a $0.3 million increase to post-retirement liabilities due to change-in-control provisions, and a $0.2 million increase related to non-level leases.

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

Information about the acquired loan portfolio subject to ASC 310-30 as of April 17, 2015 is, as follows (in thousands):

ASC 310-30 Loans
Gross contractual receivable amounts at acquisition
$
28,505

Contractual cash flows not expected to be collected (nonaccretable discount)
(7,884
)
Expected cash flows at acquisition
20,621

Interest component of expected cash flows (accretable discount)
(3,950
)
Fair value of acquired loans
$
16,671

The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is not deductible for tax purposes.
The fair value of savings and transaction deposit accounts acquired in the Hampden acquisition was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

Direct acquisition and integration costs of the Hampden acquisition were expensed as incurred, and totaled $8.0 million during the six months ending June 30, 2015 and there were $0 million for the same period of 2014.

The Company has determined it is impractical to report the amounts of revenue and earnings of the acquired entity since the acquisition date. Due to the integration of its operations with those of the organization, the Company does not record revenue

13

and earnings separately for these operations. The revenue and earnings of these operations are included in the consolidated statement of income.

The following table presents selected unaudited pro forma financial information reflecting the acquisition assuming it was completed as of January 1, 2014. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the time of the merger. These adjustments would have been different if they had been recorded on January 1, 2014, 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 Hampden 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 4.2 million shares issued as a result of the Hampden acquisition. The unaudited pro forma information is based on the actual financial statements of Berkshire and Hampden for the periods shown until the date of acquisition, at which time the Hampden operations became included in Berkshire’s financial statements.

The unaudited pro forma information, for the six months ended June 30, 2015 and 2014, set forth below reflects adjustments related to (a) amortization and accretion of purchase accounting fair value adjustments; (b) amortization of core deposit intangible; and (c) an estimated tax rate of 40.5 percent . Direct acquisition expenses incurred by Berkshire during 2015 as noted above, and $7.7 million recorded by Hampden are reversed for the purposes of this unaudited pro forma information. Also excluded during 2015, was a $2.2 million gain on Hampden stock that was held by Berkshire at the time of acquisition. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur after June 30, 2015.

Information in the following table is shown in thousands, except earnings per share:
Pro Forma (unaudited)
Six Months Ended June 30,
2015
2014
Net interest income
$
105,076

$
98,639

Non-interest income
28,010

20,708

Net income
22,244

13,435

Pro forma earnings per share:
Basic
$
0.77

$
0.46

Diluted
$
0.76

$
0.46




NOTE 3. TRADING SECURITY
The Company holds a tax advantaged economic development bond that is being accounted for at fair value. The security had an amortized cost of $12.3 million and $12.6 million , and a fair value of $14.4 million and $14.9 million , at June 30, 2015 and December 31, 2014 , 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, 2015 .

14

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, 2015




Securities available for sale




Debt securities:




Municipal bonds and obligations
$
147,779

$
4,226

$
(1,704
)
$
150,301

Government-guaranteed residential mortgage-backed securities
61,533

511

(177
)
61,867

Government-sponsored residential mortgage-backed securities
886,974

7,005

(4,281
)
889,698

Corporate bonds
51,651

137

(1,030
)
50,758

Trust preferred securities
12,747

590

(72
)
13,265

Other bonds and obligations
3,197

—

(30
)
3,167

Total debt securities
1,163,881

12,469

(7,294
)
1,169,056

Marketable equity securities
31,616

5,998

(1,914
)
35,700

Total securities available for sale
1,195,497

18,467

(9,208
)
1,204,756

Securities held to maturity




Municipal bonds and obligations
49,343

25

(992
)
48,376

Government-sponsored residential mortgage-backed securities
69

3

—

72

Tax advantaged economic development bonds
37,251

1,509

(27
)
38,733

Other bonds and obligations
331

—

—

331

Total securities held to maturity
86,994

1,537

(1,019
)
87,512

Total
$
1,282,491

$
20,004

$
(10,227
)
$
1,292,268

December 31, 2014




Securities available for sale




Debt securities:




Municipal bonds and obligations
$
127,014

$
6,859

$
(174
)
$
133,699

Government-guaranteed residential mortgage-backed securities
68,972

702

(206
)
69,468

Government-sponsored residential mortgage-backed securities
755,893

7,421

(3,130
)
760,184

Corporate bonds
55,134

120

(1,103
)
54,151

Trust preferred securities
16,607

820

(1,212
)
16,215

Other bonds and obligations
3,211

—

(52
)
3,159

Total debt securities
1,026,831

15,922

(5,877
)
1,036,876

Marketable equity securities
48,993

7,322

(1,373
)
54,942

Total securities available for sale
1,075,824

23,244

(7,250
)
1,091,818

Securities held to maturity




Municipal bonds and obligations
4,997

—

—

4,997

Government-sponsored residential mortgage-backed securities
70

4

—

74

Tax advantaged economic development bonds
37,948

1,680

(34
)
39,594

Other bonds and obligations
332

—

—

332

Total securities held to maturity
43,347

1,684

(34
)
44,997

Total
$
1,119,171

$
24,928

$
(7,284
)
$
1,136,815


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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, 2015 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
$
31,405

$
30,472

$
4,320

$
4,320

Over 1 year to 5 years
1,255

1,270

18,924

19,751

Over 5 years to 10 years
12,364

12,590

12,904

13,066

Over 10 years
170,350

173,159

50,777

50,303

Total bonds and obligations
215,374

217,491

86,925

87,440

Marketable equity securities
31,616

35,700

—

—

Residential mortgage-backed securities
948,507

951,565

69

72

Total
$
1,195,497

$
1,204,756

$
86,994

$
87,512


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, 2015






Securities available for sale






Debt securities:






Municipal bonds and obligations
$
618

$
11,657

$
1,086

$
30,986

$
1,704

$
42,643

Government-guaranteed residential mortgage-backed securities
128

12,773

49

14,035

177

26,808

Government-sponsored residential mortgage-backed securities
3,297

180,831

984

122,864

4,281

303,695

Corporate bonds
—

—

1,030

36,158

1,030

36,158

Trust preferred securities
—

—

72

928

72

928

Other bonds and obligations
30

3,025

—

—

30

3,025

Total debt securities
4,073

208,286

3,221

204,971

7,294

413,257

Marketable equity securities
1,871

8,972

43

299

1,914

9,271

Total securities available for sale
5,944

217,258

3,264

205,270

9,208

422,528

Securities held to maturity






Municipal bonds and obligations
176

4,880

816

30,981

992

35,861

Tax advantaged economic development bonds
27

7,847

—

—

27

7,847

Total securities held to maturity
203

12,727

816

30,981

1,019

43,708

Total
$
6,147

$
229,985

$
4,080

$
236,251

$
10,227

$
466,236


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December 31, 2014






Securities available for sale






Debt securities:






Municipal bonds and obligations
$
8

$
1,001

$
166

$
7,206

$
174

$
8,207

Government guaranteed residential mortgage-backed securities
46

7,122

160

16,727

206

23,849

Government-sponsored residential mortgage-backed securities
236

30,672

2,894

167,473

3,130

198,145

Corporate bonds
1,103

39,571

—

—

1,103

39,571

Trust preferred securities
65

935

1,147

2,408

1,212

3,343

Other bonds and obligations
—

—

52

3,035

52

3,035

Total debt securities
1,458

79,301

4,419

196,849

5,877

276,150

Marketable equity securities
1,039

9,902

334

4,755

1,373

14,657

Total securities available for sale
2,497

89,203

4,753

201,604

7,250

290,807

Securities held to maturity






Tax advantaged economic development bonds
—

—

34

7,972

34

7,972

Total securities held to maturity
—

—

34

7,972

34

7,972

Total
$
2,497

$
89,203

$
4,787

$
209,576

$
7,284

$
298,779

Debt Securities
The Company expects to recover its amortized cost basis on all debt securities in its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of June 30, 2015 , prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover. The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS and HTM portfolios were not other-than-temporarily impaired at June 30, 2015 :
AFS municipal bonds and obligations
At June 30, 2015 , 41 of the total 186 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.8% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market.  At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk.  There were no material underlying credit downgrades during the quarter.  All securities are performing.
AFS residential mortgage-backed securities
At June 30, 2015 , 86 out of the total 253 securities in the Company’s portfolios of AFS residential mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 1.2% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association (“GNMA”) guarantee the contractual cash flows of all of the Company’s residential mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.
AFS corporate bonds
At June 30, 2015 , 3 out of 5 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 2.8% of the amortized cost of bonds in unrealized loss positions.  The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.  None of the bonds are investment grade rated.

17

At June 30, 2015 , $0.9 million of the total unrealized losses was attributable to a $31.4 million investment.  The Company evaluated this security, with a Level 2 fair value of $30.5 million , for potential other-than-temporary impairment (“OTTI”) at June 30, 2015 and determined that OTTI was not evident based on both the Company’s ability and intent to hold the security until the recovery of its remaining amortized cost.
AFS trust preferred securities
At June 30, 2015 , 1 out of the 4 securities in the Company’s portfolio of AFS trust preferred securities was in an unrealized loss position. Aggregate unrealized losses represented 7.2% of the amortized cost of the security in an unrealized loss position. The Company’s evaluation of the present value of expected cash flows on this security supports its conclusions about the recoverability of the securities’ amortized cost basis. This security is investment grade rated.  The Company reviews the financial strength of all of the single issue trust issuers and has concluded that the amortized cost remains supported by the market value of these securities and they are performing.
AFS other bonds and obligations
At June 30, 2015 , 4 of the total 8 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.9% of the amortized cost of securities in unrealized loss positions. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.
Marketable Equity Securities
In evaluating its marketable equity securities portfolio for OTTI, the Company considers its ability to more likely than not hold an equity security to recovery.  The Company additionally considers other various factors including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer.  Any OTTI is recognized immediately through earnings.
At June 30, 2015 , 4 out of the total 24 securities in the Company’s portfolio of marketable equity securities were in an unrealized loss position. The unrealized loss represented 17.1% of the amortized cost of the securities. The Company has the ability and intent to hold the securities until recovery of their cost basis and does not consider the securities other-than-temporarily impaired at June 30, 2015 .  As new information becomes available in future periods, changes to the Company’s assumptions may be warranted and could lead to a different conclusion regarding the OTTI of these securities.
Securities Held to Maturity
HTM Municipal bonds and obligations
At June 30, 2015 , 30 of the total 77 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 2.7% of the amortized cost of securities in unrealized loss positions. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

NOTE 5. LOANS
The Company’s loan portfolio is segregated into the following segments: residential mortgage, commercial real estate, commercial and industrial, and consumer. Residential mortgage loans include classes for 1-4 family owner occupied and construction loans.  Commercial real estate loans include construction, single and multi-family, and other commercial real estate classes.  Commercial and industrial loans include asset based lending loans, lease financing and other commercial business loan classes.  Consumer loans include home equity, direct and indirect auto, and other.  These portfolio segments each have unique risk characteristics that are considered when determining the appropriate level for the allowance for loan losses.
A substantial portion of the loan portfolio is secured by real estate in western Massachusetts, southern Vermont, northeastern New York, and in the Bank’s other New England lending areas. The ability of many of the Bank’s borrowers to honor their contracts is dependent, among other things, on the specific economy and real estate markets of these areas.
Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from Hampden Bancorp, Inc., the New York branch acquisition, Beacon Federal Bancorp, Inc., The Connecticut Bank and Trust Company, Legacy Bancorp, Inc., and Rome Bancorp, Inc. The following is a summary of total loans:

18

June 30, 2015
December 31, 2014
(In thousands)
Business
Activities Loans
Acquired
Loans
Total
Business
Activities Loans
Acquired
Loans
Total
Residential mortgages:






1-4 family
$
1,238,456

$
366,046

$
1,604,502

$
1,199,408

$
268,734

$
1,468,142

Construction
30,247

2,607

32,854

27,044

1,018

28,062

Total residential mortgages
1,268,703

368,653

1,637,356

1,226,452

269,752

1,496,204

Commercial real estate:






Construction
181,157

44,230

225,387

169,189

4,201

173,390

Single and multi-family
149,716

47,950

197,666

140,050

53,168

193,218

Other commercial real estate
1,105,381

378,803

1,484,184

1,030,837

214,122

1,244,959

Total commercial real estate
1,436,254

470,983

1,907,237

1,340,076

271,491

1,611,567

Commercial and industrial loans:






Asset based lending
339,331

—

339,331

341,246

—

341,246

Other commercial and industrial loans
490,594

91,265

581,859

411,945

51,175

463,120

Total commercial and industrial loans
829,925

91,265

921,190

753,191

51,175

804,366

Total commercial loans
2,266,179

562,248

2,828,427

2,093,267

322,666

2,415,933

Consumer loans:






Home equity
294,878

56,275

351,153

252,681

65,951

318,632

Auto and other
315,500

152,178

467,678

346,480

103,351

449,831

Total consumer loans
610,378

208,453

818,831

599,161

169,302

768,463

Total loans
$
4,145,260

$
1,139,354

$
5,284,614

$
3,918,880

$
761,720

$
4,680,600

The carrying amount of the acquired loans at June 30, 2015 totaled $1.1 billion .  A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $24.9 million (and a note balance of $45.2 ). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans that were considered not impaired at the acquisition date had a carrying amount of $1.1 billion .
The carrying amount of the acquired loans at December 31, 2014 totaled $762 million . A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $13.8 million (and a note balance of $25.8 ). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans that were considered not impaired at the acquisition date had a carrying amount of $747.9 million .
The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.

19

Three Months Ended June 30,
(In thousands)
2015
2014
Balance at beginning of period
$
3,431

$
3,154

Acquisitions
4,178

—

Sales
—

—

Reclassification form nonaccretable difference for loans with improved cash flows
405

39

Change in cash flows that do not affect nonaccretable difference
—

(149
)
Accretion
(1,474
)
(604
)
Balance at end of period
$
6,540

$
2,440

Six Months Ended June 30,
(In thousands)
2015
2014
Balance at beginning of period
$
2,541

$
2,559

Acquisitions
4,178

—

Sales
—

—

Reclassification form nonaccretable difference for loans with improved cash flows
1,736

1,579

Change in cash flows that do not affect nonaccretable difference
—

(149
)
Accretion
(1,915
)
(1,549
)
Balance at end of period
$
6,540

$
2,440


20


The following is a summary of past due loans at June 30, 2015 and December 31, 2014 :
Business Activities Loans
(in thousands)
30-59 Days
Past Due
60-89 Days
Past Due
90
Days or Greater Past
Due
Total Past
Due
Current
Total Loans
Past Due >
90 days and
Accruing
June 30, 2015







Residential mortgages:







1-4 family
$
1,915

$
1,073

$
3,777

$
6,765

$
1,231,691

$
1,238,456

$
913

Construction
—

—

—

—

30,247

30,247

—

Total
1,915

1,073

3,777

6,765

1,261,938

1,268,703

913

Commercial real estate:







Construction
—

—

199

199

180,958

181,157

—

Single and multi-family
135

260

262

657

149,059

149,716

187

Other commercial real estate
993

1,819

6,896

9,708

1,095,673

1,105,381

442

Total
1,128

2,079

7,357

10,564

1,425,690

1,436,254

629

Commercial and industrial loans:







Asset based lending
—

—

—

—

339,331

339,331

—

Other commercial and industrial loans
355

438

2,447

3,240

487,354

490,594

—

Total
355

438

2,447

3,240

826,685

829,925

—

Consumer loans:







Home equity
60

—

2,623

2,683

292,195

294,878

1,194

Auto and other
928

120

293

1,341

314,159

315,500

2

Total
988

120

2,916

4,024

606,354

610,378

1,196

Total
$
4,386

$
3,710

$
16,497

$
24,593

$
4,120,667

$
4,145,260

$
2,738


Business Activities Loans
(in thousands)
30-59 Days
Past Due
60-89 Days
Past Due
90
Days or Greater Past
Due
Total Past
Due
Current
Total Loans
Past Due >
90 days and
Accruing
December 31, 2014







Residential mortgages:







1-4 family
$
5,580

$
146

$
4,053

$
9,779

$
1,189,629

$
1,199,408

$
1,527

Construction
666

410

—

1,076

25,968

27,044

—

Total
6,246

556

4,053

10,855

1,215,597

1,226,452

1,527

Commercial real estate:







Construction
—

2,000

720

2,720

166,469

169,189

—

Single and multi-family
178

156

458

792

139,258

140,050

—

Other commercial real estate
692

705

9,383

10,780

1,020,057

1,030,837

621

Total
870

2,861

10,561

14,292

1,325,784

1,340,076

621

Commercial and industrial loans:







Asset based lending
—

—

—

—

341,246

341,246

—

Other commercial and industrial loans
1,040

498

856

2,394

409,551

411,945

6

Total
1,040

498

856

2,394

750,797

753,191

6

Consumer loans:







Home equity
333

1,000

1,387

2,720

249,961

252,681

230

Auto and other
831

65

315

1,211

345,269

346,480

10

Total
1,164

1,065

1,702

3,931

595,230

599,161

240

Total
$
9,320

$
4,980

$
17,172

$
31,472

$
3,887,408

$
3,918,880

$
2,394


21

Acquired Loans
(in thousands)
30-59 Days
Past Due
60-89 Days
Past Due
90
Days or Greater Past
Due
Total Past
Due
Acquired
Credit
Impaired
Total Loans
Past Due >
90 days and
Accruing
June 30, 2015







Residential mortgages:







1-4 family
$
1,622

$
514

$
1,787

$
3,923

$
2,615

$
366,046

$
417

Construction
—

—

—

—

—

2,607

—

Total
1,622

514

1,787

3,923

2,615

368,653

417

Commercial real estate:







Construction
—

—

664

664

3,289

44,230

—

Single and multi-family
310

—

158

468

1,798

47,950

—

Other commercial real estate
445

—

2,786

3,231

15,179

378,803

603

Total
755

—

3,608

4,363

20,266

470,983

603

Commercial and industrial loans:







Asset based lending
—

—

—

—

—

—

—

Other commercial and industrial loans
1,323

50

584

1,957

1,711

91,265

—

Total
1,323

50

584

1,957

1,711

91,265

—

Consumer loans:







Home equity
78

41

939

1,058

113

56,275

212

Auto and other
661

825

544

2,030

153

152,178

—

Total
739

866

1,483

3,088

266

208,453

212

Total
$
4,439

$
1,430

$
7,462

$
13,331

$
24,858

$
1,139,354

$
1,232


Acquired Loans
(in thousands)
30-59 Days
Past Due
60-89 Days
Past Due
90
Days or Greater Past
Due
Total Past
Due
Acquired
Credit
Impaired
Total Loans
Past Due >
90 days and
Accruing
December 31, 2014







Residential mortgages:







1-4 family
$
1,133

$
638

$
1,651

$
3,422

$
375

$
268,734

$
269

Construction
—

—

—

—

—

1,018

—

Total
1,133

638

1,651

3,422

375

269,752

269

Commercial real estate:



—




Construction
—

—

691

691

1,296

4,201

—

Single and multi-family
277

—

572

849

5,477

53,168

—

Other commercial real estate
—

715

2,004

2,719

5,504

214,122

329

Total
277

715

3,267

4,259

12,277

271,491

329

Commercial and industrial loans:







Asset based lending
—

—

—

—

—

—

—

Other commercial and industrial loans
202

32

855

1,089

986

51,175

—

Total
202

32

855

1,089

986

51,175

—

Consumer loans:







Home equity
176

95

1,049

1,320

171

65,951

466

Auto and other
1,170

944

1,363

3,477

—

103,351

194

Total
1,346

1,039

2,412

4,797

171

169,302

660

Total
$
2,958

$
2,424

$
8,185

$
13,567

$
13,809

$
761,720

$
1,258


22

The following is summary information pertaining to non-accrual loans at June 30, 2015 and December 31, 2014 :
June 30, 2015
December 31, 2014
(In thousands)
Business
Activities Loans
Acquired
Loans (1)
Total
Business
Activities Loans
Acquired
Loans (2)
Total
Residential mortgages:






1-4 family
$
2,864

$
1,370

$
4,234

$
2,526

$
1,382

$
3,908

Construction
—

—

—

—

—

—

Total
2,864

1,370

4,234

2,526

1,382

3,908

Commercial real estate:






Construction
199

—

199

720

—

720

Single and multi-family
75

158

233

458

141

599

Other commercial real estate
6,454

2,183

8,637

8,762

1,675

10,437

Total
6,728

2,341

9,069

9,940

1,816

11,756

Commercial and industrial loans:






Other commercial and industrial loans
2,447

547

2,994

850

811

1,661

Total
2,447

547

2,994

850

811

1,661

Consumer loans:






Home equity
1,429

728

2,157

1,157

583

1,740

Auto and other
291

543

834

305

1,169

1,474

Total
1,720

1,271

2,991

1,462

1,752

3,214

Total non-accrual loans
$
13,759

$
5,529

$
19,288

$
14,778

$
5,761

$
20,539

_______________________________________
(1)  At quarter end June 30, 2015 , acquired credit impaired loans accounted for $0.7 million of non-accrual loans that are not presented in the above table.
(2)  At December 31, 2014 , acquired credit impaired loans accounted for $1.2 million of non-accrual loans that are not presented in the above table.

Loans evaluated for impairment as of June 30, 2015 and December 31, 2014 were as follows:
Business Activities Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Total
June 30, 2015





Loans receivable:





Balance at end of period





Individually evaluated for impairment
$
2,926

$
19,100

$
8,410

$
605

$
31,041

Collectively evaluated
1,265,777

1,417,154

821,515

609,773

4,114,219

Total
$
1,268,703

$
1,436,254

$
829,925

$
610,378

$
4,145,260


23

Business Activities Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Total
December 31, 2014





Loans receivable:





Balance at end of year





Individually evaluated for impairment
$
3,238

$
22,015

$
743

$
452

$
26,448

Collectively evaluated for impairment
1,223,214

1,318,061

752,448

598,709

3,892,432

Total
$
1,226,452

$
1,340,076

$
753,191

$
599,161

$
3,918,880

Acquired Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Total
June 30, 2015





Loans receivable:





Balance at end of Period





Individually evaluated for impairment
$
743

$
7,338

$
33

$
320

$
8,434

Collectively evaluated
367,910

463,645

91,232

208,133

1,130,920

Total
$
368,653

$
470,983

$
91,265

$
208,453

$
1,139,354

Acquired Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Total
December 31, 2014





Loans receivable:





Balance at end of year





Individually evaluated for impairment
$
695

$
5,637

$
39

$
199

$
6,570

Collectively evaluated for impairment
269,057

265,854

51,136

169,103

755,150

Total
$
269,752

$
271,491

$
51,175

$
169,302

$
761,720


24

The following is a summary of impaired loans at June 30, 2015 :
Business Activities Loans
June 30, 2015
(In thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Residential mortgages - 1-4 family
$
2,043

$
2,043

$
—

Commercial real estate - construction
2,140

2,140

—

Commercial real estate - single and multifamily
—

—

—

Other commercial real estate loans
15,958

15,958

—

Other commercial and industrial loans
6,669

6,669

—

Consumer - home equity
493

493

—

Consumer - other
112

112

—

With an allowance recorded:



Residential mortgages - 1-4 family
$
796

$
883

$
87

Commercial real estate - construction
—

—

—

Commercial real estate - single and multifamily
—

—

—

Other commercial real estate loans
973

1,003

30

Other commercial and industrial loans
35

1,741

1,706

Consumer - home equity
—

—

—

Total



Residential mortgages
$
2,839

$
2,926

$
87

Commercial real estate
19,071

19,101

30

Commercial and industrial loans
6,704

8,410

1,706

Consumer
605

605

—

Total impaired loans
$
29,219

$
31,042

$
1,823


















25

Acquired Loans
June 30, 2015
(In thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Residential mortgages - 1-4 family
$
442

$
442

$
—

Commercial real estate - construction
664

664

—

Commercial real estate - single and multifamily
—

—

—

Other commercial real estate loans
1,915

1,915

—

Other commercial and industrial loans
33

33

—

Consumer - home equity
320

320

—

With an allowance recorded:



Residential mortgages - 1-4 family
$
262

$
301

$
39

Commercial real estate - construction
—

—

—

Commercial real estate - single and multifamily
2,807

2,847

40

Other commercial real estate loans
1,786

1,912

126

Consumer - home equity
—

—

—

Total



Residential mortgages
$
704

$
743

$
39

Commercial real estate
7,172

7,338

166

Commercial and industrial loans
33

33

—

Consumer
320

320

—

Total impaired loans
$
8,229

$
8,434

$
205





















26

The following is a summary of impaired loans at December 31, 2014 :
Business Activities Loans
December 31, 2014
(In thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Residential mortgages - 1-4 family
$
2,528

$
2,528

$
—

Commercial real estate - construction
16,990

16,990

—

Commercial real estate - single and multifamily
—

—

—

Other commercial real estate loans
102

102

—

Other commercial and industrial loans
743

743

—

Consumer - home equity
87

87

—

Consumer - other
—

—

—

With an allowance recorded:



Residential mortgages - 1-4 family
$
555

$
710

$
155

Commercial real estate - construction
3,511

4,431

920

Commercial real estate - single and multifamily
490

492

2

Other commercial real estate loans
—

—

—

Other commercial and industrial loans
—

—

—

Consumer - home equity
194

248

54

Consumer - other
105

117

12

Total



Residential mortgages
$
3,083

$
3,238

$
155

Commercial real estate
21,093

22,015

922

Commercial and industrial loans
743

743

—

Consumer
386

452

66

Total impaired loans
$
25,305

$
26,448

$
1,143

Acquired Loans
December 31, 2014
(In thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Residential mortgages - 1-4 family
$
189

$
189

$
—

Other commercial real estate loans
5,206

5,206

—

Other commercial and industrial loans
39

39

—

Consumer - home equity
—

—

—

With an allowance recorded:



Residential mortgages - 1-4 family
$
458

$
506

$
48

Other commercial real estate loans
383

431

48

Consumer - home equity
124

199

75

Total



Residential mortgages
$
647

$
695

$
48

Other commercial real estate loans
5,589

5,637

48

Other commercial and industrial loans
39

39

—

Consumer - home equity
124

199

75

Total impaired loans
$
6,399

$
6,570

$
171


27

The following is a summary of the average recorded investment and interest income recognized on impaired loans as of June 30, 2015 and 2014 :
Business Activities Loans
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
(in thousands)
Average Recorded
Investment
Cash Basis Interest
Income Recognized
Average Recorded
Investment
Cash Basis Interest
Income Recognized
With no related allowance:




Residential mortgages - 1-4 family
$
2,281

$
41

$
4,661

$
99

Commercial real estate - construction
2,466

1

—

—

Commercial real estate - single and multifamily
120

—

17,308

312

Other commercial real estate loans
12,734

170

2,397

—

Commercial and industrial loans
1,447

3

583

14

Consumer - home equity
360

1

300

3

Consumer - other
114

2

123

2

With an allowance recorded:




Residential mortgages - 1-4 family
$
764

$
17

$
482

$
3

Commercial real estate - construction
—

—

—

—

Commercial real estate - single and multifamily
—

—

2,858

—

Other commercial real estate loans
6,629

92

—

—

Commercial and industrial loans
329

2

2,055

44

Consumer - home equity
—

—

—

—

Total




Residential mortgages
$
3,045

$
58

$
5,143

$
102

Commercial real estate
21,949

263

22,563

312

Commercial and industrial loans
1,776

5

2,638

58

Consumer loans
474

3

423

5

Total impaired loans
$
27,244

$
329

$
30,767

$
477



















28


Acquired Loans
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
(in thousands)
Average Recorded
Investment
Cash Basis Interest
Income Recognized
Average Recorded
Investment
Cash Basis Interest
Income Recognized
With no related allowance:




Residential mortgages - 1-4 family
$
569

$
2

$
930

$
5

Commercial real estate - construction
664

60

—

—

Commercial real estate - single and multifamily
254

—

—

—

Other commercial real estate loans
1,977

3

4,392

51

Other commercial and industrial loans
51

3

537

8

Consumer - home equity
355

6

51

—

Consumer - other
—

—

—

—

With an allowance recorded:




Residential mortgages - 1-4 family
$
310

$
5

$
363

$
1

Commercial real estate - single and multifamily
2,872

63

—

—

Other commercial real estate loans
845

59

1,489

55

Other commercial and industrial loans
—

—

68

3

Total




Residential mortgages
$
879

$
7

$
1,293

$
6

Other commercial real estate loans
6,612

185

5,881

106

Commercial and industrial loans
51

3

605

11

Consumer loans
355

6

51

—

Total impaired loans
$
7,897

$
201

$
7,830

$
123

Troubled Debt Restructuring Loans
The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months .  TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.
The following tables include the recorded investment and number of modifications identified during the three and six months ended June 30, 2015 and for the three and six months ended June 30, 2014, respectively.  The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. The modifications for the three and six months ending June 30, 2015 were attributable to interest rate concessions, maturity date extensions and modified payment terms.  The modifications for the three and six months ending June 30, 2014 were attributable to concessions granted as ordered by bankruptcy court, interest rate concessions and maturity date extensions.
Three Months Ended June 30, 2015
(Dollars in thousands)
Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings



Commercial - Construction
1

$
1,877

$
1,877

Commercial - Other
1

1,694

1,694

Commercial and industrial - Other
4

8,159

8,159

Total
6

$
11,730

$
11,730



29

Six Months Ended June 30, 2015
(Dollars in thousands)
Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings



Commercial - Construction
1

$
2,000

$
2,000

Commercial - Other
2

1,694

1,694

Commercial and industrial - Other
5

8,192

8,192

Total
8

$
11,886

$
11,886

Three Months Ended June 30, 2014
(Dollars in thousands)
Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings



Residential - 1-4 Family
2

$
247

$
247

Commercial - single and multifamily
1

623

623

Commercial - other
6

4,804

4,804

Total
9

$
5,674

$
5,674

Six Months Ended June 30, 2014
(Dollars in thousands)
Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings



Residential - 1-4 Family
3

$
369

$
366

Commercial - single and multifamily
1

623

623

Commercial - other
6

4,804

4,804

Total
10

$
5,796

$
5,793


The following table discloses the recorded investment and number of modifications for TDRs within the last three and six months where a concession has been made, that then defaulted in the respective reporting period.
Modifications that Subsequently Defaulted
Three Months Ended June 30, 2015
Number of Contracts
Recorded Investment
Troubled Debt Restructurings


Commercial - Other
1

$
668

Modifications that Subsequently Defaulted
Six Months Ended June 30, 2015
Number of Contracts
Recorded Investment
Troubled Debt Restructurings


Commercial - Other
1

$
649

Modifications that Subsequently Defaulted
Three Months Ended June 30, 2014
Number of Contracts
Recorded Investment
Troubled Debt Restructurings


Commercial - Other
2

$
158


30

Modifications that Subsequently Defaulted
Six Months Ended June 30, 2014
Number of Contracts
Recorded Investment
Troubled Debt Restructurings


Commercial - Other
2

$
158


The following table presents the Company’s TDR activity for the three and six months ended June 30, 2015 and 2014 :
Three Months Ended June 30,
(In thousands)
2015
2014
Balance at beginning of the period
$
17,204

$
10,112

Principal payments
(607
)
(88
)
TDR status change (1)
—

(589
)
Other reductions/increases (2)
(611
)
4

Newly identified TDRs
9,730

5,674

Balance at end of the period
$
25,716

$
15,113

Six Months Ended June 30,
(In thousands)
2015
2014
Balance at beginning of the period
$
16,714

$
10,822

Principal payments
(1,091
)
(960
)
TDR status change (1)
—

(641
)
Other reductions/increases (2)
(1,793
)
99

Newly identified TDRs
11,886

5,793

Balance at end of the period
$
25,716

$
15,113

_______________________________________
(1) TDR status change classification represents TDR loans with a specified interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk and  the loan was on current payment status and not impaired based on the terms specified by the restructuring agreement.
(2) Other reductions classification consists of transfer to other real estate owned and charge-offs and advances to loans.
The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.
As of June 30, 2015 , the Company maintained foreclosed residential real estate property with a fair value of $119 thousand . Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure totaled $5.3 million . As of December 31, 2014 , foreclosed residential real estate property totaled $1.3 million .

NOTE 6.               LOAN LOSS ALLOWANCE
Activity in the allowance for loan losses for the six months ended June 30, 2015 and 2014 was as follows:

31

Business Activities Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Unallocated
Total
June 30, 2015






Balance at beginning of period
$
6,836

$
14,690

$
5,206

$
5,928

$
135

$
32,795

Charged-off loans
446

4,422

372

462

—

5,702

Recoveries on charged-off loans
113

146

154

127

—

540

Provision/(releases) for loan losses
(32
)
2,553

4,178

(679
)
(427
)
5,593

Balance at end of period
$
6,471

$
12,967

$
9,166

$
4,914

$
(292
)
$
33,226

Individually evaluated for impairment
87

30

1,706

—

—

1,823

Collectively evaluated
6,384

12,937

7,460

4,914

(292
)
31,403

Total
$
6,471

$
12,967

$
9,166

$
4,914

$
(292
)
$
33,226

Business Activities Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Unallocated
Total
June 30, 2014






Balance at beginning of period
$
6,937

$
13,705

$
5,173

$
3,644

$
68

$
29,527

Charged-off loans
1,159

1,645

1,426

571

—

4,801

Recoveries on charged-off loans
64

6

22

177

—

269

Provision/(releases) for loan losses
(299
)
2,389

1,396

1,597

143

5,226

Balance at end of period
$
5,543

$
14,455

$
5,165

$
4,847

$
211

$
30,221

Individually evaluated for impairment
57

712

475

—

—

1,244

Collectively evaluated
5,486

13,743

4,690

4,847

211

28,977

Total
$
5,543

$
14,455

$
5,165

$
4,847

$
211

$
30,221

Acquired Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Unallocated
Total
June 30, 2015






Balance at beginning of period
$
615

$
790

$
1,093

$
369

$
—

$
2,867

Charged-off loans
375

587

336

608

—

1,906

Recoveries on charged-off loans
41

395

56

56

—

548

Provision for loan losses
527

1,188

160

587

—

2,462

Balance at end of period
$
808

$
1,786

$
973

$
404

$
—

$
3,971

Individually evaluated for impairment
39

166

—

—

—

205

Collectively evaluated
769

1,620

973

404

—

3,766

Total
$
808

$
1,786

$
973

$
404

$
—

$
3,971


32

Acquired Loans
(In thousands)
Residential
mortgages
Commercial
real estate
Commercial and
industrial loans
Consumer
Unallocated
Total
June 30, 2014






Balance at beginning of period
$
625

$
2,339

$
597

$
235

$
—

$
3,796

Charged-off loans
723

495

176

638

—

2,032

Recoveries on charged-off loans
161

1

24

23

—

209

Provision for loan losses
599

246

624

690

—

2,159

Balance at end of period
$
662

$
2,091

$
1,069

$
310

$
—

$
4,132

Individually evaluated for impairment
60

306

20

—

—

386

Collectively evaluated
602

1,785

1,049

310

—

3,746

Total
$
662

$
2,091

$
1,069

$
310

$
—

$
4,132

Credit Quality Information
Business Activities Loans Credit Quality Analysis
The Company monitors the credit quality of its portfolio by using internal risk ratings that are based on regulatory guidance. Loans that are given a Pass rating are not considered a problem credit. Loans that are classified as Special Mention loans are considered to have potential credit problems and are evaluated closely by management. Substandard and non-accruing loans are loans for which a definitive weakness has been identified and which may make full collection of contractual cash flows questionable. Doubtful loans are those with identified weaknesses that make full collection of contractual cash flows, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The Company assigns an internal risk rating at origination and reviews the rating annually, semiannually or quarterly depending on the risk rating. The rating is also reassessed at any point in time when management becomes aware of information that may affect the borrower’s ability to fulfill their obligations.
The Company risk rates its residential mortgages, including 1-4 family and residential construction loans, based on a three rating system: Pass, Special Mention and Substandard.  Loans that are current within 59 days are rated Pass.  Residential mortgages that are 60 - 89 days delinquent are rated Special Mention. Loans delinquent for 90 days or greater are rated Substandard and generally placed on non-accrual status.  Home equity loans are risk rated based on the same rating system as the Company’s residential mortgages.
Ratings for other consumer loans, including auto loans, are based on a two rating system. Loans that are current within 119 days are rated Performing while loans delinquent for 120 days or more are rated Non-performing. Other consumer loans are placed on non-accrual at such time as they become Non-performing.
Acquired Loans Credit Quality Analysis
Upon acquiring a loan portfolio, our internal loan review function assigns risk ratings to the acquired loans, utilizing the same methodology as it does with business activities loans.  This may differ from the risk rating policy of the predecessor bank.  Loans which are rated Substandard or worse according to the rating process outlined below are deemed to be credit impaired loans accounted for under ASC 310-30, regardless of whether they are classified as performing or non-performing.
The Bank utilizes an eleven grade internal loan rating system for each of its acquired commercial real estate, construction and commercial loans as outlined in the Credit Quality Information section of this Note.  The Company risk rates its residential mortgages, including 1-4 family and residential construction loans, based on a three rating system: Pass, Special Mention and Substandard.  Residential mortgages that are current within 59 days are rated Pass.  Residential mortgages that are 60 — 89 days delinquent are rated Special Mention.  Residential mortgages delinquent for 90 days or greater are rated Substandard.  Home equity loans are risk rated based on the same rating system as the Company’s residential mortgages.  Other consumer loans are rated based on a two rating system.  Other consumer loans that are current within 119 days are rated Performing while loans delinquent for 120 days or more are rated Non-performing. Non-performing other consumer loans are deemed to be credit impaired loans accounted for under ASC 310-30.
The Company subjects loans that do not meet the ASC 310-30 criteria to ASC 450-20 by collectively evaluating these loans for an allowance for loan loss.  The Company applies a methodology similar to the methodology prescribed for business activities loans, which includes the application of environmental factors to each category of loans.  The methodology to collectively evaluate the acquired loans outside the scope of ASC 310-30 includes the application of a number of environmental factors that reflect management’s best estimate of the level of incremental credit losses that might be recognized given current conditions.  This is reviewed as part of the allowance for loan loss adequacy analysis.  As the loan portfolio matures and environmental factors change, the loan portfolio will be reassessed each quarter to determine an appropriate reserve allowance.

33

Additionally, the Company considers the need for an additional reserve for acquired loans accounted for outside of the scope of ASC 310-30 under ASC 310-20. At acquisition date, the Bank determined a fair value mark with credit and interest rate components.  Under the Company’s model, the impairment evaluation process involves comparing the carrying value of acquired loans, including the entire unamortized premium or discount, to the recorded reserve allowance. If necessary, the Company books an additional reserve to account for shortfalls identified through this calculation.  Fair value marks are not bifurcated when evaluating for impairment.
A decrease in the expected cash flows in subsequent periods requires the establishment of an allowance for loan losses at that time for ASC 310-30 loans.  At June 30, 2015, the allowance for loan losses related to acquired loans was $4.0 million using the above mentioned criteria.
The Company presented several tables within this footnote separately for business activity loans and acquired loans in order to distinguish the credit performance of the acquired loans from the business activity loans.
The following table presents the Company’s loans by risk rating at June 30, 2015 and December 31, 2014:
Business Activities Loans
Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
1-4 family
Construction
Total residential mortgages
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Grade:






Pass
$
1,233,607

$
1,195,209

$
30,247

$
26,634

$
1,263,854

$
1,221,843

Special mention
1,073

146

—

410

1,073

556

Substandard
3,776

4,053

—

—

3,776

4,053

Total
$
1,238,456

$
1,199,408

$
30,247

$
27,044

$
1,268,703

$
1,226,452

Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
Construction
Single and multi-family
Other
Total commercial real estate
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Grade:








Pass
$
178,785

$
166,295

$
146,780

$
137,533

$
1,048,171

$
959,836

$
1,373,736

$
1,263,664

Special mention
—

—

769

—

5,432

6,933

6,201

6,933

Substandard
2,372

2,894

2,167

2,517

51,705

63,995

56,244

69,406

Doubtful
—

—

—

—

73

73

73

73

Total
$
181,157

$
169,189

$
149,716

$
140,050

$
1,105,381

$
1,030,837

$
1,436,254

$
1,340,076

Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
Asset based lending
Other
Total comm. and industrial loans
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Grade:






Pass
$
339,331

$
341,246

$
456,713

$
404,846

$
796,044

$
746,092

Special mention
—

—

20,047

560

20,047

560

Substandard
—

—

13,834

6,539

13,834

6,539

Total
$
339,331

$
341,246

$
490,594

$
411,945

$
829,925

$
753,191




34

Consumer Loans
Credit Risk Profile Based on Payment Activity
Home equity
Auto and other
Total consumer loans
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Performing
$
293,449

$
251,524

$
315,209

$
346,175

$
608,658

$
597,699

Nonperforming
1,429

1,157

291

305

1,720

1,462

Total
$
294,878

$
252,681

$
315,500

$
346,480

$
610,378

$
599,161

Acquired Loans
Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
1-4 family
Construction
Total residential mortgages
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Grade:






Pass
$
362,389

$
266,445

$
2,607

$
1,018

$
364,996

$
267,463

Special mention
631

638

—

—

631

638

Substandard
3,026

1,651

—

—

3,026

1,651

Total
$
366,046

$
268,734

$
2,607

$
1,018

$
368,653

$
269,752

Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
Construction
Single and multi-family
Other
Total commercial real estate
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Grade:








Pass
$
40,940

$
2,904

$
41,080

$
44,497

$
356,270

$
195,681

$
438,290

$
243,082

Special mention
2,020

—

625

533

9,076

4,868

11,721

5,401

Substandard
1,270

1,297

6,245

8,138

13,457

13,573

20,972

23,008

Total
$
44,230

$
4,201

$
47,950

$
53,168

$
378,803

$
214,122

$
470,983

$
271,491

Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
Asset based lending
Other
Total comm. and industrial loans
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Grade:






Pass
$
—

$
—

$
86,751

$
45,757

$
86,751

$
45,757

Special mention
—

—

1,361

1,723

1,361

1,723

Substandard
—

—

3,113

3,695

3,113

3,695

Doubtful
—

—

40

—

40

—

Total
$
—

$
—

$
91,265

$
51,175

$
91,265

$
51,175







35

Consumer Loans
Credit Risk Profile Based on Payment Activity
Home equity
Auto and other
Total consumer loans
(In thousands)
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
June 30, 2015
December 31, 2014
Performing
$
55,547

$
65,368

$
151,634

$
102,182

$
207,181

$
167,550

Nonperforming
728

583

544

1,169

1,272

1,752

Total
$
56,275

$
65,951

$
152,178

$
103,351

$
208,453

$
169,302


The following table summarizes information about total loans rated Special Mention or lower as of June 30, 2015 and December 31, 2014.  The table below includes consumer loans that are special mention and substandard accruing that are classified in the above table as performing based on payment activity.
June 30, 2015
December 31, 2014
(In thousands)
Business
Activities Loans
Acquired Loans
Total
Business
Activities Loans
Acquired Loans
Total
Non-Accrual
$
13,759

$
6,230

$
19,989

$
14,778

$
6,927

$
21,705

Substandard Accruing
63,085

22,430

85,515

66,995

23,839

90,834

Total Classified
76,844

28,660

105,504

81,773

30,766

112,539

Special Mention
27,441

14,577

42,018

9,113

8,800

17,913

Total Criticized
$
104,285

$
43,237

$
147,522

$
90,886

$
39,566

$
130,452

NOTE 7.               DEPOSITS
A summary of time deposits is as follows:
(In thousands)
June 30,
2015
December 31,
2014
Time less than $100,000
$
551,610

$
515,570

Time $100,000 or more
1,200,314

940,176

Total time deposits
$
1,751,924

$
1,455,746

Included in deposits are brokered deposits of $609.9 million and $430.8 million at June 30, 2015 and December 31, 2014 , respectively.  Included in the brokered deposit balance stated above are reciprocal deposits of $8.7 million and $9.4 million at June 30, 2015 and December 31, 2014 , respectively.

NOTE 8.               BORROWED FUNDS
Borrowed funds at June 30, 2015 and December 31, 2014 are summarized, as follows:

36

June 30, 2015
December 31, 2014
Weighted
Weighted
Average
Average
(dollars in thousands)
Principal
Rate
Principal
Rate
Short-term borrowings:




Advances from the FHLBB
$
1,058,001

0.24
%
$
890,900

0.24
%
Other Borrowings
—

—

10,000

1.80

Total short-term borrowings:
1,058,001

0.24

900,900

0.23

Long-term borrowings:




Advances from the FHLBB
118,483

1.92

61,676

0.93

Subordinated borrowings
74,318

7.00

74,283

7.00

Junior subordinated borrowings
15,464

2.13

15,464

2.08

Total long-term borrowings:
208,265

3.75

151,423

4.03

Total
$
1,266,266

0.82
%
$
1,052,323

0.79
%
Short term debt includes Federal Home Loan Bank of Boston (“FHLBB”) advances with an original maturity of less than one year and a short-term line-of-credit drawdown through a correspondent bank.  The Bank also maintains a $3.0 million secured line of credit with the FHLBB that bears a daily adjustable rate calculated by the FHLBB. There was no outstanding balance on the FHLBB line of credit for the periods ended June 30, 2015 and December 31, 2014 .
The Bank is approved to borrow on a short-term basis from the Federal Reserve Bank of Boston as a non-member bank. The Bank has pledged certain loans and securities to the Federal Reserve Bank to support this arrangement. No borrowings with the Federal Reserve Bank of Boston took place for the periods ended June 30, 2015 and December 31, 2014 .
Long-term FHLBB advances consist of advances with an original maturity of more than one year.  The advances outstanding at June 30, 2015 include callable advances totaling $11.0 million , and amortizing advances totaling $5.1 million .  The advances outstanding at December 31, 2014 include callable advances totaling $5.0 million , and amortizing advances totaling $5.1 million . All FHLBB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.
A summary of maturities of FHLBB advances as of June 30, 2015 and December 31, 2014 is as follows:
June 30, 2015
December 31, 2014
Weighted
Weighted
Average
Average
(in thousands, except rates)
Principal
Rate
Principal
Rate
Fixed rate advances maturing:




2015
$
1,067,031

0.25
%
$
940,900

0.24
%
2016
52,792

1.37

1,519

0.88

2017
33,719

2.46

5,000

4.33

2018
1,044

2.62

—

—

2019 and beyond
21,898

2.72

5,157

3.85

Total FHLBB advances
$
1,176,484

0.41
%
$
952,576

0.28
%
The Company does not have variable-rate FHLB advances for the periods ended June 30, 2015 and December 31, 2014 .
In September 2012, the Company issued fifteen year subordinated notes in the amount of $75.0 million at a discount of 1.15% .  The interest rate is fixed at 6.875% for the first ten years. After ten years , the notes become callable and convert to an interest rate of three-month LIBOR rate plus 511.3% basis points.
The Company holds 100% of the common stock of Berkshire Hills Capital Trust I (“Trust I”) which is included in other assets with a cost of $0.5 million .  The sole asset of Trust I is $15.5 million of the Company’s junior subordinated debentures due in 2035. These debentures bear interest at a variable rate equal to LIBOR plus 1.85% and had a rate of 2.13% and 2.08% at June 30, 2015 and December 31, 2014 , respectively. The Company has the right to defer payments of interest for up to five years on the debentures at any time, or from time to time, with certain limitations, including a restriction on the payment of dividends to stockholders while such interest payments on the debentures have been deferred.  The Company has not exercised this right to defer payments.  The Company has the right to redeem the debentures at par value. Trust I is considered a variable interest entity

37

for which the Company is not the primary beneficiary.  Accordingly, Trust I is not consolidated into the Company’s financial statements.
NOTE 9.               STOCKHOLDERS’ EQUITY
The actual and required capital ratios were as follows:
June 30,
2015
Regulatory
Minimum to be
Well Capitalized
December 31,
2014
Regulatory
Minimum to be
Well Capitalized
Company (consolidated)




Total capital to risk weighted assets
11.7
%
10.0
%
11.4
%
10.0
%
Common Equity Tier 1 Capital to risk weighted assets
9.5

6.5

N/A

N/A

Tier 1 capital to risk weighted assets
9.6

8.0

9.0

6.0

Tier 1 capital to average assets
7.4

5.0

7.0

5.0

Bank




Total capital to risk weighted assets
11.0
%
10.0
%
10.8
%
10.0
%
Common Equity Tier 1 Capital to risk weighted assets
9.7

6.5

N/A

N/A

Tier 1 capital to risk weighted assets
9.7

8.0

9.3

6.0

Tier 1 capital to average assets
7.5

5.0

7.2

5.0

At each date shown, the Company and the Bank met the conditions to be classified as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.
Effective January 1, 2015, the Company and the Bank became subject to the Basel III rule that requires the Company and the Bank to assess their Common Equity Tier 1 Capital to risk weighted assets and the Company and the Bank each exceed the minimum to be well capitalized.

Accumulated other comprehensive income (loss)
Components of accumulated other comprehensive income is as follows:
(In thousands)
June 30,
2015
December 31,
2014
Other accumulated comprehensive income, before tax:


Net unrealized holding gain on AFS securities
$
9,259

$
15,993

Net (loss) on effective cash flow hedging derivatives
(6,416
)
(3,299
)
Net unrealized holding (loss) on pension plans
(3,757
)
(2,291
)
Income taxes related to items of accumulated other comprehensive income:


Net unrealized holding gain on AFS securities
(3,582
)
(6,077
)
Net (loss) on effective cash flow hedging derivatives
2,586

1,330

Net unrealized holding (loss) on pension plans
1,514

923

Accumulated other comprehensive income
$
(396
)
$
6,579







38




The following table presents the components of other comprehensive income for the three and six months ended June 30, 2015 and 2014 :
(In thousands)
Before Tax
Tax Effect
Net of Tax
Three Months Ended June 30, 2015



Net unrealized holding gains on AFS securities:



Net unrealized losses arising during the period
$
(13,687
)
$
5,243

$
(8,444
)
Less: reclassification adjustment for (gains) realized in net income
(2,384
)
857

(1,527
)
Net unrealized holding loss on AFS securities
(16,071
)
6,100

(9,971
)
Net loss on cash flow hedging derivatives:



Net unrealized gain arising during the period
784

(316
)
468

Less: reclassification adjustment for losses realized in net income
—

—

—

Net gain on cash flow hedging derivatives
784

(316
)
468

Net unrealized holding loss on pension plans



Net unrealized gain arising during the period
—

—

—

Less: reclassification adjustment for losses realized in net income
65

(26
)
39

Net unrealized holding gain on pension plans
65

(26
)
39

Other comprehensive loss
$
(15,222
)
$
5,758

$
(9,464
)
Three Months Ended June 30, 2014



Net unrealized holding loss on AFS securities:



Net unrealized loss arising during the period
$
11,316

$
(4,344
)
$
6,972

Less: reclassification adjustment for (gains) realized in net income
(203
)
83

(120
)
Net unrealized holding gain on AFS securities
11,113

(4,261
)
6,852

Net loss on cash flow hedging derivatives:



Net unrealized loss arising during the period
(3,267
)
1,322

(1,945
)
Less: reclassification adjustment for (gains) realized in net income
—

—

—

Net loss on cash flow hedging derivatives
(3,267
)
1,322

(1,945
)
Net gain on terminated swap:



Net unrealized loss arising during the period
—

—

—

Less: reclassification adjustment for losses realized in net income
—

—

—

Net gain on terminated swap
—

—

—

Other comprehensive income
$
7,846

$
(2,939
)
$
4,907


39

(In thousands)
Before Tax
Tax Effect
Net of Tax
Six Months Ended June 30, 2015



Net unrealized holding gains on AFS securities:



Net unrealized losses arising during the period
$
(4,316
)
$
1,625

$
(2,691
)
Less: reclassification adjustment for (gains) realized in net income
(2,418
)
870

(1,548
)
Net unrealized holding loss on AFS securities
(6,734
)
2,495

(4,239
)
Net loss on cash flow hedging derivatives:



Net unrealized loss arising during the period
(3,117
)
1,256

(1,861
)
Less: reclassification adjustment for losses realized in net income
—

—

—

Net loss on cash flow hedging derivatives
(3,117
)
1,256

(1,861
)
Net unrealized holding loss on pension plans



Net unrealized loss arising during the period
(1,596
)
643

(953
)
Less: reclassification adjustment for losses realized in net income
130

(52
)
78

Net unrealized holding loss on pension plans
(1,466
)
591

(875
)
Other comprehensive income
$
(11,317
)
$
4,342

$
(6,975
)
Six Months Ended June 30, 2014



Net unrealized holding loss on AFS securities:



Net unrealized loss arising during the period
$
17,370

$
(6,576
)
$
10,794

Less: reclassification adjustment for (gains) realized in net income
(237
)
95

(142
)
Net unrealized holding gain on AFS securities
17,133

(6,481
)
10,652

Net loss on cash flow hedging derivatives:



Net unrealized loss arising during the period
(4,127
)
1,691

(2,436
)
Less: reclassification adjustment for (gains) realized in net income
5,393

(2,201
)
3,192

Net gain on cash flow hedging derivatives
1,266

(510
)
756

Net gain on terminated swap:



Net unrealized loss arising during the period
—

—

—

Less: reclassification adjustment for losses realized in net income
3,237

(1,312
)
1,925

Net gain on terminated swap
3,237

(1,312
)
1,925

Other comprehensive income
$
21,636

$
(8,303
)
$
13,333















40

The following table presents the changes in each component of accumulated other comprehensive income (loss), for the three and six months ended June 30, 2015 and 2014 :
Net unrealized
holding  gain
on AFS
Net loss on
effective cash
flow hedging
Net loss
on
terminated
Net unrealized
holding loss
on
(in thousands)
Securities
derivatives
swap
pension plans
Total
Three Months Ended June 30, 2015





Balance at Beginning of Period
$
15,648

$
(4,298
)
$
—

$
(2,282
)
$
9,068

Other Comprehensive (Loss) Gain Before reclassifications
(8,444
)
468

—

—

(7,976
)
Amounts Reclassified from Accumulated other comprehensive income
(1,527
)
—

—

39

(1,488
)
Total Other Comprehensive (Loss) Income
(9,971
)
468

—

39

(9,464
)
Balance at End of Period
$
5,677

$
(3,830
)
$
—

$
(2,243
)
$
(396
)
Three Months Ended June 30, 2014





Balance at Beginning of Period
$
(1,976
)
$
1,335

$
—

$
10

$
(631
)
Other Comprehensive Gain (Loss) Before reclassifications
6,972

(1,945
)
—

—

5,027

Amounts Reclassified from Accumulated other comprehensive income
(120
)
—

—

—

(120
)
Total Other Comprehensive Income (Loss)
6,852

(1,945
)
—

—

4,907

Balance at End of Period
$
4,876

$
(610
)
$
—

$
10

$
4,276

Six Months Ended June 30, 2015





Balance at Beginning of Period
$
9,916

$
(1,969
)
$
—

$
(1,368
)
$
6,579

Other Comprehensive (Loss) Before reclassifications
(2,691
)
(1,861
)
—

(953
)
(5,505
)
Amounts Reclassified from Accumulated other comprehensive income
(1,548
)
—

—

78

(1,470
)
Total Other Comprehensive (Loss)
(4,239
)
(1,861
)
—

(875
)
(6,975
)
Balance at End of Period
$
5,677

$
(3,830
)
$
—

$
(2,243
)
$
(396
)
Six Months Ended June 30, 2014





Balance at Beginning of Period
$
(5,776
)
$
(1,366
)
$
(1,925
)
$
10

$
(9,057
)
Other Comprehensive Gain (Loss) Before reclassifications
10,794

(2,436
)
—

—

8,358

Amounts Reclassified from Accumulated other comprehensive income
(142
)
3,192

1,925

—

4,975

Total Other Comprehensive Income
10,652

756

1,925

—

13,333

Balance at End of Period
$
4,876

$
(610
)
$
—

$
10

$
4,276










41




The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 :
Affected Line Item in the
Three Months Ended June 30,
Statement where Net Income
(in thousands)
2015
2014
is Presented
Realized (gains) on AFS securities:


$
(2,384
)
$
(203
)
Non-interest income
857

83

Tax expense
(1,527
)
(120
)
Net of tax
Realized losses on cash flow hedging derivatives:


—

—

Non-interest income
—

—

Tax expense
—

—

Net of tax
Amortization of realized gains on terminated swap:


—

—

Non-interest income
—

—

Tax expense
—

—

Net of tax
Realized loss on pension plans:


65

—

Non-interest income
(26
)
—

Tax expense
39

—

Net of tax
Total reclassifications for the period
$
(1,488
)
$
(120
)
Net of tax

42

Affected Line Item in the
Six Months Ended June 30,
Statement where Net Income
(in thousands)
2015
2014
is Presented
Realized (gains) on AFS securities:


$
(2,418
)
$
(237
)
Non-interest income
870

95

Tax expense
(1,548
)
(142
)
Net of tax
Realized losses on cash flow hedging derivatives:


—

5,393

Non-interest income
—

(2,201
)
Tax expense
—

3,192

Net of tax
Amortization of realized gains on terminated swap:


—

3,237

Non-interest income
—

(1,312
)
Tax expense
—

1,925

Net of tax
Realized loss on pension plans:


130

—

Non-interest income
(52
)
—

Tax expense
78

—

Net of tax
Total reclassifications for the period
$
(1,470
)
$
4,975

Net of tax

NOTE 10. EARNINGS PER SHARE
Earnings per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
Three Months Ended June 30,
Six Months Ended June 30,
(In thousands, except per share data)
2015
2014
2015
2014
Net income
$
10,044

$
11,464

$
18,803

$
10,358

Average number of common shares issued
29,975

26,525

28,260

26,525

Less: average number of treasury shares
1,193

1,417

1,244

1,421

Less: average number of unvested stock award shares
481

393

459

397

Average number of basic common shares outstanding
28,301

24,715

26,557

24,707

Plus: dilutive effect of unvested stock award shares
94

44

91

55

Plus: dilutive effect of stock options outstanding
66

50

65

59

Average number of diluted common shares outstanding
28,461

24,809

26,713

24,821

Earnings per share:




Basic
$
0.35

$
0.46

$
0.71

$
0.42

Diluted
$
0.35

$
0.46

$
0.70

$
0.42

For the six months ended June 30, 2015 , 365 thousand shares of restricted stock and 207 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.  For the six months ended June 30, 2014 , 342 thousand shares of restricted stock and 305 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.
NOTE 11. STOCK-BASED COMPENSATION PLANS

43

A combined summary of activity in the Company’s stock award and stock option plans for the six months ended June 30, 2015 is presented in the following table:
Non-vested Stock
Awards Outstanding
Stock Options Outstanding
Weighted-
Weighted-
Number of
Average
Grant Date
Number of
Average
Exercise
(Shares in thousands)
Shares
Fair Value
Shares
Price
December 31, 2014
424

$
24.33

282

$
20.42

Granted
174

26.33

—

—

Stock options exercised
—

—

(11
)
10.52

Stock awards vested
(86
)
24.28

—

—

Forfeited
(11
)
23.64

—

—

Expired
—

—

—

—

June 30, 2015
501

$
24.92

271

$
21.12

Exercisable options,
June 30, 2015


271

$
21.12

During the six months ended June 30, 2015 and 2014 , proceeds from stock option exercises totaled $116 thousand and totaled $848 thousand , respectively.  During the six months ended June 30, 2015 , there were 86 thousand shares issued in connection with vested stock awards.  During the six months ended June 30, 2014 , there were 66 thousand shares issued in connection with vested stock awards.  All of these shares were issued from available treasury stock.  Stock-based compensation expense totaled $2.3 million and $1.8 million during the six months ended June 30, 2015 and 2014 , respectively.  Stock-based compensation expense is recognized over the requisite service period for all awards.
NOTE 12. OPERATING SEGMENTS
The Company has two reportable operating segments, Banking and Insurance, which are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp, Inc.  Banking includes the activities of the Bank and its subsidiaries, which provide retail and commercial banking, along with wealth management and investment services.  Insurance includes the activities of Berkshire Insurance Group, Inc. (“BIG”), which provides retail and commercial insurance services.  The only other consolidated financial activity of the Company is the Parent, which consists of the transactions of Berkshire Hills Bancorp, Inc. Management fees for corporate services provided by the Bank to BIG and the Parent are eliminated.
The accounting policies of each reportable segment are the same as those of the Company.  The Insurance segment and the Parent reimburse the Bank for administrative services provided to them.  Income tax expense for the individual segments is calculated based on the activity of the segments, and the Parent records the tax expense or benefit necessary to reconcile to the consolidated total.  The Parent does not allocate capital costs.  Average assets include securities available-for-sale based on amortized cost.













44

A summary of the Company’s operating segments was as follows:
(In thousands)
Banking
Insurance
Parent
Eliminations
Total Consolidated
Three Months Ended June 30, 2015





Net interest income
$
53,480

$
—

$
5,157

$
(6,000
)
$
52,637

Provision for loan losses
4,204

—

—

—

4,204

Non-interest income
14,096

2,486

7,445

(7,247
)
16,780

Non-interest expense
47,531

1,901

4,591

2

54,025

Income before income taxes
15,841

585

8,011

(13,249
)
11,188

Income tax expense (benefit)
2,951

227

(2,033
)
(1
)
1,144

Net income
$
12,890

$
358

$
10,044

$
(13,248
)
$
10,044

Average assets (in millions)
$
7,191

$
29

$
884

$
(909
)
$
7,195

Three Months Ended June 30, 2014





Net interest income (expense)
$
45,244

$
—

$
(915
)
$
—

$
44,329

Provision for loan losses
3,989

—

—

—

3,989

Non-interest income
12,046

2,460

12,272

(12,272
)
14,506

Non-interest expense
36,970

1,887

406

—

39,263

Income before income taxes
16,331

573

10,951

(12,272
)
15,583

Income tax expense (benefit)
4,409

223

(513
)
—

4,119

Net income
$
11,922

$
350

$
11,464

$
(12,272
)
$
11,464

Average assets (in millions)
$
6,111

$
27

$
744

$
(736
)
$
6,146

Six Months Ended June 30, 2015





Net interest income
$
99,819

$
—

$
10,311

$
(12,000
)
$
98,130

Provision for loan losses
8,055

—

—

—

8,055

Non-interest income
23,509

5,453

11,229

(10,849
)
29,342

Non-interest expense
90,025

3,841

5,305

2

99,173

Income before income taxes
25,248

1,612

16,235

(22,851
)
20,244

Income tax expense (benefit)
3,384

626

(2,568
)
(1
)
1,441

Net income
$
21,864

$
986

$
18,803

$
(22,850
)
$
18,803

Average assets (in millions)
$
6,837

$
29

$
821

$
(841
)
$
6,846

Six Months Ended June 30, 2014





Net interest income (expense)
$
88,954

$
—

$
(1,859
)
$
—

$
87,095

Provision for loan losses
7,385

—

—

—

7,385

Non-interest income
13,420

5,509

12,020

(12,020
)
18,929

Non-interest expense
79,543

4,209

871

—

84,623

Income before income taxes
15,446

1,300

9,290

(12,020
)
14,016

Income tax expense (benefit)
4,217

509

(1,068
)
—

3,658

Net income
$
11,229

$
791

$
10,358

$
(12,020
)
$
10,358

Average assets (in millions)
$
5,971

$
26

$
733

$
(732
)
$
5,998

NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As of June 30, 2015 , the Company held derivatives with a total notional amount of $1.2 billion .  That amount included $300.0 million in forward starting interest rate swap derivatives that were designated as cash flow hedges for accounting purposes.  The Company also had economic hedges and non-hedging derivatives totaling $824.0 million and $55.7 million , respectively, which

45

are not designated as hedges for accounting purposes and are therefore recorded at fair value.  Economic hedges included interest rate swaps totaling $692.6 million , risk participation agreements with dealer banks of $48.8 million , and $82.6 million in forward commitment contracts.
As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities. Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. The derivatives program is overseen by the Risk Management/Capital Committee of the Company’s Board of Directors. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at June 30, 2015 .
The Company pledged collateral to derivative counterparties in the form of cash totaling $6.0 million and securities with an amortized cost of $24.8 million and a fair value of $24.8 million as of June 30, 2015 . The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back economic hedges. However certain language is written into the International Swaps Dealers Association, Inc. (“ISDA”) and loan documents where, in default situations, the Bank is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.
Information about derivative assets and liabilities at June 30, 2015 , follows:
Weighted
Weighted Average Rate
Estimated
Notional
Average
Contract
Fair Value
Amount
Maturity
Received
pay rate
Asset (Liability)
(In thousands)
(In years)
(In thousands)
Cash flow hedges:




Forward-starting interest rate swaps on FHLBB borrowings
$
300,000

3.8
—
%
2.29
%
$
(6,416
)
Total cash flow hedges
300,000



(6,416
)
Economic hedges:




Interest rate swap on tax advantaged economic development bond
12,272

14.4
0.52
%
5.09
%
(2,326
)
Interest rate swaps on loans with commercial loan customers
340,147

6.6
1.74
%
4.54
%
(11,471
)
Reverse interest rate swaps on loans with commercial loan customers
340,147

6.6
4.54
%
1.74
%
11,567

Risk Participation Agreements with Dealer Banks
48,801

15.7


(69
)
Forward sale commitments
82,640

0.2


475

Total economic hedges
824,007



(1,824
)
Non-hedging derivatives:




Interest rate lock commitments
55,749

0.2


382

Total non-hedging derivatives
55,749



382

Total
$
1,179,756



$
(7,858
)








46



Information about derivative assets and liabilities at December 31, 2014 , follows:
Weighted
Weighted Average Rate
Estimated
Notional
Average
Contract
Fair Value
Amount
Maturity
Received
pay rate
Asset (Liability)
(In thousands)
(In years)
(In thousands)
Cash flow hedges:




Forward-starting interest rate swaps on FHLBB borrowings
$
300,000

4.3
—
%
2.29
%
$
(3,299
)
Total cash flow hedges
300,000



(3,299
)
Economic hedges:




Interest rate swap on tax advantaged economic development bond
12,554

14.9
0.52
%
5.09
%
(2,578
)
Interest rate swaps on loans with commercial loan customers
297,158

6.0
2.23
%
4.54
%
(12,183
)
Reverse interest rate swaps on loans with commercial loan customers
297,158

6.0
4.54
%
2.23
%
12,221

Risk participation agreements with dealer banks
45,842

16.6


(91
)
Forward sale commitments
42,366

0.2


(510
)
Total economic hedges
695,078



(3,141
)
Non-hedging derivatives:




Interest rate lock commitments
39,589

0.2


625

Total non-hedging derivatives
39,589



625

Total
$
1,034,667



$
(5,815
)
Cash flow hedges
The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive income and subsequently reclassified to earnings in the same period or periods during which the hedged transaction is forecasted to affect earnings. Each quarter, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings.
The Company has entered into six forward-starting interest rate swap contracts with a combined notional value of $300.0 million as of June 30, 2015 .  The six forward starting swaps will become effective in 2016.  All have durations of three years. This hedge strategy converts the one month rolling FHLBB borrowings based on the FHLBB’s one month fixed interest rate to fixed interest rates, thereby protecting the Company from floating interest rate variability.
Amounts included in the Consolidated Statements of Income and in the other comprehensive income section of the Consolidated Statements of Comprehensive Income (related to interest rate derivatives designated as hedges of cash flows), were as follows:

47

Three Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2015
2014
2015
2014
Interest rate swaps on FHLBB borrowings:




Unrealized gain (loss) recognized in accumulated other comprehensive loss
$
784

$
(3,343
)
$
(3,117
)
$
(4,127
)
Reclassification of unrealized loss from accumulated other comprehensive income to other non-interest income for termination of swaps
—

—

—

8,630

Reclassification of unrealized deferred tax benefit from accumulated other comprehensive income to tax expense for terminated swaps
—

—

—

(3,611
)
Net tax benefit (expense) on items recognized in accumulated other comprehensive income
(316
)
1,352

1,256

1,666

Interest rate swaps on junior subordinated debentures:




Unrealized loss recognized in accumulated other comprehensive income
—

—

—

(1
)
Reclassification of unrealized loss from accumulated other comprehensive income to interest expense
—

75

—

204

Net tax expense on items recognized in accumulated other comprehensive income
—

(29
)
—

(80
)
Other comprehensive gain (loss) recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects
$
468

$
(1,945
)
$
(1,861
)
$
2,681

Net interest expense recognized in interest expense on junior subordinated notes
$
—

$
75

$
—

$
204

Hedge ineffectiveness on interest rate swaps designated as cash flow hedges was immaterial to the Company’s financial statements during the three and six months ended June 30, 2015 and 2014 .
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company does not anticipate any such reclassifications.
As a result of the branch acquisition, in the first quarter of 2014, the Company initiated and subsequently terminated all of its interest rate swaps, with various institutions, associated with FHLB advances with 3-month LIBOR based floating interest rates with an aggregate notional amount of $30 million , all of its interest rate swaps associated with 90 day rolling FHLB advances issued using the FHLB’s 3 -month fixed interest rate with an aggregate notional amount of $145 million and all of its forward-starting interest rate swaps associated with 90 day rolling FHLB advances issued using the FHLB’s 3-month fixed interest rate with an aggregate notional amount of $235 million . In the first quarter of 2014, the Company elected to extinguish $215 million of FHLB advances related to the terminated swaps. As a result the Company reclassified $8.6 million of losses from the effective portion of the unrealized changes in the fair value of the terminated derivatives from other comprehensive income to non-interest income as the forecasted transactions to the related FHLB advances will not occur.
Economic hedges
As of June 30, 2015 , the Company has an interest rate swap with a $12.3 million notional amount to swap out the fixed rate of interest on an economic development bond bearing a fixed rate of 5.09% , currently within the Company’s trading portfolio under the fair value option, in exchange for a LIBOR-based floating rate. The intent of the economic hedge is to improve the Company’s asset sensitivity to changing interest rates in anticipation of favorable average floating rates of interest over the 21 -year life of the bond.  The fair value changes of the economic development bond are mostly offset by fair value changes of the related interest rate swap.
The Company also offers certain derivative products directly to qualified commercial borrowers.  The Company economically hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with

48

third-party financial institutions.  The transaction allows the Company’s customer to convert a variable-rate loan to a fixed rate loan. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts mostly offset each other in earnings. Credit valuation adjustments arising from the difference in credit worthiness of the commercial loan and financial institution counterparties totaled $94.7 thousand as of June 30, 2015 .  The interest income and expense on these mirror image swaps exactly offset each other.
The Company has risk participation agreements with dealer banks. Risk participation agreements occur when the Company participates on a loan and a swap where another bank is the lead.  The Company gets paid a fee to take on the risk associated with having to make the lead bank whole on Berkshire’s portion of the pro-rated swap should the borrower default. Changes in fair value are recorded in current period earnings.
The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale.  The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings.
The Company uses the following types of forward sale commitments contracts:
•
Best efforts loan sales,
•
Mandatory delivery loan sales, and
•
To Be Announced (“TBA”) mortgage-backed securities sales.
A best efforts contract refers to a loan sale agreement where the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes.  The Company may enter into a best efforts contract once the price is known, which is shortly after the potential borrower’s interest rate is locked.
A mandatory delivery contract is a loan sale agreement where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date.  Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer.
The Company may sell TBA mortgage-backed securities to hedge the changes in fair value of interest rate lock commitments and held for sale loans, which do not have corresponding best efforts or mandatory delivery contracts.  These security sales transactions are closed once mandatory contracts are written.  On the closing date the price of the security is locked-in, and the sale is paired-off with a purchase of the same security.  Settlement of the security purchase/sale transaction is done with cash on a net-basis.
Non-hedging derivatives
The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time.  IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance.  Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan.  The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in noninterest income in the Company’s consolidated statements of income.  Changes in the fair value of IRLCs subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.












49



Amounts included in the Consolidated Statements of Income related to economic hedges and non-hedging derivatives were as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2015
2014
2015
2014
Economic hedges




Interest rate swap on industrial revenue bond:




Unrealized gain (loss) recognized in other non-interest income
$
331

$
(350
)
$
60

$
(731
)
Interest rate swaps on loans with commercial loan customers:




Unrealized (loss) gain recognized in other non-interest income
3,889

(1,919
)
775

(1,732
)
Reverse interest rate swaps on loans with commercial loan customers:




Unrealized loss recognized in other non-interest income
(3,889
)
1,919

(775
)
1,732

Favorable (Unfavorable) change in credit valuation adjustment recognized in other non-interest income
56

4

57

11

Risk Participation Agreements:




Unrealized gain recognized in other non-interest income
31

—

(40
)
—

Forward Commitments:




Unrealized gain (loss) recognized in other non-interest income
475

(561
)
87

(669
)
Realized gain (loss) in other non-interest income
504

(177
)
413

(341
)
Non-hedging derivatives




Interest rate lock commitments




Unrealized gain recognized in other non-interest income
$
382

$
660

$
1,359

$
1,037

Realized gain in other non-interest income
186

769

941

1,035

Assets and Liabilities Subject to Enforceable Master Netting Arrangements
Interest Rate Swap Agreements (“Swap Agreements”)
The Company enters into swap agreements to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated statements of condition. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of marketable securities is received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds.  The Company had net asset positions with its commercial banking counterparties totaling $11.6 million and $12.3 million as of June 30, 2015 and December 31, 2014 , respectively.  The Company had net liability positions with its financial institution counterparties totaling $16.4 million and $18.2 million as of June 30, 2015 and December 31, 2014 , respectively.  At June 30, 2015 , the Company did not have a net liability position with its commercial banking counterparties, compared to a $0.1 million liability at December 31, 2014 .  The collateral posted by the Company that covered liability positions was $16.4 million and $18.2 million as of June 30, 2015 and December 31, 2014 , respectively.



50



The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of June 30, 2015 and December 31, 2014 :
Offsetting of Financial Assets and Derivative Assets
Gross
Amounts of
Gross Amounts
Offset in the
Net Amounts
of Assets
Presented in the
Gross Amounts Not Offset in
the Statements of Condition
Recognized
Statements of
Statements of
Financial
Cash
(in thousands)
Assets
Condition
Condition
Instruments
Collateral Received
Net Amount
June 30, 2015






Interest Rate Swap Agreements:






Institutional counterparties
$
27

$
—

$
27

$
—

$
—

$
27

Commercial counterparties
11,585

—

11,585

—

—

11,585

Total
$
11,612

$
—

$
11,612

$
—

$
—

$
11,612

Offsetting of Financial Liabilities and Derivative Liabilities
Gross
Amounts of
Gross Amounts
Offset in the
Net Amounts
of Liabilities
Presented in the
Gross Amounts Not Offset in
the Statements of Condition
Recognized
Statements of
Statements of
Financial
Cash
(in thousands)
Liabilities
Condition
Condition
Instruments
Collateral Pledged
Net Amount
June 30, 2015






Interest Rate Swap Agreements:






Institutional counterparties
$
(16,421
)
$
5

$
(16,416
)
$
10,596

$
5,820

$
—

Commercial counterparties
(18
)
—

(18
)
—

—

(18
)
Total
$
(16,439
)
$
5

$
(16,434
)
$
10,596

$
5,820

$
(18
)
Offsetting of Financial Assets and Derivative Assets
Gross
Amounts of
Gross Amounts
Offset in the
Net Amounts
of Assets
Presented in the
Gross Amounts Not Offset in
the Statements of Condition
Recognized
Statements of
Statements of
Financial
Cash
(in thousands)
Assets
Condition
Condition
Instruments
Collateral Received
Net Amount
December 31, 2014






Interest Rate Swap Agreements:






Institutional counterparties
$
23

$
—

$
23

$
—

$
—

$
23

Commercial counterparties
12,270

—

12,270

—

—

12,270

Total
$
12,293

$
—

$
12,293

$
—

$
—

$
12,293

Offsetting of Financial Liabilities and Derivative Liabilities
Gross
Amounts of
Gross Amounts
Offset in the
Net Amounts
of Liabilities
Presented in the
Gross Amounts Not Offset in
the Statements of Condition
Recognized
Statements of
Statements of
Financial
Cash
(in thousands)
Liabilities
Condition
Condition
Instruments
Collateral Pledged
Net Amount
December 31, 2014






Interest Rate Swap Agreements:






Institutional counterparties
$
(18,232
)
$
58

$
(18,174
)
$
14,984

$
3,190

$
—

Commercial counterparties
(50
)
—

(50
)
—

—

(50
)
Total
$
(18,282
)
$
58

$
(18,224
)
$
14,984

$
3,190

$
(50
)
NOTE 14. FAIR VALUE MEASUREMENTS

51

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.

Recurring Fair Value Measurements
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 , segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
June 30, 2015
Level 1
Level 2
Level 3
Total
(In thousands)
Inputs
Inputs
Inputs
Fair Value
Trading security
$
—

$
—

$
14,378

$
14,378

Available-for-sale securities:




Municipal bonds and obligations
—

150,301

—

150,301

Government guaranteed residential mortgage-backed securities
—

61,867

—

61,867

Government-sponsored residential mortgage-backed securities
—

889,698

—

889,698

Corporate bonds
—

50,758

—

50,758

Trust preferred securities
—

13,265

—

13,265

Other bonds and obligations
—

3,167

—

3,167

Marketable equity securities
33,983

944

773

35,700

Loans held for sale (1)
—

37,324

—

37,324

Derivative assets
425

11,610

431

12,466

Derivative liabilities
—

20,326

—

20,326

(1) Loans held for sale excludes $11.2 million of loans for sale held shown on the balance sheet that is held at lower of cost or market.
December 31, 2014
Level 1
Level 2
Level 3
Total
(In thousands)
Inputs
Inputs
Inputs
Fair Value
Trading security
$
—

$
—

$
14,909

$
14,909

Available-for-sale securities:




Municipal bonds and obligations
—

133,699

—

133,699

Government guaranteed residential mortgage-backed securities
—

69,468

—

69,468

Government-sponsored residential mortgage-backed securities
—

760,184

—

760,184

Corporate bonds
—

54,151

—

54,151

Trust preferred securities
—

14,667

1,548

16,215

Other bonds and obligations
—

3,159

—

3,159

Marketable equity securities
53,806

358

778

54,942

Loans Held for Sale
—

19,493

—

19,493

Derivative assets
—

12,328

625

12,953

Derivative liabilities
417

18,259

93

18,769

There were no transfers between levels during the three and six months ended June 30, 2015 or 2014 .
Trading Security at Fair Value. The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The determination

52

of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security.  The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.
Securities Available for Sale . AFS securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. AFS securities classified as Level 2 include most of the Company’s debt securities. The pricing on Level 2 was primarily sourced from third party pricing services, overseen by management, and is based on models that consider standard input factors such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and condition, among other things. The Company owns one privately owned equity security classified as Level 3. The security’s fair value is determined through unobservable issuer-provided financial information and a pricing model utilizing peer data.
Loans held for sale. The Company elected the fair value option for all loans held for sale (HFS) originated for sale on or after May 1, 2012.  Loans HFS are classified as Level 2 as the fair value is based on input factors such as quoted prices for similar loans in active markets.
Aggregate Fair Value
June 30, 2015
Aggregate
Aggregate
Less Aggregate
(In thousands)
Fair Value
Unpaid Principal
Unpaid Principal
Loans Held for Sale (1)
$
37,324

$
36,787

$
537

(1) Loans held for sale excludes $11.2 million of loans for sale held shown on the balance sheet that is held at lower of cost or market.
Aggregate Fair Value
December 31, 2014
Aggregate
Aggregate
Less Aggregate
(In thousands)
Fair Value
Unpaid Principal
Unpaid Principal
Loans Held for Sale
$
19,493

$
18,885

$
608

The changes in fair value of loans held for sale for the three and six months ended June 30, 2015 , were losses of $285 thousand and $71 thousand , respectively.  The changes in fair value of loans held for sale for the three and six months ended June 30, 2014 , were gains of $427 thousand and $467 thousand , respectively. The changes in fair value are included in mortgage banking income in the Consolidated Statements of Income.
Derivative Assets and Liabilities.
Interest Rate Swap. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.
Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of June 30, 2015 , the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time.  The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close, and by the non-refundable costs of originating the loan.  The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment.  The costs to originate are primarily based on the Company’s internal commission rates that are not observable. As such, IRLCs are classified as Level 3 measurements.

53

Forward Sale Commitments . The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale.  To Be Announced (“TBA”) mortgage-backed securities forward commitment sales are used as the hedging instrument, are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets.  The fair values of the Company’s best efforts and mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable.  However, costs to originate and closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable.  As such, best efforts and mandatory forward commitments are classified as Level 3 measurements.
The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and six months ended June 30, 2015 and 2014 .
Assets (Liabilities)
Securities
Interest Rate
Trading
Available
Lock
Forward
(In thousands)
Security
for Sale
Commitments
Commitments
Three Months Ended June 30, 2015




March 31, 2015
$
14,970

$
719

$
977

$
(93
)
Sale of AFS security
—

—

—

—

Unrealized (loss) gain, net recognized in other non-interest income
(451
)
—

941

—

Unrealized gain included in accumulated other comprehensive loss
—

54

—

143

Paydown of trading security
(141
)
—

—

—

Transfers to held for sale loans
—

—

(1,536
)
—

June 30, 2015
$
14,378

$
773

$
382

$
50

Six Months Ended June 30, 2015




December 31, 2014
$
14,909

$
2,326

$
625

$
(93
)
Sale of AFS security
—

(1,327
)
—

—

Unrealized (loss) gain, net recognized in other non-interest income
(248
)
—

2,671

—

Unrealized gain included in accumulated other comprehensive loss
—

(226
)
—

143

Paydown of trading security
(283
)
—

—

—

Transfers to held for sale loans
—

—

(2,914
)
—

June 30, 2015
$
14,378

$
773

$
382

$
50

Unrealized gains (losses) relating to instruments still held at June 30, 2015
$
2,106

$
3

$
382

$
50


54

Assets (Liabilities)
Securities
Interest Rate
Trading
Available
Lock
Forward
(In thousands)
Security
for Sale
Commitments
Commitments
Three Months Ended June 30, 2014




March 31, 2014
$
14,923

$
2,046

$
377

$
(96
)
Purchase of Marketable Equity Security
—

—

—

—

Unrealized (loss) gain, net recognized in other non-interest income
181

—

1,075

(67
)
Unrealized gain included in accumulated other comprehensive loss
—

171

—

—

Paydown of trading account security
(133
)
—

—

—

Transfers to held for sale loans
—

—

(792
)
—

June 30, 2014
$
14,971

$
2,217

$
660

$
(163
)
Six Months Ended June 30, 2014




December 31, 2013
$
14,840

$
1,964

$
258

$
19

Purchase of Marketable Equity Security
—

—

—

—

Unrealized (loss) gain, net recognized in other non-interest income
399

—

1,794

(182
)
Unrealized gain included in accumulated other comprehensive loss
—

253

—

—

Paydown of trading account security
(268
)
—

—

—

Transfers to held for sale loans
—

—

(1,392
)
—

June 30, 2014
$
14,971

$
2,217

$
660

$
(163
)
Unrealized gains (losses) relating to instruments still held at June 30, 2014
$
2,144

$
(1,118
)
$
660

$
(163
)



















55


Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:
Fair Value
Significant
Unobservable Input
(In thousands)
June 30, 2015
Valuation Techniques
Unobservable Inputs
Value
Assets (Liabilities)


Trading Security
$
14,378

Discounted Cash Flow
Discount Rate
2.73
%
AFS Securities
773

Pricing Model
Median Peer Price/Tangible Book Value Percentage Multiple
99.02
%
Forward Commitments
50

Historical Trend
Closing Ratio
92.11
%

Pricing Model
Origination Costs, per loan
$
2,500

Interest Rate Lock Commitment
382

Historical Trend
Closing Ratio
92.11
%

Pricing Model
Origination Costs, per loan
$
2,500

Total
$
15,583


Fair Value
Significant
Unobservable Input
(In thousands)
December 31, 2014
Valuation Techniques
Unobservable Inputs
Value
Assets (Liabilities)


Trading Security
$
14,909

Discounted Cash Flow
Discount Rate
2.60
%
AFS Securities
2,326

Discounted Cash Flow
Discount Rate
13.74
%

Credit Spread
11.06
%
Forward Commitments
(93
)
Historical Trend
Closing Ratio
91.07
%

Pricing Model
Origination Costs, per loan
$
2,500

Interest Rate Lock Commitment
625

Historical Trend
Closing Ratio
91.07
%

Pricing Model
Origination Costs, per loan
$
2,500

Total
$
17,767


Non-Recurring Fair Value Measurements
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured at fair value on a non-recurring basis.

56

June 30, 2015
December 31, 2014
Six months ended
June 30, 2015
Fair Value Measurement Date
Level 3
Level 3
Total
Level 3
(In thousands)
Inputs
Inputs
Gains (Losses)
Inputs
Assets



Impaired loans
$
6,659

$
5,820

$
839

June 2015
Capitalized mortgage servicing rights
4,697

3,757

—

May 2015
Other real estate owned
674

2,049

(285
)
March 2013 - July 2014
Total
$
12,030

$
11,626

$
554

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:
Fair Value
(in thousands)
June 30, 2015
Valuation Techniques
Unobservable Inputs
Range (Weighted Average) (a)
Assets

Impaired loans
$
6,659

Fair value of collateral
Loss severity
0.41% to 38.41% (9.15%)

Appraised value
$2.7 to $2,272.0 ($491.6)
Capitalized mortgage servicing rights
4,697

Discounted cash flow
Constant prepayment rate (CPR)
7.67% to 21.08% (10.43%)

Discount rate
10.00% to 13.00% (10.58%)
Other real estate owned
674

Fair value of collateral
Appraised value
$57 to $700.0 ($595.6)
Total
$
12,030

(a)
Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.
Fair Value
(in thousands)
December 31, 2014
Valuation Techniques
Unobservable Inputs
Range (Weighted Average) (a)
Assets

Impaired loans
$
5,820

Fair value of collateral
Loss severity
0.31% to 38.7% (12.65%)

Appraised value
$5 to $1,600.0 ($912.7)
Capitalized mortgage servicing rights
3,757

Discounted cash flow
Constant prepayment rate (CPR)
7.83% to 19.00% (9.92%)

Discount rate
10.00% to 13.00% (10.43%)
Other real estate owned
2,049

Fair value of collateral
Appraised value
$57 to $700.0 ($462.6)
Total
$
11,626

(a)
Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.
There were no Level 1 or Level 2 nonrecurring fair value measurements for the periods ended June 30, 2015 and December 31, 2014 .

57

Impaired Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan.  Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.  However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values.  Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data.  Therefore, nonrecurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.
Capitalized mortgage loan servicing rights . A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.
Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.
Summary of Estimated Fair Values of Financial Instruments
The estimated fair values, and related carrying amounts, of the Company’s financial instruments follow. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

58

June 30, 2015
Carrying
Fair
(In thousands)
Amount
Value
Level 1
Level 2
Level 3
Financial Assets





Cash and cash equivalents
$
205,518

$
205,518

$
205,518

$
—

$
—

Trading security
14,378

14,378

—

—

14,378

Securities available for sale
1,204,756

1,204,756

33,983

1,170,000

773

Securities held to maturity
86,994

87,512

—

—

87,512

FHLB bank stock and restricted securities
73,212

73,212

—

73,212

—

Net loans
5,247,417

5,293,778

—

—

5,293,778

Loans held for sale
48,514

48,514

—

48,514

—

Accrued interest receivable
19,120

19,120

—

19,120

—

Cash surrender value of bank-owned life insurance policies
123,536

123,536

—

123,536

—

Derivative assets
12,466

12,466

425

11,610

431

Assets held for sale
2,519

2,519

—

2,519

—

Financial Liabilities





Total deposits
$
5,322,176

$
5,324,354

$
—

$
5,324,354

$
—

Short-term debt
1,058,001

1,058,162

—

1,058,162

—

Long-term Federal Home Loan Bank advances
118,483

121,809

—

121,809

—

Subordinated borrowings
89,782

94,320

—

94,320

—

Derivative liabilities
20,326

20,326

—

20,326

—



59

December 31, 2014
Carrying
Fair
(In thousands)
Amount
Value
Level 1
Level 2
Level 3
Financial Assets





Cash and cash equivalents
$
71,754

$
71,754

$
71,754

$
—

$
—

Trading security
14,909

14,909

—

—

14,909

Securities available for sale
1,091,818

1,091,818

5,806

1,035,686

2,326

Securities held to maturity
43,347

44,997

—

—

44,997

FHLB bank stock and restricted securities
55,720

55,720

—

55,720

—

Net loans
4,644,938

4,695,256

—

—

4,695,256

Loans held for sale
19,493

19,493

—

19,493

—

Accrued interest receivable
17,274

17,274

—

17,274

—

Cash surrender value of bank-owned life insurance policies
104,588

104,588

—

104,588

—

Derivative assets
12,953

12,953

—

12,328

625

Assets held for sale
1,280

1,280

—

1,280

—

Financial Liabilities





Total deposits
$
4,654,679

$
4,655,234

$
—

$
4,655,234

$
—

Short-term debt
900,900

900,983

—

900,983

—

Long-term Federal Home Loan Bank advances
61,676

63,283

—

63,283

—

Subordinated borrowings
89,747

93,441

—

93,441

—

Derivative liabilities
18,769

18,769

417

18,259

93

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.
Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.
FHLB bank stock and restricted securities. Carrying value approximates fair value based on the redemption provisions of the issuers.
Cash surrender value of life insurance policies. Carrying value approximates fair value.
Loans, net. The carrying value of the loans in the loan portfolio is based on the cash flows of the loans discounted over their respective loan origination rates. The origination rates are adjusted for substandard and special mention loans to factor the impact of declines in the loan’s credit standing. The fair value of the loans is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.
Accrued interest receivable. Carrying value approximates fair value.
Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.
Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings.  Such funds include all categories of debt and debentures in the table above.
Subordinated borrowings. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.
Off-balance-sheet financial instruments. Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.

60

NOTE 15. NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
Presented below is net interest income after provision for loan losses for the three months ended June 30, 2015 and 2014, respectively.
Three Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2015
2014
2015
2014
Net interest income
$
52,637

$
44,329

$
98,130

$
87,095

Provision for loan losses
4,204

3,989

8,055

7,385

Net interest income after provision for loan losses
$
48,433

$
40,340

$
90,075

$
79,710

NOTE 16. SUBSEQUENT EVENTS
On August 7, 2015, the Company acquired all of the outstanding equity of Firestone Financial Corp. (“Firestone”), which now operates as a subsidiary of Berkshire Bank. Firestone is a commercial specialty finance company providing secured installment loan equipment financing for small and medium-sized businesses.

Firestone shareholders received 1.4 million shares of the Company’s common stock and $13.7 million cash. As of June 30, 2015, Firestone had assets with a carrying value of approximately $201.2 million , including financing receivables outstanding with a carrying value of approximately $197.7 million . The results of Firestone’s operations will be included in the Company’s Consolidated Statement of Income from the date of acquisition. The Company incurred $896 thousand of merger and acquisition expenses related to the Firestone merger for the three months ended June 30, 2015.

As a result of the proximity of the closing of the merger with Firestone to the date these consolidated financial statements are available to be issued, the Company is still evaluating the estimated fair values of the assets acquired and the liabilities assumed. Accordingly, the amount of any goodwill and other intangible assets to be recognized in connection with this transaction is also yet to be determined.

This merger agreement had no significant effect on the Company’s financial statements for the periods presented.


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2014 Annual Report on Form 10-K. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the year 2015 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. Tax-equivalent adjustments are the result of increasing income from tax-advantaged securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 40.5% marginal income tax rate. In the discussion, references to earnings per share refer to diluted earnings per share unless otherwise specified.

Berkshire Hills Bancorp (“Berkshire” or “the Company”) is a Delaware corporation headquartered in Pittsfield, Massachusetts and the holding company for Berkshire Bank (“the Bank”) and Berkshire Insurance Group. Established in 1846, the Bank operates as a commercial bank under a Massachusetts trust company charter. The Bank is one of Massachusetts' oldest and largest independent banks and is the largest banking institution based in Western Massachusetts. Berkshire Bank operates under the brand America’s Most Exciting Bank ® .

61


On April 17, 2015, Berkshire completed the acquisition of Springfield, MA based Hampden Bancorp, Inc. (“Hampden’). Hampden’s operations are included with Berkshire’s results as of the acquisition date. Hampden operated ten branches in the Springfield area and three of these branches were consolidated with existing Berkshire and Hampden branches in the second quarter of 2015. The Company now has 17 total branches in the Springfield area, The Company issued approximately 4.2 million net shares as merger consideration, and had a total of 29.5 million shares outstanding at mid-year 2015. The accounting for this acquisition is discussed in Note 2 of the consolidated financial statements. On May 22, 2015, Berkshire announced that Berkshire Bank would acquire Firestone Financial Corp., a commercial specialty finance company providing secured installment loan equipment financing for small and medium-sized businesses. This acquisition was completed on August 7, 2015 and is discussed in Note 16 of the consolidated financial statements.

Berkshire is a regional financial services company that seeks to distinguish itself over the long term based on the following attributes:

•
Strong growth from organic, de novo, product, and acquisition strategies
•
Solid capital, core funding, and risk management culture
•
Experienced executive team focused on earnings and stockholder value
•
Distinctive brand and culture as America’s Most Exciting Bank ®
•
Diversified integrated financial service revenues
•
Positioned to be regional consolidator in attractive markets

Shown below is a profile of the Company:

FORWARD-LOOKING STATEMENTS
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that Berkshire Hills Bancorp files with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and the Risk Factors in Item 1A of this report. Because of these and other uncertainties, Berkshire’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, Berkshire’s past results of operations do not necessarily indicate Berkshire’s combined future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. Berkshire is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Berkshire qualifies all of its forward-looking statements by these cautionary statements.

62


APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND RECENT ACCOUNTING PRONOUNCEMENTS

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Please see those policies in conjunction with this discussion. Management believes that the following policies would be considered critical under the SEC’s definition:

Allowance for Loan Losses . The allowance for loan losses represents probable credit losses that are inherent in the loan portfolio at the financial statement date and which may be estimated. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although management believes that it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. Conditions in the local economy and real estate values could require the Company to increase provisions for loan losses, which would negatively impact earnings.

Acquired Loans. Loans that the Company acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired.  For collateral dependent loans with deteriorated credit quality, the Company estimates the fair value of the underlying collateral of the loans.  These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.

Income Taxes. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable ordinary income, taxable capital gain income, and the existence of prior years’ taxable income, to which “carry back” refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. In determining the valuation allowance, the Company uses historical and forecasted future operating results, including a review of the eligible carry-forward periods, tax planning opportunities and other relevant considerations. These underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination is made.

Goodwill and Identifiable Intangible Assets. Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and analysis of market pricing multiples. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.


63

Determination of Other-Than-Temporary Impairment of Securities. The Company evaluates debt and equity securities within the Company’s available for sale and held to maturity portfolios for other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer.  Any OTTI on marketable equity securities is recognized immediately through earnings. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

Fair Value of Financial Instruments. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings.  For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.
























64

SELECTED FINANCIAL DATA
The following summary data is based in part on the consolidated financial statements and accompanying notes and other information appearing elsewhere in this or prior Form 10-Qs.
At or for the Three
Months Ended June 30,
At or for the Six
Months Ended June 30,
2015
2014
2015
2014
PER COMMON SHARE DATA




Net earnings, diluted
$
0.35

$
0.46

$
0.70

$
0.42

Adjusted earnings, diluted (1)
0.51

0.44

1.01

0.86

Total common book value
28.02

27.49

28.02

27.49

Dividends
0.19

0.18

0.38

0.36

Common stock price:




High
29.30

26.64

29.30

27.28

Low
26.77

22.06

24.27

22.06

Close
28.48

23.22

28.48

23.22

PERFORMANCE RATIOS (2)


Return on average assets
0.56
%
0.75
%
0.55
%
0.35
%
Return on average common equity
5.05

6.64

5.03

3.00

Net interest margin, fully taxable equivalent
3.30

3.26

3.24

3.31

Fee income/Net interest and fee income
22.92

23.87

23.08

23.37

ASSET QUALITY RATIOS (3)




Net charge-offs (period annualized)/average loans
0.27
%
0.31
%
0.26
%
0.30
%
Allowance for loan losses/total loans
0.70

0.77

0.70

0.77

CONDITION RATIOS




Stockholders’ equity to total assets
11.00
%
10.94
%
11.00
%
10.94
%
Investments to total assets
18.35

18.99

18.35

18.99

Loans/deposits
99

99

99

99

FINANCIAL DATA: (In millions)




Total assets
$
7,519

$
6,311

$
7,519

$
6,311

Total earning assets
6,740

5,700

6,740

5,700

Total loans
5,285

4,450

5,285

4,450

Allowance for loan losses
37

34

37

34

Total intangible assets
321

279

321

279

Total deposits
5,322

4,479

5,322

4,479

Total borrowings
1,266

1,054

1,266

1,054

Total common stockholders’ equity
827

690

827

690

FOR THE PERIOD: (In thousands)




Net interest income
$
52,637

$
44,329

$
98,130

$
87,095

Non-interest income
16,780

14,506

29,342

18,929

Provision for loan losses
4,204

3,989

8,055

7,385

Non-interest expense
54,025

39,263

99,173

84,623

Net income
10,044

11,464

18,803

10,358

Adjusted Income (non-GAAP) (1)
14,556

10,915

26,930

21,327

_______________________________________
(1) Adjusted income and adjusted earnings are non-GAAP financial measures that the Company believes provide investors with information that is useful in understanding our financial performance and condition.
(2)  All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(3)  Generally accepted accounting principles require that loans acquired in a business combination be recorded at fair value, whereas loans from business activities are recorded at cost. The fair value of loans acquired in a business combination includes expected loan losses, and there is no loan loss allowance recorded for these loans at the time of acquisition. Accordingly, the

65

ratio of the loan loss allowance to total loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally reduced for loans acquired in a business combination since these loans are recorded net of expected loan losses. Therefore, the ratio of net loan charge-offs to average loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Other institutions may have loans acquired in a business combination, and therefore there may be no direct comparability of these ratios between and among other institutions.

AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following table presents average balances and an analysis of average rates and yields on an annualized fully taxable equivalent basis for the periods included.

66

Three Months Ended June 30,
Six Months Ended June 30,
2015
2014
2015
2014
($ In millions)
Average
Balance
Yield/Rate
(FTE basis)
Average
Balance
Yield/Rate
(FTE basis)
Average
Balance
Yield/Rate
(FTE basis)
Average
Balance
Yield/Rate
(FTE basis)
Assets








Loans:








Residential mortgages
$
1,563

4.08
%
$
1,380

3.99
%
$
1,516

4.01
%
$
1,379

4.05
%
Commercial real estate
1,889

4.46

1,488

4.16

1,768

4.29

1,454

4.30

Commercial and industrial loans
886

3.64

704

3.82

847

3.67

694

3.90

Consumer loans
822

3.24

730

3.49

794

3.23

715

3.53

Total loans (1)
5,160

4.02

4,302

3.96

4,925

3.94

4,242

4.05

Investment securities (2)
1,302

2.99

1,226

3.13

1,239

3.04

1,137

3.09

Short term investments & loans held for sale (3)
72

1.13

28

1.40

64

1.26

29

1.46

Total interest-earning assets
6,534

3.77

5,556

3.76

6,228

3.72

5,408

3.83

Intangible assets
304


279


290


279


Other non-interest earning assets
357


311


328


312


Total assets
$
7,195


$
6,146


$
6,846


$
5,999


Liabilities and stockholders’ equity








Deposits:








NOW
$
460

0.15
%
$
426

0.15
%
$
442

0.15
%
$
418

0.15
%
Money market
1,438

0.37

1,448

0.36

1,424

0.39

1,470

0.37

Savings
606

0.17

482

0.16

554

0.16

473

0.16

Time
1,558

0.91

1,153

0.98

1,489

0.91

1,111

1.07

Total interest-bearing deposits
4,062

0.52

3,509

0.51

3,909

0.53

3,472

0.53

Borrowings and notes (4)
1,299

0.76

1,126

0.84

1,209

0.80

1,019

0.94

Total interest-bearing liabilities
5,361

0.58

4,635

0.59

5,118

0.59

4,491

0.63

Non-interest-bearing demand deposits
974


780


922


765


Other non-interest earning liabilities
65


40


58


52


Total liabilities
6,400


5,455


6,098


5,308


Total stockholders’ equity (2)
795


691


748


691


Total liabilities and stockholders’ equity
$
7,195


$
6,146


$
6,846


$
5,999


Net interest spread

3.19
%

3.17
%

3.13
%

3.20
%
Net interest margin (5)

3.30


3.26


3.24


3.31

Cost of funds

0.49


0.51


0.50


0.53

Cost of deposits

0.42


0.42


0.43


0.44

Supplementary data








Total deposits (In millions)
$
5,037


$
4,289


$
4,830


$
4,236


Fully taxable equivalent income adj. (In thousands)
1,068


852


979


1,570


_______________________________________
(1)
The average balances of loans include nonaccrual loans and deferred fees and costs.

67

(2)
The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.
(3)
Interest income on loans held for sale is included in loan interest income on the income statement.
(4)
The average balances of borrowings includes the capital lease obligation presented under other liabilities on the consolidated balance sheet.
(5)
Purchased loan accretion totaled $2.2 million and $1.1 million for the three months ended June 30, 2015 and 2014, respectively. Purchased loan accretion totaled $2.5 million and $3.9 million for the six months ended June 30, 2015 and 2014, respectively.
NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP operating measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management deems to be non-operating and excludes when computing non-GAAP operating earnings can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP earnings information set forth is not necessarily comparable to non-GAAP information which may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company’s GAAP financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for operating revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations, including securities gains/losses, losses recorded for hedge terminations, merger costs, restructuring costs, systems conversion costs, and out-of-period adjustments. Non-operating adjustments are presented net of an adjustment for income tax expense. This adjustment is determined as the difference between the GAAP tax rate and the effective tax rate applicable to operating income.

Charges related to merger and acquisition activity consist primarily of severance/benefit related expenses, contract termination costs, and professional fees. Systems conversion costs relate primarily to the Company’s operating systems conversion and related systems conversions costs. Restructuring costs primarily consist of costs and losses associated with the consolidation of branches and other operating facilities of the Company. Out-of-period accounting adjustments for interest income on acquired loans were recorded following systems conversions and merger related accounting activity and were deemed non-operating. Non-operating expenses include variable rate compensation related to non-operating items.

The Company calculates adjusted earnings per share based on its measure of earnings from ongoing operations. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to merger and acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company’s operating performance. Management also believes that the computation of non-GAAP earnings and earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The efficiency ratio is adjusted for non-core revenue and expense items and for tax preference items. The Company adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

The following table summarizes the reconciliation of non-GAAP items recorded for the time periods and dates indicated:









68

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
At or for the Quarters Ended
At or for the Six Months Ended
June 30,
June 30,
June 30,
June 30,
(in thousands)
2015
2014
2015
2014
Net income (loss) (GAAP)
$
10,044

$
11,464

$
18,803

$
10,358

Adj: Gain on sale of securities, net
(2,384
)
(203
)
(2,418
)
(237
)
Adj: Loss on termination of hedges
—

—

—

8,792

Adj: Merger and acquisition expense
5,665

52

8,940

3,689

Adj: Restructuring and conversion expense
3,046

138

4,192

2,803

Adj: Out-of-period adjustment (1)
—

—

—

1,381

Adj: Income taxes
(1,815
)
(536
)
(2,587
)
(5,459
)
Total adjusted income (non-GAAP)
(A)
$
14,556

$
10,915

$
26,930

$
21,327

Total revenue (GAAP)
$
69,417

$
58,835

$
127,472

$
106,024

Adj: Securities gains, net
(2,384
)
(203
)
(2,418
)
(237
)
Adj: Loss on termination of hedges
—

—

—

8,792

Adj: Out-of-period adjustment (1)
—

—

—

1,381

Total operating revenue (non-GAAP)
(B)
$
67,033

$
58,632

$
125,054

$
115,960

Total non-interest expense (GAAP)
$
54,025

$
39,263

$
99,173

$
84,623

Less: Total non-operating expense (see above)
(8,711
)
(190
)
(13,132
)
(6,492
)
Operating non-interest expense (non-GAAP)
(C)
$
45,314

$
39,073

$
86,041

$
78,131

(in millions, except per share data)


Total average assets
(D)
$
7,195

$
6,146

$
6,846

$
5,999

Total average stockholders’ equity
(E)
795

691

748

692

Total average tangible stockholders’ equity
(F)
492

412

459

413

Total tangible stockholders’ equity, period-end (2)
(G)
507

411

507

411

Total common shares outstanding, period-end (thousands)
(H)
29,521

25,115

29,521

25,115

Average diluted shares outstanding (thousands)
(I)
28,461

24,809

26,713

24,821

Adjusted earnings per share, diluted
(A/I)
$
0.51

$
0.44

$
1.01

$
0.86

Tangible book value per share, period-end
(G/H)
$
17.16

$
16.40

$
17.16

$
16.40

Performance ratios (3)



Adjusted return on assets
(A/D)
0.81
%
0.71
%
0.79
%
0.71
%
Adjusted return on equity
(A/E)
7.32

6.32

7.20

6.17

Adjusted return on tangible equity (4)
(A/F)
12.30

11.34

12.23

11.09

Efficiency ratio
(C-L)/(B+J+M)
61.51

62.96

62.34

63.68

Supplementary data (in thousands)



Tax benefit - tax-advantaged commercial project investments (5)
(J)
$
4,034

$
555

$
8,068

$
1,110

Non-interest income charge - tax-advantaged commercial project investments (6)
(K)
(2,851
)
(417
)
(5,703
)
(834
)
Net income on tax-advantaged commercial project investments
(J+K)
1,183

138

2,365

276

Intangible amortization
(L)
934

1,274

1,835

2,580

Fully taxable equivalent income adjustment
(M)
1,068

852

1,957

1,570

(1)
The out of period adjustment shown above relates to interest income earned on loans acquired in bank acquisitions.

69

(2)
Total tangible stockholders’ equity is computed by taking total stockholders’ equity less the intangible assets at period-end.
(3)
Ratios are annualized and based on average balance sheet amounts, where applicable. Quarterly data may not sum to year-to-date data due to rounding.
(4)
Adjusted return on tangible equity is computed by dividing the total adjusted income adjusted for the tax-affected amortization of intangible assets, assuming a 40% marginal rate, by tangible equity.
(5)
The tax benefit is the direct reduction to the income tax provision due to tax credits and deductions generated from investments in historic rehabilitation, low-income housing, new market projects, and renewable energy projects.
(6)
The non-interest income charge is the reduction to the tax-advantaged commercial project investments, which are incurred as the tax credits are generated.

SUMMARY

Berkshire recorded growth in adjusted earnings per share in the second quarter and first half of 2015 compared to 2014. Adjusted earnings per share have increased sequentially in each quarter since the first quarter of 2014. Adjusted earnings per share exclude non-operating charges. This improvement reflects growth in income from business activities together with the benefit of business combinations including the purchase of New York branches on January 17, 2014 and the acquisition of Hampden Bancorp on April 17, 2015. Improved adjusted earnings also reflect economies resulting from restructuring activities as well as positive operating leverage based on increased market and wallet share in the Company’s footprint. Profitability and efficiency metrics related to adjusted earnings in the most recent quarter were the strongest since the middle of 2013. Due to a dividend increase in January 2015, shareholder dividends increased in the second quarter and first half of 2015 were higher compared to comparable periods in 2014.

First half GAAP earnings per share increased in 2015 compared to 2014, while second quarter GAAP results decreased due to non-operating charges for the Hampden acquisition. GAAP earnings in all periods include the impact of non-operating charges consisting primarily of merger, acquisition, and restructuring related costs.

Total assets increased by 16% in the first half of 2015 primarily due to the Hampden acquisition. Measures of asset quality, capital, liquidity, and interest rate sensitivity have not significantly changed from the start of the year. The Company has used common stock as the primary source of merger consideration and funded asset growth primarily with deposit increases through a combination of acquisition and business activities and promotions.

Second quarter 2015 financial highlights included:

13% increase in commercial loans (8% annualized from business activities)
13% increase in deposits (10% annualized from business activities)
14% increase in fee income
61.5% efficiency ratio
0.05% improvement in adjusted ROA to 0.81% (0.56% GAAP ROA)
0.27% non-performing assets/assets
0.27% net loan charge-offs/average loans

Berkshire produced solid second quarter results from business development across its regions and business lines. Commercial loan activity remained strong and deposit growth improved after the slower winter quarter. Loan and deposit fee income also advanced and mortgage banking revenues remained elevated. The Company is benefiting from heightened recognition in its markets as a preferred partner, combining local focus with strong regional resources.
The acquisition of Hampden Bancorp was completed in April 2015 and the systems conversion was successfully completed in June 2015. Berkshire announced an agreement to acquire Firestone Financial in May 2015, a commercial specialty lender in Eastern Massachusetts, and expeditiously completed the merger effective August 7.

The benefit of positive operating leverage was demonstrated by improvement in Berkshire’s profitability and efficiency in the second quarter compared to the prior quarter. The net interest margin continued to improve and is expected to benefit from the Firestone acquisition. In addition to improving bottom line results, Berkshire introduced Apple Pay™ convenience to our customers, and its employees participated in the biggest Week of Community Service in the Company’s history.



70


COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2015 AND DECEMBER 31, 2014

Summary: Total assets increased by $1.0 billion, or 16%, to $7.5 billion in the first half of 2015, including $688 million in assets resulting from the Hampden acquisition. Deposits grew by $667 million, including $484 million from the Hampden acquisition. Berkshire issued $115 million in net common stock as Hampden merger consideration, which accounted for most of the $118 million increase in equity. Most other balance sheet categories also increased including acquired Hampden balances.

Capital and liquidity ratios improved slightly and remained solid. Berkshire remains modestly asset sensitive in most modeled scenarios of interest rate sensitivity. The Company’s book value per share was generally stable, as Berkshire’s internal capital generation was sufficient to absorb modest dilution from the Hampden acquisition. The acquisition is targeted to provide future accretion to earnings per share while immediately accreting key-operating profitability metrics. Mid-year tangible book value per share measured $17.16 and total book value per share was $28.02.

Cash and Short Term Investments: Cash and short term investments were higher at $206 million at mid-year. The Company acquired $83 million in cash and short term investments from Hampden. Berkshire was active in funds management during the second quarter as it integrated Hampden and funded loan growth. Temporary additional borrowings were repaid on July 1 and mid-year cash balances were elevated in anticipation of this scheduled paydown.

Securities: Total securities increased by $174 million to $1.38 billion in the first half of 2015, including $72 million in balances acquired from Hampden. Some of the Hampden balances were restructured to increase yield and most of the securities growth was in municipal bonds ($61 million) and mortgage-backed securities ($122 million) which consisted primarily of collateralized mortgage obligations. Investments in bank capital instruments were reduced as a result of new regulatory requirements that increased the required capital support for these investments. The Company reduced its investment in equity securities and trust preferred securities by $22 million. The Company continues to focus on loan growth as a primary operating objective; it utilizes the securities portfolio to provide additional income and to accomplish its overall balance sheet and asset liability management objectives. The Company classified most of its municipal securities purchases as held to maturity in the context of its interest rate risk strategies.

The overall portfolio yield of 2.99% in the most recent quarter was little changed from the fourth quarter of 2014. The mid-year portfolio duration was 4.9 years, compared to 4.3 years at the start of the year as longer lived instruments were utilized to mitigate the impact of yield compression in the ongoing low interest rate environment.

During the first quarter of 2015, the Company realized a $1.4 million net loss on bonds due primarily to the sale of a pooled trust preferred security which was reported with a $1.0 million unrealized loss at year-end 2014. The bond losses were offset by $1.4 million in net gains realized on the sale of equity securities. During the second quarter, the Company recognized a $2.2 million gain on its existing investment in Hampden common stock as a result of the acquisition. This stock was converted to Berkshire stock which is held as an investment security by a Bank subsidiary and is eliminated at the consolidated level.

The net unrealized gain on investment securities decreased to $10 million (0.8% of cost) at mid-year 2015 compared to $18 million (1.6% of cost) at year-end 2014 due to the impact of higher interest rates on securities prices at mid-year. There were no material changes in measures of securities asset quality during the first six months of 2015 and no securities impairments recognized during this period.

Loans . Berkshire generated 11% annualized commercial loan growth from business activities in the first half of 2015, while also integrating the acquired Hampden portfolio. The total loan portfolio increased by $604 million to $5.28 billion, including $493 million of Hampden loans along with $132 million of commercial loans from business activities. Residential mortgage growth from business activities was 2% annualized, while the consumer portfolio decreased at an 8% annualized rate, excluding Hampden loans, due to targeted runoff of lower rate super prime auto loans. Lending activities in all portfolios included both direct and indirect originations.

Berkshire continues to target double digit annualized commercial loan growth to increase earnings, market share, and business relationships. Mortgage and consumer loan growth is more affected by balance sheet management considerations depending on market conditions and asset liability objectives. Berkshire’s commercial lending activities produced 7% annualized commercial real estate growth totaling $56 million. The Company recorded 19% annualized growth in commercial and industrial loans from lending activities, including in-market and out-of-market production from established sources. Including Hampden loans, the growth in the commercial real estate portfolio included an $87 million increase in owner occupied properties to $592 million and a $152 million increase to non-owner occupied properties to $892 million. Commercial construction balances increased by $52 million to $225 million.

71


The Hampden loan portfolio consists largely of Springfield area loans and included $130 million of residential mortgages, $281 million of commercial loans, and $82 million of consumer loans. Determining the fair value of assets acquired in business combinations is a critical accounting estimate. Berkshire estimated the fair value yield of the Hampden portfolio at approximately 4.6% at the acquisition date. Berkshire’s loans from business activities were originated with coupons averaging approximately 3.5% during the second quarter. Due to the added Hampden loans, Berkshire’s overall loan portfolio yield increased to 4.02% in the second quarter of 2015 compared to 3.96% in the fourth quarter of 2014. For its loans from business activities, the Company estimated that its loan yield was approximately stable in the 2015 first quarter, and declined several basis points in the most recent quarter due to yield compression in the ongoing low rate environment. For the most recent several quarters, the Company has been pursuing strategies to remix its portfolio to help offset market related yield compression. This has included outplacing lower margin commercial balances and de-emphasizing the origination of lower yielding super prime auto loans. At mid-year, loans repricing in one to five years measured 25% of total loans, and loans repricing over five years were 40% of total loans. These metrics were little changed from the start of the year.

Asset Quality . Asset quality metrics remained favorable and continued to improve in the first half of 2015. Annualized net loan charge-offs measured 0.26% of average loans during this period,with little difference in the charge-off rate between loans from business activities and from business combinations. Mid-year non-performing assets decreased to $21 million (0.27% of assets) from $24 million (0.37% of assets) at the start of the year. In recent years, prior to its acquisition, Hampden reported negligible loan charge-offs, and it reported non-accruing loans in the area of 1% of total loans.

Due to accounting principles for business combinations, Hampden’s loans are marked to fair value at acquisition and all are recorded as accruing, despite payment status. Accordingly, charge-off and accrual measures for the combined portfolio decreased including the acquired loans and are not fully comparable to prior periods. Berkshire’s fair value estimate of Hampden’s loans included impaired loans with a contractual balance of $28.5 million which were recorded with a fair value of $16.7 million (59% of the contract balance). This including a $7.6 million non-accretable discount and a $4.0 million accretable discount. The accretable discount is based on an average yield of 7.2% and average time of approximately 3.5 years to collect these balances. The total discount recorded on Hampden’s impaired loans was $11.8 million, or 2.4% of the total loan carrying balance at acquisition.

Accruing delinquent loans decreased to 0.41% of total loans from 0.52% in the first half of the year, including accruing loans over 90 days past due which increased slightly to 0.12% from 0.10% due to the Hampden merger accounting. Loans identified as troubled debt restructurings totaled $26 million at mid-year including $12 million which were newly identified in the first half of the year related to a small number of commercial loans. Loans which became non-accruing totaled $5 million in the second quarter, which is within the general run rate range of $4 - 9 million experienced for a number of recent quarters.

Loan Loss Allowance . The determination of the allowance for loan losses is a critical accounting estimate. The Company considers the allowance for loan losses appropriate to cover probable losses which can be reasonably estimated in the loan portfolio as of the balance sheet date. Under accounting standards for business combinations, acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition. A loan loss allowance is recorded by the Company for the emergence of new probable and estimable losses on acquired loans which were not impaired as of the acquisition date. Because of the accounting for acquired loans, some measures of the loan loss allowance are not comparable to periods prior to the acquisition date or to peer measures.

The total loan loss allowance increased by $1.5 million to $37.2 million in the first half of 2015, including the impact of increased loans from business activities as well as changes in commercial risk ratings. The ratio of the allowance to total loans decreased to 0.70% from 0.76% including the impact of the acquired Hampden balances. For loans from business activities, this ratio decreased to 0.80% from 0.84%. At mid-year, the allowance provided 2.9X coverage of annualized second quarter net charge-offs and 186% coverage of period-end non-accrual loans.

The credit risk profile of the Company’s loan portfolio is described in the Loan Loss Allowance note in the consolidated financial statements. The Company’s risk management process focuses primary attention on loans with higher than normal risk, which includes loans rated special mention and classified (substandard and lower). These loans are referred to as criticized loans. Criticized loans increased to $148 million (2.0% of assets) at mid-year 2015 from $130 million (2.0% of assets) at the start of the year. This increase was primarily due to a small number of additional commercial loans designated as special mention due to industry related factors. The Company views its potential problem loans as those loans from business activities which are rated as classified and continue to accrue interest. These loans have a possibility of loss if weaknesses are not corrected. Classified loans acquired in business combinations are recorded at fair value and are classified as performing at the time of acquisition and therefore have not generally been viewed as potential problem loans. Potential problem loans decreased to $63 million from $67 million during the first half of the year. The balance of accruing classified acquired loans decreased to $22 million from $24 million during this period despite the addition of the Hampden portfolio. There were no significant changes in the composition of problem assets during 2015 through mid-year. The Company’s evaluation of its credit risk profile also compares the amount of criticized assets

72

to the total of the Bank’s Tier 1 Capital plus the loan loss allowance. This ratio declined to 26% from 28% during the first six months of 2015.

Deposits. Total deposits increased by 8% annualized from business activities in the first half of the year, including 11% annualized growth in demand deposit balances. Total deposits increased by $667 million to $5.32 billion, including $484 million in acquired balances from Hampden. There was little change in total deposits from business activities in savings and money market balances. Excluding Hampden balances, total NOW deposits decreased due to changes in institutional and corporate balances. Deposit growth included a $196 million increase in brokered balances which helped fund loan growth and contributed to the Company’s targeted asset sensitive interest rate sensitivity profile.

The Hampden deposit portfolio consisted largely of Springfield area accounts and increased Berkshire’s estimated market share to a top five position in that market. These acquired deposits included $97 million in demand deposits, $51 million in NOW accounts, $62 million in money market accounts, $120 million in savings balances, and $154 million in time account balances. The average cost of Hampden’s deposits in the first quarter of 2015, before its acquisition, was approximately 0.57%. The average cost of Berkshire’s combined deposits declined to 0.42% in the most recent quarter from 0.43% in the prior quarter, including a lower cost of money market balances as a result of account changes, along with the ongoing benefit of growth in demand deposits and the benefit of a lower fair value cost assigned to Hampden time deposits. Mid-year brokered time deposits had a cost of 0.64% and an 11.3 month average maturity.

In 2015, the Company has consolidated seven branches and entered an agreement for the sale of its Tennessee branch in the second half of the year. The Company does not expect that its branch consolidations will have any material impact on its deposit balances. The Company ended its participation in the Massachusetts Depositors Insurance Fund (“DIF”) at mid-year 2014 and the one year transitional coverage of existing balances expired early in July, 2015. Hampden Bank’s participation in this fund terminated with no transitional coverage as of the Hampden merger date. Normal FDIC insurance coverage remains in place for the Bank’s deposits. The Company has initiated limited offerings of reciprocal deposit money market accounts, as well as collateralized deposit accounts for certain municipal customers. The DIF transition has affected the pace and mix of deposit growth over the last year. The Company is targeting positive deposit growth in the second half of 2015 through targeted deposit promotions and additional brokered balances as it develops the long run funding for the Firestone acquisition.

New federal regulatory liquidity coverage ratios for the largest banks became effective in 2015, with the potential of increasing competition for retail deposits and reducing competition for large corporate deposits. Additionally, some institutions have offered higher time deposit account rates in anticipation of the initiation of interest rate increases by the Federal Reserve Bank after several years of near-zero short term rates. The Company believes that it may have competitive advantage in the event of interest rate increases due to the comparative stability of some of its more rural deposit markets. The ratio of loans/deposits was 99% at mid-year, compared to 101% at the start of the year, and has initially increased as a result of the Firestone acquisition completed on August 7.

Borrowings, Derivative Financial Instruments and Hedging Activities. Berkshire uses borrowings as a supplement to deposits to fund asset growth. Total borrowings increased by $214 million to $1.27 billion in the first half of 2015. This growth included $120 million in acquired Hampden borrowings and an additional amount of approximately $100 million which was scheduled for repayment on July 1 from excess cash generated through the acquisition of brokered deposits late in June. There were no other significant changes in borrowing activities during the period. A major portion of borrowings is managed on a short term basis under collateralized borrowing arrangements provided through the Federal Home Loan Bank of Boston and is routinely renewed in the normal course of business. Berkshire is using its expanded systems capability to upgrade its collateral support related to existing and acquired loans to facilitate expanded liquidity from the Federal Home Loan Bank. The Bank’s unused borrowing capacity with the FHLBB stood at $541 million at mid-year. The weighted average cost of borrowings decreased to 0.76% in the most recent quarter from 0.85% in the prior quarter due to the higher level of lower rate borrowings in the second quarter, including the fair value costs assigned to Hampden borrowings.

The notional amount of derivatives increased by $145 million to $1.18 billion during the first six months of 2015, including an $86 million increase in derivatives related to commercial loan interest rate swaps and a $56 million increase in derivatives related to mortgage banking. These increases were related to growth in lending activities and customer demand for fixed rate protection against expected future interest rate increases. The net unrealized loss on derivatives increased to $7.9 million from $5.8 million due to the increase in the loss on the Company’s forward starting interest rate swaps to $6.4 million. This reflects the slower pace of future interest rate increases expected by the market at mid-year. The amount of this loss has varied significantly due to the unusually high volatility of long term interest rates in recent periods reflecting uncertainty about domestic and foreign monetary policy.


73

Stockholders’ Equity. Stockholders’ equity increased by $118 million in the first half of the year, including $115 in stock consideration issued for the Hampden acquisition. Retained earnings contributed $8 million, which was mostly offset by the $7 million decrease in accumulated other comprehensive income. This decrease resulted from the decline in unrealized bond gains previously discussed in the securities section. Total shares outstanding increased by 4.3 million to 29.5 million including 4.2 million shares issued as Hampden merger consideration.

The ratio of tangible equity/assets increased to 7.04% from 6.96% during the first half of 2015. This ratio is a non-GAAP financial measure commonly used by investors and it excludes goodwill and other intangible assets from equity and assets. The Company generally targets to maintain this measurement within a range of 7-8% and also considers its return on tangible equity as a source of capital strength for improving its condition and supporting its growth. The Hampden acquisition was estimated to be accretive to this capital measure, and the Firestone acquisition is also expected to be accretive to this measure. The ratio of equity/assets increased to 11.00% from 10.91% in the first six months of 2015. Regulatory capital measures also improved during the first half of 2015, with the Bank’s risk based capital increasing to 11.0% of risk weighted assets.

Mid-year tangible book value per share measured $17.16 and was down slightly from $17.19 at year-end 2014. Retained earnings offset most of the dilution from the Hampden acquisition and the decline in other comprehensive income. Mid-year book value per share measured $28.02 compared to $28.17 at year-end 2014 and included the impact of the new shares issued for Hampden at $27.38 per share.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

Summary. Berkshire’s results in 2015 included the Hampden Bank operations acquired on April 17, 2015.
As a result, many measures of revenue, expense, income, and average balances increased compared to prior periods, and per share measures were affected by new shares issued as Hampden Bank merger consideration. Results in 2014 included New York branch operations acquired on January 17, 2014.

As noted previously, Berkshire uses a non-GAAP measure of adjusted net income to supplement its evaluation of its operating results. Adjusted net income excludes certain amounts not viewed as related to ongoing operations. These non-operating items consist primarily of merger, acquisition, conversion, and restructuring expenses, together with gains recorded on securities and investments in acquired banks. Berkshire views its net merger related costs as part of the economic investment for its acquisitions.

Second quarter adjusted net income per share increased by 16% to $0.51 in 2015 from $0.44 in 2014. For the first half of the year, this measure increased by 17% to $1.01 from $0.86. This improvement was due to positive operating leverage driven by revenue growth from acquisitions and business activities, as well as reflecting the benefit of restructuring activities. Management estimated that the Hampden merger was neutral to adjusted earnings per share in the first half of 2015. Second quarter 2015 adjusted earnings per share increased at an 8% annualized rate compared to the prior quarter, demonstrating continued earnings momentum from business activities.

Second quarter GAAP net income per share was $0.35 in 2015 compared to $0.46 in 2014. First half GAAP net income per share was $0.70 and $0.42 in 2015 and 2014, respectively. In addition to operations, GAAP results included non-operating charges including charges from current year acquisitions and also related to the branch acquisition in January, 2014.

Quarterly adjusted EPS and profitability metrics have improved sequentially in all consecutive quarters since the beginning of 2014. Adjusted return on equity improved to 7.3% in the most recent quarter and adjusted return on assets improved to 0.81%. The GAAP measures of 5.1% and 0.56% for these measures, respectively, in the most recent quarter and included the impact of net non-operating charges.

Revenue. Total second quarter net revenue increased by $11 million, or 18%, to $69 million in 2015 compared to 2014. This growth included an estimated $5.3 million related to Hampden operations with the remainder attributable to business activities. Berkshire’s goal is to produce positive operating leverage from revenue growth as it develops revenue synergies in its expanded footprint and from integrated product sales that improve wallet share, while further developing efficiencies in its operations. Annualized second quarter 2015 net revenue measured $9.76 per share, increasing from the prior quarter including the benefits of the Hampden merger.

Net Interest Income. Second quarter 2015 net interest income increased over the prior quarter by $7.1 million, or 16%, and by $8.3 million, or 19%, over the second quarter of 2014. Included in the most recent quarter was an estimated $4.5 million from the Hampden operations acquired on April 17, 2015. Income in all periods included purchased loan accretion, consisting primarily of recoveries on the collection of impaired loans acquired in business combinations. This accretion totaled $2.2 million, $0.3

74

million, and $1.0 million for the above three periods, respectively. Berkshire has a strong focus on achieving improved values from its management of acquired impaired loans, and these recoveries also reflect the benefit of a stronger market for higher risk assets due to the ongoing impact of low interest rates fostered by federal monetary policy. These recoveries vary from quarter to quarter and are difficult to predict. The Company has focused on building its operating revenues in anticipation of a decrease in these recoveries due to the general seasoning of the acquired loan portfolios. Six month trends in net interest income also reflect double digit year over year increases, while purchased loan accretion totaled $2.5 million and $3.9 million in the first half of 2015 and 2014, respectively. At mid-year 2015, the contractual balance of purchased impaired loans (including Hampden) was $45 million and the carrying balance was $25 million. The $20 million discount on these loans included a $6.5 million accretable balance, which included $4.2 million from Hampden.

In addition to the benefit of growth in average earning assets, net interest income has also recently benefited from improvement in the net interest margin, despite the effects on industry margins of yield compression in the ongoing low interest rate environment. As previously discussed in the Loans section, the Company has pursued a strategy to remix its assets and reduce certain lower yielding loan balances. The net interest margin increased to 3.30% in the most recent quarter, and measured 3.16% excluding purchased loan accretion. The yield on earning assets improved to 3.77%, and the benefit of the higher yielding Hampden loans offset the impact of its lower yielding securities portfolio. The cost of funds declined to 0.49% due to the lower deposit and borrowings costs previously discussed.

Non-Interest Income. Non-interest income increased year over year by $2.3 million in the second quarter and $10.4 million in the first half 2015 compared to 2014. Non-interest income growth reflected the benefit of expanded operations on fee income together with changes in other non-interest income related to merger accounting.

Fee income increased both for the second quarter and for the first six months of 2015 compared to 2014. Second quarter 2015 fee income increased by $1.9 million, or 14%, compared to the prior quarter and by $1.8 million, or 13%, compared to the second quarter of 2014. This growth included an estimated $0.8 million contributed by the Hampden operations in the most recent quarter. Fee income has also benefited from the improved market for residential mortgages in 2015 following a dip in long term interest rates near the start of the year. Second quarter mortgage banking fee income increased by $0.3 million and $0.9 million compared to the prior quarter and year over year. Loan related income increased including higher fees on commercial interest rate swaps and income on the sale of seasoned loans. The second quarter ratio of deposit fee income to average deposits decreased year over year to 0.51% from 0.57% and included the impact of lower overdraft utilization by customers. In the most recent quarter, overdraft fees totaled $2.4 million, card related income totaled $2.1 million, and all other deposit related fee income totaled $1.9 million. Second quarter insurance and wealth revenues advanced modestly year over year. Wealth management income included the benefit of higher stock market prices together with the benefit of business developement. Wealth assets under management totaled $1.4 billion at mid-year 2015. Overall second quarter fee income as a percentage of revenue decreased to 23% from 24% year over year including the impact of Hampden which had a proportionate revenue contribution from fee based products and services.

Other non-interest income includes income on bank owned life insurance as well as capital gains distributions from investments. Non-interest income is stated net of charges to reduce the carrying value of tax-advantaged investments in commercial redevelopment projects. These charges are further discussed in the later section on income tax expense. Income in the most recent quarter included a $2.2 million gain recorded on Hampden stock held since prior to the acquisition announcement. In the first quarter of 2014, non-interest income was net of $8.8 million in charges for the termination of hedges following the New York branch acquisition.

Loan Loss Provision. The provision for loan losses increased year over year by $0.2 million in the second quarter and by $0.7 million in the first half of 2015 compared to 2014. The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company as an estimate of the probable and estimable loan losses in the portfolio as of period-end. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The level of the allowance was included in the discussion of financial condition. The amount of the provision exceeded net charge-offs in all periods shown, as the amount of the allowance has risen gradually based on loan portfolio growth and reflecting the ongoing improvement in loan performance and credit quality.

Non-Interest Expense. Non-interest expense increased year over year in the second quarter and for the first six months of 2015 compared to 2014 due to non-operating merger charges as well as the addition of the Hampden operations as of April 17, 2015. The Company evaluates its operations based on its measure of operating expense net of non-operating charges as disclosed previously in the reconciliation of non-GAAP measures. Operating non-interest expense in the second quarter of 2015 increased by $4.6 million, or 11% compared to the prior quarter and by $6.2 million, or 16%, compared to the prior year second quarter. The increase included $2.7 million in estimated Hampden operating expense following the Hampden acquisition on April 17, 2015. The remaining increase was primarily related to factors associated with revenue production. These included higher loan

75

related expenses associated with increased loan fee income, mortgage banking income, and impaired loan recoveries. Additionally, the Company's increased financing of tax-advantaged commercial development projects contributed $0.10 per share in the first half of 2015 and the Company reinvested a portion of this benefit into resources targeted towards future revenue generation. In comparison to average assets, annualized operating non-interest expense measured 2.52% in the most recent quarter. This measure has remained in the range of 2.49% - 2.54% over the last five quarters. Management’s focus is on investing in the business while managing overall expenses in proportion to the Company’s growth and achieving higher revenue growth to produce positive operating leverage. Total full time equivalent staff increased by 6% during the most recent quarter to 1,153 including the Hampden team. With its combined strategies of revenue growth and expense management, Berkshire operated with an improved efficiency ratio measuring 61.5% in the most recent quarter. The Company had 93 ongoing branches as of mid-year and in 2015 has consolidated seven branches and entered an agreement to sell its Tennessee branch in the second half of the year.

Income Tax Expense. Berkshire’s increased financing of tax-advantaged commercial development projects contributed $0.09 per share towards earnings in the first half of 2015. Berkshire reinvested a portion of this benefit into professionals and projects targeted towards future revenue generation. Due to its regional reach and resources, the Company has expanded its tax-advantaged investments in redevelopment projects with commercial relationship partners in its communities. This financing results in a charge to non-interest income which is more than offset by the tax benefits recorded as a reduction in income tax expense. The charge to non-interest income represents a reduction in the carrying value of the Company’s project investments; charges totaled $5.8 million in the first half of 2015. The tax benefits include tax credits along with a tax deduction on the amount of the charge. The total tax benefit recognized for these projects was $8.1 million in the first half of the year.

The Company’s second quarter effective income tax rate was 10% in 2015 and 26% in 2014. For the first half of the year, the rate was 7% in 2015 and 26% in 2014. In addition to the above tax credit related investments, the tax rate also includes the benefit of tax advantaged investments in municipal bonds and bank owned life insurance. The lower effective rate in 2015 is primarily due to the increased financing of tax-advantaged commercial development projects. The Company evaluates its effective tax rate on operating earnings. In the most recent quarter, this rate was 17%, including a 16% benefit from tax credit related investments.

Hampden Bancorp Acquisition. The Hampden acquisition was completed on April 17, 2015. Hampden was a community bank headquartered in Springfield, Massachusetts and serving the Springfield area. This in-market merger was targeted to benefit all constituencies, bringing additional products and services to the Hampden customers, providing revenue synergies and cost efficiencies to the combined operations, and boosting Berkshire’s deposit share in the Springfield MSA to a top 5 position based on most recent data. Berkshire is the largest Massachusetts based bank now serving the Springfield market. Berkshire consolidated 3 of the Hampden branches in the most recent quarter and now operates a total of 17 branches in that market, including 7 former Hampden offices.

The total acquisition cost was $119 million and Berkshire issued 4.2 million common shares as merger consideration. The price to tangible book value measured 157% including $8.4 million in pre-tax merger related costs recorded by Hampden and excluding the $4.6 million value of the Hampden shares owned by Berkshire. Berkshire recorded $9.6 million in pre-tax merger related costs through mid-year 2015 and expects to record additional related costs in the third quarter of 2015. The tangible deposit premium measured 8.6%. The Company believes that it is on plan to achieve its cost saves goal within a year of the closing date. The Company has also consolidated three Hampden branches and recorded in non-operating restructuring charges in 2015 for these consolidations.

The Company estimates that Hampden’s operations in the most recent quarter contributed to improvements in its operating profitability ratios but were not accretive to second quarter adjusted earnings per share. The Company is targeting that these operations will be accretive to earnings per share after all cost savings are complete. Based on the pro forma analysis included in the consolidated financial statements, the Hampden acquisition was calculated to be accretive to GAAP EPS for the periods shown based on the stated assumptions, due largely to the lower GAAP EPS resulting from other non-operating activities in those periods.

Due to the stock issued as merger consideration, the Company estimates that the Hampden acquisition improved the ratio of tangible equity/tangible assets by approximately 0.2% and also contributed positively to regulatory capital ratios. The acquisition is estimated to have resulted in approximately $0.30 dilution to tangible book value per share. This exceeded the Company’s original estimate including the impact of litigation costs and additional loan related discount because of the rise in interest rates since the time of the acquisition announcement. The Company continues to target tangible book value dilution payback within approximately 3 years from the merger date based on future merger related operating EPS accretion. The Company also continues to target double digit long run return on the equity invested in this acquisition.

Firestone Financial Acquisition. The Firestone acquisition was completed on August 7, 2015. Based in Needham, Massachusetts, Firestone is a longstanding profitable commercial specialty finance company providing secured installment loan equipment

76

financing for small and medium-sized businesses. Firestone lends nationally, financing fitness equipment, carnival rides and games, amusement and video entertainment, gaming, vending, laundry, and ATM machines. This acquisition provides revenue diversification to Berkshire and increased opportunities for cross sales of existing Berkshire products and services. This business is viewed as complementary to Berkshire’s existing specialized financing businesses, including asset based lending and SBA loan programs. Firestone is being operated as a subsidiary of Berkshire Bank and is maintaining its existing operations with a goal of expanding its programs based on Berkshire’s increased capital and financing capabilities.

Second quarter 2015 financial results included $0.9 million in non-operating Firestone merger related charges including legal fees and costs related to regulatory applications and SEC reporting. All other financial statement impacts of this business acquisition are being recorded in the third quarter of 2015 and in future operations. The initial cost of the acquisition was estimated at $53 million and is subject to final adjustment in the third quarter of 2015. Merger consideration was 75% stock and 25% cash. The Company has issued 1.4 million shares as initial merger consideration, which is subject to adjustment in the third quarter.

The Company is targeting that this acquisition will be accretive to adjusted earnings per share and profitability metrics after Firestone’s operations are integrated. The transaction is expected to be accretive to the Company’s capital ratios and that dilution to tangible book value per share will not exceed $0.10. The Company’s goal is that Firestone’s operations will produce a double digit return on its equity investment and tangible book value dilution will be repaid from Firestone’s operating earnings accretion in 2.5 years.

Results of Segment and Parent Operations . Berkshire Hills Bancorp (“the Parent”) has two subsidiary operating segments - banking and insurance. Results in the banking segment generally followed the levels and trends of consolidated results, which have been previously discussed. In the insurance segment, first half income increased to $1.0 million in 2015 from $0.8 million in the prior year due to a 9% reduction in operating expenses. For the Parent, operating results primarily reflected changes in the operations of its bank subsidiary.

Total Comprehensive Income. Total comprehensive income includes net income together with other comprehensive income. For the first half the year, total comprehensive income decreased to $11.8 million in 2015 compared to $23.7 million in the prior year. Net income increased by $8.4 million to $18.8 million. This improvement was offset by a change in the unrealized gain on investment securities. This gain decreased by $6.7 million in 2015 whereas the gain had improved by $17.1 million in 2014. This resulted in a $23.8 million adverse swing in the contribution from unrealized securities gains from year to year. This was due to a general improvement in bond prices in the first half of 2014 which was followed by a general decline in bond prices in the first half of 2015 as a result of changes in long term interest rates. The adverse effect of this swing was partially offset by a tax related benefit on this change in unrealized bond gains.

Liquidity and Cash Flows. During the first half of 2015, increased deposits were the primary source of funds and net loan growth was the primary use of funds. The increase in cash in 2015 included funds that were used to pay down borrowings on July 1. Berkshire generally plans that over the medium term, deposit growth will be the primary source of funds and loan growth will be the primary use of funds. The Bank is diversifying its deposit sources including institutional and wholesale sources as part of the expansion of its liquidity management program and to provide additional options for managing its funds costs and asset/liability objectives. In select cases, the Bank may offer collateralized deposits to municipalities or insured reciprocal deposits to large institutional accounts to supplement its deposit insurance protection in place of its previous participation in the Depositors Insurance Fund.

The Bank is also expanding its use of short term institutional borrowings and FHLBB borrowings will continue to be a significant source of liquidity for daily operations and borrowings targeted for specific asset/liability purposes. The Company also uses interest rate swaps in managing its funds sources and uses. As of June 30, 2015, the Bank had approximately $541 million in borrowing availability with the Federal Home Loan Bank. This was increased from $246 million at the start of the year due to additional collateral that was pledged to the FHLBB, together with the collateral provided through the Hampden acquisition.

Berkshire Hills Bancorp had a cash balance totaling $28 million as of June 30, 2015 which was on deposit with Berkshire Bank. The primary long run routine sources of funds for the Parent are expected to be dividends from Berkshire Bank and Berkshire Insurance Group, as well as cash from the exercise of stock options. The Bank paid a $12 million dividend to the Parent in the first half of 2015. The Parent has a $10 million revolving line of credit provided by a correspondent bank. The primary long run uses of funds by the Parent include the payment of cash dividends on common stock and debt service. The Parent's cash at mid-year included cash acquired from Hampden Bancorp.

Capital Resources. Please see the “Stockholders’ Equity” section of the Comparison of Financial Condition for a discussion of stockholders’ equity together with the “Stockholders’ Equity” note to the consolidated financial statements. At June 30, 2015, the regulatory capital ratios of the Bank and the Company continued to be consistent with the requirements to be classified as

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“Well Capitalized.” Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in the 2014 Form 10-K.

Berkshire views its earnings and related internal capital generation as a primary source of capital to support dividends and growth of the franchise. Additionally, the Company generally uses the issuance of common stock as the primary source of consideration for bank acquisitions, and such acquisitions may result in net increases or decreases in its capital ratios. Berkshire’s long term objective is to generate a double digit annual return on equity, and the Company evaluates lending, investment, and acquisition decisions with this objective as a benchmark. The Risk Management/Capital Committee of Berkshire’s Board of Directors is responsible for assisting the Board in planning for future capital needs and for ensuring compliance with regulations pertaining to capital structure and levels. The Company believes that the market for its stock is an additional capital resource over the long run and that Berkshire’s common stock is a significant resource available as merger consideration in the event of future acquisitions and business combinations. Additionally, the Company continues to monitor market conditions for other forms of regulatory capital such as preferred stock or subordinated debt, which are additional potential future capital resources to the Company and/or the Bank.

The Company issued approximately 4.2 million net shares as merger consideration for the acquisition of Hampden Bancorp on April 17, 2015 in accordance with the terms of the merger agreement. Most of the Company’s capital ratios improved as a result of this acquisition. The Company issued approximately 1.4 million shares for the acquisition of Firestone Financial on August 7, 2015 and the Company also expects that this acquisition will be accretive to its capital ratios.

Off-Balance Sheet Arrangements and Contractual Obligations. In the normal course of operations, Berkshire engages in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. Further information about the Company’s off-balance sheet arrangements is contained in the Company’s 2014 Form 10-K and information relating to payments due under contractual obligations is presented in the 2014 form 10-K. Changes in the fair value of derivative financial instruments and hedging activities are included on the balance sheet and information related to these matters is reported in the related footnote to the consolidated financial statements, and was included in management’s discussion of changes in financial condition. Aside from the completion of the Hampden Bancorp acquisition on April 17, 2015, there have been no significant changes in off-balance sheet arrangements and contractual obligations since year-end 2014. Berkshire is modifying certain Hampden off-balance sheet arrangements and contractual obligations as a result of the merger. The Firestone Financial acquisition was a significant off-balance sheet contractual obligation at mid-year. This acquisition obligation was completed on August 7, 2015 and Firestone’s routine operating commitments are not viewed as material to the Company’s total obligations. As a result of its restructuring activities, including branch consolidations, certain facilities leases have been terminated during the first half of 2015.

Fair Value Measurements. The Company records fair value measurements of certain assets and liabilities, as described in the related note in the financial statements. There were no significant changes in the fair value measurement methodologies at June 30, 2015 compared to December 31, 2014. The Company compares the carrying value to fair value for major categories of financial assets and liabilities. The biggest difference relates to loans, which had an estimated fair value premium of $50 million (1% of loans) at mid-year, which was not substantially changed from the prior year-end.


ITEM 3.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the way that the Company measures market risk in the first half of 2015. For further discussion about the Company’s Quantitative and Qualitative Aspects of Market Risk, please review Item 7A of the Report 10-K filed for the fiscal year ended December 31, 2014. Berkshire’s objective is to maintain an asset sensitive interest rate risk profile, as measured by the sensitivity of net interest income to market interest rate changes. The Company measures this sensitivity primarily by evaluating the impact of ramped and shocked interest rate changes on net interest income in the one year, two year, and three year time horizons, including parallel shifts and yield curve twists. The Company also evaluates its equity at risk from interest rate changes through discounted cash flow analysis. This measure assesses the present value changes to equity based on long term impacts of rate changes beyond the time horizons evaluated for net interest income at risk.

As of June 30, 2015, there were no significant changes in the Company’s methodologies for measuring the sensitivity of net interest income to changes in market interest rates. The Company remains modestly asset sensitive in most interest rate scenarios. Increases in interest rates which result from a parallel shift in the yield curve generally result in higher interest income in most future periods

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compared to the base scenario of unchanged interest rates. Interest income is positively affected in the range of 1.5% - 2% in the third year compared to this base scenario. This reflects the repricing of assets in an upward rate environment, together with the benefit of the fixed payment swaps. The Company’s position tends to be initially asset sensitive as prime and LIBOR indexed loans are expected to react quickly to rate changes while modeled deposit rate changes are expected to react less quickly. The Company’s asset sensitivity in the third year is modestly lower than the 5% estimate at the end of the prior quarter due to the integration of the liability sensitive Hampden balance sheet. The Firestone acquisition, which consists primarily of variable rate loans, is not expected to have a material impact on interest rate sensitivity measures. If interest rates remain unchanged or if the yield curve flattens due to higher short term rates, the Company’s net interest income could be negatively impacted in the initial effective period of the swaps due to the contracted fixed payments, together with the ongoing effects of asset yield compression which have pressured industry margins in recent years. Through its pricing disciplines and mix of business, Berkshire’s goal is to manage its balance sheet to support the net interest margin in the event that interest rates do not rise as anticipated by management during the effective period of the swaps.

In addition to modeling market risk in relation to net interest income, the Company also models net income at risk in various interest rate scenarios. Various sources of fee income, including interest rate swap income and mortgage banking revenue, are sensitive to interest rates. Other components of revenue and expense are also considered and net income estimates include the impact of income taxes on modeled changes. Management considers the risks to net income in evaluating its overall asset liability management and strategies.

The Company also estimates the sensitivity of the economic value of its equity to interest rate shocks. The Company seeks to avoid having excess long term earnings at risk when interest rates rise in the future, as anticipated. At June 30, 2015, the Company estimated that the economic value of equity, including estimates related to Hampden, would decrease by approximately 7% in the event of a 200 basis point upward interest rate shock, which was within the Company’s policy limits. This reflected the impact of fixed rate assets on medium and long term modeled net interest income if interest rates increase. This estimate is subject to numerous assumptions and uncertainties and is not intended as a projection of future operating results. The sensitivity of equity at risk in the modeled scenario decreased modestly from 9% at year-end 2014. Equity at risk is not expected to be materially impacted by the Firestone acquisition.

In a prolonged low rate environment, Berkshire has a number of business strategies to support its net interest income and margin objectives. These include changes in volumes and mix of interest bearing assets and liabilities, some of which are discussed above. The Company also evaluates its pricing strategies on an ongoing basis, and considers its investment, borrowings, and derivatives strategies in managing its income and risk profile. Due to the limitations and uncertainties relating to model assumptions, the modeled computations should not be relied on as projections of income. Further, the computations do not reflect any actions that management may undertake in response to changes in interest rates.


ITEM 4.           CONTROLS AND PROCEDURES
a)  Disclosure controls and procedures.
The principal executive officers, including the principal financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures were effective.
b)  Changes in internal control over financial reporting.
There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
ITEM 1.            LEGAL PROCEEDINGS
As of June 30, 2015, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. However, neither the Company nor the Bank is a party to any pending legal proceedings that it believes, in the aggregate, would have a material adverse effect on the financial condition or operations of the Company.
ITEM 1A.               RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. The risks described in this form are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. As a result of the closing of the Hampden Bancorp acquisition on April 17, 2015, the risks related to the failure to complete that acquisition are no longer relevant. The risks related to the acquisition of Firestone Financial were described in the Form S4/A filed by Berkshire on June 29, 2015. The risks related to the failure to complete that acquisition are no longer relevant. There have been no other material changes in the Company’s Risk Factors during the first half of 2015.

ITEM 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) No Company unregistered securities were sold during the quarter ended June 30, 2015.
(b) Not applicable.
(c) The following table provides certain information with regard to shares repurchased by the Company in the second quarter of 2015.
Total number of
Average price
Total number of shares
purchased as part of
publicly announced
Maximum number of
shares that may yet
be purchased under
Period
shares purchased
paid per share
plans or programs
the plans or programs
April 1-30, 2015
—

$
—

—

18,113

May 1-31, 2015
—

—

—

18,113

June 1-30, 2015
—

—

—

18,113

Total
—

$
—

—

18,113

On March 26, 2013, the Company announced that its Board of Directors authorized a new stock repurchase program, pursuant to which the Company may repurchase up to 500,000 shares of the Company’s common stock, which represents approximately 2.0% of the Company’s issued and outstanding shares. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will be recorded as treasury shares. The program will continue until it is completed or terminated by the Board of Directors.  The Company has no intentions to terminate this program or to cease any future potential purchases.
ITEM 3.                DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.                  MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.                OTHER INFORMATION
None.

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ITEM 6.                   EXHIBITS
2.1
Agreement and Plan of Merger, dated as of November 3, 2014, by and between Berkshire Hills Bancorp, Inc. and Hampden Bancorp, Inc. (1)
2.2
Agreement and Plan of Merger, dated as of May 21, 2015, by and among Firestone Financial Corp., Berkshire Hills Bancorp, Inc., Berkshire Bank, Jacob Acquisition LLC, and David S. Cohen, solely in his capacity as the representative of the Firestone security holders (15)
3.1
Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (2)
3.2
Amended and Restated Bylaws of Berkshire Hills Bancorp, Inc.(3)
4.1
Form of Common Stock Certificate of Berkshire Hills Bancorp, Inc. (2)
4.2
Note Subscription Agreement by and among Berkshire Hills Bancorp, Inc. and certain subscribers dated September 20, 2012 (4)
10.1
Amended and Restated Employment Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Michael P. Daly (5)
10.2
Amended and Restated Supplemental Executive Retirement Agreement between Berkshire Bank and Michael P. Daly (6)
10.3
Three Year Executive Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and George F. Bacigalupo (7)
10.4
Three-Year Executive Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Josephine Iannelli (7)
10.5
Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Richard M. Marotta (8)
10.6
Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Sean A. Gray (9)
10.7
Form of Split Dollar Agreement entered into with Michael P. Daly, Sean A. Gray, and Richard M. Marotta (10)
10.8
Berkshire Hills Bancorp, Inc. 2011 Equity Incentive Plan (11)
10.9
Berkshire Hills Bancorp, Inc. 2013 Equity Incentive Plan (12)
10.10
Legacy Bancorp, Inc. Amended and Restated 2006 Equity Incentive Plan (13)
10.11
Berkshire Bank 2014 Executive Short Term Incentive Plan (14)
10.12
Form of Amended and Restated Director Retirement Agreement between Berkshire Bank (as successor to Hampden Bank) and Richard Suski
11.0
Statement re: Computation of Per Share Earnings is incorporated herein by reference to Part II, Item 8, “Financial Statements and Supplementary Data”
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive data files pursuant to Rule 405 of Regulation S-T:  (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v)
the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail
_______________________________________

(1)
Incorporated by reference from the Exhibits to the Form 8-K filed on November 4, 2014.
(2)
Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement and amendments thereto, initially filed on March 10, 2000, Registration No. 333-32146.
(3)
Incorporated herein by reference from the Exhibits to the Form 8-K as filed on April 28, 2015.
(4)
Incorporated by reference from the Exhibits to the Form 8-K as filed on September 26, 2012.
(5)
Incorporated herein by reference from the Exhibits to the Form 8-K as filed on January 6, 2009.
(6)
Incorporated herein by reference from the Exhibits to Form 10-K as filed on March 16, 2009.
(7)
Incorporated herein by reference from the Exhibits to the Form 10-K as filed on March 17, 2014.

81

(8)
Incorporated herein by reference from the Exhibits to the Form 10-K as filed on March 16, 2010.
(9)
Incorporated herein by reference from the Exhibits to the Form 10-K as filed on March 16, 2011.
(10)
Incorporated herein by reference from the Exhibit to the Form 8-K as filed on January 19, 2011.
(11)
Incorporated herein by reference from the Appendix to the Proxy Statement as filed on March 24, 2011.
(12)
Incorporated herein by reference from the Appendix to the Proxy Statement as filed on April 2, 2013.
(13)
Incorporated herein by reference from the Exhibits to the Form 8-K filed by Legacy Bancorp, Inc. on December 22, 2010.
(14)
Incorporated herein by reference from Exhibits to the Form 10-K as filed on March 16, 2015.
(15)
Incorporated herein by reference from Exhibits to the Form 8-K as filed on May 22, 2015.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BERKSHIRE HILLS BANCORP, INC.
Dated: August 10, 2015
By:
/s/ Michael P. Daly
Michael P. Daly
President and Chief Executive Officer
Dated: August 10, 2015
By:
/s/ Josephine Iannelli
Josephine Iannelli
Executive Vice President, Chief Financial Officer


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