BBT 10-Q Quarterly Report March 31, 2017 | Alphaminr
BERKSHIRE HILLS BANCORP INC
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BBT 10-Q Quarter ended March 31, 2017

Balance Sheet
Cash Flow
Income Statement
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BERKSHIRE HILLS BANCORP INC
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10-Q 1 bhlb-2017331x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2017
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
newlogoa01.jpg
BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
04-3510455
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
24 North Street, Pittsfield, Massachusetts
01201
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (413) 236-3149
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filers,” “accelerated filers,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 35,789,262 shares of common stock, par value $0.01 per share, outstanding as of May 5, 2017.


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
March 31,
2017

December 31,
2016
(In thousands, except share data)

Assets


Cash and due from banks
$
67,580

$
71,494

Short-term investments
25,763

41,581

Total cash and cash equivalents
93,343

113,075

Trading security, at fair value
12,966

13,229

Securities available for sale, at fair value
1,293,683

1,209,537

Securities held to maturity (fair values of $334,866 and $337,680)
331,179

334,368

Federal Home Loan Bank stock and other restricted securities
76,407

71,112

Total securities
1,714,235

1,628,246

Loans held for sale, at fair value
89,741

120,673

Commercial real estate
2,673,363

2,616,438

Commercial and industrial loans
1,146,125

1,062,038

Residential mortgages
1,850,684

1,893,131

Consumer loans
985,761

978,180

Total loans
6,655,933

6,549,787

Less: Allowance for loan losses
(45,804
)
(43,998
)
Net loans
6,610,129

6,505,789

Premises and equipment, net
95,203

93,215

Other real estate owned
71

151

Goodwill
403,106

403,106

Other intangible assets
18,644

19,445

Cash surrender value of bank-owned life insurance policies
139,914

139,257

Deferred tax assets, net
42,403

41,128

Other assets
91,119

98,457

Total assets
$
9,297,908

$
9,162,542

Liabilities


Demand deposits
$
1,194,633

$
1,278,875

NOW deposits
562,743

570,583

Money market deposits
1,819,403

1,781,605

Savings deposits
660,007

657,486

Time deposits
2,419,268

2,333,543

Total deposits
6,656,054

6,622,092

Short-term debt
1,136,801

1,082,044

Long-term Federal Home Loan Bank advances
157,920

142,792

Subordinated borrowings
89,206

89,161

Total borrowings
1,383,927

1,313,997

Other liabilities
158,374

133,155

Total liabilities
$
8,198,355

$
8,069,244

(continued)
Shareholders’ equity


Common stock ($.01 par value; 50,000,000 shares authorized and 36,732,129 shares issued and 35,728,523 shares outstanding in 2017; 36,732,129 shares issued and 35,672,817 shares outstanding in 2016)
366

366

Additional paid-in capital
899,831

898,989

Unearned compensation
(7,971
)
(6,374
)
Retained earnings
225,307

217,494

Accumulated other comprehensive income
7,858

9,766

Treasury stock, at cost (1,003,606 shares in 2017 and 1,059,312 shares in 2016)
(25,838
)
(26,943
)
Total shareholders’ equity
1,099,553

1,093,298

Total liabilities and shareholders’ equity
$
9,297,908

$
9,162,542

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

4

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
(In thousands, except per share data)
2017
2016
Interest and dividend income


Loans
$
68,943

$
58,442

Securities and other
11,766

10,034

Total interest and dividend income
80,709

68,476

Interest expense


Deposits
9,098

7,159

Borrowings
4,725

3,620

Total interest expense
13,823

10,779

Net interest income
66,886

57,697

Non-interest income


Mortgage banking originations
12,678

821

Loan related income
4,179

3,046

Deposit related fees
6,204

6,109

Insurance commissions and fees
3,136

2,893

Wealth management fees
2,526

2,502

Total fee income
28,723

15,371

Other, net
93

223

Gain on sale of securities, net
12,570

36

Loss on termination of hedges
(6,629
)
—

Total non-interest income
34,757

15,630

Total net revenue
101,643

73,327

Provision for loan losses
5,095

4,006

Non-interest expense


Compensation and benefits
36,119

25,714

Occupancy and equipment
9,026

6,690

Technology and communications
6,087

4,857

Marketing and promotion
1,999

673

Professional services
2,451

1,280

FDIC premiums and assessments
1,298

1,233

Other real estate owned and foreclosures
28

263

Amortization of intangible assets
801

819

Acquisition, restructuring and conversion related expenses
11,682

780

Other
4,835

4,791

Total non-interest expense
74,326

47,100

Income before income taxes
22,222

22,221

Income tax expense
6,762

6,220

Net income
$
15,460

$
16,001

Earnings per share:


Basic
$
0.44

$
0.52

Diluted
$
0.44

$
0.52

Weighted average common shares outstanding:


Basic
35,280

30,511

Diluted
35,452

30,688

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
March 31,
(In thousands)
2017
2016
Net income
$
15,460

$
16,001

Other comprehensive income, before tax:


Changes in unrealized gain on securities available-for-sale
(9,433
)
17,706

Changes in unrealized loss on cash flow hedging derivatives
6,573

(4,506
)
Income taxes related to other comprehensive income:


Changes in unrealized gain on securities available-for-sale
3,540

(6,856
)
Changes in unrealized loss on cash flow hedging derivatives
(2,588
)
1,808

Total other comprehensive (loss) income
(1,908
)
8,152

Total comprehensive income
$
13,552

$
24,153

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


6

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Additional
Accumulated
other
Common stock
paid-in
Unearned
Retained
comprehensive
Treasury
(In thousands)
Shares
Amount
capital
compensation
earnings
income
stock
Total
Balance at December 31, 2015
30,974

$
322

$
742,619

$
(6,997
)
$
183,885

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

Comprehensive income:








Net income
—

—

—

—

16,001

—

—

16,001

Other comprehensive income
—

—

—

—

—

8,152

—

8,152

Total comprehensive income







24,153

Cash dividends declared ($0.20 per share)
—

—

—

—

(6,216
)
—

—

(6,216
)
Treasury stock adjustment (1)
—

—

1,645

—

—

—

(1,645
)
—

Forfeited shares
(22
)
—

68

526

—

—

(594
)
—

Exercise of stock options
2

—

—

—

(17
)
—

42

25

Restricted stock grants
105

—

312

(2,931
)
—

—

2,619

—

Stock-based compensation
—

—

—

1,156

—

—

—

1,156

Net tax benefit related to stock-based compensation
—

—

99

—

—

—

—

99

Other, net
(20
)
—

—

—

—

—

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

$
322

$
744,743

$
(8,246
)
$
193,653

$
4,847

$
(29,482
)
$
905,837

Balance at December 31, 2016
35,673

$
366

$
898,989

$
(6,374
)
$
217,494

$
9,766

$
(26,943
)
$
1,093,298

Comprehensive income:








Net income
—

—

—

—

15,460

—

—

15,460

Other comprehensive loss
—

—

—

—

—

(1,908
)
—

(1,908
)
Total comprehensive income







13,552

Cash dividends declared ($0.21 per share)
—

—

—

—

(7,506
)
—

—

(7,506
)
Treasury stock adjustment
—

—

—

—

—

—

—

—

Forfeited shares
(2
)
—

20

60

—

—

(80
)
—

Exercise of stock options
6

—

—

—

(71
)
—

152

81

Restricted stock grants
81

—

807

(2,859
)
—

—

2,052

—

Stock-based compensation
—

—

—

1,202

—

—

—

1,202

Net tax benefit related to stock-based compensation
—

—

—

—

—

—

—

—

Other, net
(29
)
—

15

—

(70
)
—

(1,019
)
(1,074
)
Balance at March 31, 2017
35,729

$
366

$
899,831

$
(7,971
)
$
225,307

$
7,858

$
(25,838
)
$
1,099,553

(1) Treasury stock adjustment represents the extinguishment of 168,931 shares of Berkshire Hills Bancorp stock held by the Company's subsidiary.

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

7

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(In thousands)
2017
2016
Cash flows from operating activities:


Net income
$
15,460

$
16,001

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


Provision for loan losses
5,095

4,006

Net amortization of securities
626

725

Change in unamortized net loan costs and premiums
1,227

72

Premises and equipment depreciation and amortization expense
2,467

2,155

Stock-based compensation expense
1,202

1,156

Accretion of purchase accounting entries, net
(4,597
)
(2,469
)
Amortization of other intangibles
801

819

Excess tax loss from stock-based payment arrangements
—

(99
)
Income from cash surrender value of bank-owned life insurance policies
(967
)
(1,053
)
Gain on sales of securities, net
(12,570
)
(35
)
Net decrease (increase) in loans held for sale
30,932

(2,728
)
Loss on disposition of assets
662

—

Loss on sale of real estate
13

54

Amortization of interest in tax-advantaged projects
1,329

991

Net change in other
13,536

(10,285
)
Net cash provided by operating activities
55,216

9,310

Cash flows from investing activities:


Net decrease in trading security
157

148

Proceeds from sales of securities available for sale
26,085

7,000

Proceeds from maturities, calls and prepayments of securities available for sale
44,794

40,832

Purchases of securities available for sale
(151,731
)
(46,442
)
Proceeds from maturities, calls and prepayments of securities held to maturity
3,791

3,439

Purchases of securities held to maturity
(1,037
)
(52
)
Net change in loans
(82,329
)
17,069

Proceeds from surrender of bank-owned life insurance
310

150

Proceeds from sale of Federal Home Loan Bank stock
1,636

11,495

Purchase of Federal Home Loan Bank stock
(6,931
)
(739
)
Net investment in limited partnership tax credits
(354
)
(1,803
)
Proceeds from the sale of premises and equipment
—

168

Purchase of premises and equipment, net
(5,070
)
(2,383
)
Proceeds from sale of other real estate
102

446

Net cash (used) provided by investing activities
$
(170,577
)
$
29,328

(continued)

8

Three Months Ended
March 31,
(In thousands)
2017
2016
Cash flows from financing activities:


Net increase in deposits
34,757

25,961

Proceeds from Federal Home Loan Bank advances and other borrowings
2,291,600

2,119,500

Repayments of Federal Home Loan Bank advances and other borrowings
(2,221,603
)
(2,212,752
)
Exercise of stock options
81

25

Excess tax loss from stock-based payment arrangements
—

99

Common stock cash dividends paid
(7,506
)
(6,216
)
Acquisition contingent consideration paid
(1,700
)
—

Net cash provided (used) by financing activities
95,629

(73,383
)
Net change in cash and cash equivalents
(19,732
)
(34,745
)
Cash and cash equivalents at beginning of year
113,075

103,562

Cash and cash equivalents at end of year
$
93,343

$
68,817

Supplemental cash flow information:


Interest paid on deposits
$
9,253

$
6,967

Interest paid on borrowed funds
5,084

3,508

Income taxes paid (refunded), net
(3,685
)
(370
)
Other non-cash changes:


Other net comprehensive (loss) income
(1,908
)
8,152

Real estate owned acquired in settlement of loans
35

215

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


9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.           BASIS OF PRESENTATION

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

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

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 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. previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In management’s opinion, all adjustment’s necessary for a fair statement are reflected in the interim periods presented.

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

Recently Adopted Accounting Principles
Effective January 1, 2017, the following new accounting guidance was adopted by the Company:
•
ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships;
•
ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments;
•
ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting
•
ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments; and
•
ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities

The adoption of these accounting standards did not have a material impact on the Company's financial statements.

Future Application of Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, ASU No. 2015-14, “Deferral of the Effective Date” was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. In 2016, ASU No. 2016-08, “Principal versus Agent Considerations,” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” were issued. These ASUs do not change the core principle for revenue recognition in Topic 606; instead, the amendments provide more detailed guidance in a few areas and additional implementation guidance and examples, which are expected to reduce the degree of judgment necessary to comply with Topic 606. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20 are the same as those provided by ASU 2015-14. While the

10

assessment of the provisions of ASU No. 2014-09 is not complete, the timing of the Company’s revenue recognition is not expected to materially change. Certain implementation issues relevant to the industry are still pending resolution; however our preliminary conclusions reached as to the application of the new guidance are not expected to be significantly affected. We will continue to evaluate any impact as additional guidance is issued and as our internal assessment progresses.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to: i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The guidance provides an election to subsequently measure certain non-marketable equity investments at cost less any impairment and adjusted for certain observable price changes. The guidance also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is only permitted for the provision related to instrument specific credit risk. While the Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01, the effect of the adoption will depend on the Company’s portfolio at the time of transition. The Company will continue to closely monitor developments and additional guidance.

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

Additionally, the ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply as well as transition guidance specific to nonstandard leasing transactions. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company's consolidated financial statements. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position. The Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. The ASU requires companies to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

11

Forward-looking information will now be used in credit loss estimates. The ASU requires enhanced disclosures to provide better understanding surrounding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Most debt instruments will require a cumulative-effect adjustment to retained earnings on the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted (modified retrospective approach). However, there is instrument-specific transition guidance. ASU No. 2016-13 is effective for interim and annual periods beginning after December 15, 2019. Early application will be permitted for interim and annual periods beginning after December 15, 2018. The Company is evaluating the provisions of ASU No. 2016-13, and will closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements. The Company expects the primary changes to be the application of the expected credit loss model to the financial statements. In addition, the Company expects the guidance to change the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines. The Company is in the process of identifying and implementing required changes to loan loss estimation models and processes and evaluating the impact of this new accounting guidance, which at the date of adoption is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.

12

NOTE 2.           TRADING SECURITY

The Company holds a tax advantaged economic development bond accounted for at fair value. The security had an amortized cost of $11.2 million and $11.4 million , and a fair value of $13.0 million and $13.2 million , at March 31, 2017 and December 31, 2016 , respectively. As discussed further in Note 11 - Derivative Financial Instruments and Hedging Activities, the Company 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 were no other securities in the trading portfolio at March 31, 2017 .

13

NOTE 3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

The following is a summary of securities available for sale and held to maturity:
(In thousands)
Amortized  Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
March 31, 2017




Securities available for sale




Debt securities:




Municipal bonds and obligations
$
118,170

$
3,391

$
(970
)
$
120,591

Agency collateralized mortgage obligations
752,638

2,863

(3,424
)
752,077

Agency mortgage-backed securities
232,888

507

(2,244
)
231,151

Agency commercial mortgage-backed securities
65,003

83

(1,709
)
63,377

Corporate bonds
60,331

632

(467
)
60,496

Trust preferred securities
11,380

408

—

11,788

Other bonds and obligations
10,662

211

(11
)
10,862

Total debt securities
1,251,072

8,095

(8,825
)
1,250,342

Marketable equity securities
35,823

8,433

(915
)
43,341

Total securities available for sale
1,286,895

16,528

(9,740
)
1,293,683

Securities held to maturity




Municipal bonds and obligations
202,696

4,108

(2,299
)
204,505

Agency collateralized mortgage obligations
75,311

1,438

(420
)
76,329

Agency mortgage-backed securities
8,762

—

(257
)
8,505

Agency commercial mortgage-backed securities
10,529

—

(441
)
10,088

Tax advantaged economic development bonds
33,557

1,558

—

35,115

Other bonds and obligations
324

—

—

324

Total securities held to maturity
331,179

7,104

(3,417
)
334,866

Total
$
1,618,074

$
23,632

$
(13,157
)
$
1,628,549

December 31, 2016




Securities available for sale




Debt securities:




Municipal bonds and obligations
$
117,910

$
2,955

$
(1,049
)
$
119,816

Agency collateralized mortgage obligations
652,680

2,522

(3,291
)
651,911

Agency mortgage-backed securities
230,308

557

(2,181
)
228,684

Agency commercial mortgage-backed securities
65,673

229

(1,368
)
64,534

Corporate bonds
56,320

408

(722
)
56,006

Trust preferred securities
11,578

368

(59
)
11,887

Other bonds and obligations
10,979

195

(16
)
11,158

Total debt securities
1,145,448

7,234

(8,686
)
1,143,996

Marketable equity securities
47,858

19,296

(1,613
)
65,541

Total securities available for sale
1,193,306

26,530

(10,299
)
1,209,537

Securities held to maturity




Municipal bonds and obligations
203,463

3,939

(2,416
)
204,986

Agency collateralized mortgage obligations
75,655

1,281

(411
)
76,525

Agency mortgage-backed securities
9,102

—

(243
)
8,859

Agency commercial mortgage-backed securities
10,545

—

(434
)
10,111

Tax advantaged economic development bonds
35,278

1,596

—

36,874

Other bonds and obligations
325

—

—

325

Total securities held to maturity
334,368

6,816

(3,504
)
337,680

Total
$
1,527,674

$
33,346

$
(13,803
)
$
1,547,217


14

The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities, segregated by contractual maturity at March 31, 2017 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
$
279

$
283

$
1,252

$
1,254

Over 1 year to 5 years
25,458

25,978

19,126

19,885

Over 5 years to 10 years
53,862

54,934

16,244

16,706

Over 10 years
120,944

122,542

199,955

202,099

Total bonds and obligations
200,543

203,737

236,577

239,944

Marketable equity securities
35,823

43,341

—

—

Mortgage-backed securities
1,050,529

1,046,605

94,602

94,922

Total
$
1,286,895

$
1,293,683

$
331,179

$
334,866


15

Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
Less Than Twelve Months
Over Twelve Months
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
(In thousands)
Losses
Value
Losses
Value
Losses
Value
March 31, 2017






Securities available for sale






Debt securities:






Municipal bonds and obligations
$
970

$
12,175

$
—

$
—

$
970

$
12,175

Agency collateralized mortgage obligations
3,424

420,178

—

—

3,424

420,178

Agency mortgage-backed securities
2,216

133,529

28

1,480

2,244

135,009

Agency commercial mortgage-backed securities
1,709

53,156

—

—

1,709

53,156

Corporate bonds
4

4,461

463

16,571

467

21,032

Other bonds and obligations
11

3,018

—

—

11

3,018

Total debt securities
8,334

626,517

491

18,051

8,825

644,568

Marketable equity securities
48

1,330

867

6,139

915

7,469

Total securities available for sale
8,382

627,847

1,358

24,190

9,740

652,037

Securities held to maturity






Municipal bonds and obligations
2,299

69,480

—

—

2,299

$
69,480

Agency collateralized mortgage obligations
420

14,422

—

—

420

$
14,422

Agency mortgage-backed securities
257

8,505

—

—

257

$
8,505

Agency commercial mortgage-backed securities
441

10,088

—

—

441

$
10,088

Total securities held to maturity
3,417

102,495

—

—

3,417

102,495

Total
$
11,799

$
730,342

$
1,358

$
24,190

$
13,157

$
754,532

December 31, 2016






Securities available for sale






Debt securities:






Municipal bonds and obligations
$
1,049

$
13,839

$
—

$
—

$
1,049

$
13,839

Agency collateralized mortgage obligations
3,291

319,448

—

—

3,291

319,448

Agency mortgage-backed securities
2,153

130,766

28

2,061

2,181

132,827

Agency commercial mortgage-backed securities
1,368

44,860

—

—

1,368

44,860

Corporate bonds
11

4,780

711

19,655

722

24,435

Trust preferred securities
—

—

59

1,204

59

1,204

Other bonds and obligations
15

3,014

1

27

16

3,041

Total debt securities
7,887

516,707

799

22,947

8,686

539,654

Marketable equity securities
157

6,600

1,456

5,927

1,613

12,527

Total securities available for sale
8,044

523,307

2,255

28,874

10,299

552,181

Securities held to maturity






Municipal bonds and obligations
2,416

69,308

—

—

2,416

69,308

Agency collateralized mortgage obligations
411

14,724

—

—

411

14,724

Agency mortgage-backed securities
243

8,859

—

—

243

8,859

Agency commercial mortgage-backed securities
434

10,111

—

—

434

10,111

Total securities held to maturity
3,504

103,002

—

—

3,504

103,002

Total
$
11,548

$
626,309

$
2,255

$
28,874

$
13,803

$
655,183


16

Debt Securities
The Company expects to recover its amortized cost basis on all debt securities in its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of March 31, 2017 , prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS and HTM portfolios were not other-than-temporarily impaired at March 31, 2017 :

AFS municipal bonds and obligations
At March 31, 2017, 9 of the total 271 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 7.4% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

AFS collateralized mortgage obligations
At March 31, 2017 , 77 out of the total 225 securities in the Company’s portfolios of AFS collateralized mortgage obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.8% 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 collateralized mortgage obligations. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS mortgage-backed securities
At March 31, 2017 , 42 out of the total 102 securities in the Company’s portfolios of AFS mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 2.1% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of all of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS corporate bonds
At March 31, 2017 , 2 out of 12 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 2.2% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.

At March 31, 2017 , $463 thousand of the total unrealized losses was attributable to a $17.0 million investment. The Company evaluated this security, with a Level 2 fair value of $16.6 million , for potential other-than-temporary impairment (“OTTI”) at March 31, 2017 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 other bonds and obligations
At March 31, 2017, 5 of the 9 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.4% of the amortized cost of securities in unrealized loss positions. The securities are all investment grade rated, and there were no material underlying credit downgrades during the quarter. All securities are performing.

17

HTM Municipal bonds and obligations
At March 31, 2017, 53 of the 195 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.2% 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.

HTM collateralized mortgage obligations
At March 31, 2017, 1 of the 9 securities in the Company’s portfolio of HTM collateralized mortgage obligations was in an unrealized loss position. Aggregate unrealized losses represented 2.9% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of all of the Company's collateralized residential mortgage obligations. The securities are investment grade rated, and there were no material underlying credit downgrades during the quarter. All securities are performing.
HTM mortgage-backed securities
At March 31, 2017, 2 out of a total of 2 securities in the Company’s portfolio of HTM mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 3.6% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows 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.

Marketable Equity Securities
In evaluating its marketable equity securities portfolio for OTTI, the Company considers its ability to more likely than not hold an equity security to recovery. The Company additionally considers other various factors including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI is recognized immediately through earnings.

At March 31, 2017 , 5 out of the total 19 securities in the Company’s portfolio of marketable equity securities were in an unrealized loss position. The unrealized loss represented 10.9% of the amortized cost of the securities. The Company has the ability and intent to hold the securities until recovery of their cost basis and does not consider the securities other-than-temporarily impaired at March 31, 2017 . 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.

18

NOTE 4. LOANS

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

Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from First Choice Bank, Parke Bank, Firestone Financial Corp., Hampden Bancorp, Inc., the New York branch acquisition, Beacon Federal Bancorp, Inc., The Connecticut Bank and Trust Company, Legacy Bancorp, Inc., and Rome Bancorp, Inc. Business activity and acquired loans are serviced, managed, and accounted for under the Company's same control environment. The following is a summary of total loans:
March 31, 2017
December 31, 2016
(in thousands)
Business
Activities Loans
Acquired
Loans
Total
Business
Activities Loans
Acquired
Loans
Total
Commercial real estate:






Construction
$
281,134

$
24,976

$
306,110

$
253,302

$
34,207

$
287,509

Single and multi-family
339,259

105,673

444,932

191,819

125,672

317,491

Other commercial real estate
1,405,948

516,373

1,922,321

1,481,223

530,215

2,011,438

Total commercial real estate
2,026,341

647,022

2,673,363

1,926,344

690,094

2,616,438

Commercial and industrial loans:






Asset based lending
351,992

—

351,992

321,270

—

321,270

Other commercial and industrial loans
664,783

129,350

794,133

586,832

153,936

740,768

Total commercial and industrial loans
1,016,775

129,350

1,146,125

908,102

153,936

1,062,038

Total commercial loans
3,043,116

776,372

3,819,488

2,834,446

844,030

3,678,476

Residential mortgages:






1-4 family
1,548,762

289,665

1,838,427

1,583,794

297,355

1,881,149

Construction
11,545

712

12,257

11,178

804

11,982

Total residential mortgages
1,560,307

290,377

1,850,684

1,594,972

298,159

1,893,131

Consumer loans:







Home equity
312,639

77,308

389,947

313,521

80,279

393,800

Auto and other
497,156

98,658

595,814

478,368

106,012

584,380

Total consumer loans
809,795

175,966

985,761

791,889

186,291

978,180

Total loans
$
5,413,218

$
1,242,715

$
6,655,933

$
5,221,307

$
1,328,480

$
6,549,787


19

The carrying amount of the acquired loans at March 31, 2017 totaled $1.2 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 $44.3 million (and a note balance of $79.3 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not impaired at acquisition date had a carrying amount of $1.2 billion .

At December 31, 2016, acquired loans maintained a carrying value of $1.3 billion and purchased credit-impaired loans totaled $46.8 million (note balance of $86.6 million). Loans considered not impaired at acquisition date had a carrying amount of $1.3 billion .

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer:
Three Months Ended March 31,
(in thousands)
2017
2016
Balance at beginning of period
$
8,738

$
6,925

Reclassification from nonaccretable difference for loans with improved cash flows
418

896

Change in cash flows that do not affect nonaccretable difference
(747
)
—

Reclassification to TDR
—

(185
)
Accretion
(1,046
)
(1,172
)
Balance at end of period
$
7,363

$
6,464


20

The following is a summary of past due loans at March 31, 2017 and December 31, 2016:

Business Activities Loans
(in thousands)
30-59 Days
Past Due
60-89 Days
Past Due
90
Days or Greater Past
Due
Total Past
Due
Current
Total Loans
Past Due >
90 days and
Accruing
March 31, 2017







Commercial real estate:







Construction
$
—

$
—

$
—

$
—

$
281,134

$
281,134

$
—

Single and multi-family
118

—

513

631

338,628

339,259

—

Other commercial real estate
2,080

1,136

6,608

9,824

1,396,124

1,405,948

641

Total
2,198

1,136

7,121

10,455

2,015,886

2,026,341

641

Commercial and industrial loans:







Asset based lending
—

—

—

—

351,992

351,992

—

Other commercial and industrial loans
1,583

1,405

7,124

10,112

654,671

664,783

6

Total
1,583

1,405

7,124

10,112

1,006,663

1,016,775

6

Residential mortgages:







1-4 family
2,125

66

3,830

6,021

1,542,741

1,548,762

1,274

Construction
—

—

—

—

11,545

11,545

—

Total
2,125

66

3,830

6,021

1,554,286

1,560,307

1,274

Consumer loans:







Home equity
581

50

2,485

3,116

309,523

312,639

85

Auto and other
1,624

428

1,195

3,247

493,909

497,156

22

Total
2,205

478

3,680

6,363

803,432

809,795

107

Total
$
8,111

$
3,085

$
21,755

$
32,951

$
5,380,267

$
5,413,218

$
2,028


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, 2016







Commercial real estate:







Construction
$
—

$
—

$
—

$
—

$
253,302

$
253,302

$
—

Single and multi-family
618

110

624

1,352

190,467

191,819

155

Other commercial real estate
481

2,243

4,212

6,936

1,474,287

1,481,223

—

Total
1,099

2,353

4,836

8,288

1,918,056

1,926,344

155

Commercial and industrial loans:







Asset based lending
—

—

—

—

321,270

321,270

—

Other commercial and industrial loans
3,090

1,301

6,290

10,681

576,151

586,832

5

Total
3,090

1,301

6,290

10,681

897,421

908,102

5

Residential mortgages:







1-4 family
1,393

701

4,179

6,273

1,577,521

1,583,794

1,956

Construction
10

—

—

10

11,168

11,178

—

Total
1,403

701

4,179

6,283

1,588,689

1,594,972

1,956

Consumer loans:







Home equity
99

—

2,981

3,080

310,441

313,521

306

Auto and other
2,483

494

968

3,945

474,423

478,368

16

Total
2,582

494

3,949

7,025

784,864

791,889

322

Total
$
8,174

$
4,849

$
19,254

$
32,277

$
5,189,030

$
5,221,307

$
2,438


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
March 31, 2017







Commercial real estate:







Construction
$
—

$
—

$
—

$
—

$
—

$
24,976

$
—

Single and multi-family
81

—

558

639

3,381

105,673

—

Other commercial real estate
463

—

782

1,245

27,123

516,373

102

Total
544

—

1,340

1,884

30,504

647,022

102

Commercial and industrial loans:







Asset based lending
—

—

—

—

—

—

—

Other commercial and industrial loans
325

128

1,228

1,681

5,282

129,350

18

Total
325

128

1,228

1,681

5,282

129,350

18

Residential mortgages:







1-4 family
674

84

1,416

2,174

7,269

289,665

—

Construction
—

—

—

—

—

712

—

Total
674

84

1,416

2,174

7,269

290,377

—

Consumer loans:







Home equity
80

396

1,353

1,829

893

77,308

514

Auto and other
431

239

1,464

2,134

383

98,658

767

Total
511

635

2,817

3,963

1,276

175,966

1,281

Total
$
2,054

$
847

$
6,801

$
9,702

$
44,331

$
1,242,715

$
1,401


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, 2016







Commercial real estate:



—




Construction
$
—

$
—

$
—

$
—

$
47

$
34,207

$
—

Single and multi-family
2

—

437

439

4,726

125,672

—

Other commercial real estate
1,555

—

765

2,320

30,047

530,215

—

Total
1,557

—

1,202

2,759

34,820

690,094

—

Commercial and industrial loans:







Asset based lending
—

—

—

—

—

—

—

Other commercial and industrial loans
1,850

15

1,262

3,127

3,369

153,936

24

Total
1,850

15

1,262

3,127

3,369

153,936

24

Residential mortgages:







1-4 family
321

343

2,015

2,679

7,283

297,355

443

Construction
—

—

—

—

—

804

—

Total
321

343

2,015

2,679

7,283

298,159

443

Consumer loans:







Home equity
753

—

870

1,623

957

80,279

353

Auto and other
542

314

1,686

2,542

387

106,012

791

Total
1,295

314

2,556

4,165

1,344

186,291

1,144

Total
$
5,023

$
672

$
7,035

$
12,730

$
46,816

$
1,328,480

$
1,611



22

The following is summary information pertaining to non-accrual loans at March 31, 2017 and December 31, 2016:
March 31, 2017
December 31, 2016
(in thousands)
Business
Activities Loans
Acquired
Loans (1)
Total
Business
Activities Loans
Acquired
Loans (2)
Total
Commercial real estate:






Construction
$
—

$
—

$
—

$
—

$
—

$
—

Single and multi-family
513

521

1,034

469

437

906

Other commercial real estate
5,967

717

6,684

4,212

765

4,977

Total
6,480

1,238

7,718

4,681

1,202

5,883

Commercial and industrial loans:






Other commercial and industrial loans
7,118

1,127

8,245

6,285

1,155

7,440

Total
7,118

1,127

8,245

6,285

1,155

7,440

Residential mortgages:






1-4 family
2,556

1,402

3,958

2,223

1,572

3,795

Construction
—

—

—

—

—

—

Total
2,556

1,402

3,958

2,223

1,572

3,795

Consumer loans:






Home equity
2,400

838

3,238

2,675

517

3,192

Auto and other
1,173

697

1,870

952

895

1,847

Total
3,573

1,535

5,108

3,627

1,412

5,039

Total non-accrual loans
$
19,727

$
5,302

$
25,029

$
16,816

$
5,341

$
22,157

_______________________________________
(1)  At quarter end March 31, 2017 , acquired credit impaired loans accounted for $98 thousand of loans greater than 90 days past due that are not presented in the above table.
(2)  At December 31, 2016, acquired credit impaired loans accounted for $83 thousand of loans greater than 90 days past due that are not presented in the above table.

23

Loans evaluated for impairment as of March 31, 2017 and December 31, 2016 were as follows:

Business Activities Loans
(in thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Total
March 31, 2017





Loans receivable:





Balance at end of period





Individually evaluated for impairment
$
29,208

$
6,460

$
2,798

$
2,380

$
40,846

Collectively evaluated for impairment
1,997,133

1,010,315

1,557,509

807,415

5,372,372

Total
$
2,026,341

$
1,016,775

$
1,560,307

$
809,795

$
5,413,218


Business Activities Loans
(in thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Total
December 31, 2016





Loans receivable:





Balance at end of year





Individually evaluated for impairment
$
25,549

$
5,705

$
2,775

$
2,703

$
36,732

Collectively evaluated for impairment
1,900,795

902,397

1,592,197

789,186

5,184,575

Total
$
1,926,344

$
908,102

$
1,594,972

$
791,889

$
5,221,307


Acquired Loans
(in thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Total
March 31, 2017





Loans receivable:





Balance at end of Period





Individually evaluated for impairment
$
3,325

$
654

$
494

$
741

$
5,214

Purchased credit-impaired loans
30,504

5,282

7,269

1,276

44,331

Collectively evaluated for impairment
613,193

123,414

282,614

173,949

1,193,170

Total
$
647,022

$
129,350

$
290,377

$
175,966

$
1,242,715


Acquired Loans
(in thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Total
December 31, 2016





Loans receivable:





Balance at end of year





Individually evaluated for impairment
$
4,256

$
635

$
308

$
406

$
5,605

Purchased credit-impaired loans
34,820

3,369

7,283

1,344

46,816

Collectively evaluated for impairment
651,018

149,932

290,568

184,541

1,276,059

Total
$
690,094

$
153,936

$
298,159

$
186,291

$
1,328,480


24

The following is a summary of impaired loans at March 31, 2017 and December 31, 2016:

Business Activities Loans
March 31, 2017
(in thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Commercial real estate - construction
$
—

$
—

$
—

Commercial real estate - single and multifamily
151

151

—

Other commercial real estate loans
20,710

20,710

—

Other commercial and industrial loans
1,051

1,051

—

Residential mortgages - 1-4 family
1,797

1,797

—

Consumer - home equity
1,232

1,232

—

Consumer - other
—

—

—

With an allowance recorded:



Commercial real estate - construction
$
—

$
—

$
—

Commercial real estate - single and multifamily
181

182

1

Other commercial real estate loans
8,085

8,165

80

Other commercial and industrial loans
5,286

5,409

123

Residential mortgages - 1-4 family
865

1,001

136

Consumer - home equity
1,098

1,148

50

Consumer - other
—

—

—

Total



Commercial real estate
$
29,127

$
29,208

$
81

Commercial and industrial loans
6,337

6,460

123

Residential mortgages
2,662

2,798

136

Consumer
2,330

2,380

50

Total impaired loans
$
40,456

$
40,846

$
390


25

Business Activities Loans
December 31, 2016
(in thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Commercial real estate - construction
$
—

$
—

$
—

Commercial real estate - single and multifamily
—

—

—

Other commercial real estate loans
18,905

18,905

—

Other commercial and industrial loans
382

382

—

Residential mortgages - 1-4 family
2,101

2,101

—

Consumer - home equity
1,605

1,605

—

Consumer - other
—

—

—

With an allowance recorded:



Commercial real estate - construction
$
—

$
—

$
—

Commercial real estate - single and multifamily
179

181

2

Other commercial real estate loans
6,306

6,462

156

Other commercial and industrial loans
5,060

5,324

264

Residential mortgages - 1-4 family
538

674

136

Consumer - home equity
942

1,098

156

Consumer - other
—

—

—

Total



Commercial real estate
$
25,390

$
25,548

$
158

Commercial and industrial loans
5,442

5,706

264

Residential mortgages
2,639

2,775

136

Consumer
2,547

2,703

156

Total impaired loans
$
36,018

$
36,732

$
714


26

Acquired Loans
March 31, 2017
(in thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Commercial real estate - single and multifamily
$
521

$
521

$
—

Other commercial real estate loans
403

403

—

Other commercial and industrial loans
298

298

—

Residential mortgages - 1-4 family
397

397

—

With an allowance recorded:



Commercial real estate - single and multifamily
$
883

$
911

$
28

Other commercial real estate loans
1,455

1,490

35

Other commercial and industrial loans
350

356

6

Residential mortgages - 1-4 family
93

97

4

Consumer - home equity
672

741

69

Total


x

Commercial real estate
$
3,262

$
3,325

$
63

Commercial and industrial loans
648

654

6

Residential mortgages
490

494

4

Consumer
672

741

69

Total impaired loans
$
5,072

$
5,214

$
142


Acquired Loans
December 31, 2016
(in thousands)
Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:



Commercial real estate - single and multifamily
$
—

$
—

$
—

Other commercial real estate loans
547

547

—

Other commercial and industrial loans
—

—

—

Residential mortgages - 1-4 family
208

208

—

With an allowance recorded:



Commercial real estate - single and multifamily
$
1,250

$
1,358

$
108

Other commercial real estate loans
2,209

2,351

142

Other commercial and industrial loans
576

635

59

Residential mortgages - 1-4 family
89

100

11

Consumer - home equity
292

406

114

Total



Commercial real estate
$
4,006

$
4,256

$
250

Commercial and industrial loans
576

635

59

Residential mortgages
297

308

11

Consumer
292

406

114

Total impaired loans
$
5,171

$
5,605

$
434


27

The following is a summary of the average recorded investment and interest income recognized on impaired loans as of March 31, 2017 and 2016:

Business Activities Loans
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
(in thousands)
Average Recorded
Investment
Cash Basis Interest
Income Recognized
Average Recorded
Investment
Cash Basis Interest
Income Recognized
With no related allowance:




Commercial real estate - construction
$
—

$
—

$
—

$
—

Commercial real estate - single and multifamily
153

—

—

—

Other commercial real estate loans
20,756

217

3,166

—

Other commercial and industrial loans
1,350

5

734

13

Residential mortgages - 1-4 family
2,025

18

1,520

2

Consumer - home equity
1,574

19

663

4

Consumer - other
—

—

1

—

With an allowance recorded:




Commercial real estate - construction
$
—

$
—

$
2,000

$
28

Commercial real estate - single and multifamily
181

—

97

1

Other commercial real estate loans
7,011

71

8,143

81

Other commercial and industrial loans
5,876

143

5,962

84

Residential mortgages - 1-4 family
939

14

1,619

19

Consumer - home equity
1,149

8

1,197

8

Consumer - other
—

—

106

1

Total




Commercial real estate
$
28,101

$
288

$
13,406

$
110

Commercial and industrial loans
7,226

148

6,696

97

Residential mortgages
2,964

32

3,139

21

Consumer loans
2,723

27

1,967

13

Total impaired loans
$
41,014

$
495

$
25,208

$
241


28

Acquired Loans
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
(in thousands)
Average Recorded
Investment
Cash Basis Interest
Income Recognized
Average Recorded
Investment
Cash Basis Interest
Income Recognized
With no related allowance:




Commercial real estate - construction
$
—

$
—

$
—

$
—

Commercial real estate - single and multifamily
721

31

126

2

Other commercial real estate loans
1,272

21

760

—

Other commercial and industrial loans
403

—

261

—

Residential mortgages - 1-4 family
409

6

12

—

Consumer - home equity
—

—

—

—

Consumer - other
—

—

169

1

With an allowance recorded:




Commercial real estate - construction
$
—

$
—

$
—

$
—

Commercial real estate - single and multifamily
915

12

825

11

Other commercial real estate loans
1,494

19

2,569

44

Other commercial and industrial loans
362

13

53

—

Residential mortgages - 1-4 family
98

1

334

3

Consumer - home equity
743

4

309

2

Consumer - other
—

—

—

—

Total




Other commercial real estate loans
$
4,402

$
83

$
4,280

$
57

Commercial and industrial loans
765

13

314

—

Residential mortgages
507

7

346

3

Consumer loans
743

4

478

3

Total impaired loans
$
6,417

$
107

$
5,418

$
63


29

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 months ended March 31, 2017 . 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 months ended March 31, 2017 were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity. The modifications for the three months ending March 31, 2016 were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity.
Three Months Ended March 31, 2017
(Dollars in thousands)
Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings



Commercial - Other
6

$
2,832

$
2,333

Commercial and industrial - Other
1

24

24

Residential - 1-4 Family
2

205

188

Consumer - Home Equity
1

53

53

Total
10

$
3,114

$
2,598

Three Months Ended March 31, 2016
(Dollars in thousands)
Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings



Commercial - Other
2

$
1,049

$
1,049

Commercial and industrial - Other
2

151

151

Total
4

$
1,200

$
1,200



The following table discloses the recorded investments and numbers of modifications for TDRs where a concession has been made, that then defaulted in the respective reporting period. For the three months ended March 31, 2016, there were no loans that were restructured that had subsequently defaulted during the period.
Modifications that Subsequently Defaulted
Three Months Ended March 31, 2017
(Dollars in thousands)
Number of Contracts
Recorded Investment
Troubled Debt Restructurings


Commercial - Other
1

$
113

Commercial and industrial- Other
1

$
101


30

The following table presents the Company’s TDR activity for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31,
(in thousands)
2017
2016
Balance at beginning of the period
$
33,829

$
22,048

Principal payments
(888
)
(342
)
TDR status change (1)
—

2,235

Other reductions/increases (2)
(840
)
(1,487
)
Newly identified TDRs
2,598

1,200

Balance at end of the period
$
34,699

$
23,654

_________________________________
(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 March 31, 2017 , the Company maintained foreclosed residential real estate property with a fair value of $71 thousand . Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of March 31, 2017 and December 31, 2016 totaled $5.6 million and $4.8 million , respectively. As of December 31, 2016, foreclosed residential real estate property totaled $151 thousand .

31

NOTE 5.               LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for the three months ended March 31, 2017 and 2016 was as follows:
At or for the three months ended March 31, 2017
Business Activities Loans
(In thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Unallocated
Total
Balance at beginning of period
$
16,405

$
9,371

$
7,752

$
5,447

$
254

$
39,229

Charged-off loans
124

1,270

235

687

—

2,316

Recoveries on charged-off loans
58

16

15

86

—

175

Provision/(releases) for loan losses
(224
)
3,616

244

568

171

4,375

Balance at end of period
$
16,115

$
11,733

$
7,776

$
5,414

$
425

$
41,463

Individually evaluated for impairment
80

123

137

50

—

390

Collectively evaluated for impairment
16,035

11,610

7,639

5,364

425

41,073

Total
$
16,115

$
11,733

$
7,776

$
5,414

$
425

$
41,463


At or for the three months ended March 31, 2016
Business Activities Loans
(In thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Unallocated
Total
Balance at beginning of period
$
14,508

$
7,317

$
7,566

$
4,956

$
227

$
34,574

Charged-off loans
1,044

965

547

401

—

2,957

Recoveries on charged-off loans
128

74

—

67

—

269

Provision/(releases) for loan losses
2,451

2,203

42

(553
)
(531
)
3,612

Balance at end of period
$
16,043

$
8,629

$
7,061

$
4,069

$
(304
)
$
35,498

Individually evaluated for impairment
340

130

151

56

—

677

Collectively evaluated for impairment
15,703

8,499

6,910

4,013

(304
)
34,821

Total
$
16,043

$
8,629

$
7,061

$
4,069

$
(304
)
$
35,498


At or for the three months ended March 31, 2017
Acquired Loans
(In thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Unallocated
Total
Balance at beginning of period
$
2,303

$
1,164

$
766

$
536

$
—

$
4,769

Charged-off loans
577

436

143

151

—

1,307

Recoveries on charged-off loans
10

55

39

55

—

159

Provision for loan losses
392

271

44

13

—

720

Balance at end of period
$
2,128

$
1,054

$
706

$
453

$
—

$
4,341

Individually evaluated for impairment
63

6

4

69

—

142

Purchased credit-impaired loans
—

—

—

—

—

—

Collectively evaluated for impairment
2,065

1,048

702

384

—

4,199

Total
$
2,128

$
1,054

$
706

$
453

$
—

$
4,341


32

At or for the three months ended March 31, 2016
Acquired Loans
(In thousands)
Commercial
real estate
Commercial and
industrial loans
Residential
mortgages
Consumer
Unallocated
Total
Balance at beginning of period
$
1,903

$
1,330

$
976

$
525

$
—

$
4,734

Charged-off loans
126

25

310

286

—

747

Recoveries on charged-off loans
(1
)
69

83

25

—

176

Provision for loan losses
187

(99
)
145

161

—

394

Balance at end of period
$
1,963

$
1,275

$
894

$
425

$
—

$
4,557

Individually evaluated for impairment
182

2

37

24

—

245

Purchased credit-impaired loans
—

—

—

—

—

—

Collectively evaluated for impairment
1,781

1,273

857

401

—

4,312

Total
$
1,963

$
1,275

$
894

$
425

$
—

$
4,557



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.

For commercial credits, 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, the Company's 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 ratings system is similar to loans originated through business activities.

The Company subjects loans that do not meet the ASC 310-30 criteria to ASC 450-20 ( Loss Contingencies ) by collectively evaluating these loans for an allowance for loan loss. The Company applies a methodology similar to

33

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.

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 March 31, 2017 , the allowance for loan losses related to acquired loans under ASC 310-30 and ASC 310-20 was $4.3 million using the above mentioned criteria.

34

The following tables present the Company’s loans by risk rating at March 31, 2017 and December 31, 2016:

Business Activities Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
Construction
Single and multi-family
Other
Total commercial real estate
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Grade:








Pass
$
281,134

$
253,302

$
330,460

$
189,310

$
1,352,475

$
1,434,762

$
1,964,069

$
1,877,374

Special mention
—

—

6,046

334

10,642

5,827

16,688

6,161

Substandard
—

—

2,753

2,175

42,795

40,598

45,548

42,773

Doubtful
—

—

—

—

36

36

36

36

Total
$
281,134

$
253,302

$
339,259

$
191,819

$
1,405,948

$
1,481,223

$
2,026,341

$
1,926,344


Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
Asset based lending
Other
Total comm. and industrial loans
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Grade:






Pass
$
351,992

$
321,270

$
641,461

$
569,704

$
993,453

$
890,974

Special mention
—

—

3,882

123

3,882

123

Substandard
—

—

16,315

13,825

16,315

13,825

Doubtful
—

—

3,125

3,180

3,125

3,180

Total
$
351,992

$
321,270

$
664,783

$
586,832

$
1,016,775

$
908,102


Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
1-4 family
Construction
Total residential mortgages
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Grade:






Pass
$
1,544,866

$
1,578,913

$
11,545

$
11,178

$
1,556,411

$
1,590,091

Special mention
66

701

—

—

66

701

Substandard
3,830

4,179

—

—

3,830

4,179

Total
$
1,548,762

$
1,583,793

$
11,545

$
11,178

$
1,560,307

$
1,594,971


Consumer Loans
Credit Risk Profile Based on Payment Activity
Home equity
Auto and other
Total consumer loans
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Performing
$
310,239

$
310,846

$
495,983

$
477,416

$
806,222

$
788,262

Nonperforming
2,400

2,675

1,173

952

3,573

3,627

Total
$
312,639

$
313,521

$
497,156

$
478,368

$
809,795

$
791,889


35

Acquired Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
Construction
Single and multi-family
Other
Total commercial real estate
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Grade:








Pass
$
24,276

$
33,461

$
100,195

$
119,414

$
474,137

$
496,562

$
598,608

$
649,437

Special mention
—

—

845

907

11,885

1,622

12,730

2,529

Substandard
700

746

4,633

5,351

30,351

32,031

35,684

38,128

Total
$
24,976

$
34,207

$
105,673

$
125,672

$
516,373

$
530,215

$
647,022

$
690,094


Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
Asset based lending
Other
Total comm. and industrial loans
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Grade:






Pass
$
—

$
—

$
120,511

$
147,102

$
120,511

$
147,102

Special mention
—

—

1,421

1,260

1,421

1,260

Substandard
—

—

7,418

5,574

7,418

5,574

Total
$
—

$
—

$
129,350

$
153,936

$
129,350

$
153,936


Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
1-4 family
Construction
Total residential mortgages
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Grade:






Pass
$
286,908

$
294,983

$
712

$
804

$
287,620

$
295,787

Special mention
88

343

—

—

88

343

Substandard
2,669

2,029

—

—

2,669

2,029

Total
$
289,665

$
297,355

$
712

$
804

$
290,377

$
298,159


Consumer Loans
Credit Risk Profile Based on Payment Activity
Home equity
Auto and other
Total consumer loans
(In thousands)
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
March 31, 2017
December 31, 2016
Performing
$
76,470

$
79,762

$
97,961

$
105,117

$
174,431

$
184,879

Nonperforming
838

517

697

895

1,535

1,412

Total
$
77,308

$
80,279

$
98,658

$
106,012

$
175,966

$
186,291


36

The following table summarizes information about total loans rated Special Mention or lower as of March 31, 2017 and December 31, 2016. 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.
March 31, 2017
December 31, 2016
(In thousands)
Business
Activities Loans
Acquired Loans
Total
Business
Activities Loans
Acquired Loans
Total
Non-Accrual
$
19,726

$
5,399

$
25,125

$
16,816

$
5,424

$
22,240

Substandard Accruing
52,809

43,269

96,078

51,125

44,177

95,302

Total Classified
72,535

48,668

121,203

67,941

49,601

117,542

Special Mention
21,114

14,856

35,970

7,479

4,323

11,802

Total Criticized
$
93,649

$
63,524

$
157,173

$
75,420

$
53,924

$
129,344


37

NOTE 6.               DEPOSITS

A summary of time deposits is as follows:
(In thousands)
March 31,
2017
December 31,
2016
Time less than $250,000
$
2,093,791

$
2,015,332

Time $250,000 or more
325,477

318,211

Total time deposits
$
2,419,268

$
2,333,543


Included in time deposits are brokered deposits of $953.8 million and $787.9 million at March 31, 2017 and December 31, 2016 , respectively. Included in the deposit balances contained on the balance sheet are reciprocal deposits of $114.7 million and $113.4 million at March 31, 2017 and December 31, 2016 , respectively.


NOTE 7.               BORROWED FUNDS

Borrowed funds at March 31, 2017 and December 31, 2016 are summarized, as follows:
March 31, 2017
December 31, 2016
Weighted
Weighted
Average
Average
(dollars in thousands)
Principal
Rate
Principal
Rate
Short-term borrowings:




Advances from the FHLB
$
1,136,801

0.93
%
$
1,072,044

0.71
%
Other borrowings
—

—

10,000

2.42

Total short-term borrowings:
1,136,801

0.93

1,082,044

0.72

Long-term borrowings:




Advances from the FHLB and other borrowings
157,920

1.43

142,792

1.53

Subordinated borrowings
73,742

7.00

73,697

7.00

Junior subordinated borrowings
15,464

2.90

15,464

2.77

Total long-term borrowings:
247,126

3.19

231,953

3.35

Total
$
1,383,927

1.33
%
$
1,313,997

1.19
%

Short term debt includes Federal Home Loan Bank (“FHLB”) 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 FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended March 31, 2017 and December 31, 2016 .

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 took place for the periods ended March 31, 2017 and December 31, 2016 .

Long-term FHLB advances consist of advances with an original maturity of more than one year. The advances outstanding at March 31, 2017 include callable advances totaling $6.0 million , and amortizing advances totaling $1.1 million . The advances outstanding at December 31, 2016 include callable advances totaling $11.0 million , and amortizing advances totaling $1.2 million . All FHLB 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.

38

A summary of maturities of FHLB advances as of March 31, 2017 is as follows:
March 31, 2017
Weighted Average
(in thousands, except rates)
Principal
Rate
Fixed rate advances maturing:


2017
$
1,160,800

0.95
%
2018
118,879

1.17

2019
—

—

2020
5,184

1.94

2021 and beyond
9,858

2.73

Total FHLB advances
$
1,294,721

0.99
%

The Company did not have variable-rate FHLB advances for the periods ended March 31, 2017 and December 31, 2016 .

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 5.113% . The subordinated note includes reduction to the note principal balance of $675 thousand and $706 thousand for unamortized debt issuance costs as of March 31, 2017 and December 31 2016, respectively.

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 2.90% and 2.77% at March 31, 2017 and December 31, 2016 , 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 shareholders 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 for which the Company is not the primary beneficiary. Accordingly, Trust I is not consolidated into the Company’s financial statements.

39

NOTE 8.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios were as follows:
March 31,
2017
Regulatory
Minimum to be
Well Capitalized
December 31,
2016
Regulatory
Minimum to be
Well Capitalized
Company (consolidated)




Total capital to risk weighted assets
11.8
%
10.0
%
11.9
%
10.0
%
Common equity tier 1 capital to risk weighted assets
9.9

6.5

9.9

6.5

Tier 1 capital to risk weighted assets
10.1

8.0

10.1

8.0

Tier 1 capital to average assets
7.8

5.0

7.9

5.0

Bank



Total capital to risk weighted assets
11.1
%
10.0
%
11.2
%
10.0
%
Common equity tier 1 capital to risk weighted assets
9.9

6.5

10.0

6.5

Tier 1 capital to risk weighted assets
9.9

8.0

10.0

8.0

Tier 1 capital to average assets
7.7

5.0

7.8

5.0


At each date shown, the Company and the Bank met the conditions to be classified as “well capitalized” under the relevant regulatory framework. 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. In addition, the final capital rules added a requirement to maintain a minimum conservation buffer, composed of Common equity tier 1 capital, of 2.5% of risk-weighted assets, to be phased in over three years and applied to the Common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly, banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0% , a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5% .

The required minimum conservation buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016, increased to 1.25% on January 1, 2017, and will increase to 1.875% on January 1, 2018 and 2.5% on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At March 31, 2017 , the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at March 31, 2017 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 1.25% .

40

Accumulated other comprehensive income (loss)
Components of accumulated other comprehensive income is as follows:
(In thousands)
March 31,
2017
December 31,
2016
Other accumulated comprehensive income, before tax:


Net unrealized holding gain on AFS securities
$
15,743

$
25,176

Net unrealized loss on cash flow hedging derivatives
—

(6,573
)
Net unrealized holding loss on pension plans
(2,954
)
(2,954
)
Income taxes related to items of accumulated other comprehensive income:


Net unrealized holding gain on AFS securities
(6,095
)
(9,636
)
Net unrealized loss on cash flow hedging derivatives
—

2,589

Net unrealized holding loss on pension plans
1,164

1,164

Accumulated other comprehensive income
$
7,858

$
9,766


The following table presents the components of other comprehensive income for the three months ended March 31, 2017 and 2016 :
(In thousands)
Before Tax
Tax Effect
Net of Tax
Three Months Ended March 31, 2017



Net unrealized holding gain on AFS securities:
x


Net unrealized gains arising during the period
$
3,137

$
(1,173
)
$
1,964

Less: reclassification adjustment for gains realized in net income
12,570

(4,713
)
7,857

Net unrealized holding (loss) on AFS securities
(9,433
)
3,540

(5,893
)
Net unrealized loss on cash flow hedging derivatives:



Net unrealized (loss) arising during the period
(449
)
180

(269
)
Less: reclassification adjustment for (losses) realized in net income
(7,022
)
2,768

(4,254
)
Net unrealized gain on cash flow hedging derivatives
6,573

(2,588
)
3,985

Other comprehensive (loss)
$
(2,860
)
$
952

$
(1,908
)
Three Months Ended March 31, 2016



Net unrealized holding gain on AFS securities:


Net unrealized gains arising during the period
$
17,742

$
(6,869
)
$
10,873

Less: reclassification adjustment for gains realized in net income
36

(13
)
23

Net unrealized holding gain on AFS securities
17,706

(6,856
)
10,850

Net unrealized loss on cash flow hedging derivatives:


Net unrealized (loss) arising during the period
(4,914
)
1,972

(2,942
)
Less: reclassification adjustment for (losses) realized in net income
(408
)
164

(244
)
Net unrealized (loss) on cash flow hedging derivatives
(4,506
)
1,808

(2,698
)
Other comprehensive income
$
13,200

$
(5,048
)
$
8,152


41

The following table presents the changes in each component of accumulated other comprehensive income (loss), for the three months ended March 31, 2017 and 2016 :
(in thousands)
Net unrealized
holding gain
on AFS Securities
Net loss on
effective cash
flow hedging derivatives
Net unrealized
holding loss
on pension plans
Total
Three Months Ended March 31, 2017




Balance at Beginning of Period
$
15,541

$
(3,985
)
$
(1,790
)
$
9,766

Other comprehensive gain (loss) before reclassifications
1,964

(269
)
—

1,695

Less: amounts reclassified from accumulated other comprehensive income (loss)
7,857

(4,254
)
—

3,603

Total other comprehensive (loss) income
(5,893
)
3,985

—

(1,908
)
Balance at End of Period
$
9,648

$
—

$
(1,790
)
$
7,858

Three Months Ended March 31, 2016




Balance at Beginning of Period
$
3,880

$
(5,108
)
$
(2,077
)
$
(3,305
)
Other comprehensive gain (loss) before reclassifications
10,873

(2,942
)
—

7,931

Less: amounts reclassified from accumulated other comprehensive income (loss)
23

(244
)
—

(221
)
Total other comprehensive income (loss)
10,850

(2,698
)
—

8,152

Balance at End of Period
$
14,730

$
(7,806
)
$
(2,077
)
$
4,847


The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2017 and 2016 :
Affected Line Item in the
Three Months Ended March 31,
Statement where Net Income
(in thousands)
2017
2016
is Presented
Realized gains on AFS securities:


$
12,570

$
36

Non-interest income
(4,713
)
(13
)
Tax expense
7,857

23

Net of tax
Realized (losses) on cash flow hedging derivatives:


(393
)
(408
)
Interest expense
(6,629
)
—

Non-interest expense
2,768

164

Tax benefit
(4,254
)
(244
)
Net of tax
Total reclassifications for the period
$
3,603

$
(221
)
Net of tax

42

NOTE 9. 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 March 31,
(In thousands, except per share data)
2017
2016
Net income
$
15,460

$
16,001

Average number of common shares issued
36,732

32,162

Less: average number of treasury shares
1,020

1,138

Less: average number of unvested stock award shares
432

513

Average number of basic common shares outstanding
35,280

30,511

Plus: dilutive effect of unvested stock award shares
126

119

Plus: dilutive effect of stock options outstanding
46

58

Average number of diluted common shares outstanding
35,452

30,688

Earnings per share:


Basic
$
0.44

$
0.52

Diluted
$
0.44

$
0.52


For the three months ended March 31, 2017 , 306 thousand shares of restricted stock and 55 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. For the three months ended March 31, 2016 , 394 thousand shares of restricted stock and 206 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.

43

NOTE 10. STOCK-BASED COMPENSATION PLANS

A combined summary of activity in the Company’s stock award and stock option plans for the three months ended March 31, 2017 is presented in the following table:
Non-Vested Stock Awards Outstanding
Stock Options Outstanding
(Shares in thousands)
Number of Shares
Weighted-Average Grant Date Fair Value
Number of Shares
Weighted-Average Exercise Price
December 31, 2016
448

$
26.28

109

$
15.72

Granted
81

35.47

—

—

Stock options exercised
—

—

(6
)
14.23

Stock awards vested
(101
)
25.35

—

—

Forfeited
(2
)
26.31

—

—

Expired
—

—

(10
)
33.46

March 31, 2017
426

$
28.49

93

$
13.91

Exercisable options at
March 31, 2017
93

$
13.91


During the three months ended March 31, 2017 and 2016 , proceeds from stock option exercises totaled $81 thousand and $25 thousand , respectively. During the three months ended March 31, 2017 , there were 101 thousand shares issued in connection with vested stock awards. During the three months ended March 31, 2016 , there were 62 thousand shares issued in connection with vested stock awards. All of these shares were issued from available treasury stock. Stock-based compensation expense totaled $1.2 million during the three months ended March 31, 2017 and 2016 , respectively. Stock-based compensation expense is recognized over the requisite service period for all awards.

44

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As of March 31, 2017 , the Company held derivatives with a total notional amount of $2.1 billion . The Company had economic hedges and non-hedging derivatives totaling $1.8 billion and $274.8 million , respectively, which are not designated as hedges for accounting purposes with changes in fair value recorded directly through earnings. Economic hedges included interest rate swaps totaling $1.4 billion , risk participation agreements with dealer banks of $92.7 million , and $321.2 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 March 31, 2017 .

The Company pledged collateral to derivative counterparties in the form of securities with an amortized cost of $28.6 million and a fair value of $28.6 million as of March 31, 2017 . 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 March 31, 2017 , 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:




Interest rate swaps on FHLB borrowings
$
—

0
—
%
—
%
$
—

Total cash flow hedges
—



—

Economic hedges:




Interest rate swap on tax advantaged economic development bond
11,230

12.7
1.15
%
5.09
%
(1,899
)
Interest rate swaps on loans with commercial loan customers
706,862

6.2
2.57
%
4.20
%
(4,624
)
Reverse interest rate swaps on loans with commercial loan customers
706,862

6.2
4.20
%
2.57
%
4,787

Risk participation agreements with dealer banks
92,708

10.7


(13
)
Forward sale commitments
321,234

0.2


(1,251
)
Total economic hedges
1,838,896



(3,000
)
Non-hedging derivatives:




Commitments to lend
274,843

0.2


8,061

Total non-hedging derivatives
274,843



8,061

Total
$
2,113,739



$
5,061


45

Information about derivative assets and liabilities at December 31, 2016 , 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:




Interest rate swaps on FHLB borrowings
$
300,000

2.3
0.63
%
2.29
%
$
(6,573
)
Total cash flow hedges
300,000



(6,573
)
Economic hedges:




Interest rate swap on tax advantaged economic development bond
11,386

12.9
0.98
%
5.09
%
(2,021
)
Interest rate swaps on loans with commercial loan customers
668,541

6.2
2.43
%
4.21
%
(6,752
)
Reverse interest rate swaps on loans with commercial loan customers
668,541

6.2
4.21
%
2.43
%
7,077

Risk participation agreements with dealer banks
83,360

11.6


5

Forward sale commitments
259,889

0.2


722

Total economic hedges
1,691,717



(969
)
Non-hedging derivatives:




Commitments to lend
208,145

0.2


4,738

Total non-hedging derivatives
208,145



4,738

Total
$
2,199,862



$
(2,804
)

46

Cash flow hedges
In the first quarter of 2017, the Company maintained six interest rate swap contracts with an aggregate notional value of $300 million with original durations of three years. This hedge strategy converted one month rolling FHLB borrowings based on the FHLB’s one month fixed interest rate to fixed interest rates, thereby protecting the Company from floating interest rate variability.

On February 7, 2017, the Company initiated and subsequently terminated all of its interest rate swaps associated with FHLB advances with 1-month LIBOR based floating interest rates of an aggregate notional amount of $300 million. As of March 31, 2017, the Company no longer held the FHLB advances associated with the interest rate swaps. As a result, the Company reclassified $6.6 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.

For the periods presented, the effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges was reported in other comprehensive income. Each quarter, the Company assessed 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. No ineffectiveness was identified for the three months ending March 31, 2017 and 2016.

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:
Three Months Ended March 31,
(In thousands)
2017
2016
Interest rate swaps on FHLB borrowings:


Unrealized (loss) recognized in accumulated other comprehensive loss
$
(449
)
$
(4,914
)
Less: reclassification of unrealized (loss) from accumulated other comprehensive income to interest expense
(393
)
(408
)
Less: reclassification of unrealized (loss) from accumulated other comprehensive income to other non-interest expense
(6,629
)
—

Net tax (expense) benefit on items recognized in accumulated other comprehensive income
(2,589
)
1,808

Other comprehensive gain (loss) recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects
$
3,984

$
(2,698
)

Hedge ineffectiveness on interest rate swaps designated as cash flow hedges was immaterial to the Company’s financial statements during the three months ended March 31, 2017 and 2016 .

47

Economic hedges
As of March 31, 2017 , the Company has an interest rate swap with a $11.2 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 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 $(162) thousand as of March 31, 2017 . 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.

48

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.

Amounts included in the Consolidated Statements of Income related to economic hedges and non-hedging derivatives were as follows:
Three Months Ended March 31,
(In thousands)
2017
2016
Economic hedges


Interest rate swap on industrial revenue bond:


Unrealized gain (loss) recognized in other non-interest income
$
122

$
(539
)
Interest rate swaps on loans with commercial loan customers:


Unrealized gain (loss) recognized in other non-interest income
1,098

(13,597
)
Reverse interest rate swaps on loans with commercial loan customers:


Unrealized gain (loss) recognized in other non-interest income
(1,098
)
13,597

(Unfavorable) Favorable change in credit valuation adjustment recognized in other non-interest income
(162
)
(61
)
Risk participation agreements:


Unrealized (loss) gain recognized in other non-interest income
(18
)
83

Forward commitments:


Unrealized (loss) gain recognized in other non-interest income
(1,251
)
(447
)
Realized gain (loss) in other non-interest income
(2,906
)
(383
)
Non-hedging derivatives


Commitments to lend


Unrealized gain recognized in other non-interest income
$
8,061

$
802

Realized gain in other non-interest income
8,774

849


49

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 $9.8 million and $11.5 million as of March 31, 2017 and December 31, 2016 , respectively. The Company had net liability positions with its financial institution counterparties totaling $6.6 million and $15.4 million as of March 31, 2017 and December 31, 2016 , respectively. The Company had net liability positions with its commercial banking counterparties totaling $5.0 million and $4.4 million as of March 31, 2017 and December 31, 2016 . The collateral posted by the Company that covered liability positions was $6.6 million and $19.8 million as of March 31, 2017 and December 31, 2016 , respectively.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of March 31, 2017 and December 31, 2016 :

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
March 31, 2017






Interest Rate Swap Agreements:






Institutional counterparties
$
41

$
—

$
41

$
—

$
—

$
41

Commercial counterparties
9,743

—

9,743

—

—

9,743

Total
$
9,784

$
—

$
9,784

$
—

$
—

$
9,784


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
March 31, 2017






Interest Rate Swap Agreements:






Institutional counterparties
$
(11,740
)
$
5,164

$
(6,576
)
$
6,576

$
—

$
—

Commercial counterparties
(4,958
)
2

(4,956
)
—

—

(4,956
)
Total
$
(16,698
)
$
5,166

$
(11,532
)
$
6,576

$
—

$
(4,956
)

50

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, 2016






Interest Rate Swap Agreements:






Institutional counterparties
$
49

$
—

$
49

$
—

$
—

$
49

Commercial counterparties
11,461

—

11,461

—

—

11,461

Total
$
11,510

$
—

$
11,510

$
—

$
—

$
11,510


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, 2016






Interest Rate Swap Agreements:






Institutional counterparties
$
(20,077
)
$
4,689

$
(15,388
)
$
14,738

$
650

$
—

Commercial counterparties
(4,407
)
23

(4,384
)
—

—

(4,384
)
Total
$
(24,484
)
$
4,712

$
(19,772
)
$
14,738

$
650

$
(4,384
)

51

NOTE 12. FAIR VALUE MEASUREMENTS

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 March 31, 2017 and December 31, 2016 , segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
March 31, 2017
Level 1
Level 2
Level 3
Total
(In thousands)
Inputs
Inputs
Inputs
Fair Value
Trading security
$
—

$
—

$
12,966

$
12,966

Available-for-sale securities:




Municipal bonds and obligations
—

120,591

—

120,591

Agency collateralized mortgage obligations
—

752,077

—

752,077

Agency residential mortgage-backed securities
—

231,151

—

231,151

Agency commercial mortgage-backed securities
—

63,377

—

63,377

Corporate bonds
—

60,496

—

60,496

Trust preferred securities
—

11,788

—

11,788

Other bonds and obligations
—

10,862

—

10,862

Marketable equity securities
43,008

333

—

43,341

Loans held for sale
—

89,741

—

89,741

Derivative assets
—

14,897

8,061

22,958

Other assets
—

—

976

976

Derivative liabilities
1,229

16,645

22

17,896

December 31, 2016
Level 1
Level 2
Level 3
Total
(In thousands)
Inputs
Inputs
Inputs
Fair Value
Trading security
$
—

$
—

$
13,229

$
13,229

Available-for-sale securities:




Municipal bonds and obligations
—

119,816

—

119,816

Agency collateralized mortgage obligations
—

651,911

—

651,911

Agency residential mortgage-backed securities
—

228,684

—

228,684

Agency commercial mortgage-backed securities
—

64,534

—

64,534

Corporate bonds
—

56,006

—

56,006

Trust preferred securities
—

11,887

—

11,887

Other bonds and obligations
—

11,158

—

11,158

Marketable equity securities
62,284

3,257

—

65,541

Loans held for sale
—

120,673

—

120,673

Derivative assets
622

16,157

4,838

21,617

Other assets
—

—

798

798

Derivative liabilities
—

24,420

—

24,420


52

There were no transfers between levels during the three months ended March 31, 2017 . During the three months ended March 31, 2016, the Company had one transfer of $708 thousand in marketable equity securities from Level 3 to Level 2 based on a change in valuation technique driven by the availability of market data.

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 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.

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
March 31, 2017
Aggregate
Aggregate
Less Aggregate
(In thousands)
Fair Value
Unpaid Principal
Unpaid Principal
Loans Held for Sale
$
89,741

$
86,653

$
3,088


Aggregate Fair Value
December 31, 2016
Aggregate
Aggregate
Less Aggregate
(In thousands)
Fair Value
Unpaid Principal
Unpaid Principal
Loans Held for Sale
$
120,673

$
118,178

$
2,495


The changes in fair value of loans held for sale for the three months ended March 31, 2017 and March 31, 2016 , were gains of $593 thousand and $215 thousand , respectively. The changes in fair value are included in mortgage banking originations in the Consolidated Statements of Income.

Interest Rate Swaps. 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 March 31, 2017 , the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation

53

adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Commitments to Lend. The Company enters into commitments to lend for residential mortgage loans intended for sale, 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, these commitments are classified as Level 3 measurements.

Forward Sale Commitments . The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the commitments to lend 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 commitments to lend 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.

Capitalized Servicing Rights. The Company accounts for certain capitalized servicing rights at fair value in its Consolidated Financial Statements, as the Company is permitted to elect the fair value option for each specific instrument. 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. 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.

54

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 months ended March 31, 2017 and 2016 .
Assets (Liabilities)
Securities
Capitalized
Trading
Available
Commitments
Forward
Servicing
(In thousands)
Security
for Sale
to Lend
Commitments
Rights
Three Months Ended March 31, 2017




December 31, 2016
$
13,229

$
—

$
4,738

$
100

$
798

Unrealized (loss) gain, net recognized in other non-interest income
(106
)
—

17,302

(122
)
(2
)
Paydown of trading security
(157
)
—

—

—

—

Transfers to Level 2
—

—

—

—

—

Transfers to held for sale loans
—

—

(13,979
)
—

—

Additions to servicing rights
—

—

—

—

180

March 31, 2017
$
12,966

$
—

$
8,061

$
(22
)
$
976

Unrealized gains (losses) relating to instruments still held at March 31, 2017
$
1,736

$
—

$
8,061

$
(22
)
$
—

Assets (Liabilities)
Securities
Interest Rate
Capitalized
Trading
Available
Lock
Forward
Servicing
(In thousands)
Security
for Sale
Commitments
Commitments
Rights
Three Months Ended March 31, 2016




December 31, 2015
$
14,189

$
708

$
323

$
9

$
—

Unrealized gain, net recognized in other non-interest income
433

—

1,206

(152
)
—

Paydown of trading account security
(148
)
—

—

—

—

Transfers to Level 2
—

(708
)
—

—

—

Transfers to held for sale loans
—

—

(727
)
—

—

Additions to servicing rights
$
—

$
—

$
—

$
—

$
—

March 31, 2016
$
14,474

$
—

$
802

$
(143
)
$
—

Unrealized gains (losses) relating to instruments still held at March 31, 2016
$
2,637

$
—

$
802

$
(143
)
$
—


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)
March 31, 2017
Valuation Techniques
Unobservable Inputs
Value
Assets (Liabilities)


Trading Security
$
12,966

Discounted Cash Flow
Discount Rate
2.68
%
Forward Commitments
8,061

Historical Trend
Closing Ratio
79.68
%

Pricing Model
Origination Costs, per loan
$
3,692

Commitments to Lend
22

Historical Trend
Closing Ratio
79.68
%

Pricing Model
Origination Costs, per loan
$
3,692

Capitalized Servicing Rights
976

Discounted Cash Flow
Constant Prepayment rate (CPR)
10.30
%
Discount Rate
11.00
%
Total
$
22,025


Fair Value
Significant
Unobservable Input
(In thousands)
December 31, 2016
Valuation Techniques
Unobservable Inputs
Value
Assets (Liabilities)


Trading Security
$
13,229

Discounted Cash Flow
Discount Rate
2.62
%
Forward Commitments
100

Historical Trend
Closing Ratio
80.36
%

Pricing Model
Origination Costs, per loan
$
3,692

Commitments to Lend
4,738

Historical Trend
Closing Ratio
80.36
%

Pricing Model
Origination Costs, per loan
$
3,692

Capitalized Servicing Rights
798

Discounted Cash Flow
Constant Prepayment rate (CPR)
10.40
%
Discount Rate
11.00
%
Total
$
18,865




56

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.
March 31, 2017
December 31, 2016
Fair Value Measurement Date as of March 31, 2017
Level 3
Level 3
Level 3
(In thousands)
Inputs
Inputs
Inputs
Assets


Impaired loans
$
18,968

$
17,761

March 2017
Capitalized servicing rights
11,766

10,726

February/March 2017
Other real estate owned
71

151

July 2016 - Oct. 2016
Total
$
30,805

$
28,638


Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:
Fair Value
(in thousands)
March 31, 2017
Valuation Techniques
Unobservable Inputs
Range (Weighted Average) (a)
Assets

Impaired loans
$
18,968

Appraised value of collateral
Discounted cash flow - loss severity
0.24% to 19.09% (3.61%)

Appraised value
$22.70 to $2,221.20 ($1,017.60)
Capitalized servicing rights
11,766

Discounted cash flow
Constant prepayment rate (CPR)
7.33% to 13.12% (9.90%)

Discount rate
10.00% to 12.50% (11.17%)
Other real estate owned
71

Appraised value of collateral
Appraised value
$94.00 to $175.00 ($134.90)
Total
$
30,805

(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, 2016
Valuation Techniques
Unobservable Inputs
Range (Weighted Average) (a)
Assets

Impaired loans
$
17,761

Appraised value of collateral
Discounted cash flow - loss severity
0.00% to 88.70% (9.73%)

Appraised value
$0 to $2,192 ($1,026)
Capitalized servicing rights
10,726

Discounted cash flow
Constant prepayment rate (CPR)
7.35% to 14.28% (10.44%)

Discount rate
10.00% to 14.00 (11.77%)
Other real estate owned
151

Appraised value of collateral
Appraised value
$101 to $129 ($122)
Total
$
28,638

(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 March 31, 2017 and December 31, 2016 .

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 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 comparable sales and appraisals.

58

Summary of Estimated Fair Values of Financial Instruments
The following tables summarize the estimated fair values, and related carrying amounts, of the Company’s financial instruments. Certain financial instruments and all non-financial instruments are excluded. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
March 31, 2017
Carrying
Fair
(In thousands)
Amount
Value
Level 1
Level 2
Level 3
Financial Assets





Cash and cash equivalents
$
93,343

$
93,343

$
93,343

$
—

$
—

Trading security
12,966

12,966

—

—

12,966

Securities available for sale
1,293,683

1,293,683

43,008

1,250,675

—

Securities held to maturity
331,179

334,866

—

299,751

35,115

FHLB bank stock and restricted securities
76,407

76,407

—

76,407

—

Net loans
6,610,129

6,642,677

—

—

6,642,677

Loans held for sale
89,741

89,741

—

89,741

—

Accrued interest receivable
27,599

27,599

—

27,599

—

Cash surrender value of bank-owned life insurance policies
139,914

139,914

—

139,914

—

Derivative assets
22,958

22,958

—

14,897

8,061

Assets held for sale
322

322

—

322

—

Financial Liabilities





Total deposits
$
6,656,054

$
6,659,280

$
—

$
6,659,280

$
—

Short-term debt
1,136,801

1,136,621

—

1,136,621

—

Long-term Federal Home Loan Bank advances
157,920

157,884

—

157,884

—

Subordinated borrowings
89,206

97,623

—

97,623

—

Derivative liabilities
17,896

17,896

1,229

16,645

22

December 31, 2016
Carrying
Fair
(In thousands)
Amount
Value
Level 1
Level 2
Level 3
Financial Assets





Cash and cash equivalents
$
113,075

$
113,075

$
113,075

$
—

$
—

Trading security
13,229

13,229

—

—

13,229

Securities available for sale
1,209,537

1,209,537

62,284

1,147,253

—

Securities held to maturity
334,368

337,680

—

300,806

36,874

FHLB bank stock and restricted securities
71,112

71,112

—

71,112

—

Net loans
6,505,789

6,532,745

—

—

6,532,745

Loans held for sale
120,673

120,673

—

120,673

—

Accrued interest receivable
26,113

26,113

—

26,113

—

Cash surrender value of bank-owned life insurance policies
139,257

139,257

—

139,257

—

Derivative assets
21,617

21,617

622

16,157

4,838

Assets held for sale
322

322

—

322

—

Financial Liabilities





Total deposits
$
6,622,092

$
6,624,108

$
—

$
6,624,108

$
—

Short-term debt
1,082,044

1,081,996

—

1,081,996

—

Long-term Federal Home Loan Bank advances
142,792

143,151

—

143,151

—

Subordinated borrowings
89,161

96,973

—

96,973

—

Derivative liabilities
24,420

24,420

—

24,420

—


59

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 cash flows 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.


NOTE 13. NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

Presented below is net interest income after provision for loan losses for the three months ended March 31, 2017 and 2016, respectively.
Three Months Ended March 31,
(In thousands)
2017
2016
Net interest income
$
66,886

$
57,697

Provision for loan losses
5,095

4,006

Net interest income after provision for loan losses
$
61,791

$
53,691


60

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 2016 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 2017 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 during the current period 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 39.4% marginal income tax rate. In the discussion, references to earnings per share refer to diluted earnings per share unless otherwise specified.

Berkshire Hills Bancorp, Inc. (“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. Berkshire Bank operates under the brand America’s Most Exciting Bank®.

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:

corporatefactsa03.jpg

61


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, 2016 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

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 Forms 10-Q.
At or for the
Three Months Ended March 31,
2017
2016
PER COMMON SHARE DATA (1)


Net earnings, diluted
$
0.44

$
0.52

Adjusted earnings, diluted (2)
0.55

0.54

Total book value
30.77

29.18

Tangible book value (2)
18.97

18.44

Dividends
0.21

0.20

Common stock price:


High
37.45

28.93

Low
32.90

24.71

Close
36.05

26.89

PERFORMANCE RATIOS (1)(3)
Return on assets
0.68
%
0.82
%
Adjusted return on assets (2)
0.85

0.85

Return on equity
5.71

7.19

Adjusted return on equity (2)
7.17

7.40

Adjusted return on tangible equity (2)
12.05

12.20

Net interest margin, fully taxable equivalent (FTE) (4) (8)
3.33

3.33

Net interest margin, excluding purchased loan accretion and FTE (2) (8)
3.15

3.22

Fee income/Net interest and fee income
30.04

21.04

Efficiency ratio (2) (8)
61.94

59.27

GROWTH
Total commercial loans, (annualized)
15
%
6
%
Total loans, (annualized)
6

—

Total deposits, (annualized)
2

—

Total net revenues, (compared to prior year)
39

26

Earnings per share, (compared to prior year)
(15
)
49

Adjusted earnings per share, (compared to prior year) (2)
2

8

FINANCIAL DATA: (In millions) (1)


Total assets
$
9,298

$
7,808

Total earning assets
8,486

7,142

Total investments
1,740

1,399

Total loans
6,656

5,727

Allowance for loan losses
46

40

Total intangible assets
422

334

Total deposits
6,656

5,584

Total borrowings
1,384

1,170

Total common stockholders’ equity
1,100

906

Net Income
15.5

16.0

Adjusted income (2)
19.4

16.5


63

At or for the
Three Months Ended March 31,
2017
2016
ASSET QUALITY AND CONDITION RATIOS (1)(6)
Net charge-offs (annualized)/average loans
0.20
%
0.23
%
Allowance for loan losses/total loans
0.69

0.70

Loans/deposits
100

103

Shareholders' equity to total assets
11.83

11.60

Tangible shareholders' equity to tangible assets (2)
7.64

7.66

FOR THE PERIOD: (In thousands) (1)


Net interest income
$
66,886

$
57,697

Non-interest income
34,757

15,630

Provision for loan losses
5,095

4,006

Non-interest expense
74,326

47,100

Net income
15,460

16,001

Adjusted Income (2)
19,400

16,489

______________________________________
(1)  Adjusted measurements are non-GAAP financial measures that are adjusted to exclude net non-operating charges primarily related to acquisitions and restructuring activities. Refer to the Reconciliation of Non-GAAP Financial Measures for additional information.
(2)
Non-GAAP financial measure.
(3)  All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(4) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.
(5) Revisions were made to the calculations of the net interest margin, efficiency ratio, and yields for the interest annualization and the fully taxable equivalent calculations. Prior period measures were revised to include these changes.
(6)  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 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.

64

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:
Three Months Ended March 31,
2017
2016
($ In millions)
Average
Balance
Yield/Rate
(FTE basis)(1)
Average
Balance
Yield/Rate
(FTE basis)(1)
Assets
Loans:




Commercial real estate
$
2,631

4.58
%
$
2,079

4.14
%
Commercial and industrial loans
1,072

4.86

1,027

4.96

Residential mortgages
1,887

3.55

1,798

3.84

Consumer loans
979

3.62

808

3.43

Total loans (2)
6,569

4.24

5,712

4.10

Investment securities (3)
1,626

3.38

1,343

3.42

Short term investments & loans held for sale (4)
138

2.71

56

0.91

Total interest-earning assets
8,333

4.00

7,111

3.94

Intangible assets
422


334


Other non-interest earning assets
389


346


Total assets
$
9,144


$
7,791


Liabilities and shareholders’ equity
Deposits:




NOW
$
575

0.22
%
$
484

0.13
%
Money market
1,805

0.52

1,417

0.49

Savings
649

0.13

602

0.13

Time
2,351

1.08

2,064

0.99

Total interest-bearing deposits
5,380

0.69

4,567

0.63

Borrowings and notes (5)
1,386

1.38

1,234

1.18

Total interest-bearing liabilities
6,766

0.83

5,801

0.75

Non-interest-bearing demand deposits
1,179


1,026


Other non-interest earning liabilities
117


73


Total liabilities
8,062


6,900


Total shareholders’ equity (3)
1,082


891


Total liabilities and stockholders’ equity
$
9,144


$
7,791


Three Months Ended March 31,
2017
2016
Average
Balance
Yield/Rate
(FTE basis)
Average
Balance
Yield/Rate
(FTE basis)
Net interest spread

3.17
%

3.19
%
Net interest margin (6)

3.33


3.33

Cost of funds

0.70


0.63

Cost of deposits

0.56


0.51

Supplementary data




Total deposits (In millions)
$
6,558


$
5,594


Fully taxable equivalent income adj. (In thousands) (7)
2,511


1,894



65

_____________________________________
(1)
Revisions were made to the calculations of the net interest margin, efficiency ratio, and yields for the interest annualization and the fully taxable equivalent calculations. Prior period measures were revised to include these changes.
(2)
The average balances of loans include nonaccrual loans and deferred fees and costs.
(3)
The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.
(4)
Interest income on loans held for sale is included in loan interest income on the income statement.
(5)
The average balances of borrowings includes the capital lease obligation presented under other liabilities on the consolidated balance sheet.
(6)
Purchased loan accretion totaled $3.7 million and $2.1 million for the three months ended March 31, 2017 and 2016, respectively.
(7)
Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.

66

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 measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP adjusted 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 adjusted 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-GAAP adjustments are presented net of an adjustment for income tax expense.

The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. 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 performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry.

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 core systems conversion and related systems conversions costs. Restructuring costs primarily consist of the Company's continued effort to create efficiencies in operations through calculated adjustments to the branch banking and office footprint. Expense adjustments include variable rate compensation related to nonoperating items. In the most recent quarter, adjusting items also included the loss recorded on the termination of cash flow hedges which was done in conjunction with the First Choice integration and was not viewed as related to normalized operations.

The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.



67

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items recorded for the periods indicated:
At or for the Three Months Ended
(in thousands)
March 31, 2017
December 31, 2016
March 31, 2016
GAAP Net income
$
15,460

$
10,331

$
16,001

Adj: (Gains) losses on sale of securities, net
(12,570
)
652

(36
)
Adj. Loss on termination of hedges
6,629

—

—

Adj: Net (gains) on sale of business operations
—

(522
)
—

Adj: Merger and acquisition expense
5,947

10,820

527

Adj: Restructuring and conversion expense
5,735

1,113

253

Adj: Income taxes
(1,801
)
(4,373
)
(256
)
Total adjusted income (non-GAAP)
(A)
$
19,400

$
18,021

$
16,489

GAAP Total revenue
$
101,643

$
75,883

$
73,327

Adj: (Gains) losses on sale of securities, net
(12,570
)
652

(36
)
Adj: Net (gains) on sale of business operations
—

(522
)
—

Adj. Loss on termination of hedges
6,629

—

—

Total operating revenue (non-GAAP)
(B)
$
95,702

$
76,013

$
73,291

GAAP Total non-interest expense
$
74,326

$
61,090

$
47,100

Less: Total non-operating expense (see above)
(11,682
)
(11,933
)
(780
)
Operating non-interest expense (non-GAAP)
(C)
$
62,644

$
49,157

$
46,320

(in millions, except per share data)


Total average assets
(D)
$
9,144

$
8,276

$
7,791

Total average shareholders’ equity
(E)
1,082

963

891

Total average tangible shareholders’ equity
(F)
660

601

557

Total tangible shareholders’ equity, period-end (1)
(G)
678

671

572

Total tangible assets, period-end (1)
(H)
8,876

8,740

7,474

Total common shares outstanding, period-end (thousands)
(I)
35,729

35,673

31,039

Average diluted shares outstanding (thousands)
(J)
35,452

32,381

30,688

Earnings per share, diluted
$
0.44

$
0.32

$
0.52

Adjusted earnings per share, diluted
(A/J)
0.55

0.56

0.54

Book value per share, period-end
30.77

30.65

29.18

Tangible book value per share, period-end
(G/I)
18.97

18.81

18.44

Total shareholders' equity/total assets
11.83

11.93

11.60

Total tangible shareholder's equity/total tangible assets
(G)/(H)
7.64

7.68

7.66

Performance ratios (2)


GAAP return on assets
0.68
%
0.50
%
0.82
%
Adjusted return on assets
(A/D)
0.85

0.87

0.85

GAAP return on equity
5.71

4.29

7.19

Adjusted return on equity
(A/E)
7.17

7.49

7.40

Adjusted return on tangible equity (3)
(A/F)
12.05

12.23

12.20

Efficiency ratio
(C-M)/(B+K+N)
61.94

58.42

59.27

Supplementary data (in thousands)


Tax benefit on tax-credit investments (4)
(K)
$
1,624

$
4,918

$
1,588

Non-interest income charge on tax-credit investments (5)
(L)
(1,329
)
(4,428
)
(1,101
)
Net income on tax-credit investments
(K+L)
295

490

487

Intangible amortization
(M)
801

572

819

Fully taxable equivalent income adjustment
(N)
2,511

2,228

1,894


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_______________________________________
(1)
Total tangible shareholders’ equity is computed by taking total shareholders’ equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end.
(2)
Ratios are annualized and based on average balance sheet amounts, where applicable.
(3)
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.
(4)
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.
(5)
The non-interest income charge is the reduction to the tax-advantaged commercial project investments, which are incurred as the tax credits are generated.

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SUMMARY
In the first quarter of 2017, Berkshire completed the systems conversion of First Choice Bank ("First Choice"), which was acquired on December 2, 2016, on budget and on schedule. The Bank expanded organically during the quarter, led by double digit annualized commercial loan growth, and an increase in the net interest margin over the prior quarter. New senior commercial leadership was recruited for the Mid-Atlantic region. Fee income expanded with the contribution of the mortgage banking operations of First Choice Loan Services (“FCLS”). Berkshire opened its first Boston branch to support its growing commercial business in Greater Boston. The Bank completed three previously announced branch consolidations and initiated a further restructuring to reduce premises overhead, including an additional planned branch consolidation. Balance sheet restructuring actions were taken in association with the First Choice integration, with the termination of the Bank’s portfolio of cash flow hedges, expansion of the investment portfolio, and the realization of equity gains. Berkshire declared a 5% increase in the quarterly cash dividend to $0.21 per quarter.

Total first quarter net revenue increased by 39% year-over-year due to the First Choice acquisition together with organic business development and the benefit of other 2016 business combinations. Annualized first quarter net revenue measured $407 million. GAAP earnings decreased by $0.5 million (3%) to $15.5 million, and were net of $5.9 million in merger related charges that were primarily related to the First Choice acquisition. Adjusted earnings increased by $2.9 million, or 18%, due to the benefits of business expansion. As discussed in an earlier section, the Company uses the non-GAAP measure of adjusted earnings, and related metrics, to evaluate the results of its operations

FIRST QUARTER FINANCIAL HIGHLIGHTS (comparisons are to prior quarter unless otherwise stated):

•
34% increase in total net revenue
•
46% increase in fee income
•
15% annualized commercial loan growth
•
6% annualized total loan growth
•
2% annualized deposit growth
•
3.33% net interest margin, increased from 3.21% in the prior quarter
•
0.27% non-performing assets/assets
•
0.20% net loan charge-offs/average loans

During the quarter, the Company benefited from the full quarter impact of the 25 basis point short term rate hike in December 2016. The additional 25 basis point hike in the target Fed Funds rate to 1% in March 2017 was expected to further benefit results in the second quarter. Ten year treasury rates started and ended the quarter near 2.4%.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2017 AND DECEMBER 31, 2016
Summary: Berkshire produced 6% annualized loan growth and 2% annualized deposit growth in the first quarter of 2017. In addition to the balance sheet changes mentioned above, the Company sold 30-year seasoned residential mortgages and increased its investment in medium term mortgage backed securities.

Its modeled net interest income remains modestly asset sensitive. Capital and liquidity metrics decreased slightly due to the strong commercial loan growth, which is not expected to remain at the elevated first quarter level. At period-end, book value per share measured $30.77 and tangible book value per share (a non-GAAP financial measure) measured $18.97. Total assets increased by $135 million, or 1%, to $9.3 billion during the quarter. In the most recent period, the Company made non-material revisions to the calculation of yields, costs, and margins following recent systems enhancements; prior period measures were revised to include these changes.

Securities: Total investment securities increased by $86 million, or 5%, to $1.7 billion during the most recent quarter. This increase was due to a $100 million increase in available for sale medium duration collateralized mortgage obligation securities, which replaced seasoned mortgage loans sold and contributed to liquidity and interest rate sensitivity objectives. The Company sold $25 million in equity securities, and realized $13 million in net securities gains. These gains were already included as a component of shareholders’ equity in accumulated other comprehensive income. This

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sale took advantage of strong market conditions for bank stocks. At quarter-end, the fair value of the remaining equity securities was $43 million and included $8 million in additional unrealized gains.

The securities portfolio yield decreased to 3.38% in the first quarter of 2017, compared to 3.58% in the prior quarter and 3.42% in the first quarter of 2016. This reflected the full quarter impact of the acquired First Choice portfolio, together with the first quarter portfolio changes noted above. The Company’s goal is to maintain this yield near the current level during 2017 and to minimize further compression from the ongoing low interest rates. The average life of the portfolio decreased slightly to 5.7 years from 5.9 years during the quarter. Debt securities purchased during the quarter were investment grade rated. Due primarily to the equity gains realized, the total unrealized gain on investment securities decreased to $10 million, or 0.6% of book value, at quarter-end, compared to $20 million, or 1.3% of book value, at the start of the quarter.

Loans: Total loans increased by $106 million, at a 6% annualized rate, to $6.7 billion during the first quarter of 2017. This included a $141 million increase, at a 15% annualized rate, in total commercial loans, which was primarily due to an $84 million increase in commercial and industrial loans and with contributions from the New York region, along with seasonal ABL and Firestone activity, together with wholesale and participation loans. Line utilization was up 2% during the quarter, which equated to a 14% annualized increase in outstandings. This was attributed to improving economic activity and business optimism in Berkshire’s markets. The Company recruited a new SVP Commercial Banking Regional Leader and a new SVP ABL Regional Leader with extensive experience to lead commercial growth in the new Mid-Atlantic region. Berkshire has a strategic focus on the development of commercial relationships and commercial business loans to support its strategies for market share enhancement and profitability improvement.

Commercial real estate loans increased in the most recent quarter by $57 million, or 9% annualized to $2.7 billion, and constitute the largest loan category. Berkshire monitors its commercial real estate lending risk using the enhanced processes required for banks exceeding the related federal regulatory monitoring thresholds even though it is well margined below those thresholds. Berkshire’s total commercial real estate outstandings measured 268% of regulatory capital at period-end, compared to the 300% regulatory monitoring guidelines (based on regulatory definitions). Total construction loan outstandings was 47% regulatory capital, compared to the 100% monitoring guideline.

Residential mortgages decreased by $42 million, or 2%, in the first quarter. As previously noted, the Bank shifted a portion of its longer duration fixed rate residential mortgage loans to medium duration mortgage backed securities, which contributed to its liquidity and interest rate risk management objectives. A total of $141 million of seasoned residential mortgages were sold during the quarter. Most of the Bank’s mortgage origination activity is managed as part of its secondary market oriented mortgage banking business unit, including the recently acquired First Choice Loan Services subsidiary. This activity is discussed in a later discussion of fee income. Total consumer loans were little changed during the quarter, with a 4% annualized decrease in home equity outstandings offset by 8% annualized growth in auto and other loans. The Bank has an indirect auto lending team originating prime auto loans throughout its New England/New York footprint.

The most recent quarter was the first full quarter with the acquired First Choice loan balances, and loan yields are therefore not fully comparable to prior periods. The quarter also included the benefit from the December rate hike on the yield of Prime and Libor based loans. The loan yield of 4.24% was higher than the 4.03% yield in the prior quarter and the 4.10% yield in the first quarter of 2016. The loan yield includes purchased loan accretion, including recoveries of purchased credit impaired loans. Excluding purchased loan accretion, the loan yields in these three respective periods were 4.01%, 3.91%, and 3.95%. At period-end, 43% of loans contractually repriced within one year, 21% repriced in one to five years, and 36% repriced after five years. The portfolio repricing life was slightly shorter than at the start of the year due to the mortgage asset repositioning and increased commercial line usage.

Asset Quality. Asset quality metrics remained favorable and generally improved slightly from the start of the year. First quarter annualized net loan charge-offs decreased to 0.20% from 0.21% in the prior quarter. Total past due loans decreased. Non-accruing loans increased to 0.38% of total loans from 0.34%. At period-end, the total contractual balance of purchased credit impaired loans was $79 million, with a $44 million carrying value, representing a $35 million discount, which is a 44% discount from the contractual amount. Included in this amount was a $7 million accretable balance net of accretion recorded during the quarter.

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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 loan loss allowance increased by $2 million, or 4%, in the first quarter of 2017. The ratio of the allowance to total loans increased slightly to 0.69% from 0.67%. The allowance on loans from business activities increased to 0.77% from 0.74% during the quarter. The allowance on acquired loans decreased to 0.35% from 0.40%. At period-end, the allowance provided 3.5X coverage of first quarter net loan charge-offs and 1.8X coverage of period-end non-accrual loans. Criticized loans increased to $157 million, or 1.7% of total assets, from $129 million, or 1.4% of total assets.

Deposits. Total deposits increased by $34 million, or 2% annualized, during the most recent quarter. Contributing to this growth was a $38 million increase in money market accounts and an $86 million increase in time deposits. This growth in part was in personal accounts reflecting changes following recent and anticipated interest rate increases. Transaction account balances decreased by $92 million primarily due to seasonal reductions in commercial and municipal balances following higher usage of those accounts at the prior year-end.

The most recent quarter was the first full quarter with the acquired First Choice deposit balances, and deposit costs are therefore not fully comparable to prior periods. First Choice deposit costs included the benefit of fair value accounting for the acquired time deposits. The quarter also included the impact from the December rate hike on deposit costs as a result of higher rates and mix shifts. These impacts tended to offset each other and the cost of deposits was unchanged at 0.56% from the prior quarter, while it was increased from 0.51% in the first quarter of 2016 including the ongoing impact from the December 2015 rate hike. Berkshire has been adjusting its Mid-Atlantic deposit offerings which were historically higher cost at First Choice Bank while staying on track with its goals for retaining and growing accounts in this promising new market. The loans/deposits ratio increased to 100% from 99% during the quarter, and is down from 105% at September 30, 2016 which reflects the benefit of the excess First Choice deposits acquired in December.

Borrowings and Derivative Financial Instruments: Total borrowings increased by $70 million in the first quarter to support earning asset growth.

As previously noted, the Company terminated its cash flow hedges in early February in conjunction with its process of integrating the acquired First Choice balance sheet, including excess deposits. The Company retired the one month rolling FHLB loans that were hedged by the terminated fixed payment interest rate swaps. The Company recorded a $7 million loss on this termination; this loss was already a component of shareholders’ equity in accumulated other comprehensive income. The swaps had a fixed pay rate of 2.3% with a remaining maturity of 2.3 years at the start of the quarter.

The cost of borrowings decreased to 1.38% in the first quarter, compared to 1.63% in the prior quarter. This reduction included the impact of the swap termination, and was partially offset by the higher borrowing costs resulting from the December interest rate hike. Due to the lower borrowing costs, the total cost of funds decreased to 0.70% from 0.73% for the above periods.

The notional balance of derivative financial instruments decreased by $86 million to $2.1 billion during the most recent quarter, including the impact of the termination of cash flow hedges totaling $300 million. The balance of interest rate swaps related to commercial loans increased by $77 million to $1.4 billion due to the origination of swaps related to lending activities during the quarter. The $1.4 billion balance includes identical $707 million amounts related to customer interest rate swaps and to the offsetting reverse interest rate swaps with national financial counterparties which serve as economic hedges. Derivatives related to mortgage banking for customer

72

interest rate lock commitments and forward secondary market sale commitments increased by $128 million in total to $0.6 billion due to pipeline growth by quarter-end.

With the termination of the cash flow hedges and the realization of the $7 million related loss, the net fair value of the remaining derivatives changed from a $3 million liability at year-end 2016 to a $5 million asset at quarter-end, which mostly represented net sale gains included in mortgage originations revenue, net of an unrealized loss on the bond held as a trading security.

Shareholders’ Equity. Berkshire’s capital metrics decreased slightly during the quarter due to strong loan growth and the impact of merger and restructuring charges. The Company generally targets that earnings from operations will support organic growth, shareholder dividends, and improving capital metrics. The Company and the Bank remained Well Capitalized under regulatory guidelines at period-end. The Bank’s risk based capital ratio decreased slightly to 11.1% from 11.2% during the quarter.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2017 and 2016

Summary. Berkshire’s results in the most recent quarter included the first full quarter impact of First Choice Bank acquired on December 2, 2016. Many measures of revenue, expense, income, and average balances increased year-to-year due to this acquisition, together with other business combinations and organic growth. An analysis of pro forma 2016 revenue and expense was provided in the most recent Form 10-K. Based on the assumptions contained therein, pro forma 2016 revenue was 33% higher assuming that the 2016 business combinations were completed prior to 2016 and were included in 2016 results. Pro forma 2016 earnings per share (excluding merger related expenses and before targeted cost saves) were $2.24 in this analysis. This pro forma information about the combined operations should be considered in comparing operating results between 2017 and 2016.

As noted previously, Berkshire uses a non-GAAP measure of adjusted net income (or adjusted earnings) to supplement its evaluation of its operating results. Adjusted net income excludes certain amounts not viewed as related to its normalized operations. These adjusting items consist primarily of merger, acquisition, conversion, and restructuring expenses, together with net gains recorded on securities and the loss on termination of hedges recorded in the most recent quarter. Berkshire views its net merger related costs as part of the economic investment for its acquisitions. Berkshire also makes references to adjusted revenues and adjusted expenses in its discussion of operating results. Please see the non-GAAP reconciliation section of this discussion for more information about adjusted net income and other non-GAAP financial measures discussed in this report.

First quarter GAAP net income decreased year-to-year by 3% to $15 million due primarily to the impact of restructuring and merger costs in 2017, including the First Choice merger related expenses. GAAP EPS decreased by 15% to $0.44 including the impact of shares issued as merger consideration. Adjusted earnings increased by 18% to $19 million, while adjusted earnings per share increased by 2% to $0.55. These increases reflected the benefit of the Company’s strategies targeted towards increasing long term earnings and profitability through disciplined expansion. The First Choice acquisition was targeted to produce $0.10 in annual EPS accretion after completion of $15 million (17%) in targeted cost saves. The Company is targeting full completion of these cost savings by midyear. The Company also is targeting additional EPS accretion from other 2016 business combinations.

First quarter 2017 return on assets measured 0.68%, while adjusted return on assets measured 0.85%. The return on equity in this period measured 5.7%, while the adjusted return on equity measured 7.2%. The adjusted return on tangible equity measured 12.0% in the current period. This non-GAAP financial measure compares adjusted earnings to average tangible equity in order to measure the rate of internal capital generation to support ongoing growth, dividends, and capital strength.

As a result of its growth, the Company is approaching the $10 billion asset threshold for additional regulatory requirements under the Dodd Frank Act. After crossing the threshold, the Company has additional compliance costs, additional FDIC insurance premium expense, and also would forfeit a portion of its card related fee income under

73

the Durbin Amendment. The Company has been enhancing its staff and resources with the goal of having the resources available to meet the compliance related costs at the time the threshold may be met in the future.

Revenue. Year over year, first quarter net revenue increased by 39%, while first quarter adjusted revenue increased by 31%. These increases were due to the benefit of business expansion. Net interest income increased by 16%, while fee income increased by 87%. Berkshire’s strategic focus is to diversify revenue and increase its fee income sources to reduce reliance on balance sheet spread income and support its wallet share and market share development goals. Annualized first quarter revenue per share increased by 20% to $11.47 in 2017 from $9.56 in 2016.

Net Interest Income. First quarter net interest income increased by $8 million, or 13%, over the prior quarter and by $9 million, or 16%, year-over-year. The increase was primarily due to growth in average earning assets which measured $0.8 billion, or 10% and $1.2 billion, or 17%, for these respective periods. This included $1.0 billion in acquired earning assets from First Choice.

The first quarter net interest margin was 3.33%, 3.21%, and 3.33% in the respective periods. The Company also measures its net interest margin before purchased loan accretion. This measure was 3.15% in the most recent quarter, 3.11% in the prior quarter, and 3.22% in the first quarter of 2016. The most recent quarter was the first full quarter with the full impacts of the First Choice acquisition, which contributed to purchased loan accretion. Purchased loan accretion totaled $3.7 million, $1.9 million, and $2.1 million for the above periods, respectively. The net interest margin benefited from the December rate hikes in 2015 and 2016 and is expected to benefit from the March 2017 rate hike. In addition to the level of interest rates, the margin is affected by the shape of the yield curve and by behaviors of pricing indices and yield spreads in the markets. The Company seeks to offset these impacts through pricing and product mix while maintaining a positive sensitivity of interest income to expected future rate increases.

As previously noted, with the enhancements provided by recent systems upgrades, the Company made nonmaterial changes to its methodologies for calculating yields, costs, and margins. Prior period calculations have been revised to include the impact of these changes.

Non-Interest Income. The Company views fee income as a key strategic focus for achieving its marketplace and profitability objectives. First quarter fee income increased year-over-year by $13 million, or 87%. This was mainly due to a $12 million increase in mortgage banking originations revenue. All other fee income sources increased 10% year-over year. First quarter revenue includes seasonally higher contributions from insurance due to annual commission income and wealth management due to tax preparation fees. First quarter fee income increased to 30% of interest and fee income in 2017 from 21% in the prior year.

The acquisition of First Choice Bank included its subsidiary, First Choice Loan Services (“FCLS”). FCLS operates in a secondary market model with most originations designated as held for sale to investors. Estimated revenues are initially recognized at the time of the customer interest rate lock commitment based on the sale commitments arranged at the same time. Direct costs of loan originations are netted from revenues. FCLS is expected to account for approximately 90% of Berkshire’s mortgage origination revenue, with the traditional operations of Berkshire Home Lending accounting for the remainder. Home Lending conducts both secondary market and portfolio mortgage operations in Berkshire’s northeast footprint. The increase in mortgage originations revenue represents the first full quarter contribution from FCLS. First quarter combined originations of held for sale mortgages totaled $429 million in 2017 compared to $530 million in the prior year, based on previously reported FCLS data. The Company estimates that combined interest rate lock volume increased slightly compared to the prior quarter, and that gain on sale margins strengthened, adjusted for the Berkshire accounting practices adopted on the merger date. Mortgage banking origination revenues are expected to be seasonally highest in the second and third quarters of the year. Operating margins in this business line are lower than in other business lines, contributing to a lower overall bank efficiency ratio.

All other fee income revenues increased by $1 million, or 10% year-over-year. Most of the increase was in loan related income, which totaled $4 million, including $1 million related to the sale of commercial loan interest rate

74

swaps, and $2 million in gains on the sale of SBA loans and seasoned residential mortgages. Non-interest income in the most recent period included the $13 million in net securities gains and the $7 million in loss on termination of hedges as previously discussed. These transactions affected cash flow but did not affect net equity since the fair value adjustments were already included as components of accumulated comprehensive income. Included in the category of “Other” was $1 million in accrued income on bank owned life insurance which offset $1 million in charges for the amortization of tax credit investments. This amortization generated benefit to income tax expense as discussed below.

Loan Loss Provision. The provision for loan losses increased year-to-year by $1 million. 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. It is 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 and the level of the allowance was included in the discussion of financial condition. The amount of the provision exceeded net charge-offs, as the allowance has risen due to loan portfolio growth resulting from loan originations.

Non-Interest Expense and Income Tax Expense. GAAP non-interest expense increased by $27 million, or 58%, including the first full quarter impact of acquired First Choice operations. This increase also included the elevated charges for mergers and restructuring. The non-GAAP measure of adjusted non-interest expense increased by $16 million, or 35%, which slightly exceeded the 31% increase in adjusted revenue. Accordingly, the efficiency ratio rose to 61.9% from 59.3%. As previously discussed, the $12 million increase in mortgage banking origination revenue was associated with a related increase in operating expense due to the lower efficiency of these operations. The Company anticipates seasonally higher mortgage banking expenses in the second and third quarters, related to seasonally higher revenues. The Company is working to complete the remaining targeted cost savings from the integration of the acquired First Choice operations by midyear 2017. Full time equivalent staff totaled 1,728 positions at quarter-end, compared to 1,731 at the start of the year. Merger related expense was nearly all related to the integration of the First Choice operations. The Company anticipates additional First Choice merger related charges in the second quarter and it is targeting to remain within its initial goals for total deal costs. The Company completed the consolidation of three previously announced branches in the most recent quarter. The related restructuring charges were mostly recognized in 2016. The $6 million in restructuring expenses charged against the current quarter were mostly related to leasehold terminations for lending offices and other excess premises, including one additional branch which is targeted to be consolidated in the third quarter. The Company is targeting that annual cost savings will repay the initial restructuring charge in approximately three years.

The Company has been absorbing the additional infrastructure expenses required at the $10 billion asset size threshold established in the Dodd Frank legislation. At year-end 2016, the Company estimated that it had absorbed $5 million, or 85% of the investment in these annual costs in its operating run rate. These regulatory costs are primarily related to consumer compliance, capital stress testing, and risk management. The Company’s goal is to evaluate future growth opportunities such that the targeted accretive benefit of expansion will be sufficient to offset the impact on profitability of regulatory requirements as it approaches and may at some future time exceed this $10 billion threshold.

The effective GAAP income tax rate was 30% and the income tax rate on adjusted earnings was 31% in the most recent quarter. The Company received $0.01 per share in net earnings benefit from its investment in tax credit related projects during the quarter, compared to $0.02 in the prior quarter. This benefit is net of the amortization charges recorded in non-interest income. The calculated marginal tax rate on items excluded by the Company from its adjusted earnings was similar to the overall marginal tax rate utilized by the Company. The Company expects its tax rate on adjusted earnings to be in the 25-30% range during 2017, depending on the timing of tax credit related projects. Changes in the tax rate will mostly be offset by related amortization charges, with little impact expected on EPS from quarter to quarter. The $13 million of securities gains recorded during the quarter will be available to offset projected 2020 capital losses from the planned sale of a tax credit investment. Federal law allows for net capital losses to be carried back, up to three years, to recover prior taxes paid on net capital gains realized in the carry-back period.

Total Comprehensive Income. Total comprehensive income includes net income together with other comprehensive income. Comprehensive income totaled $14 million in the most recent quarter, which was not significantly different from the $15 million in net income.

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Liquidity and Cash Flows. Berkshire manages its liquidity and cash flows with the goal of meeting expected as well as stressed cash needs for the foreseeable future. For the first quarter of 2017, Berkshire primarily utilized deposit growth and borrowings to fund the increase in loans and investment securities. The loans/deposits ratio increased to 100% from 99% during the quarter. This ratio had decreased from 105% in the prior quarter as a result of the excess deposits acquired with the First Choice merger. During the third quarter, the Bank increased its borrowing capacity with the Federal Home Loan Bank by approximately $110 million, to about $600 million at quarter-end due primarily to the growth in eligible securities collateral. Berkshire is also taking advantage of its recent upgrades in internal systems to analyze and monitor assets which can be used as additional collateral with the Federal Reserve Bank and the Federal Home Loan Bank in order to further supplement its liquidity resources.

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 provides insured brokered reciprocal money market deposits to large institutional accounts to supplement its deposit insurance protection. FHLB borrowings continue to be a significant source of liquidity for daily operations and borrowings targeted for specific asset/liability purposes. The Company’s mortgage banking operations have extensive secondary market hedging and investor counterparties which are necessary to support these business models. The Company’s financial institutions banking function is building a network of regional counterparties for wholesale transactions related to the purchase and sale of loans. The Company’s commercial banking and specialty lending units have national and regional counterparty banks for loan participations and syndications, and the Bank is designated as an SBA preferred lender to support its small business lending activities.

Berkshire Hills Bancorp had a $39 million cash balance at quarter end, compared to $43 million at the start of the year. During the first quarter, the Company paid off the $10 million balance outstanding at the start of the year on its $15 million unsecured line of credit. 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 $9 million in dividends to the Parent during the most recent quarter. The Parent uses cash for dividends, debt service, and holding company operating expenses. Based on its charter, it also makes targeted purchase and sales of equity securities to support the overall consolidated investment plan. Additionally, the Parent sometimes uses cash as an element of merger consideration and sometimes acquires cash as a source of funds as a result of business combinations.
Capital Resources. Please see the “Shareholders’ Equity” section of the Comparison of Financial Condition for a discussion of shareholders’ equity together with the note on Shareholders' Equity in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in the most recent 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 Company also evaluates its return on tangible equity as an indicator of its capital generation to support ongoing balance sheet growth. The Risk Management and 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 the various forms of regulatory capital, which are additional potential future capital resources to the Company and/or the Bank. The Company continues to enhance its internal processes for evaluating capital adequacy under various scenarios including stressed conditions.


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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 and information relating to payments due under contractual obligations is presented in the most recent 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. There were no significant changes in off-balance sheet arrangements and contractual obligations in the first quarter of 2017.

Fair Value Measurements. The most significant fair value measurements recorded by the Company are those related to assets and liabilities acquired in business combinations. The premium or discount value of acquired loans has historically been the most significant element of these measurements. Berkshire provides a summary of estimated fair values of financial instruments at each quarter-end. The premium or discount value of loans has historically been the most significant element of this quarter-end presentation. This premium or discount is a Level 3 estimate and reflects management’s subjective judgments. At March 31, 2017, the premium value of the loan portfolio was $33 million, or 0.5% of the carrying value, compared to $27 million, or 0.4% of carrying value at year-end 2016. The Company makes further measurements of fair value of certain assets and liabilities, as described in the related note in the financial statements. The most significant measurements of recurring fair values of financial instruments primarily relate to securities available for sale, derivative instruments, and subordinated borrowings. These measurements were generally based on Level 2 market based inputs.

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

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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. In particular, income tax benefits and deferred tax assets generated from tax-advantaged commercial development projects are based on management's assessment and interpretation of applicable tax law as it currently stands. These underlying assumptions can change from period to period. For example, tax law changes or variances in projected taxable ordinary income or taxable capital gain income could result in a change in the deferred tax asset or 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 in excess of the 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.

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.

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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.

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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 quarter of 2017.
For further discussion about the Company’s Quantitative and Qualitative Aspects of Market Risk, please review Item 7A of the most recent report on Form 10-K which sets forth the methodologies employed by the Company and the various aspects of its analysis of its interest rate sensitivity. Berkshire’s objective is to maintain a neutral or asset sensitive interest rate risk profile, as measured by the sensitivity of net interest income to market interest rate changes. There were no significant changes in the sensitivity of net interest income during the most recent quarter. While the Company terminated its fixed payment interest rate swaps during the period, it also shortened the overall duration of its loan portfolio and extended some time deposit durations. The decrease in transaction account balances contributed to an immaterial reduction in the overall asset sensitivity of the Company. This decrease was attributed primarily to seasonal factors and balances in related accounts are expected to rebound during the year. There were no material changes in the other measures and components of interest rate risk discussed in the most recent Form 10-K.


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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
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. As of March 31, 2017, other than the items noted below, 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.

On April 28, 2016, Berkshire Hills and Berkshire Bank were served with a complaint filed in the United States District Court, District of Massachusetts, Springfield Division. The complaint was filed by an individual Berkshire Bank depositor, who claims to have filed the complaint on behalf of a purported class of Berkshire Bank depositors, and alleges violations of the Electronic Funds Transfer Act and certain regulations thereunder, among other matters. On July 15, 2016, the complaint was amended to add purported claims under the Massachusetts Consumer Protection Act. The complaint seeks, in part, compensatory, consequential, statutory, and punitive damages. Berkshire Hills and Berkshire Bank deny the allegations contained in the complaint and are vigorously defending this lawsuit.

On November 3, 2016, the Massachusetts Supreme Judicial Court issued a slip opinion containing an appellate ruling in favor of the Massachusetts Insurers Insolvency Fund (the “Fund”) in a civil case entitled, Massachusetts Insurers Insolvency Fund v. Berkshire Bank, Appeal no. SJC-12019. At issue in this case is the Fund’s right to recover from Berkshire Bank under M.G.L Ch. 175D, § 17 (3), workers compensation benefits paid by the Fund to a former employee after the workers compensation insurer previously responsible for paying those benefits failed. In earlier proceedings in the Massachusetts Superior Court, the trial judge had entered summary judgment in Berkshire Bank’s favor, finding that Berkshire Bank had no liability to the Fund in this instance. The Supreme Judicial Court reversed and remanded the case to the trial court for entry of judgment in favor of the Fund on the issue of liability. The case was originally bifurcated in the trial court to resolve the issue of liability first, and no evidence has been presented to date regarding the amount of any damages that Berkshire Bank may owe to the Fund. Further proceedings will now be required in the trial court to determine the amount of any such damages.

On December 22, 2016, Berkshire Bank was served with a complaint filed in the United States District Court, District of Massachusetts, Springfield Division. The complaint was filed by an individual Berkshire Bank depositor and alleges violations of federal and state electronic funds transfer statutes and the Massachusetts Uniform Commercial Code in connection with two wire transfers totaling $1.4 million, which were initiated from the customer’s account after his personal email account was allegedly hacked. Berkshire Bank denies the allegations contained in the complaint and is vigorously defending this lawsuit.


ITEM 1A.               RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and in Part I, “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. There are no new material risks which were identified during the most recent quarter. Risks related to the integration of business combinations described in the Form 10-K were reduced in the most recent quarter as a result of the integration activities that were completed during this period.


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ITEM 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)                Recent Sales of Unregistered Securities
The Company occasionally engages in the practice of transferring unregistered securities for the purpose of completing business transactions. These shares are issued to vendors or other organizations as consideration for services performed in accordance with each contract. During the three months ended March 31, 2017 and March 31, 2016, the Company did not transfer any shares.

(b)                 Not applicable.

(c)                 The following table provides certain information with regard to shares repurchased by the Company in the first quarter of 2017:
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
January 1-31, 2017
—

$
—

—

500,000

February 1-28, 2017
—

—

—

500,000

March 1-31, 2017
—

—

—

500,000

Total
—

$
—

—

500,000


On December 2, 2015, the Company announced that its Board of Directors authorized a new stock repurchase program, pursuant to which the Company may repurchase up to 500 thousand shares of the Company's common stock, representing approximately 1.6% of the Company’s then 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 or 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 repurchase plan will continue until it is completed or terminated by the Board of Directors. As of March 31, 2017, no shares had been purchased under this program.


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
2.2
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 (1)
2.3
Agreement and Plan of Merger, dated as of June 24, 2016, by and among Berkshire Hills Bancorp, Inc., Berkshire Bank, and First Choice Bank (2)
3.1
Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (3)
3.2
Amended and Restated Bylaws of Berkshire Hills Bancorp, Inc. (4)
4.1
Form of Common Stock Certificate of Berkshire Hills Bancorp, Inc. (3)
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
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Shareholder 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 Shareholders’ 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 herein by reference from the Exhibits to the Form 8-K as filed on May 22, 2015.
(2)
Incorporated herein by reference from the Exhibits to the Form 8-K as filed on June 27, 2016.
(3)
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.
(4)
Incorporated herein by reference from the Exhibits to the Form 8-K as filed on April 28, 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: May 10, 2017
By:
/s/ Michael P. Daly
Michael P. Daly
Chief Executive Officer
Dated: May 10, 2017
By:
/s/ James M. Moses
James M. Moses
Senior Executive Vice President, Chief Financial Officer


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