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ACQUISITIONS | 12 Months Ended
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Dec. 31, 2016
Business Combinations [Abstract] |
ACQUISITIONS | ACQUISITIONS 44 Business Capital On April 29, 2016, the Company acquired and assumed the business model, certain assets, and certain liabilities of 44 Business Capital LLC, along with certain loans and other assets of Parke Bank’s (“Parke”) SBA 7(a) loan program operations. 44 Business Capital was a joint venture of Parke (51%) and a management group (49%), 44 Amigos LLC, located in Blue Bell, Pennsylvania. 44 Business Capital was engaged in originating, servicing, and selling SBA loans using Parke’s SBA PLP preferred lender license. The transaction includes acquiring assets, key people, systems, and processes necessary for a market participant to run operations as a business. In accordance with ASC 805-10-55, the transaction was recorded as a business combination, resulting in acquisition accounting in which all assets acquired and liabilities are assumed at fair value. The loans acquired by the Bank were the unguaranteed portions of SBA loans of which $35.6 million were recorded as commercial real estate and $1.2 million were recorded as commercial & industrial. Servicing rights on a notional loan balance of $148 million were also acquired. The Company expects the acquisition to expand its SBA lending program on a super-regional and national basis with the intent of selling many of these loans on the secondary market. It expands and diversifies the Company's fee revenue sources. Additionally, the acquisition of 44 Business Capital expands the Company’s product lines, creates cross-selling opportunities, and adds niche lending to its portfolio. 44 Business Capital will operate as a direct small business lending division reporting up through the Company’s established Specialty Lending line of business. The following table provides a summary of the assets acquired and liabilities assumed and the associated fair value adjustments as recorded by the Company at acquisition:
|  |  |  | Fair Value |  |  |  | As Recorded by
(in thousands) |  | As Acquired |  | Adjustments |  |  |  | the Company
Consideration paid: |  |  |  |  |  |  |  |  |  |  |
Company common stock issued to certain 44 Business Capital shareholders (44,840 shares) |  | $ | 1,217 |
Cash paid to 44 Business Capital shareholders and Parke |  |  |  |  |  |  |  | 55,649 |
Total consideration paid |  |  |  |  |  |  |  | $ | 56,866 |
Recognized amounts of identifiable assets acquired and (liabilities) assumed, at fair value:
Cash and short-term investments |  | $ | 107 |  |  | $ | — |  |  |  |  | $ | 107 |
Loans |  | 42,627 |  |  | (5,400 | ) |  | (a) |  | 37,227 |
Premises and equipment |  | 69 |  |  | (36 | ) |  | (b) |  | 33 |
Other assets |  | 3,076 |  |  | 639 |  |  | (c) |  | 3,715 |
Other liabilities |  | (108 | ) |  | — |  |  |  |  | (108 | )
Total identifiable net assets |  | $ | 45,771 |  |  | $ | (4,797 | ) |  |  |  | $ | 40,974 |
Goodwill |  |  |  |  |  |  |  | $ | 15,892 |
________________________________ Explanation of Certain Fair Value Adjustments
(a) | The adjustment represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. Loans with evidence of credit deterioration at acquisition are accounted for under ASC 310-30 and had a book value of $6.3 million and have a fair value $2.9 million. Non-impaired loans accounted for under ASC 310-10 had a book value of $36.4 million and have a fair value of $34.3 million. ASC 310-30 loans have a $708 thousand fair value adjustment discount that is accretable in earnings over an average estimated six-year life using the effective yield as determined on the date of acquisition. The effective yield is periodically adjusted for changes in expected cash flows. ASC 310-10 loans have a $2.1 million fair value adjustment discount that is amortized into income over the remaining term of the loans using the effective interest method.
(b) | The fair value of the equipment was assumed to approximate the net carrying value based on overall condition and age. The adjustment represents the immediate expensing of equipment not meeting the thresholds for capitalization in accordance with Company policy. The recorded amount will be depreciated over the remaining estimated economic lives of the assets.
(c) | The adjustment represents the fair value write up of book value of the loan servicing right asset to its estimated fair value based on current interest rates and expected cash flows, which includes an estimate of cost of service and conditional prepayment rates applied to the underlying unpaid loan pool balance over the remaining life of the loans. The balance includes accrued interest of $221 thousand.
The fair values for loans acquired were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of the seller’s allowance for credit losses associated with the loans that were acquired in the acquisition as the loans were initially recorded at fair value. Information about the acquired loan portfolio subject to ASC 310-30 as of April 29, 2016 is, as follows (in thousands):
| ASC 310-30 Loans
Gross contractual receivable amounts at acquisition | $ | 6,265 |
Contractual cash flows not expected to be collected (nonaccretable discount) | (2,623 | )
Expected cash flows at acquisition | 3,642 |
Interest component of expected cash flows (accretable discount) | (708 | )
Fair value of acquired loans | $ | 2,934 |
Capitalized goodwill, which is not amortized for book purposes, is deductible for tax purposes. Direct acquisition and integration costs of the 44 Business Capital acquisition were expensed as incurred, and totaled $454 thousand during the twelve months ending December 31, 2016 and $285 thousand for the same period of 2015. Ronald N. Lazzaro, P.C. On December 2, 2016, the Company acquired and assumed certain assets and liabilities, as well as the operations, of Ronald N. Lazzaro, P.C. (“RNL”). RNL was an independent financial planning and investment services firm based in Rutland, Vermont. The operations and assets acquired from RNL have been renamed RNL & Associates, a division of BerkshireBanc Investment Services, reflecting RNL & Associates' new position as a key component of Berkshire Bank's financial planning and investment services platform. The Company expects the acquisition to expand its market share of wealth management services in its footprint, while creating a recurring source of fee revenue. The transaction includes acquiring assets, key people, and processes necessary for a market participant to run operations as a business. In accordance with ASC 805-10-55, the transaction was recorded as a business combination, resulting in acquisition accounting in which all assets acquired and liabilities are assumed at fair value. The Company agreed to pay $10.2 million, including $3.4 million in future contingent consideration comprised of cash and stock. RNL met all of the objectives for the contingent consideration and the payments were fully accrued as of the acquisition date. The acquired customer relationships (or customer account base) of RNL resulted in the capitalization of a $4.7 million customer relationship intangible. The asset will be amortized over the estimated useful life of the underlying customer accounts (10 years). The Company expects this acquisition to expand the market penetration of its wealth management and investment services, with a primary geographic focus on Vermont and the northeastern United States. Capitalized goodwill of $5.5 million, which is not amortized for book purposes, is deductible for tax purposes. Direct acquisition and integration costs of the RNL acquisition were expensed as incurred, and totaled $287 thousand during the twelve months ending December 31, 2016 and none for the same period of 2015. First Choice Bank At the close of business on December 2, 2016, the Company completed the acquisition of First Choice Bank and the merger of First Choice Bank into Berkshire Bank. As a result of this merger, First Choice Loan Services Inc. became a wholly-owned operating subsidiary of Berkshire Bank. With this acquisition, the Company added eight bank branches in the Princeton, New Jersey and Greater Philadelphia areas, as well as First Choice Loan Services, a best in class mortgage banking operations, which originates loans across a nation a l platform. The Company expects its expanded branch and lending footprint to yield increased earnings accretion. On acquisition date, First Choice Bank had 3.369 million outstanding common shares. First Choice Bank common shareholders received 1.945 million of the Company’s common shares based on an exchange ratio of 0.5773 shares of the Company’s common stock for each First Choice Bank share. On November 22, 2016, First Choice Bank held a special meeting of its preferred stockholders, who voted to approve the merger of First Choice Bank with and into Berkshire Bank. This vote also determined not to classify the merger as a liquidation event, as defined in First Choice Bank’s certificate of incorporation and the applicable certificates of designation for the series of convertible preferred stock. Accordingly, each outstanding share of First Choice Bank preferred stock was converted into the right to receive such number of Berkshire Hills common stock equal to the number of shares of First Choice Bank common stock issuable upon the conversion of the First Choice Bank preferred stock, multiplied by 0.5773. As of the closing date, 51,000 shares of First Choice Bank preferred stock were outstanding in the following series:
• | 7,500 shares of Series A Preferred Stock, with each share convertible into 57.7300 shares of Berkshire Hills common stock (and cash in lieu of fractional shares);
• | 15,000 shares of Series B Preferred Stock, with each share convertible into 57.7300 shares of Berkshire Hills common stock (and cash in lieu of fractional shares);
• | 6,000 shares of Series C Preferred Stock, with each share convertible into 50.0694 shares of Berkshire Hills common stock (and cash in lieu of fractional shares);
• | 10,000 shares of Series D Preferred Stock, with each share convertible into 41.2357 shares of Berkshire Hills common stock (and cash in lieu of fractional shares); and
• | 12,500 shares of Series E Preferred Stock, with each share convertible into 36.3082 shares of Berkshire Hills common stock (and cash in lieu of fractional shares).
The Company issued 4.410 million total shares of common stock, valued at $34.25 per share based on the December 2, 2016 closing price. This resulted in a consideration value of $151.0 million. Pursuant to the Merger Agreement, all outstanding options and warrants to purchase First Choice Bank common stock, whether or not vested, were terminated with a payment by First Choice Bank to the holder of the option or warrant. The payment was determined as the amount of cash equal to the excess, if any, of $16.00 over the applicable per share price of the option or warrant multiplied by the number of shares of First Choice Bank common stock that the holder could have purchased with the option or warrant if the holder had exercised the option or warrant immediately prior to the date of the merger. The following table provides a summary of the assets acquired and liabilities assumed and the associated fair value adjustments as recorded by the Company at acquisition:
|  |  |  | Fair Value |  |  |  | As Recorded by
(in thousands) |  | As Acquired |  | Adjustments |  |  |  | the Company
Consideration Paid: |  |  |  |  |  |  |  |
Company common stock issued to First Choice Bank common and preferred shareholders |  | $ | 151,048 |
Total consideration paid |  |  |  |  |  |  |  | $ | 151,048 |
Recognized amounts of identifiable assets acquired and (liabilities) assumed, at fair value:
Cash and short-term investments |  | $ | 5,935 |  |  | $ | — |  |  |  |  | $ | 5,935 |
Investment securities |  | 447,960 |  |  | (6,009 | ) |  | (a) |  | 441,951 |
Loans held for sale |  | 112,669 |  |  | — |  |  |  |  | 112,669 |
Loans, net |  | 437,832 |  |  | (13,061 | ) |  | (b) |  | 424,771 |
Premises and equipment |  | 6,354 |  |  | (878 | ) |  | (c) |  | 5,476 |
Core deposit intangibles |  | — |  |  | 7,690 |  |  | (d) |  | 7,690 |
Deferred tax assets, net |  | 9,626 |  |  | 8,175 |  |  | (e) |  | 17,801 |
Other assets |  | 42,200 |  |  | (60 | ) |  | (f) |  | 42,140 |
Deposits |  | (889,993 | ) |  | (2,804 | ) |  | (g) |  | (892,797 | )
Borrowings |  | (51,796 | ) |  | 68 |  |  | (h) |  | (51,728 | )
Other liabilities |  | (15,019 | ) |  | (5,877 | ) |  | (i) |  | (20,896 | )
Total identifiable net assets |  | $ | 105,768 |  |  | $ | (12,756 | ) |  |  |  | $ | 93,012 |
Goodwill |  |  |  |  |  |  |  | $ | 58,036 |
________________________________ Explanation of Certain Fair Value Adjustments
(a) | The adjustment represents the write down of the book value of securities to their estimated fair value based on estimates at the date of acquisition.
(b) | The adjustment represents the write-off of the balance of $14.7 million in allowance for loan and lease losses and the write down of the book value of loans to their estimated fair value based on interest rates and expected cash flows as of the acquisition date, which includes an estimate of expected loan loss inherent in the portfolio. Loans with evidence of credit deterioration at acquisition are accounted for under ASC 310-30 and had a book value of $63.8 million and had a fair value of $36.4 million. Non-impaired loans accounted for under ASC 310-20 had a book value of $388.7 million and have a fair value of $388.3 million. ASC 310-30 loans have a $5.4 million fair value adjustment that is accretable in earnings over an estimated three-year life using the effective yield as determined on the date of acquisition. The effective yield is periodically adjusted for changes in expected flows. ASC 310-20 loans have a $5.8 million fair value adjustment premium that is amortized into expense over the remaining term of the loans using the effective interest method, or a straight-line method if the loan is a revolving credit facility.
(c) | The amount represents the adjustment of the book value of furniture, fixtures, and equipment, to their estimated fair value and the immediate expensing of equipment not meeting the thresholds for capitalization in accordance with Company policy. The adjustments will be depreciated over the remaining estimated economic lives of the assets.
(d) | The adjustment represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized over the estimated useful life of the deposit base (10 years).
(e) | Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.
(f) | The amount consists of a $0.5 million write-off of goodwill and intangible assets from a prior First Choice Bank acquisition, a $0.1 million fair value adjustment to write-down other real estate owned based on market report data, and a $0.1 million write-off of prepaid assets due to obsolescence. These adjustments are not accretable into earnings in the statement of income.
(g) | The adjustment is necessary because the weighted average interest rate of deposits exceeded the cost of similar funding at the time of acquisition. The amount will be amortized over the estimated useful life of one year.
(h) | Adjusts borrowings to their estimated fair value, which is calculated based on the expected future cash flow of the borrowings.
(i) | Adjusts the book value of other liabilities to their estimated fair value at the acquisition date. The adjustment consists of a $4.0 million increase for the fair value of the above/below market leases, a $3.4 million establishment of a reserve on certain acquired loans determined to have specific risk at the time of acquisition, a $0.9 million net decrease related to non-level leases, and a $0.6 million write-off of deferred revenue.
Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, the Company estimated fair value by analyzing the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of the seller’s allowance for credit losses associated with the loans acquired, as the loans were initially recorded at fair value. Information about the First Choice Bank acquired loan portfolio subject to ASC 310-30 as of December 2, 2016 is as follows (in thousands):
| ASC 310-30 Loans
Gross contractual receivable amounts at acquisition | $ | 63,820 |
Contractual cash flows not expected to be collected (nonaccretable discount) | (21,926 | )
Expected cash flows at acquisition | 41,894 |
Interest component of expected cash flows (accretable discount) | (5,417 | )
Fair value of acquired loans | $ | 36,477 |
Capitalized goodwill, which is not amortized for book purposes, is not deductible for tax purposes. Direct acquisition and integration costs of the First Choice Bank acquisition were expensed as incurred, and totaled $11.9 million during the twelve months ending December 31, 2016 and there were none for the same period of 2015. Pro Forma Information (unaudited) The following table presents selected unaudited pro forma financial information reflecting the acquisitions of First Choice Bank, RNL, and 44 Business Capital assuming the acquisitions were completed as of January 1, 2015. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the acquisitions. These adjustments would have been different if they had been recorded on January 1, 2015, and they do not include the impact of prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and the acquisitions had the transactions actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. Pro forma basic and diluted earnings per common share were calculated using Berkshire’s actual weighted-average shares outstanding for the periods presented plus the 45 thousand shares and 4.4 million shares issued as a result of the 44 Business Capital and First Choice Bank acquisitions, respectively. The unaudited pro forma information is based on the actual financial statements of Berkshire and the acquired businesses for the periods shown until the dates of acquisition, at which time the acquired business’ operations became included in Berkshire’s financial statements. For the period from the date of acquisition through December 31, 2016, 44 Business Capital's net revenue was $5.5 million and net income was $1.3 million which includes $454 thousand of acquisition expenses. For whole-bank acquisitions, the Company has determined it is impractical to report the amounts of revenue and earnings of each entity since acquisition date. Due to the integration of their operations with those of the organization, the Company does not record revenue and earnings separately. The revenue and earnings of First Choice Bank’s operations are included in the Consolidated Statement of Income. The unaudited pro forma information, for the twelve months ended December 31, 2016 and 2015, set forth below reflects adjustments related to (a) amortization and accretion of purchase accounting fair value adjustments; (b) amortization of core deposit and customer relationship intangibles; and (c) an estimated tax rate of 40 percent. Direct acquisition expenses incurred by the Company during 2016, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition. Information in the following table is shown in thousands, except earnings per share:
|  | Pro Forma (unaudited) Years ended December 31,
|  | 2016 |  | 2015
Net interest income |  | $ | 259,494 |  |  | $ | 249,533 |
Non-interest income |  | 137,395 |  |  | 125,855 |
Net income |  | 79,011 |  |  | 60,852 |
Pro forma earnings per share: |  |  |  |  |  |
Basic |  | $ | 2.25 |  |  | $ | 1.85 |
Diluted |  | $ | 2.24 |  |  | $ | 1.84 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1497-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1490-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1392-128463 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1486-128463 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4845-128472 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1524-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4922-128472 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4934-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4926-128472 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=73530397&loc=SL65897772-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1383-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 + Details
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