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ACQUISITIONS | 6 Months Ended
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Jun. 30, 2019
Business Combinations [Abstract] |
ACQUISITIONS | ACQUISITIONS SI Financial Group, Inc. At the close of business on May 17, 2019, the Company completed the acquisition of SI Financial Group, Inc. (“SIFI”), the parent company of Savings Institute Bank and Trust Company (“Savings Institute”). Savings Institute also merged with and into Berkshire Bank. With this acquisition, the Company increased its market presence with 18 branches in Eastern Connecticut and 5 branches in Rhode Island, adding to the existing 9 Connecticut branches. As established by the merger agreement, each of the 11.858 million outstanding shares of SIFI common stock was converted into the right to receive 0.48 shares of the Company's common stock, plus cash in lieu of fractional shares. As of close of business on May 17, 2019, the Company issued 5.691 million common shares as merger consideration, pursuant to the merger agreement. The value of this consideration was measured at $175.8 million for the common stock based on the $30.89 closing price of the Company’s common stock on the issuance date. SIFI had a stock option plan, and as part of the acquisition agreement, Berkshire agreed to continue the vesting schedules of option holders of SIFI stock with corresponding Berkshire stock with a share conversion ratio of 48%. The fair value of the vested portion of the options was $0.9 million, and was included as part of consideration paid for SIFI. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Accordingly, the Company recognizes amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair value, with any excess of purchase consideration over the net assets being reported as goodwill. Due to the complexity in valuing the assets acquired and liabilities assumed and the significant amount of data inputs required, the valuation of the assets and liabilities acquired is not yet final. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to the closing date fair values becomes available. The following table provides a summary of the assets acquired and liabilities assumed and the associated fair value adjustments as recorded by the Company at acquisition:
(in thousands) |  | As Acquired |  | Fair Value Adjustments |  | As Recorded by the Company
Consideration Paid: |  |  |  |  |  |
Company common stock issued to SIFI common shareholders | $ | 175,804 |
Fair value of SIFI stock options converted to Berkshire options |  |  |  |  |  | 907 |
Cash in lieu paid to SIFI shareholders |  |  |  |  |  | 14 |
Total consideration paid |  |  |  |  |  | $ | 176,725 |
Recognized amounts of identifiable assets acquired and (liabilities) assumed, at fair value:
Cash and short-term investments |  | $ | 110,774 |  |  | $ | — |  |  | $ | 110,774 |
Investment securities |  | 144,629 |  |  | (1,261 | ) | (a) | 143,368 |
Loans held for sale |  | 1,005 |  |  | — |  |  | 1,005 |
Loans, net |  | 1,332,127 |  |  | (29,388 | ) | (b) | 1,302,739 |
Premises and equipment |  | 19,039 |  |  | (2,092 | ) | (c) | 16,947 |
Core deposit intangibles |  | — |  |  | 17,980 |  | (d) | 17,980 |
Deferred tax assets, net |  | 6,629 |  |  | 10,607 |  | (e) | 17,236 |
Goodwill and other intangibles |  | 16,063 |  |  | (16,063 | ) | (f) | — |
Other assets |  | 60,648 |  |  | (341 | ) |  | 60,307 |
Deposits |  | (1,327,115 | ) |  | (7,733 | ) | (g) | (1,334,848 | )
Borrowings |  | (154,726 | ) |  | 1,717 |  | (h) | (153,009 | )
Other liabilities |  | (33,987 | ) |  | (8,166 | ) | (i) | (42,153 | )
Total identifiable net assets |  | $ | 175,086 |  |  | $ | (34,740 | ) |  | $ | 140,346 |
Goodwill |  |  |  |  |  | 36,379 |
_____________________________________ Explanation of Certain Fair Value Adjustments:
(a) | The adjustment represents the write down of the book value of securities to their estimated fair value at the date of acquisition.
(b) | The adjustment represents the write-off of $15.6 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 $55.8 million and had a fair value of $32.1 million, including a $4.2 million fair value adjustment that is accretable in earnings. Non-impaired loans accounted for under ASC 310-20 had a book value of $1.29 billion and have a fair value of $1.27 billion, including a $6.7 million fair value adjustment discount that is amortized 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 adjustment represents a decreased fair value based on the appraised value of Savings Institute’s owned branches comprised of $1.1 million for land. This is in addition to a $1.0 million reduction 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) | Represents the write-off of goodwill and intangible assets from a prior SIFI acquisition.
(g) | The adjustment is necessary because the weighted average interest rate of time deposits exceeded the cost of similar funding at the time of acquisition. The amount will be amortized over the estimated useful life of eleven months.
(h) | Adjusts borrowings by a reduction of $0.8 million to their estimated fair value, which is calculated based on current market rates. This is in addition to a $0.9 million reduction to the estimated fair value for the SI Capital Trust II, which is calculated based on the amount an institution would be willing to purchase the instrument at in the open market.
(i) | Adjusts the book value of other liabilities to their estimated fair value at the acquisition date. The adjustment consists of a $7.6 million increase to post-retirement liabilities due to change-in-control provisions, a $0.8 million increase in bank-owned life insurance liabilities, offset by a decrease of $0.4 to the unfunded commitment reserve.
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. Provisional information about the Savings Institute acquired loan portfolio subject to ASC 310-30 as of May 17, 2019 is as follows (in thousands):
|  | ASC 310-30 Loans
Gross contractual receivable amounts at acquisition |  | $ | 55,754 |
Contractual cash flows not expected to be collected (nonaccretable discount) |  | (19,427 | )
Expected cash flows at acquisition |  | 36,327 |
Interest component of expected cash flows (accretable discount) |  | (4,200 | )
Fair value of acquired loans |  | $ | 32,127 |
Capitalized goodwill, which is not amortized for book purposes, is not deductible for tax purposes. Direct acquisition and integration costs of the Savings Institute acquisition were expensed as incurred, and totaled $11.3 million during the six months ending June 30, 2019 and there were no ne for the same period of 2018. Pro Forma Information (unaudited) The following table presents selected unaudited pro forma financial information reflecting the acquisition of SIFI assuming the acquisition was completed as of January 1, 2018. The preliminary valuation of the assets and liabilities acquired has been used to prepare pro forma adjustments. The final allocation could differ materially from the preliminary valuation. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to the closing date fair values becomes available. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments. These adjustments would have been different if they had been recorded on January 1, 2018, 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 acquisition had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. The unaudited pro forma information is based on the actual financial statements of Berkshire and the acquired business for the periods shown until the dates of acquisition, at which time the acquired business operations became included in Berkshire’s financial statements. 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 SIFI’s operations are included in the Consolidated Statement of Income. The unaudited pro forma information, for the six months ended June 30, 2019 and 2018, 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 26.83 percent. Direct acquisition expenses incurred by the Company during 2019, 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) Six Months Ended June 30,
|  | 2019 |  | 2018
Net interest income |  | $ | 195,624 |  |  | $ | 202,709 |
Non-interest income |  | 43,732 |  |  | 44,228 |
Income available to common shareholders |  | 60,357 |  |  | 67,666 |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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