UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 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

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 40,423,077 shares of common stock, par value $0.01 per share, outstanding as of August 7, 2017.

BERKSHIRE HILLS BANCORP, INC.

FORM 10-Q

INDEX 

				Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016			4
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016			5
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016			6
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2017 and 2016			7
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016			8
	Notes to Consolidated Financial Statements
		Note 1	Basis of Presentation	10
		Note 2	Trading Security	13
		Note 3	Securities Available for Sale and Held to Maturity	14
		Note 4	Loans	19
		Note 5	Loan Loss Allowance	32
		Note 6	Deposits	39
		Note 7	Borrowed Funds	39
		Note 8	Capital Ratios and Shareholders’ Equity	41
		Note 9	Earnings per Share	45
		Note 10	Stock-Based Compensation Plans	46
		Note 11	Derivative Financial Instruments and Hedging Activities	47
		Note 12	Fair Value Measurements	54
		Note 13	Net Interest Income after Provision for Loan Losses	62
		Note 14	Subsequent Events	63
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			64
	Selected Financial Data			64
	Average Balances and Average Yields/Rates			66
	Non-GAAP Financial Measures			68
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			85
Item 4.	Controls and Procedures			86

2

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	87
Item 1A.	Risk Factors	87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89
Item 3.	Defaults Upon Senior Securities	89
Item 4.	Mine Safety Disclosures	89
Item 5.	Other Information	89
Item 6.	Exhibits	90
Signatures		91

3

PART I

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2017			December 31, 2016
(In thousands, except share data)
Assets
Cash and due from banks	$	78,407		$	71,494
Short-term investments	23,426			41,581
Total cash and cash equivalents	101,833			113,075
Trading security, at fair value	12,837			13,229
Securities available for sale, at fair value	1,329,993			1,209,537
Securities held to maturity (fair values of $358,398 and $337,680)	350,992			334,368
Federal Home Loan Bank stock and other restricted securities	78,874			71,112
Total securities	1,772,696			1,628,246
Loans held for sale, at fair value	146,482			120,673
Commercial real estate	2,689,522			2,616,438
Commercial and industrial loans	1,227,936			1,062,038
Residential mortgages	1,934,068			1,893,131
Consumer loans	1,012,956			978,180
Total loans	6,864,482			6,549,787
Less: Allowance for loan losses	(47,359		)	(43,998		)
Net loans	6,817,123			6,505,789
Premises and equipment, net	94,354			93,215
Other real estate owned	279			151
Goodwill	403,106			403,106
Other intangible assets	17,874			19,445
Cash surrender value of bank-owned life insurance policies	140,135			139,257
Deferred tax assets, net	40,948			41,128
Other assets	92,441			98,457
Total assets	$	9,627,271		$	9,162,542
Liabilities
Demand deposits	$	1,179,456		$	1,278,875
NOW deposits	574,661			570,583
Money market deposits	1,790,173			1,781,605
Savings deposits	669,617			657,486
Time deposits	2,500,947			2,333,543
Total deposits	6,714,854			6,622,092
Short-term debt	1,081,600			1,082,044
Long-term Federal Home Loan Bank advances	301,374			142,792
Subordinated borrowings	89,250			89,161
Total borrowings	1,472,224			1,313,997
Other liabilities	171,999			133,155
Total liabilities	$	8,359,077		$	8,069,244
(continued)
Shareholders’ equity
Common stock ($.01 par value; 50,000,000 shares authorized and 41,369,819 shares issued and 40,427,624 shares outstanding in 2017; 36,732,129 shares issued and 35,672,817 shares outstanding in 2016)	412			366
Additional paid-in capital	1,053,493			898,989
Unearned compensation	(9,051		)	(6,374		)
Retained earnings	237,470			217,494
Accumulated other comprehensive income	10,331			9,766
Treasury stock, at cost (942,195 shares in 2017 and 1,059,312 shares in 2016)	(24,461		)	(26,943		)
Total shareholders’ equity	1,268,194			1,093,298
Total liabilities and shareholders’ equity	$	9,627,271		$	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 June 30,						Six Months Ended June 30,
(In thousands, except per share data)	2017			2016			2017			2016
Interest and dividend income
Loans	$	71,983		$	59,703		$	140,926		$	118,145
Securities and other	12,683			9,315			24,449			19,349
Total interest and dividend income	84,666			69,018			165,375			137,494
Interest expense
Deposits	9,971			7,378			19,069			14,537
Borrowings	5,150			4,199			9,875			7,819
Total interest expense	15,121			11,577			28,944			22,356
Net interest income	69,545			57,441			136,431			115,138
Non-interest income
Mortgage banking originations	16,281			1,335			28,959			2,156
Loan related income	5,275			2,898			9,454			5,944
Deposit related fees	6,645			6,291			12,849			12,400
Insurance commissions and fees	2,588			2,660			5,724			5,553
Wealth management fees	2,286			2,235			4,812			4,737
Total fee income	33,075			15,419			61,798			30,790
Other, net	(276		)	(851		)	(183		)	(628		)
(Loss) Gain on sale of securities, net	(1		)	(13		)	12,569			23
Loss on termination of hedges	—			—			(6,629		)	—
Total non-interest income	32,798			14,555			67,555			30,185
Total net revenue	102,343			71,996			203,986			145,323
Provision for loan losses	4,889			4,522			9,984			8,528
Non-interest expense
Compensation and benefits	36,997			24,664			73,116			50,378
Occupancy and equipment	8,678			6,560			17,704			13,250
Technology and communications	6,883			4,814			12,970			9,671
Marketing and promotion	3,177			737			5,176			1,410
Professional services	2,190			1,509			4,641			2,789
FDIC premiums and assessments	1,588			1,203			2,886			2,436
Other real estate owned and foreclosures	30			393			58			656
Amortization of intangible assets	770			787			1,571			1,606
Acquisition, restructuring, and other expenses	2,903			878			14,585			1,658
Other	6,307			4,723			11,142			9,514
Total non-interest expense	69,523			46,268			143,849			93,368
Income before income taxes	27,931			21,206			50,153			43,427
Income tax expense	8,237			5,249			14,999			11,469
Net income	$	19,694		$	15,957		$	35,154		$	31,958
Earnings per share:
Basic	$	0.53		$	0.52		$	0.97		$	1.05
Diluted	$	0.53		$	0.52		$	0.96		$	1.04
Weighted average common shares outstanding:
Basic	37,324			30,605			36,305			30,561
Diluted	37,474			30,765			36,466			30,725

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

5

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2017			2016			2017			2016
Net income	$	19,694		$	15,957		$	35,154		$	31,958
Other comprehensive income, before tax:
Changes in unrealized gain on securities available-for-sale	3,927			9,586			(5,505		)	27,293
Changes in unrealized loss on cash flow hedging derivatives	—			(884		)	6,573			(5,390		)
Income taxes related to other comprehensive income:
Changes in unrealized gain on securities available-for-sale	(1,455		)	(3,691		)	2,086			(10,548		)
Changes in unrealized loss on cash flow hedging derivatives	—			355			(2,589		)	2,163
Total other comprehensive income	2,472			5,366			565			13,518
Total comprehensive income	$	22,166		$	21,323		$	35,719		$	45,476

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	—		—		—			—			31,958			—			—			31,958
Other comprehensive income	—		—		—			—			—			13,518			—			13,518
Total comprehensive income																				45,476
Acquisition of 44 Business Capital	45		—		—			—			—			—			1,217			1,217
Cash dividends declared ($0.40 per share)	—		—		—			—			(12,442		)	—			—			(12,442		)
Treasury stock adjustment (1)	—		—		1,645			—			—			—			(1,645		)	—
Forfeited shares	(22	)	—		68			526			—			—			(594		)	—
Exercise of stock options	2		—		—			—			(19		)	—			55			36
Restricted stock grants	180		—		496			(4,923		)	—			—			4,427			—
Stock-based compensation	—		—		—			2,596			—			—			—			2,596
Net tax benefit related to stock-based compensation	—		—		(1		)	—			—			—			—			(1		)
Other, net	(23	)	—		(17		)	—			—			—			(634		)	(651		)
Balance at June 30, 2016	31,156		$	322	$	744,810		$	(8,798	)	$	203,382		$	10,213		$	(26,509	)	$	923,420
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	—		—		—			—			35,154			—			—			35,154
Other comprehensive income	—		—		—			—			—			565			—			565
Total comprehensive income																				35,719
Common stock issued	4,638		46		152,879			—			—			—			—			152,925
Cash dividends declared ($0.42 per share)	—		—		—			—			(15,024		)	—			—			(15,024		)
Treasury stock adjustment	—		—		—			—			—			—			—			—
Forfeited shares	(10	)	—		63			304			—			—			(367		)	—
Exercise of stock options	7		—		—			—			(85		)	—			196			111
Restricted stock grants	154		—		1,566			(5,505		)	—			—			3,939			—
Stock-based compensation	—		—		—			2,524			—			—			—			2,524
Net tax benefit related to stock-based compensation	—		—		—			—			—			—			—			—
Other, net	(34	)	—		(4		)	—			(69		)	—			(1,286		)	(1,359		)
Balance at June 30, 2017	40,428		$	412	$	1,053,493		$	(9,051	)	$	237,470		$	10,331		$	(24,461	)	$	1,268,194

(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

	Six Months Ended June 30,
(In thousands)	2017			2016
Cash flows from operating activities:
Net income	$	35,154		$	31,958
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	9,984			8,528
Net amortization of securities	1,332			2,003
Change in unamortized net loan costs and premiums	(158		)	(3,268		)
Premises and equipment depreciation and amortization expense	4,961			4,237
Stock-based compensation expense	2,524			2,596
Accretion of purchase accounting entries, net	(7,971		)	(4,801		)
Amortization of other intangibles	1,571			1,606
Write down of other real estate owned	—			365
Excess tax loss from stock-based payment arrangements	—			(105		)
Income from cash surrender value of bank-owned life insurance policies	(1,188		)	(2,025		)
Gain on sales of securities, net	(12,570		)	(23		)
Net decrease (increase) in loans held for sale	(25,809		)	(9,259		)
Loss on disposition of assets	912			15
(Gain) loss on sale of real estate	(12		)	57
Amortization of interest in tax-advantaged projects	2,782			2,929
Net change in other	16,187			(5,134		)
Net cash provided by operating activities	27,699			29,679
Cash flows from investing activities:
Net decrease in trading security	311			296
Proceeds from sales of securities available for sale	36,779			187,519
Proceeds from maturities, calls and prepayments of securities available for sale	88,821			83,883
Purchases of securities available for sale	(241,714		)	(164,943		)
Proceeds from maturities, calls and prepayments of securities held to maturity	6,076			4,288
Purchases of securities held to maturity	(23,582		)	(4,786		)
Net change in loans	(279,723		)	(250,002		)
Proceeds from surrender of bank-owned life insurance	310			258
Proceeds from sale of Federal Home Loan Bank stock	68,672			11,578
Purchase of Federal Home Loan Bank stock	(76,433		)	(8,803		)
Net investment in limited partnership tax credits	(756		)	(4,122		)
Proceeds from the sale of premises and equipment	—			226
Purchase of premises and equipment, net	(6,921		)	(2,839		)
Acquisitions, net of cash (paid) acquired	—			(55,542		)
Proceeds from sale of other real estate	274			933
Net cash (used) by investing activities	$	(427,886	)	$	(202,056	)
(continued)

8

	Six Months Ended June 30,
(In thousands)	2017			2016
Cash flows from financing activities:
Net increase in deposits	94,324			98,604
Proceeds from Federal Home Loan Bank advances and other borrowings	3,841,600			4,449,120
Repayments of Federal Home Loan Bank advances and other borrowings	(3,683,292		)	(4,391,925		)
Exercise of stock options	111			37
Common stock cash dividends paid	(15,023		)	(12,442		)
Common stock issued, net	152,925			—
Acquisition contingent consideration paid	(1,700		)	—
Net cash provided by financing activities	388,945			143,394
Net change in cash and cash equivalents	(11,242		)	(28,983		)
Cash and cash equivalents at beginning of period	113,075			103,562
Cash and cash equivalents at end of period	$	101,833		$	74,579
Supplemental cash flow information:
Interest paid on deposits	$	19,398		$	14,573
Interest paid on borrowed funds	10,021			7,497
Income taxes paid, net	6,339			7,278
Acquisition of non-cash assets and liabilities:
Assets acquired	—			56,976
Liabilities assumed	—			(108		)
Other non-cash changes:
Other net comprehensive income	565			13,518
Real estate owned acquired in settlement of loans	390			225

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.

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. While the 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. This ASU impacts the Company’s wealth management services, administrative services for customer deposit accounts, interchange fees, and sale of owned real estate properties. The extent of this ASU on these revenue lines is being evaluated by the Company. The Company intends to adopt the ASU for the first quarter of 2018. Adoption is not anticipated to have a material impact on the Company’s financial statements.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to: i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of 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. 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

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $11.1 million and $11.4 million, and a fair value of $12.8 million and $13.2 million, at June 30, 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 June 30, 2017.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
June 30, 2017
Securities available for sale
Debt securities:
Municipal bonds and obligations	$	120,379	$	4,933	$	(662	)	$	124,650
Agency collateralized mortgage obligations	782,263		3,251		(2,620		)	782,894
Agency mortgage-backed securities	227,295		746		(1,844		)	226,197
Agency commercial mortgage-backed securities	64,515		154		(1,356		)	63,313
Corporate bonds	66,326		834		(312		)	66,848
Trust preferred securities	11,360		478		—			11,838
Other bonds and obligations	10,424		198		(9		)	10,613
Total debt securities	1,282,562		10,594		(6,803		)	1,286,353
Marketable equity securities	36,085		7,977		(422		)	43,640
Total securities available for sale	1,318,647		18,571		(7,225		)	1,329,993
Securities held to maturity
Municipal bonds and obligations	223,689		5,940		(1,148		)	228,481
Agency collateralized mortgage obligations	74,775		1,837		(366		)	76,246
Agency mortgage-backed securities	8,464		—		(187		)	8,277
Agency commercial mortgage-backed securities	10,513		—		(177		)	10,336
Tax advantaged economic development bonds	33,229		1,507		—			34,736
Other bonds and obligations	322		—		—			322
Total securities held to maturity	350,992		9,284		(1,878		)	358,398
Total	$	1,669,639	$	27,855	$	(9,103	)	$	1,688,391
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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities, segregated by contractual maturity at June 30, 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	$	528	$	531	$	1,184	$	1,185
Over 1 year to 5 years	31,474		32,042		18,992		19,719
Over 5 years to 10 years	54,724		56,120		15,795		16,269
Over 10 years	121,763		125,256		221,269		226,366
Total bonds and obligations	208,489		213,949		257,240		263,539
Marketable equity securities	36,085		43,640		—		—
Mortgage-backed securities	1,074,073		1,072,404		93,752		94,859
Total	$	1,318,647	$	1,329,993	$	350,992	$	358,398

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:

	Less Than Twelve Months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(In thousands)	Losses		Value		Losses		Value		Losses		Value
June 30, 2017
Securities available for sale
Debt securities:
Municipal bonds and obligations	$	662	$	14,622	$	—	$	—	$	662	$	14,622
Agency collateralized mortgage obligations	2,286		371,163		334		16,034		2,620		387,197
Agency mortgage-backed securities	1,820		130,879		24		1,430		1,844		132,309
Agency commercial mortgage-backed securities	1,356		50,075		—		—		1,356		50,075
Corporate bonds	—		—		312		16,139		312		16,139
Other bonds and obligations	9		3,123		—		—		9		3,123
Total debt securities	6,133		569,862		670		33,603		6,803		603,465
Marketable equity securities	422		5,238		—		—		422		5,238
Total securities available for sale	6,555		575,100		670		33,603		7,225		608,703
Securities held to maturity
Municipal bonds and obligations	1,148		47,481		—		—		1,148		47,481
Agency collateralized mortgage obligations	366		13,993		—		—		366		13,993
Agency mortgage-backed securities	187		8,277		—		—		187		8,277
Agency commercial mortgage-backed securities	177		10,336		—		—		177		10,336
Total securities held to maturity	1,878		80,087		—		—		1,878		80,087
Total	$	8,433	$	655,187	$	670	$	33,603	$	9,103	$	688,790
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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Securities

The Company expects to recover its amortized cost basis on all debt securities in its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of June 30, 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 June 30, 2017:

AFS municipal bonds and obligations

At June 30, 2017, 9 of the total 270 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 4.3% 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 June 30, 2017, 76 out of the total 233 securities in the Company’s portfolios of AFS collateralized mortgage obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.7% 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 commercial and residential mortgage-backed securities

At June 30, 2017, 49 out of the total 103 securities in the Company’s portfolios of AFS mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 1.7% 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 June 30, 2017, 1 out of 14 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 1.9% 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 June 30, 2017, $312 thousand of the total unrealized losses was attributable to a $16.5 million investment. The Company evaluated this security, with a Level 2 fair value of $16.1 million, for potential other-than-temporary impairment (“OTTI”) at June 30, 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 June 30, 2017, 6 of the 9 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.3% 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HTM Municipal bonds and obligations

At June 30, 2017, 35 of the 201 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 2.4% 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 June 30, 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 2.2% 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 commercial and residential mortgage-backed securities

At June 30, 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 1.9% 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 June 30, 2017, 4 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 7.1% of the amortized cost of the securities. The Company has the ability and intent to hold the securities until recovery of their cost basis and does not consider the securities other-than-temporarily impaired at June 30, 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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:

	June 30, 2017						December 31, 2016
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Commercial real estate:
Construction	$	266,859	$	24,568	$	291,427	$	253,302	$	34,207	$	287,509
Single and multi-family	356,771		97,950		454,721		191,819		125,672		317,491
Other commercial real estate	1,436,091		507,283		1,943,374		1,481,223		530,215		2,011,438
Total commercial real estate	2,059,721		629,801		2,689,522		1,926,344		690,094		2,616,438
Commercial and industrial loans:
Asset based lending	336,698		10,361		347,059		321,270		—		321,270
Other commercial and industrial loans	773,839		107,038		880,877		586,832		153,936		740,768
Total commercial and industrial loans	1,110,537		117,399		1,227,936		908,102		153,936		1,062,038
Total commercial loans	3,170,258		747,200		3,917,458		2,834,446		844,030		3,678,476
Residential mortgages:
1-4 family	1,651,980		271,857		1,923,837		1,583,794		297,355		1,881,149
Construction	9,977		254		10,231		11,178		804		11,982
Total residential mortgages	1,661,957		272,111		1,934,068		1,594,972		298,159		1,893,131
Consumer loans:
Home equity	287,732		100,490		388,222		313,521		80,279		393,800
Auto and other	561,916		62,818		624,734		478,368		106,012		584,380
Total consumer loans	849,648		163,308		1,012,956		791,889		186,291		978,180
Total loans	$	5,681,863	$	1,182,619	$	6,864,482	$	5,221,307	$	1,328,480	$	6,549,787

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying amount of the acquired loans at June 30, 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 $40.2 million (and a note balance of $69.3 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 $1.1 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, Loans and Debt Securities Acquired with Deteriorated Credit Quality:

	Three Months Ended June 30,
(In thousands)	2017			2016
Balance at beginning of period	$	7,363		$	6,464
Acquisitions	—			708
Reclassification from nonaccretable difference for loans with improved cash flows	(85		)	522
Change in cash flows that do not affect nonaccretable difference	(506		)	—
Reclassification to TDR	—			—
Accretion	(1,005		)	(1,481		)
Balance at end of period	$	5,767		$	6,213

	Six Months Ended June 30,
(In thousands)	2017			2016
Balance at beginning of period	$	8,738		$	6,925
Acquisitions	—			708
Reclassification from nonaccretable difference for loans with improved cash flows	333			1,418
Change in cash flows that do not affect nonaccretable difference	(1,253		)	—
Reclassification to TDR	—			(185		)
Accretion	(2,051		)	(2,653		)
Balance at end of period	$	5,767		$	6,213

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of past due loans at June 30, 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
June 30, 2017
Commercial real estate:
Construction	$	—	$	—	$	—	$	—	$	266,859	$	266,859	$	—
Single and multi-family	106		—		471		577		356,194		356,771		67
Other commercial real estate	1,932		—		6,443		8,375		1,427,716		1,436,091		168
Total	2,038		—		6,914		8,952		2,050,769		2,059,721		235
Commercial and industrial loans:
Asset based lending	—		—		—		—		336,698		336,698		—
Other commercial and industrial loans	1,470		1,089		7,179		9,738		764,101		773,839		135
Total	1,470		1,089		7,179		9,738		1,100,799		1,110,537		135
Residential mortgages:
1-4 family	1,147		291		2,327		3,765		1,648,215		1,651,980		320
Construction	—		—		—		—		9,977		9,977		—
Total	1,147		291		2,327		3,765		1,658,192		1,661,957		320
Consumer loans:
Home equity	212		86		2,314		2,612		285,120		287,732		184
Auto and other	2,192		329		1,180		3,701		558,215		561,916		6
Total	2,404		415		3,494		6,313		843,335		849,648		190
Total	$	7,059	$	1,795	$	19,914	$	28,768	$	5,653,095	$	5,681,863	$	880

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans

(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Acquired Credit Impaired		Total Loans		Past Due > 90 days and Accruing
June 30, 2017
Commercial real estate:
Construction	$	—	$	—	$	—	$	—	$	—	$	24,568	$	—
Single and multi-family	577		—		408		985		3,381		97,950		—
Other commercial real estate	682		982		500		2,164		26,454		507,283		—
Total	1,259		982		908		3,149		29,835		629,801		—
Commercial and industrial loans:
Asset based lending	—		—		—		—		—		10,361		—
Other commercial and industrial loans	57		76		1,343		1,476		1,850		107,038		—
Total	57		76		1,343		1,476		1,850		117,399		—
Residential mortgages:
1-4 family	183		14		1,264		1,461		7,213		271,857		26
Construction	—		—		—		—		—		254		—
Total	183		14		1,264		1,461		7,213		272,111		26
Consumer loans:
Home equity	50		—		1,220		1,270		935		100,490		4
Auto and other	612		355		457		1,424		369		62,818		—
Total	662		355		1,677		2,694		1,304		163,308		4
Total	$	2,161	$	1,427	$	5,192	$	8,780	$	40,202	$	1,182,619	$	30

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is summary information pertaining to non-accrual loans at June 30, 2017 and December 31, 2016:

	June 30, 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	404		408		812		469		437		906
Other commercial real estate	6,275		500		6,775		4,212		765		4,977
Total	6,679		908		7,587		4,681		1,202		5,883
Commercial and industrial loans:
Other commercial and industrial loans	7,044		1,260		8,304		6,285		1,155		7,440
Total	7,044		1,260		8,304		6,285		1,155		7,440
Residential mortgages:
1-4 family	2,007		1,225		3,232		2,223		1,572		3,795
Construction	—		—		—		—		—		—
Total	2,007		1,225		3,232		2,223		1,572		3,795
Consumer loans:
Home equity	2,130		1,216		3,346		2,675		517		3,192
Auto and other	1,174		457		1,631		952		895		1,847
Total	3,304		1,673		4,977		3,627		1,412		5,039
Total non-accrual loans	$	19,034	$	5,066	$	24,100	$	16,816	$	5,341	$	22,157

_______________________________________

(1)  At quarter end June 30, 2017, acquired credit impaired loans accounted for $96 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans evaluated for impairment as of June 30, 2017 and December 31, 2016 were as follows:

Business Activities Loans

(In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages		Consumer		Total
June 30, 2017
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	36,769	$	7,944	$	2,225	$	2,369	$	49,307
Collectively evaluated for impairment	2,022,952		1,102,593		1,659,732		847,279		5,632,556
Total	$	2,059,721	$	1,110,537	$	1,661,957	$	849,648	$	5,681,863

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
June 30, 2017
Loans receivable:
Balance at end of Period
Individually evaluated for impairment	$	2,909	$	611	$	484	$	981	$	4,985
Purchased credit-impaired loans	29,835		1,850		7,213		1,304		40,202
Collectively evaluated for impairment	597,057		114,938		264,414		161,023		1,137,432
Total	$	629,801	$	117,399	$	272,111	$	163,308	$	1,182,619

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of impaired loans at June 30, 2017 and December 31, 2016:

Business Activities Loans

	June 30, 2017
(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	21,630		21,630		—
Other commercial and industrial loans	1,174		1,174		—
Residential mortgages - 1-4 family	1,591		1,591		—
Consumer - home equity	—		—		—
Consumer - other	—		—		—
With an allowance recorded:
Commercial real estate - construction	$	—	$	—	$	—
Commercial real estate - single and multifamily	165		166		1
Other commercial real estate loans	14,847		14,973		126
Other commercial and industrial loans	6,642		6,770		128
Residential mortgages - 1-4 family	555		634		79
Consumer - home equity	2,011		2,369		358
Consumer - other	—		—		—
Total
Commercial real estate	$	36,642	$	36,769	$	127
Commercial and industrial loans	7,816		7,944		128
Residential mortgages	2,146		2,225		79
Consumer	2,011		2,369		358
Total impaired loans	$	48,615	$	49,307	$	692

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans

	June 30, 2017
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Commercial real estate - single and multifamily	$	326	$	326	$	—
Other commercial real estate loans	202		202		—
Other commercial and industrial loans	296		296		—
Residential mortgages - 1-4 family	391		391		—
Consumer - home equity	606		606		—
Consumer - other	—		—		—
With an allowance recorded:
Commercial real estate - single and multifamily	$	878	$	902	$	24
Other commercial real estate loans	1,449		1,479		30
Other commercial and industrial loans	311		315		4
Residential mortgages - 1-4 family	89		93		4
Consumer - home equity	339		375		36
Total					x
Commercial real estate	$	2,855	$	2,909	$	54
Commercial and industrial loans	607		611		4
Residential mortgages	480		484		4
Consumer	945		981		36
Total impaired loans	$	4,887	$	4,985	$	98

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the average recorded investment and interest income recognized on impaired loans as of June 30, 2017 and 2016:

Business Activities Loans

	Six Months Ended June 30, 2017				Six Months Ended June 30, 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 - single and multifamily	$	99	$	—	$	72	$	1
Other commercial real estate loans	22,362		473		2,690		3
Other commercial and industrial loans	1,251		16		707		16
Residential mortgages - 1-4 family	1,870		11		1,409		3
Consumer - home equity	90		—		792		5
Consumer - other	—		—		1		—
With an allowance recorded:
Commercial real estate - single and multifamily	$	171	$	8	$	—	$	—
Other commercial real estate loans	10,056		119		10,144		240
Other commercial and industrial loans	6,902		131		5,576		119
Residential mortgages - 1-4 family	636		7		1,609		36
Consumer - home equity	2,371		17		999		17
Total
Commercial real estate	$	32,688	$	600	$	12,906	$	244
Commercial and industrial loans	8,153		147		6,283		135
Residential mortgages	2,506		18		3,018		39
Consumer loans	2,461		17		1,897		24
Total impaired loans	$	45,808	$	782	$	24,104	$	442

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans

	Six Months Ended June 30, 2017				Six Months Ended June 30, 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	396		43		125		4
Other commercial real estate loans	269		49		596		—
Other commercial and industrial loans	298		1		154		—
Residential mortgages - 1-4 family	393		6		100		—
Consumer - home equity	771		—		—		—
Consumer - other	—		—		160		1
With an allowance recorded:
Commercial real estate - construction	$	—	$	—	$	—	$	—
Commercial real estate - single and multifamily	905		12		822		21
Other commercial real estate loans	1,482		19		2,598		77
Other commercial and industrial loans	328		8		233		2
Residential mortgages - 1-4 family	94		1		333		6
Consumer - home equity	390		5		326		6
Consumer - other	—		—		—		—
Total
Other commercial real estate loans	$	3,052	$	123	$	4,141	$	102
Commercial and industrial loans	626		9		387		2
Residential mortgages	487		7		433		6
Consumer loans	1,161		5		486		7
Total impaired loans	$	5,326	$	144	$	5,447	$	117

29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Troubled Debt Restructuring Loans

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.

The following tables include the recorded investment and number of modifications identified during the three and six months ended June 30, 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 and six months ended June 30, 2017 were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity. The modifications for the three and six months ending June 30, 2016 were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity.

	Three Months Ended June 30, 2017
(Dollars in thousands)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial - Other	9	$	10,613	$	9,385
Commercial and industrial - Other	4	1,793		1,793
Residential - 1-4 Family	—	—		—
Consumer - Home Equity	—	—		—
Total	13	$	12,406	$	11,178

	Six Months Ended June 30, 2017
(Dollars in thousands)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial - Other	15	$	13,445	$	11,718
Commercial and industrial - Other	5	1,817		1,817
Residential - 1-4 Family	2	205		188
Consumer - Home Equity	1	53		53
Total	23	$	15,520	$	13,776

	Three Months Ended June 30, 2016
(Dollars in thousands)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Consumer - Home Equity	1	117		117
Total	1	$	117	$	117

	Six Months Ended June 30, 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
Consumer - Home Equity	1	117		117
Total	5	$	1,317	$	1,317

30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 2017, there were no loans that were restructured that had subsequently defaulted during the period. For the six months ended June 30, 2017, there was one loan that was restructured that had subsequently defaulted during the period.

	Modifications that Subsequently Defaulted
	Three Months Ended June 30, 2017
(Dollars in thousands)	Number of Contracts	Recorded Investment
Troubled Debt Restructurings
Commercial - Other	—	$	—
Commercial and industrial- Other	—	$	—

	Modifications that Subsequently Defaulted
	Six Months Ended June 30, 2017
(Dollars in thousands)	Number of Contracts	Recorded Investment
Troubled Debt Restructurings
Commercial - Other	1	$	113
Commercial and industrial- Other	1	$	101

The following table presents the Company’s TDR activity for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,
(In thousands)	2017			2016
Balance at beginning of the period	$	34,699		$	23,654
Principal payments	(266		)	(768		)
TDR status change (1)	—			—
Other reductions/increases (2)	(1,055		)	(881		)
Newly identified TDRs	11,178			117
Balance at end of the period	$	44,556		$	22,122

	Six Months Ended June 30,
(In thousands)	2017			2016
Balance at beginning of the period	$	33,829		$	22,048
Principal payments	(1,154		)	(1,109		)
TDR status change (1)	—			2,236
Other reductions/increases (2)	(1,895		)	(2,370		)
Newly identified TDRs	13,776			1,317
Balance at end of the period	$	44,556		$	22,122

_________________________________

(1) TDR status change classification represents TDR loans with a specified interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk and  the loan was on current payment status and not impaired based on the terms specified by the restructuring agreement.

(2) Other reductions classification consists of transfer to other real estate owned and charge-offs and advances to loans.

The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

As of June 30, 2017, the Company maintained foreclosed residential real estate property with a fair value of $279 thousand. Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of June 30, 2017 and December 31, 2016 totaled $4.8 million at the end of each period. As of December 31, 2016, foreclosed residential real estate property totaled $151 thousand.

31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.               LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for the three and six months ended June 30, 2017 and 2016 was as follows:

	At or for the three months ended June 30, 2017
Business Activities Loans (In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages		Consumer		Unallocated			Total
Balance at beginning of period	$	16,115	$	11,733	$	7,776	$	5,414	$	425		$	41,463
Charged-off loans	1,393		581		278		631		—			2,883
Recoveries on charged-off loans	—		55		14		87		—			156
Provision/(releases) for loan losses	1,445		1,535		701		1,428		(950		)	4,159
Balance at end of period	$	16,167	$	12,742	$	8,213	$	6,298	$	(525	)	$	42,895
Individually evaluated for impairment	127		128		79		358		—			692
Collectively evaluated for impairment	16,040		12,614		8,134		5,940		(525		)	42,203
Total	$	16,167	$	12,742	$	8,213	$	6,298	$	(525	)	$	42,895

	At or for the six months ended June 30, 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	1,516		1,851		513		1,317		—			5,197
Recoveries on charged-off loans	57		71		29		172		—			329
Provision/(releases) for loan losses	1,221		5,151		945		1,996		(779		)	8,534
Balance at end of period	$	16,167	$	12,742	$	8,213	$	6,298	$	(525	)	$	42,895
Individually evaluated for impairment	127		128		79		358		—			692
Collectively evaluated for impairment	16,040		12,614		8,134		5,940		(525		)	42,203
Total	$	16,167	$	12,742	$	8,213	$	6,298	$	(525	)	$	42,895

	At or for the three months ended June 30, 2016
Business Activities Loans (In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages		Consumer		Unallocated			Total
Balance at beginning of period	$	16,043	$	8,629	$	7,061	$	4,069	$	(304	)	$	35,498
Charged-off loans	534		1,581		540		340		—			2,995
Recoveries on charged-off loans	—		3		5		55		—			63
Provision/(releases) for loan losses	1,386		1,245		1,000		985		(58		)	4,558
Balance at end of period	$	16,895	$	8,296	$	7,526	$	4,769	$	(362	)	$	37,124
Individually evaluated for impairment	324		113		150		55		—			642
Collectively evaluated for impairment	16,571		8,183		7,376		4,714		(362		)	36,482
Total	$	16,895	$	8,296	$	7,526	$	4,769	$	(362	)	$	37,124

32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	At or for the six months ended June 30, 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	1,578		2,546		1,087		741		—			5,952
Recoveries on charged-off loans	128		77		5		122		—			332
Provision/(releases) for loan losses	3,837		3,448		1,042		432		(589		)	8,170
Balance at end of period	$	16,895	$	8,296	$	7,526	$	4,769	$	(362	)	$	37,124
Individually evaluated for impairment	324		113		150		55		—			642
Collectively evaluated for impairment	16,571		8,183		7,376		4,714		(362		)	36,482
Total	$	16,895	$	8,296	$	7,526	$	4,769	$	(362	)	$	37,124

	At or for the three months ended June 30, 2017
Acquired Loans (In thousands)	Commercial real estate		Commercial and industrial loans			Residential mortgages			Consumer			Unallocated		Total
Balance at beginning of period	$	2,128	$	1,054		$	706		$	453		$	—	$	4,341
Charged-off loans	94		43			71			340			—		548
Recoveries on charged-off loans	13		(56		)	(2		)	(14		)	—		(59		)
Provision for loan losses	309		59			57			305			—		730
Balance at end of period	$	2,356	$	1,014		$	690		$	404		$	—	$	4,464
Individually evaluated for impairment	54		4			4			36			—		98
Purchased credit-impaired loans	—		—			—			—			—		—
Collectively evaluated for impairment	2,302		1,010			686			368			—		4,366
Total	$	2,356	$	1,014		$	690		$	404		$	—	$	4,464

	At or for the six months ended June 30, 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	670		481		215		491		—		1,857
Recoveries on charged-off loans	22		1		38		41		—		102
Provision for loan losses	701		330		101		318		—		1,450
Balance at end of period	$	2,356	$	1,014	$	690	$	404	$	—	$	4,464
Individually evaluated for impairment	54		4		4		36		—		98
Purchased credit-impaired loans	—		—		—		—		—		—
Collectively evaluated for impairment	2,302		1,010		686		368		—		4,366
Total	$	2,356	$	1,014	$	690	$	404	$	—	$	4,464

33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	At or for the three months ended June 30, 2016
Acquired Loans (In thousands)	Commercial real estate		Commercial and industrial loans			Residential mortgages		Consumer		Unallocated		Total
Balance at beginning of period	$	1,963	$	1,275		$	894	$	425	$	—	$	4,557
Charged-off loans	—		250			54		94		—		398
Recoveries on charged-off loans	1		107			21		21		—		150
Provision for loan losses	176		(356		)	20		124		—		(36		)
Balance at end of period	$	2,140	$	776		$	881	$	476	$	—	$	4,273
Individually evaluated for impairment	177		42			35		32		—		286
Purchased credit-impaired loans	—		—			—		—		—		—
Collectively evaluated for impairment	1,963		734			846		444		—		3,987
Total	$	2,140	$	776		$	881	$	476	$	—	$	4,273

	At or for the six months ended June 30, 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		275			364		380		—		1,145
Recoveries on charged-off loans	—		176			104		46		—		326
Provision for loan losses	363		(455		)	165		285		—		358
Balance at end of period	$	2,140	$	776		$	881	$	476	$	—	$	4,273
Individually evaluated for impairment	177		42			35		32		—		286
Purchased credit-impaired loans	—		—			—		—		—		—
Collectively evaluated for impairment	1,963		734			846		444		—		3,987
Total	$	2,140	$	776		$	881	$	476	$	—	$	4,273

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.

34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 June 30, 2017, the allowance for loan losses related to acquired loans under ASC 310-30 and ASC 310-20 was $4.5 million using the above mentioned criteria.

35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the Company’s loans by risk rating at June 30, 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)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	266,859	$	253,302	$	354,007	$	189,310	$	1,389,386	$	1,434,762	$	2,010,252	$	1,877,374
Special mention	—		—		549		334		12,367		5,827		12,916		6,161
Substandard	—		—		2,215		2,175		34,338		40,598		36,553		42,773
Doubtful	—		—		—		—		—		36		—		36
Total	$	266,859	$	253,302	$	356,771	$	191,819	$	1,436,091	$	1,481,223	$	2,059,721	$	1,926,344

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total comm. and industrial loans
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	331,390	$	321,270	$	752,861	$	569,704	$	1,084,251	$	890,974
Special mention	4,776		—		1,224		123		6,000		123
Substandard	532		—		16,707		13,825		17,239		13,825
Doubtful	—		—		3,047		3,180		3,047		3,180
Total	$	336,698	$	321,270	$	773,839	$	586,832	$	1,110,537	$	908,102

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	1,649,361	$	1,578,913	$	9,977	$	11,178	$	1,659,338	$	1,590,091
Special mention	291		701		—		—		291		701
Substandard	2,328		4,179		—		—		2,328		4,179
Total	$	1,651,980	$	1,583,793	$	9,977	$	11,178	$	1,661,957	$	1,594,971

Consumer Loans

Credit Risk Profile Based on Payment Activity

	Home equity				Auto and other				Total consumer loans
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Performing	$	285,602	$	310,846	$	560,742	$	477,416	$	846,344	$	788,262
Nonperforming	2,130		2,675		1,174		952		3,304		3,627
Total	$	287,732	$	313,521	$	561,916	$	478,368	$	849,648	$	791,889

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category

	Construction				Single and multi-family				Other				Total commercial real estate
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	23,868	$	33,461	$	94,963	$	119,414	$	463,569	$	496,562	$	582,400	$	649,437
Special mention	—		—		612		907		9,619		1,622		10,231		2,529
Substandard	700		746		2,375		5,351		34,095		32,031		37,170		38,128
Total	$	24,568	$	34,207	$	97,950	$	125,672	$	507,283	$	530,215	$	629,801	$	690,094

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total comm. and industrial loans
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	10,361	$	—	$	101,730	$	147,102	$	112,091	$	147,102
Special mention	—		—		296		1,260		296		1,260
Substandard	—		—		5,012		5,574		5,012		5,574
Total	$	10,361	$	—	$	107,038	$	153,936	$	117,399	$	153,936

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Grade:
Pass	$	269,288	$	294,983	$	254	$	804	$	269,542	$	295,787
Special mention	36		343		—		—		36		343
Substandard	2,533		2,029		—		—		2,533		2,029
Total	$	271,857	$	297,355	$	254	$	804	$	272,111	$	298,159

Consumer Loans

Credit Risk Profile Based on Payment Activity

	Home equity				Auto and other				Total consumer loans
(In thousands)	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Performing	$	99,274	$	79,762	$	62,361	$	105,117	$	161,635	$	184,879
Nonperforming	1,216		517		457		895		1,673		1,412
Total	$	100,490	$	80,279	$	62,818	$	106,012	$	163,308	$	186,291

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about total loans rated Special Mention or lower as of June 30, 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.

	June 30, 2017						December 31, 2016
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-Accrual	$	19,034	$	5,162	$	24,196	$	16,816	$	5,424	$	22,240
Substandard Accruing	43,627		41,330		84,957		51,125		44,177		95,302
Total Classified	62,661		46,492		109,153		67,941		49,601		117,542
Special Mention	19,622		10,691		30,313		7,479		4,323		11,802
Total Criticized	$	82,283	$	57,183	$	139,466	$	75,420	$	53,924	$	129,344

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.               DEPOSITS

A summary of time deposits is as follows:

(In thousands)	June 30, 2017		December 31, 2016
Time less than $250,000	$	2,166,004	$	2,015,332
Time $250,000 or more	334,943		318,211
Total time deposits	$	2,500,947	$	2,333,543

Included in total deposits are brokered deposits of $1.1 billion and $0.9 billion at June 30, 2017 and December 31, 2016, respectively. Included in total brokered deposits are reciprocal deposits of $107.6 million and $113.4 million at June 30, 2017 and December 31, 2016, respectively.

NOTE 7.               BORROWED FUNDS

Borrowed funds at June 30, 2017 and December 31, 2016 are summarized, as follows:

	June 30, 2017				December 31, 2016
			Weighted				Weighted
			Average				Average
(Dollars in thousands)	Principal		Rate		Principal		Rate
Short-term borrowings:
Advances from the FHLB	$	1,081,600	1.20	%	$	1,072,044	0.71	%
Other borrowings	—		—		10,000		2.42
Total short-term borrowings:	1,081,600		1.20		1,082,044		0.72
Long-term borrowings:
Advances from the FHLB and other borrowings	301,374		1.49		142,792		1.53
Subordinated borrowings	73,786		7.00		73,697		7.00
Junior subordinated borrowings	15,464		3.04		15,464		2.77
Total long-term borrowings:	390,624		2.59		231,953		3.35
Total	$	1,472,224	1.57	%	$	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 June 30, 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 June 30, 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 June 30, 2017 include callable advances totaling $4.0 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.

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of maturities of FHLB advances as of June 30, 2017 is as follows:

	June 30, 2017
			Weighted Average
(In thousands, except rates)	Principal		Rate
Fixed rate advances maturing:
2017	$	1,101,540	1.22	%
2018	168,857		1.25
2019	100,000		1.67
2020	4,825		1.94
2021 and beyond	7,752		2.70
Total FHLB advances	$	1,382,974	1.27	%

The Company did not have variable-rate FHLB advances for the periods ended June 30, 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 $645 thousand and $706 thousand for unamortized debt issuance costs as of June 30, 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 3.04% and 2.77% at June 30, 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.

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios were as follows:

	June 30, 2017		Regulatory Minimum to be Well Capitalized		December 31, 2016		Regulatory Minimum to be Well Capitalized
Company (consolidated)
Total capital to risk weighted assets	14.0	%	10.0	%	11.9	%	10.0	%
Common equity tier 1 capital to risk weighted assets	12.1		6.5		9.9		6.5
Tier 1 capital to risk weighted assets	12.3		8.0		10.1		8.0
Tier 1 capital to average assets	9.6		5.0		7.9		5.0
Bank
Total capital to risk weighted assets	11.4	%	10.0	%	11.2	%	10.0	%
Common equity tier 1 capital to risk weighted assets	10.2		6.5		10.0		6.5
Tier 1 capital to risk weighted assets	10.2		8.0		10.0		8.0
Tier 1 capital to average assets	8.0		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 June 30, 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 June 30, 2017 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 1.25%.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accumulated other comprehensive income (loss)

Components of accumulated other comprehensive income is as follows:

(In thousands)	June 30, 2017			December 31, 2016
Other accumulated comprehensive income, before tax:
Net unrealized holding gain on AFS securities	$	19,671		$	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	(7,550		)	(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	$	10,331		$	9,766

The following table presents the components of other comprehensive income for the three and six months ended June 30, 2017 and 2016:

(In thousands)	Before Tax			Tax Effect			Net of Tax
Three Months Ended June 30, 2017
Net unrealized holding gain on AFS securities:	x
Net unrealized gains arising during the period	$	3,926		$	(1,455	)	$	2,471
Less: reclassification adjustment for gains realized in net income	(1		)	—			(1		)
Net unrealized holding gain on AFS securities	3,927			(1,455		)	2,472
Net unrealized loss on cash flow hedging derivatives:
Net unrealized (loss) arising during the period	—			—			—
Less: reclassification adjustment for (losses) realized in net income	—			—			—
Net unrealized gain on cash flow hedging derivatives	—			—			—
Other comprehensive income	$	3,927		$	(1,455	)	$	2,472
Three Months Ended June 30, 2016
Net unrealized holding gain on AFS securities:
Net unrealized gains arising during the period	$	9,573		$	(3,686	)	$	5,887
Less: reclassification adjustment for losses realized in net income	(13		)	5			(8		)
Net unrealized holding gain on AFS securities	9,586			(3,691		)	5,895
Net unrealized loss on cash flow hedging derivatives:
Net unrealized (loss) arising during the period	(1,771		)	711			(1,060		)
Less: reclassification adjustment for (losses) realized in net income	(887		)	356			(531		)
Net unrealized (loss) on cash flow hedging derivatives	(884		)	355			(529		)
Other comprehensive income	$	8,702		$	(3,336	)	$	5,366

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)	Before Tax			Tax Effect			Net of Tax
Six Months Ended June 30, 2017
Net unrealized holding gain on AFS securities:	x
Net unrealized gains arising during the period	$	7,064		$	(2,627	)	$	4,437
Less: reclassification adjustment for gains realized in net income	12,569			(4,713		)	7,856
Net unrealized holding (loss) on AFS securities	(5,505		)	2,086			(3,419		)
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		)	2,769			(4,253		)
Net unrealized gain on cash flow hedging derivatives	6,573			(2,589		)	3,984
Other comprehensive income	$	1,068		$	(503	)	$	565
Six Months Ended June 30, 2016
Net unrealized holding gain on AFS securities:
Net unrealized gains arising during the period	$	27,315		$	(10,556	)	$	16,759
Less: reclassification adjustment for losses realized in net income	22			(8		)	14
Net unrealized holding gain on AFS securities	27,293			(10,548		)	16,745
Net unrealized loss on cash flow hedging derivatives:
Net unrealized (loss) arising during the period	(6,684		)	2,683			(4,001		)
Less: reclassification adjustment for (losses) realized in net income	(1,294		)	520			(774		)
Net unrealized (loss) on cash flow hedging derivatives	(5,390		)	2,163			(3,227		)
Other comprehensive income	$	21,903		$	(8,385	)	$	13,518

The following table presents the changes in each component of accumulated other comprehensive income (loss), for the three and six months ended June 30, 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 June 30, 2017
Balance at Beginning of Period	$	9,649		$	—		$	(1,790	)	$	7,859
Other comprehensive gain before reclassifications	2,471			—			—			2,471
Less: amounts reclassified from accumulated other comprehensive income (loss)	(1		)	—			—			(1		)
Total other comprehensive income	2,472			—			—			2,472
Balance at End of Period	$	12,121		$	—		$	(1,790	)	$	10,331
Three Months Ended June 30, 2016
Balance at Beginning of Period	$	14,730		$	(7,806	)	$	(2,077	)	$	4,847
Other comprehensive gain (loss) before reclassifications	5,887			(1,060		)	—			4,827
Less: amounts reclassified from accumulated other comprehensive income (loss)	(8		)	(531		)	—			(539		)
Total other comprehensive income (loss)	5,895			(529		)	—			5,366
Balance at End of Period	$	20,625		$	(8,335	)	$	(2,077	)	$	10,213

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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
Six Months Ended June 30, 2017
Balance at Beginning of Period	$	15,540		$	(3,984	)	$	(1,790	)	$	9,766
Other comprehensive gain (loss) before reclassifications	4,437			(269		)	—			4,168
Less: amounts reclassified from accumulated other comprehensive income (loss)	7,856			(4,253		)	—			3,603
Total other comprehensive (loss) income	(3,419		)	3,984			—			565
Balance at End of Period	$	12,121		$	—		$	(1,790	)	$	10,331
Six Months Ended June 30, 2016
Balance at Beginning of Period	$	3,880		$	(5,108	)	$	(2,077	)	$	(3,305	)
Other comprehensive gain (loss) before reclassifications	16,759			(4,001		)	—			12,758
Less: amounts reclassified from accumulated other comprehensive income (loss)	14			(774		)	—			(760		)
Total other comprehensive income (loss)	16,745			(3,227		)	—			13,518
Balance at End of Period	$	20,625		$	(8,335	)	$	(2,077	)	$	10,213

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016:

							Affected Line Item in the
	Three Months Ended June 30,						Statement where Net Income
(In thousands)	2017			2016			is Presented
Realized (losses) on AFS securities:
	$	(1	)	$	(13	)	Non-interest income
	—			5			Tax expense
	(1		)	(8		)	Net of tax
Realized (losses) on cash flow hedging derivatives:
	—			(887		)	Non-interest income
	—			356			Tax expense
	—			(531		)	Net of tax
Total reclassifications for the period	$	(1	)	$	(539	)	Net of tax

							Affected Line Item in the
	Six Months Ended June 30,						Statement where Net Income
(In thousands)	2017			2016			is Presented
Realized gains on AFS securities:
	$	12,569		$	23		Non-interest income
	(4,713		)	(9		)	Tax expense
	7,856			14			Net of tax
Realized (losses) on cash flow hedging derivatives:
	(393		)	—			Interest expense
	(6,629		)	(1,295		)	Non-interest expense
	2,769			521			Tax benefit
	(4,253		)	(774		)	Net of tax
Total reclassifications for the period	$	3,603		$	(760	)	Net of tax

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2017		2016		2017		2016
Net income	$	19,694	$	15,957	$	35,154	$	31,958
Average number of common shares issued	38,720		32,213		37,731		32,188
Less: average number of treasury shares	943		1,075		981		1,107
Less: average number of unvested stock award shares	453		533		445		520
Average number of basic common shares outstanding	37,324		30,605		36,305		30,561
Plus: dilutive effect of unvested stock award shares	106		102		116		99
Plus: dilutive effect of stock options outstanding	44		58		45		65
Average number of diluted common shares outstanding	37,474		30,765		36,466		30,725
Earnings per share:
Basic	$	0.53	$	0.52	$	0.97	$	1.05
Diluted	$	0.53	$	0.52	$	0.96	$	1.04

For the six months ended June 30, 2017, 327 thousand shares of restricted stock and 48 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. For the six months ended June 30, 2016, 407 thousand shares of restricted stock and 204 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. STOCK-BASED COMPENSATION PLANS

A combined summary of activity in the Company’s stock award and stock option plans for the six months ended June 30, 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	154		35.75		—		—
Stock options exercised	—		—		(7	)	15.01
Stock awards vested	(133	)	25.84		—		—
Forfeited	(10	)	29.26		—		—
Expired	—		—		(10	)	33.46
June 30, 2017	459		$	29.46	92		$	13.86
Exercisable options at June 30, 2017					92		$	13.86

During the six months ended June 30, 2017 and 2016, proceeds from stock option exercises totaled $111 thousand and $37 thousand, respectively. During the six months ended June 30, 2017, there were 133 thousand shares issued in connection with vested stock awards. During the six months ended June 30, 2016, there were 100 thousand shares issued in connection with vested stock awards. All of these shares were issued from available treasury stock. Stock-based compensation expense totaled $2.5 million and $2.6 million during the six months ended June 30, 2017 and 2016, respectively. Stock-based compensation expense is recognized over the requisite service period for all awards.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As of June 30, 2017, the Company held derivatives with a total notional amount of $2.4 billion. The Company had economic hedges and non-hedging derivatives totaling $2.1 billion and $333.1 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 $1.5 billion, risk participation agreements with dealer banks of $103.2 million, and $428.4 million in forward commitment contracts.

As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities. Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. The derivatives program is overseen by the Risk Management/Capital Committee of the Company’s Board of Directors. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at June 30, 2017.

The Company pledged collateral to derivative counterparties in the form of securities with an amortized cost of $27.3 million and a fair value of $27.3 million as of June 30, 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 June 30, 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	11,074		12.4	1.42	%	5.09	%	(1,897		)
Interest rate swaps on loans with commercial loan customers	763,443		6.2	2.83	%	4.19	%	(8,434		)
Reverse interest rate swaps on loans with commercial loan customers	763,443		6.2	4.19	%	2.83	%	8,484
Risk participation agreements with dealer banks	103,173		11.3					10
Forward sale commitments	428,425		0.2					975
Total economic hedges	2,069,558							(862		)
Non-hedging derivatives:
Commitments to lend	333,081		0.2					7,375
Total non-hedging derivatives	333,081							7,375
Total	$	2,402,639						$	6,513

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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	)

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 prior to the termination, 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. Hedge ineffectiveness on interest rate swaps designated as cash flow hedges was immaterial to the Company’s financial statements during the three and six months ended June 30, 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 June 30,					Six Months Ended June 30,
(In thousands)	2017		2016			2017			2016
Interest rate swaps on FHLB borrowings:
Unrealized (loss) recognized in accumulated other comprehensive loss	$	—	$	(1,771	)	$	(449	)	$	(6,684	)
Less: reclassification of unrealized (loss) from accumulated other comprehensive income to interest expense	—		(887		)	(393		)	(1,295		)
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	—		355			(2,589		)	2,162
Other comprehensive gain (loss) recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects	$	—	$	(529	)	$	3,984		$	(3,227	)

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Economic hedges

As of June 30, 2017, the Company has an interest rate swap with a $11.1 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 $(114) thousand as of June 30, 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.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 June 30,						Six Months Ended June 30,
(In thousands)	2017			2016			2017			2016
Economic hedges
Interest rate swap on industrial revenue bond:
Unrealized gain (loss) recognized in other non-interest income	$	2		$	(292	)	$	124		$	(831	)
Interest rate swaps on loans with commercial loan customers:
Unrealized (loss) recognized in other non-interest income	(3,810		)	(7,725		)	(1,682		)	(21,322		)
Reverse interest rate swaps on loans with commercial loan customers:
Unrealized gain recognized in other non-interest income	3,810			7,725			1,682			21,322
(Unfavorable) Favorable change in credit valuation adjustment recognized in other non-interest income	(114		)	372			(276		)	(433		)
Risk participation agreements:
Unrealized gain recognized in other non-interest income	23			33			5			116
Forward commitments:
Unrealized gain (loss) recognized in other non-interest income	975			(869		)	(276		)	(1,316		)
Realized gain (loss) in other non-interest income	238			50			(2,668		)	(333		)
Non-hedging derivatives
Commitments to lend
Unrealized gain recognized in other non-interest income	$	7,375		$	1,259		$	15,436		$	2,061
Realized gain in other non-interest income	7,693			896			16,467			1,745

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $12.3 million and $11.5 million as of June 30, 2017 and December 31, 2016, respectively. The Company had net liability positions with its financial institution counterparties totaling $10.4 million and $15.4 million as of June 30, 2017 and December 31, 2016, respectively. The Company had net liability positions with its commercial banking counterparties totaling $3.7 million and $4.4 million as of June 30, 2017 and December 31, 2016. The collateral posted by the Company that covered liability positions was $10.4 million and $19.8 million as of June 30, 2017 and December 31, 2016, respectively.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of June 30, 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
June 30, 2017
Interest Rate Swap Agreements:
Institutional counterparties	$	66	$	—		$	66	$	—	$	—	$	66
Commercial counterparties	12,195		(2		)	12,193		—		—		12,193
Total	$	12,261	$	(2	)	$	12,259	$	—	$	—	$	12,259

Offsetting of Financial Liabilities and Derivative Liabilities

	Gross Amounts of			Gross Amounts Offset in the		Net Amounts of Liabilities Presented in the			Gross Amounts Not Offset in the Statements of Condition
	Recognized			Statements of		Statements of			Financial		Cash
(In thousands)	Liabilities			Condition		Condition			Instruments		Collateral Pledged		Net Amount
June 30, 2017
Interest Rate Swap Agreements:
Institutional counterparties	$	(14,219	)	$	3,833	$	(10,386	)	$	10,386	$	—	$	—
Commercial counterparties	(3,710		)	1		(3,709		)	—		—		(3,709		)
Total	$	(17,929	)	$	3,834	$	(14,095	)	$	10,386	$	—	$	(3,709	)

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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	)

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

	June 30, 2017
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value
Trading security	$	—	$	—	$	12,837	$	12,837
Available-for-sale securities:
Municipal bonds and obligations	—		124,650		—		124,650
Agency collateralized mortgage obligations	—		782,894		—		782,894
Agency residential mortgage-backed securities	—		226,197		—		226,197
Agency commercial mortgage-backed securities	—		63,313		—		63,313
Corporate bonds	—		66,848		—		66,848
Trust preferred securities	—		11,838		—		11,838
Other bonds and obligations	—		10,613		—		10,613
Marketable equity securities	43,306		334		—		43,640
Loans held for sale	—		146,482		—		146,482
Derivative assets	964		16,017		7,386		24,367
Other assets	—		—		1,568		1,568
Derivative liabilities	—		17,853		—		17,853

	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

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no transfers between levels during the three months ended June 30, 2017. During the six months ended June 30, 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
June 30, 2017	Aggregate		Aggregate		Less Aggregate
(In thousands)	Fair Value		Unpaid Principal		Unpaid Principal
Loans Held for Sale	$	146,482	$	141,672	$	4,810

					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 and six months ended June 30, 2017, were gains of $1.7 million and $2.3 million, respectively. The changes in fair value for the three and six months ended June 30, 2016, were gains of $369 thousand and $584 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 June 30, 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

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and six months ended June 30, 2017 and 2016.

	Assets (Liabilities)
				Securities								Capitalized
	Trading			Available		Commitments			Forward			Servicing
(In thousands)	Security			for Sale		to Lend			Commitments			Rights
Three Months Ended June 30, 2017
March 31, 2017	$	12,966		$	—	$	8,061		$	(22	)	$	976
Unrealized (loss) gain, net recognized in other non-interest income	27			—		16,515			34			(68		)
Paydown of trading security	(156		)	—		—			—			—
Transfers to held for sale loans	—			—		(17,202		)	—			—
Additions to servicing rights	—			—		—			—			660
June 30, 2017	$	12,837		$	—	$	7,374		$	12		$	1,568

Six Months Ended June 30, 2017
December 31, 2016	$	13,229		$	—	$	4,738		$	100		$	798
Unrealized gain, net recognized in other non-interest income	(79		)	—		33,817			(88		)	(70		)
Paydown of trading security	(313		)	—		—			—			—
Transfers to held for sale loans	—			—		(31,181		)	—			—
Additions to servicing rights	—			—		—			—			840
June 30, 2017	$	12,837		$	—	$	7,374		$	12		$	1,568
Unrealized gains (losses) relating to instruments still held at June 30, 2017.	$	1,736		$	—	$	7,374		$	12		$	—

	Assets (Liabilities)
				Securities								Capitalized
	Trading			Available		Commitments			Forward			Servicing
(In thousands)	Security			for Sale		to Lend			Commitments			Rights
Three Months Ended June 30, 2016
March 31, 2016	$	14,474		$	—	$	802		$	(143	)	$	—
Unrealized (loss) gain, net recognized in other non-interest income	153			—		1,711			—			—
Unrealized gain included in accumulated other comprehensive loss	—			—		—			(46		)	—
Paydown of trading security	(148		)	—		—			—			—
Transfers to held for sale loans	—			—		(1,254		)	—			—
June 30, 2016	$	14,479		$	—	$	1,259		$	(189	)	$	—

Six Months Ended June 30, 2016
December 31, 2015	$	14,189		$	708		$	323		$	9		$	—
Unrealized gain, net recognized in other non-interest income	585			—			2,917			—			—
Paydown of trading security	(295		)	—			—			—			—
Transfers to Level 2	—			(708		)	—			(198		)	—
Transfers to held for sale loans	—			—			(1,981		)	—			—
June 30, 2016	$	14,479		$	—		$	1,259		$	(189	)	$	—
Unrealized gains (losses) relating to instruments still held at June 30, 2016	$	2,790		$	—		$	1,259		$	(189	)	$	—

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:

	Fair Value				Significant Unobservable Input
(In thousands)	June 30, 2017		Valuation Techniques	Unobservable Inputs	Value
Assets (Liabilities)
Trading Security	$	12,837	Discounted Cash Flow	Discount Rate	2.57		%
Commitments to Lend	7,374		Historical Trend	Closing Ratio	79.08		%
			Pricing Model	Origination Costs, per loan	$	3,692
Forward Commitments	12		Historical Trend	Closing Ratio	79.08		%
			Pricing Model	Origination Costs, per loan	$	3,692
Capitalized Servicing Rights	1,568		Discounted Cash Flow	Constant Prepayment rate (CPR)	10.90		%
				Discount Rate	11.00		%
Total	$	21,791

	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		%
Commitments to Lend	4,738		Historical Trend	Closing Ratio	80.36		%
			Pricing Model	Origination Costs, per loan	$	3,692
Forward Commitments	100		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

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

	June 30, 2017		December 31, 2016		Fair Value Measurement Date as of June 30, 2017
	Level 3		Level 3		Level 3
(In thousands)	Inputs		Inputs		Inputs
Assets
Impaired loans	$	27,286	$	17,761	June 2017
Capitalized servicing rights	11,731		10,726		May/June 2017
Other real estate owned	279		151		April 2016 - Oct. 2016
Total	$	39,296	$	28,638

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:

	Fair Value
(In thousands)	June 30, 2017		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets
Impaired loans	$	27,286	Appraised value of collateral	Discounted cash flow - loss severity	0.16% to 21.99% (3.30%)
				Appraised value	$21 to $6,040 ($2,133)
Capitalized servicing rights	11,731		Discounted cash flow	Constant prepayment rate (CPR)	6.59% to 13.48% (9.87%)
				Discount rate	10.00% to 12.50% (10.76%)
Other real estate owned	279		Appraised value of collateral	Appraised value	$94 to $215 ($193)
Total	$	39,296

(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 June 30, 2017 and December 31, 2016.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

	June 30, 2017
	Carrying		Fair
(In thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	101,833	$	101,833	$	101,833	$	—	$	—
Trading security	12,837		12,837		—		—		12,837
Securities available for sale	1,329,993		1,329,993		43,306		1,286,687		—
Securities held to maturity	350,992		358,398		—		323,662		34,736
FHLB bank stock and restricted securities	78,874		78,874		—		78,874		—
Net loans	6,817,123		6,850,718		—		6,850,718		—
Loans held for sale	146,482		146,482		—		146,482		—
Accrued interest receivable	27,005		27,005		—		27,005		—
Cash surrender value of bank-owned life insurance policies	46,343		46,343		—		46,343		—
Derivative assets	24,367		24,367		964		16,017		7,386
Assets held for sale	322		322		—		322		—
Financial Liabilities
Total deposits	$	6,714,854	$	6,710,596	$	—	$	6,710,596	$	—
Short-term debt	1,081,600		1,081,453		—		1,081,453		—
Long-term Federal Home Loan Bank advances	301,374		301,075		—		301,075		—
Subordinated borrowings	89,250		98,011		—		98,011		—
Derivative liabilities	17,853		17,853		—		17,853		—

	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		—

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 and six months ended June 30, 2017 and 2016, respectively.

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2017		2016		2017		2016
Net interest income	$	69,545	$	57,441	$	136,431	$	115,138
Provision for loan losses	4,889		4,522		9,984		8,528
Net interest income after provision for loan losses	$	64,656	$	52,919	$	126,447	$	106,610

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. SUBSEQUENT EVENTS

On May 22, 2017, the Company entered into an agreement and plan of merger with Commerce Bancshares Corp. ("Commerce"), the parent company of Commerce Bank & Trust Company ("Commerce Bank"), pursuant to which Commerce will merge with and into the Company in a transaction to be accounted for as a business combination. It is expected that Commerce Bank will also merge with and into Berkshire Bank. Headquartered in Worcester, Mass., Commerce Bank had $1.9 billion in assets as of June 30, 2017 (unaudited) and operates 16 branch banking offices providing a range of services in Central Massachusetts and greater Boston.

As established by the merger agreement, if the merger is completed, each of the 6.238 million outstanding shares of Commerce common stock will be converted into the right to receive 0.93 shares of the Company's common stock, or under limited conditions established by the agreement, 0.465 shares of new Series B preferred stock (non-voting) issued by the Company. The preferred stock is convertible into two shares of the Company's common stock under specified conditions.

The transaction is subject to closing conditions, including the receipt of regulatory approvals and approval by the

shareholders of Commerce. It is currently expected that the merger may be completed as early as mid-October 2017. However, because completion of the merger is subject to various conditions, the actual timing is uncertain. If the merger is not consummated under specified circumstances, Commerce has agreed to pay the Company a termination fee of $8.6 million.

This agreement and plan of merger had no significant effect on the Company’s financial statements for the periods

presented. Expenses related to the proposed merger are included in the financial statement line item Acquisition, Restructuring, and Other Expenses of the Consolidated Statements of Income for the three and six months ended June 30, 2017.

63

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

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						At or for the
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
PER COMMON SHARE DATA
Net earnings, diluted	$	0.53		$	0.52		$	0.96		$	1.04
Adjusted earnings, diluted (1)	0.58			0.54			1.12			1.07
Total book value	31.37			29.64			31.37			29.64
Tangible book value (2)	20.96			18.44			20.96			18.44
Dividends	0.21			0.20			0.42			0.40
Common stock price:							0
High	38.65			28.18			38.65			28.93
Low	33.55			24.80			32.90			24.71
Close	35.15			26.92			35.15			26.92
PERFORMANCE RATIOS (3)
Return on assets	0.84		%	0.82		%	0.76		%	0.82		%
Adjusted return on assets (1)	0.92			0.85			0.89			0.85
Return on equity	6.80			7.17			6.28			7.18
Adjusted return on equity (1)	7.45			7.42			7.31			7.41
Adjusted return on tangible equity (1)	11.96			12.45			12.01			12.32
Net interest margin, fully taxable equivalent (FTE) (4)	3.36			3.32			3.35			3.32
Net interest margin (FTE), excluding purchased loan accretion (2)	3.24			3.21			3.20			3.21
Fee income/Net interest and fee income	32.23			21.16			31.18			21.76
Efficiency ratio (2)	61.72			58.11			61.83			58.69
GROWTH RATIOS
Total commercial loans, (annualized)	10		%	15		%	13		%	11		%
Total loans, (annualized)	13			19			10			10
Total deposits, (annualized)	4			5			3			2
Total net revenues, (compared to prior year)	42			4			40			14
Earnings per share, (compared to prior year)	2			49			(8		)	48
Adjusted earnings per share, (compared to prior year) (1)	7			5			5			5
FINANCIAL DATA:(In millions)
Total assets	$	9,627		$	8,044		$	9,627		$	8,044
Total earning assets	8,807			7,327			8,807			7,327
Total investments	1,796			1,304			1,796			1,304
Total borrowings	1,472			1,320			1,472			1,320
Total loans	6,864			6,000			6,864			6,000
Allowance for loan losses	47			41			47			41
Total intangible assets	421			349			421			349
Total deposits	6,715			5,657			6,715			5,657
Total common stockholders’ equity	1,268			923			1,268			923

64

	At or for the						At or for the
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
ASSET QUALITY AND CONDITION RATIOS(5)
Net charge-offs (annualized)/average loans	0.20		%	0.22		%	0.20		%	0.22		%
Allowance for loan losses/total loans	0.69			0.69			0.69			0.69
Loans/deposits	102			106			102			106
Shareholders' equity to total assets	13.17			11.48			13.17			11.48
Tangible shareholders' equity to tangible assets (2)	9.20			7.46			9.20			7.46
FOR THE PERIOD:(In thousands)
Net interest income	$	69,545		$	57,441		$	136,431		$	115,138
Non-interest income	32,798			14,555			67,555			30,185
Provision for loan losses	4,889			4,522			9,984			8,528
Non-interest expense	69,523			46,268			143,849			93,368
Net income	19,694			15,957			35,154			31,958
Adjusted Income (1)	21,559			16,514			40,959			33,003

____________________________________________________________________________________________

(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)  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.

65

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 June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
($ In millions)	Average Balance		Yield/Rate (FTE basis)		Average Balance		Yield/Rate (FTE basis)		Average Balance		Yield/Rate (FTE basis)		Average Balance		Yield/Rate (FTE basis)
Assets
Loans:
Commercial real estate	$	2,692	4.41	%	$	2,174	4.45	%	$	2,661	4.50	%	$	2,126	4.31	%
Commercial and industrial loans	1,130		5.30		1,048		4.93		1,102		5.08		1,038		4.98
Residential mortgages	1,871		3.62		1,759		3.63		1,889		3.59		1,779		3.74
Consumer loans	997		3.81		845		3.40		988		3.72		826		3.42
Total loans (1)	6,690		4.25		5,826		4.14		6,640		4.22		5,769		4.14
Investment securities (2)	1,702		3.45		1,247		3.28		1,664		3.42		1,295		3.27
Short term investments & loans held for sale (3)	148		3.07		41		1.29		133		2.74		49		1.10
Total interest-earning assets	8,540		4.07		7,114		3.97		8,437		4.04		7,113		3.95
Intangible assets	422				345				422				339
Other non-interest earning assets	369				350				378				348
Total assets	$	9,331			$	7,809			$	9,237			$	7,800
Liabilities and shareholders’ equity
Deposits:
NOW	$	572	0.23	%	$	493	0.13	%	$	574	0.23	%	$	489	0.13	%
Money market	1,795		0.54		1,404		0.47		1,800		0.53		1,410		0.48
Savings	668		0.14		612		0.11		658		0.14		607		0.12
Time	2,473		1.13		2,047		1.06		2,412		1.11		2,055		1.03
Total interest-bearing deposits	5,508		0.73		4,556		0.65		5,444		0.71		4,561		0.64
Borrowings and notes (4)	1,410		1.46		1,236		1.38		1,398		1.42		1,235		1.29
Total interest-bearing liabilities	6,918		0.88		5,792		0.81		6,842		0.86		5,796		0.78
Non-interest-bearing demand deposits	1,156				1,033				1,167				1,030
Other non-interest earning liabilities	99				94				108				83
Total liabilities	8,173				6,919				8,117				6,909
Total shareholders’ equity (2)	1,158				890				1,120				891
Total liabilities and stockholders’ equity	$	9,331			$	7,809			$	9,237			$	7,800

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	Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
	Average Balance		Yield/Rate (FTE basis)		Average Balance		Yield/Rate (FTE basis)		Average Balance		Yield/Rate (FTE basis)		Average Balance		Yield/Rate (FTE basis)
Net interest spread			3.19	%			3.17	%			3.18	%			3.17	%
Net interest margin (5)			3.36				3.32				3.35				3.32
Cost of funds			0.75				0.68				0.73				0.66
Cost of deposits			0.60				0.53				0.58				0.52
Supplementary data
Total deposits (In millions)	$	6,664			$	5,589			$	6,611			$	5,591
Fully taxable equivalent income adj. (In thousands) (6)	2,644				1,972				2,578				1,933

____________________________________

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

(2)  The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.

(3)  Interest income on loans held for sale is included in loan interest income on the income statement.

(4)  The average balances of borrowings includes the capital lease obligation presented under other liabilities on the consolidated balance sheet.

(5)  Purchased loan accretion totaled $2.6 million and $2.0 million for the three months ended June 30, 2017 and 2016, respectively. Purchased loan accretion totaled $6.2 million and $4.1 million for the six months ended June 30, 2017 and 2016, respectively.

(6) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.

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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, legal settlements, 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 first quarter of 2017, 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. In the second quarter of 2017, adjusting items included $600 thousand in costs to settle two customer disputes which were 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.

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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 June 30,						At or for the Six Months Ended June 30,
(in thousands)		2017			2016			2017			2016
GAAP Net income		$	19,694		$	15,957		$	35,154		$	31,958
Adj: Losses/(gains) on sale of securities, net		1			13			(12,569		)	(23		)
Adj. Loss on termination of hedges		—			—			6,629			—
Adj: Merger and acquisition expense		2,266			701			8,213			1,228
Adj: Restructuring and other expense		637			177			6,372			430
Adj: Income taxes		(1,039		)	(334		)	(2,840		)	(590		)
Total adjusted income (non-GAAP)	(A)	$	21,559		$	16,514		$	40,959		$	33,003
GAAP Total revenue		$	102,343		$	71,996		$	203,986		$	145,323
Adj: Losses/(gains) on sale of securities, net		1			13			(12,569		)	(23		)
Adj. Loss on termination of hedges		—			—			6,629			—
Total operating revenue (non-GAAP)	(B)	$	102,344		$	72,009		$	198,046		$	145,300
GAAP Total non-interest expense		$	69,523		$	46,268		$	143,849		$	93,368
Less: Total non-operating expense (see above)		(2,903		)	(878		)	(14,585		)	(1,658		)
Operating non-interest expense (non-GAAP)	(C)	$	66,620		$	45,390		$	129,264		$	91,710
(in millions, except per share data)
Total average assets	(D)	$	9,331		$	7,809		$	9,238		$	7,800
Total average shareholders’ equity	(E)	1,158			890			1,120			891
Total average tangible shareholders’ equity	(F)	736			546			698			551
Total tangible shareholders’ equity, period-end (1)	(G)	847			574			847			574
Total tangible assets, period-end (1)	(H)	9,206			7,695			9,206			7,695
Total common shares outstanding, period-end (thousands)	(I)	40,428			31,156			40,428			31,156
Average diluted shares outstanding (thousands)	(J)	37,474			30,765			36,466			30,728
Earnings per share, diluted		$	0.53		$	0.52		$	0.96		$	1.04
Adjusted earnings per share, diluted	(A/J)	0.58			0.54			1.12			1.07
Book value per share, period-end		31.37			29.64			31.37			29.64
Tangible book value per share, period-end	(G/I)	20.96			18.44			20.96			18.44
Total shareholders' equity/total assets		13.17			11.48			13.17			11.48
Total tangible shareholder's equity/total tangible assets	(G)/(H)	9.20			7.46			9.20			7.46
Performance ratios(2)
GAAP return on assets		0.84		%	0.82		%	0.76		%	0.82		%
Adjusted return on assets	(A/D)	0.92			0.85			0.89			0.85
GAAP return on equity		6.80			7.17			6.28			7.18
Adjusted return on equity	(A/E)	7.45			7.42			7.31			7.41

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Adjusted return on tangible equity (3)	(A/F)	11.96			12.45			12.01			12.32
Efficiency ratio	(C-M)/(B+K+N)	61.72			58.11			61.83			58.69
Supplementary data(in thousands)
Tax benefit on tax-credit investments (4)	(K)	$	1,696		$	2,777		$	3,320		$	4,365
Non-interest income charge on tax-credit investments (5)	(L)	(1,453		)	(1,938		)	(2,782		)	(3,039		)
Net income on tax-credit investments	(K+L)	243			839			538			1,326
Intangible amortization	(M)	770			787			1,571			1,606
Fully taxable equivalent income adjustment	(N)	2,644			1,972			5,154			3,866

__________________________________________________________________________________________

(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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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

• Targeted expansion in Boston and Eastern Massachusetts

• Positioned to be regional consolidator in attractive markets.

Shown below is a profile of the Company:

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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.

SUMMARY

In the first half of 2017, Berkshire’s results demonstrated the benefit of the coming together of its various initiatives related to geography, profitability improvement and organic growth. The Company also set the stage for crossing the $10 billion Dodd-Frank total asset threshold with an agreement to acquire Worcester-based Commerce Bancshares Corp. ("Commerce") and its subsidiary Commerce Bank & Trust Company ("Commerce Bank"). The Company completed a stock offering and announced the planned move of its headquarters to Boston to support its growth initiatives in New England’s largest and fastest growing markets.

Second quarter total net revenues increased by 42% year over year, while net income increased by 23%. Net income per share increased 2% year-over-year to $0.53, while adjusted earnings per share grew 7% to $0.58. These per share measures include the impact of shares issued as merger consideration and in the stock offering. Earnings and several related measures are also evaluated on an adjusted basis to exclude primarily merger and restructuring costs as discussed in the prior section on non-GAAP financial measures.

The Company achieved an important profitability milestone in the most recent quarter, as the return on assets increased to 0.84% and the adjusted return on assets increased to 0.92%. Berkshire has a goal to improve this adjusted measure to more than 1%. The improvement achieved in 2017 reflects the benefit of fee income growth related to mortgage and SBA operations, together with the accretive benefits of acquisitions and restructurings, as well as disciplined expense management.

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

• 4% increase in net interest income

• 15% increase in fee income

• 10% annualized commercial loan growth

• 3.36% net interest margin

• 0.25% non-performing assets/assets

• 0.20% net loan charge-offs/average loans

In the first half of 2017, Berkshire completed the integration of the operations of New Jersey based First Choice Bank ("First Choice"), which was acquired on December 2, 2016. At acquisition, First Choice had $1.1 billion in assets and eight branches operating in the Princeton, NJ and Philadelphia, PA area markets, together with its First Choice Loan Services ("FCLS") national mortgage banking subsidiary. Compared to the prior year, Berkshire’s 2017 operations also included the full period benefit of other 2016 acquisitions. The Company benefited from

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ongoing business development in its markets. Earnings growth also reflected the several recent increases in short term interest rates and the expense benefits resulting from restructurings and branch consolidations in recent periods.

Berkshire recently opened its first Boston office, bringing its brand of revolutionary banking to this market. Its Mid-Atlantic team announced a strategic alliance with the Princeton Advisory Group, an investment advisory firm in New Jersey. The Wealth Management group recruited additional talent in Albany, NY.

Berkshire’s annual Xtraordinary Day of community service events engaged 92% of the Company in completing 65 community projects. Across its footprint, the Company is reaching out for new market share and new opportunities to deliver on its franchise promise to all of its constituencies.

In May 2017, Berkshire announced an agreement to acquire Commerce Bancshares Corp., the parent company of Commerce Bank and Trust Company, a $1.9 billion bank with 16 branches in the Worcester, MA and Boston markets. This agreement is subject to customary regulatory and shareholder approvals and is targeted to be completed by early 2018. This acquisition provides strong market positioning in New England’s second largest city, fills in an important element of Berkshire’s Massachusetts footprint, and provides a catalyst for Berkshire’s headquarters relocation to Boston and expansion in that market. It also is consistent with the Bank’s strategy for crossing the $10 billion regulatory asset threshold and absorbing compliance related revenue and cost impacts through the accretive earnings benefits of the acquisition. The merger consideration is a stock for stock exchange initially valued at $209 million. The Company estimates that, with planned cost saves and in combination with the May capital raise, it is expected to meet all the goals of its merger financial disciplines and its objectives for return on investment, return on equity, earnings accretion, and tangible book value payback. The combination with Commerce is expected to improve liquidity and, in conjunction with the recently completed capital raise, will improve capital metrics and provide support for further organic growth in the future, particularly related to the Eastern Massachusetts expansion.

Year-over-year operating results reflect in part general improvement in regional economic conditions, along with the impact of three fed funds rate hikes aggregating 0.75% and a flattening of the yield curve. The Company remains positioned to benefit from higher interest rates that may develop in the future, based on its analysis of market risk discussed in a later section of this report

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2017 AND DECEMBER 31, 2016

Summary: Total assets measured $9.6 billion at June 30, 2017, increasing by $0.5 billion, or 5%, in the first half of the year, including a 5% increase in total loans and a 9% increase in investment securities. Asset growth was funded by increases in deposits and borrowings, together with retained earnings and the $153 million in net proceeds from the common stock offering in May. This offering improved capital and share book value metrics. Credit performance metrics continued to strengthen and interest rate sensitivity remained positive. Berkshire maintains a focus on commercial loan growth, including expansion in the Boston market. It also is leveraging funds raised in the common stock offering pending the completion of the Commerce acquisition. The quarterly cash dividend was increased by 5% in the first quarter and the Company continues to generate double digit annualized internal generation of tangible equity to support organic growth.

Securities: Total investment securities increased by $144 million, or 9%, in the first half of the year, including reinvestment of a portion of the cash proceeds from the stock offering. Growth was concentrated in a $131 million increase in collateralized mortgage obligations. In the first quarter, the Company sold $25 million in equity securities, and realized $13 million in net securities gains. These gains were already included at the start of the year as a component of shareholders’ equity in accumulated other comprehensive income. This sale took advantage of strong market conditions for bank stocks.

The securities portfolio yield decreased to 3.45% in the most recent quarter, compared to 3.58% in the fourth quarter of 2016. This included the impact of the First Choice portfolio, the sale of equity securities, and ongoing yield compression in the bond markets. The yield is expected to further decrease in the second half of the year, including the impact of securities purchased to support the leverage program instituted to provide a short-term

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utilization of the excess capital from the stock offering, pending the Commerce acquisition. The weighted average life of the bond portfolio decreased to 5.5 years from 6.2 years in the first half of 2017. The net unrealized securities gain totaling 1.1% of book value at midyear was little changed from 1.3% at the start of the year. The reduction in the unrealized equity gain resulting from the realized gain on sale in the first quarter was largely offset by improved bond market prices tied to lower long term interest rates at midyear.

Loans: Total loans increased by $315 million, at a 10% annualized rate, in the first half of 2017. All major categories increased, led by commercial and industrial loans, which grew by $166 million at a 31% annualized rate.

This category is one of Berkshire’s primary areas of strategic focus, to support the development of profitable and well rounded commercial relationships, and in conjunction with the Bank’s targeted expansion in Boston and Eastern Massachusetts. Growth in this category also includes balances related to loan participations and other wholesale loan transactions. For the year-to-date, total commercial lines of credit increased at a 10% annualized rate and line utilization increased to 58% from 56%. This growth was also attributed to improving economic activity and business optimism in Berkshire’s markets. During the first quarter, 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.

Commercial growth also included a $137 million, or 43%, increase in multifamily commercial real estate loans due to activity in the Company’s regional markets. Total commercial real estate loans increased in the first half by a net amount of $73 million, at a 6% annualized rate, and constitute the largest loan category. Owner occupied commercial real estate loans increased at a 6% annualized rate to $614 million. 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 252% of bank regulatory capital at midyear, compared to the 300% regulatory monitoring guidelines (based on regulatory definitions). Total construction loans outstanding were 43% of regulatory capital, compared to the 100% monitoring guideline.

Most of the Bank’s residential mortgage lending activities are for conforming loans and are conducted by its FCLS national mortgage lending operation and are targeted for sale in the secondary markets. These operations are further addressed in later discussion of operating results. The portfolio of held for investment mortgages increased by $41 million, or 4% annualized, in the first half of the year. The balance of mortgages held for sale increased seasonally by $26 million. The Bank also purchases and sells seasoned loans in conjunction with its financial institutions banking activities. The volume of these sales totaled $181 million in the first half of the year, including some balances sold as part of a shift into shorter duration mortgage backed securities in conjunction with asset liability management.

Consumer loans increased by $35 million, or 7% annualized, in the first half of 2017. Auto and other loans increased at a 14% annualized rate, while home equity balances decreased at a 3% annualized rate. The Bank has an indirect auto lending team originating prime auto loans throughout its New England/New York footprint.

The First Choice acquisition was completed on December 2, 2016. The portfolio yield in 2017 reflects these additional acquired balances, along with changes in loan activity in 2017. The average loan yield increased to 4.25% in the second quarter of 2017, compared to 4.00% in the fourth quarter of 2016. In addition to the First Choice impacts, the yield change was primarily due to short term rate hikes by the Federal Reserve Bank in December, March, and June. These higher rates benefited the yield on Prime and LIBOR based loans, which had a balance of $2.6 billion at midyear. At mid-year, 44% of loans contractually repriced within one year, 20% 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 growth of shorter duration commercial and consumer loans.

Asset Quality. Asset quality metrics remained favorable and generally improved slightly in the first half of 2017. Annualized net loan charge-offs for this period were 0.20%. At period-end, non-performing assets were 0.25% of total assets, and accruing delinquent loans were 0.35% of total loans. At period-end, the total contractual balance of purchased credit impaired loans was $69 million, with a $40 million carrying value, representing a $29 million discount, which is a 42% discount from the contractual amount. Included in this amount was a $6 million accretable

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balance net of accretion recorded during the quarter. Criticized loans remained at 1.4% of total assets at mid-year -- unchanged from the start of the year.

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 $3 million, or 8%, to $47 million during the first half of the year. The ratio of the allowance to total loans increased to 0.69% from 0.67%, including the impact of higher growth in commercial and industrial loans, which carry a higher reserve.

Deposits. Total deposits increased by $93 million, or 3% annualized, in the first half of 2017. This included a $43 million, or 6% annualized, increase in personal time deposits, reflecting demand and competitive conditions following recent rate hikes. Total personal deposit balances increased at a 1% annualized rate in the first half of the year. While personal checking balances increased by 1%, commercial balances declined seasonally from elevated levels at the prior year-end. Commercial activity also contributed to a decrease in money market balances during the most recent quarter. The growth in non-personal time deposit balances was due to brokered time deposits which are a part of the Company's wholesale strategy in the asset liability management process to target funding durations and support its capital leverage program. Brokered balances also included some deposits acquired from First Choice. The cost of deposits increased to 0.60% in the most recent quarter, compared to 0.56% in the fourth quarter of 2016, despite three rate hikes aggregating 0.75% during this interval. 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 102% from 99% during the first half of 2017, and is down from 106% at midyear 2016 which reflects the benefit of the excess First Choice deposits acquired in December.

During the first half of the year, Berkshire consolidated three branch offices and opened its first Boston office, located in the downtown financial district. With the planned move of its corporate headquarters to Boston, and with the addition of three Boston offices from Commerce, Berkshire plans to focus on deposit growth in this promising market. The Company is also relocating a Hartford area office and has plans to open another new office in Connecticut and one in the Albany area. Berkshire continues to diversify its distribution network, including expanding its My Banker and private banking teams and integrating more closely with its wealth management, investment services, small business, insurance, and other business lines. The Company utilizes its virtual teller platform in its new Boston office and plans to utilize this technology in other strategic locations. For the 12 months ended June 30, 2017, the median deposit growth rate for Berkshire’s branches was 4%, with the highest growth in its New York and Connecticut markets. The median growth in Mid-Atlantic branches was negative due to the runoff that had been anticipated following the First Choice acquisition and the restructuring of certain uneconomic deposit products. These comparisons are based on data provided to the FDIC, including reports filed by First Choice prior to the acquisition.

Borrowings and Derivative Financial Instruments: Total borrowings increased by $158 million, or 12%, in the first half of 2017 to support earning asset growth. This growth was in long term FHLB borrowings. The cost of borrowings decreased to 1.46% in the most recent quarter, compared to 1.63% in the fourth quarter of 2016. The interest expense reduction resulting from the termination of the cash flow hedges more than offset the impact of higher short term interest rates on borrowings expense. With the benefit of lower borrowing costs, there was little increase in the cost of funds, despite the three interest rate hikes in recent months. The cost of funds was 0.75% in the most recent quarter, compared to 0.73% in the fourth quarter of 2016.

The notional balance of derivative financial instruments increased to $2.4 billion at midyear, compared to $2.2 billion at the start of the year. The termination of $300 million of cash flow hedges was offset by a $190 million

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increase in derivatives related to commercial loan interest rate swaps and a $293 million increase in derivatives related to mortgage banking. Commercial loan interest rate swap arrangements increased at a 28% annualized rate in the first half due to lending activity and customer demand for interest rate protection. Mortgage banking derivatives increased seasonally by 63% due to higher lending volume.

The cash flow hedges were terminated in early February in conjunction with the integration of 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 year.

The net fair value of derivatives improved from a $3 million liability at year-end 2016 to a $7 million premium at midyear. This was due to the realization of the $7 million loss on cash flow hedges and a $3 million increase in the fair value of mortgage derivatives related to the seasonal increase in mortgage applications in the processing pipeline.

Shareholders’ Equity. In May 2017, Berkshire completed its first public common stock offering since 2009, in the amount of $153 million (net of offering costs). This offering was for general corporate purposes and was conducted under the Company’s universal shelf registration statement with the SEC. The offering resulted in the issuance of 4.6 million shares at $34.50 per share ($32.97 per share net of costs). Also in May, the Company announced an agreement to acquire Commerce Bancshares for total consideration estimated at $209 million in a stock for stock exchange. This is Berkshire’s largest acquisition agreement to date. The Company estimates that it will issue 4.9 million common shares and 500,000 shares of a new Series B non-voting preferred stock when the merger is completed.

During the second quarter, $30 million of the stock offering proceeds were reinvested as additional paid-in capital in Berkshire Bank. The Company plans that up to $100 million of the $153 million capital proceeds will be invested into Berkshire Bank additional paid-in capital in conjunction with the planned Commerce acquisition. The remaining capital proceeds will be available for other corporate purposes, including supporting future organic growth of the Bank.

Berkshire’s capital metrics increased significantly in the first half of the year as a result of the May stock offering. Additionally, the Company’s double digit return on tangible equity during the period provided solid support for organic growth, together with a 5% increase in the quarterly shareholder dividend beginning in the first quarter. The Bank’s risk based capital ratio increased to 11.4% at mid-year, while Berkshire’s consolidated risk based capital ratio improved to 14.0%. These ratios are expected to decrease due to the goodwill associated with the Commerce transaction but are targeted to be above the year-end 2016 levels when the Commerce transaction is completed, including the impact of organic growth through that time. Book value per share increased to $31.37 including the impact of the stock offering issued at a net amount of $32.97 per share. Tangible book value per share increased to $20.96.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

Summary. Berkshire reported second quarter 2017 net income of $19.7 million, or $0.53 per share. Adjusted earnings totaled $21.6 million, or $0.58 per share. Net income was up 23% year-over-year, while adjusted earnings grew 31% due to the benefit of business expansion. Net income per share increased by 2%, while adjusted EPS increased by 7%. Net income was impacted by net charges related primarily to acquisitions which were excluded from adjusted EPS.

For the first half of the year, Berkshire reported 2017 net income of $35.2 million, or $0.96 per share. Adjusted earnings totaled $41.0 million, or $1.12 per share. Net income was up 10% year-over-year, while adjusted earnings grew by 24%. First half net income per share decreased by 8% due primarily to the additional shares issued and

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higher merger related charges, both of which were largely related to the First Choice acquisition. Adjusted earnings per share increased by 5% including the accretive benefits of 2016 business combinations.

Return on assets advanced to 0.84% in the most recent quarter, while the adjusted return on assets increased to 0.92%. The Company views this latter measure as a milestone as it continues to pursue a goal of improving this measure to 1.0% or above. The return on equity in this period measured 6.8%, while the adjusted return on equity measured 7.4%. The adjusted return on tangible equity measured 12.0% in this 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 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.

Berkshire’s results in the first half of the year included the impact of First Choice Bank which was acquired on December 2, 2016. Many measures of revenue, expense, income, and average balances increased year-over-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 than the actual, 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. 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 also is targeting additional EPS accretion from other 2016 business combinations.

The 4.6 million new common shares issued for the May stock offering had the impact of diluting per share results in 2017. Before the reinvestment of offering proceeds, this dilution was equivalent to $0.03 per share in the second quarter and by $0.03 per share for the first half of 2017. The quarterly dilution will increase in the third quarter, which will be the first quarter that these shares are outstanding for the whole quarter. Positive factors which will tend to offset this dilution include the full quarter benefit of the third interest rate hike in June, the higher run rate targeted from the completion of First Choice cost saves, additional expected seasonal benefit from mortgage banking operations, and the leveraging of the new capital into additional earning assets targeted in the third quarter.

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 will have additional compliance costs, additional FDIC insurance premium expense, and also would forfeit a portion of its card related fee income under the Durbin Amendment. The Company has been enhancing its staff and resources with the goal of having the resources in place to meet the compliance related costs at the time the threshold may be met in the future.

Revenue. Berkshire focuses on revenue growth to improve market share and wallet share, to diversify its revenue drivers, and to increase earnings. The expansion in Boston and Eastern Massachusetts provides opportunities to develop and diversify revenues. Berkshire’s annualized quarterly net revenue now exceeds $400 million and fee income now exceeds Berkshire’s goal of 30% or more of total revenue. In FY 2016, Commerce reported $65 million in net revenue, which is targeted to further contribute to Berkshire’s revenue growth when this acquisition is completed.

Net revenue increased year-over-year by 42% in the second quarter and 40% in the first half of 2017. Growth was primarily due to acquisitions and included the benefit of seasonal mortgage banking revenues at First Choice Loan

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Services. Net interest income was up 21% and 18% for the above respective periods and fee income increased 115% and 101% including the mortgage banking impact. On a per share basis, annualized net revenue advanced to $10.92 in the most recent quarter.

Net Interest Income. Second quarter net interest income advanced by $12 million year-over-year, due primarily to an increase of $1.4 billion, or 20%, in average earning assets. This included $1.0 billion in acquired earning assets from First Choice at the time of the merger. Second quarter net interest income increased by $3 million over the prior quarter and included positive volume and rate variances. The Company continues to pursue growth of earning assets in conjunction with its expansion initiatives and the near term leveraging of the new capital pending completion of the Commerce acquisition.

The net interest margin advanced to 3.36% in the most recent quarter, from 3.33% in the prior quarter and 3.32% in the second quarter of 2016. Due to the asset sensitivity of the Company’s interest rate profile, it benefits from the higher short term interest rates resulting from the fed funds rate hikes in December, March, and June. Additionally, the Company restructured its balance sheet in the first quarter of 2017, following the First Choice acquisition. The Company terminated its fixed payment cash flow hedges which has benefited interest expense and the net interest margin. In the most recent quarter, net interest income also benefited from higher penalties received on commercial loan prepayments. Additionally, proceeds from the capital offering were initially used to pay down short term borrowings, which benefited the margin. The Company plans to leverage this capital in the third quarter, which is expected to have a negative impact on the margin. The flattening of the yield curve is also expected to further pressure the margin in upcoming quarters. Net interest income includes purchased loan accretion which totaled $2.6 million, $3.7 million, and $2.0 million in the most recent quarter, the prior quarter, and the second quarter of 2016. Adjusted for this accretion, the margin measured 3.24%, 3.15%, and 3.21% in these respective periods. The amount of purchased loan accretion depends on the amount of recoveries on the resolution of purchased impaired loans and on changes in loan behaviors which are expected to vary from quarter to quarter.

Non-Interest Income. The Company views fee income as a key strategic focus for achieving its marketplace and profitability objectives. Fee income increased 115% in the second quarter and 101% in the first half of 2017, compared to the same periods of 2016. The $18 million year-over-year increase in second quarter fee income included a $15 million increase in mortgage banking revenue which was primarily related to the acquisition of First Choice Loan Services. Loan related fee income increased another $2 million primarily due to the contribution of SBA loan sale gains contributed by 44 Business Capital. Deposit related fees increased by $0.4 million including the new First Choice operations. Fee income increased to 32% of total net revenue in the most recent quarter, meeting Berkshire’s objective to increase fees to over 30% of revenue.

Second quarter mortgage banking income totaled $16 million in 2017, comprising 49% of total fee income and 16% of total net revenue. Most of this income is contributed by the national mortgage banking operation of First Choice Loan Services (“FCLS”). Mortgage banking revenues are seasonal, with peak revenue in the second and third quarters of each year. 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 sale and/or hedging commitments. Direct costs of loan originations are netted from revenues. Berkshire’s second quarter originations of held for sale mortgages were up year-over-year due to the FCLS acquisition, and originations were up seasonally over the first quarter. Industry mortgage volumes declined year-over-year due to lower refinancing demand resulting from higher mortgage interest rates. This decline has been partially offset by increased purchase mortgage demand due to better housing market conditions. FCLS has offices located in major U.S. markets where economic and housing conditions are supportive of purchase mortgage business. Refinancing volume is more tied to online and affinity marketing channels which are sensitive to changes in interest rates. Mortgage banking income increased seasonally by 28% in the most recent quarter compared to the prior quarter, with higher volume partially offset by reduced margins on that production.

Non-interest income in the first quarter of 2017 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” is accrued income on bank owned life insurance which is offset by

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charges for the amortization of tax credit investments. This amortization generates benefit to income tax expense as discussed below.

Loan Loss Provision. The six month provision for loan losses increased year-over-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. GAAP non-interest expense increased by 50% and 54% for the first three and six months of 2017 compared to 2016. This increase included higher charges for mergers and restructurings. Adjusted non-interest expense, which excludes these and other specified charges, increased by 47% and 41% in these respective periods. This increase was mostly the result of 2016 business combinations. Additionally, the FCLS mortgage banking business operates with higher expenses and lower margins, compared to other banking operations. As a result, the efficiency ratio increased to 61.7% in the most recent quarter, compared to 58.1% in the same quarter of 2016. The efficiency ratio measured 58.7% in the most recent quarter excluding the FCLS operations, which operated with an 80% efficiency ratio. Excluding expenses adjusted in the determination of adjusted income, expense categories that increased at a higher rate than the overall total included compensation and marketing. These reflected the expense structure of FCLS operations. Second quarter operating expense benefited from the restructuring charges recorded in earlier periods, which reduced certain ongoing expenses. Full-time equivalent staff totaled 1,756 positions at midyear 2017, compared to 1,731 at the start of the year. Full time equivalent staff totaled 1,222 positions at midyear 2016, before the addition of 505 positions with the First Choice acquisition in December 2016. The Company has seasonally higher mortgage banking expenses in the second and third quarters. The Company expects to have the full benefit of First Choice cost saves in the run rate of its operations during the second half of 2017.

The category of merger, restructuring, and other expense comprises the costs which are excluded from the calculation of adjusted income. These charges, net of revenue adjustments totaled $12 million and $3 million in the first and second quarters of 2017. For 2017 year-to-date, merger related charges totaled $8 million including $6 million related to First Choice and $2 million related to Commerce. The First Choice charges primarily related to the systems integration completed in the first quarter. The Commerce charges were primarily for legal and investment banking fees. The Company expects that total First Choice related merger charges will remain within its $14 million original after-tax estimate. The Company has estimated that Commerce merger related costs will total $32 million pre-tax through the closing of this acquisition. The Company expects to record some of these charges in the second half of 2017, together with some residual First Choice charges. The $6 million of restructuring charges in the first quarter of 2017 were related to the consolidation of certain branch and operating offices, and primarily related to the termination of leases and the write-down of leasehold improvements. In the second quarter of 2017, other expense totaled $0.6 million and was related to the settlement of claims in two customer dispute situations.

Income Tax Expense. The six month effective tax rate was 30% in 2017 compared to 26% in 2016. This increase was due to higher pretax income and lower tax benefits on tax-credit investments. Higher pre-tax income results in a higher effective tax rate due to less proportionate benefit from tax advantaged income. Tax-credit investments vary from period to period, and have generally declined due to lower volume following less favorable IRS guidance issued at midyear 2016. The tax credit benefits decreased to $3.3 million from $4.4 million, while the related amortization charges in non-interest income decreased to $2.8 million from $3.0 million. The benefit of these investments decreased to $0.01 per share in 2017 compared to $0.04 per share in 2016. The Company expects its effective 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 effective 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 in 2017 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.

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Total Comprehensive Income. Total comprehensive income includes net income together with other comprehensive income. Comprehensive income totaled $36 million in the first half of 2017, which was not significantly different from the $35 million in net income. In comparison, comprehensive income totaling $46 million in the first half of 2016 exceeded $32 million in net income due to the benefit of near record low interest rates on the appreciation of the fair value of the bond portfolio in the first half of 2016.

Commerce Acquisition. The notes to the financial statements describe the pending acquisition of Commerce Bancshares and its subsidiary, Commerce Bank. As consideration for the 6.2 million shares of Commerce stock, Berkshire expects to issue approximately 4.9 million common shares and 500 thousand Series B preferred shares which are convertible into two Berkshire common shares under specified conditions. Based on the $35.15 closing price of Berkshire stock at midyear 2017, the common and preferred stock consideration is valued at approximately $207 million. The actual valuation will be based on the stock price on the date the merger is completed. At June 30, 2017, Commerce Bancshares reported $1.9 billion in total assets, $1.4 billion in loans, and $1.7 billion in deposits.

Liquidity and Cash Flows. Berkshire manages its liquidity and cash flows with the goal to support growth and to meet expected as well as stressed cash needs for the foreseeable future. During the first half of 2017, the Company primarily utilized wholesale funding and the stock offering to fund earning asset growth totaling $467 million. The loans/deposits ratio increased from 99% to 102%. This ratio had decreased from 106% at midyear 2016 as a result of the excess deposits acquired with the First Choice merger. The bank is 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. At midyear 2017, the Bank had $672 million in borrowing availability with the FHLBB, which was a 20% increase from $559 million at the start of the year.

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. The Bank regularly purchases and sells seasoned loans as part of its overall balance sheet management strategies. With the First Choice merger, the Bank acquired excess deposits which have supported its overall growth. The Commerce acquisition is also expected to provide excess deposits to support future growth. Commerce had an 83% loan/deposit ratio at mid-year 2017. With this planned acquisition, Berkshire also anticipates that it will hold more short term investments due to the liquidity requirements of the Commerce payroll deposit service bureau program.

Berkshire raised $153 million in cash proceeds from the May 2017 stock offering. The Company invested $30 million of these proceeds into additional paid-in capital in the Bank, and the balance remained with the holding company at midyear in deposit accounts with the Bank. The holding company expects to invest up to $100 million of the $153 million into additional paid-in capital of the Bank to support the completion of the merger and the interim capital leverage program. The remaining $53 million in proceeds are expected to be available for general corporate purposes, including additional investments in the Bank to support further organic growth. At midyear 2017, the cash balances held by the holding company totaled $165 million. The holding company has maintained a $15 million unsecured line of credit which was unused at midyear. Subsequently, this line was renewed at a reduced amount of $5 million due to the excess liquidity currently held by the holding company. 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 $18 million in dividends to the Parent during the first half of the year. The Parent uses cash for dividends, debt service, and holding company operating

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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. The Parent's goal is to maintain access to additional sources of senior or subordinated debt at the holding company as an additional source of liquidity to support is initiatives.

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.

In the first half of 2017, the Company placed $153 million of common stock in a public offering under its SEC universal shelf registration. This was its largest follow on public stock offering to date and the first since 2009. This offering was for general corporate purposes. Additionally, the Company committed to issue common and preferred stock as consideration for the Commerce acquisition in an amount valued at $209 million based on market conditions at the time of the merger announcement. This issuance has been registered with the SEC and is based on a stock for stock exchange that is the largest amount for a merger-related stock offering in the Company’s history. The merger and related stock issuance is targeted to be completed by early 2018. The preferred stock is non-voting and is convertible to common under limited conditions and this issuance is estimated to be in an amount valued at approximately $35 million based on conditions at the time of the merger announcement.

As previously noted, the Company expects to use these stock issuances to support the Commerce acquisition as well as additional organic growth and for other general corporate purposes. The Company’s capital metrics were elevated at midyear 2017 and are expected to decrease by the time the merger is completed. The Company continues to target maintaining a well-capitalized status with appropriate buffers and a ratio of tangible equity to tangible assets generally in the range of 7-8% over the medium term. The Company’s recent history has also demonstrated regular increases in shareholder dividends based on growing earnings and a double digit return on tangible equity that supports growth both of the balance sheet and of the return of capital to shareholders.

The Commerce acquisition sets the Company on a course to cross the $10 billion asset threshold under Dodd-Frank, which includes more rigorous capital modeling and stress testing. The Company has been enhancing its capital management function in recent years in anticipation of this cross. It currently conducts informal stress test analysis and expects to meet all regulatory requirements as it pursues its growth plan over $10 billion in assets.

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-

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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. During the first half of 2017, the Company announced its agreement to acquire Commerce Bancshares, which is a significant new contractual obligation as set forth in the related S-4 registration statement which has been filed with the SEC. It also entered into a strategic alliance with the Princeton Advisory Group, a New Jersey investment advisory firm. The Company announced a planned move of its headquarters to Boston and is expected to lease headquarters facilities and complete this move in the second half 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 June 30, 2017, the premium value of the loan portfolio was $34 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.

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

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

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

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

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

Income Taxes. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable ordinary income, taxable capital gain income, and the existence of prior years' taxable income, to which "carry back" refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. In determining the valuation allowance, the Company uses historical and forecasted future operating results, including a review of the eligible carry-forward periods, tax planning opportunities and other relevant considerations. 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

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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.

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 half 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 at midyear, compared to the start of the year. The contribution to asset sensitivity of the stock raise, the general shortening of the loan and securities portfolio durations, and the lengthening of some wholesale fund maturities offset the liability sensitivity introduced by the termination of the cash flow hedges and the decrease in demand deposits. At year-end, the asset sensitivity modeled according to the forward curve is less than the asset sensitivity under an assumption of a 200 basis point parallel ramped increase. These asset sensitivities are based on a comparison to a flat rate environment, which continues to indicate additional margin pressure if rates don’t change due to ongoing asset yield compression, together with some lagged impact on funding costs from recent interest rate increases.The Company believes that in the short run, net income should respond positively to the full volume and margin impacts of the combined aspects of business operations under the scenario of the forward curve at midyear, including fee income from mortgage banking, SBA lending, and commercial interest rate swap income. The Company believes that the Commerce balance sheet is asset sensitive and that the overall positive sensitivity of its net interest income and net income will be enhanced when the Commerce acquisition is closed and integrated. The Company estimates its equity at risk as liability sensitive in the approximate amount of 8% at mid-year 2017 in the event of a 200 basis point upward shock, compared to 4% at the start of the year. This change was primarily due to a change in the modeling of the deposit decay timing, with no change in modeled deposit average lives. This change was facilitated by recent systems enhancements. This sensitivity is expected to decrease with the Commerce combination. Prior to the Commerce closing, the modeled benefit of higher interest rates may decrease due to the leverage strategy for utilizing excess capital from the recent capital offering. The Company continues to monitor and evaluate strategic positioning to best manage its income and equity value in the event of continued prolonged yield curve flattening. A key sensitivity of the Company’s interest rate risk analysis is the behavior of deposit costs as short term rates increase. Through the first half of the year, this sensitivity has been within the expectations of the Company’s modeling and the Company continues to monitor this closely and to watch for any inflection points that might surface and increase the deposit beta in the event of additional future interest rate hikes.

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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 Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Company’s business. As of June 30, 2017, other than the items noted below, neither the Company, nor its subsidiaries, 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.

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 the Company's business, financial condition, or future operating results. The risks described in this form are not the only risks presently facing the Company. Additional risks and uncertainties not currently known to the Company, or currently deemed to be immaterial, also may materially adversely affect the Company's business, financial condition, and/or operating results.

There is no assurance when or even if the merger of Commerce Bancshares with and into the Company will be completed.

Completion of the merger of Commerce with and into the Company is subject to satisfaction or waiver of a number of conditions set forth in the merger agreement. There can be no assurance that the Company and Commerce will be able to satisfy the closing conditions or that closing conditions beyond their control will be satisfied or waived. The Company and Commerce can agree at any time to terminate the merger agreement, even if Commerce Bancshares stockholders have already voted to approve the merger agreement. The Company and Commerce can also terminate the merger agreement under other specified circumstances.

Regulatory approvals may not be received, may take longer than expected, or impose conditions that are not presently anticipated.

Before the merger may be completed, certain approvals or consents must be obtained from the various bank regulatory and other authorities in the United States and the Commonwealth of Massachusetts. There can be no assurance as to whether the federal or state regulatory approval will be received or the timing of the approvals. The

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Company is not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger include any conditions or restrictions that would constitute a "material adverse effect" as defined in the merger agreement. While the Company does not currently expect that any such conditions or restrictions would be imposed, there can be no assurance that they will not be, and such conditions or restrictions could have the effect of delaying or preventing completion of the merger.

Goodwill incurred in the merger may negatively affect the Company's financial condition.

To the extent that the merger consideration, consisting of the number of shares of the Company common stock issued or to be issued in the merger, exceeds the fair value of the net assets, including identifiable intangibles of Commerce Bank, that amount will be reported as goodwill by the Company. In accordance with current accounting guidance, goodwill will not be amortized but will be evaluated for impairment at least annually. A failure to realize expected benefits of the merger could adversely impact the carrying value of the goodwill recognized in the merger, and in turn negatively affect the Company's financial condition.

The Company may be unable to successfully integrate Commerce Bank’s operations or otherwise realize the expected benefits from the merger, which would adversely affect the Company's results of operations and financial condition.

The merger involves the integration of two companies that have previously operated independently. The difficulties of combining the operations of the two companies include:

• Integrating personnel with diverse business backgrounds;

• Combining different corporate cultures; and

• Retaining key employees.

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the business and the loss of key personnel. The integration of the two companies will require the experience and expertise of certain key employees of Commerce who are expected to be retained by the Company. The Company may not be successful in retaining these employees for the time period necessary to successfully integrate Commerce’s operations with those of the Company. The diversion of management's attention and any delay or difficulty encountered in connection with the merger and the integration of the two companies' operations could have an adverse effect on the business and results of operation of the Company following the merger. The success of the merger will depend, in part, on the Company's ability to realize the anticipated benefits and cost savings from combining the business of Commerce with and into the Company. If the Company is unable to successfully integrate Commerce the anticipated benefits and cost savings of the merger may not be realized fully or may take longer to realize than expected. For example, the Company may fail to realize the anticipated increase in earning and cost savings anticipated to be derived from the acquisition. In addition, as with regard to any merger, a significant decline in asset valuations or cash flows may also cause the Company not to realize expected benefits.

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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 six months ended June 30, 2017 and June 30, 2016, the Company transferred 8,038 and 8,014 shares, respectively.

(b)                 Not applicable.

(c)                 The following table provides certain information with regard to shares repurchased by the Company in the second 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
April 1-30, 2017	—	$	—	—	500,000
May 1-31, 2017	—	—		—	500,000
June 1-30, 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 June 30, 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

2.1	Agreement and Plan of Merger, dated as of May 22, 2017, by and among Berkshire Hills Bancorp, Inc., Berkshire Bank, and Commerce Bancshares Corp. (1)
3.1	Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (3)
3.2	Amended and Restated Bylaws of Berkshire Hills Bancorp, Inc. (4)
3.3	Certificate of Amendment to the Certificate of Incorporation of Berkshire Hills Bancorp, Inc.
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
101	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, 2017.

(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: August 9, 2017	By:	/s/ Michael P. Daly
	Michael P. Daly
	Chief Executive Officer
Dated: August 9, 2017	By:	/s/ James M. Moses
	James M. Moses
	Senior Executive Vice President, Chief Financial Officer

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