EDGAR 10-K Filing

Company CIK: 1108134
Filing Year: 2021
Filename: 1108134_10-K_2021_0001108134-21-000007.json

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ITEM 1. BUSINESS
ITEM 1.
ITEM 1 TABLE 1 - LOAN PORTFOLIO ANALYSIS
ITEM 1 TABLE 2 - MATURITY AND SENSITIVITY OF LOAN PORTFOLIO
ITEM 1 TABLE 3 - PROBLEM ASSETS
ITEM 1 TABLE 4 - ALLOWANCE FOR CREDIT LOSSES
ITEM 1 TABLE 5 - ALLOCATION OF ALLOWANCE BY LOAN CATEGORY
ITEM 1 TABLE 6 - AMORTIZED COST AND FAIR VALUE OF SECURITIES
ITEM 1 TABLE 7 - WEIGHTED AVERAGE YIELD ON SECURITIES
ITEM 1 TABLE 8 - AVERAGE BALANCE AND WEIGHTED AVERAGE RATES FOR DEPOSITS
ITEM 1 TABLE 9 - MATURITY OF DEPOSITS > $100,000
PART II
ITEM 6
ITEM 6 TABLE 3 - AVERAGE BALANCES, INTEREST AND AVERAGE YIELD COSTS
ITEM 6 TABLE 4 - RATE VOLUME ANALYSIS
ITEMS 7-7A.
ITEM 7 - 7A TABLE 1 - CONTRACTUAL OBLIGATIONS
ITEM 7 - 7A TABLE 2 - QUALITATIVE ASPECTS OF MARKET RISK
PART I
ITEM 1. BUSINESS
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 Risk Factors in Item 1A of this report.
Further, the ongoing COVID-19 pandemic and the related local and national economic disruption may result in a continued decline in demand for our products and services; increased levels of loan delinquencies, problem assets and foreclosures; an increase in our allowance for loan losses; a decline in the value of loan collateral, including real estate; a greater decline in the yield on our interest-earning assets than the decline in the cost of our interest-bearing liabilities; and increased cybersecurity risks, as employees continue to work remotely.
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.
GENERAL
Berkshire Hills Bancorp, Inc. (“Berkshire” or “the Company”) is headquartered in Boston, Massachusetts. Berkshire is a Delaware corporation and the holding company for Berkshire Bank (“the Bank”) and Berkshire Insurance Group, Inc.
At year-end 2020, the Bank had 130 full-service banking offices in its New England, New York, and Mid-Atlantic footprint. The Bank has an agreement to sell its 8 Mid-Atlantic branches and has announced a plan to consolidate another 16 offices in its New England/New York footprint. The actions are targeted to be completed by mid-year 2021, and the Bank has a target of 106 branches as a result of these actions. The Company offers a wide range of deposit, lending, insurance, and wealth management products to retail and commercial customers in its market areas. The Bank also operates a socially responsible platform, Reevx LabsTM , to support emerging entrepreneurs, artists, and small non-profit organizations by providing them with the resources and connections needed to power them today and far into the 21st century.
FILINGS
Information regarding the Company is available through the Investor Relations tab at berkshirebank.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge at sec.gov and at berkshirebank.com under the Investor Relations tab. Information on the website is not incorporated by reference and is not a part of this annual report on Form 10-K.
COMPETITION
The Company is subject to strong competition from banks and other financial institutions and financial service providers. Its competition includes national and super-regional banks. Non-bank competitors include credit unions, brokerage firms, insurance providers, financial planners, and the mutual fund industry. New technology is reshaping customer interaction with financial service providers and the increase of internet-accessible financial institutions increases competition for the Company’s customers. The Company generally competes on the basis of customer service, relationship management, and the fair pricing of loan and deposit products and wealth management and insurance services. The location and convenience of branch offices is also a significant competitive factor, particularly regarding new offices. The Company does not rely on any individual, group, or entity for a material portion of its deposits.
LENDING ACTIVITIES
General. The Bank originates loans in the four basic portfolio categories discussed below. Lending activities are limited by federal and state laws and regulations. Loan interest rates and other key loan terms are affected principally by the Bank’s credit policy, asset/liability strategy, loan demand, competition, and the supply of money available for lending purposes. These factors, in turn, are affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve, legislative tax policies, and governmental budgetary matters. Most of the Bank’s loans held for investment are made in its market areas and are secured by real estate located in its market areas. Lending is therefore affected by activity in these real estate markets. The Bank does not engage in subprime lending activities. The Bank monitors and manages the amount of long-term fixed-rate lending volume. Adjustable-rate loan products generally reduce interest rate risk but may produce higher loan losses in the event of sustained rate increases. The Bank generally originates loans for investment except for residential mortgages, which are generally originated for sale on a servicing released basis. Additionally, the Bank also originates Small Business Administration ("SBA") 7A loans for sale to investors. The Bank also conducts wholesale purchases and sales of loans and loan participations generally with other banks doing business in its markets, including selected national banks. The information discussed below describes the Company’s ongoing lending activities. The COVID-19 pandemic conditions that affected the Company’s activities in 2020 are discussed in Management’s Discussion and Analysis in Item 7 of this report.
Loan Portfolio Analysis. The following table sets forth the year-end composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated. Further information about the composition of the loan portfolio is contained in Note 6 - Loans of the Consolidated Financial Statements.
Item 1 - Table 1 - Loan Portfolio Analysis
2020 2019 2018 2017 2016
(In millions) Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total
Loans:
Construction $ 455 5.6 % $ 449 4.7 % $ 371 4.1 % $ 385 4.6 % $ 351 5.4 %
Commercial multifamily 483 6.0 632 6.7 552 6.1 495 6.0 349 5.3
Commercial real estate owner occupied 552 6.8 673 7.1 562 6.2 646 7.8 595 9.1
Commercial real estate non-owner occupied 2,119 26.2 2,190 23.0 1,849 20.4 1,700 20.5 1,253 19.1
Commercial and industrial 1,943 24.0 1,844 19.4 1,954 21.6 1,740 21.0 1,044 15.9
Residential real estate 1,932 23.9 2,853 30.0 2,727 30.2 2,264 27.3 2,047 31.3
Home equity 294 3.7 379 4.0 377 4.2 409 4.9 362 5.5
Consumer other 303 3.8 483 5.1 651 7.2 660 7.9 549 8.4
Total $ 8,081 100.0 % $ 9,503 100.0 % $ 9,043 100.0 % $ 8,299 100.0 % $ 6,550 100.0 %
Allowance for credit losses (1)
(127) (64) (61) (52) (44)
Net loans $ 7,954 $ 9,439 $ 8,982 $ 8,247 $ 6,506
(1) Beginning January 1, 2020, the allowance calculation is based on current expected loss methodology. Prior to January 1, 2020, the allowance calculation was based on the incurred loss model.
Commercial Real Estate. The Bank originates commercial real estate loans on properties used for business purposes such as small office buildings, industrial, healthcare, lodging, recreation, or retail facilities. Commercial real estate loans are provided on owner-occupied properties and on investor-owned properties. The portfolio includes commercial 1-4 family and multifamily properties. Loans may generally be made with amortizations of up to 30 years and with interest rates that adjust periodically (primarily from short-term to five years). Most commercial real estate loans are originated with final maturities of 10 years or less. As part of its business activities, the Bank also enters into commercial loan participations.
Commercial real estate loans are among the largest of the Bank’s loans, and may have higher credit risk and lending spreads. Because repayment is often dependent on the successful operation or management of the properties, repayment of commercial real estate loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to manage these risks through its underwriting disciplines and portfolio management processes. The Bank generally requires that borrowers have debt service coverage ratios (the ratio of available cash flows before debt service to debt service) of at least 1.25 times based on stabilized cash flows of leases in place, with some exceptions for national credit tenants. For variable rate loans, the Bank underwrites debt service coverage to interest rate shocks of 300 basis points or higher based on a minimum of 1.0 times coverage and it uses loan maturities to manage risk based on the lease base and interest sensitivity. Loans at origination may be made up to 80% of appraised value based on property type and risk, with sublimits of 75% or less for designated specialty property types. Generally, commercial real estate loans are supported by full or partial personal guarantees by the principals. Credit enhancements in the form of additional collateral or guarantees are normally considered for start-up businesses without a qualifying cash flow history.
The Bank offers interest rate swaps to certain larger commercial mortgage borrowers. These swaps allow the Bank to originate a mortgage based on short-term LIBOR rates and allow the borrower to swap into a longer-term fixed rate. The Bank simultaneously sells an offsetting back-to-back swap to an investment grade national bank so that it does not retain this fixed-rate risk. The Bank also records fee income on these interest rate swaps based on the terms of the offsetting swaps with the bank counterparties.
The Bank originates construction loans to developers and commercial borrowers in and around its markets. The maximum loan to value limits for construction loans follow Federal Deposit Insurance Corporation ("FDIC") supervisory limits, up to a maximum of 85 percent. The Bank commits to provide the permanent mortgage financing on most of its construction loans on income-producing property. Advances on construction loans are made in accordance with a schedule reflecting the cost of the improvements. Construction loans include land acquisition loans up to a maximum 50 percent loan to value on raw land. Construction loans may have greater credit risk due to the dependence on completion of construction and other real estate improvements, as well as the sale or rental of the improved property. The Bank generally mitigates these risks with presale or preleasing requirements and phasing of construction.
Commercial and Industrial Loans ("C&I"). C&I loans are managed through the Bank’s commercial middle market banking organization. The Bank offers secured commercial term loans with repayment terms which are normally limited to the expected useful life of the asset being financed, and generally not exceeding ten years. The Bank also offers revolving loans, lines of credit, letters of credit, time notes and SBA guaranteed loans. Business lines of credit have adjustable rates of interest and can be committed or are payable on demand, subject to annual review and renewal. Commercial and industrial loans are generally secured by a variety of collateral such as accounts receivable, inventory and equipment, and are generally supported by personal guarantees. Loan-to-value ratios depend on the collateral type and generally do not exceed 80 percent of orderly liquidation value. Some commercial loans may also be secured by liens on real estate. The Bank generally does not make unsecured commercial loans. Commercial loans are of higher risk and are made primarily on the basis of the borrower’s ability to make repayment from the cash flows of its business. Further, any collateral securing such loans may depreciate over time, may be difficult to monitor and appraise and may fluctuate in value. The Bank gives additional consideration to the borrower’s credit history and the guarantor’s capacity to help mitigate these risks. Additionally, the Bank uses loan structures including shorter terms, amortizations, and advance rate limitations to additionally mitigate credit risk. The Company considers these loans, together with its owner-occupied commercial real estate loans, as constituting the primary relationship based component of its commercial lending activities. The loans
originated through the Company’s participation in the SBA’s Paycheck Protection Program (“PPP”) lending program in 2020 were classified as C&I loans. These loans were viewed as zero credit risk due to the related SBA guarantee.
Asset Based Lending. The Asset Based Lending Group serves the commercial middle market in New England, as well as the Bank’s market in northeastern New York and in the Mid-Atlantic. The group expands the Bank’s business lending offerings to include revolving lines of credit and term loans secured by accounts receivable, inventory, and other assets to manufacturers, distributors and select service companies experiencing seasonal working capital needs, rapid sales growth, a turnaround, buyout or recapitalization with credit needs generally ranging from $2 to $25 million. Asset based lending involves monitoring loan collateral so that outstanding balances are always properly secured by business assets, which reduces the risks associated with these loans.
Small Business Banking. This group is also referred to as Business Banking, and handles most business relationships which are smaller than the middle market category. Additionally, some smaller business needs are handled through the Bank’s retail branch system. Berkshire Bank also owns 44 Business Capital, a dedicated SBA 7A program lending team based in the Philadelphia area. This team originates loans in the Northeast, Mid-Atlantic and nationally. 44 Business Capital also works with business banking and small business teams to provide SBA guaranteed loans to business Banking Customers in Berkshire’s footprint. This team sells the guaranteed portions of these loans with servicing retained and the Bank retains the unguaranteed portions of the loans. The Bank is a preferred SBA lender and closely manages the servicing portfolio pursuant to SBA requirements. This team is the Bank’s largest source of commercial lending fee revenue, and it is targeting to further expand these operations. Berkshire Bank also owns Firestone Financial Corp. ("Firestone"), which is located in Needham, MA. Firestone originates loans secured by business-essential equipment through over 160 equipment distributors and manufacturers and directly via the end borrower in all 50 states. Key customer segments include the fitness, carnival, gaming, and entertainment industries.
Residential Mortgages. Through its mortgage banking operations, the Bank offers fixed-rate and adjustable-rate residential mortgage loans to individuals with maturities of up to 30 years that are fully amortizing with monthly loan payments. The majority of loans are originated for sale with rate lock commitments which are recorded as derivative financial instruments. Mortgages are generally underwritten according to U.S. government sponsored enterprise guidelines designated as “A” or “A-” and referred to as “conforming loans”. The Bank also originates jumbo loans above conforming loan amounts which generally are consistent with secondary market guidelines for these loans and are often held in portfolio. The Bank does not offer subprime mortgage lending programs. The Bank buys and sells seasoned mortgages primarily with smaller financial institutions operating in its markets.
The majority of the Bank’s secondary marketing is to U.S. secondary market investors on a servicing-released basis. The Bank also sells directly to government sponsored enterprises with servicing retained. Mortgage sales generally involve customary representations and warranties and are nonrecourse in the event of borrower default. The Bank is also an approved originator of loans for sale to the Federal Housing Administration (“FHA”), U.S. Department of Veteran Affairs (“VA”), state housing agency programs, and other government sponsored mortgage programs.
The Bank does not offer interest-only or negative amortization mortgage loans. Adjustable rate mortgage loan interest rates may rise as interest rates rise, thereby increasing the potential for default. The Bank also originates construction loans which generally provide 15-month construction periods followed by a permanent mortgage loan, and follow the Bank’s normal mortgage underwriting guidelines. Mortgage banking also requires flexible and scalable operations due to the volatility of mortgage demand over time. Investor management is integral to maintaining the secondary market support that is required for these operations.
Consumer Loans. The Bank’s consumer loans are centrally underwritten and processed by its experienced consumer lending team based in Syracuse, New York. The Bank’s primary consumer lending activity in recent years has been indirect auto lending. In 2019, the Company decided to end the origination of indirect auto loans. This decision reflects the Company’s heightened emphasis on community banking in its local markets. The Bank’s other major consumer lending activity is prime home equity lending, following its conforming mortgage underwriting guidelines with more streamlined verifications and documentation. Most of these outstanding loans are
prime based home equity lines with a maximum combined loan-to-value of 85 percent. Home equity line credit risks include the risk that higher interest rates will affect repayment and possible compression of collateral coverage on second lien home equity lines.
Maturity and Sensitivity of Loan Portfolio. The following table shows contractual final maturities of loans at year-end 2020. The contractual maturities do not reflect premiums, discounts, deferred costs, or prepayments.
Item 1 - Table 2A - Loan Contractual Maturity - Scheduled loan amortizations are not included in the maturities presented.
Contractual Maturity One Year One to More Than
(In thousands) or Less Five Years Five Years Total
Loans:
Construction $ 80,625 $ 206,398 $ 167,490 $ 454,513
Commercial multifamily 32,296 191,876 259,178 483,350
Commercial real estate owner occupied 49,176 171,991 331,246 552,413
Commercial real estate non-owner occupied 187,556 1,062,087 869,620 2,119,263
Commercial and industrial 218,898 1,404,958 319,308 1,943,164
Residential real estate 12,308 37,218 1,882,155 1,931,681
Home equity 3,207 6,077 284,697 293,981
Consumer other 10,022 229,877 63,255 303,154
Total $ 594,088 $ 3,310,482 $ 4,176,949 $ 8,081,519
Item 1 - Table 2B - Total loans due after one year - fixed and variable interest rates
(In thousands) Fixed Interest Rate Variable Interest Rate Total
Loans:
Construction $ 2,969 $ 370,919 $ 373,888
Commercial multifamily 135,881 315,173 451,054
Commercial real estate owner occupied 165,731 337,506 503,237
Commercial real estate non-owner occupied 600,778 1,330,929 1,931,707
Commercial and industrial 1,042,474 681,792 1,724,266
Residential real estate 1,450,034 469,339 1,919,373
Home equity 6,100 284,674 290,774
Consumer other 288,582 4,550 293,132
Total $ 3,692,549 $ 3,794,882 $ 7,487,431
Loan Administration. Lending activities are governed by a loan policy approved by the Board’s Risk Management and Capital Committee. Internal staff perform and monitor post-closing loan documentation review, quality control, and commercial loan administration. The lending staff assigns a risk rating to all commercial loans, excluding point scored small business loans. Management primarily relies on internal risk management staff to review the risk ratings of the majority of commercial loan balances.
The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Risk Management and Capital Committee and Management, under the leadership of the Chief Risk Officer. The Bank’s loan underwriting is based on a review of certain factors including risk ratings, recourse, loan-to-value ratios, and material policy exceptions. The Risk Management and Capital Committee has established individual and combined loan limits and lending approval authorities. Management’s Executive Loan Committee is responsible for commercial loan approvals in accordance with these standards and procedures. Generally, pass rated secured commercial loans can be approved jointly up to $7 million by the regional lending manager and regional credit officer. Loans up to $10 million can be approved with the additional signature of the Chief Credit Officer. Loans in excess of this amount, and designated lower rated loans are approved by the
Executive Loan Committee. The Bank tracks loan underwriting exceptions and exception reports are actively monitored by executive lending management.
The Bank’s lending activities are conducted by its salaried and commissioned loan personnel. Designated salaried branch staff originate conforming residential mortgages and receive bonuses based on overall performance. Additionally, the Bank employs commissioned residential mortgage originators. Commercial lenders receive salaries and are eligible for bonuses based on individual and overall performance. The Bank purchases whole loans and participations in loans from banks headquartered in its market and from outside of its market. These loans are underwritten according to the Bank’s underwriting criteria and procedures and are generally serviced by the originating lender under terms of the applicable agreement. The Bank routinely sells newly originated, fixed-rate residential mortgages in the secondary market. Customer rate locks are offered without charge and rate locked applications are generally committed for forward sale or hedged with derivative financial instruments to minimize interest rate risk pending delivery of the loans to the investors. The Bank also sells interest rate derivatives to larger commercial borrowers desiring to fix their interest rates, and includes these derivatives in its underwriting and administrative procedures.
The Bank also sells residential mortgages and commercial loan participations on a non-recourse basis. The Bank issues loan commitments to its prospective borrowers conditioned on the occurrence of certain events. Loan origination commitments are made in writing on specified terms and conditions and are generally honored for up to 60 days from approval; some commercial commitments are made for longer terms. The Company also monitors pipelines of loan applications and has processes for issuing letters of interest for commercial loans and pre-approvals for residential mortgages, all of which are generally conditional on completion of underwriting prior to the issuance of formal commitments.
The loan policy sets certain limits on concentrations of credit and requires periodic reporting of concentrations to the Risk Management and Capital Committee. The Bank has heightened monitoring of its 25 largest borrower relationships. Commercial real estate is generally managed within federal regulatory monitoring guidelines of 300% of risk based capital for non-owner occupied commercial real estate and 100% for construction loans. The Bank has hold limits for numerous categories of commercial specialty lending including healthcare, hospitality, designated franchises, and leasing, as well as hold limits for designated commercial loan participations purchased. In most cases, these limits are below 100% of risk based capital for all outstanding loans in each monitored category.
Problem Assets. The Bank prefers to work with borrowers to resolve problems rather than proceeding to foreclosure. For commercial loans, this may result in a period of forbearance or restructuring of the loan, which is normally done at current market terms and does not result in a “troubled” loan designation. For residential mortgage loans, the Bank generally follows FDIC guidelines to attempt a restructuring that will enable owner-occupants to remain in their home. However, if these processes fail to result in a performing loan, then the Bank generally will initiate foreclosure or other proceedings no later than the 90th day of a delinquency, as necessary, to minimize any potential loss. Management reports delinquent loans and non-performing assets to the Board quarterly. Loans are generally removed from accruing status when they reach 90 days delinquent, except for certain loans which are well secured and in the process of collection. Loan collections are managed by a combination of the related business units and the Bank’s special assets group, which focuses on larger, riskier collections and the recovery of purchased credit deteriorated loans.
Real estate obtained by the Bank as a result of loan collections, including foreclosures, is classified as real estate owned until sold. When property is acquired it is recorded at fair market value less estimated selling costs at the date of foreclosure, establishing a new cost basis. Holding costs and decreases in fair value after acquisition are expensed. Interest income that would have been recorded for 2020, if non-accruing loans had been current
according to their original terms, amounted to $6.8 million. Included in the amount is $64 thousand related to
troubled debt restructurings. The amount of interest income on those loans that was recognized in net income in
2020 was $4.8 million. Included in this amount is $27 thousand related to troubled debt restructurings. Interest
income on accruing troubled debt restructurings totaled $1.1 million for 2020. The total carrying value of
troubled debt restructurings was $20.5 million at year-end.
Item 1 - Table 3 - Problem Assets
(In thousands) 2020 2019 2018 2017 2016
Non-accruing loans:
Construction $ - $ - $ 150 $ 159 $ -
Commercial multifamily 757 811 474 263 363
Commercial real estate owner occupied 4,509 15,389 16,555 3,747 2,841
Commercial real estate non-owner occupied 29,572 1,031 2,056 2,023 2,136
Commercial and industrial 12,441 11,218 6,003 7,314 7,523
Residential real estate 9,711 6,411 3,394 4,062 4,468
Home equity 2,654 1,798 1,662 3,645 3,192
Consumer other 5,304 2,982 2,131 1,686 1,717
Total non-performing loans $ 64,948 $ 39,640 $ 32,425 $ 22,899 $ 22,240
Other real estate owned 149 - - - 151
Repossessed assets 1,932 858 1,209 1,147 -
Total non-performing assets $ 67,029 $ 40,498 $ 33,634 $ 24,046 $ 22,391
Total non-performing loans/total loans 0.80 % 0.42 % 0.36 % 0.28 % 0.34 %
Total non-performing assets/total assets 0.52 % 0.31 % 0.28 % 0.21 % 0.24 %
Asset Classification and Delinquencies. The Bank performs an internal analysis of its commercial loan portfolio and assets to classify such loans and assets in a manner similar to that employed by federal banking regulators. There are four classifications for loans with higher than normal risk: Loss, Doubtful, Substandard, and Special Mention. Usually an asset classified as Loss is fully charged-off. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses, are designated Special Mention. Please see the additional discussion of non-accruing and potential problem loans in Item 7 and additional information in notes to the financial statements. Impaired loans acquired in
business combinations are normally rated Substandard or lower and the fair value assigned to such loans at acquisition includes a component for the possibility of loss if deficiencies are not corrected.
Allowance for Credit Losses on Loans. The Bank’s loan portfolio is regularly reviewed by management to evaluate the adequacy of the allowance for loan losses. Prior to 2020, the allowance represented management’s estimate of inherent incurred losses that are probable and estimable as of the date of the financial statements. The allowance included a specific component for impaired loans (a “specific loan loss reserve”) and a general component for portfolios of all outstanding loans (a “general loan loss reserve”). At the time of acquisition, no allowance for loan losses was assigned to loans acquired in business combinations. These loans were initially recorded at fair value, including the impact of expected losses, as of the acquisition date. An allowance on such loans was established subsequent to the acquisition date through the provision for loan losses based on an analysis of factors including environmental factors.
On January 1, 2020, the Company adopted the new loan loss allowance standard based on Current Expected Credit losses (“CECL”). Under this standard, management makes estimates of future economic conditions over the life of the loan portfolio and other future conditions and arrives at a reasonable estimate of expected loan losses. The basis of the allowance changed from an incurred model to an expected model based on this standard. As a result, the amount of the loan loss allowance and the loan loss provision in 2020 is not comparable to prior years. Also, since different banks may use different estimates and arrive at different expectations, comparisons between banks are more difficult. Further, since the accounting is based on future projections our estimates may change significantly from period to period, the amounts of the allowance and provision may be more volatile than under the previous model. Further information about the allowance is discussed further in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements.
Management believes that it uses the best information available to establish the allowance. However, future adjustments to the allowance for loan losses may be necessary, and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making its determinations. There can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loan or loan portfolio category deteriorate. Regulatory agencies may require the Bank to make additional provisions for credit losses based upon judgments different from those of management. Any material increase in the allowance may adversely affect the Bank’s financial condition and results of operations.
Item 1 - Table 4 - Allowance for Credit Losses
(In thousands) 2020 2019 2018 2017 2016
Balance at beginning of year $ 63,575 $ 61,469 $ 51,834 $ 43,998 $ 39,308
Impact of ASC 326 25,434 - - - -
Charged-off loans:
Construction $ 834 $ - $ - $ - $ -
Commercial multifamily 100 837 32 86 50
Commercial real estate owner occupied 8,686 5,342 4,441 1,041 841
Commercial real estate non-owner occupied 11,653 934 3,007 3,181 2,152
Commercial and industrial 19,328 24,370 4,795 4,219 5,714
Residential real estate 2,285 1,180 1,481 2,033 2,926
Home equity 347 742 1,103 1,112 498
Consumer other 2,562 3,149 3,152 2,912 1,845
Total charged-off loans 45,795 36,554 18,011 14,584 14,026
Recoveries on charged-off loans:
Construction $ - $ - $ - $ - $ -
Commercial multifamily 100 - 11 59 60
Commercial real estate owner occupied 1,053 160 68 109 211
Commercial real estate non-owner occupied 307 1,094 289 52 33
Commercial and industrial 4,285 1,425 874 432 386
Residential real estate 1,359 186 191 321 306
Home equity 292 47 307 15 10
Consumer other 609 329 455 407 348
Total recoveries 8,005 3,241 2,195 1,395 1,354
Net loans charged-off 37,790 33,313 15,816 13,189 12,672
Provision for credit losses 76,083 35,419 25,451 21,025 17,362
Balance at end of year (1)
$ 127,302 $ 63,575 $ 61,469 $ 51,834 $ 43,998
Ratios:
Net charge-offs/average loans 0.41 % 0.35 % 0.18 % 0.19 % 0.21 %
Recoveries/charged-off loans 17.48 8.87 12.19 9.57 9.65
Net loans charged-off/allowance for credit losses 29.69 52.40 25.73 25.44 28.80
Non-accrual loans/total loans 0.80 0.42 0.36 0.28 0.34
Allowance for credit losses/total loans 1.58 0.67 0.68 0.62 0.67
Allowance for credit losses/non-accruing loans 196.01 160.38 189.57 226.36 197.83
(1) Beginning January 1, 2020, the allowance calculation is based on current expected loss methodology. Prior to January 1, 2020, the allowance calculation was based on the incurred loss model.
The following tables present year-end data for the approximate allocation of the allowance for loan losses by loan categories at the dates indicated (including an apportionment of any unallocated amount). The first table shows for each category the amount of the allowance allocated to that category as a percentage of the outstanding loans in that category. The second table shows the allocated allowance together with the percentage of loans in each category to total loans. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not indicative of future losses and does not restrict the use of any of the allowance to absorb losses in any category. Due to the impact of accounting standards for acquired loans, data in the accompanying tables may not be comparable between accounting periods.
Item 1 - Table 5A - Allocation of Allowance for Credit Losses by Category (as of year-end)
2020 2019 2018 2017 2016
(Dollars in thousands) Amount
Allocated Percent Allocated to Total Loans in Each Category Amount
Allocated Percent Allocated to Total Loans in Each Category Amount
Allocated Percent Allocated to Total Loans in Each Category Amount
Allocated Percent Allocated to Total Loans in Each Category Amount
Allocated Percent Allocated to Total Loans in Each Category
Construction $ 5,111 1.1 % $ 2,713 0.6 % $ 2,030 0.6 % $ 1,993 0.5 % $ 2,104 0.6 %
Commercial multifamily 5,916 1.2 4,413 0.7 4,312 0.8 3,389 0.7 2,790 0.8
Commercial real estate owner occupied 12,380 2.2 4,880 0.7 5,083 0.9 4,847 0.8 4,865 0.8
Commercial real estate non-owner occupied 35,850 1.7 16,344 0.8 12,940 0.7 10,000 0.6 8,690 0.7
Commercial and industrial 25,013 1.3 20,099 1.1 17,558 0.9 14,975 0.9 10,597 1.0
Residential real estate 28,491 1.5 9,970 0.4 11,659 0.4 10,466 0.5 8,906 0.4
Home equity 6,482 2.2 1,470 0.4 1,772 0.5 1,224 0.3 1,776 0.5
Consumer other 8,059 2.7 3,686 0.8 6,115 0.9 4,940 0.8 4,270 0.8
Total (1)
$ 127,302 1.6 % $ 63,575 0.7 % $ 61,469 0.7 % $ 51,834 0.6 % $ 43,998 0.7 %
(1) Beginning January 1, 2020, the allowance calculation is based on current expected loss methodology. Prior to January 1, 2020, the allowance calculation was based on the incurred loss model.
Item 1 - Table 5B - Allocation of Allowance for Credit Losses (as of year-end)
2020 2019 2018 2017 2016
(Dollars in thousands) Amount
Allocated Percent
of
Loans in
Each
Category to Total
Loans Amount
Allocated Percent
of
Loans in
Each
Category to Total
Loans Amount
Allocated Percent
of
Loans in
Each
Category to Total
Loans Amount
Allocated Percent
of
Loans in
Each
Category to Total
Loans Amount
Allocated Percent
of
Loans in
Each
Category to Total
Loans
Construction $ 5,111 5.6 % $ 2,713 4.7 % $ 2,030 4.1 % $ 1,993 4.6 % $ 2,104 5.4 %
Commercial multifamily 5,916 6.0 4,413 6.7 4,312 6.1 3,389 6.0 2,790 5.3
Commercial real estate owner occupied 12,380 6.8 4,880 7.1 5,083 6.2 4,847 7.8 4,865 9.1
Commercial real estate non-owner occupied 35,850 26.2 16,344 23.0 12,940 20.4 10,000 20.5 8,690 19.1
Commercial and industrial 25,013 24.0 20,099 19.4 17,558 21.6 14,975 21.0 10,597 15.9
Residential real estate 28,491 23.9 9,970 30.0 11,659 30.2 10,466 27.3 8,906 31.3
Home equity 6,482 3.7 1,470 4.0 1,772 4.2 1,224 4.9 1,776 5.5
Consumer other 8,059 3.8 3,686 5.1 6,115 7.2 4,940 7.9 4,270 8.4
Total (1)
$ 127,302 100.0 % $ 63,575 100.0 % $ 61,469 100.0 % $ 51,834 100.0 % $ 43,998 100.0 %
(1) Beginning January 1, 2020, the allowance calculation is based on current expected loss methodology. Prior to January 1, 2020, the allowance calculation was based on the incurred loss model.
INVESTMENT SECURITIES ACTIVITIES
The securities portfolio provides cash flow to protect the safety of customer deposits and as a potential source of liquidity. The portfolio is also used to manage interest rate risk and to earn a reasonable return on investment. Decisions are made in accordance with the Company’s investment policy and include consideration of risk, return, duration, and portfolio concentrations. Day-to-day oversight of the portfolio rests with the Chief Financial Officer and the Treasurer. The Enterprise Risk Management/Asset-Liability Committee meets multiple times each quarter and reviews investment strategies. The Risk Management and Capital Committee of the Board of Directors provides general oversight of the investment function.
The Company has historically maintained a high-quality portfolio of managed duration mortgage-backed securities, together with a portfolio of municipal bonds including national and local issuers and local economic development bonds issued to non-profit organizations. Nearly all of the mortgage-backed securities are issued by Ginnie Mae, Fannie Mae, or Freddie Mac, consisting principally of collateralized mortgage obligations (generally consisting of planned amortization class bonds and pass-through securities). Other than securities issued by the above agencies, no other issuer concentrations exceeding 10% of stockholders’ equity existed at year-end 2020. The municipal portfolio provides tax-advantaged yield, and the local economic development bonds were originated by the Company to area borrowers. The Company invests in investment grade corporate bonds and Agency commercial mortgage-backed securities. Purchases of non-investment grade fixed-income securities have consisted primarily of capital instruments issued by local and regional financial institutions. The Company also invests in funds financing community reinvestment projects. The Bank owns restricted equity in the Federal Home Loan Bank of Boston (“FHLBB”) based on its operating relationship with the FHLBB. The Company owns an interest rate swap against a tax advantaged economic development bond issued to a local not-for-profit organization, and as a result this security is carried as a trading account security. The Company generally designates debt securities as available for sale, but sometimes designates longer-duration municipal and other securities as held to maturity based on its intent. This also allows the Company to more effectively manage the potential impact of longer-duration, fixed-rate securities on stockholders' equity in the event of rising interest rates.
The following tables present the year-end amortized cost and fair value of the Company's securities, by type of security, for the three years indicated.
Item 1 - Table 6A Amortized Cost and Fair Value of Securities
2020 2019 2018
(In thousands) Amortized
Cost Fair
Value Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Securities available for sale
Municipal bonds and obligations $ 90,273 $ 97,803 $ 104,325 $ 110,138 $ 109,648 $ 111,207
Mortgage-backed securities 1,452,526 1,483,608 1,037,205 1,043,652 1,182,552 1,160,130
Other bonds and obligations 111,178 113,821 155,809 157,765 129,073 128,310
Total securities available for sale $ 1,653,977 $ 1,695,232 $ 1,297,339 $ 1,311,555 $ 1,421,273 $ 1,399,647
Securities held to maturity
Municipal bonds and obligations $ 246,520 $ 266,626 $ 252,936 $ 266,026 $ 264,524 $ 264,492
Mortgage-backed securities 214,907 221,472 86,291 89,191 89,273 88,442
Tax advantaged economic development bonds 3,369 3,462 18,456 17,764 19,718 18,042
Other bonds and obligations 295 295 296 296 248 248
Total securities held to maturity $ 465,091 $ 491,855 $ 357,979 $ 373,277 $ 373,763 $ 371,224
Trading account security $ 8,655 $ 9,708 $ 9,390 $ 10,769 $ 10,090 $ 11,212
Marketable equity securities 18,061 18,513 37,138 41,556 55,471 56,638
Restricted equity securities 34,873 34,873 48,019 48,019 77,344 77,344
Item 1 - Table 6B - Amortized Cost and Fair Value of Securities
2020 2019 2018
(In thousands) Amortized
Cost Fair
Value Amortized
Cost Fair
Value Amortized
Cost Fair
Value
U.S. Treasuries, other Government agencies and corporations $ 1,685,494 $ 1,723,593 $ 1,160,634 $ 1,174,399 $ 1,327,296 $ 1,305,210
Municipal bonds and obligations and tax advantaged securities 348,817 377,599 385,107 404,697 403,980 404,953
Other 146,346 148,989 204,124 206,080 206,665 205,902
Total Securities $ 2,180,657 $ 2,250,181 $ 1,749,865 $ 1,785,176 $ 1,937,941 $ 1,916,065
The schedule includes available-for-sale and held-to-maturity securities, as well as the trading security, marketable equity securities, and restricted equity securities.
The following table summarizes year-end 2020 amortized cost, weighted average yields, and contractual maturities of debt securities. Yields are shown on a fully taxable equivalent basis. A significant portion of the mortgage-based securities are planned amortization class bonds. Their expected durations are 3-5 years at current interest rates, but the contractual maturities shown reflect the underlying maturities of the collateral mortgages. Additionally, the mortgage-based securities maturities shown below are based on final maturities and do not include scheduled amortization. Yields include amortization and accretion of premiums and discounts.
Item 1 - Table 7 - Weighted Average Yield
One Year or Less More than One
Year to Five Years More than Five Years
to Ten Years More than Ten Years Total
(In millions) Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield
Municipal bonds and obligations $ 4.1 4.0 % $ 7.0 4.0 % $ 37.6 5.0 % $ 288.1 4.0 % $ 336.8 5.0 %
Mortgage-backed securities - - % 11.2 2.0 % 154.6 2.0 % 1,501.6 2.0 % 1,667.4 2.0 %
Other bonds and obligations 31.1 - % 4.4 5.0 % 53.3 5.0 % 26.0 3.0 % 114.8 3.0 %
Total $ 35.2 0.6 % $ 22.6 3.5 % $ 245.5 3.3 % $ 1,815.7 2.2 % $ 2,119.0 2.3 %
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
Deposits are the major source of funds for the Bank’s lending and investment activities. Deposit accounts are the primary product and service interaction with the Bank’s customers. The Bank serves personal, commercial, non-profit, and municipal deposit customers. Most of the Bank’s deposits are generated from the areas surrounding its branch offices. The Bank offers a wide variety of deposit accounts with a range of interest rates and terms. The Bank also periodically offers promotional interest rates and terms for limited periods of time. The Bank’s deposit accounts consist of demand deposits (non-interest-bearing checking), NOW (interest-bearing checking), regular savings, money market savings, and time certificates of deposit. The Bank emphasizes its transaction deposits - checking and NOW accounts - for personal accounts and checking accounts promoted to businesses. These accounts have the lowest marginal cost to the Bank and are also often a core account for a customer relationship. The Bank offers a courtesy overdraft program to improve customer service, and also provides debit cards and other electronic fee producing payment services to transaction account customers. The Bank offers targeted online and mobile deposit account opening capabilities for personal accounts. The Bank promotes remote deposit capture devices so that commercial accounts can make deposits from their place of business. Additionally, the Bank offers a variety of retirement deposit accounts to personal and business customers. Deposit related fees are a significant source of fee income to the Bank, including overdraft and interchange fees related to debit card usage. Deposit service fee income also includes other miscellaneous transactions and convenience services sold to customers through the branch system as part of an overall service relationship. The Bank offers compensating balance arrangements for larger business customers as an alternative to fees charged for checking account services. Berkshire’s Business Connection is a personal financial services benefit package designed for the employees of its business customers. In addition to providing service through its branches, Berkshire provides services to deposit customers through its private bankers, MyBankers, commercial/small business relationship managers, and call center representatives. Commercial cash management services are an important commercial service offered to commercial and governmental depositors and a fee income source to the bank. The Bank also operates a commercial payment processing business that serves regional and national payroll service bureau customers. Online banking and mobile banking functionality is increasingly important as a component of deposit account access and service delivery. The Bank is also gradually deploying its MyTeller video tellers to complement and extend its service capabilities in its branches.
The Company also is monitoring the development of payment services which are growing in their importance in the personal and commercial deposit markets.
The following table presents information concerning average balances and weighted average interest rates on the Bank’s interest-bearing deposit accounts for the years indicated.
Item 1 - Table 8 - Average Balance and Weighted Average Rates for Deposits
2020 2019 2018
(In millions) Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate
Demand $ 2,324.6 23 % - % $ 1,745.2 18 % - % $ 1,622.4 19 % - %
NOW and other 1,216.6 12 0.3 1,053.9 11 0.6 824.7 9 0.5
Money market 2,713.6 26 0.6 2,542.6 26 1.2 2,432.2 28 0.9
Savings 914.1 9 0.1 798.2 8 0.2 740.8 9 0.2
Time 3,102.9 30 1.7 3,754.2 37 2.0 3,075.5 35 1.7
Total $ 10,271.8 100 % 0.7 % $ 9,894.1 100 % 1.2 % $ 8,695.6 100 % 0.9 %
At year-end 2020, the Bank had time deposit accounts in amounts of $100 thousand or more maturing as follows:
Item 1 - Table 9 - Maturity of Deposits >$100,000
Maturity Period Amount Weighted Average Rate
(In thousands)
Three months or less $ 458,997 1.46 %
Over 3 months through 6 months 337,721 1.14
Over 6 months through 12 months 359,777 1.13
Over 12 months 565,266 1.26
Total $ 1,721,761 1.26 %
The Bank’s deposits are insured by the FDIC. The Bank utilizes brokered time deposits to broaden its funding base, augment its interest rate risk management vehicles, and to support loan growth. The Bank also offers brokered reciprocal money market arrangements to provide additional deposit protection to certain large commercial and institutional accounts. These balances are viewed as part of overall relationship balances with regional customers. Brokered deposits are sourced through selected Board approved brokers; these deposits are viewed as potentially more volatile than other deposits and are managed as a component of the Bank's liquidity policies.
The Company also uses borrowings from the FHLBB as an additional source of funding, particularly for daily cash management and for funding longer duration assets. FHLBB advances also provide more pricing and option alternatives for particular asset/liability needs. The FHLBB functions as a central reserve bank providing credit for member institutions. As an FHLBB member, the Company is required to own capital stock of the organization. Borrowings from this institution are secured by a blanket lien on most of the Bank’s mortgage loans and mortgage-related securities, as well as certain other assets. Advances are made under several different credit programs with different lending standards, interest rates, and range of maturities.
The Company had a $15 million trust preferred obligation and a $7 million trust preferred obligation outstanding, as well as $74 million in senior subordinated notes at year-end 2020. The Company’s common stock is listed on the New York Stock Exchange. Subject to certain limitations, the Company can also choose to issue common stock, preferred stock, subordinated debt, or senior debt in public stock offerings or private placements. In 2020, the Company renewed its universal securities shelf registration with the SEC to facilitate potential future capital issuances. The Company has maintained a shelf registration as part of its routine capital management for many years.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company offers interest rate swaps to commercial loan customers who wish to fix the interest rates on their loans, and the Company backs these swaps with offsetting swaps with national bank counterparties. With other lending institutions, the Company engages in risk participation agreements. These arrangements are structured similarly to its swaps with commercial borrowers, but a different bank is the lead underwriter. 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. These swaps are designated as economic hedges. Interest rate swaps that meet certain criteria to be viewed as conforming are required to be cleared through exchanges. The Bank has designated a national financial institution as its clearing agent.
The Company’s mortgage banking activities result in derivatives. Commitments to lend are provided on applications for residential mortgages intended for resale and are accounted for as non-hedging derivatives. The Company arranges offsetting forward sales commitments for most of these rate-locks with national bank counterparties, which are designated as economic hedges. Commitments on applications intended to be held for investment are not accounted for as derivative financial instruments. The Company has a policy for managing its derivative financial instruments, and the policy and program activity are overseen by the Risk Management and Capital Committee. Derivative financial instruments with counterparties which are not customers are limited to a select number of national financial institutions. Collateral may be required based on financial condition tests. The Company works with third-party firms which assist in marketing derivative transactions, executing transactions, and providing information for bookkeeping and accounting purposes.
The Company sometimes uses interest rate swap instruments for its own account to fix the interest rate on some of its borrowings, all of which have been designated as cash flow hedges. The Company also has begun offering forward foreign exchange derivatives to its commercial markets as part of its expanded international banking services. The Company expects to back these forwards with offsetting forwards with national bank counterparties. This activity would be targeted to support routine commercial needs of customers engaged in international trading activities and would only be offered for bank approved currencies and durations.
LIBOR BASED INSTRUMENTS
The Company’s floating-rate funding, certain hedging transactions and certain of the Company’s products, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to an index, currency, basket or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the Financial Conduct Authority (“FCA”) announced that the FCA intends to stop persuading or compelling its panel banks to submit rates for the calculation of LIBOR after 2021.
The Company has approximately 950 commercial loans with a total balance of $2.6 billion with the contract interest rate tied to LIBOR. Additionally, the Company has approximately 500 interest rate swap contracts with a notional value of approximately $3.8 billion, including customer, dealer, and risk participation agreements. Many of these interest rate swap contracts are associated with the LIBOR based commercial loans.
The Company established an enterprise-wide LIBOR transition committee in 2019. The committee has assessed the on and off-balance sheet products that will be impacted with the LIBOR transition. The areas with the most impact are LIBOR based interest rate swaps and commercial loans that utilize LIBOR as the indexed rate. During 2019 revised LIBOR fallback language was added to all new Commercial loan contracts that contemplated the use of LIBOR as an index rate. An impact assessment has been completed to identify further exposures, such as systems, processes, and models affected by the discontinuation of LIBOR. The Company continues to develop and execute plans to transition products associated with LIBOR to alternative reference rates.
WEALTH MANAGEMENT SERVICES
The Company’s Wealth Management Group provides consultative investment management, trust administration, and financial planning to individuals, businesses, and institutions, with an emphasis on personal investment management. The Wealth Management Group has built a track record over more than a decade with its dedicated in-house investment management team. The Bank also provides a full line of investment products, financial planning, and brokerage services through BerkshireBanc Investment Services utilizing Commonwealth Financial Network as the broker/dealer. The Bank is integrating with its growing private banking and MyBanker teams to further develop wealth management account generation.
INSURANCE
As an independent insurance agent, the Berkshire Insurance Group represents a carefully selected group of financially sound, reputable insurance companies offering attractive coverage at competitive prices. The Insurance Group offers a full line of personal and commercial property and casualty insurance. It also offers employee benefits insurance and a full line of personal life, health, and financial services insurance products. Berkshire Insurance Group operates a focused cross-sell program of insurance and banking products through all offices and branches of the Bank with some of the Group’s offices located within the Bank’s branches. The Group’s principal operations are in Western New England, and also provides its services in the Company’s other regions. The Group focuses on the Bank’s distribution channels in order to broaden its retail and commercial customer base.
HUMAN CAPITAL MANAGEMENT
Berkshire’s people are the core of its ability to deliver on its strategic objectives, just as they have been for 175 years. The Company’s approach to human capital management is grounded in its Be FIRST values. It focuses on strong oversight, talent acquisition, development, engagement, retention, and offering a competitive benefits package. The Board of Directors has ultimate responsibility for the strategy of the Company. The Compensation Committee of the Board of Directors oversees executive compensation matters and the Corporate Responsibility & Culture committee oversees company culture, diversity, and employee engagement. The Company further enhanced this oversight in 2020 by appointing an experienced human resources leader to Executive Vice President Chief Human Resources & Culture Officer.
Talent acquisition is the first step to ensuring Berkshire has employees with the right mix of skills and experiences. The Company leverages internship placements, affinity group relationships, and the use of experienced recruiters for key management and specialized positions. After hiring, employees’ undergo an onboarding journey including attending a virtual new hire orientation. Throughout an employees’ career Berkshire focus on development as the Company believes it’s a critical factor to long-term retention. In 2020, the Company launched a new mentoring program to pair high potential junior employees with senior staff to build on existing development opportunities. The Company reskilled and upskilled employees from across the bank to assist in government relief programs such as the SBA’s Paycheck Protection Program (“ PPP") and for employees looking to expand their professional experience in the classroom, the Company offers an education assistance program.
Berkshire continually evaluates its strategies and looks at best practices to provide competitive pay and benefits packages. All of Berkshire’s benefits are available to married same-sex or different-sex couples as well as domestic partners. In 2020, the Company completed a salary survey to ensure pay and performance measures aligned with the markets it serves and a pay equity analysis to ensure that all employees, regardless of gender and ethnicity, in comparable roles are compensated equitably. Berkshire was listed in the Bloomberg Gender-Equality Index for the second consecutive year in recognition of its work and achieved a perfect score on the Human Rights Campaign Corporate Equality Index for the first time.
Berkshire employees' health, safety, and economic stability has and continues to be a priority as the Company continues to navigate the global COVID-19 pandemic. Berkshire suspended non-essential business travel and accelerated its ongoing Work from Home initiative to swiftly, safely and securely move 86% of non-branch staff to a fully remote environment. The Company provided protective equipment to front-line employees, including masks and gloves, and offered all additional paid sick time, paid quarantine/isolation leave, job protected personal leave, flexible work schedules for remote employees, premium pay for onsite employees and maintained full pay for employees with reduced schedules, as a result of the pandemic. Berkshire enhanced support through its Employee
Assistance Program and launched the You FIRST Fund to help employees impacted by personal financial hardships. As a result of Berkshire’s collective actions, there were no bank related pandemic layoffs in 2020 and the Company instituted a special compensation program for employees assisting with government relief programs.
Human Capital* Total Full Time Equivalent 1,505
Voluntary Retention Rate 85 %
*All metrics reported are as of or for the year-ended December 31, 2020.
DIVERSITY, EQUITY, AND INCLUSION
Berkshire’s journey to build a more diverse, equitable, and inclusive company is grounded in its Be FIRST values. The Company’s goal is to build a workplace that reflects its communities' unique diversity and creates wealth in underrepresented neighborhoods across its footprint. The Company focuses on its governance practices, employee education, talent acquisition & workplace culture, supplier diversity, and product and service offerings. A collection of governance practices serve as the foundation, ensuring the appropriate oversight. The Corporate Responsibility & Culture Committee of the Board of Directors has ultimate responsibility for Diversity, Equity, and Inclusion Program performance and ensuring Management creates a workplace culture consistent with its Be FIRST values. The Company’s Diversity & Inclusion Employee Committee, which reports up to the Corporate Responsibility & Culture Committee, focuses on the diversity and inclusion strategy. The committee consists of employees from throughout the business and works to develop and execute goals, strategies, and tactics and monitor progress.
The Company offers seven Employee Resource Groups each of whom play an integral role for employees and the culture of the company. Each Employee Resource Group provides a safe space for dialogue, education, and collective action on topics relevant to their mission. These groups continue to help the company facilitate important cultural shifts, update policies, host important cultural heritage events, and attend affinity group job fairs. In 2020, the Company rolled out a new suite of Diversity, Equity, and Inclusion trainings. In addition, it continues to develop deeper partnerships with colleges, affinity groups and non-profit organizations to expand its networks beyond those traditionally touched by the banking industry. The Company leverages internal expertise and experienced external recruitment professionals to ensure it receives candidate pools that reflect the rural and urban communities where it operates. In addition, the Company regularly reviews the gender and ethnic diversity of its workforce at the employee, manager and executive management level.
Diversity & Inclusion* Percent of women in workforce 68 %
Percent of ethnic minorities in workforce 14 %
Percent disabled in workforce 2 %
*All metrics reported are as of December 31, 2020.
Additional information on Berkshire’s Culture, Human Capital and Diversity, Equity & Inclusion practices can be found in the Company’s annual Corporate Responsibility Report at www.berkshirebank.com/csr, which details the company's environmental, social, governance, and cultural programs.
SUBSIDIARY ACTIVITIES
The Company wholly-owns two active consolidated subsidiaries: the Bank and Berkshire Insurance Group, Inc. The Bank operates as a commercial bank under a Massachusetts trust company charter. Berkshire Insurance Group is incorporated in Massachusetts. Berkshire Bank owns Firestone Financial, LLC which is a Massachusetts limited liability company, as well as consolidated subsidiaries operated as Massachusetts securities corporations and other subsidiary entities. The Company also owns all of the common stock of Delaware statutory business trusts, Berkshire Hills Capital Trust I and SI Capital Trust II. The capital trusts are unconsolidated and their only material assets are trust preferred securities related to the junior subordinated debentures reported in the Company’s Consolidated Financial Statements. Additional information about the subsidiaries is contained in Exhibit 21 to this report.
REGULATION AND SUPERVISION
The Company is a Delaware corporation and a bank holding company that has elected financial holding company status within the meaning of the Bank Holding Company Act of 1956, as amended. As such, it is registered with, supervised by and required to comply with the rules and regulations of the Federal Reserve Board. The Federal Reserve Board requires the Company to file various reports and also conducts examinations of the Company. The Company must receive the approval of the Federal Reserve Board to engage in certain transactions, such as acquisitions of additional banks and savings associations.
The Bank is a Massachusetts-chartered trust company and its deposits are insured up to applicable limits by the FDIC. The Bank was previously a Massachusetts-chartered savings bank and converted to a Massachusetts-chartered trust company in July 2014. The Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks (the “Commissioner”), as its chartering agency, and by the FDIC, as its deposit insurer. The Bank is required to file reports with the Commissioner and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other depository institutions or branches of other institutions. The Commissioner and the FDIC conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. The regulatory structure gives the regulatory authorities extensive discretion in connection with supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Commissioner, the Massachusetts legislature, the FDIC, the Federal Reserve Board, or Congress, could have a material adverse impact on the Company, the Bank, and their operations.
Certain regulatory requirements applicable to the Company are referred to below. The description of statutory provisions and regulations applicable to financial institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Company and is qualified in its entirety by reference to the actual laws and regulations.A summary of the regulatory requirements referred to below is as follows:
•Massachusetts Banking Laws and Supervision
•Federal Regulations
•Enforcement
•Holding Company Regulation
•Mergers and Acquisitions
•Other Regulations
•Taxation
Massachusetts Banking Laws and Supervision
General. As a Massachusetts-chartered depository institution, the Bank is subject to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, the Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Commissioner is required for a Massachusetts-chartered institution to establish or close branches, merge with other financial institutions, issue stock, and undertake certain other activities.
Massachusetts law and regulations generally allow Massachusetts institutions to engage in activities permissible for federally chartered banks or banks chartered by another state. There is a 30-day notice procedure to the Commissioner in order to engage in such activities. Massachusetts law also authorized Massachusetts institutions to engage in activities determined to be “financial in nature,” or incidental or complementary to such a financial activity, subject to a 30-day notice to the Commissioner.
Dividends. Under Massachusetts law, the Bank may declare cash dividends from net profits not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited, or paid if the institution’s capital stock is impaired. An institution with outstanding preferred stock may not, without the prior approval of the Commissioner, declare dividends to the common stock without also declaring dividends to the
preferred stock. The approval of the Commissioner is generally required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained “net profits,” as defined, of the preceding two years. The approval of both the Commissioner and the FDIC is required for the Bank to pay a dividend from its surplus account, which would currently be the case as to any Bank dividend to the Company.
Loans to One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations of one borrower to an institution may not exceed 20.0% of the total of the institution’s capital, which is defined under Massachusetts law as the sum of the institution’s capital stock, surplus account and undivided profits.
Investment Activities. In general, Massachusetts-chartered institutions may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered institutions may also invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in Massachusetts which have pledged to the Commissioner that such monies will be used for further development within the Commonwealth. However, these powers are constrained by federal law, which generally limit the activities and equity investments of state banks to those permitted for national banks.
Regulatory Enforcement Authority. Any Massachusetts-chartered institution that does not operate in accordance with the regulations, policies, and directives of the Commissioner may be sanctioned for non-compliance, including seizure of the property and business of the institution and suspension or revocation of its charter. The Commissioner may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the institution’s business in a manner which is unsafe, unsound or contrary to the depositors’ interests, or been negligent in the performance of their duties. In addition, upon finding that an institution has engaged in an unfair or deceptive act or practice, the Commissioner may issue an order to cease and desist and impose a fine on the institution concerned. Finally, Massachusetts consumer protection and civil rights statutes applicable to the Bank permit private individual and class action lawsuits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.
Massachusetts has other statutes or regulations that are similar to the federal provisions discussed below.
Federal Regulations
Capital Requirements. Federal regulations require FDIC insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The Bank chose the opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations, including adjustments for goodwill and other intangible assets.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% and 600% is assigned to permissible equity interests, depending on certain specified factors. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary. As a bank holding company, the Company is also subject to regulatory capital requirements, as described in a subsequent section.
Interstate Banking and Branching. Federal law permits an institution, such as the Bank, to acquire another institution by merger in a state other than Massachusetts unless the other state has opted out. Federal law, as amended by the Dodd-Frank Act, authorizes de novo branching into another state to the extent that the target state allows its state chartered banks to establish branches within its borders. As of December 31, 2020, the Bank operated branches in New York, Vermont, Connecticut, New Jersey, and Pennsylvania as well as Massachusetts. At its interstate branches, the Bank may conduct any activity authorized under Massachusetts law that is permissible either for an institution chartered in that state (subject to applicable federal restrictions) or a branch in that state of an out-of-state national bank. The New York State Superintendent of Banks, the Vermont Commissioner of Banking and Insurance, the Connecticut Commissioner of Banking, the New Jersey Commissioner of Banking and Insurance, the Pennsylvania Secretary of Banking and Securities, and the Director of the Rhode Island Department of Business Regulation may exercise certain regulatory authority over the Bank’s branches in their respective states.
Prompt Corrective Regulatory Action. Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For this purpose, the law establishes three categories of capital deficient institutions: undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC regulations implementing the prompt corrective action law were amended to incorporate the previously discussed increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater, and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater, and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0%, or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0%, or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend), and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such plans must be guaranteed by its holding company in an amount equal to the lesser of 5% of the institution’s total assets when deemed “undercapitalized” or the amount needed to comply with regulatory capital requirements. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become “adequately capitalized,” requirements to
reduce assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers, and capital distributions by the holding company. “Critically undercapitalized” institutions must comply with additional sanctions including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
At December 31, 2020, the Bank met the criteria for being considered “well capitalized” as defined in the prompt corrective action regulations.
Transactions with Affiliates and Loans to Insiders. Transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. In a holding company context, at a minimum, the parent holding company of an institution and any companies which are controlled by the holding company are affiliates of the institution. Generally, Section 23A limits the extent to which the institution or its subsidiaries may engage in “covered transactions,” such as loans, with any one affiliate to 10% of such institution’s capital stock and surplus. There is also an aggregate limit on all such transactions with all affiliates to 20% of capital stock and surplus. Loans to affiliates and certain other specified transactions must comply with specified collateralization requirements. Section 23B requires that transactions with affiliates be on terms that are no less favorable to the institution or its subsidiary as similar transactions with non-affiliates.
Federal law also restricts an institution with respect to loans to directors, executive officers, and principal stockholders (“insiders”). Loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the Board of Directors. Further, loans to insiders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the institution’s employees and does not give preference to the insider over the employees. Federal law places additional limitations on loans to executive officers. Massachusetts law previously had a separate law regarding insider transactions but that law was amended in 2015 to generally incorporate the federal restrictions.
Insurance of Deposit Accounts. The Bank’s deposit accounts are insured by the Deposit Insurance Fund of the FDIC up to applicable limits. The FDIC insures deposits up to the standard maximum deposit insurance amount (“SMDIA”) of $250,000.
The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits.
Under the FDIC’s risk-based assessment system, insured institutions are assessed based on perceived risk to the Deposit Insurance Fund with institutions deemed less risky pay lower FDIC assessments. Assessments for institutions with $10 billion or more of assets are primarily based on a scorecard approach by the FDIC, including factors such as examination ratings and modeling measuring the institution’s ability to withstand asset-related and funding-related stress and potential loss to the Deposit Insurance Fund should the bank fail. The assessment range (inclusive of possible adjustments specified by the regulations) for institutions with greater than $10 billion of total assets is 1.5 to 40 basis points. The Dodd-Frank Act required that banks of greater than $10 billion of assets bear the burden of raising the Deposit Insurance Fund reserve ratio from 1.15% to 1.35%. Such institutions were subject to an annual surcharge of 4.5 basis points of total assets exceeding $10 billion, effective July 1, 2016. The FDIC announced in November 2018 that the 1.35% reserve ratio had been reached so that the surcharges would cease. In 2019, the FDIC distributed premium rebates to the Company and other bank peers as a result of having collected excess premiums in earlier periods. The Deposit Insurance Fund ratio fell to 1.30% as of June 30, 2020 due to extraordinary deposit growth resulting from economic conditions and government initiatives related to the COVID-19 pandemic. The FDIC had adopted a restoration plan for the fund to again achieve a 1.35% ratio within eight years. The current plan does not involve increased assessments or surcharges on insured institutions.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a regulator. Management does not know of any practice, condition or violation that might lead to termination of FDIC deposit insurance.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank system, which consists of 12 regional Federal Home Loan Banks that provide a central credit facility primarily for member institutions. The Bank, as a member, is required to acquire and hold shares of capital stock in the FHLBB.
The Federal Home Loan Banks are required to provide funds for certain purposes including contributing funds for affordable housing programs. These requirements, and general financial results, could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. Historically, the FHLBB has paid dividends to member banks based on money market rates.
Enforcement
The FDIC has primary federal enforcement responsibility over state chartered banks that are not members of Federal Reserve System, which includes the Bank. The FDIC has authority to bring enforcement actions against such institutions and their “institution-related parties,” including officers, directors, certain shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution or receivership or conservatorship in certain circumstances. Potential civil money penalties cover a wide range of violations and actions, and range up to $25 thousand per day or, in extreme cases, as high as $1.0 million per day.
Holding Company Regulation
General. The Company is subject to examination, regulation, and periodic reporting as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any other bank or bank holding company. Prior Federal Reserve Board approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of the bank or bank holding company.
A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than five percent of the voting securities of any company engaged in non-banking activities. The Federal Reserve Board has allowed by regulation some exceptions based on activities closely related to banking including: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; and (v) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed” as defined in the regulations, to opt to become a “financial holding company” and thereby engage in a broader array of financial activities. Such activities can include insurance and investment banking. The Company has elected to become a financial holding company.
The Company is subject to the Federal Reserve Board’s capital adequacy requirements for bank holding companies. The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. The previously discussed final rule regarding regulatory
capital requirements implemented the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital requirements identical to those applicable to the Bank applied to the Company, effective January 1, 2015. As is the case with institutions themselves, the capital conservation buffer was phased in beginning in 2016 and was fully effective on January 1, 2019.
Federal Reserve Board policy requires that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength doctrine.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior consultation with and nonobjection of the Federal Reserve Board with respect to dividends in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. Such Federal Reserve Board consultation and nonobjection was required for certain dividends paid by the Company during 2020. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.
Federal regulations require a bank holding company to give the Federal Reserve Board prior written notice of any repurchase or redemption of then outstanding equity securities if the gross consideration for the repurchase or redemption, when combined with the net consideration paid for all such repurchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption under certain circumstances. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions. Federal Reserve policy provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments under specified circumstances regardless of the applicability of the previously referenced notification requirement.
These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of its stock, or otherwise engage in capital distributions.
The status of the Company as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
Acquisition of the Company. Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as the Company unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined for this purpose, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, is the case with the Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Massachusetts Holding Company Regulation. In addition to the federal holding company regulations, a bank holding company organized or doing business in Massachusetts must comply with requirements under Massachusetts law. Approval of the Massachusetts regulatory authorities is generally required for the Company to acquire 25 percent or more of the voting stock of another depository institution. Similarly, prior regulatory approval would be necessary for any person or company to acquire 25 percent or more of the voting stock of the Company.
Mergers and Acquisitions
The Company and the Bank have authority to engage, and have engaged, in acquisitions of other depository institutions. Such transactions are subject to a variety of conditions including, but not limited to, required stockholder approvals and the receipt of all necessary regulatory approvals. Necessary regulatory approvals include those required by the federal Bank Holding Company Act and/or Bank Merger Act, Massachusetts law and, if the target institution is located in a state other than Massachusetts, the law of that state. When considering merger applications, the federal regulators must evaluate such factors as the financial and managerial resources and future prospects of the parties, the convenience and needs of the communities to be served (including performance of the parties under the Community Reinvestment Act), competitive factors, any risk to the stability of the United States banking or financial system and the effectiveness of the institutions involved in combating money laundering activities. Both the Bank Holding Company Act and the Bank Merger Act provide for a waiting period of 15 to 30 days following approval by the federal banking regulator within which the United States Department of Justice may file objections to the merger under the federal antitrust laws. Massachusetts law requires the Commissioner (or Board of Bank Incorporation in certain cases) to consider such factors as whether competition among banking institutions will be unreasonably affected and whether public convenience and advantage will be promoted (including whether the merger will result in net new benefits).
Other Regulations
Consumer Protection Laws. The Bank is subject to federal and state consumer protection statutes and regulations applicable to depository institutions. These include the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; Home Mortgage Disclosure Act, requiring financial institutions to provide certain information about home mortgage and refinance loans; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information; the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and the Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. Since the Bank has exceeded $10 billion of consolidated assets, compliance with such federal consumer protection statutes and regulations is examined for and enforced by the Consumer Finance Protection Bureau rather than the FDIC.
The Bank also is subject to Massachusetts and federal laws protecting the confidentiality of consumer financial records, and limiting the ability of the institution to share non-public personal information with third parties.
The Community Reinvestment Act (“CRA”) establishes a requirement for federal banking agencies that, in connection with examinations of depository institutions within their jurisdiction, the agencies evaluate the record of the depository institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” A less than “satisfactory” rating would result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent CRA examination by the FDIC, the Bank’s CRA rating was “satisfactory.”
Anti-Money Laundering Laws. The Bank is subject to extensive anti-money laundering provisions and requirements, which require the institution to have in place a comprehensive customer identification program and an anti-money laundering program and procedures. These laws and regulations also prohibit depository institutions from engaging in business with foreign shell banks; require depository institutions to have due diligence procedures and, in some cases, enhanced due diligence procedures for foreign correspondent and private banking accounts; and improve information sharing between depository institutions and the U.S. government. The Bank has established policies and procedures intended to comply with these provisions.
Taxation
The Company reports its income on a calendar year basis using the accrual method of accounting. This discussion of tax matters is only a summary and is not a comprehensive description of the tax rules applicable to the Company and its subsidiaries. Further discussion of income taxation is contained in a note to the financial statements. The federal income tax laws apply to the Company in the same manner as to other corporations with some exceptions. The Company may exclude from income 100 percent of dividends received from the Bank and from Berkshire Insurance Group as members of the same affiliated group of corporations. The Company reports income on a calendar year basis to the Commonwealth of Massachusetts. Massachusetts tax law generally permits special tax treatment for a qualifying limited purpose “securities corporation.” The Bank’s securities corporations all qualify for this treatment, and are taxed at a 1.3% rate on their gross income.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The risks set forth below, in addition to the other risks described in this Annual Report on Form 10-K, may adversely affect the Company's business, financial condition, strategic objectives, and operating results. In addition to the risks set forth below and the other risks described in this annual report, there may be additional risks and uncertainties that are not currently known to the Company or that the Company currently deems to be immaterial that could materially and adversely affect the Company's business, financial condition, strategic objectives, or operating results. As a result, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.
The COVID-19 global pandemic affected all aspects of the company’s business in 2020. The event of the pandemic is discussed in the Operating risk factor below, but it should be understood as affecting the overall risk environment and risk factors of the Company.
Risk Factors Summary
Lending Risks
•Deterioration in the Housing Sector, Commercial Real Estate, and Related Markets May Adversely Affect Business and Financial Results.
•The Company’s Emphasis on Commercial Lending May Expose the Company to Increased Lending Risks, Which Could Hurt Profits.
•As a Participating Lender in the Small Business Administration Paycheck Protection Program, the Company is Subject to Additional Risks of Litigation from Its Customers or Other Parties Regarding Its Processing of Loans for the Paycheck Protection Program, Which Could Have a Significant Adverse Impact On Its Business, Financial Position, Results of Operations, and Prospects.
•The Company is Subject to a Variety of Risks in Connection With Any Sale of Loans it May Conduct.
•The Company is Exposed to Risk of Environmental Liability When It Takes Title to Property.
Operating Risks
•The COVID-19 Pandemic is Adversely Affecting, and Will Likely Continue to Adversely Affect, the Company’s Business, Financial Condition, Liquidity, and Results of Operations.
•The Company is Subject to Security and Operational Risks Relating to the Use of Technology that Could Damage the Company's Reputation and Business.
•The Company Faces Cybersecurity Risks, Including Denial of Service Attacks, Hacking and Identity Theft that Could Result in the Disclosure of Confidential Information or the Creation of Unauthorized Transactions, Which Could Adversely Affect the Company’s Business or Reputation and Create Significant Legal and Financial Exposure.
•Counterparties and Correspondents Expose the Company to Risks.
•The Company’s Business is Reliant on Outside Vendors.
•Development of New Products and Services May Impose Additional Costs on the Company and May Expose It to Increased Operational Risk.
•The Discontinuation of LIBOR and the Emergence of One or More Alternative Benchmark Indices to Replace LIBOR Could Adversely Impact the Company’s Business and Results of Operations.
Liquidity Risks
•The Company's Wholesale Funding Sources May Prove Insufficient to Replace Deposits at Maturity and Support Operations and Future Growth.
•The Company's Ability to Service Our Debt, Pay Dividends, and Otherwise Pay Obligations as They Come Due Is Substantially Dependent on Capital Distributions from the Bank, and These Distributions Are Subject to Regulatory Limits and Other Restrictions. The Company’s Stock Repurchase Program is also Dependent on These Distributions.
•The Loss Recorded in 2020 May Have an Adverse Effect on Future Dividend Payments to Common Shareholders.
•Secondary Mortgage Market Conditions Could Have a Material Impact on the Company’s Financial Condition and Results of Operations.
Interest Rates
•Market Interest Rate Conditions Could Adversely Affect Results of Operations and Financial Condition.
Securities Market Value Risks
•Declines in the Value of Certain Investment Securities Could Require Write-Downs, Which Would Reduce Earnings.
Regulatory Matters Risks
•Legislative and Regulatory Initiatives May Affect Business Activities and Increase Operating Costs.
•Provisions of the Company's Certificate of Incorporation, Bylaws, and Delaware Law, as Well as State and Federal Banking Regulations, Could Delay or Prevent a Takeover of Us by a Third Party.
Significant Accounting Estimates Risks
•If the Company Determines Intangible Assets to be Impaired, the Company’s Financial Condition and Results Would Be Negatively Affected.
•Various Factors May Cause Our Allowance for Credit Losses on Loans to Increase.
Trading of the Company's Common Stock
•The Trading History of the Company’s Common Stock is Characterized By Low Trading Volume. The Value of Shareholder Investments May be Subject to Sudden Decreases Due to the Volatility of the Price of the Common Stock.
Lending
Deterioration in the Housing Sector, Commercial Real Estate, and Related Markets May Adversely Affect Business and Financial Results.
Real estate lending is a major business activity for the Company. Real estate market conditions affect the value and marketability of real estate collateral, and they also affect the cash flows, liquidity, and net worth of many borrowers whose operations and finances depend on real estate market conditions. Adverse conditions in the Company's market areas could reduce growth rates, affect the ability of our customers to repay their loans, and generally affect the Company's financial condition and results of operations. Potential increases in interest rates could increase capitalization rates which could adversely affect commercial property appraisals and collateral value.
The Company’s Emphasis on Commercial Lending May Expose the Company to Increased Lending Risks, Which Could Hurt Profits.
The Company emphasizes commercial lending, which generally exposes the Company to a greater risk of nonpayment and loss because repayment of such loans often depends on the successful operations and income stream of the borrowers. Commercial loans are historically more susceptible to delinquency, default, and loss during economic downturns. Commercial lending involves larger loan sizes and larger relationship exposures, with greater potential impact on profits in the event of adverse loan performance. The majority of the Company’s commercial loans are secured by real estate and subject to the previously discussed real estate risk factors, as well as risks specific to individual properties and property types. Geographic expansion may result in risks not previously
experienced by the Company or which it is unfamiliar with monitoring or resolving. Recent expansion has been focused on the Greater Boston market, where the Bank may be financing projects with larger loan amounts and where the Bank has less experience than in its traditional market areas and where competition may result in different lending structures.
Commercial lending activities pose higher risk of fraud. In 2019, the Company wrote-off the $16 million balance of a secured commercial loan in circumstances involving alleged borrower fraud. This asset was a participating interest in a commercial loan managed by another financial institution. Such participating interests involve risks related to counterparty performance, as further described in a later risk factor. In the case of this loan, the Company has filed legal claims against the agent bank in pursuit of the recovery of some of the loss recorded by the Company. The outcome of such legal proceedings is subject to uncertainty, and the Company has not recognized any such potential recoveries in its financial records.
As a Participating Lender in the Small Business Administration Paycheck Protection Program, the Company is Subject to Additional Risks of Litigation from Its Customers or Other Parties Regarding Its Processing of Loans for the Paycheck Protection Program, Which Could Have a Significant Adverse Impact On Its Business, Financial Position, Results of Operations, and Prospects.
The COVID-19 pandemic and its impact on the economy have led to actions including the enactment of the Coronavirus Aid, Relief and Economic Security Act, which established the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (“SBA”). Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved lenders that participate in the program, subject to numerous limitations and eligibility criteria. The Company is participating as a lender in the PPP and may be exposed to the risk of litigation. Since the initiation of the PPP, several banks have been subject to litigation or threatened litigation regarding the process and procedures that such lenders used in processing applications for the PPP. If any such litigation is filed or threatened and is not resolved in a manner favorable to the Company, it may result in significant cost or adversely affect our reputation. Any financial liability, litigation costs, or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial position, results of operations and prospects.
The Company is Subject to a Variety of Risks in Connection With Any Sale of Loans it May Conduct.
In connection with the Company’s sale of one or more loans or loan portfolios, it may make certain representations and warranties to the purchaser concerning the loans sold and the procedures under which those loans have been originated and serviced. If any of these representations and warranties are invalid, the Company may be required to refund premiums, indemnify the purchaser for any related costs or losses, or it may be required to repurchase part or all of the affected loans, which may be impaired. The Company may also be required to repurchase loans as a result of borrower fraud or in the event of early payment default by the borrower on a loan it has sold. The Company’s ability to maintain seller/servicer relationships with government agencies and government backed entities may be jeopardized in the event of the emergence of one or more of the above risks. Demand for the Company’s loans in the secondary markets could also be affected by these risks, which could lead to a reduction in related business activities.
The Company may be required to reduce the value of any loans it marks as held for sale, which could adversely affect its results of operations. As a result of the Company’s strategic initiatives, the Company sold certain loans which were previously held for investment and conducted sales with buyers who it had not previously transacted with.
The Company is Exposed to Risk of Environmental Liability When It Takes Title to Property.
In the course of its business, the Company may foreclose on and take title to real estate. As a result, the Company could be subject to environmental liabilities with respect to these properties for property damage, personal injury, investigation and clean-up costs. The costs associated with investigation or remediation activities could be substantial. The Company may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
Operating
The COVID-19 Pandemic is Adversely Affecting, and Will Likely Continue to Adversely Affect, the Company’s Business, Financial Condition, Liquidity, and Results of Operations.
The COVID-19 pandemic has negatively impacted the U.S. and global economy; disrupted U.S. and global supply chains; lowered equity market valuations; created significant volatility and disruption in financial markets; contributed to a decrease in the rates and yields on U.S. Treasury securities; resulted in ratings downgrades, credit deterioration, and defaults in many industries; increased demands on capital and liquidity; and dramatically increased unemployment levels and decreased consumer confidence. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in our footprint. The pandemic has caused us, and could continue to cause us, increases in the Company's allowance for credit losses and subsequent increases in credit losses in our loan portfolios. Some of the risks the Company faces from the pandemic include, but are not limited to: the health and availability of our colleagues, the financial condition of our clients and the demand for our products and services, falling interest rates, recognition of credit losses and increases in the allowance for credit losses, especially if businesses remain closed or restricted, unemployment continues to rise and clients and customers draw on their lines of credit or seek additional loans to help finance their businesses, and a significant deterioration of business conditions in our markets. Furthermore, the pandemic has caused us to recognize impairment of our goodwill and there could be impairment of our financial assets. Sustained adverse effects may also increase our cost of capital, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, or result in downgrades in our credit rating. The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued effectiveness of our business continuity plan, the direct and indirect impact of the pandemic on our customers, colleagues, counterparties and service providers, and actions taken by governmental authorities and other third parties in response to the pandemic.
Governmental authorities have taken significant measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth. The success of these measures is unknown, and they may not be sufficient to mitigate the negative impact of the pandemic. Additionally, some measures, such as a deferment of loan payments and the significant reduction in interest rates to near zero, will have a negative impact on our business, financial condition, liquidity, and results of operations. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions.
The length of the pandemic and the effectiveness of the measures being put in place to address it are unknown. Until the effects of the pandemic subside, we expect continued impacts on liquidity, reduced revenues in our businesses, and increased customer defaults. Furthermore, the U.S. economy experienced a recession as a result of the pandemic, and it is probable that our business would be materially and adversely affected if current conditions do not improve sufficiently. To the extent the pandemic adversely affects our business, financial condition, liquidity, or results of operations, it may also have the effect of heightening many of the other risks described in this Annual Report on Form 10-K.
The Company is Subject to Security and Operational Risks Relating to the Use of Technology that Could Damage the Company's Reputation and Business.
Security breaches of confidential information in our technology platforms could expose the Company to possible liability and damage its reputation. Any compromise of data security could also deter customers from using the Company's services. The Company relies on industry standard internet security and authentication systems to effect secure transmission of data. These precautions may not protect the Company's security systems from compromises or breaches and could result in damage to its reputation and business. The Company utilizes third party core banking software, in addition to other outsourced data processing. If third party providers encounter difficulties or if the Company has difficulty in communicating and/or transmitting with such third parties, it could significantly affect its ability to adequately process and account for customer transactions, which could significantly affect its business operations. The Company interfaces with electronic payments systems which are subject to security and operational risks. The Company utilizes file encryption in designated internal systems and networks and is subject to certain state and federal regulations regarding how the Company manages data security. The Company's enterprise governance risk and compliance function includes a framework of controls, policies and technologies to
monitor and protect information from cyberattacks, mishandling, and loss, together with safeguards related to the confidentiality, integrity, and availability of information. Natural disasters and disaster recovery risks could affect its operating systems, which could affect its reputation. The Company's business continuity program addresses crisis management, business impact, and data and systems recovery. Potential problems with the management of technology security and operational risks may affect regulatory compliance, which could affect operating costs and expansion plans.
The Company Faces Cybersecurity Risks, Including Denial of Service Attacks, Hacking and Identity Theft that Could Result in the Disclosure of Confidential Information or the Creation of Unauthorized Transactions, Which Could Adversely Affect the Company’s Business or Reputation and Create Significant Legal and Financial Exposure.
Banking institutions face increased cybersecurity risks due to the number of employees that are working remotely in regions impacted by stay-at-home orders. Increased levels of remote access create additional opportunities for cybercriminals to exploit vulnerabilities, and employees may be more susceptible to phishing and social engineering attempts due to work responsibilities at home. In addition, technological resources may be strained due to the number of remote users. Banking institutions should evaluate their cybersecurity risks in light of these issues and update their existing risk factors for any material changes or developments
The Company’s computer systems and network infrastructure are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, steal financial assets, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions. As a growing regional bank, the Company may be subject to similar attacks in the future. Hacking and identity theft risks could cause serious reputational harm and possible financial loss to the Company. Cyber threats are rapidly evolving and the Company may not be able to anticipate or prevent all such attacks.
The Company may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss. Despite efforts to ensure the integrity of its systems, the Company will not be able to anticipate all security breaches of these types, and the Company may not be able to implement effective preventive measures against such security breaches. The techniques used by cyber criminals change frequently and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of the Company’s systems to disclose sensitive information in order to gain access to its data or that of its clients or to conduct unauthorized financial transactions.
These risks may increase in the future as the Company continues to increase its mobile-payment and other internet-based product offerings and expands its internal usage of web-based products and applications. A successful penetration or circumvention of system security could cause serious negative consequences to the Company, including significant disruption of operations, misappropriation of confidential information of the Company or that of its customers, or damage to computers or systems of the Company or those of its customers and counterparties. A security breach could result in violations of applicable privacy and other laws, financial loss to the Company or to its customers, loss of confidence in the Company’s security measures, significant litigation exposure, and harm to the Company’s reputation, all of which could have a material adverse effect on the Company.
Counterparties and Correspondents Expose the Company to Risks.
The Company's use of derivative financial instruments exposes us to financial and contractual risks with counterparties. The Company maintains correspondent bank relationships, manage certain loan participations, engage in securities and funding transactions, and undergo other activities with financial counterparties that are customary to its industry. The Company also utilizes services from major vendors of technology, telecommunications, and other essential operating services. There is financial, reputational, and operational risk in these relationships, which the Company seeks to manage through internal controls and procedures, but there are no assurances that the Company will not experience loss or interruption of its business as a result of unforeseen events
with these providers. The Company's mortgage banking operations have exposed us to counterparty transactions including the use of third parties to participate in the management of interest rate risk and mortgage sales and hedging. Financial, reputational, and operational risks are inherent in these counterparty and correspondent relationships. The Company could experience losses if there are failures in the controls or accounting, including those related to derivatives activities or if there are performance failures by any counterparties. The risk of loss is increased when interest rates change suddenly and if the intended hedging objectives are not achieved as a result of market or counterparty behaviors.
The Company’s Business is Reliant on Outside Vendors.
The Company’s business is highly dependent on the use of certain outside vendors for its day-to-day operations. The Company’s operations and reputation are exposed to risk that a vendor may not perform in accordance with established performance standards required in its agreements for any number of reasons including a change in their senior management, their financial condition, their product line or mix and how they support existing customers, or a simple change in their strategic focus. While the Company has comprehensive programs, policies and procedures in place to mitigate risk at all phases of vendor management from selection, to performance monitoring and renewals, the failure of a vendor to perform in accordance with contractual agreements could be disruptive to its business, which could have a material adverse effect on its financial condition, strategic objectives, and results of operations.
Development of New Products and Services May Impose Additional Costs on the Company and May Expose It to Increased Operational Risk.
The Company’s financial performance depends, in part, on its ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate its products or provide cost efficiencies, while avoiding increased related expenses. This dependency is exacerbated in the current “FinTech” environment, where financial institutions are investing significantly in evaluating new technologies, such as “Blockchain,” and developing potentially industry-changing new products, services and industry standards. The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, the Company’s ability to access technical and other information from its clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. The Company’s failure to manage these risks and uncertainties also exposes it to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to the Company’s clients. Products and services relying on internet and mobile technologies may expose the Company to fraud and cybersecurity risks. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on the Company’s business and reputation, as well as on its consolidated results of operations and financial condition.
The Discontinuation of LIBOR and the Emergence of One or More Alternative Benchmark Indices to Replace LIBOR Could Adversely Impact the Company’s Business and Results of Operations.
The Company’s floating-rate funding, certain hedging transactions and certain of the Company’s products, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to an index, currency, basket or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. LIBOR may be discontinued as early as December 31, 2021.
Regulators and various financial industry groups have sponsored or formed committees (e.g., the Federal Reserve-sponsored Alternative Reference Rates Committee) to, among other things, facilitate the identification of an alternative benchmark index to replace LIBOR, and publish consultations on recommended practices for transitioning away from LIBOR, including (i) the utilization of recommended fallback language for LIBOR-linked financial instruments, and (ii) development of alternative pricing methodologies for recommended alternative benchmarks such as the Secured Overnight Financing Rate (“SOFR”). SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-based
repurchase transactions. At this time, it is still not possible to predict whether these recommendations and proposals will be broadly accepted in the market, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.
The discontinuation of LIBOR could result in changes to the Company’s risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, the Company’s exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that the Company has issued or owns. A substantial portion of the Company’s on- and off-balance sheet financial instruments are indexed to LIBOR, including interest rate swap agreements and other contracts used for hedging and trading account purposes, loans to commercial customers and consumers (including mortgage loans and other loans), and long-term borrowings. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks.
Liquidity
The Company's Wholesale Funding Sources May Prove Insufficient to Replace Deposits at Maturity and Support Operations and Future Growth.
The Company must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of its liquidity management, the Company uses a number of funding sources in addition to deposit growth and cash flows from loans and investments. These sources include Federal Home Loan Bank advances, proceeds from the sale of loans, and liquidity resources at the holding company. The Company uses brokered deposits both to support ongoing growth and to provide enhanced deposit insurance to support large dollar commercial relationships. The Company's financial flexibility will be severely constrained if the Company is unable to maintain access to wholesale funding or if adequate financing is not available to accommodate future growth at acceptable costs. Turbulence in the capital and credit markets may adversely affect liquidity and financial condition and the willingness of certain counterparties and customers to do business with the Company.
The Company's Ability to Service Our Debt, Pay Dividends, and Otherwise Pay Obligations as They Come Due Is Substantially Dependent on Capital Distributions from the Bank, and These Distributions Are Subject to Regulatory Limits and Other Restrictions.
A substantial source of holding company income is the receipt of dividends from the Bank, from which the Company services debt, pay obligations, and pay shareholder dividends. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the applicable regulatory authorities could assert that payment of dividends or other types of payments are an unsafe or unsound practice. If the Bank is unable to pay dividends, the Company may not be able to service debt, pay debt obligations, or pay dividends on its common stock.
The Loss Recorded in 2020 May Have an Adverse Effect on Future Dividend Payments to Common Shareholders.
Due to the loss in the first half of 2020 and its impact on retained earnings, the Bank will require the approval from the Massachusetts Division of Banks in order to continue to be a source of dividend income to the Company. Over the long term, these dividends are a source of funds to the parent to support dividend payments to Company shareholders. Also due to the loss, the Company requires nonobjection from the Federal Reserve Bank of Boston for future shareholder dividend payments. Future payments of dividends will also depend on the Board’s holistic assessment of the Company’s operating, risk, and financial situations and current circumstances, as well as regulatory assessments of these factors.
Secondary Mortgage Market Conditions Could Have a Material Impact on the Company’s Financial Condition and Results of Operations.
In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate or worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce the Company’s loan production volumes and operating results.
Secondary markets are significantly affected by Fannie Mae, Freddie Mac and Ginnie Mae (collectively, the “Agencies”) for loan purchases that meet their conforming loan requirements. These agencies could limit purchases
of conforming loans due to capital constraints, a change in the criteria for conforming loans or other factors. Proposals to reform mortgage finance could affect the role of the Agencies and the market for conforming loans which comprise the majority of the Company’s mortgage lending and related originations income.
Interest Rates
Market Interest Rate Conditions Could Adversely Affect Results of Operations and Financial Condition.
Net interest income is the Company's largest source of income. Changes in interest rates can affect the level of net interest income and other elements of net income. The Company’s interest rate sensitivity is discussed in more detail in Item 7A of this report and is the primary market risk to its condition and operations. Changes in interest rates can also affect the demand for the Company’s products and services, and the supply conditions in the U.S. financial and capital markets. Changes in the level of interest rates may negatively affect the Company’s ability to originate real estate loans, the value of its assets and its ability to realize gains from the sale of assets, all of which ultimately affect earnings.
Securities Market Values
Declines in the Value of Certain Investment Securities Could Require Write-Downs, Which Would Reduce Earnings.
Declines in the value of investment securities due to market conditions and/or issuer impairment could result in losses that can reduce capital and earnings. The Company’s investment in equity securities and non-investment grade debt securities present heightened credit and price risks. Under new accounting standards, equity gains and losses are recorded to current period operating results. The Company has an investment in the stock of the Federal Home Loan Bank of Boston ("FHLBB") which could result in write-down in the event of impairment.
Regulatory Matters
Legislative and Regulatory Initiatives May Affect Business Activities and Increase Operating Costs.
New federal or state laws and regulations could affect lending, funding practices, capital, and liquidity standards. New laws, regulations, and other regulatory changes may also increase compliance costs and affect business and operations. Moreover, the FDIC sets the cost of FDIC insurance premiums, which can affect profitability.
Regulatory capital requirements and their impact on the Company may change. The Company may need to raise additional capital in the future to support operations and continued growth. The Company's ability to raise capital, if needed, will depend on its condition and performance, and on market conditions.
New laws, regulations, and other regulatory changes, along with negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which the Company does business, the markets for and value of its loans and investments, and ongoing operations, costs and profitability. For more information, see “Regulation and Supervision” in Item 1 of this report.
In 2017, the Company crossed the $10 billion asset threshold established by the Dodd-Frank Act. The Company and the Bank are now subject to closer supervision by their primary regulators and, as to compliance with consumer protection laws and regulations, the Consumer Financial Protection Bureau. The Company and the Bank are subject to capital stress testing expectations which require significant resources and infrastructure. If the Company’s compliance with the enhanced supervision and requirements is insufficient, there can be significant negative consequences for its operations, profitability, and ability to further pursue its strategic growth plan.
Provisions of the Company's Certificate of Incorporation, Bylaws, and Delaware Law, as Well as State and Federal Banking Regulations, Could Delay or Prevent a Takeover of Us by a Third Party.
Provisions in the Company's certificate of incorporation and bylaws, the corporate law of the State of Delaware, and state and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit stockholders, or otherwise adversely affect the price of its common stock. These provisions include: limitations on voting rights of beneficial owners of more than 10 percent of common stock; supermajority voting requirements for certain business combinations; the election of directors to terms of one year; and advance notice requirements for nominations for election to the Company's Board of Directors and for proposing matters that stockholders may act on at stockholder meetings. In addition, the Company is subject to Delaware laws, including one that prohibits engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. These provisions may
discourage potential takeover attempts, discourage bids for the Company's common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, its common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors other than the candidates nominated by the Board.
Significant Accounting Estimates
If the Company Determines Intangible Assets to be Impaired, the Company’s Financial Condition and Results Would Be Negatively Affected.
When the Company completes a business combination, a portion of the purchase price of the acquisition is allocated to identifiable intangible assets. If the Company determines that the fair value of the intangible assets is less than the carrying value, the Company will be required to write down these assets. Any write-down would have a negative effect on the financial statements.
Various Factors May Cause our Allowance for Credit Losses on Loans to Increase.
The Company has an allowance for current expected credit losses on loans maintained through a provision for credit losses charged to expense. This represents our estimate of current expected credit losses based on an evaluation of risks within the portfolio of loans. The level of the allowance represents management’s estimate of current expected credit losses over the contractual life of the existing loan portfolio. The determination of the appropriate level of the allowance inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and current trends and reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and material changes. Changes in economic and other conditions affecting borrowers, along with new information regarding existing loans other factors, may indicate the need for a future increase in the allowance.
Trading of the Company's Common Stock
The Trading History of the Company’s Common Stock is Characterized By Low Trading Volume. The Value of Shareholder Investments May be Subject to Sudden Decreases Due to the Volatility of the Price of the Common Stock.
The level of interest and trading in the Company’s stock depends on many factors beyond the Company's control. The market price of the Company's common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following: actual or anticipated fluctuations in operating results; changes in interest rates; changes in the legal or regulatory environment; press releases, announcements or publicity relating to the Company or its competitors or relating to trends in its industry; changes in expectations as to future financial performance, including financial estimates or recommendations by securities analysts and investors; future sales of its common stock; changes in economic conditions in the marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and other developments. These factors may adversely affect the trading price of the Company's common stock, regardless of actual operating performance, and could prevent stockholders from selling their common stock at a desirable price.
In the past, stockholders have brought securities class action litigation against a company following periods of volatility in the market price of their securities. The Company could be the target of similar litigation in the future, which could result in substantial costs and divert management’s attention and resources.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The Company's headquarters are located at 60 State Street in leased property in Boston, MA. The Bank's headquarters are located in owned and leased facilities located in Pittsfield, MA. The Company also owns or leases other facilities within its primary market areas: Greater Boston (including Worcester, MA); Berkshire County, Massachusetts; Pioneer Valley (Springfield area), Massachusetts; Southern Vermont; the Capital Region (Albany area), New York; Central New York; Central and Eastern Connecticut; Southern Rhode Island; and Princeton area, New Jersey. As of December 31, 2020, the Company had 130 full-service branches in Massachusetts, New York, Connecticut, Vermont, Central New Jersey, and Eastern Pennsylvania. Based on its branch optimization plan, the Bank is targeting to sell its eight New Jersey and Pennsylvania branches and to consolidate 16 branches in its New England/New York footprint, reducing total branches to a target of 106 offices by midyear 2021. The Company opened a commercial banking office in Providence, Rhode Island in the beginning of 2021.
The Company also has regional locations which are full-service commercial offices located in Boston, MA.; Pittsfield, MA.; Springfield, MA.; Albany, N.Y.; East Syracuse, N.Y.; Hartford, CT.; Willimantic, CT. Worcester, MA.; Burlington, MA.; and Lawrenceville, N.J. In addition, the Company has eight lending locations in Central/Eastern, Massachusetts. The Bank's wholly-owned subsidiary, Firestone Financial, LLC, is headquartered in the Boston metro area. Berkshire Insurance Group Inc. operates from 12 locations in Western Massachusetts and East Syracuse, N.Y. in both stand-alone premises as well as in rented space located in the Bank’s premises.
Berkshire continues to enhance its new retail branch design which eliminates traditional teller counters and provides an interactive customer service environment through “pod” stations which include automated cash handling technology. In many cases, this branch design also includes a multimedia community room which is offered for use by nonprofit community groups. The Company has begun introducing MyTeller automated remote teller stations at new offices and targeted existing offices.
The Bank has made its workplace more flexible as certain designated functions are approved for telecommuting arrangements. As a result of its merger and efficiency initiatives, the Bank has excess facilities space in various locations which is some cases is owned or subject to lease. The Bank is considering alternative uses or dispositions of excess office space, including uses in support of providing community benefit. The Bank opened a Reevx Labs community workspace in 2020 to increase its presence and service to underbanked urban communities.
Access to most Company properties was restricted during periods of 2020 due to the pandemic, and special cleaning and safety protocols were instituted. Drive-up teller facilities, automated teller machines, and interactive teller machines were relied on to maintain ongoing customer access, in addition to the Bank’s internet, telephone, and mobile banking channels. Most back-office staff used home environments and telecommunications capacities to accommodate the shift out of the office due to the pandemic.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2020, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. A summary of certain legal matters involving unsettled litigation or pertaining to pending transactions are as follows:
On February 4, 2020, the Bank filed a complaint in the New York State Supreme Court for the County of Albany against Pioneer Bank (“Pioneer”) seeking damages of approximately $16.0 million. The complaint alleges that Pioneer is liable to the Bank for a credit loss of approximately $16.0 million suffered by the Bank in the third quarter of 2019 as a result of Pioneer’s breach of loan participation agreements in which it served as the lead bank, as well as constructive fraud, fraudulent concealment and/or negligent misrepresentation. Pioneer has filed a motion to dismiss aspects of the Bank’s complaint, to which the Bank is in the process of responding. The Company wrote down the underlying credit loss in its entirety in the third quarter of 2019, but recognized a partial recovery of $1.7 million early in the second quarter of 2020. The Company has not accrued for any additional anticipated recovery at this time.
On September 11, 2020, the Company received notice of a demand letter served on the Company and the Bank by a former mortgagee of the Bank pursuant to the Massachusetts Consumer Protection Act, M.G.L Ch. 93A (“Chapter 93A). The demand letter alleges that a mortgage payoff statement tendered by the Bank to the mortgagee included a mortgage discharge preparation fee that is purportedly impermissible under Massachusetts law. The demand letter also claims that the Bank failed to provide a copy of the recorded mortgage discharge to the mortgagee in a timely manner. The demand letter further purports to state claims on behalf of a putative class of similarly situated Massachusetts mortgage customers of the Bank, who allegedly may have suffered similar violations of Massachusetts law. The demand letter seeks monetary damages for the original mortgagee claimant and the putative class, plus double or treble damages and reasonable attorneys’ fees, as may be allowed under Chapter 93A. The Company and the Bank have retained outside litigation counsel, who has responded to the demand letter and denied all claims on behalf of the Company and the Bank. No class action or other lawsuit has been served on the Company or the Bank as of the date of this filing.
On or about August 10, 2020, a former employee of the Bank’s subsidiary First Choice Loan Services Inc. (“FCLS”) filed a complaint in the Court of Common Pleas, Bucks County Pennsylvania against FCLS and two of its former senior corporate officers generally alleging wrongful termination as a result of purported whistleblower retaliation and other violations of New Jersey state employment law. The complaint also purports to name the Bank and the Company as additional defendants, even though neither entity ever employed, paid wages to or contracted with the plaintiff. On November 16, 2020, the plaintiff filed a First Amended Complaint reiterating the same claims against the same defendants. The Company's liability insurer has provided outside litigation counsel to defend the Company and the Bank in this matter, as well as FCLS and its former senior corporate officers. On December 7, 2020, defense counsel filed Preliminary Objections on behalf of the Company, the Bank, FCLS and FCLS’s former senior corporate officers denying the plaintiff’s claims and seeking dismissal of the case and an order that the plaintiff’s claims must proceed through arbitration in accordance with contractual obligations set forth in plaintiff’s previous employment agreement with FCLS.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common shares of the Company trade on the New York Stock Exchange under the symbol “BHLB”. The following table sets forth the quarterly high and low sales price information and dividends declared per share of common stock in 2020 and 2019.
2020 High Low Dividends
Declared
First quarter $ 33.04 $ 11.43 $ 0.24
Second quarter 18.79 9.15 0.24
Third quarter 11.26 8.55 0.12
Fourth quarter 19.24 9.80 0.12
First quarter $ 31.81 $ 26.02 $ 0.23
Second quarter 31.60 27.35 0.23
Third quarter 33.33 28.20 0.23
Fourth quarter 33.72 27.99 0.23
The Company had approximately 4,107 holders of record of common stock at February 25, 2021.
Dividends
The Company intends to pay regular cash dividends to common shareholders; however, there is no assurance as to future dividends because they are dependent on the Company’s future earnings, capital requirements, financial condition, and regulatory environment. Dividends from the Bank have been a source of cash used by the Company to pay its dividends, and these dividends from the Bank are dependent on the Bank’s future earnings, capital requirements, and financial condition. Dividends from the Bank are currently subject to approval by the Massachusetts Division of Banks. Further information about dividend restrictions is disclosed in Note 18 - Shareholders’ Equity and Earnings per Common Share of the Consolidated Financial Statements.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
The Company occasionally issues unregistered shares of common stock to vendors or as consideration in contracts for the purchase of assets, services, or operations. During 2020, there were no shares transferred. During 2019, the Company transferred 1,936 shares.
Purchases of Equity Securities by the Issuer and Affiliated Purchases
In the first quarter of 2020, stock repurchases were suspended as the pandemic emerged. The stock repurchase program in effect on December 31, 2019 expired on March 31, 2020 and was not replaced.
Period Total number of
shares purchased Average price
paid per share Total number of shares
purchased as part of
publicly announced
plans or programs Maximum number of
shares that may yet
be purchased under
the plans or programs
October 1-31, 2020 - $ - - -
November 1-30, 2020 - - - -
December 1-31, 2020 - - - -
Total - $ - - -
Common Stock Performance Graph
The performance graph compares the Company’s cumulative shareholder return on its common stock over the last five years to the cumulative return of the NYSE Composite Index and the KBW NASAQ Regional Banking Index. Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. The Company’s cumulative shareholder return over a five-year period is based on an initial investment of $100 on December 31, 2015.
Information used on the graph and table was obtained from a third party provider, a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.
Period Ending
Index 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20
Berkshire Hills Bancorp, Inc. 100.00 130.39 132.53 99.95 125.63 68.83
NYSE Composite Index 100.00 111.94 132.90 121.01 151.87 162.49
PHLX KBW Regional Banking Index 100.00 139.02 141.45 116.70 144.49 131.91
Source: S&P Global Market Intelligence

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The following summary data is based in part on the Consolidated Financial Statements and accompanying notes, and other schedules appearing elsewhere in this Form 10-K. Historical data is also based in part on, and should be read in conjunction with, prior filings with the SEC.
At or For the Years Ended December 31,
(In thousands, except per share data) 2020 2019 2018 2017 2016
Per Common Share Data:
Net (loss)/earnings, diluted - continuing operations $ (10.21) $ 2.05 $ 2.36 $ 1.24 $ 1.88
Net (loss)/earnings, diluted - discontinued operations (0.39) (0.08) (0.07) 0.15 -
Net (loss)/earnings, diluted $ (10.60) $ 1.97 $ 2.29 $ 1.39 $ 1.88
Total book value per common share 23.37 34.65 33.30 32.14 30.65
Dividends 0.72 0.92 0.88 0.84 0.80
Common stock price:
High 33.04 33.72 44.25 40.00 37.35
Low 8.55 26.02 25.77 32.85 24.71
Close 17.12 32.88 26.97 36.60 36.85
Performance Ratios: (1)
Return on assets (4.15) % 0.75 % 0.90 % 0.56 % 0.74 %
Return on equity (37.50) 5.75 6.84 4.45 6.44
Net interest margin, fully taxable equivalent (FTE) (2) 2.72 3.17 3.40 3.40 3.31
Fee income/Net interest and fee income 18.10 23.86 23.36 29.41 22.80
Growth Ratios:
Total commercial loans (4.58) % 9.19 % 6.17 % 37.79 % 18.39 %
Total loans (14.95) 5.08 8.96 26.71 14.41
Total deposits (1.16) 15.07 2.66 32.13 18.48
Total net revenues, (compared to prior year) (14.73) 4.53 11.59 41.05 11.18
Earnings per share, (compared to prior year) (638.07) (13.97) 64.75 (26.06) 8.62
Selected Financial Data:
Total assets $ 12,838,013 $ 13,215,970 $ 12,212,231 $ 11,570,751 $ 9,162,542
Total earning assets 12,089,939 11,916,007 11,140,307 10,509,163 8,340,287
Securities 2,223,417 1,769,878 1,918,604 1,898,564 1,628,246
Total loans 8,081,519 9,502,428 9,043,253 8,299,338 6,549,787
Allowance for credit losses (127,302) (63,575) (61,469) (51,834) (43,998)
Total intangible assets 34,819 599,377 551,743 557,583 422,551
Total deposits 10,215,808 10,335,977 8,982,381 8,749,530 6,622,092
Total borrowings 571,637 827,550 1,517,816 1,137,075 1,313,997
Total shareholders’ equity 1,187,773 1,758,564 1,552,918 1,496,264 1,093,298
At or For the Years Ended December 31,
2020 2019 2018 2017 2016
Selected Operating Data:
Total interest and dividend income $ 409,782 $ 509,513 $ 465,894 $ 355,076 $ 280,439
Total interest expense 93,000 144,255 109,694 64,113 48,172
Net interest income 316,782 365,258 356,200 290,963 232,267
Fee income 69,990 76,824 74,026 71,356 68,606
All other non-interest (loss)/income (3,683) 7,178 298 2,888 (2,755)
Total net revenue 383,089 449,260 430,524 365,207 298,118
Provision for credit losses 75,878 35,419 25,451 21,025 17,362
Total non-interest expense 840,239 289,857 266,893 252,978 203,302
(Loss)/income from continuing operations before income taxes (533,028) 123,984 138,180 91,204 77,454
Income tax (benefit)/expense from continuing operations (19,853) 22,463 28,961 42,088 18,784
Net (loss)/income from continuing operations (513,175) 101,521 109,219 49,116 58,670
(Loss)/income from discontinued operations before income taxes (26,855) (5,539) (4,767) 8,545 -
Income tax (benefit)/expense from discontinued operations (7,013) (1,468) (1,313) 2,414 -
Net (loss)/income from discontinued operations (19,842) (4,071) (3,454) 6,131 -
Net (loss)/income $ (533,017) $ 97,450 $ 105,765 $ 55,247 $ 58,670
Basic (loss)/earnings per common share:
Continuing operations $ (10.21) $ 2.06 $ 2.38 $ 1.24 $ 1.89
Discontinued operations (0.39) (0.08) (0.08) 0.16 -
Total basic (loss)/earnings per share $ (10.60) $ 1.98 $ 2.30 $ 1.40 $ 1.89
Diluted (loss)/earnings per common share:
Continuing operations $ (10.21) $ 2.05 $ 2.36 $ 1.24 $ 1.88
Discontinued operations (0.39) (0.08) (0.07) 0.15 -
Total diluted (loss)/earnings per share $ (10.60) $ 1.97 $ 2.29 $ 1.39 $ 1.88
Weighted average common shares outstanding - basic 50,270 49,263 46,024 39,456 30,988
Weighted average common shares outstanding - diluted 50,270 49,421 46,231 39,695 31,167
Dividends per preferred share $ 1.20 $ 1.84 $ 1.76 $ 0.42 $ -
Dividends per common share $ 0.72 $ 0.92 $ 0.88 $ 0.84 $ 0.80
Asset Quality and Condition Ratios: (3)
Net loans charged-off/average loans 0.41 % 0.35 % 0.18 % 0.19 % 0.21 %
Allowance for credit losses/total loans 1.58 0.67 0.68 0.62 0.67
Loans/deposits 79 92 101 95 99
Capital Ratios:
Tier 1 capital to average assets - Company 9.38 % 9.33 % 9.04 % 9.01 % 7.88 %
Total capital to risk-weighted assets - Company 16.10 13.73 12.99 12.43 11.87
Tier 1 capital to risk-weighted assets - Company 14.06 12.30 11.57 11.15 10.07
Shareholders’ equity/total assets 9.25 13.31 12.73 12.93 11.93
___________________________________
(1) All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(2) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.
(3) For periods prior to 2020, 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.
Average Balances, Interest and Average Yields/Cost
The following table presents an analysis of average rates and yields on a fully taxable equivalent basis for the years presented. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison.
Item 6 - Table 3 - Average Balance, Interest and Average Yields / Costs
2020 2019 2018
(Dollars in millions) Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate
Assets
Loans: (1)
Commercial real estate $ 3,958.6 $ 151.5 3.83 % $ 3,789.5 $ 188.6 4.98 % $ 3,283.6 $ 167.7 5.11 %
Commercial and industrial loans 2,049.4 87.7 4.28 1,983.9 111.2 5.60 1,867.9 107.6 5.76
Residential loans 2,324.3 87.8 3.78 2,719.8 100.7 3.70 2,353.1 86.3 3.67
Consumer loans 828.1 31.3 3.78 1,038.4 46.5 4.48 1,115.3 47.2 4.23
Total loans 9,160.4 358.3 3.91 9,531.6 447.0 4.69 8,619.9 408.8 4.74
Investment securities (2) 1,845.2 54.6 2.96 1,846.9 62.6 3.39 1,931.7 64.4 3.33
Short-term investments and loans held for sale (3) 767.2 4.8 0.64 335.3 13.4 4.01 146.3 5.4 3.72
Total interest-earning assets 11,772.8 417.7 3.55 11,713.8 523.0 4.47 10,697.9 478.6 4.47
Intangible assets 316.1 578.1 554.6
Other non-interest earning assets (3) 772.3 669.1 516.9
Total assets $ 12,861.2 $ 12,961.0 $ 11,769.4
Liabilities and shareholders' equity
Deposits:
NOW and other $ 1,216.6 $ 3.5 0.29 % $ 1,053.9 $ 6.5 0.62 % $ 824.7 $ 4.0 0.49 %
Money market 2,713.6 15.3 0.56 2,542.6 31.4 1.23 2,432.2 21.9 0.90
Savings 914.1 0.9 0.10 798.2 1.2 0.15 740.8 1.1 0.15
Certificates of deposit 3,102.9 52.6 1.69 3,754.2 76.1 2.03 3,075.5 51.3 1.67
Total interest-bearing deposits 7,947.2 72.3 0.91 8,148.9 115.2 1.41 7,073.2 78.3 1.11
Borrowings and notes (4) 841.6 20.7 2.46 1,115.5 32.4 2.91 1,409.0 33.4 2.37
Total interest-bearing liabilities 8,788.8 93.0 1.06 9,264.4 147.6 1.59 8,482.2 111.7 1.32
Non-interest-bearing demand deposits 2,324.6 1,745.2 1,622.4
Other non-interest-bearing liabilities (3) 326.4 257.1 119.3
Total liabilities 11,439.8 11,266.7 10,223.9
Total shareholders' equity 1,421.4 1,694.3 1,545.5
Total liabilities and equity $ 12,861.2 $ 12,961.0 $ 11,769.4
Net interest income $ 324.7 $ 375.4 $ 366.9
2020 2019 2018
(Dollars in millions) Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate
Net interest spread 2.49 % 2.88 % 3.16 %
Net interest margin (5) 2.72 3.17 3.40
Cost of funds 0.84 1.34 1.11
Cost of deposits 0.71 1.16 0.90
Interest-earning assets/interest-bearing liabilities 133.95 126.44 126.12
Supplementary data
Total non-maturity deposits $ 7,168.9 $ 6,139.9 $ 5,620.1
Total deposits 10,271.8 9,894.1 8,695.6
Fully taxable equivalent adjustment 6.4 7.5 7.4
____________________________________
Notes:
(1) The average balances of loans include nonaccrual loans, and deferred fees and costs.
(2) The average balance of investment securities is based on amortized cost.
(3) Includes discontinued operations.
(4) The average balances of borrowings and notes include the capital lease obligation presented under other liabilities on the consolidated balance sheet.
(5) Purchase accounting accretion totaled $9.9 million, $14.5 million, and $23.1 million for the years-ended December 31, 2020, 2019, and 2018, respectively. The effect of purchase accounting accretion on the net interest margin was an increase in all years, which is shown sequentially as follows beginning with the most recent year and ending with the earliest year: 0.09%, 0.12%, and 0.22%.
Rate/Volume Analysis
The following table presents the effects of rate and volume changes on the fully taxable equivalent net interest income. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate), and (3) changes in volume/rate (change in rate multiplied by change in volume) have been allocated proportionately based on the absolute value of the change due to the rate and the change due to volume.
Item 6 - Table 4 - Rate Volume Analysis
2020 Compared with 2019 2019 Compared with 2018
(Decrease) Increase Due to (Decrease) Increase Due to
(In thousands) Rate Volume Net Rate Volume Net
Interest income:
Commercial real estate $ (45,193) $ 8,096 $ (37,097) $ (4,367) $ 25,271 $ 20,904
Commercial and industrial loans (27,008) 3,561 (23,447) (2,978) 6,558 3,580
Residential loans 2,017 (14,907) (12,890) 901 13,571 14,472
Consumer loans (6,575) (8,592) (15,167) 2,630 (3,357) (727)
Total loans (76,759) (11,842) (88,601) (3,814) 42,043 38,229
Investment securities (7,945) (57) (8,002) 1,098 (2,863) (1,765)
Short-term investments and loans held for sale (1)
(16,924) 8,297 (8,627) 455 7,544 7,999
Total interest income $ (101,628) $ (3,602) $ (105,230) $ (2,261) $ 46,724 $ 44,463
Interest expense:
NOW accounts $ (3,835) $ 882 $ (2,953) $ 1,217 $ 1,265 $ 2,482
Money market accounts (18,043) 1,985 (16,058) 8,411 1,036 9,447
Savings accounts (409) 156 (253) 5 86 91
Certificates of deposit (11,486) (12,093) (23,579) 12,250 12,562 24,812
Total deposits (33,773) (9,070) (42,843) 21,883 14,949 36,832
Borrowings (4,553) (7,206) (11,759) 6,695 (7,722) (1,027)
Total interest expense $ (38,326) $ (16,276) $ (54,602) $ 28,578 $ 7,227 $ 35,805
Change in net interest income $ (63,302) $ 12,674 $ (50,628) $ (30,839) $ 39,497 $ 8,658
(1) Includes discontinued operations.
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 operating revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations. These items primarily include securities gains/losses, merger costs, restructuring costs, goodwill impairment, and discontinued operations. Discontinued operations are the Company’s national mortgage banking operations for which the Company completed the wind down of operations in 2020. Merger costs consist primarily of severance/benefit related expenses, contract termination costs, systems conversion costs, variable compensation expenses, and professional fees. There were no merger costs in 2020 and merger costs in 2019 are primarily related to the acquisition of SI Financial Group, Inc. in May 2019. Restructuring costs generally consist of costs and losses associated with the disposition of assets and liabilities and lease terminations, including costs related to branch sales. Restructuring costs also include severance and consulting expenses related to the Company’s strategic review. They also include costs related to the consolidation of branches. Restructuring expense and other for 2020 primarily related to executive separation expense as a result of the CEO transition. Restructuring expense and other for 2019 primarily related to branch consolidations. Restructuring expense and other for 2018 primarily related to a core systems contract restructuring charge and executive separation expense as a result of the CEO transition.
The Company calculates certain profitability measures based on its adjusted revenue, expenses, and earnings. 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.
Due to the anticipated earnings volatility resulting from loan loss provisions reflecting changes in estimates of uncertain future economic conditions under the new CECL accounting standard, many users of bank financial statements are focusing on Pre-Provision Net Revenue (“PPNR”). This is a measure of revenue less expenses, and is calculated before the loan loss provision and income tax expense. This measure gives clearer visibility of the operations of the company during the periods presented in the income statements, without the impact of period-end estimates of future uncertain events. This measure also enhances comparisons of operations across different banks, which might have significantly different period-end estimates of uncertain future economic conditions that affect the loan loss provision. Consistent with its previous practices measuring results on an adjusted basis before the impacts of acquisitions, divestitures, and other designated items, the Company has introduced the measure of Adjusted Pre-Provision Net Revenue (“Adjusted PPNR”) which measures PPNR excluding adjustments for items not viewed as related to ongoing operations. This measure is now integral to the Company’s analysis of its operations, and is not viewed as a substitute for GAAP measures of net income. Analysts also use this measure in assessing the Company’s operations and in making comparisons across banks. The Company and analysts also measure Adjusted PPNR/Assets in order to utilize the PPNR measure in assessing its comparative operating profitability. This measure primarily relies on the measures of adjusted revenue and adjusted expense already used in the Company’s calculation of its efficiency ratio.
The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.
The following table summarizes the reconciliation of non-GAAP items recorded for the time periods indicated:
At or For the Years Ended
(Dollars in thousands) December 31, 2020 December 31, 2019 December 31, 2018
GAAP Net (loss)/income $ (533,017) $ 97,450 $ 105,765
Non-GAAP measures
Adj: Loss/(gain) on securities, net 7,520 (4,389) 3,719
Adj: Goodwill impairment 553,762 - -
Adj: Net gains on sale of business operations (1,240) - (460)
Adj: Acquisition, restructuring, conversion, and other related expenses (1) 5,839 28,046 10,752
Adj: Legal settlements - - 3,000
Adj: Systems vendor restructuring costs - - 8,379
Adj: Loss from discontinued operations before income taxes 26,855 5,539 4,767
Adj: Income taxes (29,342) (7,799) (7,102)
Net non-operating charges 563,394 21,397 23,055
Total adjusted net income (non-GAAP) $ 30,377 $ 118,847 $ 128,820
GAAP Total revenue from continuing operations $ 383,089 $ 449,260 $ 430,524
Adj: Loss/(gain) on securities, net 7,520 (4,389) 3,719
Adj: Net gains on sale of business operations (1,240) - (460)
Total adjusted operating revenue (non-GAAP) $ 389,369 $ 444,871 $ 433,783
GAAP Total non-interest expense from continuing operations $ 840,239 $ 289,857 $ 266,893
Less: Total non-operating expense (see above) (5,839) (28,046) (10,752)
Less: Goodwill impairment (553,762) - -
Less: Legal settlements - - (3,000)
Less: Systems vendor restructuring costs - - (8,379)
Adjusted operating non-interest expense (non-GAAP) $ 280,638 $ 261,811 $ 244,762
(in millions, except per share data)
Total average assets $ 12,861 $ 12,961 $ 11,769
Total average shareholders' equity 1,421 1,694 1,546
Total average tangible shareholders equity 1,105 1,116 991
Total average tangible common shareholders equity 1,088 1,076 950
Total tangible shareholders’ equity, period-end 1,153 1,159 1,001
Total tangible common shareholders’ equity, period-end 1,153 1,119 961
Total tangible assets, period-end 12,803 12,613 11,660
Total common shares outstanding, period-end (thousands) 50,833 49,585 45,417
Average diluted shares outstanding (thousands)
50,308 49,421 46,231
(Loss)/earnings per share, diluted $ (10.60) $ 1.97 $ 2.29
Plus: Net adjustments per share, diluted 11.20 0.43 0.50
Adjusted earnings per share, diluted 0.60 2.40 2.79
Book value per common share, period-end 23.37 34.65 33.30
Tangible book value per common share, period-end 22.68 22.56 21.15
Total shareholders' equity/total assets 9.25 13.31 12.72
Total tangible shareholders' equity/total tangible assets 9.01 9.19 8.59
At or For the Years Ended
(Dollars in thousands) December 31, 2020 December 31, 2019 December 31, 2018
Performance Ratios
GAAP return on assets (4.15) % 0.75 % 0.90 %
Adjusted return on assets 0.24 0.93 1.12
GAAP return on equity (37.50) 5.75 6.84
Adjusted return on equity 2.14 7.01 8.33
Adjusted return on tangible common equity 3.18 11.35 13.48
Efficiency ratio (2)
68.53 55.63 53.64
Supplementary Data (in thousands)
Tax benefit on tax-credit investments $ 4,699 $ 7,950 $ 5,876
Non-interest income charge on tax-credit investments (3,645) (6,455) (4,822)
Net income on tax-credit investments 1,054 1,495 1,054
Intangible amortization 6,181 5,783 4,934
Fully taxable equivalent income adjustment 6,402 7,451 7,423
____________________________________
(1)Acquisition, restructuring, conversion, and other related expenses included no merger and acquisition expenses for the year-ended December 31, 2020. For the year-ended 2019, these expenses included $18.7 million in merger and acquisition expenses and $9.3 million of restructuring expenses. For the year-ended 2018, these expenses included $8.9 million in merger and acquisition expenses and $1.8 million of restructuring, conversion, and other expenses.
(2)Efficiency ratio is computed by dividing total core tangible non-interest expense by the sum of total net interest income on a fully taxable equivalent basis and total core non-interest income adjusted to include tax credit benefit of tax shelter investments. The Company uses this non-GAAP measure to provide important information regarding its operational efficiency.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion is intended to assist readers in understanding the financial condition and results of operations Berkshire Hills Bancorp, Inc. (“Berkshire” or the “Company"), the changes in key items in the Company’s Consolidated Financial Statements (“financial statements”) from year to year and the primary reasons for those changes.
The objectives of this section are:
•To provide a narrative explanation of the Company’s financial statements that enables investors to see the company through the eyes of management;
•To enhance the financial disclosure and provide the context within which financial information should be analyzed; and
•To provide information about the quality of, and potential future variability of, the Company’s earnings and cash flow.
This discussion includes the following sections:
•Summary of recent events and strategic initiatives
•Comparison of Financial Condition at December 31, 2020 and 2019
•Comparison of Operating Results for the Years Ended December 31, 2020 and 2019
•Comparison of Operating Results for the Years Ended December 31, 2019 and 2018
•Liquidity and Cash Flows
•Capital Resources
•Off-Balance Sheet Arrangements
•Discussion of accounting policies and pronouncements
The following discussion and analysis should be read in conjunction with the Company’s financial statements and the notes thereto appearing in Item 8 of this document. In the following discussion, income statement comparisons are against 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 2021 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. Tax-equivalent adjustments are the result of increasing income from tax-advantaged loans and securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 26% marginal rate (including state income taxes net of federal benefit). In the discussion, unless otherwise specified, references to earnings per share and "EPS" refer to diluted earnings per common share, including the dilutive impact of the convertible preferred shares.
Berkshire is a Delaware corporation headquartered in Boston and the holding company for Berkshire Bank (“the Bank”) and Berkshire Insurance Group, Inc. Established in 1846, the Bank operates as a commercial bank under a Massachusetts trust company charter.
BE FIRST CULTURE & CORPORATE RESPONSIBILITY
Berkshire Bank is a purpose and values-driven community bank. We believe that everyone, from every neighborhood, should be able to bank with dignity. We're committed to providing an ecosystem of socially responsible financial solutions to meet our customers’ needs, engaging with communities to ensure access and upward economic mobility, addressing racial equity and fostering a workplace culture where everyone belongs. Our Be FIRST values of Belonging, Focusing, Inclusion, Respect, Service, and Teamwork guide us as we evolve and navigate our environment to create long-term sustainable value for our stakeholders.
The spirit and work ethic that began 175 years ago when Berkshire Bank first opened its doors to meet the working class and entrepreneurs’ financial needs is still at the core of our company today. As the COVID-19 pandemic ravaged communities and shuttered businesses, we answered the call to assist our neighbors. We ensured our employees, customers, and communities' health, safety, and economic resiliency was the priority. We created the You FIRST employee assistance fund to help employees impacted by unexpected financial hardships. We assisted small businesses and consumers with loan forbearances and government assistance programs and we launched a
fund to assist black and brown owned businesses most impacted by the pandemic. We also faced the stark reality that systematic racism continues to exist throughout the country. While many companies that had been on the sidelines stepped-up, Berkshire leaned in and responded with continued focus, commitment, and intentionality.
We continue to build on our Be FIRST Commitment, our roadmap for purpose-driven, socially responsible community banking. Our strong foundation of governance systems, including our Corporate Responsibility & Culture Committee of our Board of Directors, Diversity & Inclusion Employee Committee, Responsible & Sustainable Business Policy, and Social & Environmental Responsibility Risk Management practices collectively integrate social, environmental, cultural, and reputational considerations through all aspects of the company. Berkshire Bank continues to offer services to the underbanked through the Reevx Labs™ platform at reevxlabs.com.
We engage directly with our stakeholders and populate several communications channels with strategic content including our Corporate Responsibility website www.berkshirebank.com/csr, annual report, and proxy statement to highlight our commitment to disclosure, transparency and socially responsible performance. Our annual Corporate Responsibility Report, which is aligned with Sustainability Accounting Standards Board (“SASB”) commercial bank disclosure topics, details the company's environmental, social, governance, and cultural programs as well as our progress on The Be FIRST Commitment. We are also incredibly proud to be recognized for our leadership and performance, including local, regional, national, and international awards. Among these honors The North American Inspiring Workplaces Award, Communitas Award for Leadership in Corporate Social Responsibility, Listing in the Bloomberg Gender-Equality Index and achieving a perfect score in the Human Rights Campaign Corporate Equality Index.
SUMMARY
The emergence of the COVID-19 global pandemic dominated the Company’s activities and results in 2020. Berkshire adjusted its business model to manage pandemic related impacts to its operations, its customers, and its operating profitability. The Company’s markets became a national and global disease hotspot early in the pandemic, in the second quarter. Government authorities shut down much societal and economic activity in March. Conditions improved in the third quarter, but another wave of disease incidence slowed further improvement, and economic conditions remained stressed through year-end. During the year, unprecedented federal fiscal and monetary stimulus was deployed nationally. The Federal Reserve Board of Governors lowered short-term interest rates by approximately 1.50% in the first quarter, and further actions by the Federal Reserve resulted in rates coming down across all maturities, resulting in a parallel downward rate shock of approximately 1.50%. Following an unprecedented economic contraction in the second quarter, the economy had partially recovered by the end of 2020.
The rollout of vaccinations and further federal and monetary support were expected to gradually further normalize conditions in 2021.
The Bank initially closed its branches except for drive-through tellers, and most back-office staff moved to work from home status. The Bank was able to resume most branch activities in the third quarter, while back-office staff continue to telecommute. Business activities shifted during this period to provide expedited support for supporting stimulus programs and servicing the needs of customers and communities arising from the emergency conditions. Numerous programs were developed to provide support and assistance to the Bank’s staff and communities, including granting of loan payment modifications pursuant to government guidelines and the origination of commercial Paycheck Protection Program (“PPP”) SBA guaranteed loans to support employment during the shutdown. Branch access restrictions were reintroduced in the fourth quarter and some government restrictions were resumed due to worsening public health.
Changes in the Company’s financial condition and results were primarily due to the pandemic and the related changes in financial market conditions and economic expectations. Due to these downturns, the Company recorded large non-cash charges for goodwill impairment and the current expected credit loss provision during the year. These charges resulted in losses for the first and second quarters, but did not materially affect most regulatory capital measures, cash flows, or liquidity. Among the most significant financial impacts from the pandemic were the following:
•Goodwill impairment: In the second quarter, the Company recorded a $554 million noncash expense representing the full impairment and write-off of the carrying value of goodwill due to the impact of the COVID-19 disease on economic and financial market conditions resulting in a lower fair value of the Company’s equity.
•Credit Loss Provision: A $65 million noncash credit loss provision expense was recorded in the first half of 2020 primarily representing projected pandemic related current expected credit losses in future periods under the new Current Expected Credit Losses (“CECL”) accounting standard. The full year provision was $76 million.
•Reduced Revenue: Net revenue from continuing operations decreased year-over-year by 15% due primarily to compression of the net interest margin resulting from the near zero interest rate policy implemented by the Federal Reserve Board of Governors, and reflecting the Company’s asset sensitive interest rate risk profile. The margin change also reflected a change in asset mix from loans and into lower yielding short-term investments and investment securities.
•Loan Modifications: Short-term loan payment deferrals were granted in accordance with terms established by bank regulators to lessen borrower hardship. Initial payment deferrals totaled $1.6 billion. The balance of active and in-process deferrals declined to $350 million at year-end.
•Balance Sheet Changes: A pandemic related deposit surge was primarily invested in short-term investment reserves held at the Federal Reserve Bank of Boston. The Company originated $708 million in PPP loans to support employment, and these loans partially offset reductions in other loan categories due to reduced economic activity, liquidity from government stimulus, and accelerated prepayments. Demand deposits increased as borrowers stored liquidity resulting from government stimulus and reduced economic activity. Total equity decreased but most regulatory capital ratios improved, and measures of liquidity improved due to reduced usage of wholesale funding and due to higher short-term investment balances.
Reflecting the above activity, the Company recorded a loss of $569 million, or $11.33 per share for the first six months of 2020. This loss was a result of noncash charges for goodwill impairment and the provision for current expected credit losses on loans. Results returned to profitability in the second half of the year, with second half earnings totaling $36 million, or $0.73 per share. Full year results were a loss of $533 million, or $10.60 per share.
In conformance with the industry guidelines issued by the Federal Reserve at the outset of the pandemic, the Company ceased repurchases of common stock in the first quarter, and let its outstanding repurchase authorization expire at the end of the first quarter. Also, the Company reduced its shareholder dividend by 50% in the third quarter of 2020. This reduction was made to better align the dividend payout and dividend yield with the reduced level of operating earnings in the current environment.
In October 2020, the Company announced the launch of best-in-class digital account opening technology. This platform provides benefits to the customer experience, to revenue generation, and to the Company’s operating efficiency. The company also enhanced its customer experience by upgrading its call center and rolling out its e-signature platform. These enhanced capabilities are significantly more valuable in today’s environment as a result of the customer needs and accelerated digital transformation resulting from the pandemic.
Also in October 2020, the Company announced a strategic goal to pursue expense management initiatives, due in part to the long-term revenue impacts of the near zero interest rate environment. Expense management also recognizes long-term changes in customer behaviors and the Bank’s operating model based on the accelerated transition to the digital economy resulting from the pandemic. In December 2020, as part of these initiatives, the Company announced a branch optimization plan. The Company announced that it had entered into an agreement for the sale of its 8 Mid-Atlantic branches, including the transfer of more than $600 million in deposits and $300 million in loans. Additionally, the Company announced a plan to consolidate 16 branches in its New England/New York footprint. Both of these initiatives are targeted for completion in the first half of 2021. The Company expects to recognize a net gain on the sale of the Mid-Atlantic branches, as well as charges in conjunction with the branch consolidations.
In addition to reshaping the branch office network, the Company is pursuing possibilities for identifying and releasing surplus corporate real estate, and making other operational adjustments to its business model. The Company also plans to formalize cost save opportunities arising from work from home as well as changes in procurement processes in the current environment. The Company’s goal is to streamline its business model in its core markets and leverage organic growth around that foundation. Two critical enablers are the technology that the Company has invested in and its personalized banking services program, MyBanker. Berkshire has been successfully deploying these mobile personal bankers for a number of years to bring service to customers where and when they need it and they remain integral to the distinctive customer experience that the Bank is developing as a 21st century community bank.
On August 10, 2020, the Company announced that, pursuant to a separation agreement, Richard M. Marotta had stepped down from his position as President and Chief Executive Officer of the Company and CEO of the Bank, as well as from his role as a Director to pursue new opportunities. Working within its leadership succession planning process, the Board appointed Sean A. Gray, to serve as Acting President and CEO for the Company. The Board initiated a CEO search process to consider a national search for candidates inside and outside of Berkshire. The Board established a working committee to oversee the search process and retained the firm of Spencer Stuart as its executive search consulting firm. On January 25, 2021 the Board announced the appointment of Nitin J. Mhatre as President and Chief Executive Officer of the Company and the Bank effective January 29, 2021. With the appointment of Mr. Mhatre, Mr. Gray resumed his ongoing duties as President and Chief Operating Officer of Berkshire Bank and Senior Executive Vice President of Berkshire Hills Bancorp, Inc.
Mr. Mhatre is a senior banking executive with 25 years of community and global banking experience. Most recently, as Executive Vice President, Community Banking at Webster Bank, Mr. Mhatre was a member of Webster Bank's executive team and led its consumer and business banking businesses. In this role, he was responsible for profitable growth of the Community Banking segment at the $31 billion bank and led a diverse team of more than 1,500 employees. Previously, he spent more than 13 years at Citi Group in various leadership roles across consumer-related businesses globally. Mr. Mhatre served on the Board of the Consumer Bankers Association headquartered in Washington D.C. since 2014 and was Chairman of the Board from 2019 to 2020. He also serves on the Board of Junior Achievement of Southwest New England headquartered in Hartford, CT.
The Board and management team are fully aligned on the Company's long-term strategic direction. That strategy focuses on improving core operating performance with a relationship banking model that serves Berkshire’s communities and clients in its footprint. Berkshire’s brand name and franchise in its markets, its differentiated customer service and culture, and its purpose-based values are all targeted to support meaningful improvement in shareholder returns. The Company has five current key initiatives:
•Optimizing Berkshire’s branch footprint through the announced branch sales and consolidations
•Rationalizing the balance sheet to maintain strong liquidity and capital metrics and support improved profitability and shareholder return
•Further implementing digitization and automation to improve customer engagement and operational efficiencies
•Focusing on core products and services to enhance customer relationships and the customer experience while exiting non-strategic products & business lines
•Continuing proactive management of asset quality through the pandemic cycle
Berkshire continues to pursue its ongoing transformation into an innovative 21st century community bank, which has gained heightened relevance to stakeholders and the Company’s long-term opportunity as a result of this year’s events. Guided by its Be FIRST principles, the Company continues to foster a more inclusive, innovative and supportive culture, which is positioning Berkshire to deliver a differentiated and compelling community banking experience to everyone in its communities, including those who have been traditionally underbanked. Following its principles, the Company’s COVID-19 response included:
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2020 AND DECEMBER 31, 2019
Summary: The major balance sheet changes were the result of the COVID-19 pandemic and its impacts on the economy and federal fiscal and monetary policy. Total loans decreased and demand deposits increased due to the slowdown in economic activity, resulting in less credit demand and the accumulation of customer liquidity - both of which benefited from federal stimulus. The funds from loan payoffs were primarily invested into short and long-term investments and demand deposit growth was primarily used to reduce wholesale funding sources and for short-term investments. The Company’s operating focus was on meeting customer needs and further strengthening its capital and liquidity in the face of unknown pandemic impacts on its markets.
Anticipated higher credit losses from the economic impacts of the pandemic resulted in higher loan loss provisions in the first half of the year, although traditional metrics of loan performance did not begin to significantly worsen until the fourth quarter. Loan performance was aided by loan modifications and SBA guaranteed PPP loans which were implemented pursuant to federal bank supervisory guidelines in an unprecedented response to supporting the economy and financial system.
The long-term impacts of the pandemic drove bank stock prices sharply lower, and in the second quarter the Company wrote-off the full $554 million balance of goodwill which had been accumulated over the past decade principally from bank acquisitions when stock prices were higher. This was the principal reason for the $378 million, or 3%, decrease in total assets to $12.8 billion in 2020. Excluding this write-off, total assets increased by $176 million, or 1%, due to demand deposit growth invested into short-term investments. Largely due to this impairment charge, shareholders’ equity decreased by $571 million, or 32%, to $1.19 billion. The goodwill impairment charge was non-cash and had no material impact on the Company’s tangible equity or regulatory capital metrics, which improved continuously through the year due to the reduction in risk weighted assets resulting from the proportional shift from loans to investments. Book value per common share measured $23.37 at period-end and the non-GAAP measure of tangible book value per share measured $22.68 per share.
The Company's goal is to provide a strong foundation for supporting growth in its customer accounts and revenue drivers across its major markets and business lines based on improvement in forecasted public health and market conditions. The majority of the $633 million of year-end PPP loans is expected to be forgiven by the SBA in 2021, contributing to a potential decrease in total loans during the year 2021. The sale of the Mid-Atlantic branches is also expected to result in a decrease in interest bearing assets and liabilities.
Investments: Due to loan runoff and deposit growth, total short-term investments increased by $992 million in 2020, and total investment securities increased by $454 million. Most short-term investments were held at the Federal Reserve Bank of Boston. The increase in investment securities was concentrated in Available for Sale ("AFS") agency mortgage-backed securities and agency commercial mortgage-backed securities. There have been accelerated prepayments of mortgage related securities as a result of the low interest rate environment. The Company purchased $894 million in AFS securities in 2020, accepting lower yields in order to maintain and increase the size of the portfolio. In the current environment of low interest rates, a generally flat yield curve, and low credit spreads, the Company has been judicious about redeploying short-term investments into longer term structures while also maintaining balance sheet flexibility due to the general uncertainties of the current environment. The fourth quarter securities portfolio yield decreased year-over-year by 0.62% to 2.69%, reflecting ongoing rolldown of asset yields due to low rates.
The Company managed down the size of the corporate bond portfolio and has carefully monitored its exposure to credit risk in corporate and municipal obligations during the pandemic induced recession. At period-end, there were no delinquent or non-accruing debt securities. The Company liquidated most of its portfolio of corporate equity securities during the fourth quarter. These securities were a component of its capital gains management strategy related to tax credit investments; this strategy was no longer operative in 2020. The remaining equity securities at year-end were primarily bond mutual funds targeted toward Community Reinvestment Act eligible investments. The Company recorded $8 million in net securities losses during 2020 primarily due to the decline in the value of bank stocks which were a significant component of its equities portfolio. The portfolio of investment securities had
an unrealized gain of $68 million, or 3.2%, at period-end due to the gain in debt security fair values resulting from the decrease in interest rates.
Loans: Total loans decreased by $1.42 billion, or 15%, to $8.08 billion in 2020. During the year, the Company originated $708 million in commercial PPP loans, of which $633 million remained outstanding at year-end. The Company also reclassified $301 million in loans to assets held for sale, due to the pending agreement for the sale of the Mid-Atlantic branches. Excluding these loans and the PPP loans, total loans decreased by $1.80 billion, or 18%. This included a 5% reduction in commercial real estate, a 39% reduction C&I loans, a 30% reduction in residential mortgages, and a 26% reduction in consumer balances. In the commercial markets, borrower demand decreased significantly due to the pandemic and the Company adjusted its business solicitation during the height of the economic shutdowns, while focusing its resources on the operational demands of supporting the PPP program and managing requests for loan modifications pursuant to government guidelines in support of its markets. Slower business activity led many borrowers to reduce C&I borrowings and to instead build liquidity. The Company curtailed business solicitation in certain COVID-19 sensitive industries, and trimmed its exposure to commercial wholesale and participation balances, while also allowing non-relationship exposures to runoff. The Company continued to see activity in its commercial lending channels and it remained disciplined in its selection, pricing, and underwriting processes. Based on market activity and forecast market conditions, the Company is targeting to grow its middle market commercial business, with a focus on asset based lending and small business banking, and selected opportunities in commercial real estate. The Company expects overall commercial borrowing demand to improve as pandemic conditions subside and forecast economic growth emerges.
The decrease in residential mortgages reflected heightened loan prepayments and refinancings due to the drop in interest rates. Additionally, the Company focused on completing the disposition of discontinued national mortgage banking operations, and also the supply of secondary market mortgages from area correspondent banks decreased as all banks coped with higher runoff. Home equity loans outstanding decreased due to reduced borrowing demand and the portfolio of indirect auto loans continued to runoff in accordance with the Company’s strategy. The fourth quarter yield on the loan portfolio decreased year-over-year by 0.90% to 3.62% in 2020 from 4.52% in 2019. This decrease reflected pandemic related impacts, including the decrease in market interest rates, higher prepayments of higher yielding loans, and the effect of the lower yielding PPP loans. Loans repricing within one year totaled $3.8 billion, or 46% of total loans at year-end 2020.
The majority of PPP loans were originated in the second quarter to existing borrowers to provide payroll support during the pandemic shutdown. These loans bear interest at 1% and most were primarily written with two year maturities. They are guaranteed by the SBA and most are expected to be repaid by the SBA as loans are forgiven. The PPP fees received from the SBA approximated 3% of the loan amounts. At year-end, the Company had a balance of $13 million in net deferred PPP loan fees paid by the SBA which is being amortized into net interest income based on the approximate two year expected lives of the loans. The unamortized deferred balance is recognized in net interest income at the time each loan is forgiven. The Company originated $708 million of PPP loans in 2020, of which $633 million remained outstanding at year-end. With the issuance of additional forgiveness guidelines around year-end, the Company expects that the majority of PPP loans will be forgiven in the first half of 2021.
Based on its experience with borrowers during the pandemic, the Company has thoroughly assessed its commercial loan portfolio to determine the most significant sensitive industries based on exposure, risk rating, and use of federally supported lending and loan modification programs. The Company has focused on hospitality, Firestone (specialty equipment lending), restaurants, and nursing/assisted living facilities, which collectively totaled $868 million at year-end. The Company has evaluated the loans in these industries and has expanded its review of other commercial loans to broaden the scope and frequency of risk assessments. The Company initially identified a larger group of borrowers as potentially COVID-19 sensitive, including retail, arts and entertainment, medical, and construction. Based on its experience during the year, the Company has narrowed its focus of COVID-19 sensitivity to the four groups mentioned above. The Company views these COVID-19 sensitive loans as generally conforming to its longstanding financial disciplines for loan/value, debt service coverage, and recourse in conformity with customary industry practices. Based on its longstanding disciplines, the Company believes its exposures within these industries are reasonably diversified and structured to accomplish overall risk management objectives. The
Company also monitors its outstanding loans to small business borrowers. Loans with balances of $1 million or less totaled $773 million at year-end. Some smaller balance commercial loans are monitored primarily based on payment status, with less availability of current borrower financial information. Small businesses and SBA borrowers have benefited from various government support programs and may be more vulnerable in future periods if government support programs are not continued.
Asset Quality: Most asset performance measures remained within risk ranges viewed by the Company as moderate during the first nine months of 2020, including charge-offs, delinquencies, non-accruals, and troubled debt restructurings. Some measures moved adversely in the fourth quarter as pandemic impacts on loan performance emerged more clearly, particularly in COVID sensitive commercial industries. It is anticipated that some measures will remain elevated in 2021 as some borrowers experience impairment of their liquidity and capital resulting from accumulating economic impacts of the pandemic. Due to loan payment modifications granted pursuant to government guidelines, many borrowers did not make a full year of scheduled loan payments during 2020 but continued to accrue interest and were not reported as delinquent at year-end.
Asset quality benefited in 2020 from the PPP loans, which are intended to support payrolls and therefore support business operations and employment despite the contraction in the economy. Other federal stimulus measures included one-time payments issued to most taxpayers and supplemental unemployment insurance. Monetary actions drove interest rates to near zero, reducing debt service costs and supporting asset values in the public equities and credit markets. Under year-end legislation approved by Congress, further fiscal economic support was approved for disbursement in 2021.
Additionally, federal bank regulatory authorities encouraged banks to work with affected borrowers to provide loan payment modifications to protect liquidity and support solvency. Forbearances made before year-end in accordance with CARES Act guidelines are not reported as delinquencies and are not required to be analyzed as troubled debt restructurings. In 2020, loans with conforming loan modifications totaled $1.6 billion, with the majority of modifications consisting of payment deferrals to commercial customers. The Bank was initially proactive in reaching out to commercial customers to offer conforming modifications within regulatory guidelines. Most initial deferrals were 90 day deferrals of principal and interest payments, with deferred payments often added to the end of the loan term. While the majority of customers returned to scheduled payments during the year, some customers were provided additional deferrals during the year. In the fourth quarter, the majority of commercial loans receiving additional deferrals beyond 2020 agreed to pay current period interest during the deferral period. In most cases, commercial customers requesting further deferrals were individually underwritten, negotiated, and approved. Many in the hospitality segment and the Firestone segment were provided with fourth quarter deferrals beyond 90 days to reflect seasonal and specialty operations. Many hospitality modifications included interest reserves established by project sponsors. At year-end, loans with payment deferrals (including in-process deferrals) totaled $350 million, of which $331 million were commercial loans. Year-end deferrals measured 4.7% of total loans excluding PPP loans.
In part because of the loan deferral program, accruing delinquent loans did not increase during the year, reaching a quarterly low of 0.34% of total loans at year-end 2020, compared to 0.54% at year-end 2019. The deferral periods for the majority of deferred loans were scheduled to expire in the first four months of 2021. Under revised legislation passed by Congress at year-end 2020, banks can continue to provide qualifying loan modifications including payment deferrals throughout 2021 without reporting these loans as delinquent or as troubled debt restructurings. Under accounting principles, loans cannot be maintained as accruing interest if the bank does not expect to collect the full contractual amount of principal and interest from a borrower. Non-accruing loans remained little changed during the first nine months of the year, but increased to 0.80% of total loans as of year-end 2021, compared to 0.42% at the start of the year. This increase was largely due to two commercial relationships which were identified as substandard prior to the pandemic. One of these was a purchased credit deteriorated credit to a nursing/assisted living facility acquired in the 2019 bank merger, and one was a hospitality relationship in a market that became overbuilt. During the fourth quarter, the Company sold $22 million in hospitality loans which deteriorated during the pandemic.The Company continues to evaluate potential opportunities to sell deteriorated loans. Net loan charge-offs totaled $38 million in 2020 and $33 million in 2019. Charge-offs in 2020 included $12 million in hospitality loans written down in the fourth quarter due to pandemic related weaknesses. Charge-offs in 2019 included a $16 million charge in the third quarter for one commercial relationship with alleged fraud.
During 2020, the Company identified certain commercial segments which were determined to be COVID-19 sensitive. The Company refined this group during the year. The two primary segments deemed COVID-19 sensitive were hospitality loans and loans in the Company’s Firestone Financial specialty equipment lending group. Borrowers in both of these segments were more at risk of significant revenue declines due to mandated reductions in travel and social activity. Hospitality loans totaled $301 million and Firestone loans totaled $246 million at year-end. These two segments accounted for $225 million of the $331 million in total commercial active and in process deferrals at year-end 2020. They accounted for $158 million of the $338 million in year-end commercial criticized assets. For the hospitality loans, 91% of the year-end deferrals were scheduled for current interest payments and many of these were supported by interest reserve accounts. For the Firestone loans, the business lines with the most demonstrated COVID-19 risk were fitness ($71 million year-end balance) and location based entertainment such as bowling alleys and family oriented arcades ($44 million year-end balance). Together, these business lines comprised 68% of the Firestone deferrals and 58% of the Firestone criticized loans. Most of the borrowers in the hospitality and Firestone segments were expected to be able to resume operations and scheduled debt service if public health and social conditions allowed more normal revenue production to resume in the first half of 2021. Non-accruing loans to these segments totaled $18 million at year-end.
Year-end criticized loans increased in 2020 to $359 million, or 2.8% of total assets, compared to $237 million or 1.8% at year-end 2019. This increase was mainly due to the impact of the pandemic on the commercial loan portfolio. Approximately half of the $331 million in commercial deferred loans was rated criticized at year-end, and the pandemic impacts on these loans were the main driver of the growth in total criticized loans. For similar reasons, classified loans (which are those criticized loans rated substandard or lower) increased to $250 million from $162 million, including growth in non-accruing loans to $65 million from $40 million. Loans rated as criticized before the pandemic remained criticized despite any deferrals they may have been granted. The Company has traditionally viewed its potential problem loans as those loans from business activities which are rated as classified and continue to accrue interest. These loans have a possibility of loss if weaknesses are not corrected. Accruing classified loans totaled $185 million at year-end 2020. Due to the circumstances of the pandemic, the Company also views deferred special mention loans as having elevated risk of becoming substandard due to uncertainties related to public health. These loans totaled $49 million at year-end 2020.
Allowance for Credit Losses on Loans: The Company implemented the Current Expected Credit Losses (“CECL”) accounting standard on January 1, 2020. The standard changed the basis of loss recognition from incurred to expected, and expanded the covered financial instruments. The allowance for credit losses on loans replaces the previous allowance for loan losses. The allowance balance increased by $63 million from $64 million at year-end 2019 to $127 million at year-end in 2020.
The allowance increased by $25 million to $89 million on January 1, 2020 due to the adoption of CECL. The Company established a $15 million reserve related to loan credit marks, and the amortized cost basis of purchased credit deteriorated loans was increased by this same $15 million amount. The remaining implementation increase was due to the recognition of additional expected losses over the life of the loan portfolio compared to those already incurred under the previous method. The allowance measured 0.94% of total loans at the adoption of CECL.
Excluding the impact of purchased credit deteriorated loans, the allowance measured 0.78% of total loans. The Company viewed this as its reasonable supportable estimate of expected credit losses over the expected future life of the portfolio. The estimate is based on a methodology which considers historic loss rates for loans by collateral type and includes components for the impact of forecast economic conditions on loss rates, as well as an evaluation of qualitative factors including current period loan performance metrics and consideration of the benefit of expected future government support in reducing possible loss rates. The economic forecast utilizes third party base case projections and estimates credit loss impacts for the next seven quarters. The allowance does not include reserves for interest receivable. An allowance for losses on credit commitments is included in other liabilities, and measured $8 million at year-end 2020.
The allowance increased by $38 million from January 1, 2020 to $127 million at December 31, 2020. The allowance at year-end measured 1.58% of total loans and 1.71% of total loans excluding the PPP and mid-Atlantic loans. The 0.77% increase from 0.94% at the date of CECL adoption primarily reflected the projected economic
impacts of the pandemic on estimated future loan losses and was driven both by the changed economic outlook and by the qualitative impact of the emergence of higher non-accruing loans. At year-end, the economic baseline expected confirmed COVID-19 cases to reach 47 million in 2021, with the daily case rate peaking in December 2020 and abating by September 2021. GDP was projected to increase by 4.1% in 2021 after declining by 3.5% in 2020. Unemployment was expected improve to 6.9% in 2021, supported by a $2.8 trillion federal deficit spending projection. The 0.77% increase in the allowance from the CECL adoption date is equivalent to approximately $60 million in net loan losses as the Company’s general estimate of future pandemic related loan losses in addition to the annual net loan loss rate when the economy is healthy. If conditions were to remain unchanged, the Company would anticipate that charge-offs would reduce the balance of the allowance as they emerge, and that the ratio of the allowance to total loans would move towards the level before the emergence of the pandemic. Future loan loss provisions could result from adverse changes in conditions or from loan portfolio growth. No allowance is provided for PPP loans which are guaranteed by the SBA. Additionally, no allowance is provided on the loans held for sale as part of the pending mid-Atlantic branch sale.
Goodwill and Other Assets: The sustained decrease in the price of the Company’s stock in the first half of 2020 was a basis for triggering an analysis of goodwill for impairment. Additionally, the annual impairment analysis was scheduled for the second quarter. Berkshire’s stock price was $11.02 at midyear, compared to $32.88 at year-end 2019. A goodwill impairment analysis was completed according to Accounting Standards Codification Section 350. Based on this analysis, the Company recorded a $554 million impairment charge during the second quarter to fully write-off the carrying balance of goodwill. This analysis was based on an estimate of the fair value of the company’s equity as one reporting unit. Fair value was estimated based on an income approach and a market approach, which were equally weighted in the analysis. Both valuation approaches supported a conclusion of full impairment. The goodwill balance had resulted primarily from a series of bank acquisitions which consisted primarily of an exchange of shares recorded based on stock market valuations at the time of acquisition. Over this time, bank stocks were generally valued at a premium to the net fair value of assets, resulting in the recording of goodwill for these premiums. Due to the pandemic recession and federal monetary actions reducing interest rates, the outlook for banking industry earnings contracted in 2020, and a number of bank stocks were trading at a discount to book value at midyear. The impairment analysis concluded that the fair value of the Company’s equity was lower than its carrying value, indicating a goodwill impairment.
The assets held for sale at year-end 2020 consisted mainly of the loans and fixed assets tied to the pending agreement for the sale of the Mid-Atlantic branches. This sale is targeted to be completed in the first half of 2021. The carrying amount of Other Assets increased by $98 million primarily due to the increased net fair value of commercial loan interest rate swaps and related economic hedges, reflecting the market value changes resulting from the pandemic impact on market interest rates.
Deposits: Total deposits decreased by $120 million, or 1%, to $10.2 billion in 2020. Due to the pending agreement for the sale of the Mid-Atlantic branches, the Company reclassified $617 million in deposits as liabilities held for sale. Adjusting for this reclassification, total deposits increased by $497 million, or 5%. This included a $302 million increase in the year-end balance of payroll deposits, which fluctuate daily. Total brokered deposit balances decreased by $597 million to $611 million in 2020 as the Company continued to reduce wholesale funding with proceeds from loan runoff and demand deposit growth. There was growth in demand deposits, as customers maintained higher liquidity during the pandemic, including the impacts of federal support and lower spending. Additionally, some funds shifted from higher rate maturing time deposits into money market balances as customers focused on shorter maturities due to the low and relatively flat yield curve. The cost of deposits decreased to 0.47% in the fourth quarter of 2020 from 1.11% in the fourth quarter of 2019. This reflected the pronounced decrease in short-term market interest rates, together with the unusual growth in demand deposit balances and the reduction in higher cost brokered time deposits.
Borrowings and Other Liabilities: Total borrowings decreased by $256 million, or 31%, in 2020 as part of the Company’s strategy to deleverage and reduce reliance on higher cost wholesale funding sources. Including brokered deposits, total wholesale funding sources decreased by $854 million, or 43%, to $1.18 billion during 2020. The fourth quarter cost of borrowings decreased to 2.50% from 2.77%, while the fourth quarter cost of all funds decreased to 0.60% from 1.23%. As previously noted, the Mid-Atlantic deposits were reclassified as held for sale, and total liabilities held for sale related to this pending transaction measured $630 million at year-end 2020. The Company expects to settle this sale with loans and cash from short-term investments.
Derivative Financial Instruments: The $3.9 billion period-end notional balance of derivative financial instruments was down slightly from $4.1 billion at the start of the year. This notional balance includes $1.7 billion in interest rate swaps with commercial loan customers and an equal balance of offsetting back to back swaps with national financial counterparties. The Company also has $0.3 billion in risk participations with dealer banks related to interest rate swaps where another bank is the lead. The estimated net fair value of the derivative financial instruments increased from approximately zero to $94 million due to the higher value of fixed rate customer swaps as a result of the decrease in interest rates. This asset is included in other assets on the balance sheet. The Company delivered cash to the clearing house as a result of its increased obligation to national swap counterparties which is reported as a use of cash from financing activities in the cash flow statement.
Shareholders' Equity: Total shareholders’ equity decreased by $571 million, or 32%, to $1.19 billion in 2020 due to the income impact of the noncash charges of $554 million for goodwill impairment and $76 million for credit loss provision expense recorded during that time. The balance of retained earnings decreased from $361 million to ($233) million. The $41 million year-end 2019 balance of preferred stock was converted to common equity in accordance with the terms these securities, resulting in the issuance of 522 thousand common shares from treasury stock, which decreased to $31 million from $70 million.
The ratio of equity to assets stood at 9.3% at period-end, and the non-GAAP measure of tangible equity to tangible assets stood at 9.0%. The Company uses the non-GAAP measure of tangible equity which excludes goodwill and intangible assets and which is an important focus for the investment community. Tangible equity decreased by $6 million, or 1%, to $1.15 billion for the year.
All of the Company's measures of regulatory capital in relation to risk weighted assets improved during the year due to the runoff of non-PPP related loans and the zero risk weighting assigned to PPP loans because of the SBA guarantee, as well as due to the lower risk ratings of investments. The Company conducts equity stress analyses, including severe adverse pandemic loan loss scenarios based on forecasts provided by third parties. The Company believes that its capital is well cushioned above the Well Capitalized metrics in all of the adverse modeling scenarios based on the assumptions utilized. The Company’s total risk based capital ratio measured 16.1% at year-end 2020, compared to the 10% Well Capitalized standard for banks. The Company’s Tier 1 capital ratio stood at 14.1% at that date, compared to the 8% Well Capitalized standard for banks.
The Company repurchased $53 million of common stock in 2019. The Company’s plan had been to continue repurchasing shares to return capital to shareholders which was released by the balance sheet restructuring. The repurchase plan was suspended in the first quarter of 2020 as the pandemic emerged, and the existing authorization for share repurchases was allowed to expire at its March 31, 2020 maturity. During the first quarter, the Company filed a universal securities shelf registration for the routine purpose of renewing the shelf registration that expired in November 2019. The Company increased its quarterly dividend by $0.01 to $0.24 per share in the first quarter before the pandemic, in line with previous annual dividend increases. The Company decreased its dividend to $0.12 per share in the third quarter, to better align the dividend payout and dividend yield with its operating earnings as a result of the pandemic. Due to the loss recorded in 2020, any dividends intended by the Bank’s board of directors are presently subject to regulatory approval by the Massachusetts Banking Department and any shareholder dividends intended by the Company’s board of directors are subject to non-objection by the Federal Reserve.
The change in retained earnings due to the operating loss and the common dividend accounted for most of the net change in equity. The Company recorded a $19 million benefit to equity from other comprehensive income which mostly offset a $24 million reduction in equity due to the adoption of CECL. The other comprehensive income benefit was due to after-tax unrealized gains in the bond portfolio due to lower interest rates. The CECL adoption impact on equity was principally due to the increase in the allowance for credit losses on loans on the date of adoption due to the recognition of expected future losses in addition to incurred losses, as well as the increase in the allowance to offset the increase in the gross carrying value of purchased credit deteriorated loans.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Summary: Revenue and expense included the SI Financial operations acquired on May 17, 2019. Additionally, due to the COVID-19 pandemic Berkshire reported losses in the first half of 2020 due to non-cash charges of $554 million for goodwill impairment and $65 million for the provision for credit losses. As a result, many categories of revenue and expense are not directly comparable year-over-year for the first half of the year. Parts of this discussion focus on the second half of the year, where year-over-year results are more comparable and less affected by the merger and the pandemic.
Reflecting the above activity, the Company recorded a loss of $569 million, or $11.33 per share for the first six months of 2020. This loss was a result of noncash charges for goodwill impairment and the provision for credit losses on loans. Results returned to profitability in the second half of the year, with second half earnings totaling $36 million, or $0.73 per share. For the year, the Company lost $533 million, or $10.60 per share. In 2019, the Company recorded earnings for the year of $97 million, or $1.97 per share. For the second half of 2019, the Company’s earnings were $48 million, or $0.95 per share.
The Company calculates the non-GAAP financial measure of adjusted earnings to focus on earnings related to ongoing operations and excluding items described in the reconciliation of non-GAAP financial measures which was set forth in an earlier section of this report. Second half adjusted earnings were $40 million, or $0.80 per share, in 2020 compared to $59 million, or $1.15 per share in 2019. Adjusting items after-tax in the second half of 2020 totaled $4 million and were primarily related to the loss on discontinued operations and the CEO separation. Adjusting items for the second half of 2019 totaled $11 million after-tax and were primarily related to merger and restructuring expense.
The decrease in earnings and adjusted earnings was primarily due to pandemic related impacts on net interest income, which declined sequentially over the last five quarters to $76 million in the fourth quarter of 2020, compared to $91 million in the fourth quarter of 2019. The return on assets decreased to 0.48% from 0.78% for these respective periods. The return on equity decreased to 5.2% from 5.9%; this measure was impacted in 2020 by the write-off of goodwill, which measured 31% of equity at year-end 2019.
The Company has established a provision for credit losses on loans which it views as adequate to cover its reasonable estimate of expected credit losses, including pandemic related losses, based on forecast conditions at year-end. It is anticipated that net loan charge-offs will remain elevated in 2021 as predicted losses emerge and are recorded. Loan loss provision expense may be modest unless health and economic expectations change adversely. PPP loans are expected to contribute to net interest income in the first half of 2021 but this benefit is expected to decline in the second half of 2021. Benefits from the Company’s branch initiatives are initially expected to mostly be offset by pandemic related loan workout costs and strategic investments in core operations. The Company benefited from an income tax credit in 2020 due to the large pandemic credit loss provision in the first half of the year.
Revenue: Revenue was adversely impacted by the pandemic in 2020, including the impact of lower business volumes, fee waivers, and tighter margins. Net revenue from continuing operations decreased by $66 million, or 15%, to $383 million in 2020. Revenue in 2020 included a full year of revenue from SI Financial operations acquired in May 2019. The full year decrease included a $48 million decrease in net interest income, a $7 million decrease in fee income, and a $12 million adverse swing in net securities gains/losses. Second half revenue decreased by $37 million, or 16% to $196 million; this comparison fully includes acquired operations in both periods.
Net Interest Income: Net interest income from continuing operations decreased by $48 million, or 13% in 2020. This was the result of a 14% decrease in the net interest margin to 2.72% from 3.17%. The fourth quarter 2020 net interest margin was 2.61%. Quarterly net interest income peaked at $97 million in the third quarter of 2019, including the first full quarter of benefit from the acquired SI Financial operations. Net interest income decreased to $91 million in the fourth quarter of 2019 and then decreased sequentially in 2020 to $76 million in the final quarter.
The margin was under pressure coming into 2020 due to the anticipated loss of purchased loan accretion income, including the impact of the CECL accounting standard. The Company’s interest rate risk profile is asset sensitive, and is structurally sensitive both to the decrease in interest rates and to the low and relatively flat yield curve. The approximate 1.50% decrease in short-term interest rates resulting from the Federal Reserve Bank’s near zero interest rate policy response to the pandemic was adverse to the Company’s net interest margin. Additionally, the Company took on higher cost funds at the start of the pandemic to further strengthen liquidity in the national emergency as part of its risk management protocol. Also, the decline in higher yielding loans has reduced this yield as the primary source of interest revenue.
Based on conditions at year-end, the Company is targeting that PPP loans will support net interest income in the first half of 2021, including the recognition of deferred revenues as these loans are forgiven. The Company expects that the majority of these loans will be forgiven in the first half of 2021 and that earning assets will decrease in the second half of the year. The sale of the Mid-Atlantic deposits and loans is also expected to contribute to a decrease in earning assets. Excluding the impact of PPP loans, the Company is targeting that, based on rate conditions at year-end, there will be further roll down of deposit costs in 2021 due to maturities of higher rate time deposits and of promotional rates previously offered on targeted money market deposits. The Company’s goal is that these lower costs will more than offset the margin impact of asset yields continuing to price down in the current low interest rate environment. Any margin benefit in the second half is not expected to offset the impact of lower earning assets, and therefore there may be continued pressure on net interest income in the second half of 2021.
Non-Interest Income: Fee income decreased year-over-year $7 million, or 9% due to pandemic impacts on deposit and loan fees. Deposit related fees decreased by $3 million, or 11%, due to a decrease in overdraft fee income totaling $4 million or 33%. This decrease was due to pandemic impacts which resulted in less consumer spending and higher household liquidity. Additionally, overdraft fees and other deposit fees reflected increased fee waivers, which were granted programmatically by the Company as part of its support to its communities during initial lockdowns. The $8 million, or 31%, decrease in loan related fees included a $4 million reduction in commercial swap fee income due to lower demand, along with impacts from market value adjustments to the carrying value of commercial loan swaps. Other pandemic related market value adjustments affecting 2020 results related to charges against mortgage servicing rights and fair valued loans. The Company has $54 million in contractual balances on taxi medallion loans which are carried at a $2 million fair value. Recoveries on these assets are included in other income. Other non-interest income also includes securities gains/losses, which the Company does not view as related to its ongoing operations. The $10 million net securities loss in the first quarter of 2019 was due to the impact of the stock market selloff on the carrying value of equity securities. Non-interest income is net of charges totaling $4 million in 2020 and $6 million in 2019 for amortization of tax credit investments, which was more than offset by income tax expense credits of $5 million and $8 million in those respective years.
Provision for Credit Losses: In adopting the CECL accounting model, the Company moved from an incurred loss methodology to an expected loss methodology. Due to the emergence of the pandemic, the Company recorded future expected pandemic losses as provision expense against current period operations. Accordingly, provision expense increased year-over-year to $76 million from $35 million. The provision in 2019 included a component recognizing the incurred expense related to a $16 million charge-off in a fraud related commercial situation. The provision expense in 2020 was primarily due to the emergence of expected future loan losses as described in the earlier discussion of the Allowance for Credit Losses on Loans.
Non-Interest Expense: Total non-interest expense increased by $550 million to $840 million in 2020 from $290 million in 2019. This was due to the $554 million second quarter write-off of goodwill described in the earlier discussion of financial condition. Second half non-interest expense increased by 2% to $145 million in 2020 compared to 2019. The Company utilizes the non-GAAP financial measure of adjusted non-interest expense to assess its expenses related to ongoing operations. These adjustments in 2020 were primarily related to the CEO separation, and in 2019 they were primarily related to merger and restructuring charges.
Second half adjusted non-interest expense increased by $7 million, or 6%, to $139 million. This included a $2 million increase in FDIC insurance premium expense due to credits received in the second half of 2019. Technology
spending increased by $3 million to enhance the Company’s technology infrastructure. Additionally, expenses in the second half of 2020 included $3 million in charges related to a lending operations project which was completed during the period. Full time equivalent staff in continuing operations at year-end totaled 1,505, compared to 1,550 positions at the start of the year. The Company has announced strategic initiatives for the sale and consolidation of branches in the first half of 2021. The Company expects to recognize a noncore net gain on the sale of these operations and non-core charges in conjunction through these consolidations.
Income Tax Expense: Income taxes are discussed in a note to the financial statements; this note is important to an understanding of the results of operations. The Company recorded a tax benefit of $27 million in 2020 compared to a tax expense of $21 million in 2019. The Company recorded a $20 million benefit on 2020 continuing operations, resulting in a 4% benefit from the loss on continuing operations. The $20 million dollar benefit included a $15 million benefit from the $59 million deductible portion of goodwill related expense, as well as from $3.5 million in tax credit benefits. The tax rate on 2020 adjusted earnings was 8% due to the lower earnings. In 2019, the Company’s effective tax rate was 18% on pre-tax income from continuing operations. The Company received tax benefits at an effective rate of 26% on pre-tax losses of $27 million and $6 million on discontinued operations in 2020 and 2019, respectively.
Discontinued Operations: The Company completed the exit from its discontinued national mortgage banking operations in the final quarter of 2020. These operations recorded losses of $20 million and $4 million in 2020 and 2019, respectively. The losses included write-downs of related mortgage servicing rights which reflected the impact of higher mortgage prepayments as well as lower market pricing for the subject rights. Other factors contributing to the loss in 2020 were severance, contract, and hedge termination costs. Discontinued operations are excluded from the Company’s measure of adjusted income.
Total Comprehensive Income: Total comprehensive (loss)/income includes net (loss)/income together with other comprehensive income, which primarily consists of unrealized gains/losses on debt securities available for sale, after tax. Due to falling interest rates in 2020 and 2019, Berkshire recorded unrealized debt securities gains in both years. As a result, comprehensive results were a ($514) million loss in 2020 and $123 million income in 2019.
Quarterly Results. Quarterly results for 2019 and 2020 are presented in a note to the financial statements. Results for all of these periods have been discussed in previous SEC Forms 10-Q and 10-K, except for operations in the fourth quarter of 2020. Second and third quarter results are often the strongest quarterly results due to higher business activity during the spring and summer. In 2020, economic activity declined at an unprecedented rated due to the pandemic. This was followed by a partial rebound in the third quarter, but disease resurgence resulted in further government restrictions in the fourth quarter. Third quarter results were the strongest in terms of operating income. Results in the first half of 2020 were a loss due to pandemic impacts on the provision for credit losses on loans and the goodwill write-down. Pandemic impacts contributed to fourth quarter 2020 results declining from the third quarter due to lower operating revenue, higher operating expense, and a higher provision for credit losses on loans.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
Summary: Revenue and expense in 2019 included the SI Financial operations acquired on May 17, 2019. As a result, many categories of revenue and expense increased in 2019 over the same period of 2018. Additionally, operations in 2019 included the benefit of restructuring actions in both years, and the benefit of the acquired Commerce Bank operations which were being fully integrated in the first half of 2018. Earnings per share reflected the shares issued as merger consideration for the SI Financial acquisition. References to revenue and expense in this discussion are generally related to continuing operations unless otherwise noted. Year-over-year profitability declined primarily due to the $16 million charge related to the write-off of one commercial loan due to alleged fraud. Profitability was also adversely impacted by a lower net interest margin due to the decline in purchased loan accretion, which had been anticipated, as well as the impact of lower interest rates on the Company’s asset sensitive balance sheet. Total purchase accounting accretion decreased to $14 million in 2019 from $23 million in 2018. The Company undertook various initiatives following its strategic review to help mitigate these margin impacts. Results were also lower due to higher merger charges related to the completion and integration of the SI Financial acquisition. The Company’s return on equity was 5.7% in 2019, compared to 6.8% in the prior year. Its non-GAAP measure of adjusted return on tangible common equity was 11.3% compared to 13.5% for these respective periods.
Revenue: Net revenue from continuing operations increased in 2019 by $19 million, or 4%, to $449 million in 2019 compared to the prior year, including acquired SI Financial operations. This increase was divided between net interest income and non-interest income.
Net Interest Income: Net interest income from continuing operations increased by $9 million, or 3%, in 2019 compared to 2018. This growth was due to a 9% increase in average earning assets, which was partially offset by a decrease in the net interest margin. The increase in average earning assets included the impact of approximately $1.48 billion in earning assets acquired from SI Financial on May 17. This was offset by a net decline in other average earning assets due to the Company’s strategic initiative to reduce less strategically important loans and investments in order to decrease expensive wholesale funding sources and related leverage. The net interest margin decreased year-over-year to 3.17% from 3.40%, and the contribution from purchase accounting accretion decreased to 0.12% from 0.22%. The margin decreased further to 3.11% in the final quarter of the year, including a 0.17% contribution from purchase accounting accretion. The benefit of purchase accounting accretion decreased primarily due to the seasoning of purchased credit impaired loans from prior bank acquisitions. Purchase accounting accretion also benefited from accretion related to acquired SI Financial time deposits, which are contributing approximately 7 basis points per quarter accretion benefit which matured in the second quarter of 2020.
Non-Interest Income: Non-interest income from continuing operations increased by $10 million, or 13%, in 2019 compared to 2018 due primarily to an $8 million swing in unrealized securities gains/losses which the Company views as non-operating in nature. Fee income increased by $3 million, or 4%, including the benefit of acquired operations.
Provision for Loan Losses. The provision increased year-over-year by $10 million, or 39%, including the impact of one fraud related commercial loan loss in the third quarter.
Non-Interest Expense: Non-interest expense from continuing operations increased year-over-year by $23 million, or 9%, including acquired operations. Merger related expense included the completion of the SI Financial merger. The Company focuses on its non-GAAP financial measure of adjusted expense which excludes merger charges and other items set forth in the reconciliation of non-GAAP measures. Adjusted expense increased by $17 million, or 7%. Expenses in 2019 benefited from $3 million in FDIC premium rebates as a result of a return of FDIC reserves to smaller U.S. banks. The full efficiencies from the merger were not achieved until the fourth quarter of 2019.
Income Tax Expense: The effective tax rate measured 18% in 2019, compared to 21% in 2018. This reflected the proportionate benefit of tax advantaged income on lower pretax earnings, along with structural changes in the Company’s tax position, including the impacts of the SI Financial acquisition.
Discontinued Operations: These national mortgage banking operations became unprofitable in 2018 as a result of depressed industry conditions due to lower market demand for mortgages as interest rates rose in that period. While industry conditions improved in 2019 as interest rates moved downwards during the year, these operations continued to operate at a loss. The net loss was equivalent to $0.08 per share in 2019, compared to $0.07 per share in 2018. Total revenue improved to $41 million in 2019 from $39 million in 2018, but remained below the $55 million recorded during the profitable year of 2017. Most of the $5.5 million pretax loss in 2019 was due to a $4.5 million charge to write-down mortgage servicing rights based on market indications at year-end.
LIQUIDITY AND CASH FLOWS
Liquidity is the ability to meet cash needs at all times with available cash and established external liquidity sources or by conversion of other assets to cash at a reasonable price and in a timely manner. Berkshire evaluates liquidity at the holding company and on a consolidated basis, which is primarily a function of the Bank’s liquidity.
Total cash and cash equivalents increased to $1.6 billion at year-end 2020, compared to $0.6 billion at year-end 2019. Net cash provided by operating activities of continuing operations decreased slightly to $124 million in 2020 from $130 million in 2019. Net cash provided by operating activities of discontinued operations increased to $104 million from a use of $19 million in 2019 as these operations were liquidated during 2020.
The Company’s liquidity strengthened substantially in 2020. A $1.4 billion reduction in loans was primarily reinvested in investments. Short-term investments increased by $1.0 billion and investment securities increased by $0.5 billion. A $0.6 billion increase in demand deposits was used primarily to reduce wholesale funds, which decreased to $1.2 billion from $2.0 billion. The ratio of wholesale funds to assets decreased to 9% from 15%. The ratio of loans/deposits decreased to 79% from 92%.
The Company has an agreement to sell its 8 Mid-Atlantic branches, which is expected to be completed by midyear 2021. The Company is expected to provide in excess of $300 million in funds to complete this sale, which is expected to be funded from short-term investments. The planned consolidation of 16 additional branches in the first half of 2021 is targeted to be completed with strong deposit retention and no material reduction in total deposits. The Company may see some outflows of demand deposit balances which have accumulated during the pandemic and which may be drawn down by customers if economic conditions improve as expected. Any net outflows would most likely be funded from the excess levels of short-term investments that were built up in 2020. The Company also expects to use these funds to pay down maturing wholesale funds from brokered deposits and borrowings if conditions remain as anticipated. Due to the decrease in market interest rates in 2020, loan prepayment speeds increased, maturing time deposits tended to roll into money market deposits, and generally interest sensitive assets and liabilities both trended towards lower expected average lives, and therefore increased the potential of larger movements in loan and deposit balances depending on future conditions.
The Bank had unused FHLBB borrowing capacity totaling $1.0 billion at year-end, compared to $1.6 billion at the start of the year. The Bank also had available borrowing capacity of $816 million with the Federal Reserve Bank at period-end, compared to $201 million at the end of 2019. There were no PPP loans pledged at year-end 2020, and the Company did not make any material use of the Federal Reserve’s PPP Liquidity Facility during the year. The combination of on-balance sheet liquidity and off-balance sheet liquidity described above are viewed as strong support for any emerging liquidity needs.
Subsequent to first quarter-end, KBRA (the Kroll Bond Rating Agency) reaffirmed the Company’s and the Bank’s existing bond ratings, including the Bank’s A- ratings on deposits and senior debt. The ratings were affirmed with a negative outlook on the long-term ratings due to the uncertain economic impacts from the pandemic. The Company maintains ongoing relationships with correspondents and investment banks which provide further potential options for financial support to the Bank and the Company. At period-end, the Company had $84 million in cash at the parent held on deposit in the Bank. The holding company generally expects to maintain cash on hand equivalent to normal cash uses, including common stock dividends, for at least a one year period. Beginning in the third quarter of 2020, the Company cut its cash dividend to shareholders in half, reducing the quarterly cash dividend
requirement from $12 million to $6 million. Over the long-term, the Company relies on cash dividends from the Bank to provide operating cash and cash for shareholder dividends. Due to the second quarter loss, the Bank was no longer in compliance with Massachusetts banking regulations which generally require positive retained earnings over the prior three years in order to pay cash dividends to the parent. The Company made application to the Massachusetts Division of Banks near year-end 2020 to approve a routine bank dividend to the parent to cover the quarterly shareholder dividend, and this application was approved by the Division Banks after year-end. The Bank’s goal is to continue to apply for approval of routine quarterly Bank dividends to the parent in the future. Total cash dividends paid by the Bank to the parent in 2020 were $44 million due to amounts paid in the first quarter in anticipation of share repurchases, which were suspended due to the onset of the pandemic.
The Company maintains a contingency funding plan based on its assessment of the liquidity stress environment. Contingency funding information, reporting, and assessment were intensified in the first quarter when financial markets began signaling distress. Primary liquidity data is reported on daily, and thirty day stress analytics are maintained on an updated basis. The Company maintains monthly and quarterly cash flow forecasts. A one year forward liquidity stress test evaluates stress across a variety of stress scenarios, including severe adverse loan loss scenarios due to the pandemic. The Company has defined strategic options which allow it to meet funding needs in all stress scenarios.
The Company’s guidelines allow it to respond to liquidity stress by placing higher emphasis when necessary on liquidity versus margin expansion.
CAPITAL RESOURCES
The Company and the Bank target to maintain sufficient capital to qualify for the “Well Capitalized” designation by federal regulators. Berkshire’s long-term goal is to use capital efficiently to achieve its objective to become a higher performing company.
Berkshire views its adjusted internal return on tangible capital as a primary capital resource of the Company. This non-GAAP financial measure is based on the Company’s measure of adjusted earnings, which excludes net charges viewed as not related to ongoing operations. The Company focuses on internal capital generation to support shareholder dividends and organic growth and also to support non-operating charges and/or improvement in its capital ratios. The Company maintains a universal shelf registration of capital securities with the SEC. Additional discussion of the Company’s capital management is contained in the Shareholders’ Equity section of the discussion of Changes in Financial Condition in this report and in the Shareholders’ Equity note to the financial statements.
The Company has investment grade debt ratings and monitors capital market conditions. The Company views its regulatory capital as well cushioned above the “Well Capitalized” levels, and the Company believes that its plans are consistent with maintaining proper strong cushions above these levels. The Company conducts equity stress analyses, including severe adverse pandemic loss scenarios provided by third parties, in addition to Dodd-Frank stress testing. The Company believes that its capital is well cushioned above the Well Capitalized metrics in the adverse modeling scenarios based on the assumptions utilized.
Dividends by the holding company require notice and non-objection from the Federal Reserve Bank in the event that earnings are not sufficient to cover the dividend in the current period or for the four trailing quarters. The holding company also requires such notice and non-objection in order to conduct stock buybacks in a quarter which would reduce outstanding shares below the balance at the start of the quarter. In the first quarter, due to the pandemic, the Company allowed its existing board stock repurchase authorization and the related regulatory approval to expire without repurchasing additional shares which were contemplated at the start of the year and which were funded to the parent from the Bank during the first quarter. Due to the second quarter loss, the Company initiated a quarterly application process to the Federal Reserve Bank for notice and nonobjection for the routine quarterly dividend beginning in the third quarter. The amount of the dividend was cut in half based on considerations of Federal Reserve supervisory guidance and based on adjusting the dividend yield and payout ratio as a result the reduction in earnings. The Company expects to continue to provide notice and seek non-objection from the Federal Reserve Bank on a quarterly basis until it achieves four trailing quarters of income sufficient to cover dividends in those quarters. As discussed in the preceding section on Liquidity and Cash Flows, dividends from the Bank to the holding company are currently also subject to a procedure with the Massachusetts Division of Banks pursuant to state statute.
CONTRACTUAL OBLIGATIONS
The year-end 2020 contractual obligations were as follows:
Item 7 - 7A - Table 4 Contractual Obligations
Less than One One to Three Three to Five After Five
(In thousands) Total Year Years Years Years
FHLBB borrowings (1) $ 474,357 $ 395,475 $ 69,405 $ 6,014 $ 3,463
Subordinated notes 97,280 - - - 97,280
Operating lease obligations (2) 63,894 9,214 16,086 11,258 27,336
Total Contractual Obligations $ 635,531 $ 404,689 $ 85,491 $ 17,272 $ 128,079
(1) Consists of borrowings from the Federal Home Loan Bank. The maturities extend through 2040 and the rates vary by borrowing.
(2) Consists of leases, bank branches, and ATMs through 2039.
Further information about borrowings and lease obligations is disclosed in Note 11 - Borrowed Funds and Note 16 - Leases of the Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
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. As previously reported in the discussion of changes in financial condition, Berkshire has outstanding derivative financial instruments and engages in hedging activities, and the fair value of these contracts is recorded on the balance sheet.The Company’s agreement to sell its Mid-Atlantic branches is an off-balance sheet arrangement which is expected to be completed in the first half of 2021.
FAIR VALUE MEASUREMENTS
The most significant fair value measurements recorded by the Company are those related to assets and liabilities acquired in business combinations. These measurements are discussed further in the mergers and acquisitions note to the financial statements. The premium or discount value of acquired loans has historically been the most significant element of this presentation.
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, marketable equity securities, and derivative instruments. These measurements were included in the previous discussion of changes in financial condition, and were generally based on Level 2 market based inputs. Non-recurring fair value measurements primarily relate to certain corporate bonds, impaired loans, capitalized mortgage servicing rights, and other real estate owned. When measurement is required, these measures are generally based on Level 3 inputs. Acquired corporate bonds and industrial development bonds are valued based on Level 3 inputs.
Berkshire provides a summary of estimated fair values of financial instruments at each period-end. The premium or discount value of loans has historically been the most significant element of this presentation. This amount is a Level 3 estimate and reflects management’s subjective judgments.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented in this Form 10-K have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank’s performance than the general level of inflation. Interest rates may be affected by inflation, but the direction and magnitude of the impact may vary. A sudden change in inflation (or expectations about inflation), with a related change in interest rates, would have a significant impact on our operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Please refer to the notes on Recently Adopted Accounting Principles and Future Application of Accounting Pronouncements in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 1 to the financial statements. Modifications to significant accounting policies made during the year are also described in Note 1 to the financial statements. The preparation of the financial statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Management has identified the Company's most critical accounting policies as related to:
•Allowance for Credit Losses
•Goodwill and Identifiable Intangible Assets
•Fair Value of Financial Instruments
These particular significant accounting policies are considered most critical in that they are important to the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. All of these most critical accounting policies were significant in determining income and financial condition based on events in 2020.
ENTERPRISE RISK MANAGEMENT
Following sections of this report on Form 10-K include discussion of market risk and risk factors. Risk management is overseen by the Company’s Chief Risk Officer, who reports directly to the CEO. This position oversees compliance, information security, risk management policy, and coordinates with the strategic services function which monitors most aspects of credit quality. Enterprise risk assessments are brought to the Company’s Enterprise Risk Management Committee, and then are reported to the Board’s Risk Management and Capital Committee. The high level corporate risk assessment focuses on the following material business risks: credit risk, interest rate risk, price risk, liquidity risk, operational risk, compliance risk, strategic risk, and reputation risk. The credit risk category has the highest weighting. Based on management's recent review, all risks were within corporate appetites. Trends toward increasing risk were noted for credit risk and compliance risk due largely to the pandemic; liquidity risks were declining due to elevated liquid assets. For all material business risks, the inherent risk was viewed as heightened due to the environment, but the residual risk was viewed as medium/low to medium due to mitigating controls functioning in the Company.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. The Company seeks to avoid fluctuations in its net interest income and to maximize net interest income within acceptable levels of risk through periods of changing interest rates. The Company also seeks to manage the risk of interest rate changes to its net income and the economic value of equity. The Company maintains an Enterprise Risk Management/Asset-Liability Committee (ERM/ALCO) that is responsible for reviewing its asset-liability policies and interest rate risk position. This Committee meets regularly, and the Chief Financial Officer and Treasurer report trends and interest rate risk position to the Risk Management and Capital Committee of the Board of Directors on at least a quarterly basis. The manner and extent of the movement of interest rates is an uncertainty that could have a negative impact on the Company’s net interest income and earnings.
The Company manages its interest rate risk by analyzing the sensitivities and adjusting the mix of its assets and liabilities, including derivative financial instruments. The Company also uses secondary markets, brokerages, and counterparties to accommodate customer demand for long-term fixed rate loans and to provide it with flexibility in managing its balance sheet positions.
Quantitative Aspects of Market Risk. The Company measures its interest rate sensitivity primarily by evaluating models of net interest income over one year, two years, and three year time horizons. The Company generally models a base case assuming no changes in interest rates or balance sheet composition and then assuming various scenarios of ramped interest rate changes, shocked interest rate changes, and changes involving twists in the yield curve. The Bank also evaluates its equity at risk from interest rate changes through discounted cash flow analysis. This measure assesses the present value of changes to equity based on long-term impacts of rate changes beyond the time horizons evaluated for net interest income at risk.
The Company uses a simulation model to measure the changes in net interest income. The chart below shows the analysis of the scenario where interest rates ramp up in the first year compared to a base case of flat interest rates, assuming a parallel shift in the yield curve. Loans, deposits, and borrowings are modeled expected to reprice at the repricing or maturity date. Pricing caps and floors are included in the simulation model. The Company uses prepayment guidelines set forth by market sources as well as Company generated data where applicable. Generally, cash flows from loans and securities are assumed to be reinvested to maintain a static balance sheet. Other assumptions about balance sheet mix are generally held constant. There were no material changes to the way that the Company measures market risk in 2020. The model at year-end 2020 included two adjustments reflecting conditions at that date. The modeled balance sheet excluded the assets and liabilities related to the Mid-Atlantic branch sale, including loans and deposits held for sale, with a reduction in short-term investments sufficient to fund the sale. The model also assumed that the balance of PPP loans expected to be repaid were not reinvested and these funds are modeled to payoff the corresponding wholesale funding as it matures. Neither of these adjustments was viewed as material to the projection results, and both of these items are targeted to be substantially completed by midyear 2021.
Item 7 - 7A - Table 2 - Qualitative Aspects of Market Risk
Change in
Interest Rates-Basis
Points (Rate Ramp)
1- 12 Months 13- 24 Months
$ Change % Change $ Change % Change
(In thousands)
At December 31, 2020
+300 $ 5,578 1.78 % $ 27,942 9.17 %
+200 (108) (0.03) 12,199 4.01
+100 (3,090) (0.99) (943) (0.31)
-100 5,408 1.73 6,769 2.22
At December 31, 2019
+300 $ 17,080 4.70 % $ 28,003 7.60 %
+200 11,070 3.00 19,589 5.30
+100 5,107 1.40 10,289 2.80
-100 (6,559) (1.80) (13,611) (3.70)
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.As a lookback on 2020 positioning and market events, the Company was positioned to expect a decrease in net interest income in the unexpected event of a downward shift in interest rates, which is what happened early in 2020. A downward shock of 100 basis points was expected to result in approximately a 4% decrease in net interest income in the first year. Following the downward shock of approximately 150 basis points near the end of the first quarter, net interest income decreased sequentially by 10% in the second quarter.
The Company’s asset sensitivity roughly doubled over the first nine months of the year. This was due to the influx of non-interest bearing demand deposit balances, the growth in short-term investments, the initial lengthening of wholesale fund maturities, runoff of higher rate fixed rate assets, and the assumed higher prepayment speeds of the remaining portfolio. Also, the reduction in base case net interest income increases the relative impact of changes due to interest rate sensitivity. In line directionally with this modeled sensitivity, at the start of the year, the sharp decrease in interest rates in the first quarter resulted in compression of the Company’s net interest margin in the first half of 2020. Also in line directionally with the model, the margin stabilized in the second half of the year as deposit pricing began to catch up with loan yield compression.
The Company’s interest rate sensitivity decreased significantly in the final quarter of the year, with net interest income sensitivity moving to nearly neutral at year-end. Contributing factors were the branch sale agreement, an increase in investment securities, and accumulating impacts of payoffs of LIBOR based loans and shortening of the liability maturity ladder. In the first year of the four modeled scenarios, the impact of the modeled change in net interest income was less than 2% in all four scenarios. In the second modeled year, the percentage change in net interest income was less than the sensitivity shown at year-end 2019 for all scenarios except the +300 basis point scenario. At year-end 2020, the greatest modeled sensitivity was in the second year of the +200 basis point and +300 basis point scenarios, where the positive interest sensitivity exceeded $10 million in annual net interest income based on the modeled parallel shifts in interest rates.
Due to the low level of interest rates, the modeled sensitivity of a downward shift in interest rates is affected by assumptions related to market influences on spreads and floors applied to zero rate indicates. Prime, mortgage rates, and deposits are floored. All other rates are zero bound. Measures of risk in an upward rate environment were close to neutral at year-end 2020 in both year one and year two of the 100 basis point upward scenarios, and in the first year of a 200 basis point increase. The Company also models sensitivity to yield curve twists. A steepening of the yield curve is more asset sensitive than the scenario of a parallel shift. The above sensitivities are compared to the baseline static model and based on current interest rates and modeling assumptions. Further flattening of the yield curve also presents the possibility of compressing the margin, including the impact of tighter market spreads due to competitive factors in such environments.
In addition to modeling the sensitivity of net interest income, the Company also models the sensitivity of net income and of equity at risk in the event of rate changes. The dollar amount of net income at risk was modeled to generally be the same as the amount of net-interest income at risk in the two percent ramp up scenario. The Company’s equity at risk is normally modeled as liability sensitive, due to the overall shorter duration of its funding sources compared to earning assets. This liability sensitivity had shifted to near neutral at year-end 2019, and equity at risk was asset sensitive at year-end 2020, increasing by approximately 3% in the event of a 200 basis point upward shock.
Modeled interest rate sensitivity depends on material assumptions. Additionally, market risk exposure is affected by the level and shape of the yield curve in markets for financial instruments including U.S. Treasury obligations, forward interest rate derivatives, the U.S. prime interest rate, and LIBOR rates. Also, the economic impact on customer and market behaviors of the COVID-19 pandemic remains uncertain and may cause actual events to differ from assumptions.
A critical component of the Company’s modeling is the assumption of deposit interest rate sensitivity, which the Company continues to model at a 40% beta level. Results in 2020 for non-brokered deposits were generally consistent with this assumption. The behavior of markets under the historically unusual conditions currently prevailing may be different from modeling assumptions, and the Company continues to monitor the markets and the assumptions in its model.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary data required by this item are presented elsewhere in this report beginning on page, in the order shown below:
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive (Loss)/Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a and 15(d) -15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of December 31, 2019. Based upon their evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of that date, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”): (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company evaluated changes in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the last fiscal quarter. The Company determined that there were no changes that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s report on internal control over financial reporting and the independent registered public accounting firm’s report on the Company’s internal control over financial reporting are contained in “Item 8 - Consolidated Financial Statements and Supplementary Data.”

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
For information concerning the directors of the Company, the information contained under the sections captioned “Proposal 1 - Election of Directors for a One-Year Term” in Berkshire’s Proxy Statement for the 2021 Annual Meeting of Stockholders (“Proxy Statement”) is incorporated by reference. The following table sets forth certain information regarding the executive officers of the Company.
Name Age Position
Nitin J. Mhatre 50 President and Chief Executive Officer of the Company; Chief Executive Officer - Berkshire Bank; Director of Berkshire Hills Bancorp and Berkshire Bank
Sean A. Gray 45 Senior Executive Vice President of the Company; President - Berkshire Bank
James M. Moses 44 Senior Executive Vice President, Chief Financial Officer of the Company; Senior Executive Vice President, Chief Financial Officer - Berkshire Bank
George F. Bacigalupo 66 Senior Executive Vice President, Head of Commercial Banking - Berkshire Bank
Tami F. Gunsch 58 Senior Executive Vice President, Head of Consumer Banking - Berkshire Bank
Gregory D. Lindenmuth 53 Senior Executive Vice President, Chief Risk Officer - Berkshire Bank
Deborah A. Stephenson 50 Senior Executive Vice President, Regulatory & Compliance- Berkshire Bank
Jennifer M. Carmichael 44 Executive Vice President, Chief Internal Audit Officer - Berkshire Bank
Jacqueline Courtwright 57 Executive Vice President, Chief Human Resources and Culture Officer - Berkshire Bank
Georgia Melas 57 Executive Vice President, Chief Credit Officer - Berkshire Bank
Wm. Gordon Prescott 59 Executive Vice President, General Counsel and Corporate Secretary - Berkshire Bank
Jason T. White 46 Executive Vice President , Chief Information Officer - Berkshire Bank
The executive officers are elected annually and hold office until their successors have been elected and qualified or until they are removed or replaced.
BIOGRAPHICAL INFORMATION
Nitin J. Mhatre. Age 50. Mr. Mhatre was appointed to the role of President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank in January 2021. He was also appointed as a Director of the Company and the Bank. Prior to joining the Company, Mr. Mhatre was Executive Vice President, Community Banking, at Webster Bank, where he led consumer and business banking businesses. Before joining Webster in 2009, Mr. Mhatre spent 13 years at Citi Group in various leadership roles across consumer-related businesses globally.
Sean A. Gray. Age 45. Mr. Gray was appointed to the role of Senior Executive Vice President and Chief Operating Officer of the Company and President of the Bank in November 2018. He was previously Senior Executive Vice President of the Company and Chief Operating Officer of the Bank since 2015. Mr. Gray joined the Company in retail banking in 2007 and attained the positon of Executive Vice President, Retail Banking. Previously, he was Vice President and Consumer Market Manager at Bank of America, in Waltham, Massachusetts.
James M. Moses. Age 44. Mr. Moses is Senior Executive Vice President, Chief Financial Officer of the Company and the Bank, since joining the Bank in July 2016. Mr. Moses previously served at Webster Bank as Senior Vice President and Asset/Liability Manager. Mr. Moses joined Webster Bank in 2011 from M&T Bank where he spent four years in various roles including head mortgage trader, deposit products pricing manager, and consumer credit card product manager.
George F. Bacigalupo. Age 66. Mr. Bacigalupo was promoted to Senior Executive Vice President, Head of Commercial Banking, Berkshire Bank in September 2015, having previously served as an Executive Vice President since October 2013 and Senior Vice President, Chief Credit Officer since 2011. Previously, Mr. Bacigalupo was EVP of Specialty Lending at TD Banknorth, where he established the ABL and other middle-market lending groups. Subsequently, at TD Bank, he was the Senior Lender for New England.
Tami F. Gunsch. Age 58. Ms. Gunsch is Senior Executive Vice President, Head of Consumer Banking, Berkshire Bank. Ms. Gunsch is responsible for all aspects of the retail banking consumer experience. Ms. Gunsch has previously held the positions of EVP, Retail Banking and Senior Vice President. Ms. Gunsch joined Berkshire from Citizens Bank in 2009 as First VP of Retail Banking.
Gregory D. Lindenmuth. Age 53. Mr. Lindenmuth is Senior Executive Vice President, Chief Risk Officer of the Bank, a position he was promoted to in October 2018. Mr. Lindenmuth joined Berkshire in 2016 from the FDIC where he was employed for 24 years and held multiple positions including Senior Risk Examiner for the Division of Risk Management Supervision and Acting Regional Manager for the Division of Insurance and Research. With the FDIC, Mr. Lindenmuth was also a Capital Markets, Mortgage Banking, and Fraud Specialist.
Deborah Stephenson. Age 50. Senior Executive Vice President, Compliance and Regulatory of Berkshire Bank. Ms. Stephenson joined the Company in 2014. She was previously Senior Vice President at Country Bank where she managed retail banking and human resources.
Jennifer M. Carmichael, Age 44. Ms. Carmichael was promoted to Executive Vice President, Chief Internal Audit Officer of Berkshire Bank in November 2020. She reports to the Audit Committee of the Board and administratively to the CEO. Ms. Carmichael previously served as Senior Vice President and Audit Manager. She joined the Bank in 2016 from Accume Partners where she served as Senior Audit Manager to several clients in the New York and New England regions, including Berkshire.
Jacqueline Courtwright, Age 57. Ms. Courtwright was promoted in September 2020 to Executive Vice President, Chief Human Resources and Culture Officer at Berkshire Bank. She had been appointed as Senior Vice President, Chief Human Resources Officer in July 2019. Prior to joining Berkshire in 2012, Ms. Courtwright was VP, Human Resources Business Partner at Citizen Bank and also held senior human resource roles during her 20 years at KeyBank.
Georgia Melas. Age 57. Ms.Melas is Executive Vice President, Chief Credit Officer of Berkshire Bank, a position she was promoted to in October 2018. Ms. Melas joined Berkshire as Senior Vice President, Chief Credit Officer in 2015 from Key Bank where she held multiple positions including Senior Credit Officer, Commercial Banking.
Wm. Gordon Prescott, Age 59. Mr. Prescott is Executive Vice President, General Counsel and Corporate Secretary of the Bank, a position he was promoted to in October 2018. Mr. Prescott joined Berkshire in 2008 as VP, General Counsel and Corporate Secretary. Mr. Prescott has 30 plus years of experience in the legal profession, including extensive experience as in-house corporate counsel, most recently with KB Toys Inc. prior to joining the Bank.
Jason T. White, Age 46. Mr. White was promoted to Executive Vice President, Chief Information Officer of Berkshire Bank in November 2020. He previously served as Senior Vice President, Chief Technology Officer since May 2019 when he joined the Bank following the acquisition of Savings Institute Bank & Trust, where he served as Chief Information Officer and Information Security Officer.
Reference is made to the cover page of this report and to the section captioned “Additional Information - Other Information Relating to Directors and Executive Officers - Delinquent Section 16(a) Reports” in the Proxy Statement for information regarding compliance with Section 16(a) of the Exchange Act. For information concerning the audit committee and the audit committee financial expert, reference is made to the section captioned “Proposal 1 - Election of Directors for a One-Year Term", "Proposal 1 - Election of Directors for One Year Term - Corporate Governance - Committees of the Board of Directors”, and “Proposal 1 - Election of Directors for a One Year Term - Board Committees and Responsibilities" in the Proxy Statement.
For information concerning the Company’s code of ethics, the information contained under the section captioned “Proposal 1 - Election of Directors for a One Year Term - Corporate Governance - Code of Business Conduct and Anonymous Reporting Line Policy” in the Proxy Statement is incorporated herein by reference.
A copy of the Company’s code of ethics is available to stockholders on the Company’s website at:
http://ir.berkshirebank.com.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
For information regarding executive compensation, the sections captioned “Proposal 1 - Election of Directors for a One-Year Term”, “Proposal 1 - Election of Directors of a One Year Term - Corporate Governance - Committees of the Board of Directors”, and “Proposal 1 - Election of Directors for a One Year Term - Board Committees and Responsibilities” in the Proxy Statement are incorporated herein by reference.
For information regarding the Compensation Committee Report, the section captioned “Compensation Discussion and Analysis” in the Proxy Statement is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
(a)Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned “Additional Information - Stock Ownership” in the Proxy Statement.
(b)Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned “Additional Information - Stock Ownership” in the Proxy Statement.
(c)Changes in Control
Management of Berkshire knows of no arrangements, including any pledge by any person of securities of Berkshire, the operation of which may at a subsequent date result in a change in control of the registrant.
(d)Equity Compensation Plan Information
The following table sets forth information, as of December 31, 2020, about Company common stock that may be issued upon exercise of options under stock-based benefit plans maintained by the Company, as well as the number of securities available for issuance under equity compensation plans:
Plan category Number of securities
to be issued upon
exercise of
outstanding options, warrants and rights Weighted-average
exercise price of
outstanding options, warrants and rights Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities reflected in the first column)
Equity compensation plans approved by security holders
112,280 $ 22.95 898,483
Equity compensation plans not approved by security holders
- - -
Total 112,280 $ 22.95 898,483

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the sections captioned “Additional Information - Other Information Relating to Directors and Executive Officers - Transactions with Related Persons" and “Additional Information - Other Information Relating to Directors and Executive Officers - Procedures Governing Related Persons Transactions” in the Proxy Statement. Information regarding director independence is incorporated herein by reference to the section “Proposal 1 - Election of Directors for a One Year Term” in the Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section captioned “Proposal 3 - Ratification of the Appointment of the Independent Registered Public Accounting Firm” in the Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) [1] Consolidated Financial Statements
•Report of Independent Registered Public Accounting Firm
•Consolidated Balance Sheets as of December 31, 2020 and 2019
•Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Comprehensive (Loss)/Income for the Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
•Notes to Consolidated Financial Statements
The Consolidated Financial Statements required to be filed in our Annual Report on Form 10-K are included in Part II, Item 8 hereof.
[2] Financial Statement Schedules
All financial statement schedules are omitted because the required information is either included or is not applicable.
[3] Exhibits
3.1 Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of Berkshire Hills Bancorp, Inc. (2)
3.3 Certificate of Amendment to the Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (3)
3.4 Certificate of Designations of the Series B Non-Voting Preferred Stock (4)
4.1 Form of Common Stock Certificate of Berkshire Hills Bancorp, Inc. (1)
4.2 Note Subscription Agreement by and among Berkshire Hills Bancorp, Inc. and certain subscribers dated September 20, 2012 (5)
4.3 Description of Berkshire Hills Bancorp, Inc. Securities (16)
10.1 Three-Year Employment Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Richard M. Marotta (6)
10.2 Separation Agreement between Berkshire Hills Bancorp, Inc., Berkshire Bank and Richard M. Marotta (11)
10.3 Supplemental Executive Retirement Agreement between Berkshire Bank and Sean A. Gray (6)
10.4 Three Year Executive Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc., and George F. Bacigalupo (7)
10.5 Three-Year Executive Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc., and James M. Moses (8)
10.6 Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc., and Sean A. Gray (9)
10.7 Berkshire Bank Enhanced Change in Control Severance Plan (Gregory Lindenmuth and Tami Gunsch) (16)
10.8 Form of Split Dollar Agreement entered into with Sean A. Gray (10)
10.9 Three Year Employment Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Nitin Mhatre (12)
10.10 Berkshire Bank Executive Long-Term Care Insurance Plan (13)
10.11 Berkshire Hills Bancorp, Inc. 2018 Equity Incentive Plan (14)
10.12 Senior Executive Short Term Incentive Plan (15)
21.0 Subsidiary Information
23.1 Consent of Crowe LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in 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 Form S-1, Registration Statement and amendments thereto, initially filed on March 10, 2000, Registration No. 333-32146.
(2) Incorporated herein by reference from the Exhibits to the Form 8-K as filed on June 26, 2017.
(3) Incorporated herein by reference from the Exhibits to the Form 10-Q as filed on November 9, 2017.
(4) Incorporated herein by reference from the Exhibits to the Form 8-K as filed on October 16, 2017.
(5) Incorporated herein by reference from the Exhibits to the Form 8-K as filed on September 26, 2012.
(6) Incorporated herein by reference from the Exhibits to the Form 8-K as filed on February 22, 2019.
(7) Incorporated herein by reference from the Exhibits to the Form 10-K as filed on March 17, 2014.
(8) Incorporated herein by reference from the Exhibits to the Form 8-K as filed on September 23, 2016.
(9) Incorporated herein by reference from the Exhibits to the Form 10-K as filed on March 16, 2011.
(10) Incorporated herein by reference from the Exhibit to the Form 8-K as filed on January 19, 2011.
(11) Incorporated herein by reference from the Exhibit to the Form 8-K as filed on August 13, 2020
(12) Incorporated herein by reference from the Exhibit to the Form 8-K as filed on January 26, 2021.
(13) Incorporated herein by reference from the Exhibits to the Form 8-K as filed on January 23, 2015.
(14) Incorporated herein by reference from the Appendix to the Proxy Statement as filed on April 6, 2018.
(15) Incorporated herein by reference from the Exhibits to the Form 10-Q as filed on May 10, 2019.
(16) Incorporated herein by reference from the Exhibit to the Form 10-K as filed on February 28, 2020.