EDGAR 10-K Filing

Company CIK: 1108134
Filing Year: 2022
Filename: 1108134_10-K_2022_0001108134-22-000004.json

---

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 - CREDIT QUALITY RATIOS
ITEM 1 TABLE 4 - ALLOCATION OF ALLOWANCE BY LOAN CATEGORY
ITEM 1 TABLE 5 - WEIGHTED AVERAGE YIELD ON SECURITIES
ITEM 1 TABLE 6 - AVERAGE BALANCE AND WEIGHTED AVERAGE RATES FOR DEPOSITS
ITEM 1 TABLE 7 - MATURITY OF DEPOSITS > $250,000
PART II
ITEMS 7-7A.
ITEM 7 TABLE 1 - AVERAGE BALANCES, INTEREST AND AVERAGE YIELD COSTS
ITEM 7 TABLE 2 - RATE VOLUME ANALYSIS
ITEM 7 - 7A TABLE 3 - 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 continue to result in a 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. Additionally, financial markets and/or Company operations may be adversely affected by the current or anticipated impact of military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events.
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”).
Berkshire Bank is transforming what it means to bank its neighbors socially, humanly, and digitally to empower the financial potential of people, families, and businesses in its communities as it pursues its vision of being the leading socially responsible omni-channel community bank in the markets it serves. Berkshire Bank provides business and consumer banking, mortgage, wealth management, and investment services.
At year-end 2021, the Bank had 106 full-service banking offices in its New England and New York footprint. During 2021, the Company opened commercial banking offices in New Haven, CT and Providence, RI. During the year 2021, the Company sold its 8 Mid-Atlantic banking offices and related operations, while maintaining a commercial lending office with an asset-based lending focus. Also during the year, the Bank consolidated 16 branch offices in its New England/New York footprint. and sold its insurance operations.
The emergence of the global COVID-19 pandemic in the first quarter of 2020 affected many aspects of the Company’s operations and financial condition through 2020 and 2021, as further described in other sections of this report. The Company’s markets were initially among the hardest hit areas in the world. Beginning in the first
quarter of 2021, the Company’s markets were among the leading areas of the country in achieving high rates of vaccination with new vaccines that were deployed.
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, as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission, 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 its products. The location and convenience of branch offices is also a significant competitive factor, particularly regarding new offices. The Company is pursuing a “banker heavy, branch light” model in newer markets, and uses its mobile MyBanker teams which provide personalized service to customers with committed relationships. The Company does not rely on any individual, group, or entity for a material portion of its deposits. Due to recent mergers of in-market bank competitors, the Company is pursuing opportunities to expand its market share and talent recruitment.
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 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 2021 and 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 7 - Loans of the Consolidated Financial Statements.
Item 1 - Table 1 - Loan Portfolio Analysis
2021 2020 2019
(In millions) Amount Percent of Total Amount Percent of Total Amount Percent of Total
Loans:
Construction $ 324 4.7 % $ 455 5.6 % $ 449 4.7 %
Commercial multifamily 516 7.6 483 6.0 632 6.7
Commercial real estate owner occupied 607 8.9 552 6.8 673 7.1
Commercial real estate non-owner occupied 2,157 31.6 2,119 26.2 2,190 23.0
Commercial and industrial 1,285 18.8 1,943 24.0 1,844 19.4
Residential real estate 1,489 21.8 1,932 23.9 2,853 30.0
Home equity 252 3.7 294 3.7 379 4.0
Consumer other 196 2.9 303 3.8 483 5.1
Total $ 6,826 100.0 % $ 8,081 100.0 % $ 9,503 100.0 %
Allowance for credit losses (1)
(106) (127) (64)
Net loans $ 6,720 $ 7,954 $ 9,439
(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 published interest 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 mostly 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. This program was an integral component of federal support programs in response to the emergence of the pandemic in the first half of 2020. These loans were viewed as zero credit risk due to the related SBA guarantee. Most of these loans were repaid via SBA forgiveness in 2021. The balance of these PPP loans was $30 million at year-end 2021, compared to $633 million at year-end 2020.
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 in its C&I loan portfolio. 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 Bank is developing conduit relationships in its markets as an additional business channel for newly originated mortgages.
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. In 2021, the Bank entered into a third party relationship to service the residential mortgages and real estate secured consumer loans in its portfolio.
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 was indirect auto lending. In 2019, the Company decided to end the origination of indirect auto loans. 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. In 2021, the Company expanded its consumer lending in its markets through a third party relationship with a financial technology company which originates unsecured consumer loans through the internet using artificial intelligence technology in combination with the Bank’s underwriting criteria.
Maturity and Sensitivity of Loan Portfolio. The following table shows contractual final maturities of loans at year-end 2021. 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 Five to More Than
(In thousands) or Less Five Years Fifteen Years Fifteen Years Total
Loans:
Construction $ 80,052 $ 142,114 $ 87,478 $ 14,638 $ 324,282
Commercial multifamily 39,899 177,740 293,666 4,512 515,817
Commercial real estate owner occupied 45,827 173,858 316,684 70,108 606,477
Commercial real estate non-owner occupied 280,160 1,049,631 748,396 78,742 2,156,929
Commercial and industrial 303,706 683,365 274,324 23,034 1,284,429
Residential real estate 3,430 33,530 233,909 1,218,379 1,489,248
Home equity 1,388 4,195 65,897 180,886 252,366
Consumer other 9,396 133,138 44,001 9,764 196,299
Total $ 763,858 $ 2,397,571 $ 2,064,355 $ 1,600,063 $ 6,825,847
Item 1 - Table 2B - Total loans due after one year as of December 31, 2021 - fixed and variable interest rates
(In thousands) Fixed Interest Rate Variable Interest Rate Total
Loans:
Construction $ 28,215 $ 216,015 $ 244,230
Commercial multifamily 115,278 360,640 475,918
Commercial real estate owner occupied 199,055 361,595 560,650
Commercial real estate non-owner occupied 581,824 1,294,945 1,876,769
Commercial and industrial 356,189 624,534 980,723
Residential real estate 1,148,983 336,835 1,485,818
Home equity 2,045 248,933 250,978
Consumer other 180,932 5,971 186,903
Total $ 2,612,521 $ 3,449,468 $ 6,061,989
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 business line Managing Director and Credit Director. 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 on accruing troubled debt restructurings totaled $0.2 million for 2021. The total carrying value of troubled debt restructurings was $26.8 million at year-end.
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 beginning 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 credit losses on loans 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 3 - Credit Quality Ratios
2021 2020 2019
Ratios:
Allowance for credit losses/total loans 1.55 % 1.58 % 0.67 %
Non-accrual loans/total loans 0.52 0.80 0.42
Allowance for credit losses/non-accruing loans 300.33 196.01 160.38
Net charge-offs/average loans 0.29 0.41 0.35
Item 1 - Table 3.a - Net charge-offs to average loans for each loan category
2021 2020 2019
Net charge-offs to average loans:
Construction - % 0.01 % - %
Commercial multifamily - - 0.01
Commercial real estate owner occupied 0.02 0.08 0.05
Commercial real estate non-owner occupied 0.18 0.12 -
Commercial and industrial 0.09 0.16 0.24
Residential real estate - 0.01 0.01
Home equity - - 0.01
Consumer other 0.01 0.02 0.03
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 4A - Allocation of Allowance for Credit Losses by Category (as of year-end)
2021 2020 2019
(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
Construction $ 3,206 1.0 % $ 5,111 1.1 % $ 2,713 0.6 %
Commercial multifamily 6,120 1.2 5,916 1.2 4,413 0.7
Commercial real estate owner occupied 12,752 2.1 12,380 2.2 4,880 0.7
Commercial real estate non-owner occupied 32,106 1.5 35,850 1.7 16,344 0.8
Commercial and industrial 22,584 1.8 25,013 1.3 20,099 1.1
Residential real estate 22,734 1.5 28,491 1.5 9,970 0.4
Home equity 4,006 1.6 6,482 2.2 1,470 0.4
Consumer other 2,586 1.3 8,059 2.7 3,686 0.8
Total (1)
$ 106,094 1.6 % $ 127,302 1.6 % $ 63,575 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 4B - Allocation of Allowance for Credit Losses (as of year-end)
2021 2020 2019
(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
Construction $ 3,206 4.8 % $ 5,111 5.6 % $ 2,713 4.7 %
Commercial multifamily 6,120 7.5 5,916 6.0 4,413 6.7
Commercial real estate owner occupied 12,752 8.9 12,380 6.8 4,880 7.1
Commercial real estate non-owner occupied 32,106 31.6 35,850 26.2 16,344 23.0
Commercial and industrial 22,584 18.8 25,013 24.0 20,099 19.4
Residential real estate 22,734 21.8 28,491 23.9 9,970 30.0
Home equity 4,006 3.7 6,482 3.7 1,470 4.0
Consumer other 2,586 2.9 8,059 3.8 3,686 5.1
Total (1)
$ 106,094 100.0 % $ 127,302 100.0 % $ 63,575 100.0 %
(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.
Historically, the Company has maintained short-term investment balances as a component of cash and cash equivalents which are a component of short-term liquidity management. Due to the pandemic, with a surge in demand deposits and a reduction in loan balances, the balance of short-term investments has increased due to the comparatively low yields and spreads on longer duration investment securities. Most short-term investments have been maintained at the Federal Reserve Bank of Boston.
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). 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 has various hold limits limiting credit and instrument exposures.
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 table summarizes year-end 2021 amortized cost, weighted average yields, and contractual maturities of debt securities. Yields are shown on a fully taxable equivalent basis and are based on amortized cost. 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. There were no material changes in the tax-exempt portfolio.
Item 1 - Table 5 - 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 $ 2.1 3.0 % $ 5.5 5.0 % $ 36.5 5.0 % $ 309.2 4.0 % $ 353.3 4.0 %
Mortgage-backed securities 0.1 2.0 % 31.8 2.0 % 255.4 2.0 % 1,752.8 1.0 % 2,040.1 2.0 %
Other bonds and obligations 61.0 - % 1.7 2.0 % 40.1 4.0 % 22.3 3.0 % 125.1 2.0 %
Total $ 63.2 0.3 % $ 39.0 2.7 % $ 332.0 2.4 % $ 2,084.3 1.9 % $ 2,518.5 1.9 %
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 Bank has partnered with a third party fintech company to provide enhanced online deposit account opening services. 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 6 - Average Balance and Weighted Average Rates for Deposits
2021 2020 2019
(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 $ 3,008.5 30 % - % $ 2,324.6 23 % - % $ 1,745.2 18 % - %
NOW and other 976.4 10 0.1 1,216.6 12 0.3 1,053.9 11 0.6
Money market 3,293.5 32 0.2 2,713.6 26 0.6 2,542.6 26 1.2
Savings 1,111.6 11 0.1 914.1 9 0.1 798.2 8 0.2
Time 1,678.9 17 0.9 3,102.9 30 1.7 3,754.2 37 2.0
Total $ 10,068.9 100 % 0.3 % $ 10,271.8 100 % 0.7 % $ 9,894.1 100 % 1.2 %
Estimated uninsured deposits were $3.7 billion and $4.1 billion at December 31, 2021 and 2020, respectively. At year-end 2021, time deposits in excess of the FDIC insurance limit and estimated time deposits that are otherwise uninsured by maturity were as follows:
Item 1 - Table 7 - Maturity of Deposits >$250,000
Maturity Period Time Deposits that
Meet or Exceed the
FDIC Insurance
Limit Estimated Aggregate
Time Deposits that
Meet or Exceed the
FDIC Insurance
Limit and Otherwise
Uninsured Time
Deposits
(In thousands)
Three months or less $ 114,373 $ 180,053
Over 3 months through 6 months 102,789 153,912
Over 6 months through 12 months 77,235 123,310
Over 12 months 97,390 177,493
Total $ 391,787 $ 634,768
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 Bank also has access to borrowings from the Federal Reserve Bank of Boston.
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 2021. The Company’s common stock is listed on the New York Stock Exchange under the ticker “BHLB”. 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 using the London Interbank Offered Rate (“LIBOR”). Pursuant to bank regulations, the use of LIBOR as an index for new contracts was prohibited beginning in 2022. The use of LIBOR as an index on existing “Legacy” contracts will be discontinued beginning in 2023. There is further discussion of the LIBOR transition in Item 1A and Item 7 of this report.
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. The Wealth Management Group reported $1.7 billion in total assets under management at year-end 2021. The Company expanded this team during the year and introduced Socially Responsible Investment portfolios as another element of the Company’s overall vision of being a leading socially responsible company.
HUMAN CAPITAL MANAGEMENT
Berkshire’s people are the core of its ability to deliver on its Berkshire’s Exciting Strategic Transformation (BEST) plan and vision of being a high performing, leading socially responsible community bank in New England and beyond. The Company’s approach to human capital management is grounded in its Be FIRST values and focuses on:
•Strong oversight and risk management practices
•Recruitment
•Compensation & Benefits
•Retention, Training, Development & Engagement
•Health & Wellness
Oversight
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 proactively identifies potential human capital related risks, such as the labor market shortage, rising labor costs, and employee retention and designs strategies to mitigate those risks. Strong human capital management is viewed as integral to the Company's strategic transformation.
Recruitment
Berkshire operates in a highly competitive labor market with strong competition for top talent. To help power Berkshire’s transformation, it relies on and continues to recruit employees with the right mix of skills, expertise and experiences. The Company leverages several strategies to support its talent pipeline and talent acquisition activities including internship placements, affinity group relationships, and the use of experienced recruiters for key management and specialized positions. Berkshire continues to pursue a hybrid work model to expand its access to top talent and provide its employees with workplace flexibility. These strategies have proved effective in meeting the demand for talent demonstrated by the Company’s strong track record attracting new talent across retail, commercial, wealth management, business banking and operational areas. In addition, as market disruptions from mergers remain, Berkshire will continue to leverage its differentiated brand and unique market positioning to hire community-focused bankers from its competitors.
Compensation & Benefits
While the labor market shortage and other factors can contribute to increased labor costs, Berkshire continually evaluates its strategies and looks at best practices to provide competitive pay and benefits packages that reward performance and retain top talent at all levels of the Company. The Company offers comprehensive medical coverage, paid vacation and personal time, along with other benefits, all of which are available to married same-sex or different-sex couples as well as domestic partners. In addition to its compensation and health benefits, Berkshire offers volunteer-time off, an employee assistance program, regular performance reviews and the You FIRST Fund to help employees impacted by personal financial hardships.
Retention, Training, Development & Engagement
Strong employee retention will help reduce expense, create efficiencies and contribute to the success of BEST. In addition to compensation and benefits packages, Berkshire employs a collection of strategies to strengthen employee retention. The Company offers a menu of development and training programs consistent with one’s job responsibilities and professional goals including a mentoring program to pair high potential junior employees with senior staff. Berkshire continues to reskill and upskill employees from across the Company to take on new responsibilities and roles. For employees looking to expand their professional experience in the classroom, the Company offers an education assistance program. In 2021, Berkshire further enhanced its commitment to creating a strong workplace culture by rolling out a comprehensive employee engagement survey to identify strengthens and opportunity areas within the organization. Action plans were developed in areas that did not meet the Company’s high expectations. It expects to continue to enhance its efforts through intentional actions including offering a new employee rewards and recognition program.
Health & Wellness
Like all businesses, Berkshire has been impacted by the ongoing COVID-19 pandemic and continues to proactively manage impacts to protect the health and safety of its employees, customers and communities as well as retain and attract top talent. During the height of the pandemic, the Company provided protective equipment to front-line employees, including masks and gloves, and offered all additional paid sick time, paid vaccine 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. The Company continues to maintain a largely hybrid working environment with the majority of non-branch staff working remotely at least part-time.
Future of the Workplace
Berkshire continues to evolve and enhance its human capital management strategies to help drive organizational growth in support of BEST while combating risks, such as the labor market shortage and rising labor costs. The Company intends to continue to evolve its workplace model into a hybrid environment over the long-term. It also plans to pursue its DigiTouch™ service delivery model, a powerful combination of personal service driven by bankers fused with the convenience of user-centric technology that combined, delivers a superior customer experience. While technology will play a bigger role in the future of Berkshire helping to improve processes and drive efficiencies, people will always be at the core of its ability to deliver value to its customers and communities. The Company remains confident that the Berkshire brand, value proposition and socially-responsible vision will continue to be a differentiator in the market and help overcome labor market disruptions.
Human Capital* ◦Total Full Time Equivalent
◦Turnover Rate
31%
◦Retention Rate
64%
*All metrics reported are as of or for the year-ended December 31, 2021.
Diversity, Equity & Inclusion
Creating a diverse, equitable, and inclusive workplace is a critical component to the success of Berkshire’s Exciting Strategic Transformation (BEST) and its BEST Community Comeback. At the core of Berkshire’s strategy is a goal to ensure that its workforce reflects the communities in which it operates, that its employees feel that they are valued and can reach their full potential and that it leverages its core business to improve the access and affordability of financial solutions to support economic growth of under-represented populations and communities.
The Company instituted a strong foundation of governance practices to ensure that diversity, equity and inclusion is embedded into Berkshire’s business activities. This includes the Corporate Responsibility & Culture Committee of the Board of Directors which has ultimate oversight responsibility. Berkshire’s Diversity, Equity & Inclusion Committee, which reports into the Board committee, provides additional management level oversight to the Company’s programming and performance. To further strengthen those efforts in 2021, Berkshire named a Senior Vice President/Chief Diversity Officer.
The Company continues to work to improve representation within its workplace leveraging a combination of strategies. Berkshire identifies opportunities in targeted markets and business lines, develops deeper partnerships with non-profit organizations and affinity groups and uses external recruitment professionals to ensure it receives candidate pools that reflect the rural and urban communities in which 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
67 %
◦Percent of ethnic minorities in workforce
15 %
◦Percent of women on the Board
25 %
◦Percent of ethnic minorities on the Board
25 %
◦Percent of women in management (officer+)
20 %
◦Percent of ethnic minorities in management officer+)
4 %
*All metrics reported are as of December 31, 2021.
Berkshire provides a full suite of diversity, equity & inclusion trainings to build understanding and afford employees with strategies they can put into practice. All employees complete training annually. In addition, Berkshire offers seven Employee Resource Groups (ERGs) each playing an integral role for employees and the culture of the company. Every Employee Resource Group provides a safe space for dialogue, education, and collective action on topics relevant to their members and the Company. Through the ERGs, employees concerns and ideas to strengthen Berkshire’s culture are elevated to members of management and the Diversity, Equity & Inclusion Committee for action, empowering employees to collectively be engines of positive change within the workplace.
Additional information on Berkshire’s Human Capital Management and Diversity, Equity & Inclusion practices can be found in the Company’s annual Corporate Responsibility Report, which details the company's environmental, social and governance programs.
SUBSIDIARY ACTIVITIES
The Company wholly-owns Berkshire Bank. The Bank operates as a commercial bank under a Massachusetts trust company charter. 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, and the Company must seek nonobjection for various capital actions, including stock repurchases.
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. Under specified conditions, the Bank must also seek regulatory approval of capital distributions to the Company, its sole shareholder.
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 and the Bank 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 was the case during 2021 as to Bank dividends to the Company, and is expected to be the case for 2022.
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 definitions of these capital categories and the ratio metrics are set out in federal regulations. 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.
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, 2021, the Bank operated branches in New York, Vermont, Connecticut and Rhode Island, 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 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. At December 31, 2021, the Bank met the criteria for being considered “well capitalized” as defined in the prompt corrective action regulations.
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.
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.
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 are adjusted annually for inflation. Such penalties currently range up to more than $50 thousand per day or, in extreme cases, as high as $2 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. Consolidated regulatory capital requirements identical to those applicable to the Bank apply also to the Company.
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 the first half of 2021. The Federal Reserve Board guidance also provides for consultation and nonobjection for material increases in the amount of a bank holding company’s common stock dividend. 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 guidance provides for regulatory consultation and nonobjection under specified circumstances prior to a holding company redeeming or repurchasing regulatory capital instruments, including common stock, 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 power to vote 25% or more of any class of voting stock. 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.

---

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 2021 and 2020. The impact of the pandemic is discussed in the "Operating" risk factors 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.
•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.
•New Third Party Lending Relationships and Sourcing Channels May Increase Lending Risk
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, Ransomware, 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
•Various Factors May Cause Our Allowance for Credit Losses on Loans to Increase.
•Fair Value Measurements May Be Affected by Inherent Uncertainties
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. Similarly, if residential mortgage interest rates increase from lows in recent years, residential property values may be adversely impacted. Pandemic impacts on the supply and demand of residential properties have caused unusual price appreciation in many markets, which may not be sustained if market conditions normalize.
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 where the Bank has less experience than in its traditional market areas and where competition may result in different lending structures. Recent expansion of the commercial lending team may expose the Company to new markets and risks if new lenders are not integrated with the Company’s policies, controls, and procedures.
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.
The Company is Subject to a Variety of Risks in Connection With Any Sale of Loans it May Conduct.
The Company routinely sells newly originated residential mortgage loans and SBA guaranteed business loans, and may also sell other loans or loans 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.
New Third Party Lending Relationships and Sourcing Channels May Increase Lending Risk.
The Company is expanding its lending sourcing channels, including forming a residential mortgage conduit, partnering with fintech online lenders, and expanding its commercial loan sourcing channels. It is also relying more on third party loan servicing. These activities may increase the underwriting risks and loan administration risks in managing its lending activities.
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 and labor markets; created significant volatility and disruption in financial markets; impacted rates and yields on U.S. Treasury securities; resulted in increased credit risk in certain industries; increased demands on capital and liquidity; and affected employment and consumer confidence. In addition, the pandemic has resulted in temporary closures and curtailment of individual and business activities 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 supply of labor, inflationary impacts on operating costs, the financial condition of our clients and the demand for our products and services, changes in interest rates, recognition of credit losses and increases in the allowance for credit losses, impacts if customers draw on their lines of credit or draw down deposits 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 future impact of these measures is unknown, and they may not be sufficient to mitigate the negative impact of the pandemic. 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 face possible impacts on liquidity, operating revenues, and credit performance. 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, Ransomware, 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. Pursuant to regulations, the use of LIBOR on new contracts was discontinued on December 31, 2021, and LIBOR will cease publication after June 30, 2023.
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 Company has adopted SOFR as its preferred benchmark as an alternative to LIBOR for use in new contracts beginning on January 1, 2022.
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. The Company’s Stock Repurchase Program is also Dependent on These Distributions.
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 Company may also be unable to repurchase common stock under its Stock Repurchase Program.
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 requires 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. Changes in interest rates may also affect the market value of the Company’s investment securities portfolio, which may affect the level and adequate of its regulatory capital. The Federal Open Market Committee has indicated that it plans to increase interest rates in 2022.
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.
With total assets over $10 billion, the Company and the Bank are 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
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.
Fair Value Measurements May Be Affected by Inherent Uncertainties
The Company uses fair value measurements to determine fair value disclosures and to record fair value adjustments to certain assets and liabilities, such as interest rate swaps, impaired loans, securities available for sale, and derivatives. Additionally, from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and capitalized servicing rights. Whenever there is no readily available market data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial statements.
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.

---

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

---

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; and Southern Rhode Island. As of December 31, 20201 the Company had 106 full-service branches in Massachusetts, New York, Connecticut, and Vermont. The Company opened a commercial banking offices in Providence, Rhode Island and New Haven, Connecticut during 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, Providence RI, and New Haven, CT. The Bank's wholly-owned subsidiary, Firestone Financial, LLC, is headquartered in the Boston metro area. Its 44 Business Capital lending division is headquartered in Blue Bell, Pennsylvania.
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 leases. The Company has designated certain excess real estate as held for sale and is evaluating further real estate consolidations.
Access to most Company properties was restricted during periods of 2020 and 2021 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, mobile banking channels, and its MyBanker teams. Most back-office staff used home environments and telecommunications capacities to accommodate the shift out of the office due to the pandemic.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2021, 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, which motion was allowed in part by the court to dismiss the Bank’s negligent misrepresentation claim, and denied in part by the court to allow all other claims by the Bank to proceed. Discovery is now underway in this action. 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 in this matter, and discussions have proceeded between the parties to find a mutually acceptable resolution. On July 28, 2021, a class action complaint was filed by the original 93A claimant against the Bank in the Massachusetts Superior Court for Suffolk County, pursuant to a pre-negotiated Memorandum of Understanding (“MOU”) between the parties. In accordance with the MOU, the parties have filed and the court has preliminarily approved a settlement agreement, under which the Bank expects to pay damages of approximately $510,000 in exchange for the dismissal with prejudice and release of all claims that have been or could have been asserted in the filed class action lawsuit on behalf of the plaintiff and all putative settlement class members, plus certain costs for administration of the class action settlement and legal fees incurred by the named plaintiff up to the amount of $85,000. The court granted preliminary approval of the settlement on October 18, 2021 and set a hearing date for final approval. The settlement administrator issued notice to class members shortly after preliminary approval, informing them of the settlement and of the opportunity to object. No objections were received prior to the objection deadline set by the court. On February 23, 2022, the court granted final approval of the settlement agreement and dismissed this action with prejudice accordingly.
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. On June 30, 2021, the court dismissed the plaintiff’s complaint without prejudice in support of FCLS’s petition to compel arbitration. The parties are preparing for arbitration proceedings that are expected to occur in the first half of 2022.

---

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

---

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 Company had approximately 3,932 holders of record of common stock at February 25, 2022.
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 and the FDIC. Further information about dividend restrictions is disclosed in Note 19 - 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 2021, there were no shares transferred. During 2020, there were no shares transferred.
Purchases of Equity Securities by the Issuer and Affiliated Purchases
On April 28, 2021, the Company announced that its Board of Directors had approved a stock repurchase program pursuant to which the Company may repurchase up to 2,500,000 shares of its common stock through April 30, 2022. On September 13, 2021, the Company announced that it had completed this stock repurchase program. The Company repurchased 2,500,000 shares of its common stock at an aggregate price of $68.7 million, or an average price of $27.48 per share.
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, 2021 - $ - - -
November 1-30, 2021 - - - -
December 1-31, 2021 - - - -
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, 2016.
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 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21
Berkshire Hills Bancorp, Inc. 100.00 101.65 76.68 96.38 52.72 89.16
NYSE Composite Index 100.00 118.73 108.10 135.68 145.16 175.17
KBW NASDAQ Regional Banking Index 100.00 101.75 83.95 103.94 94.89 129.65
Source: S&P Global Market Intelligence

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
The following summary data is based in part on the Consolidated Financial Statements and accompanying notes, and other 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) 2021 2020 2019 2018 2017
Per Common Share Data:
Net earnings/(loss), diluted - continuing operations $ 2.39 $ (10.21) $ 2.05 $ 2.36 $ 1.24
Net (loss)/earnings, diluted - discontinued operations - (0.39) (0.08) (0.07) 0.15
Net earnings/(loss), diluted $ 2.39 $ (10.60) $ 1.97 $ 2.29 $ 1.39
Total book value per common share 24.30 23.37 34.65 33.30 32.14
Dividends 0.48 0.72 0.92 0.88 0.84
Common stock price:
High 29.16 33.04 33.72 44.25 40.00
Low 16.35 8.55 26.02 25.77 32.85
Close 28.43 17.12 32.88 26.97 36.60
Performance Ratios: (1)
Return on assets 0.98 % (4.15) % 0.75 % 0.90 % 0.56 %
Return on equity 10.18 (37.50) 5.75 6.84 4.45
Return on tangible common equity 10.80 (48.60) 9.36 11.41 7.29
Net interest margin, fully taxable equivalent (FTE) (2) 2.60 2.72 3.17 3.40 3.40
Fee income/Net interest and fee income 22.49 18.10 23.86 23.36 29.41
Growth Ratios:
Total commercial loans (12.09) % (4.58) % 9.19 % 6.17 % 37.79 %
Total loans (15.54) (14.95) 5.08 8.96 26.71
Total deposits (1.44) (1.16) 15.07 2.66 32.13
Total net revenues, (compared to prior year) 13.40 (14.73) 4.53 11.59 41.05
Earnings per share, (compared to prior year) 122.55 (638.07) (13.97) 64.75 (26.06)
Selected Financial Data:
Total assets $ 11,554,913 $ 12,838,013 $ 13,215,970 $ 12,212,231 $ 11,570,751
Total earning assets 10,899,109 12,089,939 11,916,007 11,140,307 10,509,163
Securities 2,548,695 2,223,417 1,769,878 1,918,604 1,898,564
Total loans 6,825,847 8,081,519 9,502,428 9,043,253 8,299,338
Allowance for credit losses (106,094) (127,302) (63,575) (61,469) (51,834)
Total intangible assets 29,619 34,819 599,377 551,743 557,583
Total deposits 10,068,953 10,215,808 10,335,977 8,982,381 8,749,530
Total borrowings 110,844 571,637 827,550 1,517,816 1,137,075
Total shareholders’ equity 1,182,435 1,187,773 1,758,564 1,552,918 1,496,264
At or For the Years Ended December 31,
2021 2020 2019 2018 2017
Selected Operating Data:
Total interest and dividend income $ 329,065 $ 409,782 $ 509,513 $ 465,894 $ 355,076
Total interest expense 37,899 93,000 144,255 109,694 64,113
Net interest income 291,166 316,782 365,258 356,200 290,963
Fee income 84,462 69,990 76,824 74,026 71,356
All other non-interest income/(loss) 58,786 (3,683) 7,178 298 2,888
Total net revenue 434,414 383,089 449,260 430,524 365,207
Provision for credit losses (500) 75,878 35,419 25,451 21,025
Total non-interest expense 285,893 840,239 289,857 266,893 252,978
Income/(loss) from continuing operations before income taxes 149,021 (533,028) 123,984 138,180 91,204
Income tax expense/(benefit) from continuing operations 30,357 (19,853) 22,463 28,961 42,088
Net income/(loss) from continuing operations 118,664 (513,175) 101,521 109,219 49,116
(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 income/(loss) $ 118,664 $ (533,017) $ 97,450 $ 105,765 $ 55,247
Basic earnings/(loss) per common share:
Continuing operations $ 2.41 $ (10.21) $ 2.06 $ 2.38 $ 1.24
Discontinued operations - (0.39) (0.08) (0.08) 0.16
Total basic earnings/(loss) per share $ 2.41 $ (10.60) $ 1.98 $ 2.30 $ 1.40
Diluted earnings/(loss) per common share:
Continuing operations $ 2.39 $ (10.21) $ 2.05 $ 2.36 $ 1.24
Discontinued operations - (0.39) (0.08) (0.07) 0.15
Total diluted earnings/(loss) per share $ 2.39 $ (10.60) $ 1.97 $ 2.29 $ 1.39
Weighted average common shares outstanding - basic 49,240 50,270 49,263 46,024 39,456
Weighted average common shares outstanding - diluted 49,554 50,270 49,421 46,231 39,695
Dividends per preferred share $ - $ 1.20 $ 1.84 $ 1.76 $ 0.42
Dividends per common share $ 0.48 $ 0.72 $ 0.92 $ 0.88 $ 0.84
Asset Quality and Condition Ratios: (3)
Net loans charged-off/average loans 0.29 % 0.41 % 0.35 % 0.18 % 0.19 %
Allowance for credit losses/total loans 1.55 1.58 0.67 0.68 0.62
Loans/deposits 68 79 92 101 95
Capital Ratios:
Tier 1 capital to average assets - Company 10.49 % 9.38 % 9.33 % 9.04 % 9.01 %
Total capital to risk-weighted assets - Company 17.32 16.10 13.73 12.99 12.43
Tier 1 capital to risk-weighted assets - Company 15.30 14.06 12.30 11.57 11.15
Shareholders’ equity/total assets 10.23 9.25 13.31 12.73 12.93
___________________________________
(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 7 - Table 3 - Average Balance, Interest and Average Yields / Costs
2021 2020 2019
(Dollars in millions) Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate
Assets
Loans: (1)(2)
Commercial real estate $ 3,600.2 $ 124.4 3.46 % $ 3,958.6 $ 151.5 3.83 % $ 3,789.5 $ 188.6 4.98 %
Commercial and industrial loans 1,527.6 71.8 4.70 2,049.4 87.7 4.28 1,983.9 111.2 5.60
Residential loans 1,560.4 58.4 3.75 2,324.3 87.8 3.78 2,719.8 100.7 3.70
Consumer loans 569.1 22.0 3.87 828.1 31.3 3.78 1,038.4 46.5 4.48
Total loans 7,257.3 276.6 3.81 9,160.4 358.3 3.91 9,531.6 447.0 4.69
Investment securities (2)(3) 2,283.6 49.4 2.16 1,845.2 54.6 2.96 1,846.9 62.6 3.39
Short-term investments and loans held for sale (4) 1,619.4 2.3 0.58 767.2 4.4 0.64 335.3 13.4 4.01
Mid-Atlantic region loans held for sale 179.5 7.1 3.97 25.2 0.4 1.07 - - -
Total interest-earning assets 11,339.8 335.4 2.60 11,798.0 417.7 3.55 11,713.8 523.0 4.47
Intangible assets 32.0 316.1 578.1
Other non-interest earning assets (4) 684.1 747.1 669.1
Total assets $ 12,055.9 $ 12,861.2 $ 12,961.0
Liabilities and shareholders' equity
Deposits:
NOW and other $ 1,340.2 $ 1.0 0.07 % $ 1,216.6 $ 3.5 0.29 % $ 1,053.9 $ 6.5 0.62 %
Money market 2,749.7 5.3 0.19 2,713.6 15.3 0.56 2,542.6 31.4 1.23
Savings 1,067.7 0.5 0.05 914.1 0.9 0.10 798.2 1.2 0.15
Certificates of deposit 1,978.9 18.6 0.94 3,102.9 52.5 1.69 3,754.2 76.1 2.03
Total interest-bearing deposits 7,136.5 25.4 0.36 7,947.2 72.2 0.91 8,148.9 115.2 1.41
Borrowings and notes (5) 320.2 10.7 3.34 841.6 20.7 2.46 1,115.5 32.4 2.91
Mid-Atlantic region interest-bearing deposits 335.1 1.8 0.54 45.0 0.1 0.80 - - -
Total interest-bearing liabilities 7,791.8 37.9 0.49 8,833.8 93.0 1.06 9,264.4 147.6 1.59
Non-interest-bearing demand deposits 2,817.4 2,324.6 1,745.2
Other non-interest-bearing liabilities (4) 280.9 281.4 257.1
Total liabilities 10,890.1 11,439.8 11,266.7
Total shareholders' equity 1,165.8 1,421.4 1,694.3
Total liabilities and equity $ 12,055.9 $ 12,861.2 $ 12,961.0
Net interest income $ 297.5 $ 324.7 $ 375.4
2021 2020 2019
(Dollars in millions) Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate
Net interest spread 2.12 % 2.49 % 2.88 %
Net interest margin (6) 2.60 2.72 3.17
Cost of funds 0.35 0.84 1.34
Cost of deposits 0.26 0.71 1.16
Interest-earning assets/interest-bearing liabilities 149.67 133.95 126.44
Supplementary data
Total non-maturity deposits $ 7,975.0 $ 7,168.9 $ 6,139.9
Total deposits 9,954.0 10,271.8 9,894.1
Fully taxable equivalent adjustment 6.3 6.4 7.5
____________________________________
Notes:
(1) The average balances of loans include nonaccrual loans, and deferred fees and costs. As of December 31, 2021 and December 31, 2020, deferred fees related to PPP loans totaled $0.2 million and 12.3 million, respectively.
(2) The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 27%.
(3) The average balance of investment securities is based on amortized cost.
(4) Includes discontinued operations.
(5) The average balances of borrowings and notes include the capital lease obligation presented under other liabilities on the consolidated balance sheet.
(6) Purchase accounting accretion totaled $6.7 million, $9.9 million, and $14.5 million for the years-ended December 31, 2021, 2020, and 2019, 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. There are no out-of-period adjustments included in the rate/volume analysis in the following table.
Item 7 - Table 4 - Rate Volume Analysis
2021 Compared with 2020 2020 Compared with 2019
(Decrease) Increase Due to (Decrease) Increase Due to
(In thousands) Rate Volume Net Rate Volume Net
Interest income:
Commercial real estate $ (14,027) $ (13,071) $ (27,098) $ (45,193) $ 8,096 $ (37,097)
Commercial and industrial loans 7,962 (23,913) (15,951) (27,008) 3,561 (23,447)
Residential loans (762) (28,622) (29,384) 2,017 (14,907) (12,890)
Consumer loans 704 (10,014) (9,310) (6,575) (8,592) (15,167)
Total loans (6,123) (75,620) (81,743) (76,759) (11,842) (88,601)
Investment securities (16,598) 11,341 (5,257) (7,945) (57) (8,002)
Short-term investments and loans held for sale (1)
(5,508) 2,980 (2,528) (16,924) 8,297 (8,627)
Mid-Atlantic region loans held for sale (1,480) 8,600 $ 7,120 - - -
Total interest income $ (29,709) $ (52,699) $ (82,408) $ (101,628) $ (3,602) $ (105,230)
Interest expense:
NOW accounts $ (2,832) $ 327 $ (2,505) $ (3,835) $ 882 $ (2,953)
Money market accounts (10,259) 201 (10,058) (18,043) 1,985 (16,058)
Savings accounts (536) 137 (399) (409) 156 (253)
Certificates of deposit (18,740) (15,233) (33,973) (11,486) (12,093) (23,579)
Total deposits (32,367) (14,568) (46,935) (33,773) (9,070) (42,843)
Borrowings 5,691 (15,702) (10,011) (4,553) (7,206) (11,759)
Mid-Atlantic region interest-bearing deposits 814 1,005 $ 1,819 - - -
Total interest expense $ (26,676) $ (30,270) $ (55,127) $ (38,326) $ (16,276) $ (54,602)
Change in net interest income $ (3,033) $ (22,429) $ (27,281) $ (63,302) $ 12,674 $ (50,628)
(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.
In 2021, the Company recorded a third quarter net gain of $52 million on the sale of the operations of the insurance subsidiary and the Mid-Atlantic branch operations. Expense adjustments in the first quarter 2021 were primarily related to branch consolidations. Third quarter 2021 adjustments included Federal Home Loan Bank borrowings prepayment costs. They also included other restructuring charges for efficiency initiatives in operations areas including write-downs on real estate moved to held for sale and severance related to staff reductions. The fourth quarter 2021 revenue adjustment was primarily related to trailing revenue on a previously reported sale, and the expense adjustment was due primarily to branch restructuring costs.
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.
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, 2021 December 31, 2020 December 31, 2019
GAAP Net income/(loss) $ 118,664 $ (533,017) $ 97,450
Non-GAAP measures
Adj: Loss/(gain) on securities, net 787 7,520 (4,389)
Adj: Goodwill impairment - 553,762 -
Adj: Net gains on sale of business operations (52,942) (1,240) -
Adj: Acquisition, restructuring, conversion, and other related expenses (1) 5,781 5,839 28,046
Adj: Loss from discontinued operations before income taxes - 26,855 5,539
Adj: Income taxes 11,696 (29,342) (7,799)
Net non-operating charges (34,678) 563,394 21,397
Total adjusted net income (non-GAAP) $ 83,986 $ 30,377 $ 118,847
GAAP Total revenue from continuing operations $ 434,414 $ 383,089 $ 449,260
Adj: Loss/(gain) on securities, net 787 7,520 (4,389)
Adj: Net gains on sale of business operations (52,942) (1,240) -
Total adjusted operating revenue (non-GAAP) $ 382,259 $ 389,369 $ 444,871
GAAP Total non-interest expense from continuing operations $ 285,893 $ 840,239 $ 289,857
Less: Total non-operating expense (see above) (5,781) (5,839) (28,046)
Less: Goodwill impairment - (553,762) -
Adjusted operating non-interest expense (non-GAAP) $ 280,112 $ 280,638 $ 261,811
Pre-tax, pre-provision net revenue (PPNR) from continuing operations $ 148,521 $ (457,150) $ 159,403
Adjusted pre-tax, pre-provision net revenue (PPNR) 102,147 108,731 $ 183,060
(in millions, except per share data)
Total average assets $ 12,056 $ 12,861 $ 12,961
Total average shareholders' equity 1,166 1,421 1,694
Total average tangible shareholders equity 1,134 1,105 1,116
Total average tangible common shareholders equity 1,134 1,088 1,076
Total tangible shareholders’ equity, period-end 1,153 1,153 1,159
Total tangible common shareholders’ equity, period-end 1,153 1,153 1,119
Total tangible assets, period-end 11,525 12,803 12,613
Total common shares outstanding, period-end (thousands) 48,667 50,833 49,585
Average diluted shares outstanding (thousands)
49,554 50,308 49,421
Earnings/(loss) per share, diluted $ 2.39 $ (10.60) $ 1.97
Plus: Net adjustments per share, diluted (0.70) 11.20 0.43
Adjusted earnings per share, diluted 1.69 0.60 2.40
Book value per common share, period-end 24.30 23.37 34.65
Tangible book value per common share, period-end 23.69 22.68 22.56
Total shareholders' equity/total assets 10.23 9.25 13.31
Total tangible shareholders' equity/total tangible assets 10.00 9.01 9.19
At or For the Years Ended
(Dollars in thousands) December 31, 2021 December 31, 2020 December 31, 2019
Performance Ratios
GAAP return on assets 0.98 % (4.15) % 0.75 %
Adjusted return on assets 0.70 0.24 0.93
GAAP return on equity 10.18 (37.46) 5.75
Adjusted return on equity 7.20 2.14 7.01
Adjusted return on tangible common equity 7.74 3.18 11.35
Efficiency ratio (2)
69.96 68.53 55.63
Supplementary Data (in thousands)
Tax benefit on tax-credit investments $ 4,372 $ 4,699 $ 7,950
Non-interest income charge on tax-credit investments (3,445) (3,645) (6,455)
Net income on tax-credit investments 928 1,054 1,495
Intangible amortization 5,200 6,181 5,783
Fully taxable equivalent income adjustment 6,344 6,402 7,451
____________________________________
(1)Acquisition, restructuring, conversion, and other related expenses included no merger and acquisition expenses for the years -ended December 31, 2021, and 2020. For the year-ended 2019, these expenses included $18.7 million in merger and acquisition expenses and $9.3 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.
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
•Comparison of Financial Condition at December 31, 2021 and 2020
•Comparison of Operating Results for the Years Ended December 31, 2021 and 2020
•Comparison of Operating Results for the Years Ended December 31, 2020 and 2019
•Liquidity and Cash Flows
•Capital Resources
•Application of Critical Accounting Policies
•Enterprise Risk Management
•LIBOR Transition
•Corporate Responsibility Update
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 2022 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 27% 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”) Established in 1846, the Bank operates as a commercial bank under a Massachusetts trust company charter.
SUMMARY
The Company’s vision is to be a high performing, leading socially responsible community bank in New England and beyond. It offers a wide range of banking, investment, and financial services through its lines of business that include Commercial Banking, Retail Banking, Consumer Lending, Wealth Management, Private Banking, and its 44 Business Capital national SBA lending division. Berkshire is committed to unleashing the financial potential of all its stakeholders by leveraging its 175 years of expertise, leading performance on environmental, social and governance (ESG) matters and best-in-class fintech partnerships. Its differentiated DigiTouch™ approach, a powerful combination of personal service, including its MyBanker program, fused with the convenience of user-centric technology, targets high customer satisfaction and a frictionless experience.
The ongoing COVID-19 global pandemic continued to impact the Company’s activities and results in 2021. Business and consumer activity were recovering from the sharp downturn in 2020 but remained constrained by the impact of the pandemic. The Company’s markets generally reported comparatively high vaccination rates, but the emergence of new variants created disruptions throughout the year. Labor and supply shortages affected many sectors in the economy. The emergence of inflation led to expectations of a reversal of accommodative monetary policy near year-end, which had supported higher asset values across many financial and other property classes. Further federal fiscal support early in the year buoyed ongoing liquidity across the economy, and credit performance remained positive and improving throughout the year. The Company’s retail branch offices were intermittently affected by closures or reduced operations. Its non-branch workforce remained in a work-from-home status throughout the year as the Company continued to plan its transition to a hybrid work environment.
Berkshire reported net income of $119 million in 2021, compared to a loss of $533 million in 2020 and net income of $97 million in 2019. The loss in 2020 was primarily due to pandemic impacts leading to the write-off of goodwill and elevated provisioning for expected credit losses. Net income in 2021 included the benefit of lower credit loss provision expense reflecting strong credit performance. Results in 2021 also included gains recorded on the sale of Mid-Atlantic branches and insurance operations which were part of the Company’s strategy to focus on core markets and return excess equity to shareholders.
The Company uses the non-GAAP measure of adjusted earnings to assess its performance. This measure excludes items not viewed as related to ongoing operations. These items were presented and reconciled to GAAP measures in a previous section of this Item 7. Adjusted earnings were $84 million in 2021, compared to $30 million in 2020 and $119 million in 2019. The decrease in 2021 adjusted earnings compared to the pre-pandemic year of 2019 is a result of pandemic, economic, and operating factors leading to lower operating leverage. The Company’s BEST strategic plan goal, discussed below, is to restore operating leverage through revenue growth and expense discipline and to improve efficiencies based on its operating focus and technology initiatives.
Net income per share totaled $2.39 in 2021, and adjusted earnings per share totaled $1.69. For the year 2021, book value per share increased by 4% to $24.30, and the non-GAAP measure of tangible book value per share also increased by 4% to $23.69.
The Company’s Board of Directors recruited Nitin Mhatre as Chief Executing Officer in January 2021, completing the transition following the resignation of the previous CEO in August 2020. During the first quarter of 2021, the
Company recruited Subhadeep Basu as SEVP/ Chief Financial Officer, replacing the prior CFO who resigned during the quarter. Also, during 2021, following the departure of the SEVP/Head of Consumer Banking, the Company recruited Lucy Bellomia as EVP/Head of Retail Banking and Ellen Steinfeld as EVP/Head of Consumer Lending and Payments. During 2021, Board Chair J. Williar Dunlaevy retired from the board, and Vice Chair David Brunelle was elected to the position of Board Chair. Three new directors joined the Board during the year: Nina A. Charnley, Jeffrey W. Kip, and Michael A. Zaitzeff.
In the second quarter of 2021, the Company announced its Berkshire’s Exciting Strategic Transformation (BEST) plan. The comprehensive BEST plan is targeted to improve the customer experience, deliver profitable growth, enhance stakeholder value and strengthen Berkshire’s community impact with improved focus on long-term efficiency, its customers, and its communities. The BEST plan has five major goals over the three-year plan period:
•Return On Tangible Common Equity (ROTCE): 10 - 12%
◦2021 Return on tangible common equity was 10.80%; Adjusted ROTCE was 7.74%
•Return on Assets (ROA): 1.00 - 1.05%
◦2021 ROA was 0.98%; Adjusted ROA was 0.70%
•Annual Pre-tax Pre-Provision Net Revenue (PPNR): $180 - 200 million
◦2021 PPNR was $149 million; adjusted PPNR was $102 million
•Net Promoter Score (NPS) in top quartile among New England banks
◦NPS measures customer experience and is correlated with business growth potential
◦NPS measure to be initiated in 2022
•ESG ranking in the top quartile nationally based on composite metrics tracked by the Company
◦ESG percentile ranking improved from 39th at year-end 2020 to 24th at year-end 2021
The plan has three major pillars; optimize, digitize, and enhance, outlined below along with the Company's 2021 accomplishments:
•Optimize
◦Completed the sale of its Mid-Atlantic branch operations, sold insurance operations, and consolidated 16 branch locations.
◦Procurement programs were widely initiated throughout the company.
◦Excess real estate was identified and designated as held for sale.
◦A third-party partnership was entered into for residential mortgage servicing.
•Digitize
◦Built out Application Programming Interfaces (APIs) to core systems.
◦Data warehouse technology was enhanced and enterprise analytics were expanded.
◦A mobile deposit application was deployed to customers through a fintech partnership.
◦A third-party fintech partnership was entered into for internet and mobile consumer loan origination.
•Enhance
◦Front-line bankers were recruited across multiple business lines.
◦Socially responsible wealth management investment solutions were introduced.
◦A residential mortgage origination conduit was initiated with third-party in-market bank partners.
◦A 5% share repurchase was completed and a new repurchase program for additional buybacks was announced after year-end for approximately 9% of outstanding shares.
In the third quarter, Berkshire announced its BEST Community Comeback initiative that targets to lend and invest $5 billion over three years to strengthen the economic health of its communities, an industry-leading commitment given the relative size of the program and the Bank. This initiative includes specific targets for small business lending, lending in low and moderate income neighborhoods, mortgage lending to minorities, and lending for low-
carbon projects amongst other non-financial measures. The plan is expected to help create more businesses and jobs, assist more families in achieving the dream of homeownership and support the transition to a low-carbon economy.
Berkshire resumed commercial loan growth in the fourth quarter of 2021 after a number of quarters of attrition from targeted run-off and lower demand. Growth of non-interest-bearing deposit account balances totaled 21% in 2021. The Company used excess liquidity to reduce higher cost wholesale funds and to increase the portfolio of investment securities. At year-end 2021, the Company viewed itself as having excess liquidity to support plans for resumed loan growth, further reductions in higher cost funds, and stock repurchases in the coming year.
The Company ended 2021 with cash and cash equivalents measuring 14% of total assets, contributing to strongly positive earnings sensitivity to higher interest rates. These low yielding assets reduced profitability metrics in 2021 but positioned the Company to benefit from forecast higher interest rates in 2022 and beyond. In addition to its $1.6 billion in year-end cash and equivalents, the Company also had $3.4 billion in loans with scheduled repricings within three months.
At year-end 2021, many of the Company’s asset quality and credit performance metrics had returned to pre-pandemic levels. The Company reduced the level of its credit loss allowance/loans in the fourth quarter and anticipated possible further normalization of reserve coverage if public health and economic conditions continued to support strong credit performance.
In 2021, Berkshire established a new banking region in Southern Connecticut and recruited a veteran Connecticut banking professional as SVP, Regional President & Middle Market Team Leader in Southern Connecticut, based in New Haven. The Company also opened a new Commercial Banking office in Providence, Rhode Island to complement and expand its existing Rhode Island presence. The Company also hired experienced frontline bankers in its growing Commercial Banking, SBA Lending, Asset-Based Lending, Wealth Management, Private Banking, and MyBanker teams.
The Company believes that merger activities among major local competitors provide opportunity for customer and talent acquisition over the near and medium term. The Company’s strategy is to be “banker heavy and branch light” in newer markets. The Company’s goal is to produce positive operating leverage through revenue growth and disciplined expense management utilizing expanded market channels, it’s 175 year history of community focus and it’s Digitouch™ strategy which combines personal service with the convenience of user-friendly technology.
The Company reduced its total branch banking offices from 130 offices at the start of the year to 106 offices at year-end 2021, including the 8 Mid-Atlantic offices sold and the consolidation of 16 other offices. The Company is considering the further consolidation of another 5 - 10 branches. Berkshire executed this plan in conjunction with the expansion of its MyBanker concierge style banking program. Deposit retention in the consolidated branches is regarded as high in part due to the MyBanker program,
At year-end 2021, forecasts of economic and public health conditions were supportive of the prospects for continued improvement in the Company’s markets. While uncertainties remain about the course of public health and government programs that have supported the economy during the pandemic, the Company views itself as positioned with excess capital and excess liquidity to support its strategies. Price inflation has recently reached levels not seen in four decades, and interest rate levels are expected to increase sharply after years of low interest rates. The Company’s income is targeted to benefit from higher rates based on its asset sensitive interest rate sensitivity profile.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2021 AND DECEMBER 31, 2020
Summary: Total assets decreased to $11.6 billion from $12.8 billion during 2021. This included the $0.6 billion impact of the sale of the Mid-Atlantic branch operations, along with the impact of $0.6 billion in Paycheck Protection Program (“PPP”) loan payoffs. Cash and cash equivalents increased to 14% of total assets, contributing to heightened asset sensitivity which is expected to benefit income in the forecast rising rate environment. The ratio of loans to deposits decreased to 68% from 79%, and the regulatory ratio of common equity tier 1 capital to risk-weighted assets increased to 15.0% from 13.8%. Most major measures of asset quality strengthened as economic
conditions improved from distressed pandemic conditions, with many measures returning to pre-pandemic levels. The Company paid down most higher cost wholesale funding which, along with ongoing repricing of maturing retail time deposits, continued to lower overall funding costs and support the net interest margin. Stock repurchases were resumed in 2021 following a pause in 2020 and are targeted to accelerate in 2022.
Investments: Short-term investments remained elevated at $1.52 billion, or 14% of earning assets at year-end 2021.
These funds are available for ongoing payoffs of remaining maturing brokered deposits and are available to fund targeted net loan growth in 2022, as well as potential increases in the investment securities portfolio. Most short-term investments are held at the Federal Reserve Bank of Boston. The yield on short-term investments was approximately 0.17% in the final quarter of 2021, which brought down the overall yield on earning assets and the return on assets until the planned opportunity to source higher yielding loans and investments in 2022.
The portfolio of investment securities increased by $325 million, or 15%, to $2.55 billion in 2021, with much of this growth recorded in the fourth quarter in order to avoid further accumulation of low yielding short-term investments.
Growth was concentrated in agency mortgage-backed securities. Approximately 53% of the net growth was in held to maturity securities in order to limit negative impacts on accumulated other comprehensive income in shareholders’ equity if rising rates lead to bond price declines which would result in charges to shareholders’ equity. The portfolio is highly liquid, with an average life of 4.6 years for the bond portfolio at period-end. The portfolio yield decreased to 2.04% in the fourth quarter of 2021 from 2.69% in the fourth quarter of 2020, due to ongoing compression of asset yields.
The portfolio of investment securities had an unrealized gain of $6 million, or 0.2% of cost, at period-end, compared to $68 million, or 3.2% of cost at the start of the year, due to the rise in medium term interest rates during 2021. The Company continues to evaluate possible expansion of the securities portfolio to utilize a portion of excess short-term investments, taking into consideration the outlook for interest rates, loan growth, and deposit behaviors.
Loans: Total loans decreased by $1.3 billion, or 16% in 2021, to $6.83 billion. This primarily reflected $0.6 billion in PPP loan pay-offs and $0.6 billion in run-off of residential mortgages and consumer loans. The PPP loan repayments were based on SBA loan forgiveness procedures and were anticipated. Excluding these loans, total commercial loans decreased by $74 million due to a $158 million decrease in commercial loans to COVID-sensitive industries.
Commercial loan growth turned positive in the final quarter of the year as new frontline bankers contributed to loan originations. This also contributed to a strengthening of the commercial loan pipeline at year-end.
At year-end 2021, non-owner occupied commercial real estate loans measured 223% of risk based capital, compared to the 300% federal regulatory monitoring guideline. Construction loans measured 26% of risk-based capital, compared to the 100% guideline. Included in commercial and industrial loans, the remaining balance of PPP loans was $30 million at year-end 2021, having declined from $633 million at the start of the year due to payoffs from SBA loan forgiveness. Also included in commercial and industrial loans are the asset-based lending loans managed by the Company’s growing ABL team in the Northeast and MidAtlantic. At year-end 2021, total C&I loans included $440 million of ABL balances, which was a 40% increase over the prior year-end. The Company’s 44 Business Capital national SBA lending group ranked 24th nationally for the SBA year ending September 30, 2021, with a total of $293 million in gross loans approved. The Company sells the SBA guaranteed portion of these loans, with the result that 44 Business Capital is one of the Company’s largest sources of non-interest income.
Residential mortgage runoff reflected ongoing prepayments in the low interest rate environment. Berkshire is expanding its mortgage origination team and is also developing conduit relationships with in-market third-party lenders. Consumer loan runoff primarily represents targeted run-off of the indirect auto loan portfolio. The balance of this portfolio was $110 million at year-end 2021, compared to $222 million at year-end 2020. In the fourth quarter of 2021, the Bank initiated a relationship with a leading artificial intelligence digital (AI) lending platform designed to improve access to affordable consumer credit while reducing the risk and costs of lending. The
Company is investigating additional consumer lending channels as it pursues the strategies and goals set out in its BEST and Berkshire Community Comeback programs.
At year-end 2021, 50% of total loans were scheduled to mature or reprice within three months. contributing to the modeled asset sensitivity of the Company’s interest rate risk profile.
Asset Quality and Credit Loss Allowance: Major asset quality metrics improved in 2021, trending towards pre-pandemic levels. Total non-accruing loans decreased year-over-year and ended below the year-end 2019 pre-pandemic level, declining to $35 million and measuring 0.52% of period-end loans. Total delinquent loans decreased year-over-year and compared to year-end 2019, totaling $78 million and measuring 1.15% of year-end 2021 loans. Net loan charge-offs decreased compared to the prior two years, totaling $21 million in 2021 and measuring 0.29% of average loans in 2021. Accruing troubled debt restructurings totaled $17 million at year-end 2021 compared to $18 million at year-end 2020. Total COVID-19 loan modifications decreased to $14 million at year-end 2021 from approximately $1.5 billion in the second quarter of 2020 and $316 million at year-end 2020.
Criticized loans decreased year-over-year to $242 million, measuring 3.5% of total year-end 2021 loans. These included classified loans which decreased to $142 million, measuring 2.1% of year-end 2021 loans. 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 decreased year-over-year to $106 million at year-end 2021.
The allowance for credit losses on loans decreased by $21 million, or 17%, to $106 million during 2021. The ratio of the allowance to total loans measured 1.55%, compared to 1.58% at the start of the year. The ratio of the allowance to total loans remains higher than the 0.94% ratio following the adoption of CECL and prior to the emergence of the pandemic. The Company anticipates that the allowance ratio may decline in 2022, depending on economic and qualitative factors, and depending on the portfolio performance and mix.
The allowance 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 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, with straight-line reversion to historical losses thereafter. The overall weighted average portfolio life was estimated at approximately 2.9 years at year-end 2021.
Deposits and Borrowings: Berkshire has been pursuing a course of reducing higher cost wholesale funds by paying off brokered time deposits and FHLB borrowings as they mature, as well as prepaying most longer maturity FHLB borrowings. Total wholesale funds were reduced to $340 million, or 3% of total year-end 2021 assets, compared to $1.18 billion, or 9% of total assets at year-end 2020.
Total deposits decreased by $147 million, or 1%, to $10.07 billion during 2021. Excluding the $383 million decrease in brokered deposits, total deposits increased by $236 million, or 2%, in 2021. Non-interest-bearing demand deposits increased by $524 million, or 21%, including the benefit of federal stimulus payments in the Company’s markets, along with funds inflows from maturing retail time deposits. The Company entered the year with $1.77 billion in retail time deposits and repriced maturing time deposits down in the current low rate environment, with the result that retail time deposits decreased by $324 million, and most maturing funds were transferred to demand deposits and other deposit products, including savings deposits. Most of the remaining $1.45 billion remaining balance of retail time deposits at year-end 2021 was scheduled to mature in 2021, and the Company targets additional deposit cost savings on these maturing deposits.
The total cost of deposits decreased in the fourth quarter of 2021 to 0.19% from 0.47% in the same quarter of 2020. This mostly reflected the growth in non-interest-bearing checking accounts and the reduction and downward repricing of time deposits, which cost 0.80% compared to 1.35% for the above respective periods. The total cost of funds decreased to 0.26% from 0.60% for these periods and included the benefit from the paydown of borrowings.
Other Assets and Liabilities: At year-end 2020, liabilities held for sale totaling $630 million and assets held for sale totaling $317 million included deposits and loans held for sale pursuant to the contract for the sale of the Mid-Atlantic branch operations. This sale was completed in the third quarter of 2021.
Derivative Financial Instruments: There were no material changes in the portfolio of outstanding derivative financial instruments, which totaled $3.8 billion in notional amount at period-end. The estimated fair value of these instruments was an asset of $43 million at period-end, which decreased from $94 million at year-end 2020 due to the impact of rising medium term interest rates on the value of outstanding commercial loan interest rate swaps.
Shareholders' Equity: Total shareholders’ equity was unchanged at $1.18 billion in 2021, as the contribution from net income was offset by shareholder distributions in the form of dividends and stock repurchases, along with a charge to accumulated other comprehensive net income due to lower debt investment security valuations related to higher medium interest rates at year-end. Due to the decline in assets, capital metrics improved year-over-year, with the common equity tier 1 capital ratio strengthening further to 15.0% from 13.8% at the start of the year. The Company’s BEST plan targets reducing this ratio to around 11% over time through loan growth and shareholder distributions of excess capital.
During the second quarter, Berkshire announced board authorization for the repurchase of 2.5 million shares, or approximately 5% of the then outstanding shares. The Company completed this repurchase in the third quarter, paying an average price of $27.48 per share, totaling $69 million, for the repurchase of the 2.5 million shares. After year-end, the Company announced the approval of another repurchase authorization through 2022 totaling $140 million, equating to approximately 9% of outstanding shares. The Company maintained its $0.12 per share quarterly dividend through 2021.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
Summary: Berkshire reported net income of $119 million, or $2.39 per share, in 2021, compared to a loss of $533 million, or $10.60 per share, in 2020. The loss in 2020 was primarily due to pandemic impacts leading to a $554 million pre-tax charge to write-off goodwill. The Company also recorded a $27 million pre-tax charge in 2020 as it completed the exit from discontinued national mortgage banking operations. In 2021, the Company recorded a pre-tax gain of $53 million on the sale of its Mid-Atlantic branch operations and its insurance operations.
The Company uses the non-GAAP measure of adjusted income to assess its performance, with component measures of adjusted revenue and adjusted expense. These measures exclude items not viewed as related to ongoing operations. In addition to the above items, the Company excludes securities gains and losses, other sale related gains and losses, and restructuring and other expense, together with related tax impacts, as discussed in the previous section on non-GAAP financial measures. Adjusted income totaled $84 million, or $1.69 per share, in 2021, compared to $30 million, or $0.60 per share, in 2020. Earnings in 2020 were depressed by $76 million in credit loss provision expense based on future loan loss expectations following the emergence of the pandemic.
Berkshire entered into an agreement to sell the operations of its eight mid-Atlantic branches in 2020 and completed the sale in the third quarter of 2021. During that quarter, the Company also announced and completed the sale of the operations of its insurance subsidiary. These operations were not viewed as central to the Company’s strategy. The sales produced $53 million in pre-tax gains which are planned to be returned to shareholders through the announced share buyback program. The operating expenses related to these sold operations are being reinvested in bankers and technology contributing to Berkshire’s BEST plan with a goal of replacing and expanding on the revenues previously related to these sold operations.
The return on tangible common equity measured 10.80% in 2021 and the non-GAAP measure of adjusted return on tangible common equity measured 7.74%. The Company’s BEST plan targets improving this measure to the 10 -12% range. Return on assets measured 0.98% in 2020, while the adjusted return on assets measured 0.70%. The Company’s BEST plan targets improving this measure to the 1.00 - 1.05% range.
Revenue: Total net revenue increased 13% year-over-year due to the gains on sales of operations. The non-GAAP measure of adjusted revenue excluding sale gains and losses, decreased year-over-year by $7 million, or 2%, to $382 million in 2021. A decrease in net interest income was partially offset by higher fee income. Contributing to this decrease were the four months of operating revenues related to the branch and insurance operations that were sold at the start of September. The Company targets to increase these revenues in 2022 based on expanded frontline bankers, increased business activity, and improved margins in the forecast environment of higher interest rates.
Net Interest Income: Net interest income decreased year-over-year by $26 million, or 8%. The Company recorded a $612 million, or 5%, decrease in average earning assets and a 4% decrease in the net interest margin to 2.60% in 2021 compared to 2.72% in 2020. The decrease in average earning assets was due to the use of funds from loan runoff to reduce wholesale funding, along with the impact of the sale of branch operations.
The net interest margin was generally stable over the last five quarters, ranging between 2.56% and 2.62% on a quarterly basis, and ending the year at 2.60 % in the fourth quarter of 2021. The full year decrease compared to 2020 was primarily due to the sharp contraction in the margin in the second quarter of 2020 as a result of the near-zero interest rate monetary policy. The margin in the first three quarters of 2021 included an average 9 basis point benefit from PPP loans due to elevated recognition of deferred PPP income at the time of loan repayment. There was no benefit in the fourth quarter due to the reduced PPP loan balance. The fourth quarter margin benefited from ongoing reduction in funding costs, along with higher investment securities balances. As discussed in the later section on interest rate sensitivity, the Company’s models indicate that the Company’s net interest income is positively sensitive to higher interest rates, based on conditions and model assumptions at year-end 2021. The Company also targets to benefit from maturing higher rate time deposits in 2022.
Non-Interest Income: Total fee income increased year-over-year by $14 million, or 21%, due primarily to an $18 million increase in loan fees and revenue. This included a $9 million increase in revenue related to SBA loan originations, which totaled a record $21 million in 2021 after recovering from pandemic impacts on business volume in 2020. Fee revenue benefited from a decrease in fair value charges related to mortgage servicing rights and interest rate swaps which were elevated in 2020 after the plunge in interest rates resulting from federal monetary policy actions. Loan fees benefited by $2 million in 2021 from PPP loan referral fees recorded mostly in the first quarter of the year in relation to the second round of PPP loan support which the Company referred to a third-party.
Fee income also benefited in 2021 from a $2 million, or 7%, increase in deposit related fees and a $1 million, or 13%, increase in wealth management related revenue. This was offset by a $4 million reduction in insurance fee revenue due to the sale of these operations in the third quarter. Mortgage banking revenue decreased by $3 million, or 60%, as origination activity was reduced in 2021. Other non-interest income also benefited from an improvement related to fair valued loans resulting from charges in 2020 and recoveries in 2021.
The Company is actively expanding its SBA lending, mortgage banking, and wealth management teams as part of its strategy to build revenues and earnings and reduce reliance on net interest income. The Company is evaluating potential changes in industry practice related to overdraft fees which could reduce future deposit related fee income. Net overdraft fee income totaled $8 million in 2021.
Securities losses in 2020 were due primarily to pandemic related impacts on equity securities values. Gains on the sale of operations in 2021 were related to the previously described sales of branch operations and insurance operations.
Credit Loss Provision Expense: The Company recorded a $500 thousand credit to provision expense in 2021, compared to a $76 million charge in 2020. The elevated charge in 2020 was due to the provision for estimated credit losses projected to arise from the pandemic. In 2021, the credit to the provision resulted from a $21 million release of the credit loss allowance net of $21 million in net loan charge-offs. The allowance release was primarily due to the reduction in loan balances during the year.
Non-Interest Expense: Non-interest expense decreased year-over-year by $554 million due to the $554 million charge for the write-down of goodwill in 2020. Non-interest expense was flat before the impact of this charge and benefited from the third quarter sale of branch and insurance operations. Modest increases in compensation and technology expense were partially offset by lower occupancy expense. Lower salary expense was offset by higher performance-based compensation, which had been reduced in 2020 due to the pandemic. Professional services expense increased by $4 million, including $3 million accrued in the first quarter for legal, consulting, and other advisory services related to board and management matters. The category of all other expense decreased including the impact of higher lending and workout related charges in 2020. Procurement initiatives have been deployed across the company, contributing to lower expenses for occupancy and professional services towards the end of the year.
The Company completed the consolidation of 16 branch offices in 2021. Including the 8 Mid-Atlantic branches sold, total branch offices declined from 130 to 106, as the Company pursues its “branch light, banker heavy” strategy for front-line bankers in managing expansion and market positioning. This includes a focus on its MyBankers who provide dedicated relationship support to customers with committed banking relationships.
Full time equivalent staff totaled 1,319 positions at year-end 2021, compared to 1,505 positions at the start of the year. This decrease included 79 positions which were transferred in conjunction with the sale of insurance and branch operations. The Company designated a number of real estate properties as held for sale in the third quarter as it pursues its efficiency strategies for reducing overhead and evolving a hybrid work environment. Due to the revenue contraction, the efficiency ratio increased year-over-year to 69.96% from 68.53%.
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 an effective income tax rate of 20% on income from continuing operations in 2021. The Company recorded a benefit to income tax expense in 2020 due to loss carrybacks resulting from the 2020 loss.
The 2021 effective tax rate included a 2.3% benefit from tax exemptions on investment securities. The effective tax rate was also reduced by 2.3% related to the Company’s tax credit investment projects for historic rehabilitation and low income housing. The Company reported $0.02 per share in net income benefit in both 2021 and 2020 related to investments in tax credit projects, net of amortization charges recorded to non-interest income. The Company actively pursues tax credit investment projects in its markets to provide financial support to community development projects as part of its overall banking services while also generating an appropriate return on the Bank’s investment.
Discontinued Operations: In the fourth quarter of 2020, the Company completed the exit of its national mortgage banking operations. These operations generated a net loss of $20 million in 2020. These operations are excluded from the Company’s measures of adjusted net income.
Total Comprehensive Income: Total comprehensive income includes net income together with other comprehensive income, which primarily consists of unrealized gains/losses on debt securities available for sale, after tax. The decrease in interest rates in 2020 resulted in $19 million in other net after-tax comprehensive income and the increase in medium term interest rates in 2021 resulted in a $34 million other net after-tax comprehensive loss.
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 charges of $554 million for goodwill impairment and $76 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 year 2020, the Company recorded a loss of $533 million, or $10.60 per share. In 2019, the Company recorded earnings for the year of $97 million, or $1.97 per share.
Revenue: Revenue was adversely impacted by the pandemic in 2020, including the impact of lower business volumes, fee waivers, and tighter margins. Net revenue 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.
Net Interest Income: Net interest income 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 was asset sensitive and was 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 reduced this yield as the primary source of interest revenue.
Non-Interest Income: Fee income decreased year-over-year $7 million, or 9% due to pandemic impacts on deposit and loan fees. The decrease in deposit fees 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 decrease in loan related fees included a 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. Securities losses in 2020 were primarily due to the impact of the pandemic related stock market selloff on the carrying value of equity securities.
Provision for Credit Losses: In adopting the CECL accounting model on January 1, 2020, the Company moved from an incurred loss methodology to an expected loss methodology. Additionally, due to the emergence of the pandemic in March 2020, the Company recorded expected pandemic-related 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 loan situation.
Non-Interest Expense: Total non-interest expense increased by $550 million due to the $554 million second quarter write-off of goodwill. Expenses in 2020 included a full year of the acquired SI Financial operations. Full time equivalent staff in continuing operations at year-end 2020 totaled 1,505, compared to 1,550 positions at the start of the year.
Income Tax Expense: The Company recorded a $20 million income tax benefit on 2020 continuing operations, including a benefit from the deductible portion of goodwill related impairment expense. In 2019, the Company’s effective tax rate was 18% on pre-tax income from continuing operations.
LIQUIDITY AND CASH FLOWS
Short-Term Liquidity: In 2021, the primary sources of cash were the decrease in total loans and the increase in demand deposits. The primary uses of cash were the reduction of wholesale funds, the settlement of the branch sale, and increases in short and long-term investments.
The Company viewed itself as having excess short-term liquidity at year-end 2021, with cash and equivalents totaling $1.6 billion, or 14% of total assets. The Company targets to use its excess liquidity in 2022 to fund growth in loans and investment securities, and to paydown higher cost funds sources. The Company also anticipates using liquidity to fund share repurchases under its $140 million stock repurchase program. Based on contractual obligations and ongoing operations, the Corporation's sources of liquidity are sufficient to meet present and future liquidity needs. Contractual obligations are viewed as normal in the context of banking operations, and consist primarily of payment schedules of financial instruments and off balance sheet commitments as discussed in the consolidated financial statements.
In addition to its cash and cash equivalents, the primary sources of the Company’s on balance sheet liquidity are its portfolio of high-quality marketable securities and the pledgeable loans in its loan portfolio. In addition to its on-balance sheet liquidity, the Bank has access to brokered deposits and to short-term credit availability. At year-end 2021, unused borrowing capacity at the FHLBB was $1.5 billion, and borrowing availability at the Fed discount window was $0.5 billion.
The Bank monitors a series of liquidity indicators and maintains monthly and quarterly forecasts of liquidity and cash flow, with primary focus on on-balance sheet cash equivalents and high-quality liquid investment securities in relation to scheduled debt and time deposit maturities. The Company views its liquidity as strong based on its high level of cash and equivalents and reduced use of wholesale funding.
The Company maintains a contingency funding plan based on its assessment of the liquidity stress environment. Primary liquidity data is reported on daily, and thirty-day stress analytics are maintained on an updated basis. 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.
Long-Term Liquidity: Over the long term, the Company expects to generate organic deposit growth that will fund organic loan growth. Operating earnings are expected to fund routine cash operating costs and capital expenditures. As a depository institution, the Bank maintains a high-quality liquid securities portfolio as a source of liquidity to service unexpected customer demand for loan advances or deposit withdrawals. Additionally, the aforementioned FHLBB and Federal Reserve Bank secured borrowing arrangements are maintained, and the Company and Bank have investment grade debt ratings from a Nationally Recognized Statistical Rating Organization (KBRA - Kroll Bond Rating Agency) to support access to public and institutional debt markets. The Company also is active in secondary markets for residential mortgages and SBA guaranteed loans, which support its organic growth without relying on internal liquidity and capital resources. The Company is monitoring for potential shifts in deposit sources as customer usage of traditional banking channels is also impacted by the spread of fintech alternatives. The Company’s strategy is to actively partner with fintechs to pursue a strong position in the evolving financial marketplace, while evolving its own technology to support these partnerships. The Company is also monitoring potential shifts in deposit demand if interest rates and inflation rise rapidly and pandemic related customer liquidity declines.
Parent Company Liquidity: Total cash held by the holding company was $109 million at year-end 2021. The Company targets to use cash at the holding company together with dividends from the Bank to fund holding company cash uses including modest operating expenditures, debt service, purchases of investments, shareholder dividends, and stock repurchases. A $50 million cash dividend was paid from the Bank to the parent company after year-end as an additional source of funds for stock repurchases. 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. Bank dividends to the holding company presently require approval by the FDIC and the Massachusetts Division of Banks. The holding company’s goal is to maintain access to private and public credit markets to provide access to additional liquidity sources depending on conditions.
CAPITAL RESOURCES
Please see the “Shareholders’ Equity” section of the Comparison of Financial Condition for a discussion of shareholders’ equity together with the note on Shareholders' Equity in the consolidated financial statements.
The Company views its regulatory capital measures as providing it with a cushion of excess capital in relation to its operating condition, risk profile, and strategic plans, and compared to peers. The Company’s priorities for uses of its capital are based on maintaining strong capital, supporting organic growth and its BEST strategic plan, paying a dividend yield that in the long run is competitive and targets a 30-40% payout ratio, and distributing excess capital to shareholders through stock repurchases.
The Company repurchased approximately 5% of its shares in 2021 and has approved an additional repurchase program for approximately 9% of its shares up to $140 million in 2022. The Company repurchased shares in 2019 but allowed a repurchase authorization to expire unused in 2020 due to the onset of the pandemic. In large measure, these repurchases represented a return of capital that became excess as a result of the reduction of certain business activities and loans, including targeted runoff of selected portfolios.
The Company’s long-term goal is to maintain a competitive capital stack and to provide a return in excess of the cost of its common equity capital. The Company’s tier 2 capital includes a $75 million subordinated note which converts to a floating rate and becomes callable as of September 2022. The Company will monitor capital markets conditions while assessing future plans for this capital. The Company maintains a universal shelf registration of capital securities with the SEC. The Company and Bank are investment grade rated by the KBRA bond rating service. The Company’s stock is traded on the New York Stock Exchange and the Company views itself as having good access to current capital markets.
The Company performs capital stress testing at least annually and has a general goal to remain qualifying for the “well capitalized” designation in the severely stressed scenario. The Company views its current stressed capital position as sound and conforming to its objectives.
In acting as a source of strength for the Bank, the Company relies in the long term on capital distributions from the Bank in order to provide operating and capital service for the Company, which in turn can access national financial markets to provide financial support to the Bank. Capital distributions from the Bank to the parent company presently require approval by the FDIC and the Massachusetts Division of Banking.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies and modifications to significant accounting policies made during the year are described in Note 1 to the financial statements. The preparation of the financial statements is in accordance with GAAP and general practices applicable to the financial services industry. This preparation requires management to make estimates, assumptions, and judgements that affect the amounts reported in the financial statements and accompanying notes. The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Actual results could differ from those estimates, assumptions, and judgements.
Not all significant accounting policies require management to make difficult, subjective or complex judgments. Certain estimates inherently have a greater reliance on the use of assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. The following 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. Both of these most critical accounting policies were significant in determining income and financial condition based on events in 2021.
Allowance for Credit Losses for Loans
The allowance for credit losses for loans (“ACLL”) represents management’s estimate of expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACLL in those future periods.
The appropriateness of the ACLL could change significantly because current economic conditions and forecasts can change and future events are inherently difficult to predict. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. While management utilizes its best judgment and information available, the ultimate adequacy of our ACLL is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, and changes in interest rates. For detailed information on the ACLL see Note 1- Summary of Significant Accounting Policies and Note 7 - Loans and Allowance for Credit Losses.
Fair Value Measurements
The Company uses fair value measurements to determine fair value disclosures and to record fair value adjustments to certain assets and liabilities, such as interest rate swaps, impaired loans, securities available for sale, and derivatives. Our fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and capitalized servicing rights. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting or other accounting standards.
Management has established and documented a process for determining fair value. The use of observable inputs is maximized and the use of unobservable inputs is minimized when developing fair value measurements. Whenever
there is no readily available market data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial statements. For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 1 - Summary of Significant Accounting Policies and Note 21 - Fair Value Measurements for more information.
ENTERPRISE RISK MANAGEMENT
Other 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 risk management policy, credit, compliance, and information security. 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, with the credit risk category having the highest weighting. Based on management's recent review, all risks were within corporate appetites. For all material business risks, residual risk was viewed as medium/low to medium due to mitigating controls functioning in the Company.
LIBOR TRANSITION
The Company’s use of LIBOR based instruments and the industry-wide transition program off of LIBOR are discussed in Item 1 (“Business”) and Item 1 - A (“Risk Factors”) of this report. The Company has in excess of $5 billion in notional balances of LIBOR based instruments related primarily to its commercial banking operations. These include loans priced off of LIBOR, as well as interest rate swap contacts including customer, dealer, and risk participation agreements.
The Financial Conduct Authority (“FCA”) presently intends to continue publishing most LIBOR indices through June 2023 for use with legacy instruments contracted in 2021 or before. The Company continues to develop and execute plans to transition instruments associated with LIBOR to alternative reference rates. The Company has approved the use of Term SOFR as the lead base case index to replace LIBOR for pricing of new contracts starting in 2022, with Daily Simple SOFR as an alternate. The Company continues to monitor additional index rates as they become available or are requested by customers or other counterparties.
CORPORATE RESPONSIBILITY UPDATE
Our Commitment to Environmental, Social, Governance (ESG) & Corporate Responsibility
Berkshire is committed to purpose-driven, community-centered banking that enhances value for all stakeholders as it pursues its vision of being a high performing, leading socially responsible community bank in New England and beyond. We’re a bank with a purpose: to empower the financial potential of individuals, families and businesses in our communities. We provide an ecosystem of socially responsible financial solutions, actively engage with our communities, and harness the power of our entire business to fuel the economy, promote thriving neighborhoods, foster financial access and success, and invest in a low-carbon future.
At Berkshire, our most important investment for 175 years has been the one we make in each other. We know that where you bank matters and building stronger communities requires a better approach to banking. As such, ESG factors are central to our vision, mission, risk management practices, and Berkshire’s Exciting Strategic Transformation (BEST).
BEST Community Comeback
We believe every community deserves a comeback. That’s why we launched the BEST Community Comeback in 2021, a transformational commitment to empower our stakeholders’ financial potential. The plan focuses on four key areas: fueling small businesses; community financing and philanthropy; financial access and empowerment; and funding environmental sustainability. Through this far-reaching initiative, Berkshire aims to help create more
businesses and jobs, help more families achieve the dream of owning a home, and aid communities in becoming more environmentally efficient and eco-friendly.
Ongoing Pandemic Support
As 2021 continued to present new challenges, we remained committed to serving our customers and communities. We’re guided by our Be FIRST Values of Belonging, Focusing, Inclusion, Respect, Service, and Teamwork. These values fueled our efforts to navigate the pandemic with the goal of supporting the health and economic resiliency of all our stakeholders. During the height of the pandemic, Berkshire created the You FIRST employee assistance fund to help staff impacted by unexpected financial hardships, provided additional paid sick time, flexible work schedules for remote staff, and maintained full pay for those with reduced schedules as a result of the pandemic. Small businesses and consumers were helped with loan forbearances and government assistance programs. We also launched a fund to assist businesses in the LGBTQIA+ and Black, Indigenous and People of Color (BIPOC) communities.
ESG Program & Business Integration
We’re committed to integrating social, environmental and reputational considerations into all business decision making through our strong foundation of governance systems, including our Environmental, Social and Governance (ESG) Management Committee, Corporate Responsibility & Culture Committee of our Board of Directors, Diversity Equity & Inclusion Committee, Responsible & Sustainable Business Policy, and a strong collection of Social & Environmental risk management practices. Berkshire engages directly with its stakeholders to share information about the progress we’ve made in our ESG performance, including through our Corporate Responsibility website, corporate annual report, and proxy statement. Additionally, our annual Corporate Responsibility Report, which is aligned with Sustainability Accounting Standards Board (“SASB”) commercial bank disclosure topics, details the Company's ESG efforts and programs.
Ratings, Awards & Recognition
We’re proud to be recognized for our performance with local, regional, national, and international awards as well as leading third party ESG ratings* including:
•MSCI ESG- BBB
•ISS ESG Quality Score - Environment: 3, Social: 1, Governance: 2
•Bloomberg ESG Disclosure- 47.81
•The Company is also rated by Sustainalytics
•Banking Northeast Community Champion Award
•Communitas Award for Leadership in Corporate Social Responsibility
•Bloomberg Gender-Equality Index
•Human Rights Campaign Corporate Equality Index Best Place to Work for LGBTQ+ equality- 100% Score
*As of December 31, 2021
Climate Change
Climate Change poses unprecedented risks and opportunities to the world, including Berkshire, its customers and communities. The impacts which can occur from climate change can directly and/or indirectly impact the Company and its stakeholders. As the transition to a low-carbon economy accelerates, new policy emerges, and market dynamics shift, Berkshire expects that its efforts to manage its environmental footprint, mitigate the risks associated with climate change, and support the transition will allow it to strengthen its positioning as a high performing, leading socially responsible community bank. The Company continues to evolve its practices to reflect its community bank mission as well as the size, scope, and complexity of its operations.
Berkshire is actively managing climate related risks and opportunities at board, management and employee levels. The Company’s Board of Directors Corporate Responsibility & Culture Committee provides oversight to environmental sustainability and Climate Change. All business risks are also integrated into our Enterprise Risk Management program and discussed by other applicable Board Committees including the Risk Management & Capital Committee. Both Committees report into the full board. Berkshire enhanced its governance over material
environmental matters in 2021 by formalizing an Environmental, Social and Governance management committee and completing a formal climate change risk assessment to evaluate the bank’s operations and lending activities for potential exposure to transition and physical risks resulting from climate change.
The results of the risk assessment guide Berkshire’s forward climate management and environmental sustainability strategies to ensure its actively managing these risks and opportunities. It has set targets to help finance the green transition, reduce its Greenhouse Gas (GHG) emissions and source 100% of its electricity from renewable sources by the end of 2024. As the Company moves further along in its climate journey, it expects to continue to enhance its plans, disclosures, programs and initiatives to reduce its emissions as well as capitalize on the many business opportunities arising from the transition to a lower-carbon economy. Further details on Berkshire’s Climate Change governance, risk management, strategy, metrics & targets and next steps can be found in its most recent Corporate Responsibility Report.

---

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 seeks to provide sustainable net interest income (NII) under varying economic conditions, while protecting the economic value of assets and liabilities from adverse effects of changes in market interest rates. While a number of market factors affect the level of NII and the economic value of our assets and liabilities, changes in interest rates is the most significant aspect of our market risk. As such, the Company maintains a regular cadence for review and oversight of its asset-liability policies and interest rate risk positioning with oversight from senior management and the Board of Directors. The manner and extent of the movement of interest rates is an uncertainty that could have a positive or negative impact on the Company’s earnings.
The Company manages its interest rate risk by analyzing the sensitivity and 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 quantifies its NII sensitivity using an earnings simulation model that compares a baseline view of NII over 12 and 24 month horizons, based on a static view of the balance sheet and market interest rates, to a wide range of parallel and non-parallel rate shocks and ramps. In addition, the Company analyzes net income at risk and equity at risk from interest rate changes through discounted cash flow analysis.
The chart below shows an analysis of a scenario where interest rates ramp in a parallel manner over a period of 12 months compared to a base case of flat interest rates. Modeled assets and liabilities are assumed to reprice at respective repricing or maturity dates. Pricing caps and floors are included in the results, where applicable. The Company uses prepayment expectations 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 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, 2021
+200 17,815 6.82 39,059 14.83
+100 7,294 2.79 15,282 5.80
-100 1,227 0.47 (1,356) (0.51)
At December 31, 2020
+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 year-end 2021, a 200 basis point parallel upward interest rate increase results in approximately a 7% increase in modeled NII compared to the static baseline view in the first year, and approximately a 15% increase in the second-year horizon. The Company has shifted towards asset sensitive positioning throughout 2021, and remains well-positioned for the forecast rate cycle ahead. Asset sensitivity is driven by elevated cash balances from loan payoffs, a predominantly floating-rate loan portfolio, and modeled assumptions for deposit pricing and beta. For purposes of NII sensitivity reporting, a weighted average deposit beta of 35-45% is assumed in asset-liability modeling. Our positioning to downward changes in market rates remains limited due to a smaller effective shock for assets and liabilities to reprice lower from the current rate environment. In addition to parallel shocks and ramps, the Company analyzes the impact of non-parallel shocks (i.e., yield curve twist scenarios). At this time, the primary driver of asset sensitivity is on the short-end of the yield curve, though upward changes in the long-end are also expected to be accretive to NII.
Economic value of equity is modeled to increase by 4.5% in the event of a 200 basis point upward parallel shock in interest rates. Based on market expectations for higher interest rates in 2022 and beyond, and on commentary from monetary authorities about easing monetary stimulus, it is anticipated that the Company’s positive sensitivity to rising rates may contribute to its BEST goals for improved profitability.
A critical component of modeling this scenario is the assumption of deposit interest rate sensitivity, which the Company continues to model at a 40% beta level after an initial low beta for the first 50 basis points of rising 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. Prime, mortgage rates, and deposits are floored. All other rates are zero bound.
Modeled interest rate sensitivity depends on other material assumptions. 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. 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.

---

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 (PCAOB ID 173)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019
Notes to Consolidated Financial Statements

---

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

---

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, 2021. 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.”

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

---

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 2022 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 51 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
Subhadeep Basu 51 Senior Executive Vice President, Chief Financial Officer of the Company and the Bank
George F. Bacigalupo 67 Senior Executive Vice President, Head of Commercial Banking - Berkshire Bank
Gregory D. Lindenmuth 54 Senior Executive Vice President, Chief Risk Officer - Berkshire Bank
Deborah A. Stephenson 51 Senior Executive Vice President, Regulatory & Compliance- -Berkshire Bank
Lucia “Lucy” Bellomia 56 Executive Vice President, Head of Retail Banking - Berkshire Bank
Jennifer M. Carmichael 44 Executive Vice President, Chief Internal Audit Officer - Berkshire Bank
Jacqueline Courtwright 58 Executive Vice President, Chief Human Resources and Culture Officer - Berkshire Bank
Georgia Melas 58 Executive Vice President, Chief Credit Officer - Berkshire Bank
Wm. Gordon Prescott 60 Executive Vice President, General Counsel and Corporate Secretary - Berkshire Bank; Corporate Secretary - Berkshire Hills Bancorp
Ellen Steinfeld 60 Executive Vice President, Head of Consumer Lending & Payments
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 51. 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 position of Executive Vice President, Retail Banking. Previously, he was Vice President and Consumer Market Manager at Bank of America, in Waltham, Massachusetts.
Subhadeep Basu, Age 51. Mr. Basu joined the Company in March 2021 as Senior Executive Vice President, Chief Financial Officer. He is responsible for the accounting, treasury, tax, investor relations, procurement/facilities, and capital markets functions. Prior to joining Berkshire, Mr. Basu served as Senior Vice President of Global Institutional Services at State Street. Before joining State Street, he spent more than 15 years at Citigroup, Bank of America, and Ally Financial in various leadership roles across Finance, Treasury, Risk, and Consumer and Commercial Banking.
George F. Bacigalupo. Age 67. 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.
Gregory D. Lindenmuth. Age 54. 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 A. Stephenson. Age 51. Ms. Stephenson is Senior Executive Vice President, Compliance and Regulatory of Berkshire Bank, a position she was promoted to in 2018. Ms. Stephenson joined the Company in 2014. She was previously Senior Vice President at Country Bank where she managed retail banking and human resources. She started her career at the FDIC as a Safety and Soundness and Compliance Examiner. Subsequently, she has held various leadership roles in Compliance, CRA, BSA/AML, Retail Sales/Branch Administration, Human Resources and Training.
Lucia “Lucy” Bellomia, Age 56. Ms. Bellomia is Executive Vice President and Head of Retail Banking. She oversees the retail branch network, branch training, the MyBanker program, Call Center, Branch Operations, Retail Sales and Service Delivery. Prior to joining Berkshire in September 2021, she served as the Executive SVP, PM, Community Banking, Northeast Region, for Bank of America. She previously held positions at the Police and Fire Credit Union in Philadelphia, Santander Bank, PNC Bank, Sun National Bank, and Pioneer Savings and Loans.
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 58. 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 58. 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 60. 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.
Ellen Steinfeld, Age 60. Ms. Steinfeld is Executive Vice President and Head of Consumer Lending & Payments. She is responsible for Mortgage Banking sales and operations, Home Equity, Consumer Lending and Payments. Prior to joining Berkshire in September 2021, she was President of Innovative Lending Strategic Solutions LLC. Before her consulting role, she was Managing Director and US Consumer Lending Executive for TIAA-CREF, where she managed Mortgage Lending, Small Business Lending, Consumer Lending. She has also held management positions at Hudson City Savings, Citizens Bank, RBC Wealth Management, and E*TRADE Financial. (Note: Ms. Steinfeld’s stock ownership reports to the SEC are filed under her legal name of Ellen Tulchiner).
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:
berkshirebank.com under the Investor Relations tab.

---

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.

---

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, 2021, 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
80,400 $ 25.21 536,469
Equity compensation plans not approved by security holders
- - -
Total 80,400 $ 25.21 536,469

---

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.

---

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

---

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, 2021 and 2020
•Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020, and 2019
•Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2021, 2020, and 2019
•Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2021, 2020, and 2019
•Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020, and 2019
•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 (6)
10.1 Three-Year Employment Agreement by and among Berkshire Hills Bancorp, Inc., Berkshire Bank and Nitin J. Mhatre (7)
10.2 Berkshire Bank Supplemental Executive Retirement Agreement entered into with Nitin J. Mhatre (8)
10.3 Amended and Restated Three Year Change in Control Agreement by and among Berkshire Hills Bancorp, Inc., Berkshire Bank and Sean A. Gray (9)
10.4 Supplemental Executive Retirement Agreement between Berkshire Bank and Sean A. Gray (10)
10.5 Three Year Executive Change in Control Agreement by and among Berkshire Hills Bancorp, Inc. Berkshire Bank and George F. Bacigalupo (11)
10.6 Berkshire Bank Enhanced Change in Control Severance Plan (Gregory D. Lindenmuth and Deborah Stephenson) (12)
10.7 Form of Split Dollar Agreement entered into with Sean A. Gray (13)
10.8 Berkshire Bank Executive Long-Term Care Insurance Plan (14)
10.9 Berkshire Hills Bancorp, Inc. 2018 Equity Incentive Plan (15)
10.10 Senior Executive Short Term Incentive Plan (16)
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 Exhibit 4.3 to the Form 10-K as filed on February 28, 2020.
(7) Incorporated herein by reference from the Exhibit to the Form 8-K as filed on January 26, 2021.
(8) Incorporated herein by reference from the Exhibit to the Form 8-K as filed on April 2, 2021.
(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 Exhibits to the Form 8-K as filed on February 22, 2019.
(11) Incorporated herein by reference from the Exhibits to the Form 10-K as filed on March 17, 2014.
(12) Incorporated herein by reference from the Exhibits to the Form 10-K as filed on February 28, 2020.
(13) Incorporated herein by reference from the Exhibit to the Form 8-K as filed on January 19, 2011.
(14) Incorporated herein by reference from the Exhibits to the Form 8-K as filed on January 23, 2015.
(15) Incorporated herein by reference from the Appendix to the Proxy Statement as filed on April 6, 2018.
(16) Incorporated herein by reference from the Exhibits to the Form 10-Q as filed on May 10, 2019.