Companies: 10,793     total market cap: $139.375 T
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Berkshire Hills Bancorp
BHLB
#4598
Rank
$2.20 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$26.13
Share price
-0.65%
Change (1 day)
1.83%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Berkshire Hills Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q3

Berkshire Hills Bancorp - 10-Q quarterly report FY2020 Q3


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2020
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                  
 
Commission File Number: 001-15781
bhlb-20200930_g1.jpg  
BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware04-3510455
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
   
60 State StreetBoston Massachusetts02109
(Address of principal executive offices)(Zip Code)
 
Registrant’s telephone number, including area code: (800) 773-5601, ext. 133773

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareBHLBThe New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o
    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    ý    Accelerated filer        o     
Non-accelerated filer    o     Smaller reporting company    ☐
    Emerging growth company    ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐  No ☒
 
As of November 6, 2020, the Registrant had 50,832,036 shares of common stock, $0.01 par value per share, outstanding

BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
 
INDEX 
  Page
   
 
 
 Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
4
 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019
6
 Consolidated Statements of Comprehensive Income/(Loss) for the Three and Nine Months Ended September 30, 2020 and 2019
8
 Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019
9
 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019
11
 Notes to Consolidated Financial Statements (Unaudited) 
  
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20
  
21
25
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48
  
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60
  
64
  
65
  
66
  
75
Item 2.
76
 
76
 
78
 
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102
2
 
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108

3
PART I
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
 September 30,
2020		December 31,
2019
(In thousands, except share data)
Assets  
Cash and due from banks$90,537 $105,447 
Short-term investments844,755 474,382 
Total cash and cash equivalents935,292 579,829 
Trading security, at fair value9,525 10,769 
Marketable equity securities, at fair value31,993 41,556 
Securities available for sale, at fair value1,575,289 1,311,555 
Securities held to maturity (fair values of $356,035 and $373,277)
330,197 357,979 
Federal Home Loan Bank stock and other restricted securities40,520 48,019 
Total securities1,987,524 1,769,878 
Less: Allowance for credit losses on held to maturity securities(96)— 
Net securities1,987,428 1,769,878 
Loans held for sale15,854 36,664 
Total loans8,982,336 9,502,428 
Less: Allowance for credit losses on loans (134,414)(63,575)
Net loans8,847,922 9,438,853 
Premises and equipment, net117,116 120,398 
Other real estate owned40 — 
Goodwill— 553,762 
Other intangible assets40,947 45,615 
Cash surrender value of bank-owned life insurance policies231,217 227,894 
Other assets425,675 288,945 
Assets from discontinued operations12,966 154,132 
Total assets$12,614,457 $13,215,970 
Liabilities  
Demand deposits$2,585,173 $1,884,100 
NOW and other deposits1,522,289 1,492,569 
Money market deposits2,516,168 2,528,656 
Savings deposits952,836 841,283 
Time deposits2,890,093 3,589,369 
Total deposits10,466,559 10,335,977 
Short-term debt110,000 125,000 
Long-term Federal Home Loan Bank advances and other495,483 605,501 
Subordinated borrowings97,223 97,049 
Total borrowings702,706 827,550 
Other liabilities251,220 267,398 
Liabilities from discontinued operations14,947 26,481 
Total liabilities$11,435,432 $11,457,406 
(continued)
September 30,
2020		December 31,
2019
Shareholders’ equity  
Preferred Stock (Series B non-voting convertible preferred stock - $0.01 par value; 2,000,000 shares authorized, 260,907 shares issued and outstanding in 2020; 2,000,000 shares authorized, 521,607 shares issued and outstanding in 2019)
20,325 40,633 
Common stock ($0.01 par value; 100,000,000 shares authorized and 51,903,190 shares issued and 50,305,952 shares outstanding in 2020; 51,903,190 shares issued and 49,585,143 shares outstanding in 2019
523 517 
Additional paid-in capital - common stock1,422,300 1,422,441 
Unearned compensation(7,526)(8,465)
Retained earnings (deficit)(242,175)361,082 
Accumulated other comprehensive income 32,426 11,993 
Treasury stock, at cost (1,597,238 shares in 2020 and 2,318,047 shares in 2019)
(46,848)(69,637)
Total shareholders’ equity1,179,025 1,758,564 
Total liabilities and shareholders’ equity$12,614,457 $13,215,970 
The accompanying notes are an integral part of these consolidated financial statements.
4
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,		Nine Months Ended
September 30,
(In thousands, except per share data)2020201920202019
Interest and dividend income from continuing operations  
Loans$85,688 $118,371 $278,259 $338,012 
Securities and other12,080 15,354 39,392 46,060 
Total interest and dividend income97,768 133,725 317,651 384,072 
Interest expense from continuing operations  
Deposits16,070 31,501 60,460 86,396 
Borrowings4,643 5,353 16,118 23,751 
Total interest expense20,713 36,854 76,578 110,147 
Net interest income from continuing operations77,055 96,871 241,073 273,925 
Non-interest income from continuing operations  
Mortgage banking originations2,044 292 4,647 616 
Loan related income4,988 6,493 12,007 17,318 
Deposit related fees7,062 8,705 20,382 23,088 
Insurance commissions and fees2,660 2,895 8,451 8,486 
Wealth management fees2,299 2,325 6,926 7,114 
Total fee income19,053 20,710 52,413 56,622 
Other, net1,927 609 492 1,363 
(Loss)/gain on securities, net(1,017)87 (9,925)2,655 
Total non-interest income19,963 21,406 42,980 60,640 
Total net revenue from continuing operations97,018 118,277 284,053 334,565 
Provision for credit losses 1,200 22,600 65,878 30,068 
Non-interest expense from continuing operations  
Compensation and benefits34,809 37,272 111,121 105,551 
Occupancy and equipment11,084 9,893 32,411 28,788 
Technology and communications8,540 6,849 24,376 19,821 
Marketing and promotion1,002 1,006 3,069 3,428 
Professional services2,567 2,282 7,852 8,510 
FDIC premiums and assessments1,518 — 4,658 3,390 
Other real estate owned and foreclosures40 150 81 150 
Amortization of intangible assets1,530 1,526 4,668 4,201 
Goodwill impairment— — 553,762 — 
Acquisition, restructuring, and other expenses5,316 4,163 5,316 22,333 
Other6,437 7,870 21,129 23,398 
Total non-interest expense72,843 71,011 768,443 219,570 
Income/(loss) from continuing operations before income taxes$22,975 $24,666 $(550,268)$84,927 
Income tax (benefit)/expense(68)4,007 (18,194)16,042 
Net income/(loss) from continuing operations$23,043 $20,659 $(532,074)$68,885 
(Loss)/income from discontinued operations before income taxes$(2,477)$2,747 $(21,741)$3,975 
Income tax (benefit)/expense(659)790 (5,789)1,161 
Net (loss)/income from discontinued operations$(1,818)$1,957 $(15,952)$2,814 
Net income/(loss)$21,225 $22,616 $(548,026)$71,699 
Preferred stock dividend58 240 313 720 
Income/(loss) available to common shareholders$21,167 $22,376 $(548,339)$70,979 
(continued)
5
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONCLUDED)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Basic earnings/(loss) per common share:  
Continuing operations$0.46 $0.40 $(10.58)$1.41 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.47 
Diluted earnings/(loss) per common share:
Continuing operations$0.46 $0.40 $(10.58)$1.40 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.46 
Weighted average shares outstanding:  
Basic50,329 51,422 50,256 48,846 
Diluted50,329 51,545 50,256 48,987 
The accompanying notes are an integral part of these consolidated financial statements.
6
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Three Months Ended
September 30,		Nine Months Ended
September 30,
(In thousands)2020201920202019
Net income/(loss)$21,225 $22,616 $(548,026)$71,699 
Other comprehensive income, before tax:    
Changes in unrealized gain on debt securities available-for-sale(1,085)6,154 27,529 39,477 
Income taxes related to other comprehensive income:   
Changes in unrealized gain on debt securities available-for-sale272 (1,575)(7,096)(10,127)
Total other comprehensive income (813)4,579 20,433 29,350 
Total comprehensive income/(loss)$20,412 $27,195 $(527,593)$101,049 
The accompanying notes are an integral part of these consolidated financial statements.

7
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 Preferred stockCommon stockAdditional
paid-in capital		Unearned compensationRetained earnings (deficit)Accumulated
other
comprehensive income/(loss)		Treasury stock
(In thousands)SharesAmountSharesAmountTotal
Balance at June 30, 2019522 $40,633 51,045 $517 $1,421,461 $(6,555)$336,542 $11,301 $(24,062)$1,779,837 
Comprehensive income:       
Net income— — — — — — 22,616 — — 22,616 
Other comprehensive income— — — — — — — 4,579 — 4,579 
Total comprehensive income— — — — — — 22,616 4,579 — 27,195 
Cash dividends declared on common shares ($0.23 per share)
— — — — — — (11,812)— — (11,812)
Cash dividends declared on preferred shares ($0.46 per share)
— — — — — — (240)— — (240)
Treasury shares repurchased— — (800)— — — — — (24,325)(24,325)
Forfeited shares— — (8)— (25)252 — — (227)— 
Exercise of stock options— — 5 — — — (74)— 129 55 
Restricted stock grants— — 152 — 867 (4,709)— — 3,842 — 
Stock-based compensation— — — — — 1,543 — — — 1,543 
Other, net— — — — 50 — (61)— (18)(29)
Balance at September 30, 2019522 $40,633 50,394 $517 $1,422,353 $(9,469)$346,971 $15,880 $(44,661)$1,772,224 
Balance at June 30, 2020261 $20,325 50,192 $523 $1,427,728 $(8,298)$(257,352)$33,239 $(52,025)$1,164,140 
Comprehensive income:       
Net income— — — — — — 21,225 — — 21,225 
Other comprehensive (loss)— — — — — — — (813)— (813)
Total comprehensive income— — — — — — 21,225 (813)— 20,412 
Cash dividends declared on common shares ($0.12 per share)
— — — — — — (5,993)— — (5,993)
Cash dividends declared on preferred shares ($0.24 per share)
— — — — — — (58)— — (58)
Forfeited shares— — (74)— (1,395)2,163 — — (768)— 
Exercise of stock options— — — — — — — — — — 
Restricted stock grants— — 198 — (4,033)(2,026)— — 6,059 — 
Stock-based compensation— — — — — 635 — — — 635 
Other, net— — (10)— — — 3 — (114)(111)
Balance at September 30, 2020261 $20,325 50,306 $523 $1,422,300 $(7,526)$(242,175)$32,426 $(46,848)$1,179,025 
8
 Preferred stockCommon stockAdditional
paid-in capital		Unearned compensationRetained earnings (deficit)Accumulated
other
comprehensive income/(loss)		Treasury stock
(In thousands)SharesAmountSharesAmountTotal
Balance at December 31, 2018522 $40,633 45,417 $460 $1,245,013 $(6,594)$308,839 $(13,470)$(21,963)$1,552,918 
Comprehensive income:       
Net income— — — — — — 71,699 — — 71,699 
Other comprehensive income— — — — — — — 29,350 — 29,350 
Total comprehensive income— — — — — — 71,699 29,350 — 101,049 
Acquisition of SI Financial Group, Inc.— — 5,691 57 176,654 — — — — 176,711 
Cash dividends declared on common shares ($0.69 per share)
— — — — — — (32,756)— — (32,756)
Cash dividends declared on preferred shares ($1.38 per share)
— — — — — — (720)— — (720)
Treasury shares repurchased— — (910)— — — — — (27,651)(27,651)
Forfeited shares— — (59)— (234)1,951 — — (1,717)— 
Exercise of stock options— — 6 — — — (89)— 158 69 
Restricted stock grants— — 284 — 869 (8,372)— — 7,503 — 
Stock-based compensation— — — — — 3,546 — — — 3,546 
Other, net— — (35)— 51 — (2)— (991)(942)
Balance at September 30, 2019522 $40,633 50,394 $517 $1,422,353 $(9,469)$346,971 $15,880 $(44,661)$1,772,224 
Balance at December 31, 2019522 $40,633 49,585 $517 $1,422,441 $(8,465)$361,082 $11,993 $(69,637)$1,758,564 
Comprehensive (loss):       
Net (loss)— — — — — — (548,026)— — (548,026)
Other comprehensive income— — — — — — — 20,433 — 20,433 
Total comprehensive (loss)— — — — — — (548,026)20,433 — (527,593)
Impact of ASC 326 Adoption— — — — — — (24,380)— — (24,380)
Conversion of preferred stock to common stock(261)(20,308)522 6 5,391 — — — 14,911 — 
Cash dividends declared on common shares ($0.60 per share)
— — — — — — (30,143)— — (30,143)
Cash dividends declared on preferred shares ($1.20 per share)
— — — — — — (313)— — (313)
Treasury shares repurchased— — (14)— — — — — (473)(473)
Forfeited shares— — (87)— (1,551)2,648 — — (1,097)— 
Exercise of stock options— — 33 — — — (395)— 1,002 607 
Restricted stock grants— — 306 — (3,981)(5,159)— — 9,140 — 
Stock-based compensation— — — — — 3,450 — — — 3,450 
Other, net— — (39)— — — — — (694)(694)
Balance at September 30, 2020261 $20,325 50,306 $523 $1,422,300 $(7,526)$(242,175)$32,426 $(46,848)$1,179,025 
The accompanying notes are an integral part of these consolidated financial statements.
9
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended
September 30,
(In thousands)20202019
Cash flows from operating activities:  
Net (loss)/income from continuing operations$(532,074)$68,885 
Net (loss)/income from discontinued operations(15,952)2,814 
Net (loss)/income$(548,026)$71,699 
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:  
Provision for credit losses65,878 30,068 
Net amortization of securities2,035 1,811 
Change in unamortized net loan costs and premiums20,565 8,964 
Premises and equipment depreciation and amortization expense8,944 7,844 
Stock-based compensation expense3,450 3,546 
Accretion of purchase accounting entries, net(8,146)(9,589)
Amortization of other intangibles4,668 4,201 
Income from cash surrender value of bank-owned life insurance policies(3,876)(3,546)
Securities losses (gains), net9,925 (2,655)
Net change in loans held-for-sale(7,130)(2,920)
Decrease in right-of-use lease assets1,809 10,025 
Decrease in lease liabilities(1,746)(10,189)
Loss on disposition of assets327 1,615 
Loss on sale of real estate13 5 
Amortization of interest in tax-advantaged projects2,621 4,459 
Goodwill impairment553,762 — 
Net change in other(36,152)(4,803)
Net cash provided by operating activities of continuing operations84,873 107,721 
Net cash provided (used) by operating activities of discontinued operations109,897 (104,001)
Net cash provided by operating activities194,770 3,720 
Cash flows from investing activities:  
Net decrease in trading security546 522 
Purchases of marketable equity securities(17,631)(18,150)
Proceeds from sales of marketable equity securities18,458 17,728 
Purchases of securities available for sale(635,194)(30,032)
Proceeds from sales of securities available for sale71,844 82,978 
Proceeds from maturities, calls, and prepayments of securities available for sale320,010 151,155 
Purchases of securities held to maturity(3,200)(5,692)
Proceeds from maturities, calls, and prepayments of securities held to maturity29,237 13,822 
Net change in loans474,707 395,643 
Proceeds from surrender of bank-owned life insurance553 1,457 
Purchase of Federal Home Loan Bank stock(6,741)(112,208)
Proceeds from redemption of Federal Home Loan Bank stock14,240 141,424 
Net investment in limited partnership tax credits(6,499)(3,997)
Purchase of premises and equipment, net(6,190)(8,518)
Acquisitions, net of cash acquired— 110,774 
Proceeds from sales of seasoned commercial loan portfolios37,988 — 
Proceeds from sale of other real estate171 150 
(continued)
10
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
 Nine Months Ended
September 30,
(In thousands)20202019
Net investing cash flows from discontinued operations— (2)
Net cash provided by investing activities292,299 737,054 
Cash flows from financing activities:  
Net increase in deposits133,031 109,238 
Proceeds from Federal Home Loan Bank advances and other borrowings326,277 5,267,520 
Repayments of Federal Home Loan Bank advances and other borrowings(451,493)(5,937,568)
Purchase of treasury stock(473)(27,651)
Exercise of stock options607 69 
Common and preferred stock cash dividends paid(30,456)(33,476)
Settlement of derivative contracts with financial institution counterparties(109,099)— 
Net cash used by financing activities(131,606)(621,868)
Net change in cash and cash equivalents355,463 118,906 
Cash and cash equivalents at beginning of period579,829 183,189 
Cash and cash equivalents at end of period$935,292 $302,095 
Supplemental cash flow information:  
Interest paid on deposits$67,119 $87,499 
Interest paid on borrowed funds16,961 27,499 
Income taxes paid, net345 8,368 
Acquisition of non-cash assets and liabilities:  
Assets acquired$— $1,595,054 
Liabilities assumed— (1,530,010)
Other non-cash changes:  
Other net comprehensive income$20,433 $29,350 
Impact to retained earnings from adoption of ASC 326, net of tax24,380 — 
Reclass of seasoned loan portfolios to held-for-sale, net10,048 — 
Real estate owned acquired in settlement of loans224 — 
The accompanying notes are an integral part of these consolidated financial statements.
11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.           BASIS OF PRESENTATION

The Consolidated Financial Statements (the “financial statements”) of Berkshire Hills Bancorp, Inc. and its subsidiaries (the “Company” or “Berkshire”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company is a Delaware corporation, headquartered in Boston, Massachusetts, and the holding company for Berkshire Bank (the “Bank”), a Massachusetts-chartered trust company headquartered in Pittsfield, Massachusetts, and Berkshire Insurance Group, Inc. These financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Bank’s consolidated subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless GAAP requires otherwise.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these financial statements were issued.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to GAAP have been omitted.

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and disclosures Berkshire Hills Bancorp, Inc. previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current presentation.

Recently Adopted Accounting Principles
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles: Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies the test for goodwill impairment by eliminating the second step of the current two-step method. Under the new accounting guidance, entities will compare the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, the entity is required to recognize an impairment charge for this amount. Current guidance requires an entity to proceed to a second step, whereby the entity would determine the fair value of its assets and liabilities. The new method applies to all reporting units. The performance of a qualitative assessment is still allowable. This accounting guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The adoption of ASU No. 2017-04 did not impact the Company's Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds, and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Entities are also allowed to elect early adoption for the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU No. 2018-15 clarifies certain aspects of ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud
12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Computing Arrangement,” which was issued in April 2015. Specifically, ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU No. 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU No. 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption did not have a material impact on the Company's Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and related subsequent amendments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For available for sale debt securities with unrealized losses, Topic 326 requires credit losses to be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses are recognized immediately in earnings rather than as interest income over time. The current expected credit loss measurement will be used to estimate the allowance for credit losses (“ACL”) over the life of the financial assets. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.

As previously disclosed, the Company assembled a cross-functional working group that met regularly to oversee the implementation plan which included assessment and documentation of processes and internal controls, model development and documentation, assessing existing loan and loss data, assessing models for default and loss estimates, and conducting parallel runs and reviews through December 31, 2019.

Under CECL the Company determines its allowance for credit losses on loans using pools of assets with similar risk characteristics. The Company evaluates its risk characteristics of loans based on regulatory call report code with sub-segmentation based on underlying collateral for certain loan types. Loans that no longer match the risk profile of the pool are individually assessed for credit losses. The Company’s lifetime credit loss models are based on historical data and incorporate forecasts of macroeconomic variables, expected prepayments and recoveries. Enhancements were made in the third quarter of 2020 to the Company’s economic adjustment calculation. The Company implemented segment-level loss calculations based on the equation of the fit line which replaced the previous calculation using a range. This allows the model to calculate a specific point estimate for the loss rate as compared to using a mid-point of a range. Additionally, the Company utilized actual loan runoff by segment whereas previously a calculation was utilized for the weighted average life period. The enhancements to the economic adjustment calculation were accounted for as a change in estimate and were not considered material to the overall calculation. Outside of the model, non-economic qualitative factors are applied to further refine the expected loss calculation for each portfolio. A seven quarter reasonable and supportable forecast period with a 1 year reversion period is currently used for all loan portfolios. When the risk characteristics of a loan no longer match the characteristics of the collective pool, the loan is removed from the pool and individually assessed for credit losses. Generally, non-accrual loans above a threshold deemed appropriate by management, TDRs, potential TDRs, and collateral dependent loans are individually assessed.

The individual assessment for credit impairment is generally based on a discounted cash flow approach unless the asset is collateral dependent. A loan is considered collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans are individually assessed and the expected credit loss is based on the fair value of the collateral. The fair value is reduced for estimated costs to sell if the value of the collateral is expected to be realized through sale.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has elected to present accrued interest receivable separately from the amortized cost basis on the balance sheet and is not currently estimating an allowance for credit loss on accrued interest. This election applies to loans as well as debt securities. The Company's non-accrual policies have not changed as a result of adopting CECL.

The Company adopted CECL on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for the reporting periods after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. On the adoption date, the Company increased the allowance for credit losses for loans by $25.4 million and increased the allowance for credit losses for unfunded loan commitments by $8.0 million (in other liabilities). The increase related to the Company's acquired loan portfolio totaled $15.3 million. Under the previously applicable accounting guidance, any remaining unamortized loan discount on an individual loan could be used to offset a charge-off for that loan, so the allowance for loan losses needed for the acquired loans was reduced by the remaining loan discounts. The new ASU removes the ability to offset a charge-off against the remaining loan discount and requires an allowance for credit losses to be recognized in addition to the loan discount. The impact of adopting the ASU, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities portfolio, along with other management judgments. The FASB provided transition relief, allowing entities to irrevocably elect, upon adoption of CECL, the fair value option (FVO) on financial instruments that were previously recorded at amortized cost and are within the scope of ASC 326-20 if the instruments are eligible for the FVO under ASC 825-10. It is applied through a cumulative-effect adjustment to retained earnings. The Company elected the FVO for the taxi medallion portfolio resulting in a $15.3 million reduction in loan valuation. As of January 1, 2020, the Company recorded a cumulative-effect adjustment of $24.4 million decrease in retained earnings, net of deferred tax balances of $9.0 million.

The Company recorded an allowance for credit losses as of January 1, 2020 on its securities held to maturity of $0.3 million.

The Company adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, Berkshire did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $15.3 million to the allowance for credit losses for loans which is net of $11.9 million adjustment for confirmed losses. The remaining noncredit discount in the amount of $3.2 million will be accreted into interest income at the effective interest rate as of January 1, 2020.


14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The impact of the January 1, 2020, adoption entry is summarized in the table below:
(in thousands)December 31, 2019 Pre-ASC 326 AdoptionImpact of AdoptionJanuary 1, 2020 Post-ASC 326 Adoption
Assets:
Loans9,502,428 — 9,502,428 
PCD gross up— 15,326 15,326 
Fair value option— (15,291)(15,291)
Total loans9,502,428 35 9,502,463 
Allowance for credit losses on loans63,575 25,434 89,009 
Allowance for credit losses on securities— 309 309 
Deferred tax assets, net51,165 8,993 60,158 
Liabilities and shareholders' equity:
Other liabilities (ACL unfunded loan commitments)100 7,993 8,093 
Retained earnings361,082 (24,380)336,702 

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company is adopting the capital transition relief over the permissible five-year period.

On March 27, 2020, the Coronavirus, Aid, Relief, and Economic Security ("CARES") Act, which provides relief from certain requirements under GAAP, was signed into law. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings ("TDRs") under ASC 310-40 in certain situations. In addition, on April 7, 2020, certain regulatory banking agencies issued an interagency statement that offers practical expedients for evaluating whether loan modifications in response to the COVID-19 pandemic are TDRs. The interagency statement was originally issued on March 22, 2020, but was revised to address the relationship between their original TDR guidance and the guidance in Section 4013 of the CARES Act. To qualify for TDR accounting and disclosure relief under the CARES Act, the applicable loan must not have been more than 30 days past due as of December 31, 2019, and the modification must be executed during the period beginning on March 1, 2020, and ending on the earlier of December 31, 2020, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19. The CARES Act applies to modifications made as a result of COVID-19, including forbearance agreements, interest rate modifications, repayment plans, and other arrangements to defer or delay payment of principal or interest. The interagency statement does not require the modification to be completed within a certain time period if it is related to COVID-19 and the loan was not more than 30 days past due as of the date of the Company’s implementation of its modification programs. Moreover, the interagency statement applies to short-term modifications including payment deferrals, fee waivers, extensions of repayment terms, or other insignificant payment delays as a result of COVID-19. The Company will apply Section 4013 of the CARES Act and the interagency statement in connection with applicable modifications. For modifications that qualify under either the CARES Act or the interagency statement, TDR accounting and reporting is suspended through the period of the modification; however, the Company will continue to apply its existing non-accrual policies including consideration of the loan's past due status which is determined on the basis of the contractual terms of the loan. Once a loan has been contractually modified, the past due status is generally based on the updated terms including payment deferrals.
15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future Application of Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. As ASU No. 2018-14 only revises disclosure requirements, it will not have a material impact on the Consolidated Financial Statements.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU No. 2019-12 removes specific exceptions to the general principles in FASB ASC Topic 740. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 also improves financial statement preparers’ application of income tax-related guidance and simplifies: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this ASU become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the Consolidated Financial Statements.

In January 2020, the FASB issued ASU No. 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)”. ASU No. 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, this ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this ASU become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. The Company is currently evaluating the impact of adopting the new guidance on the Consolidated Financial Statements.

In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. For instance, entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, entities can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. It is anticipated that this ASU will simplify any modifications that are executed between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. The Company is currently evaluating the impact of adopting the new guidance on the Consolidated Financial Statements.
16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.           DISCONTINUED OPERATIONS

During the first quarter of 2019, the Company reached the decision to pursue the sale of the national mortgage banking operations of First Choice Loan Services, Inc. (“FCLS”) – a subsidiary of the Bank. The decision was based on a number of strategic priorities and other factors, including the competitiveness of the mortgage industry. FCLS continued to operate and serve its customers as the Company initiated the process of identifying a buyer. As a result of these actions, the Company classified the operations of FCLS as discontinued under ASC 205-20. The Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows present discontinued operations retrospectively for current and prior periods.

On May 7, 2020, the Company completed a transaction to sell certain assets and liabilities related to the operations of FCLS. The Company continued to wind-down the operations of FCLS through the third quarter of 2020 and intends to complete a second transaction to transfer licenses and other intellectual property by the end of the year. Operating results for the three and nine months ended September 30, 2020, include expenses related to the wind-down of operations.

The following is a summary of the assets and liabilities of the discontinued operations of FCLS at September     30, 2020 and December 31, 2019:
(In thousands)September 30, 2020December 31, 2019
Assets
Loans held for sale, at fair value$1,742 $132,655 
Premises and equipment, net— 1,073 
Other real estate owned361 — 
Mortgage servicing rights, at fair value3,855 12,299 
Mortgage banking derivatives— 2,329 
Right-of-use asset1,773 3,462 
Other assets5,235 2,314 
Total assets$12,966 $154,132 
Liabilities
Customer payments in process$11,698 $15,372 
Lease liability1,773 3,494 
Other liabilities1,476 7,615 
Total liabilities$14,947 $26,481 

FCLS funds its lending operations and maintains working capital through an intercompany line-of-credit with the Bank. Although the sale of FCLS will contemplate settlement of these borrowings, debt was not allocated to discontinued operations due to the intercompany nature of the borrowings.
17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents operating results of the discontinued operations of FCLS for the three and nine months ended September 30, 2020 and September 30, 2019:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Interest income$23 $1,765 $1,516 $4,627 
Interest expense3 1,030 390 2,676 
Net interest income20 735 1,126 1,951 
Non-interest income(286)15,055 (4,175)37,114 
Total net revenue(266)15,790 (3,049)39,065 
Non-interest expense2,211 13,043 18,692 35,090 
(Loss)/income from discontinued operations before income taxes(2,477)2,747 (21,741)3,975 
Income tax (benefit)/expense(659)790 (5,789)1,161 
Net (loss)/income from discontinued operations$(1,818)$1,957 $(15,952)$2,814 
18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.           TRADING SECURITY

The Company holds a tax-advantaged economic development bond accounted for at fair value. The security had an amortized cost of $8.8 million and $9.4 million, and a fair value of $9.5 million and $10.8 million, at September 30, 2020 and December 31, 2019, respectively. As discussed further in Note 9 - Derivative Financial Instruments and Hedging Activities, the Company entered into a swap contract to swap-out the fixed rate of the security in exchange for a variable rate. The Company does not purchase securities with the intent of selling them in the near term, and there were no other securities in the trading portfolio at September 30, 2020 or December 31, 2019.
19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SECURITIES AVAILABLE FOR SALE, HELD TO MATURITY, AND MARKETABLE
        EQUITY SECURITIES

The following is a summary of securities available for sale, held to maturity, and marketable equity securities:
(In thousands)Amortized  CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Fair ValueAllowance
September 30, 2020    
Securities available for sale    
Municipal bonds and obligations
$97,463 $7,057 $(13)$104,507 $— 
Agency collateralized mortgage obligations
722,124 19,469 (124)741,469 — 
Agency mortgage-backed securities
322,252 4,202 (437)326,017 — 
Agency commercial mortgage-backed securities
263,406 10,304 (102)273,608 — 
Corporate bonds
74,357 842 (222)74,977 — 
Other bonds and obligations
52,958 1,762 (9)54,711 — 
Total securities available for sale1,532,560 43,636 (907)1,575,289 — 
Securities held to maturity    
Municipal bonds and obligations
242,666 18,401 — 261,067 67 
Agency collateralized mortgage obligations
68,124 6,535 — 74,659 — 
Agency mortgage-backed securities
5,280 208 — 5,488 — 
Agency commercial mortgage-backed securities
10,305 671 — 10,976 — 
Tax advantaged economic development bonds
3,527 32 (9)3,550 29 
Other bonds and obligations
295 — — 295 — 
Total securities held to maturity330,197 25,847 (9)356,035 96 
Marketable equity securities34,179 1,480 (3,666)31,993 — 
Total$1,896,936 $70,963 $(4,582)$1,963,317 $96 
(In thousands)Amortized  CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Fair ValueAllowance
December 31, 2019    
Securities available for sale    
Municipal bonds and obligations
$104,325 $5,813 $— $110,138 $— 
Agency collateralized mortgage obligations
742,550 6,431 (169)748,812 — 
Agency mortgage-backed securities
146,589 1,515 (360)147,744 — 
Agency commercial mortgage-backed securities
148,066 176 (1,146)147,096 — 
Corporate bonds
115,395 1,788 (607)116,576 — 
Other bonds and obligations
40,414 780 (5)41,189 — 
Total securities available for sale1,297,339 16,503 (2,287)1,311,555 — 
Securities held to maturity    
Municipal bonds and obligations
252,936 13,095 (5)266,026 — 
Agency collateralized mortgage obligations
69,667 2,870 (50)72,487 — 
Agency mortgage-backed securities
6,271 29 — 6,300 — 
Agency commercial mortgage-backed securities
10,353 51 — 10,404 — 
Tax advantaged economic development bonds
18,456 218 (910)17,764 — 
Other bonds and obligations
296 — — 296 — 
Total securities held to maturity357,979 16,263 (965)373,277 — 
Marketable equity securities37,138 5,147 (729)41,556 — 
Total$1,692,456 $37,913 $(3,981)$1,726,388 $— 

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity in the allowance for credit losses for debt securities held to maturity by security type for the three and nine months ended September 30, 2020:
(In thousands)Municipal bonds and obligationsTax advantaged economic development bondsTotal
Balance at June 30, 2020(62)(51)(113)
Provision for credit losses- reversal(5)22 17 
Balance at September 30, 2020(67)(29)(96)
(In thousands)Municipal bonds and obligationsTax advantaged economic development bondsTotal
Balance at December 31, 2019— — — 
Impact of ASC 326 adoption(83)(226)(309)
Provision for credit losses- reversal16 197 213 
Balance at September 30, 2020(67)(29)(96)

Credit Quality Information
The Company monitors the credit quality of held to maturity securities through credit ratings from various rating agencies. Credit ratings express opinions about the credit quality of a security and are utilized by the Company to make informed decisions. Investment grade securities are rated BBB-/Baa3 or higher and generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade are considered to have distinctively higher credit risk than investment grade securities. For securities without credit ratings, the Company utilizes other financial information indicating the financial health of the underlying municipality, agency, or organization.

As of September 30, 2020, none of the Company's investment securities were delinquent or in non-accrual status.

The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities segregated by contractual maturity at September 30, 2020 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.
 Available for saleHeld to maturity
 AmortizedFairAmortizedFair
(In thousands)CostValueCostValue
Within 1 year$38,196 $38,234 $2,526 $2,528 
Over 1 year to 5 years12,714 12,610 4,006 4,022 
Over 5 years to 10 years75,351 76,403 23,066 23,897 
Over 10 years98,517 106,948 216,890 234,465 
Total bonds and obligations224,778 234,195 246,488 264,912 
Mortgage-backed securities1,307,782 1,341,094 83,709 91,123 
Total$1,532,560 $1,575,289 $330,197 $356,035 

During the three months ended September 30, 2020, purchases of AFS securities totaled $319.2 million and the proceeds from the sale of AFS securities totaled $64.2 million. During the nine months ended September 30, 2020, purchases of AFS securities totaled $635.2 million and the proceeds from the sale of AFS securities totaled $71.8 million. During the three months ended September 30, 2019, purchases of AFS securities totaled $14.9 million. During the three months ended September 30, 2019, there were no securities sold. During the nine months ended September 30, 2019, purchases of AFS securities totaled $30.0 million and the proceeds from the sale of AFS securities totaled $83.0 million. During the three months ended September 30, 2020, gross gains on AFS securities totaled $704.6 thousand and there were $698.6 thousand gross losses. During the nine months ended September 30, 2020, gross gains on AFS securities totaled $705.4 thousand and gross losses totaled $699.9 thousand. During the
21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
three months ended September 30,2019, gross gains on AFS securities totaled $5 thousand and gross losses totaled $1 thousand. During the nine months ended September 30, 2019, gross gains totaled $11 thousand and gross losses totaled $7 thousand. These gains and losses are included in gain/(loss) on securities, net on the consolidated statements of income.

Securities available for sale and held to maturity with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
 Less Than Twelve MonthsOver Twelve MonthsTotal
 Gross Gross Gross 
 UnrealizedFairUnrealizedFairUnrealizedFair
(In thousands)LossesValueLossesValueLossesValue
September 30, 2020      
Securities available for sale      
Municipal bonds and obligations
$13 $3,451 $— $— $13 $3,451 
Agency collateralized mortgage obligations
124 44,785 — — 124 44,785 
Agency mortgage-backed securities
434 133,536 3 257 437 133,793 
Agency commercial mortgage-backed securities102 22,336 — — 102 22,336 
Corporate bonds
222 10,663 — — 222 10,663 
Other bonds and obligations
— — 9 1,064 9 1,064 
Total securities available for sale895 214,771 12 1,321 907 216,092 
Securities held to maturity      
Tax advantaged economic development bonds
9 1,430 — — 9 1,430 
Total securities held to maturity9 1,430 — — 9 1,430 
Total$904 $216,201 $12 $1,321 $916 $217,522 
December 31, 2019      
Securities available for sale      
Agency collateralized mortgage obligations
127 52,623 42 6,267 169 58,890 
Agency mortgage-backed securities
59 10,640 301 23,404 360 34,044 
Agency commercial mortgage-backed securities1,097 116,324 49 11,250 1,146 127,574 
Corporate bonds
— — 607 42,823 607 42,823 
Other bonds and obligations
4 1,239 1 29 5 1,268 
Total securities available for sale1,287 180,826 1,000 83,773 2,287 264,599 
Securities held to maturity      
Municipal bonds and obligations
5 800 — — 5 800 
Agency collateralized mortgage obligations
50 9,778 — — 50 9,778 
Tax advantaged economic development bonds
— — 910 6,925 910 6,925 
Total securities held to maturity55 10,578 910 6,925 965 17,503 
Total$1,342 $191,404 $1,910 $90,698 $3,252 $282,102 

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities
The Company expects to recover its amortized cost basis on all debt securities in its AFS and HTM portfolios. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of September 30, 2020, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS and HTM portfolios were not other-than-temporarily impaired at September 30, 2020:

AFS municipal bonds and obligations
At September 30, 2020, 2 of the 174 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.4% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

AFS collateralized mortgage obligations
At September 30, 2020, 14 of the 257 securities in the Company’s portfolio of AFS collateralized mortgage obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.3% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”) guarantee the contractual cash flows of all of the Company’s collateralized mortgage obligations. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS commercial and residential mortgage-backed securities
At September 30, 2020, 15 of the 122 securities in the Company’s portfolio of AFS mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 0.3% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of all of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

AFS corporate bonds
At September 30, 2020, 3 of the 18 securities in the Company’s portfolio of AFS corporate bonds were in unrealized loss positions. Aggregate unrealized losses represents 10.4% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.

AFS other bonds and obligations
At September 30, 2020, 3 of the 7 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.8% of the amortized cost of securities in unrealized loss positions. The securities are all investment grade rated, and there were no material underlying credit downgrades during the quarter. All securities are performing.
 
HTM tax-advantaged economic development bonds
At September 30, 2020, 1 of the 3 securities in the Company’s portfolio of tax-advantaged economic development bonds was in an unrealized loss position. Aggregate unrealized losses represented 0.6% of the amortized cost of the security in an unrealized loss position. The Company believes that more likely than not all the principal outstanding will be collected. All securities are performing.
23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Upon adoption of ASC 326, the Company evaluates its risk characteristics of loans based on regulatory call report code with sub-segmentation based on underlying collateral for certain loan types. Prior to the adoption of ASC 326, under the incurred loss model, the Company evaluated its risk characteristics of loans based on purpose of the loans. The composition of loans by portfolio segment as of December 31, 2019 and January 1, 2020 follows:
(In thousands)December 31, 2019 Statement BalanceImpact of ASC 326 AdoptionJanuary 1, 2020 Post-ASC 326 Adoption
Loans:
Construction$448,452 $187 $448,639 
Commercial multifamily631,740 252 631,992 
Commercial real estate owner occupied673,308 3,185 676,493 
Commercial real estate non-owner occupied2,189,780 6,540 2,196,320 
Commercial and industrial1,522,059 (13,372)1,508,687 
Commercial and industrial - other321,624 1,160 322,784 
Residential real estate2,853,385 1,868 2,855,253 
Home equity378,793 10 378,803 
Consumer other483,287 205 483,492 
Total$9,502,428 $35 $9,502,463 
Allowance:
Construction$2,713 $(342)$2,371 
Commercial multifamily4,413 (1,842)2,571 
Commercial real estate owner occupied4,880 6,062 10,942 
Commercial real estate non-owner occupied16,344 11,201 27,545 
Commercial and industrial17,243 (2,696)14,547 
Commercial and industrial - other2,856 507 3,363 
Residential real estate9,970 6,799 16,769 
Home equity1,470 4,884 6,354 
Consumer other3,686 861 4,547 
Total$63,575 $25,434 $89,009 


24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of total loans by regulatory call report code with sub-segmentation based on underlying collateral for certain loan types:
(In thousands)September 30, 2020December 31, 2019
Construction$490,111 $448,452 
Commercial multifamily535,936 631,740 
Commercial real estate owner occupied595,791 673,308 
Commercial real estate non-owner occupied2,258,935 2,189,780 
Commercial and industrial1,819,175 1,522,059 
Commercial and industrial - other311,505 321,624 
Residential real estate2,270,458 2,853,385 
Home equity349,274 378,793 
Consumer other351,151 483,287 
Total loans$8,982,336 $9,502,428 
Allowance for credit losses134,414 63,575 
Net loans$8,847,922 $9,438,853 

As of September 30, 2020, loans originated under the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") totaled $708.1 million. These loans are 100% guaranteed by the SBA and the full principal amount of the loan may qualify for forgiveness. These loans are included in commercial and industrial.

Risk characteristics relevant to each portfolio segment are as follows:
Construction - Loans in this segment primarily include real estate development loans for which payment is derived from sale of the property or long term financing at completion. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions

Commercial real estate multifamily, owner occupied and non-owner - Loans in these segments are primarily owner-occupied or income-producing properties throughout New England and Northeastern New York. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans.

Commercial and industrial loans - Loans in this segment are made to businesses and are generally secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets. Repayment is expected from the cash flows of the business. Loans in this segment include asset based loans which generally have no scheduled repayment and which are closely monitored against formula based collateral advance ratios. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Commercial and industrial other loans - Loans in this segment are primarily equipment financing loans. These loans are typically term loans secured by business assets. Credit quality on these loans are impacted by a weakened economy and resultant decreased consumer spending.

Residential real estate - All loans in this segment are collateralized by residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Home equity and other consumer loans - Loans in this segment are primarily home equity lines of credit, automobile loans and other consumer loans. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Credit Losses for Loans
The Allowance for Credit Losses for Loans (“ACLL”) is comprised of the allowance for loan losses and the allowance for unfunded commitments which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the ACLL represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date. The Company uses a static pool migration analysis method, applying expected historical loss trend and observed economic metrics. The level of the ACLL is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past and current events, utilizing a 7 quarter reasonable and supportable forecast period with a 1 year reversion period. The ACLL reserve is overlaid with qualitative factors based upon:
•the existence and growth of concentrations of credit;
•the volume and severity of past due financial assets, including nonaccrual assets;
•the institutions lending and credit review as well as the experience and ability of relevant management and staff and;
•the effect of other external factors such as regulatory, competition, regional market conditions, legal and technological environment and other events such as natural disasters;
•the effect of other economic factors such as economic stimulus and customer forbearance programs.
The allowance for unfunded commitments is maintained at a level by the Company to be sufficient to absorb expected lifetime losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit).

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s activity in the allowance for credit losses for loans for the three and nine months ended September 30, 2020 was as follows:
(In thousands)Balance at Beginning of PeriodImpact of Adopting ASC 326Sub-totalCharge-offsRecoveriesProvision for Credit LossesBalance at End of Period
Three months ended September 30, 2020
Construction$7,779 $— $7,779 $— $— $(1,122)$6,657 
Commercial multifamily4,299 — 4,299 — — (518)3,781 
Commercial real estate owner occupied11,552 — 11,552 (58)38 (537)10,995 
Commercial real estate non-owner occupied34,707 — 34,707 — 155 (2,088)32,774 
Commercial and industrial17,779 — 17,779 (2,358)161 1,346 16,928 
Commercial and industrial - other5,317 — 5,317 (3,610)245 1,968 3,920 
Residential real estate39,004 — 39,004 (1,085)842 1,130 39,891 
Home equity8,021 — 8,021 (88)36 1,352 9,321 
Consumer other10,936 — 10,936 (577)102 (314)10,147 
Total allowance for credit losses$139,394 $— $139,394 $(7,776)$1,579 $1,217 $134,414 

(In thousands)Balance at Beginning of PeriodImpact of Adopting ASC 326Sub-totalCharge-offsRecoveriesProvision for Credit LossesBalance at End of Period
Nine months ended September 30, 2020
Construction$2,713 $(342)$2,371 $— $— $4,286 $6,657 
Commercial multifamily4,413 (1,842)2,571 (50)— 1,260 3,781 
Commercial real estate owner occupied4,880 6,062 10,942 (8,670)907 7,816 10,995 
Commercial real estate non-owner occupied16,344 11,201 27,545 (135)290 5,074 32,774 
Commercial and industrial17,243 (2,696)14,547 (7,480)3,709 6,152 16,928 
Commercial and industrial - other2,856 507 3,363 (6,773)316 7,014 3,920 
Residential real estate9,970 6,799 16,769 (2,212)936 24,398 39,891 
Home equity1,470 4,884 6,354 (322)136 3,153 9,321 
Consumer other3,686 861 4,547 (1,840)502 6,938 10,147 
Total allowance for credit losses$63,575 $25,434 $89,009 $(27,482)$6,796 $66,091 $134,414 

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s allowance for credit losses on unfunded commitments is recognized as a liability (other liability on consolidated balance sheet), with adjustments to the reserve recognized in other noninterest expense in the consolidated statement of operations. The Company’s activity in the allowance for credit losses on unfunded commitments for the three and nine months ended September 30, 2020 was as follows:
(In thousands)Total
Balance at June 30, 2020$8,593 
Expense for credit losses— 
Balance at September 30, 2020$8,593 
(In thousands)Total
Balance at December 31, 2019$100 
Impact of adopting ASC 3267,993 
Sub-Total8,093 
Expense for credit losses500 
Balance at September 30, 2020$8,593 


28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Information
The Company monitors the credit quality of its portfolio by using internal risk ratings that are based on regulatory guidance. Loans that are given a Pass rating are not considered a problem credit. Loans that are classified as Special Mention loans are considered to have potential weaknesses and are evaluated closely by management. Substandard, including non-accruing loans, are loans for which a definitive weakness has been identified and which may make full collection of contractual cash flows questionable. Doubtful loans are those with identified weaknesses that make full collection of contractual cash flows, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

For commercial credits, the Company assigns an internal risk rating at origination and reviews the rating annual, semiannually, or quarterly depending on the risk rating. The rating is also reassessed at any point in time when management becomes aware of information that may affect the borrower’s ability to fulfill their obligations.

The Company risk rates its residential mortgages, including 1-4 family and residential construction loans, based on a three rating system: Pass, Special Mention, and Substandard. Loans that are current within 59 days are rated Pass. Residential mortgages that are 60-89 days delinquent are rated Special Mention. Loans delinquent for 90 days or greater are rated Substandard and generally placed on non-accrual status. 

The following table presents the Company’s loans by risk category:
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of September 30, 2020
Construction
Risk rating
Pass$35,430 $241,497 $155,695 $29,807 $17,600 $3,115 $933 $— $484,077 
Special Mention— — — — — — — — — 
Substandard— — 2,034 4,000 — — — — 6,034 
Total$35,430 $241,497 $157,729 $33,807 $17,600 $3,115 $933 $— $490,111 
Commercial multifamily:
Risk rating
Pass$28,876 $56,630 $79,397 $72,790 $89,041 $185,276 $29 $— $512,039 
Special Mention— — — 13,595 — — — — 13,595 
Substandard— — — — 47 10,108 147 — 10,302 
Total$28,876 $56,630 $79,397 $86,385 $89,088 $195,384 $176 $— $535,936 
Commercial real estate owner occupied:
Risk rating
Pass$44,304 $90,869 $112,768 $71,574 $38,231 $205,814 $3,461 $— $567,021 
Special Mention— 2,123 1,815 — — 2,001 — — 5,939 
Substandard— — 5,638 1,622 1,704 13,867 — — 22,831 
Total$44,304 $92,992 $120,221 $73,196 $39,935 $221,682 $3,461 $— $595,791 
29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
Commercial real estate non-owner occupied:
Risk rating
Pass$133,231 $291,079 $469,033 $250,093 $314,902 $583,861 $16,967 $— $2,059,166 
Special Mention— 295 3,094 17,254 12,901 68,838 495 — 102,877 
Substandard7,804 6,844 3,817 11,368 2,950 63,914 195 — 96,892 
Total$141,035 $298,218 $475,944 $278,715 $330,753 $716,613 $17,657 $— $2,258,935 
Commercial and industrial:
Risk rating
Pass$755,987 $96,675 $189,565 $121,633 $47,911 $150,299 $401,356 $— $1,763,426 
Special Mention— 1,507 5,950 693 604 — 20,614 — 29,368 
Substandard1,354 275 6,354 1,661 1,965 5,848 8,522 — 25,979 
Doubtful— — — — — — 402 — 402 
Total$757,341 $98,457 $201,869 $123,987 $50,480 $156,147 $430,894 $— $1,819,175 
Commercial and industrial - other:
Risk rating
Pass$34,814 $78,318 $78,149 $33,573 $7,717 $14,585 $4,614 $— $251,770 
Special Mention933 1,100 1,944 741 497 64 — — 5,279 
Substandard2,543 29,372 12,006 4,542 3,286 307 2,400 — 54,456 
Doubtful— — — — — — — — — 
Total$38,290 $108,790 $92,099 $38,856 $11,500 $14,956 $7,014 $— $311,505 
Residential real estate
Risk rating
Pass$133,186 $163,232 $373,222 $399,237 $391,953 $794,072 $3,260 $— $2,258,162 
Special Mention39 — — — — 468 38 — 545 
Substandard— 97 539 1,162 429 9,515 9 — 11,751 
Total$133,225 $163,329 $373,761 $400,399 $392,382 $804,055 $3,307 $— $2,270,458 


30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For home equity and consumer other loan portfolio segments, Berkshire evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an ongoing basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost based on payment activity:
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of September 30, 2020
Home equity:
Payment performance
Performing$2,191 $1,995 $432 $1,990 $515 $1,954 $336,569 $— $345,646 
Nonperforming— — 2 — — — 3,626 — 3,628 
Total$2,191 $1,995 $434 $1,990 $515 $1,954 $340,195 $— $349,274 
Consumer other:
Payment performance
Performing$11,381 $39,877 $121,304 $80,701 $43,513 $37,256 $11,464 $— $345,496 
Nonperforming34 404 1,563 1,480 1,698 447 29 — 5,655 
Total$11,415 $40,281 $122,867 $82,181 $45,211 $37,703 $11,493 $— $351,151 

31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of loans by past due status at September 30, 2020:
(In thousands)30-59 Days Past Due60-89 Days Past Due90 Days or Greater Past DueTotal Past DueCurrentTotal Loans
September 30, 2020
Construction$50 $46 $2,034 $2,130 $487,981 $490,111 
Commercial multifamily278 3,584 1,047 4,909 531,027 535,936 
Commercial real estate owner occupied896 948 8,470 10,314 585,477 595,791 
Commercial real estate non-owner occupied1,377 2,826 10,412 14,615 2,244,320 2,258,935 
Commercial and industrial3,832 2,592 13,743 20,167 1,799,008 1,819,175 
Commercial and industrial - other766 232 3,969 4,967 306,538 311,505 
Residential real estate4,080 999 10,865 15,944 2,254,514 2,270,458 
Home equity598 181 4,022 4,801 344,473 349,274 
Consumer other3,437 904 5,704 10,045 341,106 351,151 
Total$15,314 $12,312 $60,266 $87,892 $8,894,444 $8,982,336 
32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of loans on nonaccrual status and loans past due 90 days or more and still accruing as of September 30, 2020:
January 1, 2020June 30, 2020September 30, 2020
(In thousands)Nonaccrual Amortized CostNonaccrual Amortized CostNonaccrual Amortized CostNonaccrual With No Related AllowancePast Due 90 Days or Greater and AccruingInterest Income Recognized on Nonaccrual
Construction$— $— $2,034 $2,034 $— $— 
Commercial multifamily811 753 884 598 163 — 
Commercial real estate owner occupied15,389 6,513 8,291 2,429 179 — 
Commercial real estate non-owner occupied1,031 2,372 3,074 2,170 7,338 — 
Commercial and industrial5,465 8,103 10,300 3,869 3,443 — 
Commercial and industrial - other5,753 6,173 3,969 2,959 — — 
Residential real estate6,411 13,997 9,555 5,876 1,310 — 
Home equity1,798 2,405 3,628 490 394 — 
Consumer other2,982 4,568 5,655 49 49 — 
Total$39,640 $44,884 $47,390 $20,474 $12,876 $— 

The commercial and industrial loans nonaccrual amortized cost includes medallion loans with a fair value of $2.8 million and a contractual balance of $66.4 million.

A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of individually analyzed collateral-dependent loans by loan portfolio segment:
Type of Collateral
(In thousands)Real EstateInvestment Securities/CashOther
September 30, 2020
Construction$2,389 $— $— 
Commercial multifamily598 — — 
Commercial real estate owner occupied8,956 — — 
Commercial real estate non-owner occupied3,819 — — 
Commercial and industrial2,506 59 245 
Commercial and industrial - other— — 2,958 
Residential real estate5,290 — — 
Home equity272 — — 
Consumer other26 — — 
Total loans$23,856 $59 $3,203 

33

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

The following table presents activity in TDRs for the three and nine months ended September 30, 2020:
(In thousands)Balance at Beginning of PeriodPrincipal PaymentsTDR Status ChangeOther Additions/(Reductions)Newly Identified TDRsBalance at End of Period
Three months ended September 30, 2020
Construction$— $— $— $— $— $— 
Commercial multifamily779 (12)— — — 767 
Commercial real estate owner occupied2,919 (19)— — 18 2,918 
Commercial real estate non-owner occupied11,166 — — 1,241 194 12,601 
Commercial and industrial1,080 (12)— (2)— 1,066 
Commercial and industrial - other1,483 (115)— (56)399 1,711 
Residential real estate1,968 (57)— — — 1,911 
Home equity275 (3)— (72)— 200 
Consumer other43 (3)— — — 40 
Total$19,713 $(221)$— $1,111 $611 $21,214 
(In thousands)Balance at Beginning of PeriodPrincipal PaymentsTDR Status ChangeOther Additions/(Reductions)Newly Identified TDRsBalance at End of Period
Nine months ended September 30, 2020
Construction$— $— $— $— $— $— 
Commercial multifamily793 (26)— — — 767 
Commercial real estate owner occupied13,331 (5,721)— (4,710)18 2,918 
Commercial real estate non-owner occupied1,373 — — 1,241 9,987 12,601 
Commercial and industrial1,109 (41)— (2)— 1,066 
Commercial and industrial - other340 (157)— (58)1,586 1,711 
Residential real estate2,045 (134)— — — 1,911 
Home equity277 (5)— (72)— 200 
Consumer other48 (8)— — — 40 
Total$19,316 $(6,092)$— $(3,601)$11,591 $21,214 


34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents loans modified as TDRs that occurred during the three and nine months ended September 30, 2020 and 2019:
(dollars in thousands)Total
Three months ended September 30, 2020
TDR:
Number of loans10 
Pre-modification outstanding recorded investment$611 
Post-modification outstanding recorded investment$611 
Three months ended September 30, 2019
TDR:
Number of loans2 
Pre-modification outstanding recorded investment$65 
Post-modification outstanding recorded investment$65 

(dollars in thousands)Total
Nine months ended September 30, 2020
TDR:
Number of loans15 
Pre-modification outstanding recorded investment$11,591 
Post-modification outstanding recorded investment$11,591 
Nine months ended September 30, 2019
TDR:
Number of loans7 
Pre-modification outstanding recorded investment$685 
Post-modification outstanding recorded investment$682 

There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2020 and 2019.

Beginning in March 2020, the Company has offered three-month payment deferrals for customers with a current payment status who were negatively impacted by economic disruption caused by the COVID-19 pandemic. Refer to Note 11 - Other Commitments, Contingencies, and Off-Balance Sheet Activities for more information regarding these modifications.

35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the adoption of ASC 326 on January 1, 2020, the Company calculated allowance for loan losses using incurred losses methodology. The following tables are disclosures related to loans in prior periods.

The following is a summary of total loans as of December 31, 2019:
 December 31, 2019
(In thousands)Business
Activities Loans		Acquired
Loans		Total
Commercial real estate:   
Construction$382,014 $47,792 $429,806 
Other commercial real estate2,414,942 1,189,521 3,604,463 
Total commercial real estate2,796,956 1,237,313 4,034,269 
Commercial and industrial loans:1,442,617 397,891 1,840,508 
Total commercial loans4,239,573 1,635,204 5,874,777 
Residential mortgages:   
1-4 family2,143,817 533,536 2,677,353 
Construction4,641 3,478 8,119 
Total residential mortgages2,148,458 537,014 2,685,472 
Consumer loans:   
Home equity273,867 106,724 380,591 
Auto and other504,599 56,989 561,588 
Total consumer loans778,466 163,713 942,179 
Total loans$7,166,497 $2,335,931 $9,502,428 

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total unamortized net costs and premiums included in the December 31, 2019 total loans for business activity loans were the following:
(In thousands)December 31, 2019
Unamortized net loan origination costs$13,259 
Unamortized net premium on purchased loans2,643 
Total unamortized net costs and premiums$15,902 

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality:
(In thousands)Three Months Ended September 30, 2019Nine Months Ended September 30, 2019
Balance at beginning of period$5,420 $2,840 
Acquisitions— 4,200 
Accretion(2,872)(6,470)
Net reclassification from nonaccretable difference2,066 4,195 
Payments received, net(196)(356)
Reclassification to TDR— 9 
Balance at end of period$4,418 $4,418 

The following is a summary of past due loans at December 31, 2019:
Business Activities Loans
(in thousands)30-59 Days
Past Due		60-89 Days
Past Due		>90 Days Past DueTotal Past
Due		CurrentTotal LoansPast Due >
90 days and
Accruing
December 31, 2019       
Commercial real estate:       
Construction$— $— $— $— $382,014 $382,014 $— 
Commercial real estate423 89 15,623 16,135 2,398,807 2,414,942 — 
Total423 89 15,623 16,135 2,780,821 2,796,956 — 
Commercial and industrial loans       
Total2,841 2,033 10,662 15,536 1,427,081 1,442,617 122 
Residential mortgages:       
1-4 family1,669 714 3,350 5,733 2,138,084 2,143,817 800 
Construction— — — — 4,641 4,641 — 
Total1,669 714 3,350 5,733 2,142,725 2,148,458 800 
Consumer loans:       
Home equity149 — 1,147 1,296 272,571 273,867 52 
Auto and other4,709 990 2,729 8,428 496,171 504,599 1 
Total4,858 990 3,876 9,724 768,742 778,466 53 
Total$9,791 $3,826 $33,511 $47,128 $7,119,369 $7,166,497 $975 

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans
(in thousands)30-59 Days
Past Due		60-89 Days
Past Due		>90 Days Past DueTotal Past
Due		Acquired
Credit
Impaired		Total LoansPast Due >
90 days and
Accruing
December 31, 2019       
Commercial real estate:       
Construction$— $— $— $— $1,396 $47,792 $— 
Commercial real estate3,907 245 10,247 14,399 21,639 1,189,521 5,751 
Total3,907 245 10,247 14,399 23,035 1,237,313 5,751 
Commercial and industrial loans       
Total888 299 1,275 2,462 26,718 397,891 442 
Residential mortgages:       
1-4 family745 491 932 2,168 10,840 533,536 139 
Construction— — — — — 3,478 — 
Total745 491 932 2,168 10,840 537,014 139 
Consumer loans:       
Home equity346 222 789 1,357 540 106,724 72 
Auto and other120 22 265 407 286 56,989 — 
Total466 244 1,054 1,764 826 163,713 72 
Total$6,006 $1,279 $13,508 $20,793 $61,419 $2,335,931 $6,404 


The following is summary information pertaining to non-accrual loans at December 31, 2019:
 December 31, 2019
(In thousands)Business Activities
Loans		Acquired  Loans Total
Commercial real estate:   
Construction$— $— $— 
Other commercial real estate15,623 4,496 20,119 
Total15,623 4,496 20,119 
Commercial and industrial loans:  
Total10,540 833 11,373 
Residential mortgages:   
1-4 family2,550 793 3,343 
Construction— — — 
Total2,550 793 3,343 
Consumer loans:   
Home equity1,095 717 1,812 
Auto and other2,728 265 2,993 
Total3,823 982 4,805 
Total non-accrual loans$32,536 $7,104 $39,640 
38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans evaluated for impairment as of December 31, 2019 were as follows:

Business Activities Loans
(In thousands) Commercial
real estate		 Commercial
and industrial		 Residential
mortgages		ConsumerTotal
Loans receivable:     
Balance at end of year     
Individually evaluated for impairment$19,192 $9,167 $3,019 $630 $32,008 
Collectively evaluated2,777,764 1,433,450 2,145,439 777,836 7,134,489 
Total$2,796,956 $1,442,617 $2,148,458 $778,466 $7,166,497 

Acquired Loans
(In thousands) Commercial
real estate		 Commercial
and industrial		 Residential
mortgages		ConsumerTotal
Loans receivable:     
Balance at end of year     
Individually evaluated for impairment$4,241 $464 $372 $575 $5,652 
Purchased credit-impaired loans23,035 26,718 10,840 826 61,419 
Collectively evaluated1,210,037 370,709 525,802 162,312 2,268,860 
Total$1,237,313 $397,891 $537,014 $163,713 $2,335,931 

The following is a summary of impaired loans at December 31, 2019:
Business Activities Loans
 December 31, 2019
(In thousands)Recorded Investment (1)Unpaid Principal
Balance (2)		Related Allowance
With no related allowance:   
Other commercial real estate loans$18,676 $37,493 $— 
Commercial and industrial loans4,805 10,104 — 
Residential mortgages - 1-4 family433 699 — 
Consumer - home equity32 238 — 
Consumer - other— — — 
With an allowance recorded:   
Other commercial real estate loans$550 $1,411 $20 
Commercial and industrial loans4,166 12,136 122 
Residential mortgages - 1-4 family2,615 2,924 109 
Consumer - home equity594 614 42 
Consumer - other8 8 1 
Total   
Commercial real estate$19,226 $38,904 $20 
Commercial and industrial loans8,971 22,240 122 
Residential mortgages3,048 3,623 109 
Consumer634 860 43 
Total impaired loans$31,879 $65,627 $294 
(1) The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on the Consolidated Balance Sheet.
(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.
39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans
 December 31, 2019
(In thousands)Recorded Investment (1)Unpaid Principal
Balance (2)		Related Allowance
With no related allowance:   
Other commercial real estate loans$3,200 $6,021 $— 
Other commercial and industrial loans437 532 — 
Residential mortgages - 1-4 family292 293 — 
Consumer - home equity416 844 — 
Consumer - other— — — 
With an allowance recorded:   
Other commercial real estate loans$1,033 $1,050 $97 
Commercial and industrial loans28 30 1 
Residential mortgages - 1-4 family84 110 8 
Consumer - home equity121 123 6 
  Consumer - other39 37 6 
Total   
Commercial real estate$4,233 $7,071 $97 
Commercial and industrial loans465 562 1 
Residential mortgages376 403 8 
Consumer 576 1,004 12 
Total impaired loans$5,650 $9,040 $118 
(1) The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on the Consolidated Balance Sheet.
(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.
40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the average recorded investment and interest income recognized on impaired loans as of December 31, 2019:
 
Business Activities Loans
 December 31, 2019
(in thousands)Average  Recorded
Investment		Cash Basis  Interest
Income  Recognized
With no related allowance:  
Other commercial real estate$19,805 $586 
Other commercial and industrial3,165 523 
Residential mortgages - 1-4 family185 17 
Consumer-home equity148 3 
Consumer-other— — 
With an allowance recorded:  
Other commercial real estate$374 $107 
Other commercial and industrial2,533 793 
Residential mortgages - 1-4 family2,427 150 
Consumer-home equity349 32 
Consumer - other11 1 
Total  
Commercial real estate$20,179 $693 
Commercial and industrial5,698 1,316 
Residential mortgages2,612 167 
Consumer loans508 36 
Total impaired loans$28,997 $2,212 
 
41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans
 December 31, 2019
(in thousands)Average  Recorded
Investment		Cash Basis  Interest
Income  Recognized
With no related allowance:  
Other commercial real estate$1,603 $117 
Other commercial and industrial441 51 
Residential mortgages - 1-4 family241 11 
Consumer - home equity475 23 
Consumer - other — — 
With an allowance recorded:  
Other commercial real estate$1,005 $59 
Other commercial and industrial29 2 
Residential mortgages - 1-4 family88 7 
Consumer - home equity68 6 
Consumer - other 41 2 
Total  
Commercial real estate$2,608 $176 
Commercial and industrial470 53 
Residential mortgages329 18 
Consumer loans584 31 
Total impaired loans$3,991 $278 

No additional funds are committed to be advanced in connection with impaired loans.

The modifications for the three and nine months ended September 30, 2019 were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity.
Modifications by Class
For the three months ending September 30, 2019
 Number of
Modifications		Pre-Modification
Outstanding Recorded
Investment (In thousands)		Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings   
Commercial real estate— $— $— 
Commercial and industrial loans— — — 
Residential mortgages - 1-4 family2 65 65 
 2 $65 $65 
Modifications by Class
For the nine months ending September 30, 2019
 Number of
Modifications		Pre-Modification
Outstanding Recorded
Investment (In thousands)		Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings   
Commercial real estate2 $145 $145 
Commercial and industrial loans3 475 472 
Residential mortgages - 1-4 family2 65 65 
 7 $685 $682 
42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no TDRs that defaulted within twelve months of modifications during the three and nine months ended September 30, 2019.

The following table presents the Company’s TDR activity for the three and nine months ended September 30, 2019:
(In thousands)Three Months Ended September 30, 2019
Balance at beginning of year$25,089 
Principal payments(3,876)
TDR status change (1)— 
Other reductions (2)(1,548)
Newly identified TDRs65 
Balance at end of year$19,730 
(In thousands)Nine Months Ended September 30, 2019
Balance at beginning of year$27,415 
Principal payments(5,664)
TDR status change (1)— 
Other reductions (2)(2,703)
Newly identified TDRs682 
Balance at end of year$19,730 
_____________________ 
(1) TDR status change classification represents TDR loans with a specified interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk and the loan was on current payment status and not impaired based on the terms specified by the restructuring agreement.
(2)  Other reductions classification consists of transfer to other real estate owned, charge-offs to loans, and other loan sale payoffs.

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Loan Losses
Prior to the adoption of ASC 326 on January 1, 2020, the Company calculated allowance for loan losses using incurred losses methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

Activity in the allowance for loan losses for the three and nine months ended September 30, 2019 was as follows:
At or for the three months ended September 30, 2019
Business Activities Loans
(In thousands)		Commercial
real estate		Commercial and
industrial loans		Residential
mortgages		ConsumerTotal
Balance at beginning of period$22,408 $18,849 $8,834 $5,341 $55,432 
Charged-off loans3,061 19,315 95 760 23,231 
Recoveries on charged-off loans286 469 — 53 808 
Provision/(releases) for loan losses3,815 18,929 23 420 23,187 
Balance at end of period$23,448 $18,932 $8,762 $5,054 $56,196 
At or for the nine months ended September 30, 2019
Business Activities Loans
(In thousands)		Commercial
real estate		Commercial and
industrial loans		Residential
mortgages		ConsumerTotal
Balance at beginning of period$21,732 $16,504 $10,535 $7,368 $56,139 
Charged-off loans5,019 22,171 343 2,536 30,069 
Recoveries on charged-off loans561 895 58 186 1,700 
Provision/(releases) for loan losses6,174 23,704 (1,488)36 28,426 
Balance at end of period$23,448 $18,932 $8,762 $5,054 $56,196 
At or for the three months ended September 30, 2019
Acquired Loans
(In thousands)		Commercial
real estate		Commercial and
industrial loans		Residential
mortgages		ConsumerTotal
Balance at beginning of period$4,562 $870 $882 $410 $6,724 
Charged-off loans20 89 97 87 293 
Recoveries on charged-off loans36 85 52 17 190 
Provision/(releases) for loan losses(648)20 7 34 (587)
Balance at end of period$3,930 $886 $844 $374 $6,034 
At or for the nine months ended September 30, 2019
Acquired Loans
(In thousands)		Commercial
real estate		Commercial and
industrial loans		Residential
mortgages		ConsumerTotal
Balance at beginning of period$3,153 $1,064 $630 $483 $5,330 
Charged-off loans824 460 201 515 2,000 
Recoveries on charged-off loans536 311 112 103 1,062 
Provision/(releases) for loan losses1,065 (29)303 303 1,642 
Balance at end of period$3,930 $886 $844 $374 $6,034 

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the Company’s loans by risk rating at December 31, 2019:

Business Activities Loans

Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)ConstructionReal EstateTotal Commercial Real Estate
Grade:   
Pass$382,014 $2,354,375 $2,736,389 
Special mention— 12,167 12,167 
Substandard— 48,400 48,400 
Total$382,014 $2,414,942 $2,796,956 
Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)Total Commercial and Industrial Loans
Grade: 
Pass$1,366,342 
Special mention50,072 
Substandard24,112 
Doubtful2,091 
Total$1,442,617 
Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
December 31, 2019
(In thousands)1-4 FamilyConstructionTotal Residential Mortgages
Grade:   
Pass$2,139,753 $4,641 $2,144,394 
Special mention714 — 714 
Substandard3,350 — 3,350 
Total$2,143,817 $4,641 $2,148,458 
Consumer Loans
Credit Risk Profile Based on Payment Activity
December 31, 2019
(In thousands)Home EquityAuto and OtherTotal Consumer Loans
Performing$272,772 $501,871 $774,643 
Nonperforming1,095 2,728 3,823 
Total
$273,867 $504,599 $778,466 
45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans

Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)ConstructionReal EstateTotal Commercial Real Estate
Grade:   
Pass$46,396 $1,130,333 $1,176,729 
Special mention— 5,993 5,993 
Substandard1,396 53,195 54,591 
Total$47,792 $1,189,521 $1,237,313 
Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)Total Commercial and Industrial Loans
Grade: 
Pass$373,744 
Special mention4,404 
Substandard19,743 
Total
$397,891 

Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
December 31, 2019
(In thousands)1-4 FamilyConstructionTotal Residential Mortgages
Grade:   
Pass$528,282 $3,478 $531,760 
Special mention592 — 592 
Substandard4,662 — 4,662 
Total$533,536 $3,478 $537,014 

Consumer Loans
Credit Risk Profile Based on Payment Activity
December 31, 2019
(In thousands)Home EquityAuto and OtherTotal Consumer Loans
Performing$106,007 $56,724 $162,731 
Nonperforming717 265 982 
Total
$106,724 $56,989 $163,713 

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about total loans rated Special Mention or lower at December 31, 2019. The table below includes consumer loans that are Special Mention and Substandard accruing that are classified in the above table as performing based on payment activity.
 December 31, 2019
(In thousands)Business
Activities Loans		Acquired LoansTotal
Non-Accrual$32,536 $7,104 $39,640 
Substandard Accruing49,293 73,131 122,424 
Total Classified81,829 80,235 162,064 
Special Mention63,943 11,341 75,284 
Total Criticized
$145,772 $91,576 $237,348 

NOTE 6. GOODWILL

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is assessed annually for impairment and more frequently if events or changes in circumstances indicate that there may be an impairment. The Company tests goodwill impairment annually as of June 30 using second quarter data.

The Company compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The fair value of the reporting unit was determined using the guideline public company method. As a result of the assessment, the Company recognized a full goodwill impairment for the nine months ended September 30, 2020.

The primary causes of the goodwill impairment were economic and industry conditions resulting from the COVID-19 pandemic that caused volatility and reductions in the market capitalization of the Company and its peer banks, increased loan provision estimates, increased discount rates and other changes in variables driven by the uncertain macro-environment that resulted in the estimated fair value of the reporting unit being less than the reporting unit’s carrying value.


NOTE 7.               DEPOSITS

A summary of time deposits is as follows:
(In thousands)September 30,
2020		December 31,
2019
Time less than $100,000$780,654 $905,190 
Time $100,000 through $250,0001,504,455 2,027,717 
Time more than $250,000604,984 656,462 
Total time deposits$2,890,093 $3,589,369 

Included in total deposits are brokered deposits of $0.8 billion and $1.2 billion at September 30, 2020 and December 31, 2019, respectively. Included in total deposits are reciprocal deposits of $128.9 million and $91.7 million at September 30, 2020 and December 31, 2019, respectively.
47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8.               BORROWED FUNDS

Borrowed funds at September 30, 2020 and December 31, 2019 are summarized, as follows:
 September 30, 2020December 31, 2019
  Weighted Weighted
  Average Average
(Dollars in thousands)PrincipalRatePrincipalRate
Short-term borrowings:    
Advances from the FHLB $110,000 1.16 %$125,000 2.06 %
Total short-term borrowings:110,000 1.16 125,000 2.06 
Long-term borrowings:    
Advances from the FHLB and other borrowings494,859 1.90 605,501 2.16 
Paycheck Protection Program Liquidity Facility ("PPPLF")624 0.35 — — 
Subordinated borrowings74,366 7.00 74,232 7.00 
Junior subordinated borrowing - Trust I15,464 2.11 15,464 3.76 
Junior subordinated borrowing - Trust II7,393 1.95 7,353 3.59 
Total long-term borrowings:592,706 2.55 702,550 2.72 
Total$702,706 2.33 %$827,550 2.62 %

Short-term debt includes Federal Home Loan Bank (“FHLB”) advances with an original maturity of less than one year and a short-term line-of-credit drawdown through a correspondent bank. The Bank also maintains a $3.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended September 30, 2020 and December 31, 2019. The Bank's available borrowing capacity with the FHLB was $1.6 billion for both the periods ended September 30, 2020 and December 31, 2019.

The Bank is approved to borrow on a short-term basis from the Federal Reserve Bank of Boston as a non-member bank. The Bank has pledged certain loans and securities to the Federal Reserve Bank to support this arrangement. No borrowings with the Federal Reserve Bank under this arrangement took place for the periods ended September 30, 2020 and December 31, 2019. As a participant in the SBA Paycheck Protection Program ("PPP"), the Bank may pledge originated loans as collateral at face value to the Federal Reserve Bank of Boston for term financings. As of September 30, 2020, the Bank had pledged PPP loans of $624 thousand, which is equal to the amount borrowed. The Bank's available borrowing capacity with the Federal Reserve Bank was $870.2 million and $201.3 million for the periods ended September 30, 2020 and December 31, 2019, respectively.

Long-term FHLB advances consist of advances with an original maturity of more than one year and are subject to prepayment penalties. The advances outstanding at September 30, 2020 included callable advances totaling $10.0 million and amortizing advances totaling $5.5 million. The advances outstanding at December 31, 2019 included callable advances totaling $10.0 million and amortizing advances totaling $4.4 million. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.


48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of maturities of FHLB advances as of September 30, 2020 is as follows:
 September 30, 2020
  Weighted Average
(In thousands, except rates)PrincipalRate
Fixed rate advances maturing:  
2020$129,994 1.57 %
2021395,476 1.80 
202258,706 1.92 
202311,170 2.19 
2023 and beyond9,513 1.61 
Total FHLB advances$604,859 1.77 %

The Company did not have variable-rate FHLB advances for the periods ended September 30, 2020 and December 31, 2019.

In September 2012, the Company issued fifteen year subordinated notes in the amount of $75.0 million at a discount of 1.15%. The interest rate is fixed at 6.875% for the first ten years. After ten years, the notes become callable and convert to an interest rate of three-month LIBOR rate plus 5.113%. The subordinated note includes reduction to the note principal balance of $246 thousand and $338 thousand for unamortized debt issuance costs as of September 30, 2020 and December 31 2019, respectively.

The Company holds 100% of the common stock of Berkshire Hills Capital Trust I (“Trust I”) which is included in other assets with a cost of $0.5 million. The sole asset of Trust I is $15.5 million of the Company’s junior subordinated debentures due in 2035. These debentures bear interest at a variable rate equal to LIBOR plus 1.85% and had a rate of 2.11% and 3.76% at September 30, 2020 and December 31, 2019, respectively. The Company has the right to defer payments of interest for up to five years on the debentures at any time, or from time to time, with certain limitations, including a restriction on the payment of dividends to shareholders while such interest payments on the debentures have been deferred. The Company has not exercised this right to defer payments. The Company has the right to redeem the debentures at par value. Trust I is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, Trust I is not consolidated into the Company’s financial statements.

The Company holds 100% of the common stock of SI Capital Trust II (“Trust II”) which is included in other assets with a cost of $0.2 million. The sole asset of Trust II is $8.2 million of the Company’s junior subordinated debentures due in 2036. These debentures bear interest at a variable rate equal to LIBOR plus 1.70% and had a rate of 1.95% and 3.59% at September 30, 2020 and December 31, 2019, respectively. The Company has the right to defer payments of interest for up to five years on the debentures at any time, or from time to time, with certain limitations, including a restriction on the payment of dividends to shareholders while such interest payments on the debentures have been deferred. The Company has not exercised this right to defer payments. The Company has the right to redeem the debentures at par value. Trust II is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, Trust II is not consolidated into the Company’s financial statements.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As of September 30, 2020, the Company held derivatives with a total notional amount of $3.8 billion. The Company had economic hedges totaling $3.8 billion and $75.1 million non-hedging derivatives, which are not designated as hedges for accounting purposes with changes in fair value recorded directly through earnings. Economic hedges included interest rate swaps totaling $3.4 billion, risk participation agreements with dealer banks of $0.3 billion, and $17.6 million in forward commitment contracts. Forward sale commitments and commitments to lend are included in discontinued operations. See Note 2 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities. Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. The derivatives program is overseen by the Risk Management and Capital Committee of the Company’s Board of Directors. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at September 30, 2020.

The Company pledged collateral to derivative counterparties in the form of cash totaling $77.1 million and securities with an amortized cost of $38.6 million and a fair value of $38.9 million as of September 30, 2020. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back economic hedges. However certain language is written into the International Swaps Dealers Association, Inc. (“ISDA”) and loan documents where, in default situations, the Bank is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

Information about derivative assets and liabilities at September 30, 2020, follows:
  WeightedWeighted Average RateEstimated
 NotionalAverage ContractFair Value
 AmountMaturityReceivedpay rateAsset (Liability)
 (In thousands)(In years)  (In thousands)
Economic hedges:     
Interest rate swap on tax advantaged economic development bond$8,843 9.20.52 %5.09 %$(1,933)
Interest rate swaps on loans with commercial loan customers1,713,149 6.04.28 %1.93 %177,731 
Offsetting interest rate swaps on loans with commercial loan customers (1)
1,713,149 6.01.93 %4.28 %(72,386)
Risk participation agreements with dealer banks315,936 7.0  660 
Forward sale commitments (2)
17,594 0.2  397 
Total economic hedges3,768,671    104,469 
Non-hedging derivatives:     
Commitments to lend (2)
75,090 0.2  1,498 
Total non-hedging derivatives75,090    1,498 
Total$3,843,761    $105,967 
(1) Fair value estimates include the impact of $109 million settled to market contract agreements.
(2) Includes the impact of discontinued operations.
50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about derivative assets and liabilities at December 31, 2019, follows:
  WeightedWeighted Average RateEstimated
 NotionalAverage ContractFair Value
 AmountMaturityReceivedpay rateAsset (Liability)
 (In thousands)(In years)  (In thousands)
Economic hedges:     
Interest rate swap on tax advantaged economic development bond$9,390 9.92.08 %5.09 %$(1,488)
Interest rate swaps on loans with commercial loan customers1,669,895 6.44.38 %3.28 %75,326 
Offsetting interest rate swaps on loans with commercial loan customers1,669,895 6.43.28 %4.38 %(77,051)
Risk participation agreements with dealer banks315,140 7.5  320 
Forward sale commitments (1)
237,412 0.2  (227)
Total economic hedges3,901,732    (3,120)
Non-hedging derivatives:     
Commitments to lend (1)
168,997 0.2  2,628 
Total non-hedging derivatives 168,997    2,628 
Total$4,070,729    $(492)
(1) Includes the impact of discontinued operations.
51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Economic hedges
As of September 30, 2020, the Company has an interest rate swap with a $9.4 million notional amount to swap out the fixed rate of interest on an economic development bond bearing a fixed rate of 5.09%, currently within the Company’s trading portfolio under the fair value option, in exchange for a LIBOR-based floating rate. The intent of the economic hedge is to improve the Company’s asset sensitivity to changing interest rates in anticipation of favorable average floating rates of interest over the 21-year life of the bond. The fair value changes of the economic development bond are mostly offset by fair value changes of the related interest rate swap.

The Company also offers certain derivative products directly to qualified commercial borrowers. The Company economically hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with third-party financial institutions. The transaction allows the Company’s customer to convert a variable-rate loan to a fixed rate loan. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts mostly offset each other in earnings. Credit valuation loss adjustments arising from the difference in credit worthiness of the commercial loan and financial institution counterparties totaled $2.0 million as of September 30, 2020. The interest income and expense on these mirror image swaps exactly offset each other.

The Company has risk participation agreements with dealer banks. Risk participation agreements occur when the Company participates on a loan and a swap where another bank is the lead. The Company gets paid a fee to take on the risk associated with having to make the lead bank whole on Berkshire’s portion of the pro-rated swap should the borrower default. Changes in fair value are recorded in current period earnings.

The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings. Forward sale commitments are included in discontinued operations. See Note 2 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

The Company uses the following types of forward sale commitments contracts:
•Best efforts loan sales,
•Mandatory delivery loan sales, and
•To Be Announced (“TBA”) mortgage-backed securities sales.

A best efforts contract refers to a loan sale agreement where the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. The Company may enter into a best efforts contract once the price is known, which is shortly after the potential borrower’s interest rate is locked.

A mandatory delivery contract is a loan sale agreement where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer.

The Company may sell TBA mortgage-backed securities to hedge the changes in fair value of interest rate lock commitments and held for sale loans, which do not have corresponding best efforts or mandatory delivery contracts. These security sales transactions are closed once mandatory contracts are written. On the closing date the price of the security is locked-in, and the sale is paired-off with a purchase of the same security. Settlement of the security purchase/sale transaction is done with cash on a net-basis.
52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-hedging derivatives
The Company enters into interest rate lock commitments (“IRLCs”), or commitments to lend, for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in discontinued operations in the Company’s consolidated statements of income. Changes in the fair value of IRLCs subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. Commitments to lend are included in discontinued operations. See Note 2 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Amounts included in the Consolidated Statements of Income related to economic hedges and non-hedging derivatives were as follows:
 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Economic hedges    
Interest rate swap on industrial revenue bond:    
Unrealized gain/(loss) recognized in other non-interest income$106 $(120)$(444)$(463)
Interest rate swaps on loans with commercial loan customers:    
Unrealized (loss)/gain recognized in other non-interest income(10,219)26,975 104,434 91,931 
Favorable/(unfavorable) change in credit valuation adjustment recognized in other non-interest income406 (872)(2,029)(2,156)
Offsetting interest rate swaps on loans with commercial loan customers:    
Unrealized gain/(loss) recognized in other non-interest income10,219 (26,975)(104,434)(91,931)
Risk participation agreements:    
Unrealized (loss)/gain recognized in other non-interest income(26)68 339 174 
Forward commitments:    
Unrealized (loss)/gain recognized in discontinued operations(50)1,090 624 680 
Realized gain/(loss) in discontinued operations48 (3,343)(8,283)(9,142)
Non-hedging derivatives    
Commitments to lend    
Unrealized gain/(loss) recognized in discontinued operations$349 $(1,921)$(1,130)$3,157 
Realized gain in discontinued operations1,563 20,476 14,532 48,189 
53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Subject to Enforceable Master Netting Arrangements
Interest Rate Swap Agreements (“Swap Agreements”)
The Company enters into swap agreements to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated statements of condition. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of marketable securities is received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds.

The Company had net asset positions with its financial institution counterparties totaling $1.1 million and $0.6 million as of September 30, 2020 and December 31, 2019, respectively. The Company had net asset positions with its commercial banking counterparties totaling $177.7 million and $76.4 million as of September 30, 2020 and December 31, 2019, respectively. The Company had net liability positions with its financial institution counterparties totaling $74.8 million and $78.8 million as of September 30, 2020 and December 31, 2019, respectively. The Company had no net liability positions with its commercial banking counterparties as of September 30, 2020. The Company had net liability positions with its commercial banking counterparties totaling $1.1 million as of December 31, 2019. The Company has collateral pledged to cover this liability.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of September 30, 2020 and December 31, 2019:

Offsetting of Financial Assets and Derivative Assets
Gross
Amounts of		Gross Amounts
Offset in the		Net Amounts
of Assets
Presented in the		Gross Amounts Not Offset in
the Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)AssetsConditionConditionInstrumentsCollateral ReceivedNet Amount
September 30, 2020      
Interest Rate Swap Agreements:      
Institutional counterparties$1,199 $(92)$1,107 $— $— $1,107 
Commercial counterparties177,731 — 177,731 — — 177,731 
Total$178,930 $(92)$178,838 $— $— $178,838 

Offsetting of Financial Liabilities and Derivative Liabilities
Gross
Amounts of		Gross Amounts
Offset in the		Net Amounts
of Liabilities
Presented in the		Gross Amounts Not Offset in
the Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)LiabilitiesConditionConditionInstrumentsCollateral PledgedNet Amount
September 30, 2020      
Interest Rate Swap Agreements:      
Institutional counterparties$(184,018)$109,253 $(74,765)$38,893 $77,075 $41,203 
Commercial counterparties— — — — — — 
Total$(184,018)$109,253 $(74,765)$38,893 $77,075 $41,203 
54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Offsetting of Financial Assets and Derivative Assets
Gross
Amounts of		Gross Amounts
Offset in the		Net Amounts
of Assets
Presented in the		Gross Amounts Not Offset in
the Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)AssetsConditionConditionInstrumentsCollateral ReceivedNet Amount
December 31, 2019      
Interest Rate Swap Agreements:      
Institutional counterparties$640 $(54)$586 $— $— $586 
Commercial counterparties76,428 (22)76,406 — — 76,406 
Total$77,068 $(76)$76,992 $— $— $76,992 

Offsetting of Financial Liabilities and Derivative Liabilities
Gross
Amounts of		Gross Amounts
Offset in the		Net Amounts
of Liabilities
Presented in the		Gross Amounts Not Offset in
the Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)LiabilitiesConditionConditionInstrumentsCollateral PledgedNet Amount
December 31, 2019      
Interest Rate Swap Agreements:      
Institutional counterparties$(80,024)$1,219 $(78,805)$25,828 $96,310 $43,333 
Commercial counterparties(1,080)— (1,080)— — (1,080)
Total$(81,104)$1,219 $(79,885)$25,828 $96,310 $42,253 
55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. LEASES

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space. Most of the Company’s leases are classified as operating leases. At September 30, 2020, lease expiration dates ranged from 1 month to 20 years.

The following table represents the Consolidated Balance Sheets classification of the Company’s right-of-use (“ROU”) assets and lease liabilities:
(In thousands)September 30, 2020December 31, 2019
Lease Right-of-Use AssetsClassification
Operating lease right-of-use assets (1)
Other assets$71,937 $76,332 
Finance lease right-of-use assetsPremises and equipment, net7,328 7,720 
Total Lease Right-of-Use Assets$79,265 $84,052 
Lease Liabilities
Operating lease liabilities (2)
Other liabilities$76,185 $80,734 
Finance lease liabilitiesOther liabilities10,510 10,883 
Total Lease Liabilities$86,695 $91,617 
(1) Includes operating lease right-of-use assets classified as discontinued operations of $1.8 million and $3.5 million as of September 30, 2020 and December 31, 2019, respectively.
(2) Includes operating lease liabilities classified as discontinued operations of $1.8 million and $3.5 million as of September 30, 2020 and December 31, 2019, respectively.

Supplemental information related to leases was as follows:
September 30, 2020December 31, 2019
Weighted-Average Remaining Lease Term (in years)
Operating leases9.910.3
Finance leases14.114.8
Weighted-Average Discount Rate
Operating leases3.02 %3.36 %
Finance leases5.00 %5.00 %

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be segregated.

The Company does not have any material sub-lease agreements.

Lease expense for operating leases for the three months ended September 30, 2020 was $3.4 million, of which $0.2 million was related to FCLS and is reported as discontinued operations. Lease expense for operating leases for the nine months ended September 30, 2020 was $10.2 million, of which $0.9 million was related to FCLS and is reported as discontinued operations. Variable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

Lease expense for operating leases for the three months ended September 30, 2019 was $3.7 million, of which $0.7 million was related to FCLS and is reported as discontinued operations. Lease expense for operating leases for the nine months ended September 30, 2019 was $10.7 million, of which $2.2 million was related to FCLS and is reported as discontinued operations.
56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Variable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

Supplemental cash flow information related to leases was as follows:
Three Months Ended
(In thousands)September 30, 2020September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)
$2,441 $3,829 
Operating cash flows from finance leases133 159 
Financing cash flows from finance leases125 119 
(1) Includes operating cash flows from operating leases related to discontinued operations of $0.2 million and $0.7 million at September 30, 2020 and September 30, 2019 respectively.
Nine Months Ended
(In thousands)September 30, 2020September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)
$10,461 $10,984 
Operating cash flows from finance leases399 478 
Financing cash flows from finance leases374 315 
(1) Includes operating cash flows from operating leases related to discontinued operations of $0.9 million and $2.2 million at September 30, 2020 and September 30, 2019 respectively.

The following table presents a maturity analysis of the Company’s lease liability by lease classification at September 30, 2020:
(In thousands)Operating LeasesFinance Leases
2020$3,396 $250 
202112,826 1,031 
202211,671 1,031 
20239,738 1,037 
20248,345 1,037 
Thereafter42,438 10,260 
Total undiscounted lease payments (1)
88,414 14,646 
Less amounts representing interest (1)
(12,229)(4,136)
Lease liability (1)
$76,185 $10,510 
(1) Includes $1.8 million of discontinued operations.
57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. OTHER COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ACTIVITIES

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in China and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The impact of the COVID-19 pandemic is fluid and continues to evolve, which is adversely affecting some of the Company’s clients. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets, and our clients, employees, and vendors.

The Company’s business, financial condition and results of operations generally rely upon the ability of the Company’s borrowers to repay their loans, the value of collateral underlying the Company’s secured loans, and demand for loans and other products and services the Company offers, which are highly dependent on the business environment in the Company’s primary markets where it operates and in the United States as a whole.

During the current year, the Company’s results of operations were negatively impacted by full impairment of the Company's goodwill, an increase in its provision for credit losses and related allowance for credit losses, a decline in the fair value of its equity portfolio, and a decline in valuation of assets accounted for pursuant to the fair value option. At this time, it is difficult to quantify the impact COVID-19 will have on the Company during the remainder of 2020. These circumstances could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, results of operations and prospects. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, loan servicing rights, deferred tax assets, lease right-of-use assets, or counter-party risk derivatives.

Beginning in March 2020, the Company has offered three-month payment deferrals for customers with a current payment status who were negatively impacted by economic disruption caused by the COVID-19 pandemic. Through September 30, 2020, the Company had modified 5,884 loans with a carrying value of $1.6 billion. As of September 30, 2020, the Company had 728 active modified loans outstanding with a carrying value of $231.7 million, which excluded loans returning to payment or awaiting evaluation for further deferral. The Company continues to accrue interest on these loans during the deferral period. In accordance with interagency guidance issued in March 2020 and Section 4013 (Temporary Relief from Troubled Debt Restructurings) of the CARES Act, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty. In addition, the risk-ratings on COVID-19 modified loans did not automatically change as a result of payment deferrals, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. Refer to Note 1 - Basis of Presentation for additional information regarding the Company's accounting policy regarding these modifications.
58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios were as follows:
September 30,
2020		Regulatory
Minimum to be
Well Capitalized		December 31,
2019		Regulatory
Minimum to be
Well Capitalized
Company (consolidated)    
Total capital to risk weighted assets15.4 %N/A13.7 %N/A
Common equity tier 1 capital to risk weighted assets13.2 N/A12.1 N/A
Tier 1 capital to risk weighted assets13.4 N/A12.3 N/A
Tier 1 capital to average assets9.2 N/A9.3 N/A
Bank   
Total capital to risk weighted assets14.3 %10.0 %12.8 %10.0 %
Common equity tier 1 capital to risk weighted assets13.2 6.5 12.2 6.5 
Tier 1 capital to risk weighted assets13.2 8.0 12.2 8.0 
Tier 1 capital to average assets9.0 5.0 9.1 5.0 

At each date shown, the Bank met the conditions to be classified as “well capitalized” under the relevant regulatory framework. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.

Effective January 1, 2015, the Company and the Bank became subject to the Basel III rule that requires the Company and the Bank to assess their Common equity Tier 1 capital to risk weighted assets. The Bank's Common equity Tier 1 capital to risk weighted assets exceeds the minimum to be well capitalized. In addition, the final capital rules added a requirement to maintain a minimum conservation buffer, composed of Common equity Tier 1 capital, of 2.5% of risk-weighted assets, to be phased in over three years and applied to the Common equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio, and the Total risk-based capital ratio. As of January 1, 2019, banking organizations must maintain a minimum Common equity Tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5%, and a minimum Total risk-based capital ratio of 10.5%. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At September 30, 2020, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and the Bank's regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at September 30, 2020 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 2.5%.
59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated other comprehensive income
Components of accumulated other comprehensive income is as follows:
(In thousands)September 30,
2020		December 31,
2019
Other accumulated comprehensive income, before tax:  
Net unrealized holding gain on AFS securities$46,792 $19,263 
Net unrealized holding (loss) on pension plans(3,023)(3,023)
Income taxes related to items of accumulated other comprehensive income:  
Net unrealized tax (expense) on AFS securities(12,155)(5,059)
Net unrealized tax benefit on pension plans812 812 
Accumulated other comprehensive income$32,426 $11,993 

The following table presents the components of other comprehensive income for the three and nine months ended September 30, 2020 and 2019:
(In thousands)Before TaxTax EffectNet of Tax
Three Months Ended September 30, 2020
   
Net unrealized holding gain on AFS securities:x 
Net unrealized gains arising during the period$(1,079)$270 $(809)
Less: reclassification adjustment for gains realized in net income6 (2)4 
Net unrealized holding gain on AFS securities(1,085)272 (813)
Other comprehensive income$(1,085)$272 $(813)
Three Months Ended September 30, 2019
   
Net unrealized holding gain on AFS securities:  
Net unrealized gains arising during the period$6,159 $(1,576)$4,583 
Less: reclassification adjustment for (losses) realized in net income5 (1)4 
Net unrealized holding gain on AFS securities6,154 (1,575)4,579 
Other comprehensive income$6,154 $(1,575)$4,579 
(In thousands)Before TaxTax EffectNet of Tax
Nine Months Ended September 30, 2020   
Net unrealized holding gain on AFS securities:x 
Net unrealized gains arising during the period$27,534 $(7,097)$20,437 
Less: reclassification adjustment for (losses) realized in net income5 (1)4 
Net unrealized holding gain on AFS securities27,529 (7,096)20,433 
Other comprehensive income$27,529 $(7,096)$20,433 
Nine Months Ended September 30, 2019   
Net unrealized holding gain on AFS securities:  
Net unrealized gains arising during the period$39,486 $(10,129)$29,357 
Less: reclassification adjustment for gains realized in net income9 (2)7 
Net unrealized holding gain on AFS securities39,477 (10,127)29,350 
Other comprehensive income$39,477 $(10,127)$29,350 

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in each component of accumulated other comprehensive income, for the three and nine ended September 30, 2020 and 2019:
(In thousands)Net unrealized
holding loss
on AFS Securities		Net unrealized
holding loss
on pension plans		Total
Three Months Ended September 30, 2020   
Balance at Beginning of Period$35,450 $(2,211)$33,239 
Other comprehensive income before reclassifications(809)— (809)
Less: amounts reclassified from accumulated other comprehensive income 4 — 4 
Total other comprehensive income(813)— (813)
Balance at End of Period$34,637 $(2,211)$32,426 
Three Months Ended September 30, 2019   
Balance at Beginning of Period$13,318 $(2,017)$11,301 
Other comprehensive income before reclassifications4,583 — 4,583 
Less: amounts reclassified from accumulated other comprehensive income 4 — 4 
Total other comprehensive income4,579 — 4,579 
Balance at End of Period$17,897 $(2,017)$15,880 
Nine Months Ended September 30, 2020   
Balance at Beginning of Period$14,204 $(2,211)$11,993 
Other comprehensive income before reclassifications20,437 — 20,437 
Less: amounts reclassified from accumulated other comprehensive income4 — 4 
Total other comprehensive income20,433 — 20,433 
Balance at End of Period$34,637 $(2,211)$32,426 
Nine Months Ended September 30, 2019   
Balance at Beginning of Period$(11,453)$(2,017)$(13,470)
Other comprehensive income before reclassifications29,357 — 29,357 
Less: amounts reclassified from accumulated other comprehensive income7 — 7 
Total other comprehensive income29,350 — 29,350 
Balance at End of Period$17,897 $(2,017)$15,880 

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amounts reclassified out of each component of accumulated other comprehensive income for the three and nine ended September 30, 2020 and 2019:
   Affected Line Item in the
 Three Months Ended September 30,Statement where Net Income
(In thousands)20202019is Presented
Realized gains on AFS securities:  
 $6 $5 Non-interest income
 (2)(1)Tax expense
 4 4 Net of tax
   
Total reclassifications for the period$4 $4 Net of tax
   Affected Line Item in the
 Nine Months Ended September 30,Statement where Net Income
(In thousands)20202019is Presented
Realized gains on AFS securities:  
 $5 $9 Non-interest income
 (1)(2)Tax expense
 4 7 Net of tax
   
Total reclassifications for the period$4 $7 Net of tax

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. EARNINGS/(LOSS) PER SHARE

Earnings/(loss) per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands, except per share data)2020201920202019
Income/(loss) from continuing operations$23,043 $20,659 $(532,074)$68,885 
(Loss)/income from discontinued operations(1,818)1,957 (15,952)2,814 
Net income/(loss)$21,225 $22,616 $(548,026)$71,699 
Average number of common shares issued51,903 51,903 51,903 49,068 
Less: average number of treasury shares1,560 1,089 1,674 855 
Less: average number of unvested stock award shares536 435 499 410 
Plus: average participating preferred shares522 1,043 526 1,043 
Average number of basic shares outstanding50,329 51,422 50,256 48,846 
Plus: dilutive effect of unvested stock award shares— 87 — 109 
Plus: dilutive effect of stock options outstanding— 36 — 32 
Average number of diluted shares outstanding50,329 51,545 50,256 48,987 
Basic earnings/(loss) per common share:  
Continuing operations$0.46 $0.40 $(10.58)$1.41 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.47 
Diluted earnings/(loss) per common share:
Continuing operations$0.46 $0.40 $(10.58)$1.40 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.46 

Due to the Company's average stock price during the period, all unvested restricted stock and options were considered anti-dilutive for the three months ended September 30, 2020. Due to the year-to-date net loss, all unvested restricted stock and options were considered anti-dilutive for the nine months ended September 30, 2020. For the three months ended September 30, 2019, 348 thousand shares of restricted stock and 125 thousand options were anti-dilutive and therefore excluded from the earnings per share calculation. For the nine months ended September 30, 2019, 296 thousand shares of restricted stock and 60 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.
63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. STOCK-BASED COMPENSATION PLANS

A combined summary of activity in the Company’s stock award and stock option plans for the nine months ended September 30, 2020 is presented in the following table:
 Non-Vested Stock Awards OutstandingStock Options Outstanding
(Shares in thousands)Number of SharesWeighted-Average Grant Date Fair ValueNumber of SharesWeighted-Average Exercise Price
December 31, 2019450 $32.47 153 $22.00 
Granted306 16.84 — — 
Acquired— — — — 
Stock options exercised— — (33)18.38 
Stock awards vested(133)33.84 — — 
Forfeited(87)30.23 — — 
Expired— — (1)9.85 
September 30, 2020536 $28.35 119 $22.72 
Exercisable options at September 30, 2020119 $22.72 

During the three ended September 30, 2020 there were no options exercised. During the nine months ended September 30, 2020, proceeds from stock option exercises totaled $607 thousand. During the three and nine months ended September 30, 2019, proceeds from stock option exercises totaled $55 thousand and $69 thousand. During the three and nine months ended September 30, 2020, there were 37 thousand and 133 thousand shares vested in connection with stock awards, respectively. During the three and nine months ended September 30, 2019, there were 3 thousand and 130 thousand shares issued in connection with vested stock awards, respectively. All of these shares were issued from available treasury stock. Stock-based compensation expense totaled $0.6 million and $1.5 million during the three months ended September 30, 2020 and 2019, respectively. Stock-based compensation expense totaled $3.5 million and $3.5 million during the nine months ended September 30, 2020 and 2019, respectively. Stock-based compensation expense is recognized over the requisite service period for all awards.
64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. FAIR VALUE MEASUREMENTS

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value, including assets classified as discontinued operations on the consolidated balance sheets. See Note 2 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Recurring Fair Value Measurements
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
 September 30, 2020
 Level 1Level 2Level 3Total
(In thousands)InputsInputsInputsFair Value
Trading security$— $— $9,525 $9,525 
Securities available for sale: 
Municipal bonds and obligations— 104,507 — 104,507 
Agency collateralized mortgage obligations— 741,469 — 741,469 
Agency residential mortgage-backed securities— 326,017 — 326,017 
Agency commercial mortgage-backed securities— 273,608 — 273,608 
Corporate bonds— 49,152 25,825 74,977 
Other bonds and obligations— 54,711 — 54,711 
Marketable equity securities31,321 672 — 31,993 
Loans held for investment at fair value— — 2,774 2,774 
Loans held for sale (1)
— 17,596 — 17,596 
Derivative assets (1)
— 177,731 1,895 179,626 
Capitalized servicing rights (1)
— — 3,855 3,855 
Derivative liabilities (1)
— 73,659 — 73,659 
(1) Includes assets and liabilities classified as discontinued operations.
 December 31, 2019
 Level 1Level 2Level 3Total
(In thousands)InputsInputsInputsFair Value
Trading security$— $— $10,769 $10,769 
Securities available for sale:
Municipal bonds and obligations— 110,138 — 110,138 
Agency collateralized mortgage obligations— 748,812 — 748,812 
Agency residential mortgage-backed securities— 147,744 — 147,744 
Agency commercial mortgage-backed securities— 147,096 — 147,096 
Corporate bonds— 73,610 42,966 116,576 
Other bonds and obligations— 41,189 — 41,189 
Marketable equity securities40,499 1,057 — 41,556 
Loans held for investment at fair value— — — — 
Loans held for sale (1)
— 140,280 — 140,280 
Derivative assets (1)
— 77,562 2,628 80,190 
Capitalized servicing rights (1)
— — 12,229 12,229 
Derivative liabilities (1)
227 80,454 — 80,681 
 
(1) Includes assets and liabilities classified as discontinued operations.
65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no transfers between levels during the three or nine months ended September 30, 2020.

Trading Security at Fair Value. The Company holds one security designated as a trading security. It is a tax-advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The fair value of this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security. The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.

Securities Available for Sale and Marketable Equity Securities. Marketable equity securities classified as Level 1 consist of publicly-traded equity securities for which the fair values can be obtained through quoted market prices in active exchange markets. Marketable equity securities classified as Level 2 consist of securities with infrequent trades in active exchange markets, and pricing is primarily sourced from third party pricing services. AFS securities classified as Level 2 include most of the Company’s debt securities. The pricing on Level 2 and Level 3 was primarily sourced from third party pricing services, overseen by management, and is based on models that consider standard input factors such as dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and condition, among other things. Level 3 pricing includes inputs unobservable to market participants.

Loans Held for Investment. The Company’s held for investment loan portfolio includes loans originated by Company and loans acquired through business combinations. The Company intends to hold these assets until maturity as a part of its business operations. For one acquired portfolio subset, the Company previously accounted for these purchased-credit impaired loans as a pool under ASC 310, as they were determined to have common risk characteristics. These loans were recorded at fair value on acquisition date and subsequently evaluated for impairment collectively. Upon adoption of ASC 326, the Company elected the fair value option on this portfolio, recognizing a $11.2 million fair value write-down charged to Retained Earnings, net of deferred tax impact, as of January 1, 2020. The fair value of this loan portfolio is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable; therefore, the loans meet the definition of Level 3 assets. The discount rate used in the valuation is consistent with assets that have significant credit deterioration. The cash flow assumptions include payment schedules for loans with current payment histories and estimated collateral value for delinquent loans. All of these loans were nonperforming as of September 30, 2020.
   Aggregate Fair Value
September 30, 2020AggregateAggregateLess Aggregate
(In thousands)Fair ValueUnpaid PrincipalUnpaid Principal
Loans held for investment at fair value$2,774 $66,381 $(63,607)

Loans Held for Sale. The Company elected the fair value option for all loans held for sale (HFS) originated for sale on or after May 1, 2012. Loans HFS are classified as Level 2 as the fair value is based on input factors such as quoted prices for similar loans in active markets.
   Aggregate Fair Value
September 30, 2020AggregateAggregateLess Aggregate
(In thousands)Fair ValueUnpaid PrincipalUnpaid Principal
Loans held for sale - continuing operations$15,854 $15,430 $424 
Loans held for sale - discontinued operations1,742 1,811 (69)
Total loans held for sale $17,596 $17,241 $355 
   Aggregate Fair Value
December 31, 2019AggregateAggregateLess Aggregate
(In thousands)Fair ValueUnpaid PrincipalUnpaid Principal
Loans held for sale - continuing operations$7,625 $7,485 $140 
Loans held for sale - discontinued operations132,655 129,622 3,033 
Total loans held for sale $140,280 $137,107 $3,173 
66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in fair value of loans held for sale for the three months ended September 30, 2020, were losses of $6 thousand from continuing operations and gains of $0.9 million from discontinued operations. The changes in fair value of loans held for sale for the nine months ended September 30, 2020 were gains of $284 thousand from continuing operations and losses of $3.1 million from discontinued operations. During the three months ended September 30, 2020, originations of loans held for sale from continuing operations totaled $70.6 million and sales of loans originated for sale from continuing operations totaled $74.1 million.

During the three months ended September 30, 2019, originations of loans held for sale from continuing operations totaled $22.6 million and sales of loans originated for sale from continuing operations totaled $25.1 million. During the nine months ended September 30, 2020, originations of loans held for sale from continuing operations totaled $149.5 million and sales of loans originated for sale from continuing operations totaled $141.3 million. During the nine months ended September 30, 2019, originations of loans held for sale from continuing operations totaled $51.5 million and sales of loans originated for sale from continuing operations totaled $48.6 million.

Interest Rate Swaps. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.

Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2020, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Commitments to Lend. The Company enters into commitments to lend for residential mortgage loans intended for sale, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close, and by the non-refundable costs of originating the loan. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. The costs to originate are primarily based on the Company’s internal commission rates that are not observable. As such, these commitments are classified as Level 3 measurements. Commitments to lend are included in discontinued operations. See Note 2 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the commitments to lend and loans originated for sale. To Be Announced (“TBA”) mortgage-backed securities forward commitment sales are used as the hedging instrument, are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of the Company’s best efforts and mandatory delivery loan sale commitments are determined similarly to the commitments to lend using quoted prices in the market place that are observable. However, costs to originate and closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable. As such, best efforts and mandatory forward commitments are classified as Level 3 measurements. Forward sale commitments are included in discontinued operations. See Note 2 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized Servicing Rights. The Company accounts for certain capitalized servicing rights at fair value in its Consolidated Financial Statements, as the Company is permitted to elect the fair value option for each specific instrument. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. Capitalized servicing rights held at fair value are included in discontinued operations on the consolidated balance sheet. See Note 2 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, 2020 and 2019.
 Assets (Liabilities)
  SecuritiesLoans Capitalized
 TradingAvailableHeld for CommitmentsForwardServicing
(In thousands)Securityfor SaleInvestmentto Lend (1)Commitments (1)Rights (1)
Three Months Ended September 30, 2020
June 30, 2020$9,519 $25,600 $3,140 $1,149 $447 $4,828 
Unrealized gain/(loss), net recognized in other non-interest income190 — 1,189 — (50)— 
Unrealized gain included in accumulated other comprehensive income— 225 — — — — 
Unrealized gain/(loss), net recognized in discontinued operations— — — 2,124 — (973)
Paydown of asset(184)— (1,555)— — — 
Transfers to held for sale loans— — — (1,775)— — 
Additions to servicing rights— — — — — — 
September 30, 2020$9,525 $25,825 $2,774 $1,498 $397 $3,855 
Nine Months Ended September 30, 2020
December 31, 2019$10,769 $42,966 $— $2,628 $— $12,299 
Adoption of ASC 326— — 7,660 — — — 
Maturity of AFS security— (17,000)— — — — 
Unrealized (loss)/gain, net recognized in other non-interest income(698)— (2,523)— 397 — 
Unrealized (loss) included in accumulated other comprehensive income— (141)— — — — 
Unrealized gain/(loss), net recognized in discontinued operations— — — 15,877 — (8,255)
Transfers to Level 2— — — — — — 
Paydown of asset(546)— (2,363)— — — 
Transfers to held for sale loans— — 0(17,007)— — 
Additions to servicing rights— — 0— — (189)
September 30, 2020$9,525 $25,825 $2,774 $1,498 $397 $3,855 
Unrealized gain/(loss) relating to instruments still held at September 30, 2020$682 $(643)$— $1,498 $397 $— 
68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  SecuritiesLoansCapitalized
 TradingAvailableHeld for CommitmentsServicing
(In thousands)Securityfor SaleInvestmentto Lend (1)Rights (1)
Three Months Ended September 30, 2019   
June 30, 2019$11,210 $— $— $9,005 $11,206 
Unrealized gain, net recognized in other non-interest income109 — — — — 
Unrealized gain/(loss), net recognized in discontinued operations— — — 19,915 (1,381)
Paydown of trading security(174)— — — — 
Transfers to held for sale loans— — — (21,836)— 
Additions to servicing rights— — — — 6,588 
September 30, 2019$11,145 $— $— $7,084 $16,413 
Nine Months Ended September 30, 2019   
December 31, 2018$11,212 $— $— $3,927 $11,485 
Unrealized gain, net recognized in other non-interest income454 — — — — 
Unrealized gain/(loss), net recognized in discontinued operations— — — 48,254 (4,495)
Paydown of trading security(521)— — — — 
Transfers to held for sale loans— — — (45,097)— 
Additions to servicing rights— $— — — 9,423 
September 30, 2018$11,145 $— $— $7,084 $16,413 
Unrealized gains relating to instruments still held at September 30, 2019$1,576 $— $— $7,084 $— 
(1) Classified as assets from discontinued operations on the consolidated balance sheets.

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:
 Fair Value  Significant
Unobservable Input
(In thousands)September 30, 2020Valuation TechniquesUnobservable InputsValue
Assets (Liabilities)    
Trading security$9,525 Discounted Cash FlowDiscount Rate3.75 %
AFS Securities25,825 Indication from Market MakerPrice
97% - 100%
Loan held for investment2,774 Discounted Cash FlowDiscount Rate30.00 %
Collateral Value
$8.8 - $26.5
Commitments to lend (1)
1,498 Historical TrendClosing Ratio74.40 %
  Pricing ModelOrigination Costs, per loan$3 
Forward commitments (1)
397 Historical TrendClosing Ratio74.40 %
  Pricing ModelOrigination Costs, per loan$3 
Capitalized servicing rights (1)
3,855 Discounted cash flowConstant Prepayment Rate (CPR)25.35 %
Discount Rate10.00 %
Total$43,874    
(1) Classified as assets from discontinued operations on the consolidated balance sheets.

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Fair Value  Significant
Unobservable Input
(In thousands)December 31, 2019Valuation TechniquesUnobservable InputsValue
Assets (Liabilities)    
Trading security$10,769 Discounted Cash FlowDiscount Rate2.21 %
AFS Securities42,966 Indication from Market MakerPrice
97% - 100%
Commitments to lend (1)
2,628 Historical TrendClosing Ratio77.81 %
  Pricing ModelOrigination Costs, per loan$3 
Capitalized servicing rights (1)
12,299 Discounted Cash FlowConstant Prepayment Rate (CPR)11.50 %
Discount Rate10.00 %
Total$68,662    
(1) Classified as assets from discontinued operations on the consolidated balance sheets.

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Recurring Fair Value Measurements
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured at fair value on a non-recurring basis.
 September 30, 2020December 31, 2019Fair Value Measurement Date as of September 30, 2020
 Level 3Level 3Level 3
(In thousands)InputsInputsInputs
Assets  
Individually evaluated loans$41,312 $8,831 September 2020
Capitalized servicing rights13,694 14,152 September 2020
Other real estate owned (1)
401 — September 2020
Total$55,407 $22,983 
(1)    Includes discontinued operations.

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:
 Fair Value   
(In thousands)September 30, 2020Valuation TechniquesUnobservable InputsRange (Weighted Average) (1)
Assets    
Individually evaluated loans$41,312 Fair Value of CollateralDiscounted Cash Flow - Loss Severity
0.04% to 100.00% (48.31%)
   Appraised Value
$0 to $10,972 ($8,258)
Capitalized servicing rights13,694 Discounted Cash FlowConstant Prepayment Rate (CPR)
14.98% to 22.05% (17.08%)
   Discount Rate
8.25% to 11.00% (9.17%)
Other Real Estate Owned (2)
401 Fair Value of CollateralAppraised Value
$94 - $361
Total$55,407    
(1)     Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.
(2)    Includes discontinued operations.
 Fair Value   
(In thousands)December 31, 2019Valuation TechniquesUnobservable InputsRange (Weighted Average) (1)
Assets    
Impaired Loans$8,831 Fair Value of CollateralDiscounted Cash Flow - loss severity
15.72% to 0.12% (4.50%)
   Appraised Value
$8 to $1,548 ($736)
Capitalized servicing rights14,152 Discounted Cash FlowConstant Prepayment Rate (CPR)
9.44% to 14.12% (12.25%)
   Discount Rate
10.00% to 13.50% (11.78%)
Other Real Estate Owned— Fair Value of CollateralAppraised Value—
Total$22,983    
(1)     Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no Level 1 or Level 2 nonrecurring fair value measurements for the periods ended September 30, 2020 and December 31, 2019.

Individually evaluated loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, nonrecurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. 

Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Estimated Fair Values of Financial Instruments
The following tables summarize the estimated fair values (represents exit price), and related carrying amounts, of the Company’s financial instruments. Certain financial instruments and all non-financial instruments are excluded. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Certain assets and liabilities in the following disclosures include balances classified as discontinued operations. See Note 2 - Discontinued Operations for more information on these assets and liabilities.
 September 30, 2020
 CarryingFair   
(In thousands)AmountValueLevel 1Level 2Level 3
Financial Assets     
Cash and cash equivalents$935,292 $935,292 $935,292 $— $— 
Trading security9,525 9,525 — — 9,525 
Marketable equity securities31,993 31,993 31,321 672 — 
Securities available for sale 1,575,289 1,575,289 — 1,549,464 25,825 
Securities held to maturity330,197 356,035 — 352,485 3,550 
FHLB bank stock and restricted securities40,520 N/AN/AN/AN/A
Net loans8,847,922 9,172,009 — — 9,172,009 
Loans held for sale (1)
17,596 17,596 — 17,596 — 
Accrued interest receivable48,467 48,467 — 48,467 — 
Derivative assets (1)
179,626 179,626 — 177,731 1,895 
Financial Liabilities     
Total deposits$10,466,559 $10,483,734 $— $10,483,734 $— 
Short-term debt110,000 110,214 — 110,214 — 
Long-term Federal Home Loan Bank advances and other495,483 500,933 — 500,933 — 
Subordinated borrowings97,223 94,287 — 94,287 — 
Derivative liabilities (1)
73,659 73,659 — 73,659 — 
(1) Includes assets and liabilities classified as discontinued operations.
 December 31, 2019
 CarryingFair   
(In thousands)AmountValueLevel 1Level 2Level 3
Financial Assets     
Cash and cash equivalents$579,829 $579,829 $579,829 $— $— 
Trading security10,769 10,769 — — 10,769 
Marketable equity securities41,556 41,556 40,499 1,057 — 
Securities available for sale and other1,311,555 1,311,555 — 1,267,573 43,982 
Securities held to maturity357,979 373,277 — 355,513 17,764 
FHLB bank stock and restricted securities48,019 N/AN/AN/AN/A
Net loans9,438,853 9,653,550 — — 9,653,550 
Loans held for sale (1)
169,319 169,319 — 140,280 29,039 
Accrued interest receivable36,462 36,462 — 36,462 — 
Derivative assets (1)
80,190 80,190 — 77,562 2,628 
Financial Liabilities     
Total deposits$10,335,977 $10,338,993 $— $10,338,993 $— 
Short-term debt125,000 125,081 — 125,081 — 
Long-term Federal Home Loan Bank advances605,501 606,381 — 606,381 — 
Subordinated borrowings97,049 101,055 — 101,055 — 
Derivative liabilities (1)
80,681 80,681 227 80,454 — 
(1) Includes assets and liabilities classified as discontinued operations.
73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

Presented below is net interest income after provision for credit losses for the three and nine months ended September 30, 2020 and 2019, respectively.
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Net interest income from continuing operations$77,055 $96,871 $241,073 $273,925 
Provision for credit losses1,200 22,600 65,878 30,068 
Net interest income from continuing operations after provision for credit losses$75,855 $74,271 $175,195 $243,857 
74
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA
The following summary data is based in part on the consolidated financial statements and accompanying notes and other information appearing elsewhere in this or prior Forms 10-Q. Stock price information is for Berkshire’s common shares traded on the New York Stock exchange under the symbol “BHLB”.
At or for theAt or for the
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
PER SHARE DATA (1)
    
Net earnings/(loss) per common share, diluted$0.42 $0.44 $(10.90)$1.46 
Adjusted earnings/(loss) per common share, diluted (1)
0.53 0.46 0.32 1.70 
Total book value per common share23.03 34.36 23.03 34.36 
Tangible book value per common share (2)
22.22 22.42 22.22 22.42 
Dividend per common share0.12 0.23 0.60 0.69 
Dividend per preferred share0.24 0.46 1.20 1.38 
Common stock price:  
High11.26 33.33 33.04 33.33 
Low8.55 28.20 8.55 26.02 
Close10.11 29.29 10.11 29.29 
PERFORMANCE RATIOS (3)
Return on assets0.67 %0.67 %(5.63)%0.74 %
Adjusted return on assets (1)
0.84 0.71 0.17 0.88 
Return on equity7.50 5.12 (48.26)5.70 
Adjusted return on equity (1)
9.33 5.35 1.44 6.64 
Adjusted return on tangible common equity (1)
10.27 8.74 2.39 10.74 
Net interest margin, fully taxable equivalent (FTE) (4) (6)
2.61 3.22 2.75 3.19 
Fee income/Net interest and fee income19.82 17.61 17.86 17.13 
Efficiency ratio (2)65.39 53.37 67.72 56.30 
GROWTH RATIOS
Total commercial loans, (organic, annualized) (5)
(8)%(8)%5 %(9)%
Total loans, (organic, annualized)(17)(9)(7)(9)
Total deposits, (organic, annualized)(11)(5)2 2 
Total net revenues, (compared to prior year period)(18)9 (15)4 
Earnings per share, (compared to prior year period) (5)(37)(847)(26)
Adjusted earnings per share (compared to prior-year period)(2)
15 (36)(81)(18)
FINANCIAL DATA: (In millions)
    
Total assets$12,614 $13,532 $12,614 $13,532 
Total earning assets11,832 12,174 11,832 12,174 
Total securities1,988 1,861 1,988 1,861 
Total borrowings703 1,001 703 1,001 
Total loans8,982 9,719 8,982 9,719 
Allowance for credit losses134 62 134 62 
Total intangible assets41 602 41 602 
Total deposits10,467 10,423 10,467 10,423 
Total stockholders’ equity1,179 1,772 1,179 1,772 
Net income/(loss)21.2 22.6 (548.0)71.7 
Adjusted income (2)
26.4 23.7 16.3 83.5 
Purchased accounting accretion2.5 4.8 7.7 9.3 
Goodwill impairment— — 553.8 — 
75
At or for theAt or for the
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
ASSET QUALITY AND CONDITION RATIOS (6)
Net charge-offs (annualized)/average loans0.27 %0.92 %0.29 %0.41 %
Total non-performing assets/total assets0.39 0.28 0.39 0.27 
Allowance for credit losses/total loans1.50 0.64 1.50 0.64 
Loans/deposits86 93 86 93 
Shareholders' equity to total assets9.35 13.10 9.35 13.10 
Tangible shareholders' equity to tangible assets (2)
9.05 9.05 9.05 9.05 
FOR THE PERIOD: (In thousands)
    
Net interest income from continuing operations$77,055 $96,871 $241,073 $273,925 
Non-interest income from continuing operations19,963 21,406 42,980 60,640 
Net revenue from continuing operations97,018 118,277 284,053 334,565 
Provision for credit losses1,200 22,600 65,878 30,068 
Non-interest expense from continuing operations72,843 71,011 768,443 219,570 
Net income/(loss)21,225 22,616 (548,026)71,699 
Adjusted income (1)
26,424 23,664 16,315 83,513 
____________________________________________________________________________________________
(1)  Adjusted measurements are non-GAAP financial measures that are adjusted to exclude net non-operating charges primarily related to acquisitions and restructuring activities. Refer to the Reconciliation of non-GAAP Financial Measures for additional information.
(2)     Non-GAAP financial measure. Refer to the Reconciliation of non-GAAP Financial Measures for additional information.
(3)  All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(4) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.
(5)    Includes the impact of PPP loan originations.
(6)  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.
(6)    The effect of purchase accounting accretion for loans, time deposits, and borrowings on the net interest margin was an increase in all periods presented. The increase for the three months ended September 30, 2020 and 2019 was 0.08% and 0.16%, respectively. The increase for the nine months ended September 30, 2020 and 2019 was 0.07% and 0.14%, respectively.
76
AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following table presents average balances and an analysis of average rates and yields on an annualized fully taxable equivalent basis for the periods included:
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(Dollars in millions)Average
Balance		Yield/Rate
(FTE basis)		Average
Balance		Yield/Rate
(FTE basis)		Average
Balance		Yield/Rate
(FTE basis)		Average
Balance		Yield/Rate
(FTE basis)
Assets
Loans:    
Commercial real estate$3,986 3.52 %$3,998 4.92 %$3,997 3.90 %$3,700 4.95 %
Commercial and industrial loans2,192 3.88 1,951 5.58 2,047 4.31 1,998 5.74 
Residential mortgages2,224 3.78 2,849 3.73 2,444 3.78 2,707 3.74 
Consumer loans801 3.59 1,036 4.55 863 3.86 1,060 4.51 
Total loans (1)
9,203 3.68 9,834 4.67 9,351 3.95 9,465 4.72 
Investment securities (2)
1,874 2.78 1,847 3.41 1,804 3.06 1,879 3.42 
Short-term investments & loans held for sale (3)
766 0.21 310 4.11 613 0.83 166 3.69 
Total interest-earning assets11,843 3.31 11,991 4.45 11,768 3.63 11,510 4.49 
Intangible assets41 X604  410 570 
Other non-interest earning assets760  669  725 607 
Assets from discontinued operations16 204 75 171 
Total assets$12,660  $13,468  $12,978 $12,858 
Liabilities and shareholders’ equity
Deposits:    
NOW and other$1,243 0.24 %$1,112 0.61 %$1,196 0.34 %$1,043 0.64 %
Money market2,674 0.38 2,625 1.27 2,699 0.65 2,493 1.25 
Savings941 0.10 838 0.13 896 0.11 786 0.15 
Time3,056 1.63 4,159 2.02 3,263 1.78 3,730 2.05 
Total interest-bearing deposits7,914 0.81 8,734 1.43 8,054 1.00 8,052 1.43 
Borrowings and notes (4)
777 2.36 816 3.12 890 2.44 1,200 2.96 
Total interest-bearing liabilities8,691 0.95 9,550 1.57 8,944 1.14 9,252 1.63 
Non-interest-bearing demand deposits2,559  1,865  2,250 1,694 
Other non-interest earning liabilities254  257  245 215 
Liabilities from discontinued operations23 28 25 20 
Total liabilities11,527  11,700  11,464 11,181 
Total preferred shareholders' equity20 41 20 41 
Total common shareholders' equity1,113 1,727 1,494 1,636 
Total shareholders’ equity (2)
1,133  1,768  1,514 1,677 
Total liabilities and stockholders’ equity$12,660  $13,468  $12,978 $12,858 
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Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Average
Balance		Yield/Rate
(FTE basis)		Average
Balance		Yield/Rate
(FTE basis)		Average BalanceYield/Rate (FTE basis)Average BalanceYield/Rate (FTE basis)
Net interest spread2.36 % 2.88 %2.49 %2.86 %
Net interest margin (5)
2.61  3.22 2.75 3.19 
Cost of funds0.73  1.32 0.92 1.38 
Cost of deposits0.61  1.18 0.79 1.19 
Supplementary data  
Total deposits (In millions)$10,473 $10,598  $10,304 $9,744 
Fully taxable equivalent income adj. (In thousands) (6)
1,512 1,826  4,917 5,517 
____________________________________
(1)     The average balances of loans include nonaccrual loans and deferred fees and costs.
(2)     The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.
(3)     Interest income on loans held for sale is included in loan interest income on the income statement.
(4)     The average balances of borrowings includes the capital lease obligation presented under other liabilities on the consolidated balance sheet.
(5)     Purchased accounting accretion totaled $2.5 and $4.8 million for the three months ended September 30, 2020 and 2019, respectively. Purchased accounting accretion totaled $7.7 and $9.3 million for the nine months ended September 30, 2020 and 2019, respectively.
(6)    Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.
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NON-GAAP FINANCIAL MEASURES
This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP adjusted earnings information set forth is not necessarily comparable to non- GAAP information which may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company’s GAAP financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for operating revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations. These items primarily include securities gains/losses, merger costs, restructuring costs, goodwill impairment, and discontinued operations. Discontinued operations are the Company’s national mortgage banking operations for which the Company is pursuing sale opportunities. Merger costs consist primarily of severance/benefit related expenses, contract termination costs, systems conversion costs, variable compensation expenses, and professional fees. 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, including eight branches for the full year of 2019. Restructuring expense and other for the third quarter of 2020 primarily related to executive separation expense as a result of the CEO transition.

The Company also calculates adjusted earnings per share based on its measure of adjusted earnings and diluted common shares. 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 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.

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The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items recorded for the periods indicated:
  At or for the Three Months Ended September 30,At or for the Nine Months Ended September 30,
(In thousands) 2020201920202019
GAAP Net income/(loss)  $21,225 $22,616 $(548,026)$71,699 
Adj: Net losses/(gains) on securities (1)
 1,017 (87)9,925 (2,655)
Adj: Goodwill impairment— — 553,762 — 
Adj: Merger and acquisition expense — 3,802 — 15,122 
Adj: Restructuring and other expense 5,316 361 5,316 7,211 
Adj: Loss/(income) from discontinued operations before income taxes2,477 (2,747)21,741 (3,975)
Adj: Income taxes (3,611)(281)(26,403)(3,889)
Total adjusted income/(loss) (non-GAAP) (2)
(A)$26,424 $23,664 $16,315 $83,513 
GAAP Total revenue  $97,018 $118,277 $284,053 $334,565 
Adj: Losses/(gains) on securities, net (1)
 1,017 (87)9,925 (2,655)
Total operating revenue (non-GAAP) (2)
(B)$98,035 $118,190 $293,978 $331,910 
GAAP Total non-interest expense $72,843 $71,011 $768,443 $219,570 
Less: Total non-operating expense (see above) (5,316)(4,163)(5,316)(22,333)
Less: Goodwill impairment$— $— (553,762)— 
Operating non-interest expense (non-GAAP) (2)
(C)$67,527 $66,848 $209,365 $197,237 
Total revenue$96,752 $134,067 $281,004 $373,630 
Total non-interest expense75,054 84,054 787,135 254,660 
Pre-tax, pre-provision net revenue ("PPNR") (2)
$21,698 $50,013 $(506,131)$118,970 
Total revenue from continuing operations$97,018 $118,277 $284,053 $334,565 
Total non-interest expense from continuing operations72,843 71,011 768,443 219,570 
Pre-tax, pre-provision net revenue ("PPNR") from continuing operations (2)
$24,175 $47,266 $(484,390)$114,995 
Total adjusted revenue (2)
$98,035 $118,190 $293,978 $331,910 
Adjusted non-interest expense (2)
67,527 66,848 209,365 197,237 
Adjusted pre-tax, pre-provision net revenue ("PPNR") (2)
$30,508 $51,342 $84,613 $134,673 
(In millions, except per share data)    
Total average assets(D)$12,660 $13,468 $13,001 $12,857 
Total average shareholders’ equity(E)1,133 1,768 1,513 1,677 
Total average tangible shareholders’ equity (2)
(F)1,091 1,164 1,104 1,106 
Total average tangible common shareholders' equity (2)
(G)1,071 1,124 1,083 1,066 
Total tangible shareholders’ equity, period-end (2)(3)
(H)1,138 1,170 1,138 1,170 
Total tangible common shareholders' equity, period-end (2)(3)
(I)1,118 1,130 1,118 1,130 
Total tangible assets, period-end (2)(3)
(J)12,574 12,930 12,574 12,930 
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Total common shares outstanding, period-end (thousands)(K)50,306 50,394 50,306 50,394 
Average diluted shares outstanding (thousands)(L)50,329 51,545 50,290 48,987 
Earnings per common share, diluted$0.42 $0.44 $(10.90)$1.46 
Adjusted earnings per common share, diluted (2)
(A/L)0.53 0.46 0.32 1.70 
Book value per common share, period-end23.03 34.36 23.03 34.36 
Tangible book value per common share, period-end (2)
(I/K)22.22 22.42 22.22 22.42 
Total shareholders' equity/total assets9.35 13.10 9.35 13.10 
Total tangible shareholder's equity/total tangible assets (2)
(H/J)9.05 9.05 9.05 9.05 
Performance ratios (4)
    
GAAP return on assets0.67 %0.67 %(5.63)%0.74 %
Adjusted return on assets (2)
(A/D)0.84 0.71 0.17 0.88 
GAAP return on equity7.50 5.12 (48.26)5.70 
Adjusted return on equity (2)
(A/E)9.33 5.35 1.44 6.64 
Adjusted return on tangible common equity (2)(5)
(A+O)/(G)10.27 8.74 2.39 10.74 
Efficiency ratio (2)
(C-O)/(B+M+P)65.39 53.37 67.72 56.30 
(in thousands) 
Supplementary data (In thousands)
    
Tax benefit on tax-credit investments (6)
(M)$1,377 $2,382 $3,364 $5,447 
Non-interest income charge on tax-credit investments (7)
(N)(1,090)(1,942)(2,673)(4,459)
Net income on tax-credit investments(M+N)287 440 691 988 
Intangible amortization(O)1,530 1,526 4,668 4,201 
Fully taxable equivalent income adjustment(P)1,512 1,826 4,917 5,517 
__________________________________________________________________________________________
(1)     Net securities losses/(losses) for the periods ending September 30, 2020 and 2019 include the change in fair value of the Company's equity securities in compliance with the Company's adoption of ASU 2016-01.
(2)    Non-GAAP financial measure.
(3)    Total tangible shareholders’ equity is computed by taking total shareholders’ equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end.
(4)     Ratios are annualized and based on average balance sheet amounts, where applicable.
(5)     Adjusted return on tangible common equity is computed by dividing the total adjusted income adjusted for the tax-affected amortization of intangible assets, assuming a 27% marginal rate, by tangible equity.
(6)     The tax benefit is the direct reduction to the income tax provision due to tax credits and deductions generated from investments in historic rehabilitation and low-income housing.
(7)     The non-interest income charge is the reduction to the tax-advantaged commercial project investments, which are incurred as the tax credits are generated.

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GENERAL
Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 Annual Report on Form 10-K. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the year 2020 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 Hills Bancorp, Inc. (“Berkshire” or “the Company”) is a Delaware corporation headquartered in Boston and the holding company for Berkshire Bank (“the Bank”) and Berkshire Insurance Group, Inc. Established in 1846, the Bank operates as a commercial bank under a Massachusetts trust company charter.

Be FIRST Culture & Corporate Responsibility
We believe that everyone, from every neighborhood, should be able to bank with dignity. We are committed to providing financial solutions to meet our customers’ needs, engaging with under-resourced people and communities to ensure access, addressing racial equity and upward economic mobility as well as fostering a workplace culture where everyone feels like they belong. Our Be FIRST values of Belonging, Focusing, Inclusion, Respect, Service, and Teamwork guide us as we navigate our environment to create long-term sustainable value for all our stakeholders. We continue to lead the way forward with our Be FIRST Commitment, our roadmap for purpose-driven, socially responsible 21st century community banking. We implemented a strong foundation of governance systems including our Corporate Responsibility & Culture Committee of our Board of Directors, Diversity & Inclusion Employee Committee, Responsible & Sustainable Business Policy and Social & Environmental Responsibility Risk Management Framework which collectively integrate social, environmental, cultural and reputational considerations through all aspects of the company. Berkshire Bank serves the underbanked through the Reevx LabsTM platform at reevxlabs.com. The Labs operate with a guiding belief that by disrupting the traditional barriers to resources, the Labs can build new economies that change communities and the world.

We engage directly with our stakeholders and leverage a number of communications channels and strategic content including our Corporate Responsibility website, www.berkshirebank.com/csr, annual report, and proxy statement to highlight our commitment to disclosure and transparency. Our annual Corporate Responsibility Report, Leading the Way Forward: Purpose-Driven Performance, which is aligned with Sustainability Accounting Standards Board (“SASB”) commercial bank disclosure topics, details the company's environmental, social, governance and cultural programs as well as our progress on The Be FIRST Commitment. We are proud to be recognized for our leadership and performance with several local, regional, national and international awards including the North American Inspiring Workplaces Award, the U.S. Chamber of Commerce Foundation Top Corporate Steward Citizens Award and our listing in the Bloomberg Gender Equality Index.
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bhlb-20200930_g2.jpg

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 the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as updated by the Risk Factors in Part II Item 1A of this report.

Further, the pandemic and the related local and national economic disruption may result in a continued decline in demand for our products and services; increased levels of loan delinquencies, problem assets and foreclosures; an increase in our allowance for loan losses; a decline in the value of loan collateral, including real estate; a greater decline in the yield on our interest-earning assets than the decline in the cost of our interest-bearing liabilities; and increased cybersecurity risks, as employees continue to work remotely.

Because of these and other uncertainties, Berkshire’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, Berkshire’s past results of operations do not necessarily indicate Berkshire’s combined future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. Berkshire is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Berkshire qualifies all of its forward-looking statements by these cautionary statements.

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SUMMARY
The emergence of the COVID-19 global pandemic dominated the Company’s activities and results during the first nine months of 2020. Berkshire is managing pandemic related impacts to its operations and borrowers and doing the necessary work to adjust its business model to improve performance in this environment. As discussed below, the Company’s operations and results reflected major changes related to the emergence of the pandemic in 2020. Results in the third quarter showed significant progress towards normalization, including higher revenue and lower expenses compared to the second quarter of 2020.

Government authorities shut down much societal activity in March, including schools, government offices, and nonessential retail businesses; most households remained sheltered except for essential travel. The Company’s region became a world hot spot due to the prevalence of COVID-19 disease and death rates. Unprecedented federal fiscal and monetary stimulus was deployed nationally to mitigate the economic impacts and to support essential public services. Improving public health allowed the gradual reduction of government restrictions beginning in May and continuing through the third quarter. U.S. GDP fell by 7.8% quarter-to-quarter in the second quarter, which was followed by an 8.3% increase in the third quarter. This left GDP down 2.7% from the end of 2019. The Federal Reserve Board of Governors caused short term interest rates to drop approximately 1.50%, and Federal Reserve actions resulted in rates coming down across all maturities.

The Bank initially closed its branches except for drive-through tellers, and most back-office staff moved to work from home status. The Bank was able to resume most branch activities in the third quarter, while back-office staff continue to telecommute. Business activities shifted during this period to provide expedited support for supporting stimulus programs and servicing the needs of customers and communities arising from the emergency conditions. Numerous programs were developed to provide support and assistance to the Bank’s staff and communities, including granting of loan payment modifications pursuant to government guidelines and the origination of commercial Paycheck Protection Program (“PPP”) SBA guaranteed loans to support employment during the shutdown.

Changes in the Company’s financial condition and results were primarily due to the pandemic and the changes in financial market conditions and economic expectations. Under accounting rules, the Company recorded large non-cash charges for goodwill impairment and the credit loss provision which were not primarily related to the Company’s business activities during the first half of the year. These charges resulted in losses for the first and second quarters, but did not materially affect most regulatory capital measures, cash flows, or liquidity. Among the most significant financial impacts from the pandemic were the following:

•Goodwill impairment: In the second quarter, the Company recorded a $554 million noncash expense representing the full impairment and write-off of the carrying value of goodwill due to the impact of the COVID-19 disease on economic and financial market conditions resulting in a lower fair value of the Company’s equity;

•Loan Loss Provision: A $65 million noncash credit loss provision expense was recorded in the first half of 2020 primarily representing projected pandemic related credit losses in future periods under the new Current Expected Credit Losses (“CECL”) accounting standard;

•Reduced Revenue: Net revenue from continuing operations decreased year-over-year by 15% for the year-to-date and by 18% for the quarter due primarily to compression of the net interest margin resulting from the near zero interest rate policy implemented by the Federal Reserve Board of Governors, and reflecting the Company’s asset sensitive interest rate risk profile;

•Loan Modifications: Short-term loan payment deferrals were granted in accordance with terms established by bank regulators to lessen borrower hardship;

•Balance Sheet Changes: A pandemic related deposit surge was primarily invested in short-term investment reserves held at the Federal Reserve Bank of Boston. The Company originated $708 million in PPP loans to support employment, and these loans partially offset reductions in other loan categories due to reduced
85
economic activity, government stimulus, and accelerated prepayments. Deposits increased as borrowers stored liquidity resulting from government stimulus and reduced economic activity. Total equity decreased but most regulatory capital ratios improved, and measures of liquidity improved due to reduced usage of wholesale funding.

Reflecting the above activity, the Company recorded a loss of ($569) million, or ($11.33) per common share for the first six months of 2020. This loss was a result of noncash charges for goodwill impairment and the provision for credit losses on loans. Results returned to profitability in the third quarter, with net income totaling $21 million, or $0.42 per common share.

In conformance with the industry guidelines issued by the Federal Reserve at the outset of the pandemic, the Company ceased repurchases of common stock in the first quarter, and let its outstanding repurchase authorization expire at the end of the first quarter. Also, consistent with Federal Reserve guidelines, the Company reduced its shareholder dividend by 50% in the third quarter of 2020. This reduction was made to better align the dividend payout and dividend yield with the reduced level of operating earnings in the current environment. The Company’s stock repurchase program was primarily focused on returning shareholder capital which was viewed as excess as a result of its strategic restructuring in 2019. The Company evaluates its capital and earnings on an ongoing basis within a framework of achieving a balanced return of shareholder capital through dividends and stock repurchases over time including an evaluation of business and market conditions.

In October 2020, the Company announced the launch of best-in-class digital account opening technology which has been in development for a number of months. This is a more visible component of the technology investment that has been absorbed into the current expense run rate. This platform provides benefits to the customer experience, to revenue generation, and to the Company’s operating efficiency. The company is also enhancing its customer experience by upgrading its call center and rolling out its e-signature platform. These enhanced capabilities are that much more valuable as a result of the customer needs and accelerated digital transformation resulting from the pandemic.

Also in October 2020, the Company announced that it is pursuing strategic initiatives targeted to reduce annualized operating expenses by $10-15 million, with a goal that these reductions will become fully effective during the second half of 2021. These initiatives are in response to the long term revenue impacts of the near zero interest rate environment which has reduced revenue in the current year. The initiatives also recognize long term changes in customer behaviors and the Bank’s operating model based on the accelerated transition to the digital economy resulting from the pandemic. The Company is well along with its strategic analysis, which includes reshaping the branch office network, identifying and releasing surplus corporate real estate, and making other operational adjustments to its business model. The Company also plans to formalize cost save opportunities arising from work from home as well as changes in procurement processes in the current environment. The Company’s goal is to streamline its business model in its core markets and leverage organic growth around that foundation. Two critical enablers are the technology that the Company has previously invested in and its personalized banking services program, MyBanker. Berkshire has been successfully deploying these mobile personal bankers for a number of years to bring service to customers where and when they need it and they remain integral to the distinctive customer experience that the Bank is developing as a 21st century community bank.

On August 10, 2020, the Company announced that, pursuant to a separation agreement, Richard M. Marotta had stepped down from his position as President and Chief Executive Officer of the Company and CEO of the Bank, as well as from his role as a Director to pursue new opportunities. The Bank’s leadership succession planning process concluded with the Board choosing Sean A. Gray, to serve as Acting President and CEO for the Company. The Board initiated a CEO search process to consider candidates inside and outside of Berkshire, and Mr. Gray is a candidate in that search process. Mr. Gray has been President of Berkshire Bank since November 2018, and also served as Senior Executive Vice President of Berkshire Hills Bancorp, Inc. and Chief Operating Officer of the Bank from 2015. Mr. Gray joined Berkshire in 2007 as First Vice President, Retail Banking and has held various positions including Executive Vice President, Retail Banking.

In line with the Company’s initiatives, Mr. Gray recently announced the promotion of two of Berkshire leaders to regional president positions: Wealth Leader Kate Hersey will lead the Boston Region team and Lori Kiely, the head
86
of Berkshire’s Foundation, will lead the Berkshire County Region. The regional presidents remain critical to the Bank’s engagement with the markets that it serves. As a result of these promotions, women now constitute half of the Company’s regional president team. Berkshire also promoted EVP & Chief Information Oficer, Jason White, who is driving the technology investment and was recently honored as the Boston area CIO of the year. Berkshire’s purpose-driven culture was further recognized by the North American Inspiring Workplaces Award for its diversity and culture programming, based on its Be FIRST Commitment and internal diversity work, which is under the direction of Jacqueline Courtwright, who was promoted to EVP and Chief Human Resources and Culture Officer.

Berkshire continues to pursue its ongoing transformation into an innovative 21st century community bank, which has gained heightened relevance to stakeholders and the Company’s long-term opportunity as a result of this year’s events. Guided by its Be FIRST principles, the Company continues to foster a more inclusive, innovative and supportive culture, which is positioning Berkshire to deliver a differentiated and compelling community banking experience to everyone in its communities, including those who have been traditionally underbanked. Following its principles, the Company’s COVID-19 response included:
bhlb-20200930_g3.jpg




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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2020 AND DECEMBER 31, 2019
Summary: The major balance sheet changes were the result of the COVID-19 pandemic and its impacts on the economy and federal fiscal and monetary policy. Total loans decreased and deposits increased due to the slowdown in economic activity, resulting in less credit demand and the accumulation of customer liquidity – both of which benefited from federal stimulus. The funds from loan payoffs and deposit growth were primarily invested into short and long term investments and were used to reduce wholesale funding sources. The Company’s operating focus was on meeting customer needs and further strengthening its capital and liquidity in the face of unknown pandemic impacts on its markets.

Anticipated higher credit losses from the economic impacts of the pandemic resulted in higher loan loss provisions in the first half of the year, although loan performance through period-end remained within moderate risk benchmarks utilized by the Company. Loan performance was aided by loan modifications and SBA guaranteed PPP loans which were implemented pursuant to federal bank supervisory guidelines in an unprecedented response to supporting the economy and financial system.

The long term impacts of the pandemic drove bank stock prices sharply lower, and in the second quarter the Company wrote-off the full $554 million balance of goodwill which had been accumulated over the past decade from bank acquisitions when stock prices were higher. Largely due to this impairment charge, total assets decreased by $602 million, or 5%, to $12.6 billion. Similarly, shareholders’ equity decreased by $580 million, or 33%, to 1.18 billion. The goodwill impairment charge was non-cash and had no material impact on the Company’s tangible equity or regulatory capital metrics, which improved continuously through the year due to the reduction in risk weighted assets resulting from the proportional shift from loans to investments. Book value per common share measured $23.03 at period-end.

The Company's goal is that if public health and market conditions improve as forecasted in 2021, its positioning is targeted to provide a strong foundation for supporting growth in its customer accounts and revenue drivers across its major markets and business lines. In the near term, the Company targets to use the same combination of reducing wholesale funds and investing in short and long term investments to absorb any further funds flows from loan payoffs and/or deposit growth.

Investments: Due to loan runoff and deposit growth, total short and long-term investments increased by $588 million in the first nine months of the year. Short term investments increased by $370 million, or 78%, to $845 million. Most of these funds were held at the Federal Reserve Bank of Boston and were unpledged. The portfolio of investment securities increased by $218 million, or 12%, to $1.99 billion. The increase was concentrated in Available for Sale ("AFS") agency mortgage-backed securities and agency commercial mortgage-backed securities. There has been accelerated prepayments of mortgage related securities as a result of the low interest rate environment. The Company purchased $635 million in AFS securities during the first nine months of the year. In the current environment of low interest rates, a generally flat yield curve, and low credit spreads, the Company has been judicious about redeploying short-term investments into longer term structures while also maintaining balance sheet flexibility due to the general uncertainties of the current environment. The portfolio yield decreased by 0.53% to 2.78% during the most recent quarter, compared to 3.31% in the fourth quarter of 2019, reflecting ongoing rolldown of asset yields due to low rates.

The Company has managed down the size of the corporate bond portfolio and carefully monitors its exposure to credit risk in corporate and municipal obligations. At period-end, there were no delinquent or non-accruing debt securities, and the allowance for credit losses on debt securities measured $96 thousand at period-end. The Company’s $32 million equity securities portfolio includes Community Reinvestment Act related investments and stocks of banks and real estate investment trusts. The latter two categories have experienced significant stock market declines due to the pandemic. The Company has recorded $10 million in net securities losses for the year-to-date, primarily due to these market declines. The portfolio of investment securities had an unrealized gain of $66 million, or 3.4%, at period-end due to the gain in debt security fair values resulting from the decrease in interest rates.
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Loans. Total loans decreased by $520 million, or 5%, to $8.98 billion in the first nine months of the year. During this time, the Company originated $708 million in commercial PPP loans. Excluding these loans, total loans decreased organically by $1.23 billion, or 13%, during the year-to-date. This decrease was due to declines of approximately 20% in residential mortgages, consumer loans, and commercial and industrial loans. This primarily reflected prepayments in the mortgage and consumer categories due to the low interest rate environment. The Company sells most of its residential mortgage originations, and is no longer originating indirect auto loans in the consumer category. The $402 million decrease in commercial and industrial loans (excluding PPP loans) included a $123 million decrease in line of credit borrowings and the sale of $38 million in private aircraft loans. Other C&I decreases were due to amortizations and prepayments due to lower demand reflecting the business slowdown and increased customer liquidity. The Company has also trimmed non-relationship exposures, including participated loan interests. The Company is seeing activity in its commercial lending channels and it remains disciplined in its selection, pricing, and underwriting processes and is closely managing its COVID sensitivity. The yield on the loan portfolio decreased by 0.84% to 3.68% in the most recent quarter compared to 4.52% in the fourth quarter of 2019. This decrease primarily reflected the approximate 1.50% decrease in short term rates in the first quarter of 2020 on variable rate loans, and the impact of prepayments of higher yielding loans.

The majority of PPP loans were originated in the second quarter to existing borrowers to provide payroll support during the pandemic shutdown. These loans bear interest at 1% and most were written with two year maturities. They are guaranteed by the SBA and most are expected to be repaid by the SBA as loans are forgiven based on procedures currently being developed by the federal government. At period-end, the Company had a balance of $16.8 million in net deferred PPP loan fees paid by the SBA which is being amortized into net interest income based on the approximate two year expected lives of the loans. The unamortized deferred balance will be recognized in net interest income at the time each loan is forgiven.Applications are being processed in the fourth quarter primarily based on expedited procedures for forgiveness of loans up to $50,000 in size.

In addition to the PPP loan program authorized by Congress, the Federal Reserve has created Main Street Lending programs targeted to support larger middle market companies. The Company has not generated significant business volume through this program.

Based on its experience with borrowers during the pandemic, the Company has thoroughly assessed its commercial loan portfolio to determine the most significant sensitive industries based on exposure, risk rating, and use of federally supported lending and loan modification programs. The Company has focused on hospitality, Firestone (specialty equipment lending), restaurants, and nursing/assisted living facilities, which collectively totaled $912 million at period-end. The Company has evaluated the loans in these industries and has expanded its review of other commercial loans to broaden the scope and frequency of risk assessments. The Company initially identified a larger group of borrowers as potentially COVID sensitive, including retail, arts and entertainment, medical, and construction. Based on its experience over the last six months, the Company has narrowed its focus of COVID sensitivity to the four groups mentioned above. The Company views all of these COVID-19 sensitive loans as generally conforming to its longstanding financial disciplines for loan/value, debt service coverage, and recourse in conformity with customary industry practices. Based on its longstanding disciplines, the Company believes its exposures within these industries are reasonably diversified and structured to accomplish overall risk management objectives. The Company also monitors its outstandings to small business borrowers. Excluding PPP and SBA loans, at period-end the Company had $779 million in commercial loans managed through its small business, business banking, and 44 Business Capital operations. Small businesses and SBA borrowers have benefited from various government support programs and may be more vulnerable in future periods if government support programs are not continued.

Asset Quality: Most asset performance measures remained within risk ranges viewed by the Company as moderate during the first nine months of 2020, including charge-offs, delinquencies, non-accruals, and troubled debt restructurings. Criticized balances increased, as further discussed below. The Bank anticipates that measures of asset performance and quality will deteriorate in coming quarters based on its projections of credit losses on loans.

Asset quality has benefited from the PPP loans, which are intended to support payrolls and therefore support business operations and employment despite the contraction in the economy. Other federal stimulus measures
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included one-time payments issued to most taxpayers and supplemental unemployment insurance. Monetary actions drove interest rates to near zero, reducing debt service costs and supporting asset values in the public equities and credit markets. Additionally, federal bank regulatory authorities encouraged banks to work with affected borrowers to provide loan payment modifications to protect liquidity and support solvency. Forbearances made before year-end in accordance with CARES Act guidelines are not reported as delinquencies and are not required to be analyzed as troubled debt restructurings.

For the year-to-date, loans with conforming loan modifications totaled $1.6 billion. The Bank was initially proactive in reaching out to commercial customers to offer conforming modifications within regulatory guidelines. The preponderance of these Phase I modifications were 90 day deferrals of principal and interest payments. The majority of Phase I modifications returned to normal payment schedules, but the Company wrote more than $600 million in commercial Phase II modifications primarily during the third quarter, and in most cases these were again 90 day deferrals of principal and interest payments. For those customers requesting Phase II deferrals, the Bank conducted an updated underwriting, including risk ratings and accrual status. At the conclusion of Phase II, the Bank established a Phase III program when additional deferrals were being sought. Phase III deferrals are being processed in the fourth quarter, with a general target to have the loans resume current interest payments, with principal payments deferred another 90 days, except for longer deferrals for borrowers with specialized or seasonal operations. These deferral requests are individually underwritten, negotiated, and approved. Many in the hospitality segment and the Firestone segment are expected to target deferral of principal payments until Spring 2021. Such modifications may involve additional support from borrowers/sponsors, and most hospitality modifications are expected to include interest reserves established by project sponsors. As of period-end, the Company had $447 million in active and in-process deferrals including $231.7 million in active outstanding deferrals. The Company expects that by year-end, the balance of loans with deferrals would be reduced from the period-end total of active and in-process deferrals. The $447 million in deferrals included $394 million in commercial deferrals. These deferrals included, $273 million related to the four COVID sensitive industries previously discussed: hospitality, Firestone equipment loans, restaurants, and nursing/assisted living, which total approximately $912 million in outstanding loans. Approximately 80% of these deferrals are related to hospitality and Firestone, which are viewed as the most sensitive industries due to the impact of business closures and social distancing measures required by public health authorities in some locales. The Company views these portfolios as diversified geographically and by borrower type.

During the first nine months of the year, total criticized loans increased by $158 million from $237 million to $395 million, including classified loans which increased by $76 million from $162 million to $238 million. Most of these increases were related to the commercial COVID sensitive industries, which accounted for $205 million in criticized loans at period-end. Despite the increase in classified loans, total non-accruing loans increased by only $8 million to $47 million during the year-to-date. The Company generally did not update risk ratings during Phase I of the deferral program. As noted above, later phases included a risk rating update. Most Phase II deferrals were rated “Pass Watch” and were not viewed as criticized. In Phase III, most deferrals which result in further deferral of principal and interest beyond six months in total are expected to be rated as criticized. Deferrals of principal payments which resume interest payments may continue to be rated Pass Watch depending on borrower circumstances. Loans which were criticized before the onset of the pandemic remained criticized despite any deferrals they may have been granted.

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Allowance for Credit Losses on Loans: The Company implemented the Current Expected Credit Losses (“CECL”) accounting standard on January 1, 2020. The standard changed the basis of loss recognition from incurred to expected, and expanded the covered financial instruments. The allowance for credit losses on loans replaces the previous allowance for loan losses. The allowance balance increased by $71 million from $64 million to $134 million in the first nine months of the year.

The allowance increased by $25 million to $89 million on January 1, 2020 due to the adoption of CECL. The Company established a $15 million reserve related to loan credit marks, and the amortized cost basis of purchased credit deteriorated loans was increased by this same $15 million amount. The remaining implementation increase was due to the recognition of additional expected losses over the life of the loan portfolio compared to those already incurred under the previous method.

The allowance increased by $45 million from $89 million on January 1, 2020 to $134 million on September 30, 2020. Most of this increase was due to the impact of the pandemic recession on projected credit losses on loans based on economic forecasts. The amount of the increase was mitigated by the impact of the decrease in portfolio loans excluding PPP loans during 2020. The allowance measured 1.50% of total loans at period-end, compared to 0.67% at year-end 2019. No allowance has been established for losses on PPP loans due to the SBA 100% guarantee. The ratio of the allowance to total loans excluding PPP loans was 1.62% at period-end. Additionally, on the adoption of CECL, the Company established a separate $8 million allowance for credit losses on unfunded loan commitments which is carried in other liabilities on the balance sheet. The January 1, 2020 CECL adoption was offset to shareholders’ equity and subsequent changes in the reserve are recorded through the statement of operations. There is no reserve for credit losses on loan interest receivable, including the $13 million in deferred interest receivable from 2020 loan modifications. The ratio of the allowance to loans by category was as follows at period-end: 1.40% commercial real estate; 0.98% commercial and industrial; 1.76% residential mortgage, and 2.78% consumer. Excluding the PPP loans, the ratio was 1.47% for commercial and industrial loans.

The Company’s allowance methodology projects credit losses for the expected life of the loan portfolio. The Company uses historic loss rates as a starting point for its projection. The Company adds an economic reserve based on forecasts of the next seven quarters as a reasonable and supportable forecast timeframe. The allowance also includes a component based on certain qualitative factors. The Company evaluates several external forecasts in choosing the forecast element for the economic component of the allowance. The baseline forecast projects a 4.3% decrease in GDP in 2020, followed by a 3.5% increase in 2021. Unemployment is projected at 8.7% for 2020, decreasing to 8.4% in 2021. For each portfolio segment, the company analyzes the historical relationship between economic conditions and loss rates both in its own portfolio and in the portfolios of similar institutions, and then applies this relationship to determine an appropriate adjustment to the expected loss rates, given the forecasted economic indicators. Unemployment is a critical factor for all segments. The Company has included a qualitative overlay in its overall analysis which includes adjustments, including an adjustment of projected loss rates to take into account the impact of stimulus on credit loss propensity based on expert assessments of projected losses across various portfolio segments.

Goodwill and Other Assets: The sustained decrease in the price of the Company’s stock in recent months was a basis for triggering an analysis of goodwill for impairment. Additionally, the annual impairment analysis was scheduled for the second quarter. A goodwill impairment analysis was completed according to Accounting Standards Codification Section 350. Based on this analysis, the Company recorded a $554 million impairment charge during the second quarter to fully write-off the carrying balance of goodwill. This analysis was based on an estimate of the fair value of the company’s equity as one reporting unit. Fair value was estimated based on an income approach and a market approach, which were equally weighted in the analysis. Both valuation approaches supported a conclusion of full impairment. The goodwill balance had resulted primarily from a series of bank acquisitions which consisted primarily of an exchange of shares recorded based on stock market valuations at the time of acquisition. Over this time, bank stocks were generally valued at a premium to the net fair value of assets, resulting in the recordation of goodwill for these premiums. Due to the pandemic recession and federal monetary actions reducing interest rates, the outlook for banking industry earnings has contracted, and many bank stocks are now trading at a discount to book value. As a result, the impairment analysis concluded that the fair value of the Company’s equity is lower than its carrying value, indicating a goodwill impairment.

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The carrying amount of Other Assets increased by $137 million, or 47%, to $426 million during the first nine months of the year. This was primarily due to the increased net fair value of commercial loan interest rate swaps and related economic hedges, reflecting the market value changes resulting from the pandemic impact on market interest rates.

Deposits and Borrowings: Total deposits increased by $131 million, or 1%, to $10.47 billion in the first nine months of 2020. The Company focuses on its non-GAAP measure of organic deposits, which excludes brokered and payroll deposits. Organic deposits increased by $714 million, or 9%, to $9.09 billion during this time. This primarily reflected the excess pandemic customer liquidity that was accumulated in deposits including proceeds from government stimulus support, lower household/business expenditures, and unsettled equity market conditions. Most of the increase was concentrated in demand deposits, which increased by $701 million, or 37%. This reflected flexibility preferred by customers during the national emergency, as well as the reduction in interest rates in other deposit accounts. The Company anticipates that this pandemic related liquidity will gradually normalize as public health and economic conditions normalize in the future. The Company’s higher short-term investment balances increase the Bank’s options to respond to any unexpected demands on these balances in the near term. Organic time deposits decreased by $324 million, or 14%, to $2.06 billion as the Company allowed higher cost maturing time balances to roll off, and customers shifted funds to non-maturity accounts. Total brokered deposits decreased by $394 million, or 33%, to $814 million. The Company purchased brokered deposits early in the pandemic as part of its liquidity risk management, but continues to reduce these balances over time based on its strategic liquidity plan. Payroll deposits, which fluctuate daily, decreased during the year-to-date by $213 million, or 29%, to $531 million. Due to the reduction of brokered and higher cost retail deposits, and a shift to demand deposits, the cost of deposits decreased by 0.50% to 0.61% in the most recent quarter from 1.11% in the fourth quarter of 2019.

The Company’s strategy to reduce reliance on wholesale funding included the brokered deposits mentioned above, together with reducing borrowings as they mature. Total borrowings decreased by $125 million, or 15%, to $703 million for the year-to-date. Total wholesale funding sources decreased from $2.0 billion to $1.5 billion. Including the benefit of less reliance on these higher cost brokered and borrowed funds, the total cost of funds decreased by 0.50% to 0.73% in the most recent quarter from 1.23% in the fourth quarter of 2019. The Company continues to view reducing wholesale funding to be an important element of its strategy to improve profitability in future periods. The ratio of wholesale funds to total assets decreased to 12% from 15% during 2020 year-to-date.

Derivative Financial Instruments: The $3.8 billion period-end notional balance of derivative financial instruments was down slightly from $4.1 billion at the start of the year. The estimated net fair value of these instruments increased from approximately zero to $106 million due to the higher value of fixed rate customer swaps as a result of the decrease in interest rates. This asset is included in other assets on the balance sheet. The Company delivered cash to the clearing house as a result of its increased obligation to national swap counterparties which is reported as a use of cash from financing activities in the cash flow statement.

Shareholders' Equity: Total shareholders’ equity decreased by $580 million, or 33%, to $1.18 billion in the first nine months of the year due to the income impact of the noncash charges of $554 million for goodwill impairment and $66 million for credit provision expense recorded during that time. These charges were in conformity with accounting principles relying substantially on future uncertain events. The Company uses the non-GAAP measure of tangible equity which excludes goodwill and intangible assets and which is an important focus for the investment community. Tangible equity decreased by $21 million, or 2%, to $1.14 billion during the first nine months of the year, reflecting the impact of the $66 million credit provision expense on first half earnings. The ratio of equity to assets stood at 9.3% at period-end, and the non-GAAP measure of tangible equity to tangible assets stood at 9.1%.

All of the Company's measures of regulatory capital in relation to risk weighted assets improved during the first nine months of the year due to the runoff of non-PPP related loans and the zero risk weighting assigned to PPP loans because of the SBA guarantee. The Company conducts equity stress analyses, including severe adverse pandemic loss scenarios provided by third parties. The Company believes that its capital is well cushioned above the Well Capitalized metrics in all of the adverse modeling scenarios based on the assumptions utilized.

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The Company’s plan had been to continue repurchasing shares to return capital to shareholders which was released by the balance sheet restructuring. This plan was suspended in the first quarter as the pandemic emerged, and the existing authorization for share repurchases was allowed to expire at its March 31, 2020 maturity. During the first quarter, the Company filed a universal securities shelf registration for the routine purpose of renewing the shelf registration that expired in November 2019. The Company increased its quarterly dividend by $0.01 to $0.24 per share in the first quarter before the pandemic, in line with previous annual dividend increases. The Company decreased its dividend to $0.12 per share in the most recent quarter, to better align the dividend payout and dividend yield with its operating earnings as a result of the pandemic. The Company has changed its dividend procedure from targeting quarterly declarations to coincide with the earnings release and the procedure now targets dividend decisions by the Board to be announced in the third month of each quarter. Due to the loss recorded in 2020, any dividends intended by the Bank’s board of directors are subject to regulatory approval by the Massachusetts Banking Department and any dividends intended by the Company’s board of directors are subject to non-objection by the Federal Reserve.

The change in retained earnings due to the operating loss and the common dividend accounted for most of the net change in equity. The Company recorded a $20 million benefit to equity from other comprehensive income which mostly offset a $24 million reduction in equity due to the adoption of CECL. The other comprehensive income benefit was due to after-tax unrealized gains in the bond portfolio due to lower interest rates. The CECL adoption impact on equity was principally due to the increase in the allowance for credit losses on loans on the date of adoption due to the recognition of expected future losses in addition to incurred losses, as well as the increase in the allowance to offset the increase in the gross carrying value of purchased credit deteriorated loan.

The Company has received notice for the conversion of its remaining outstanding preferred stock to common stock, which is not expected to have a material impact on the Company’s financial condition and per common share metrics.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

Summary: Revenue and expense included the SI Financial operations acquired on May 17, 2019. Additionally, due to the COVID-19 pandemic Berkshire reported losses in the first half of 2020 due to non-cash charges of $554 million for goodwill impairment and $65 million for the provision for credit losses. As a result, many categories of revenue and expense are not directly comparable year-over-year for the first half of the year. This discussion will primarily focus on third quarter results, which are more comparable year-over-year.

Berkshire reported third quarter net income of $21 million in 2020, decreasing by 6% from $23 million in 2019. A $21 million decrease in revenue was offset by a $21 million reduction in the loan loss provision, which was elevated in 2019 primarily due to the full charge-off of a commercial loan due to fraud. The revenue decline in 2020 was largely due to the impact of the pandemic on the net interest margin and on business volumes. Berkshire also benefited year-over-year by a $6 million reduction in third quarter income tax expense due to the impact of the loss recorded in the first half of 2020. The return on assets was unchanged at 0.67%, while the return on equity improved to 7.50% from 5.12% due to the reduction in equity resulting from the goodwill impairment. Berkshire’s non-GAAP measure of adjusted earnings totaled $26 million in the most recent quarter, resulting in a 0.84% adjusted return on assets and a 9.33% adjusted return on equity. GAAP EPS totaled $0.42, and adjusted EPS totaled $0.53. Adjusting items during the quarter included executive separation costs, a further loss on discontinued national mortgage banking operations, and a net securities loss.

Berkshire reported higher revenue and lower expense in the most recent quarter, compared to the prior quarter, as operations moved in the direction of normalizing after the pandemic related impacts that reduced efficiency in the first half of the year. The third quarter efficiency ratio remained elevated at 65% in 2020 compared to 53% in 2019 due to the revenue contraction. Most of the revenue contraction stems from a lower net interest margin, which the Company views as likely to pressure profitability over the medium term. The Company also anticipates higher credit loss provision expense and income tax expense from the unusual low levels in the most recent quarter. The Company’s strategic initiative to reduce operating expense in 2021 is targeted to help mitigate these factors
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weighing on potential future profit margins, as well as to respond to long term changes in customer behaviors and preferences. The Company also anticipates that further progress toward normalization of social and economic conditions in 2021 will be favorable for business volumes and profitability

Nine-month operations resulted in a $548 million loss in 2020 due to the first half goodwill impairment and credit loss provision discussed above. Of note, neither of these noncash charges had a material impact on regulatory capital metrics. Nine-month operations resulted in a $72 million net profit in 2019. In both years, third quarter operations produced the strongest efficiency ratio for the year-to-date. In 2019, this reflected the achievement of merger benefits from the SI Financial acquisition together with benefits from 2019 strategic initiatives. In 2020, this reflected progress toward normalized operations following pandemic impacts on revenue and expense in the first half of the year.

Net Interest Income. Net interest income decreased year-over-year by $20 million, or 20%, in the third quarter and by $33 million, or 12%, in the first nine months of the year. 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 $77 million in the most recent quarter. The 20% third quarter year-over-year decrease is primarily due to a 19% decrease in the net interest margin. The margin was under pressure coming into 2020 due to the anticipated loss of purchased loan accretion income, including the impact of the CECL accounting standard. The Company’s interest rate risk profile is asset sensitive, and is structurally sensitive both to the decrease in interest rates and to the low and relatively flat yield curve. The approximate 1.50% decrease in short term interest rates resulting from the Federal Reserve Bank’s near zero interest rate policy response to the pandemic was adverse to the Company’s net interest margin. Additionally, the Company took on higher cost funds at the start of the pandemic to further strengthen liquidity in the national emergency as part of its risk management protocol. Also, the decline in higher yielding loans has reduced this revenue source as the primary source of interest revenue.

The Company expects net interest income to remain pressured based on further asset yield compression and loan runoff, and growth in non-accruing loans based on future expected credit losses may also dampen this income. An offsetting factor is further deposit cost reductions that are anticipated as maturing rates continue to roll down. In the near term, the Company expects to continue to benefit from the $708 million in PPP loans, and the majority of these loans are expected to be forgiven in the coming quarters, which would lead to recognition of the $16.8 million in net deferred origination fees into net interest income as loans are forgiven. The PPP loans provided approximately $5 million in gross interest revenue in the most recent quarter.

Non-Interest Income: Fee income decreased year-over-year by $2 million, or 8%, in the third quarter and by $4 million, or 7%, in the first nine months of the year. This change was primarily due to the pandemic, as fee income fell from $21 million in the third quarter of 2019 to $16 million in the first quarter of 2020, followed by a partial recovery to $19 million in the most recent quarter. Demand across the Company’s loan and deposit fee sources decreased as a result of the economic lockdowns which began in the first quarter, and Company resources were shifted from business development to servicing borrower needs and adjusting the service delivery model. Additionally, pandemic related unfavorable changes in fair value of financial instruments resulted in charges against both fee income and other non-interest income. Affected instruments included mortgage servicing rights, and loans carried at fair value. The Company also instituted certain deposit fee waivers to accommodate customer changes in transaction behaviors due to the lockdowns. All of these factors began to normalize in the most recent quarter. Other non-interest income also includes securities gains/losses, which the Company does not view as related to its ongoing operations. The $10 million net securities loss in the first quarter of 2019 was due to the impact of the stock market selloff on the carrying value of equity securities as previously noted in the discussion of changes in financial condition.

Provision for Credit Losses: This non-cash provision decreased year-over-year in the third quarter to $1 million from $23 million primarily due to one large commercial loan loss in 2019. For the first nine months of the year, the provision increased year-over-year to $66 million from $30 million due to pandemic related provisioning in the first half of 2020 as noted in the earlier discussion of changes in financial condition. The provision in the most recent
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quarter was primarily due to the decrease in loans which resulted in a decrease in the amount of the credit loss allowance.

Non-Interest Expense and Tax Expense: Total third quarter non-interest expense increased year-over-year by $2 million, or 3%. For the year-to-date, expense increased by $549 million due to the $554 million goodwill impairment charge in the second quarter of 2020. Excluding this impairment charge, expense decreased by $5 million, or 2%, for the first nine months due to merger costs recorded in 2019. The primary third quarter expense drivers have been technology and occupancy, which were up year-over-year by 25% and 12% respectively. FDIC insurance expense increased because rebate credits eliminated this cost in 2019. Third quarter compensation and benefit expense was down 7% year-over-year due to ongoing efficiency initiatives, along with lower bonus and incentive accruals in 2020 due to lower business volumes and margins. Expenses in the third quarter of 2019 included merger related charges and in the third quarter of 2020, expenses included costs related to executive separation, primarily due to the separation agreement with the former CEO. These merger, restructuring, and other expenses are deemed not related to ongoing operations by the Company, and are excluded as a component of its measure of adjusted earnings. Full time equivalent staff in continuing operations totaled 1,507 positions at period-end, compared to 1,550 positions at the start of the year.

Due to the impact of the first half of the year expenses in 2020, the third quarter tax rate was a benefit of 4% and the nine-month tax rate was a charge of 4%. The tax rate measured 17% in the third quarter and 19% for the first nine months. The Company estimates that its third quarter 2020 effective tax rate on continuing operations would have been 6.5% without the benefit of the loss carryforwards. The tax benefit in this period on discontinued operations was equivalent to a 27% effective tax rate.

Discontinued Operations: During the first quarter of 2020, the Company shifted the majority of its national mortgage banking operations staff to an acquiring entity. Full-time equivalent staff in these operations totaled 23 positions at period-end, compared to 323 positions at the end of 2019. The origination of applications in the national mortgage banking operations was eliminated during the first quarter. The total notional amount of mortgage servicing rights in these operations had a fair value of $4 million on the balance sheet at period-end, compared to $12 million at the start of the year. The write-down of these rights contributed to the $22 million pre-tax loss recorded by these operations for the first nine months of 2020. Other contributing factors were losses on loan originations due to the sharp changes in interest rates at the onset of the pandemic, as well as severance and contract termination costs. The wind-down of discontinued operations is expected to be completed by year-end. Discontinued operations are excluded from the Company’s measure of adjusted 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. Due to falling interest rates in 2020 and 2019, Berkshire recorded unrealized debt securities gains in the third quarter and first nine months of both years except for the most recent quarter, when a slight increase in interest rates produced a small unrealized loss. The unrealized gains resulted in comprehensive income exceeding net income, except for the most recent quarter, when the unrealized loss resulted in comprehensive income 4% lower than net income.

Liquidity and Cash Flows: The Company’s liquidity strengthened during the first nine months of 2020, as investment balances were expanded and wholesale funds were reduced. As previously noted, the use of wholesale funding from brokered deposits and borrowings was reduced by $520 million in 2020 to $1.52 billion. The Company has increased its short-term investments by $370 million and its investment securities by $218 million. The ratio of wholesale funds/assets decreased to 12% from 15% during the first nine months of the year. The ratio of loans/deposits decreased to 86% from 92% during this period. The Bank had unused FHLBB borrowing capacity totaling $1.6 billion at period-end, which was unchanged from the start of the year. The Bank also had available borrowing capacity of $870 million with the Federal Reserve Bank at period-end, compared to $201 million at the end of 2019.

The Company observed signs of disruption in the financial markets at the outset of the pandemic but strong actions by the Federal Reserve Bank to backstop the markets were successful, and the Fed continues to show strong signs of
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support through historically unprecedented monetary and balance sheet actions and bank lending facilities. Financial markets may be affected by future events involving public health, the economy, and the political system. The Company formed a special committee to closely monitor and manage liquidity during the pandemic, which is ongoing at this time. There is uncertainty about when there might be future demands on the $701 million increase in demand deposits for the year-to-date. The Company expects the majority of its $708 million in PPP loans to be repaid in coming quarters. The combination of on-balance sheet liquidity and off-balance sheet liquidity described above are viewed as strong support for any emerging liquidity needs.

Subsequent to first quarter-end, KBRA (the Kroll Bond Rating Agency) reaffirmed the Company’s and the Bank’s existing bond ratings, including the Bank’s A- ratings on deposits and senior debt. The ratings were affirmed with a watch negative status due to the uncertain economic impacts from the pandemic. The Company maintains ongoing relationships with correspondents and investment banks which provide further potential options for financial support to the Bank and the Company. At period-end, the Company had $88 million in cash held on deposit in the Bank. The cash used for shareholder dividends totaled $6 million in the most recent quarter.

The Company maintains a contingency funding plan based on its assessment of the liquidity stress environment. Contingency funding information, reporting, and assessment were intensified in the first quarter when financial markets began signaling distress. Primary liquidity data is reported on daily, and thirty day stress analytics are maintained on an updated basis. The Company maintains monthly and quarterly cash flow forecasts. A one year forward liquidity stress test evaluates stress across a variety of stress scenarios, including severe adverse loan loss scenarios due to the pandemic. The Company has defined strategic options which allow it to meet funding needs in all stress scenarios. The Company’s guidelines allow it to respond to liquidity stress by placing higher emphasis when necessary on liquidity versus margin expansion. Additional information about liquidity and cash flows is contained in the related section of the Company's most recent Annual Report on Form 10-K.

The Company generated $195 million in net cash provided by operating activities in the first nine months of 2020, including $110 million contributed by discontinued operations which primarily related to the settlement of loans held for sale. Growth in demand deposits and the reduction in total loans primarily funded growth in investments and reductions in wholesale funding.

Capital Resources: Please see the “Shareholders’ Equity” section of the Comparison of Financial Condition for a discussion of shareholders’ equity together with the note on Shareholders' Equity in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in the Company's most recent Form 10-K. The Company’s dividends are further discussed in these sources, along with the previous discussion of shareholders’ equity and in the section above on liquidity and cash flows. The Company views its Adjusted PPNR as well as its cash provided by operating activities of continuing operations as generally having provided support for its operations, net loan charge-offs, dividend, and related taxes. The Company’s balance sheet restructuring, which has largely been completed, has also supported capital, as risk-based assets have continued to be managed down. As noted in the earlier discussion of Shareholders’ Equity, the Company views itself as well capitalized. In 2019 it distributed excess capital to shareholders through both dividends and stock repurchases. These activities were modified in 2020 due to the pandemic, but remain as long term objectives of the Company’s capital management under appropriate conditions.

The Company has investment grade debt ratings and monitors capital market conditions. The Company views its regulatory capital as well cushioned above the “Well Capitalized” levels, and the Company believes that its plans are consistent with maintaining proper strong cushions above these levels. The large provision for credit losses which was recorded in the first half of 2020 anticipates higher net loan charge-offs in the next seven quarters. The allowance for credit losses is included within limits in Tier 2 regulatory capital. As expected charge-offs are realized, they will be charged against this allowance, which may have an effect of reducing total risk based capital. The timing and amount of these charge-offs is uncertain. The Company conducts equity stress analyses, including severe adverse pandemic loss scenarios provided by third parties, in addition to Dodd-Frank stress testing. The Company believes that its capital is well cushioned above the Well Capitalized metrics in the adverse modeling scenarios based on the assumptions utilized.

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Off-Balance Sheet Arrangements and Contractual Obligations: In the normal course of operations, Berkshire engages in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. Further information about the Company’s off-balance sheet arrangements and information relating to payments due under contractual obligations is presented in the most recent Form 10-K. Changes in the fair value of derivative financial instruments and hedging activities are included on the balance sheet and information related to these matters is reported in the related footnote to the consolidated financial statements, and was included in management’s discussion of changes in financial condition. There were no major changes in off-balance sheet arrangements and contractual obligations during the first nine months of 2020.

Fair Value Measurements: Fair value measurements are discussed in the related financial statement footnote. The most significant measurements of recurring fair values of financial instruments primarily relate to securities available for sale, loans held for sale, and derivative instruments. These measurements were generally based on Level 2 market-based inputs. The premium or discount value of loans has historically been the most significant element of this period-end presentation. This premium or discount is a Level 3 estimate and reflects management’s subjective judgments.

BE FIRST CORPORATE RESPONSIBILITY UPDATE

Berkshire is committed to purpose-driven performance. Learn more about the steps Berkshire is taking to be a values-based brand for all its stakeholders at www.berkshirebank.com/csr and in its most recent Corporate Responsibility Report.

Key developments in the quarter include:

•Investing in Community Recovery & Resiliency: As people and small businesses in neighborhoods across the Company’s footprint struggle through the impacts of the COVID-19 pandemic, Berkshire’s Foundation is responding and has provided nearly $3 million in grant funding to more than 400 organizations through the end of the third quarter. These critical investments are ensuring access to resources for underserved populations to become college and career ready, ensuring quality affordable housing and supporting small business growth and entrepreneurship. In addition, 75% of Berkshire’s employees, through its award-winning XTEAM volunteer program contributed more than 6,000 hours of service.

•Transitioning to a Low-Carbon Future: Berkshire is working towards transitioning its electricity to 100% renewable sources. The Company announced an agreement with Nexamp to subscribe to a community solar project in Massachusetts, lowering its carbon footprint and increasing the percentage of its energy supply procured from renewables while also reducing costs.

•Enhancing Environmental & Social Governance Practices: The Company completed updates to its Responsible & Sustainable Business Policy to improve the quality and clarity of its policy and disclosure. The update included new language to address Fraud Reporting & Suspicious Activity as well as Conflict of Interest. In addition, the Company enhanced its Social and Environmental Credit Risk Framework by incorporating new policy and procedure into the existing Commercial Loan Policy to more effectively mitigate the social and environmental risks associated with highly sensitive industries.
•Enhancing Protected Leave For Gender-Based Violence: Under the leadership of EVP, Chief Human Resources & Culture Officer Jackie Courtwright and through a unique collaboration with the non-profit FreeFrom, Berkshire enhanced protections for its employees experiencing gender-based violence by providing 15 days of paid leave a year to deal with the consequences of intimate partner violence, sexual assault, and human trafficking. This policy allows employees the ability to seek medical care, attend court proceedings, and relocate – all without missing a paycheck or depleting their accrued sick or vacation days.

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•Recognizing Impact & Results: Berkshire was named the winner of the North American Inspiring Workplaces Award for its diversity and culture programming recognizing the efforts of its Be FIRST Commitment and internal diversity work. The Company was also named one of Massachusetts Most Charitable Companies by the Boston Business Journal for the eighth consecutive year.

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APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in its most recent Annual Report on Form 10-K. Modifications to significant accounting policies made during the year are described in Note 1 to the consolidated financial statements included in Item 1 of this report. The preparation of the consolidated financial statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

Management has identified the Company's most critical accounting policies as related to:
•Allowance for Credit Losses
•Income Taxes
•Goodwill and Identifiable Intangible Assets
•Fair Value of Financial Instruments

These particular significant accounting policies are considered most critical in that they are important to the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. The accounting policies and estimates, including the nature of the estimates and types of assumptions used, are described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s most recent Form 10-K and pertain to discussion in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report. All of these most critical accounting policies were significant in determining income and financial condition based on events in the first nine months of 2020.

ENTERPRISE RISK MANAGEMENT
Following sections include discussion of market risk and risk factors. Risk management is overseen by the Company’s Chief Risk Officer, who reports directly to the CEO. This position oversees compliance, information security, risk management policy, and coordinates with the strategic services function which monitors most aspects of asset quality. Management 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 risks: credit risk, interest rate risk, price risk, liquidity risk, operational risk, compliance risk, strategic risk, reputation risk, and overall corporate risk. The credit risk category has the highest weighting. Based on management's recent review, all risks were within corporate objectives. Trends toward increasing risk were noted for credit risk and compliance risk due largely to the pandemic; liquidity risks were declining due to elevated liquid assets. For several risks, the inherent risk was viewed as heightened due to the environment, but the residual risk was viewed as medium/low due to mitigating controls functioning in the Company.

LIBOR TRANSITION PROJECT
In its most recent report on Form 10-K, the Company provided a description of its LIBOR transition project and the risks related to this project. Berkshire is collaborating closely with industry groups on the transition and closely monitoring developments in industry practices related to LIBOR alternatives. As part of the LIBOR transition project, the Company identified the impact and risks associated with various products, systems, processes, and models. An inventory of existing legal contracts that are impacted by the LIBOR transition has been compiled. The Company is assessing the LIBOR fallback language in those contracts and is devising a strategy to address the LIBOR transition for those contracts. The Company is focused on refining LIBOR fallback language in new legal contracts and expects to leverage recommendations made by the ARRC and ISDA that are tailored to its specific client segments.
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ITEM 3.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For additional discussion about the Company’s Quantitative and Qualitative Aspects of Market Risk, please review Item 7A of the most recent report on Form 10-K which sets forth the methodologies employed by the Company and the various aspects of its analysis of its interest rate sensitivity. Berkshire’s objective is to maintain a neutral or asset sensitive interest rate risk profile, as measured by the sensitivity of net interest income to market interest rate changes. The Company’s measures of interest rate risk exclude the operations of the FCLS national mortgage banking subsidiary which have been classified as discontinued operations.

The Company’s asset sensitivity has roughly doubled over the first nine months of the year, with assets repricing more quickly than liabilities in the modeled sensitivity scenarios. This is due to the influx of non-interest bearing demand deposit balances, the growth in short term investments, the lengthening of wholesale fund maturities, runoff of higher rate fixed rate assets, and the assumed higher prepayment speeds of the remaining portfolio. Also, the reduction in base case net interest income increases the relative impact of changes due to interest rate sensitivity. In line directionally with this modeled sensitivity, at the start of the year, the sharp decrease in interest rates in the first quarter resulted in compression of the Company’s net interest margin in the first half of 2020. Also in line directionally with the model, the margin stabilized in the third quarter as deposit pricing began to catch up with loan yield compression.

The Company’s models of sensitivity to a downward move in interest rates are limited to a 100 basis point decrease, given the current low level of interest rates. The sensitivity to a negative impact in the second year has decreased modestly from the modeled result at year-end 2019. The Company’s model assumes floors for prime, mortgages, and deposits. All other rates are zero bound. The Company also models sensitivity to yield curve twists. A steepening of the yield curve is also asset sensitive to a generally similar extent as the scenario of a parallel shift.

The Company anticipates that its higher asset sensitivity will gradually moderate in future periods. The Company received a pandemic related influx of demand deposits in 2020, including liquidity held by customers as a result of the PPP loans and other federal programs. The Company anticipates that these deposits may gradually decline and normalize, funded by short term investments, which may reduce interest sensitivity compared to the static balance sheet assumption. Additionally, the Company’s plans to further reduce wholesale funding dependence and reduce net loan runoff are expected to contribute to a reduction in asset sensitivity by the end of 2021 back to the general levels prevailing at the end of 2019.

The Company estimates that the asset sensitivity of its net income has also increased due to the higher asset sensitivity of net interest income. Similarly, the Company estimates that the liability sensitivity of its equity at risk decreased as a result of the changes discussed above. The modeled interest rate sensitivity depends on material assumptions. Additionally, market risk exposure is affected by the level and shape of the yield curve in markets for financial instruments including U.S. Treasury obligations, forward interest rate derivatives, the U.S. prime interest rate, and LIBOR rates. Also, the economic impact on customer and market behaviors of the COVID-19 pandemic remains uncertain and may cause actual events to differ from assumptions.
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ITEM 4.           CONTROLS AND PROCEDURES
a)  Disclosure controls and procedures.
The principal executive officers, including the principal financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures were effective.

b)  Changes in internal control over financial reporting.
There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
ITEM 1.            LEGAL PROCEEDINGS
As of September 30, 2020, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. A summary of certain legal matters involving unsettled litigation or pertaining to pending transactions are as follows:

On January 29, 2018, the Bank was served with an amended complaint filed nominally against the Company in the Business Litigation Session of the Massachusetts Superior Court sitting in Suffolk County. The amended complaint was filed by two residuary beneficiaries of an estate planning trust that was administered by the Bank as successor trustee following the death of the trust donor, and alleges the Bank breached its fiduciary duty and violated the Massachusetts Consumer Protection Act (MGL Ch. 93A) in the course of performing its duties as trustee. The complaint seeks compensatory, statutory, and punitive damages. The Company and the Bank deny all allegations contained in the complaint and are vigorously defending this lawsuit. Discovery is complete in the case, and in January 2020 the Bank filed a motion for summary judgment seeking dismissal of the case on statute of limitations grounds. On July 17, 2020, the trial court ruled that the plaintiffs’ claim for breach of fiduciary duty is time-barred and dismissed that claim accordingly. The court further ruled that the plaintiffs’ claim under MGL 93A may proceed.

On February 4, 2020, the Bank filed a complaint in the New York State Supreme Court for the County of Albany against Pioneer Bank (“Pioneer”) seeking damages of approximately $16.0 million. The complaint alleges that Pioneer is liable to the Bank for a credit loss of approximately $16.0 million suffered by the Bank in the third quarter of 2019 as a result of Pioneer’s breach of loan participation agreements in which it served as the lead bank, as well as constructive fraud, fraudulent concealment and/or negligent misrepresentation. Pioneer has filed a motion to dismiss aspects of the Bank’s complaint, to which the Bank is in the process of responding. The Company wrote down the underlying credit loss in its entirety in the third quarter of 2019, but recognized a partial recovery of $1.7 million early in the second quarter of 2020. The Company has not accrued for any additional anticipated recovery at this time.

On September 11, 2020, the Company received notice of a demand letter served on the Company and the Bank by a former mortgagee of the Bank pursuant to the Massachusetts Consumer Protection Act, M.G.L Ch. 93A (“Chapter 93A). The demand letter alleges that a mortgage payoff statement tendered by the Bank to the mortgagee included a mortgage discharge preparation fee that is purportedly impermissible under Massachusetts law. The demand letter also claims that the Bank failed to provide a copy of the recorded mortgage discharge to the mortgagee in a timely manner. The demand letter further purports to state claims on behalf of a putative class of similarly situated Massachusetts mortgage customers of the Bank, who allegedly may have suffered similar violations of Massachusetts law. The demand letter seeks monetary damages for the original mortgagee claimant and the putative class, plus double or treble damages and reasonable attorneys’ fees, as may be allowed under Chapter 93A. The Company and the Bank have retained outside litigation counsel, who has responded to the demand letter and denied all claims on behalf of the Company and the Bank. No class action or other lawsuit has been served on the Company or the Bank as of the date of this filing.
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ITEM 1A.               RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and in Part I, “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K, which could materially affect the Company's business, financial condition, or future operating results. Please also see the earlier discussion in this report about Enterprise Risk Management. The risks described in this form are not the only risks presently facing the Company. Additional risks and uncertainties not currently known to the Company, or currently deemed to be immaterial, also may materially adversely affect the Company's business, financial condition, and/or operating results. Due to changes in public health and economic conditions, the Company has identified three additional risk factors, which are discussed below. Aside from the following, there were no other major changes in risk factors identified during the first nine months of 2020.

The COVID-19 pandemic is adversely affecting, and will likely continue to adversely affect, our business, financial condition, liquidity, and results of operations.
The COVID-19 pandemic has negatively impacted the U.S. and global economy; disrupted U.S. and global supply chains; lowered equity market valuations; created significant volatility and disruption in financial markets; contributed to a decrease in the rates and yields on U.S. Treasury securities; resulted in ratings downgrades, credit deterioration, and defaults in many industries; increased demands on capital and liquidity; and dramatically increased unemployment levels and decreased consumer confidence. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in our footprint. The pandemic has caused us, and could continue to cause us, increases in our allowance for credit losses and subsequent increases in credit losses in our loan portfolios. Some of the risks we face from the pandemic include, but are not limited to: the health and availability of our colleagues, the financial condition of our clients and the demand for our products and services, falling interest rates, recognition of credit losses and increases in the allowance for credit losses, especially if businesses remain closed, unemployment continues to rise and clients and customers draw on their lines of credit or seek additional loans to help finance their businesses, and a significant deterioration of business conditions in our markets. Furthermore, the pandemic has caused us to recognize impairment of our goodwill and there could be impairment of our financial assets. Sustained adverse effects may also increase our cost of capital, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, or result in downgrades in our credit rating. The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued effectiveness of our business continuity plan, the direct and indirect impact of the pandemic on our customers, colleagues, counterparties and service providers, and actions taken by governmental authorities and other third parties in response to the pandemic.

Governmental authorities have taken significant measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth. The success of these measures is unknown, and they may not be sufficient to mitigate the negative impact of the pandemic. Additionally, some measures, such as a deferment of loan payments and the significant reduction in interest rates to near zero, will have a negative impact on our business, financial condition, liquidity, and results of operations. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions.

The length of the pandemic and the effectiveness of the measures being put in place to address it are unknown. Until the effects of the pandemic subside, we expect continued impacts on liquidity, reduced revenues in our businesses, and increased customer defaults. Furthermore, the U.S. economy experienced a recession as a result of the pandemic, and it is probable that our business would be materially and adversely affected if current conditions do not improve sufficiently. To the extent the pandemic adversely affects our business, financial condition, liquidity, or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our 2019 Annual Report on Form 10-K.

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The loss recorded in 2020 may have an adverse effect on future dividend payments to common shareholders.
Due to the loss in the first half of 2020 and its impact on retained earnings, the Bank will require the approval from the Massachusetts Division of Banks in order to continue to be a source of dividend income to its parent. 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.

As a participating lender in the SBA Paycheck Protection Program, we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP which could have a significant adverse impact on our business, financial position, results of operations, and prospects.
The COVID-19 pandemic and its impact on the economy have led to actions including the enactment of the Coronavirus Aid, Relief and Economic Security Act, which established the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (“SBA”). Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. We are participating as a lender in the PPP. Since the initiation of the PPP, several banks have been subject to litigation or threatened litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans. If any such litigation is filed or threatened against us and is not resolved in a manner favorable to us, it may result in significant cost or adversely affect our reputation. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial position, results of operations and prospects.

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ITEM 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)                Recent Sales of Unregistered Securities
The Company occasionally engages in the practice of transferring unregistered securities for the purpose of completing business transactions. These shares are issued to vendors or other organizations as consideration for services performed in accordance with each contract. During the three months ended September 30, 2020 there were no shares transferred and during the three months ended September 30, 2019, the Company transferred 1,936 shares.

(b)                 Not applicable.

(c)                 The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2020:
Total number ofAverage priceTotal number of shares
purchased as part of
publicly announced		Maximum number of
shares that may yet
be purchased under
Period shares purchasedpaid per shareplans or programsthe plans or programs
July 1-31, 2020— $— — — 
August 1-31, 2020— — — — 
September 1-30, 2020— — — — 
Total— $— — — 

In the first quarter, stock repurchases were suspended as the pandemic emerged.The stock repurchase program in effect on December 31, 2019 expired on March 31, 2020 and was not replaced.


ITEM 3.                DEFAULTS UPON SENIOR SECURITIES
None.


ITEM 4.                  MINE SAFETY DISCLOSURES
Not applicable.


ITEM 5.                OTHER INFORMATION
None.
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Table of Contents
ITEM 6.                   EXHIBITS
3.1 
Amended and Restated Certificate of Incorporation of Berkshire Hills Bancorp, Inc.(1)
3.2 
Amended and Restated Bylaws of Berkshire Hills Bancorp, Inc. (2)
4.1 
Form of Common Stock Certificate of Berkshire Hills Bancorp, Inc. (3)
4.2
Certificate of Designations of Series B Non-Voting Preferred Stock of Berkshire Hills Bancorp, Inc. (4)
10.1
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 The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (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 including detailed tags. 
104The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL.
_______________________________________
(1)     Incorporated herein by reference from the Exhibits to the Form 10-Q as filed on August 9, 2018.
(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 S-1, Registration Statement and amendments thereto, initially filed on March 10, 2000, Registration No. 333-32146.
(4)    Incorporated herein by reference from the Exhibits to the Form 8-K as filed on October 16, 2017.
(5)    Incorporated herein by reference from Exhibit 10.1 to the Form 8-K as filed on August 13, 2020.
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 BERKSHIRE HILLS BANCORP, INC.
  
   
Dated: November 9, 2020By:/s/ Sean A. Gray
 Sean A. Gray
 Acting Chief Executive Officer
  
   
Dated: November 9, 2020By:/s/ James M. Moses
 James M. Moses
 Senior Executive Vice President, Chief Financial Officer

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